As filed with the Securities and Exchange Commission on March 1, 1999
1933 Act File No. 33-25623
1940 Act File No. 811-5690
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 27 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27 [X]
FIRST INVESTORS SERIES FUND
(Exact name of Registrant as specified in charter)
95 Wall Street
New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number, Including Area Code): (212) 858-8000
Ms. Concetta Durso
Secretary and Vice President
First Investors Series Fund
95 Wall Street
New York, New York 10005
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
FIRST INVESTORS SERIES FUND
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Combined Prospectus for First Investors Insured Intermediate Tax
Exempt Fund, First Investors Insured Tax Exempt Fund, Inc.,
First Investors New York Insured Tax Free Fund, Inc. and
First Investors Multi-State Insured Tax Free Fund, Inc.
Combined Statement of Additional Information for First Investors
Insured Intermediate Tax Exempt Fund, First Investors Insured
Tax Exempt Fund, Inc., First Investors New York Insured Tax
Free Fund, Inc. and First Investors Multi-State Insured Tax
Free Fund, Inc.
Part C of Form N-1A
Signature Page
Exhibits
This filing does not relate to the First Investors Blue Chip Fund, Special
Situations Fund, Total Return Fund or Investment Grade Fund, all of which are
other series of the First Investors Series Fund.
<PAGE>
[FIRST INVESTORS LOGO]
INSURED INTERMEDIATE TAX EXEMPT
INSURED TAX EXEMPT
NEW YORK INSURED TAX FREE
MULTI-STATE INSURED TAX FREE
ARIZONA
CALIFORNIA
COLORADO
CONNECTICUT
FLORIDA
GEORGIA
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSOURI
NEW JERSEY
NORTH CAROLINA
OHIO
OREGON
PENNSYLVANIA
VIRGINIA
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
The date of this prospectus is April 30, 1999
<PAGE>
CONTENTS
INTRODUCTION
FUND DESCRIPTIONS
Insured Intermediate Tax Exempt Fund
Insured Tax Exempt Fund
New York Insured Tax Free Fund
Multi-State Insured Tax Free Fund
Arizona Minnesota
California Missouri
Colorado New Jersey
Connecticut North Carolina
Florida Ohio
Georgia Oregon
Maryland Pennsylvania
Massachusetts Virginia
Michigan
FUND MANAGEMENT
BUYING AND SELLING SHARES
How and when do the Funds price their shares?
How do I buy shares?
Which class of shares is best for me?
How do I sell shares?
Can I exchange my shares for the shares of other First Investors Funds?
ACCOUNT POLICIES
What about dividends and capital gain distributions?
What about taxes?
How do I obtain a complete explanation of all account privileges and
policies?
FINANCIAL HIGHLIGHTS
Insured Intermediate Tax Exempt Fund
Insured Tax Exempt Fund
New York Insured Tax Free Fund
Multi-State Insured Tax Free Fund
Arizona Minnesota
California Missouri
Colorado New Jersey
Connecticut North Carolina
Florida Ohio
Georgia Oregon
Maryland Pennsylvania
Massachusetts Virginia
Michigan
2
<PAGE>
INTRODUCTION
This prospectus describes the First Investors Funds that invest primarily in tax
exempt municipal bonds. Each individual Fund description in this prospectus has
an "Overview" which provides a brief explanation of the Fund's objectives, its
primary strategies and primary risks, how it has performed, and its fees and
expenses. To help you decide which Funds may be right for you, we have included
in each Overview a section offering examples of who should consider buying the
Fund. Each Fund description also contains a "Fund in Detail" section with more
information on strategies and risks of the Fund.
If you are interested in a municipal bond fund that diversifies its assets
nationally among bonds of different states, you should consider Insured
Intermediate Tax Exempt ("Intermediate Tax Exempt") and Insured Tax Exempt ("Tax
Exempt"). If you are interested in a municipal bond fund that invests primarily
in the bonds of a single state, you should consider one of our 18 single state
insured tax exempt funds. Seventeen of these single state insured tax exempt
funds are individual funds within the Multi-State Insured Tax Free Fund. The
eighteenth is the New York Insured Tax Free Fund.
None of the Funds in this prospectus pursues a strategy of allocating its assets
among stocks, bonds, and money market instruments. For most investors, a
complete program should include each of these asset classes. Stocks have
historically outperformed other categories of investments over long periods of
time and are therefore considered an important part of a diversified investment
portfolio. There have been extended periods, however, during which bonds and
money market instruments have outperformed stocks. By allocating your assets
among different types of funds, you can reduce the overall risk of your
portfolio and benefit when bonds and money market instruments outperform stocks.
Of course, even a diversified investment program can result in a loss.
3
<PAGE>
FUND DESCRIPTIONS
INSURED INTERMEDIATE TAX EXEMPT FUND
OVERVIEW
OBJECTIVE: The Fund seeks a high level of interest income that is exempt
from federal income tax and is not a tax preference item for
purposes of the Alternative Minimum Tax ("AMT").
PRIMARY
INVESTMENT
STRATEGIES: The Fund invests in municipal bonds and other municipal
securities ("municipal securities") that pay interest that is
exempt from federal income tax, including the AMT. The Fund
invests primarily in municipal bonds which are insured as to
timely payment of interest and principal by independent insurance
companies that are rated in the top rating category by a
nationally recognized rating organization, such as Moody's
Investors Service, Inc. ("Moody's"). The Fund invests primarily
in municipal bonds with intermediate maturities. These bonds are
generally less volatile but also lower yielding than long-term
municipal bonds. Under normal market conditions, the Fund
attempts to maintain a portfolio with a dollar-weighted average
maturity of between three and ten years.
PRIMARY
RISKS: The most significant risk of investing in the Fund is interest
rate risk. As with other bonds, the market values of municipal
bonds fluctuate with changes in interest rates. When interest
rates rise, municipal bonds tend to decline in price, and when
interest rates fall, they tend to increase in price. In general,
bonds with longer maturities pay higher interest rates but are
more volatile in price than shorter term bonds. When interest
rates decline, the interest income received by the Fund may also
decline. To a lesser degree, an investment in the Fund is subject
to credit risk. This is the risk that an issuer of the bonds held
by the Fund may not be able to pay interest or principal when
due. The market prices of bonds are affected by the credit
quality of their issuers. While the Fund primarily invests in
municipal bonds that are insured against credit risk, the
insurance does not eliminate credit risk because the insurer may
not be financially able to pay claims. In addition, not all of
the securities held by the Fund are insured. Moreover, the
insurance does not apply in any way to the market prices of
securities owned by the Fund, or the Fund's share price, both of
which will fluctuate. Accordingly, the value of your investment
in the Fund will go up and down, which means that you could lose
money.
AN INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
Who should consider buying the Insured Intermediate Tax Exempt Fund?
The Insured Intermediate Tax Exempt Fund may be used by
individuals as a core holding for an investment portfolio or as a
base on which to build a portfolio. It may be appropriate for you
if you:
4
<PAGE>
. Are seeking a conservative investment which provides a high degree of
credit quality,
. Are seeking income that is exempt from federal income tax, including
the AMT, and
. Are seeking a higher level of tax exempt income than is available from
a tax exempt money market fund and are willing to assume some market
volatility to achieve this goal.
The Insured Intermediate Tax Exempt Fund is generally not appropriate for
retirement accounts, investors in low tax brackets, or corporate or similar
business accounts. Different tax rules apply to corporations and other
entities.
How has the Insured Intermediate Tax Exempt Fund performed?
The bar chart and table below show you how the Fund's performance has varied
from year to year and in comparison with a broad-based index. This information
gives you some indication of the risks of investing in the Fund.
The Fund has two classes of shares, Class A shares and Class B shares. The bar
chart shows changes in the performance of the Fund's Class A shares from year to
year over the life of the Fund. The performance of Class B shares differs from
the performance of Class A shares shown in the bar chart only to the extent that
it does not have the same expenses. The bar chart does not reflect sales charges
that you may pay upon purchase or redemption of Fund shares. If they were
included, the returns would be less than those shown.
INSURED INTERMEDIATE TAX EXEMPT
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
5
<PAGE>
The following table shows how the average annual total returns for Class A
shares and Class B shares compare to those of the Lehman Brothers Municipal Bond
Index ("Lehman Index"). This table assumes that the maximum sales charge or
contingent deferred sales charge ("CDSC") was paid. The Lehman Index is a total
return performance benchmark for the long-term investment grade tax exempt bond
market. The Lehman Index does not take into account fees and expenses that an
investor would incur in holding the securities in the Lehman Index. If it did
so, the returns would be lower than those shown.
Inception Inception
Class A Shares Class B Shares
1 Year* 5 Years* (11/22/93) (1/12/95)
Class A Shares [ ] [ ] [ ] [ ]
Class B Shares [ ] [ ] [ ] [ ]
Lehman Index [ ] [ ] [ ] [ ]
* The annual returns are based upon calendar years.
What are the fees and expenses of the Insured Intermediate Tax Exempt
Fund?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Class A Class B
Shares Shares
------ -------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4%**
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL
AND SERVICE ANNUAL FUND
MANAGEMENT (12B-1) OTHER OPERATING NET
FEES(1) FEES (2) EXPENSES EXPENSES(3) FEE WAIVER(1) EXPENSES(3)
<S> <C> <C> <C> <C> <C> <C>
Class A Shares ....... [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares ....... [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
</TABLE>
*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.
**4% in the first year; declining to 0% after the sixth year. Class B shares
convert to Class A shares after eight years.
(1) For the fiscal year ended December 31, 1998, the Adviser waived Management
Fees in excess of _____%. The Adviser has contractually agreed with the Fund
to waive Management Fees in excess of _____% for a period of twelve months
commencing on _____.
(2) Because the Fund pays Rule 12b-1 fees, long-term shareholders could pay more
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
(3) The Fund has an expense offset arrangement that may reduce the Fund's
custodian fee based on the amount of cash maintained by the Fund with its
custodian. Any such fee reductions are not reflected under Total Annual Fund
Operating Expenses or Net Expenses.
6
<PAGE>
EXAMPLE
This example helps you to compare the costs of investing in the Fund with the
cost of investing in other mutual funds. The example assumes that (1) you invest
$10,000 in the Fund for the time periods indicated; (2) your investment has a 5%
return each year; and (3) the Fund's operating expenses remain the same, except
for year one which is net of fees waived. Although your actual costs may be
higher or lower, under these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
If you redeem your shares:
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
If you do not redeem your shares:
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
*Assumes conversion to Class A shares eight years after purchase.
THE FUND IN DETAIL
What are the Insured Intermediate Tax Exempt Fund's objective, principal
investment strategies, and risks?
OBJECTIVE: The Fund seeks a high level of interest income that is exempt from
federal income tax and is not a tax preference item for purposes of the AMT.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests in municipal bonds and other
types of municipal securities ("Municipal Securities") that pay interest that is
exempt from federal income tax, including the AMT. Municipal Securities include
private activity bonds, industrial development bonds, certificates of
participation, municipal notes, municipal commercial paper, variable rate demand
notes, and floating rate demand notes. Municipal bonds and other municipal
securities are issued by state and local governments, the District of Columbia
and commonwealths, territories or possessions of the United States (including
Guam, Puerto Rico, and the U.S. Virgin Islands) or their respective agencies,
instrumentalities and authorities. The Fund diversifies its assets among
municipal bonds and securities of different states, municipalities, and U.S.
territories, rather than concentrating on bonds of a particular state or
municipality.
All municipal bonds in which the Fund invests are insured as to the timely
payment of interest and principal by independent insurance companies which are
rated in the top rating category by a nationally recognized rating organization,
such as Moody's, Standard & Poor's Ratings Group and Fitch IBCA. The Fund may
purchase bonds and other municipal securities which have already been insured by
the issuer, underwriter, or some other party or it may purchase uninsured bonds
and insure them under a policy purchased by the Fund. While every municipal bond
purchased by the Fund must be insured, the Fund is allowed to invest up to 35%
of its assets in securities that are not insured. In general, the non-insured
securities held by the Fund are limited to municipal commercial paper and other
short-term investments. In any event, as described below, the insurance does not
guarantee the market values of the bonds held by the Fund or the Fund's share
price.
The Fund follows the strategy of investing in intermediate term municipal bonds,
which are generally less volatile in price but offer less yield than longer term
bonds. Under normal market conditions, the Fund will attempt to maintain a
portfolio with a dollar-weighted average maturity of between three and ten
years. The Fund adjusts the duration of its portfolio based upon its outlook on
interest rates. Duration is a measurement of a bond's sensitivity to changes in
7
<PAGE>
interest rates that takes into consideration not only the maturity of the bond
but also the time value of money that will be received from the bond over its
life. The Fund will generally adjust the duration of its portfolio by buying or
selling municipal securities, including zero coupon bonds. For example, if the
Fund believes that interest rates are likely to rise, it will generally attempt
to reduce its duration by purchasing municipal securities with shorter
maturities or selling municipal securities with longer maturities.
In selecting investments, the Fund considers coupon and yield, relative value of
an issue, the credit quality of the issuer, the cost of insurance and the
outlook for interest rates and the economy. The Fund will usually sell an
investment when there are changes in the interest rate environment that are
adverse to the investment or it falls short of the portfolio manager's
expectations. The Fund will not necessarily sell an investment if its rating is
reduced or there is a default by the issuer. Information on the Fund's recent
strategies and holdings can be found in the most recent annual report (see back
cover).
PRINCIPAL RISKS: Any investment carries with it some level of risk. In general,
the greater the potential reward of an investment, the greater the risk. Here
are the principal risks of owning the Insured Intermediate Tax Exempt Fund:
INTEREST RATE RISK: The market values of municipal securities are affected by
changes in interest rates. When interest rates rise, the market values of
municipal securities decline; when interest rates decline, the market values of
municipal securities increase. The price volatility of municipal securities also
depends on their maturities and durations. Generally, the longer the maturity
and duration of a municipal security, the greater its sensitivity to interest
rates. To compensate investors for this higher risk, municipal securities with
longer maturities and durations generally offer higher yields than municipal
securities with shorter maturities and durations.
Interest rate risk also includes the risk that the yields received by the Fund
on some of its investments will decline as interest rates decline. The Fund buys
investments with fixed maturities as well as investments that give the issuer
the option to "call" or redeem these investments before their maturity dates. If
investments mature or are "called" during a time of declining interest rates,
the Fund will have to reinvest the proceeds in investments offering lower
yields. The Fund also invests in floating rate and variable rate demand notes.
When interest rates decline, the rates paid on these securities may decline.
CREDIT RISK: This is the risk that an issuer of bonds will be unable to pay
interest or principal when due. Although all of the municipal bonds purchased by
the Fund are insured as to scheduled payments of interest and principal, the
insurance does not eliminate credit risk because the insurer may not be
financially able to pay interest and principal on the bonds and up to 35% of the
Fund's assets may be invested in securities that are not insured. It is also
important to note that, although insurance may increase the credit safety of
investments held by the Fund, it decreases the Fund's yield as the Fund must pay
for the insurance directly or indirectly. It is also important to emphasize that
the insurance does not protect against fluctuations in the market value of the
municipal bonds or the share price of the Fund.
MARKET RISK: The Fund is subject to market risk. Bond prices in general may
decline over short or even extended periods primarily due to changes in interest
rates and the credit conditions of the issuers. This is another way of
describing interest rate risk and credit risk. However, market prices also
fluctuate with the forces of supply and demand. Municipal bonds may decline in
value even if the overall market is doing well. Accordingly, the value of your
investment in the Fund will go up and down, which means that you could lose
money.
8
<PAGE>
CONCENTRATION RISK: While the Fund diversifies its assets among municipal
issuers in different states, municipalities and territories, from time to time
it may invest more than 25% of its total assets in a particular segment of the
municipal bond market, such as hospital revenue bonds, housing agency bonds,
industrial development bonds, airport bonds or electric utility bonds. Such a
possible concentration of the assets of the Fund could result in the Fund being
invested in securities which are related in such a way that economic, business,
political or other developments which would affect one security would probably
likewise affect the other securities within that particular segment of the bond
market. This risk is mitigated by the fact that at least 65% of the Fund's
municipal investments must be insured.
TAX RISK: This is the risk that some or all of the interest income that the Fund
receives might become taxable or be determined to be taxable by the Internal
Revenue Service, applicable state tax authorities, or a judicial body. See the
discussion on "What about taxes?".
YEAR 2000 RISKS: The values of securities owned by the Fund may be negatively
affected by Year 2000 problems. Many computer systems are not designed to
process correctly date-related information after January 1, 2000. The issuers of
securities held by the Fund may incur substantial costs in ensuring that
computer systems on which they rely are Year 2000 ready and may face business
and legal problems if these systems are not ready. If computer systems used by
exchanges, broker-dealers, and other market participants are not Year 2000
ready, valuing and trading securities could be difficult. These problems could
have a negative effect on the Fund's investments and returns.
ALTERNATIVE STRATEGIES: At times the Fund may judge that market, economic or
political conditions make pursuing the Fund's investment strategies inconsistent
with the best interests of its shareholders. The Fund then may temporarily use
alternative strategies that are mainly designed to limit the Fund's losses.
9
<PAGE>
INSURED TAX EXEMPT FUND
OVERVIEW
OBJECTIVE: The Fund seeks a high level of interest income that is exempt
from federal income tax and is not a tax preference item for
purposes of the Alternative Minimum Tax ("AMT").
PRIMARY
INVESTMENT
STRATEGIES: The Fund invests in municipal bonds and other municipal
securities that pay interest that is exempt from federal income
tax, including the AMT. The Fund is required to invest at least
80% of its assets in municipal bonds that are insured as to
timely payment of interest and principal by independent insurance
companies that are rated in the top rating category by a
nationally recognized rating organization, such as Moody's
Investors Service, Inc. ("Moody's"). The Fund generally invests
in long-term bonds with maturities of fifteen years or more. The
Fund invests in variable rate and floating rate municipal notes,
including "inverse floaters."
PRIMARY
RISKS: The most significant risk of investing in the Fund is interest
rate risk. As with other bonds, the market values of municipal
bonds fluctuate with changes in interest rates. When interest
rates rise, municipal bonds tend to decline in price, and when
interest rates fall, they tend to increase in price. In general,
long-term bonds pay higher interest rates but are more volatile
in price than short- or intermediate- term bonds. When interest
rates decline, the interest income received by the Fund may also
decline. Inverse floaters tend to fluctuate significantly more
than other bonds in response to interest rate changes. To a
lesser degree, an investment in the Fund is subject to credit
risk. This is the risk that an issuer of the bonds held by the
Fund may not be able to pay interest or principal when due. The
market prices of bonds are affected by the credit quality of
their issuers. While the Fund primarily invests in municipal
bonds that are insured against credit risk, the insurance does
not eliminate credit risk because the insurer may not be
financially able to pay claims. In addition, not all of the
securities held by the Fund are insured. Moreover, the insurance
does not apply in any way to the market prices of securities
owned by the Fund or the Fund's share price, both of which will
fluctuate. Accordingly, the value of your investment in the Fund
will go up and down, which means that you could lose money.
AN INVESTMENT IN THE FUND IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
Who should consider buying the Insured Tax Exempt Fund?
The Insured Tax Exempt Fund may be used by individuals as a core
holding for an investment portfolio or as a base on which to
build a portfolio. It may be appropriate for you if you:
. Are seeking a conservative investment which provides a high
degree of credit quality,
10
<PAGE>
. Are seeking income that is exempt from federal income tax,
including the AMT,
. Are seeking a relatively high level of tax exempt income and
are willing to assume a moderate degree of market volatility
to achieve this goal, and
. Have a long-term investment horizon and are able to ride out
market cycles.
The Insured Tax Exempt Fund is generally not appropriate for
retirement accounts or investors in low tax brackets, or
corporate or similar business accounts. Different tax rules apply
to corporations and other entities.
How has the Insured Tax Exempt Fund performed?
The bar chart and table below show you how the Fund's performance has varied
from year to year and in comparison with a broad-based index. This information
gives you some indication of the risks of investing in the Fund.
The Fund has two classes of shares, Class A shares and Class B shares. The bar
chart shows changes in the performance of the Fund's Class A shares from year to
year over the life of the Fund. The performance of Class B shares differs from
the performance of Class A shares shown in the bar chart only to the extent that
it does not have the same expenses. The bar chart does not reflect sales charges
that you may pay upon purchase or redemption of Fund shares. If they were
included, the returns would be less than those shown.
INSURED TAX EXEMPT
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______) and the lowest quarterly return was _____ (for the quarter
ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE HOW THE
FUND WILL PERFORM IN THE FUTURE.
The following table shows how the average annual total returns for Class A
shares and Class B shares compare to those of the Lehman Brothers Municipal Bond
Index ("Lehman Index"). This table assumes that the maximum sales charge or CDSC
11
<PAGE>
was paid. The Lehman Index is a total return performance benchmark for the
long-term investment grade tax-exempt bond market. The Lehman Index does not
take into account fees and expenses that an investor would incur in holding the
securities in the Lehman Index. If it did so, the returns would be lower than
those shown.
Inception
Class B Shares
1 Year* 5 Years* 10 Years* (1/12/95)
Class A Shares [ ] [ ] [ ] [ ]
Class B Shares [ ] [ ] [ ] [ ]
Lehman Index [ ] [ ] [ ] [ ]
* The annual returns are based upon calendar years.
What are the fees and expenses of the Insured Tax Exempt Fund?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Class A Class B
Shares Shares
------ ------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4%**
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL
AND SERVICE ANNUAL FUND
MANAGEMENT (12B-1) OTHER OPERATING NET
FEES(1) FEES (2) EXPENSES EXPENSES(3) FEE WAIVER(1) EXPENSES(3)
<S> <C> <C> <C> <C> <C> <C>
Class A Shares ....... [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares ....... [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
</TABLE>
*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.
**4% in the first year; declining to 0% after the sixth year. Class B shares
convert to Class A shares after eight years.
(1) For the fiscal year ended December 31, 1998, the Adviser waived Management
Fees in excess of _____. The Adviser has contractually agreed with the Fund
to waive Management Fees in excess of _____% for a period of twelve months
commencing on _____.
(2) Because the Fund pays Rule 12b-1 fees, long-term shareholders could pay more
than the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
(3) The Fund has an expense offset arrangement that may reduce the Fund's
custodian fee based on the amount of cash maintained by the Fund with its
custodian. Any such fee reductions are not reflected under Total Annual Fund
Operating Expenses or Net Expenses.
12
<PAGE>
EXAMPLE
This example helps you to compare the costs of investing in the Fund with the
cost of investing in other mutual funds. The example assumes that (1) you invest
$10,000 in the Fund for the time periods indicated; (2) your investment has a 5%
return each year; and (3) the Fund's operating expenses remain the same, except
for year one which is net of fees waived. Although your actual costs may be
higher or lower, under these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
If you redeem your shares:
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
If you do not redeem your shares:
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
*Assumes conversion to Class A shares eight years after purchase.
THE FUND IN DETAIL
What are the Insured Tax Exempt Fund's objective, principal investment
strategies, and risks?
OBJECTIVE: The Fund seeks a high level of interest income that is exempt from
federal income tax and is not a tax preference item for purposes of
the AMT.
PRINCIPAL INVESTMENT STRATEGIES: The Fund invests in municipal bonds and other
municipal securities ("Municipal Securities") that pay interest that is exempt
from federal income tax, including the AMT. Municipal Securities include,
private activity bonds, industrial development bonds, certificates of
participation, municipal notes, municipal commercial paper, variable rate demand
notes, and floating rate demand notes). Municipal bonds and other municipal
securities are issued by state and local governments, their agencies and
authorities, the District of Columbia and any commonwealths, territories or
possessions of the United States (including Guam, Puerto Rico and the U.S.
Virgin Islands) or their respective agencies, instrumentalities and authorities.
The Fund diversifies its assets among municipal bonds and securities of
different states, municipalities, and U.S. territories, rather than
concentrating on bonds of a particular state or municipality.
All municipal bonds in which the Fund invests are insured as to the timely
payment of interest and principal by independent insurance companies which are
rated in the top rating category by a nationally recognized rating organization,
such as Moody's, Standard & Poor's Ratings Group and Fitch IBCA. The Fund may
purchase bonds and other municipal securities which have already been insured by
the issuer, underwriter, or some other party or it may purchase uninsured bonds
and insure them under a policy purchased by the Fund. While every municipal bond
purchased by the Fund must be insured, the Fund is allowed to invest up to 20%
of its assets in securities that are not insured. In general, the non-insured
securities held by the Fund are limited to municipal commercial paper and other
short-term investments. In any event, as described below, the insurance does not
guarantee the market values of the bonds held by the Fund or the Fund's share
price.
The Fund follows the strategy of investing in long-term municipal bonds, which
are generally more volatile in price but offer more yield than short- or
intermediate- term bonds. The Fund generally purchases bonds with maturities of
fifteen years or more. The Fund adjusts the duration of its portfolio based upon
13
<PAGE>
its outlook on interest rates. Duration is a measurement of a bond's sensitivity
to changes in interest rates that takes into consideration not only the maturity
of the bond but also the time value of money that will be received from the bond
over its life. The Fund will generally adjust the duration of its portfolio by
buying or selling municipal securities, including zero coupon bonds. For
example, if the Fund believes that interest rates are likely to rise, it will
generally attempt to reduce its duration by purchasing municipal securities with
shorter maturities or selling municipal securities with longer maturities.
The Fund invests in variable rate and floating rate municipal notes, including
"inverse floaters." These securities pay interest which adjusts at specific
intervals or when a benchmark rate changes. Inverse floaters are floating rate
securities whose rates of interest move inversely to a floating rate benchmark.
The rates on inverse floaters typically fall as short-term market interest rates
rise and rise as short-term rates fall. The Fund benefits from its investments
in inverse floaters by receiving a higher rate of interest than it does on other
comparable bonds. However, inverse floaters tend to fluctuate more than other
bonds in response to interest rate changes and therefore cause the Fund's share
price to be subject to greater volatility. The Fund will not invest more than
10% of its assets in inverse floaters.
In selecting investments, the Fund considers maturity, coupon and yield,
relative value of an issue, the credit quality of the issuer, the cost of
insurance and the outlook for interest rates and the economy. The Fund will
usually sell an investment when there are changes in the interest rate
environment that are adverse to the investment or it falls short of the
portfolio manager's expectations. The Fund will not necessarily sell an
investment if its rating is reduced or there is a default by the issuer.
Information on the Fund's recent strategies and holdings can be found in the
most recent annual report (see back cover).
PRINCIPAL RISKS: Any investment carries with it some level of risk. In general,
the greater the potential reward of an investment, the greater the risk. Here
are the principal risks of owning the Insured Tax Exempt Fund:
INTEREST RATE RISK: The market value of municipal securities is affected by
changes in interest rates. When interest rates rise, the market values of
municipal securities decline; when interest rates decline, the market values of
municipal securities increase. The price volatility of municipal securities also
depends on their maturities and durations. Generally, the longer the maturity
and duration of a municipal security, the greater its sensitivity to interest
rates. To compensate investors for this higher risk, municipal securities with
longer maturities and durations generally offer higher yields than municipal
securities with shorter maturities and durations.
Interest rate risk also includes the risk that the yields received by the Fund
on some of its investments will decline as interest rates decline. The Fund buys
investments with fixed maturities as well as investments that give the issuer
the option to "call" or redeem these investments before their maturity dates. If
investments mature or are "called" during a time of declining interest rates,
the Fund will have to reinvest the proceeds in investments offering lower
yields. The Fund also invests in floating rate and variable rate demand notes.
When interest rates decline, the rates paid on these securities may decline.
CREDIT RISK: This is the risk that an issuer of bonds will be unable to pay
interest or principal when due. Although all of the municipal bonds purchased by
the Fund are insured as to scheduled payments of interest and principal, the
insurance does not eliminate credit risk because the insurer may not be
financially able to pay interest and principal on the bonds and up to 20% of the
Fund's assets may be invested in securities that are not insured. It is also
important to note that, although insurance may increase the credit safety of
investments held by the Fund, it decreases the Fund's yield as the Fund must pay
14
<PAGE>
for the insurance directly or indirectly. It is also important to emphasize that
the insurance does not protect against fluctuations in the market value of the
municipal bonds owned by the Fund or the share price of the Fund.
MARKET RISK: The Fund is subject to market risk. Bond prices in general may
decline over short or even extended periods primarily due to changes in interest
rates and the credit conditions of the issuers. This is another way of
describing interest rate risk and credit risk. However, market prices also
fluctuate with the forces of supply and demand. These events can affect the
value of the Fund's investments and its price per share. Municipal bonds may
decline in value even if the overall market is doing well. Accordingly, the
value of your investment in the Fund will go up and down, which means that you
could lose money.
CONCENTRATION RISK: While the Fund diversifies its assets among municipal
issuers in different states, municipalities and territories, from time to time
it may invest more than 25% of its total assets in a particular segment of the
municipal bond market, such as hospital revenue bonds, housing agency bonds,
industrial development bonds, airport bonds or electric utility bonds. Such a
possible concentration of the assets of the Fund could result in the Fund being
invested in securities which are related in such a way that economic, business,
political or other developments which would affect one security would probably
likewise affect the other securities within that particular segment of the bond
market. This risk is mitigated by the fact that at least 80% of the Fund's
municipal investments must be insured.
DERIVATIVE SECURITIES RISK: Because the Fund invests in inverse floaters which
are a form of derivative securities, it is subject to a greater degree of
interest rate risk than funds which do not invest in these securities. Inverse
floaters tend to fluctuate significantly more than other bonds as the result of
interest rate changes.
TAX RISK: This is the risk that some or all of the interest income that the Fund
receives might become taxable or be determined to be taxable by the Internal
Revenue Service, applicable state tax authorities, or a judicial body. See the
discussion on "What about taxes?"
YEAR 2000 RISKS: The values of securities owned by the Fund may be negatively
affected by Year 2000 problems. Many computer systems are not designed to
process correctly date-related information after January 1, 2000. The issuers of
securities held by the Fund may incur substantial costs in ensuring that
computer systems on which they rely are Year 2000 ready and may face business
and legal problems if these systems are not ready. If computer systems used by
exchanges, broker-dealers, and other market participants are not Year 2000
ready, valuing and trading securities could be difficult. These problems could
have a negative effect on the Fund's investments and returns.
ALTERNATIVE STRATEGIES: At times the Fund may judge that market, economic or
political conditions make pursuing the Fund's investment strategies inconsistent
with the best interests of its shareholders. The Fund then may temporarily use
alternative strategies that are mainly designed to limit the Fund's losses.
15
<PAGE>
SINGLE STATE INSURED TAX FREE FUNDS
OVERVIEW
OBJECTIVE: The New York Insured Tax Free Fund and each fund of the
Multi-State Insured Tax Free Fund (collectively, the "Single
State Insured Tax Free Funds" or "Funds") seek a high level of
interest income that is exempt from federal income tax and is not
a tax preference item for purposes of the Alternative Minimum Tax
("AMT"). Each Fund also seeks income that is exempt from any
applicable state income tax for individual residents of a
particular state.
PRIMARY
INVESTMENT
STRATEGIES: Each Fund invests in municipal bonds and municipal securities
that pay interest that is exempt from federal income tax,
including the AMT, as well as any applicable income tax for
residents of a particular state. Each Fund concentrates its
investments in municipal bonds issued by a single state. For
example, the New York Fund invests primarily in New York
municipal securities, the New Jersey Fund invests primarily in
New Jersey municipal securities, and so on. Each Fund, other than
the Minnesota Fund, also invests in municipal securities that are
issued by U.S. commonwealths, possessions or territories as long
as they do not produce income that is subject to state income
tax. The Minnesota Fund only invests in Minnesota obligations.
The Florida Fund invests only in municipal bonds that do not
produce distributions that are subject to the Florida intangible
personal property tax. The Funds generally invest in municipal
bonds which are insured as to timely payment of interest and
principal by independent insurance companies that are rated in
the top rating category by a nationally recognized rating
organization, such as Moody's Investors Service, Inc.
("Moody's"). The Funds generally invest in long-term bonds with
maturities of fifteen years or more. The New York Fund invests in
variable rate and floating rate municipal notes, including
"inverse floaters."
PRIMARY
RISKS: The most significant risk of investing in the Funds is interest
rate risk. As with other bonds, the market values of municipal
bonds fluctuate with changes in interest rates. When interest
rates rise, they tend to decline in price, and when interest
rates fall, they tend to increase in price. In general, bonds
with longer maturities pay higher interest rates but are more
volatile than shorter term bonds. When interest rates decline,
the interest income received by the Fund may also decline.
Inverse floaters tend to fluctuate significantly more than other
bonds in response to interest rate changes. Since each Fund
invests primarily in the municipal securities of a particular
state, its performance is affected by local, state and regional
factors. This is called concentration risk. An investment in any
of the Funds is also subject to credit risk. This is the risk
that the issuer of the bonds may not be able to pay interest or
principal when due. The market prices of bonds are affected by
the credit quality of their issuer. While the Funds primarily
invest in municipal bonds that are insured against credit risk,
the insurance does not eliminate this risk because the insurer
may not be financially able to pay claims. In addition, not all
of the securities held by the Funds are insured. Moreover, the
insurance does not apply in any way to the market prices of
securities owned by the Funds, or their share prices, both of
which will fluctuate. Accordingly, the value of your investment
in the Funds will go up and down, which means that you could lose
money.
16
<PAGE>
AN INVESTMENT IN A FUND IS NOT A BANK DEPOSIT AND IS NOT INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
Who should consider buying a Single State Insured Tax Free Fund?
A Single State Insured Tax Free Fund may be used by individuals
as a core holding for an investment portfolio or as a base on
which to build a portfolio. It may be appropriate for you if you:
o Are seeking a relatively conservative investment which
provides a high degree of credit quality,
o Are seeking income that is exempt from federal income tax,
including the federal AMT, and from state income tax for
residents of a particular state,
o Are seeking a relatively high level of tax exempt income and
are willing to assume a moderate degree of market volatility,
and
o Have a long-term investment horizon and are able to ride out
market cycles.
The Single State Insured Tax Free Funds are generally not
appropriate for retirement accounts or investors in low tax
brackets, or corporate of similar business accounts. Different
tax rules apply to corporations and other entities.
How have the Single State Insured Tax Free Funds performed?
The bar chart and table below show you how each Fund's performance has varied
from year to year and in comparison with a broad-based index. This information
gives you some indication of the risks of investing in the Funds.
Each Fund has two classes of shares, Class A shares and Class B shares. The bar
chart shows changes in the performance of each Fund's Class A shares from year
to year over the life of the Fund. The performance of Class B shares differs
from the performance of Class A shares shown in the bar chart only to the extent
that it does not have the same expenses. The bar chart does not reflect sales
charges that you may pay upon purchase or redemption of Fund shares. If they
were included, the returns would be less than those shown.
NEW YORK
[bar chart to be inserted]
1989 - 9.43%
1990 - 5.81%
1991 - 10.89%
1992 - 8.84%
1993 - 9.82%
1994 - (5.03%)
1995 - 15.45%
1996 - 2.95%
1997 - 7.82%
1998 - 5.59%
17
<PAGE>
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
ARIZONA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
CALIFORNIA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
18
<PAGE>
COLORADO
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
CONNECTICUT
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
19
<PAGE>
FLORIDA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
GEORGIA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
20
<PAGE>
MARYLAND
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
MASSACHUSETTS
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
21
<PAGE>
MICHIGAN
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
MINNESOTA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
22
<PAGE>
MISSOURI
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
NEW JERSEY
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
23
<PAGE>
NORTH CAROLINA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
OHIO
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
24
<PAGE>
OREGON
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
PENNSYLVANIA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
25
<PAGE>
VIRGINIA
[OBJECT OMITTED]
During the periods shown, the highest quarterly return was ______ (for the
quarter ended ______), and the lowest quarterly return was _____ (for the
quarter ended _____). THE FUND'S PAST PERFORMANCE DOES NOT NECESSARILY INDICATE
HOW THE FUND WILL PERFORM IN THE FUTURE.
The following tables show how the average annual total returns for Class A
shares and Class B shares of each Single State Insured Tax Free Fund compare to
those of the Lehman Brothers Municipal Bond Index ("Lehman Index"). This table
assumes that the maximum sales charge or CDSC was paid. The Lehman Index is a
total return performance benchmark for the long-term investment grade tax-exempt
bond market. The Lehman Index does not take into account fees and expenses that
an investor would incur in holding the securities in the Lehman Index.
If it did so, the returns would be lower than those shown.
Inception
Inception Class B Shares
1 Year* 5 Years* 10 Years* Class A Shares (1/12/95)
NEW YORK INSURED TAX FREE FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ]**
ARIZONA FUND
Class A Shares(a)[ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] [ ] (1) [ ] **
(a) Class A shares commenced operations on 11/1/90.
(1) The average annual total return shown is for the period _________ to
12/31/98.
26
<PAGE>
CALIFORNIA FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
COLORADO FUND
Class A Shares(b) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](2) [ ] **
(b) Class A shares commenced operations on 5/4/92.
(2) The average annual total return shown is for the period _______ to 12/31/98.
CONNECTICUT FUND
Class A Shares(c) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](3) [ ] **
(c) Class A shares commenced operations on 10/8/90.
(3) The average annual total return shown is for the period ________ to
12/31/98.
FLORIDA FUND
Class A Shares(d) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](4) [ ] **
(d) Class A shares commenced operations on 10/5/90.
(4) The average annual total return shown is for the period ________ to
12/31/98.
GEORGIA FUND
Class A Shares(e) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](5) [ ] **
(e) Class A shares commenced operations on 5/1/92.
(5) The average annual total return shown is for the period ________ to
12/31/98.
MARYLAND FUND
Class A Shares(f) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](6) [ ] **
(f) Class A shares commenced operations on 10/8/90.
(6) The average annual total return shown is for the period ________ to
12/31/98.
MASSACHUSETTS FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
MICHIGAN FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
MINNESOTA FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
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<PAGE>
MISSOURI FUND
Class A Shares(g) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](7) [ ] **
(g) Class A shares commenced operations on 5/4/92.
(7) The average annual total return shown is for the period ______ to 12/31/98.
NEW JERSEY FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
NORTH CAROLINA FUND
Class A Shares(h) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](8) [ ] **
(h) Class A shares commenced operations on 5/4/92.
(8) The average annual total return shown is for the period ______ to 12/31/98.
OHIO FUND
Class A Shares [ ] [ ] [ ] N/A N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] N/A [ ] **
OREGON FUND
Class A Shares(i) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](9) [ ] **
(i) Class A shares commenced operations on 5/4/92.
(9) The average annual total return shown is for the period ______ to 12/31/98.
PENNSYLVANIA FUND
Class A Shares(j) [ ] [ ] N/A [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] N/A [ ](10) [ ] **
(j) Class A shares commenced operations on 4/30/90.
(10) The average annual total return shown is for the period ______ to 12/31/98.
VIRGINIA FUND
Class A Shares(k) [ ] [ ] [ ] [ ] N/A
Class B Shares [ ] N/A N/A N/A [ ]
Lehman Index [ ] [ ] [ ] [ ](11) [ ] **
(k) Class A shares commenced operations on 4/30/90.
(11) The average annual total return shown is for the period ______ to 12/31/98.
* The annual returns are based upon calendar years.
** The average total return shown is for the period 1/1/95 - 12/31/98.
28
<PAGE>
What are the fees and expenses of the Single State Insured Tax Free
Funds?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
Class A Class B
Shares Shares
------ ------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4%**
*A contingent deferred sales charge of 1% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge.
**4%in the first year; declining to 0% after the sixth year. Class B shares
convert to Class A shares after eight years.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL
AND SERVICE ANNUAL FUND
MANAGEMENT (12B-1) OTHER OPERATING NET
FEES (1) FEES (2) EXPENSES EXPENSES(3) FEE WAIVER(1) EXPENSES(3)
<S> <C> <C> <C> <C> <C> <C>
NEW YORK INSURED
TAX FREE FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
ARIZONA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
CALIFORNIA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
COLORADO FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
CONNECTICUT FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
FLORIDA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
GEORGIA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
29
<PAGE>
MARYLAND FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
MASSACHUSETTS FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
MICHIGAN FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
MINNESOTA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
MISSOURI FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
NEW JERSEY FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
NORTH CAROLINA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
OHIO FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
OREGON FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
PENNSYLVANIA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
VIRGINIA FUND
Class A Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Class B Shares [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
</TABLE>
(1) For the fiscal year ended December 31, 1998, the Adviser waived Management
Fees in excess of _____%. The Adviser has contractually agreed with the
Funds to waive Management Fees in excess of ___% for a period of twelve
months commencing on _____.
(2) Because each Fund pays Rule 12b-1 fees, long-term shareholders could pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
(3) 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 Annual Fund
Operating Expenses or Net Expenses.
30
<PAGE>
EXAMPLE
This example helps you to compare the costs of investing in a Fund with the cost
of investing in other mutual funds. The example assumes that (1) you invest
$10,000 in a Fund for the time periods indicated; (2) your investment has a 5%
return each year; and (3) the Fund's operating expenses remain the same, except
for year one which is net of fees waived. Although your actual costs may be
higher or lower, under these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
If you redeem your shares:
NEW YORK INSURED TAX FREE FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
ARIZONA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
CALIFORNIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
COLORADO FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
CONNECTICUT FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
FLORIDA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
GEORGIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MARYLAND FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MASSACHUSETTS FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MICHIGAN FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
31
<PAGE>
MINNESOTA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MISSOURI FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
NEW JERSEY FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
NORTH CAROLINA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
OHIO FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
OREGON FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
PENNSYLVANIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
VIRGINIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
If you do not redeem your shares:
NEW YORK INSURED TAX FREE FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
ARIZONA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
CALIFORNIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
COLORADO FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
CONNECTICUT FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
32
<PAGE>
FLORIDA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
GEORGIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MARYLAND FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MASSACHUSETTS FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MICHIGAN FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MINNESOTA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
MISSOURI FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
NEW JERSEY FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
NORTH CAROLINA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
OHIO FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
OREGON FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
PENNSYLVANIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
VIRGINIA FUND
Class A shares [ ] [ ] [ ] [ ]
Class B shares [ ] [ ] [ ] [ ]*
*Assumes conversion to Class A shares eight years after purchase.
33
<PAGE>
THE FUNDS IN DETAIL
What are the Single State Insured Tax Free Funds' objectives, principal
investment strategies, and risks?
OBJECTIVES: Each of the Single State Insured Tax Free Funds seeks a high level
of interest income that is exempt from both federal and state income tax for
individual residents of a particular state. Each Fund also seeks income that is
not a tax preference item for purposes of the AMT.
PRINCIPAL INVESTMENT STRATEGIES: Each Fund invests in municipal bonds and other
types of municipal securities ("Municipal Securities") that pay interest that is
exempt from federal income tax, including the AMT. Municipal Securities include,
private activity bonds, industrial development bonds, certificates of
participation, municipal notes, municipal commercial paper, variable rate demand
notes, and floating rate demand notes. Municipal Securities are issued by state
and local governments, their agencies and authorities, the District of Columbia
and any commonwealths, territories or possessions of the United States
(including Guam, Puerto Rico and the U.S. Virgin Islands) or their respective
agencies, instrumentalities and authorities.
Each Fund concentrates its assets in municipal bonds and securities of a
particular state in order to produce income that is exempt from any applicable
state income tax for residents of the state. For example, the New York Fund
invests primarily in New York bonds, the New Jersey Fund invests primarily in
New Jersey bonds, and so on. Each Fund, other than the Minnesota Fund, may also
invest in municipal securities that are issued by U.S. commonwealths,
possessions, or territories such as Puerto Rico if the interest produced is
exempt from state income taxes for residents of the particular state. The
Minnesota Fund invests only in Minnesota municipal obligations because under
Minnesota tax law, dividends paid to shareholders of the Fund are exempt from
the regular Minnesota personal income tax only if 95% or more of the dividends
derived from Minnesota municipal obligations. In certain cases, the interest
paid by a Fund may also be exempt from local taxes. For example, for resident
shareholders of New York, any interest paid by the New York Fund would also be
exempt from New York City tax. There is no state income tax in Florida. However,
the Florida Fund is managed so that for resident shareholders of Florida, any
interest paid by the Florida Fund would be exempt from the Florida intangible
personal property tax.
All municipal bonds in which the Funds invest are insured as to the timely
payment of interest and principal by independent insurance companies which are
rated in the top rating category by a nationally recognized rating organization,
such as Moody's, Standard & Poor's Ratings Group and Fitch IBCA. The Funds may
purchase bonds and other municipal securities which have already been insured by
the issuer, underwriter, or some other party or it may purchase uninsured bonds
and insure them under a policy purchased by the Funds. While every municipal
bond purchased by the Funds must be insured, the Funds are allowed to invest up
to 35% of their assets in securities that are not insured. In general, the
non-insured securities held by the Funds are limited to municipal commercial
paper and other short-term investments. In any event, as described below, the
insurance does not guarantee the market values of the bonds held by the Funds or
the Funds' share price.
The Funds follow the strategy of investing in long term municipal bonds, which
are generally more volatile in price but offer more yield than short or
intermediate term bonds. The Funds generally purchase bonds with maturities of
fifteen years or more. The Funds adjust the duration of their portfolios based
upon their outlook on interest rates. Duration is a measurement of a bond's
sensitivity to changes in interest rates that takes into consideration not only
the maturity of the bond but also the time value of money that will be received
from the bond over its life. The Funds will generally adjust the duration of
their portfolios by buying or selling municipal securities, including zero
coupon bonds. For example, if the Funds believe that interest rates are likely
34
<PAGE>
to rise, they will generally attempt to reduce their durations by purchasing
municipal securities with shorter maturities or selling municipal securities
with longer maturities.
New York Fund invests in variable rate and floating rate municipal notes,
including "inverse floaters." These securities pay interest which adjusts at
specific intervals or when a benchmark rate changes. Inverse floaters are
floating rate securities whose rates of interest move inversely to a floating
rate benchmark. The rates on inverse floaters typically fall as short-term
market interest rates rise and rise as short-term rates fall. The Fund benefits
from its investments in inverse floaters by receiving a higher rate of interest
than it does on other comparable bonds. However, inverse floaters tend to
fluctuate more than other bonds in response to interest rate changes and
therefore cause the Fund's share price to be subject to greater volatility. The
Fund will not invest more than 10% of its assets in inverse floaters.
In selecting investments, the Funds consider maturity, coupon and yield,
relative value of an issue, the credit quality of the issuer, the cost of
insurance and the outlook for interest rates and the economy. The Funds will
usually sell investments when there are changes in the interest rate environment
that are adverse to the investments or they fall short of the portfolio
manager's expectations. The Funds will not necessarily sell investments if their
ratings are reduced or there is a default by the issuer. Information on the
Funds' recent strategies and holdings can be found in the most recent annual
report (see back cover).
PRINCIPAL RISKS: Any investment carries with it some level of risk. In general,
the greater the potential reward of an investment, the greater the risk. Here
are the principal risks of owning the Single State Insured Tax Free Funds:
INTEREST RATE RISK: The market value of municipal securities is affected by
changes in interest rates. When interest rates rise, the market values of
municipal securities decline; when interest rates decline, the market values of
municipal securities increase. The price volatility of municipal securities also
depends on their maturities and durations. Generally, the longer the maturity
and duration of a municipal security, the greater its sensitivity to interest
rates. To compensate investors for this higher risk, municipal securities with
longer maturities and durations generally offer higher yields than municipal
securities with shorter maturities and durations.
Interest rate risk also includes the risk that the yields received by the Funds
on some of their investments will decline as interest rates decline. The Funds
buy investments with fixed maturities as well as investments that give the
issuer the option to "call" or redeem these investments before their maturity
dates. If investments mature or are "called" during a time of declining interest
rates, the Funds will have to reinvest the proceeds in investments offering
lower yields. The Funds also invest in floating rate and variable rate demand
notes. When interest rates decline, the rates paid on these securities may
decline.
CONCENTRATION RISK: Since each Fund invests primarily in the municipal
securities of a particular state, each Fund is more vulnerable than more
geographically diversified funds to events in a particular state that could
impair investor confidence in municipal securities issued within the state. Such
events could include, but are not limited to, economic or demographic factors
that may cause a decrease in tax or other revenues for a state or its
municipalities, state legislative changes (especially those changes regarding
taxes), state constitutional limits on tax increases, judicial decisions
declaring particular municipal securities to be unconstitutional or void, budget
deficits and financial difficulties such as the 1994 bankruptcy of Orange
County.
While each Fund diversifies its assets among municipal issuers, from time to
time a 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
35
<PAGE>
bonds, industrial development bonds, airport bonds or electric utility bonds.
Such a possible concentration of the assets of a Fund could result in the Fund
being invested in securities which are related in such a way that economic,
business, political or other developments which would affect one security would
probably likewise affect the other securities within that particular segment of
the bond market. This risk is mitigated by the fact that at least 65% of each
Fund's investments must be insured.
CREDIT RISK: This is the risk that an issuer of bonds will be unable to pay
interest or principal when due. Although all of the municipal bonds purchased by
the Funds are insured as to scheduled payments of interest and principal, the
insurance does not eliminate credit risk because the insurer may not be
financially able to pay interest and principal on the bonds and up to 35% of
each Fund's assets may be invested in securities that are not insured. It is
also important to note that, although insurance may increase the credit safety
of an investment, it decreases yield as insurance must be paid for directly or
indirectly. It is also important to emphasize that the insurance does not
protect against fluctuations in the market value of the municipal bonds owned by
the Funds, or the share price of the Funds.
MARKET RISK: The Funds are subject to market risk. Bond prices in general may
decline over short or even extended periods primarily due to changes in interest
rates and the credit conditions of the issuers. This is another way of
describing interest rate risk and credit risk. However, market prices also
fluctuate with the forces of supply and demand. Municipal bonds may decline in
value even if the overall market is doing well. Accordingly, the value of your
investment in the Funds will go up and down, which means that you could lose
money.
DERIVATIVE SECURITIES RISK: Because the New York Fund invests in inverse
floaters which are a form of derivative securities, it is subject to a greater
degree of interest rate risk than funds which do not invest in these securities.
Inverse floaters tend to fluctuate significantly more than other bonds as the
result of interest rate changes.
TAX RISK: This is the risk that some or all of the interest income that the Fund
receives might become taxable or be the determined to be taxable by the Internal
Revenue Service, applicable state tax authorities, or a judicial body. See the
discussion on "What about taxes?" and the opinions of counsel in the Statement
of Additional Information.
YEAR 2000 RISKS: The values of securities owned by the Funds may be negatively
affected by Year 2000 problems. Many computer systems are not designed to
process correctly date-related information after January 1, 2000. The issuers of
securities held by the Funds may incur substantial costs in ensuring that
computer systems on which they rely are Year 2000 ready and may face business
and legal problems if these systems are not ready. If computer systems used by
exchanges, broker-dealers, and other market participants are not Year 2000
ready, valuing and trading securities could be difficult. These problems could
have a negative effect on the Funds' investments and returns.
ALTERNATIVE STRATEGIES: At times the Funds may judge that market, economic or
political conditions make pursuing the Funds' investment strategies inconsistent
with the best interests of its shareholders. Each Fund then may temporarily use
alternative strategies that are mainly designed to limit its losses.
36
<PAGE>
FUND MANAGEMENT
First Investors Management Company, Inc. ("FIMCO" or "Adviser") is the
investment adviser to each Fund. Its address is 95 Wall Street, New York, NY
10005. It currently is investment adviser to 51 mutual funds or series of funds
with total net assets of approximately $5 billion. FIMCO supervises all aspects
of the Funds' operations and determines the Funds' portfolio transactions. For
the fiscal year ended December 31, 1998, FIMCO received advisory fees as
follows: [ %] of average daily net assets, net of waiver, for Insured
Intermediate Tax Exempt Fund; [ %] of average daily net assets, net of waiver,
for Insured Tax Exempt Fund; [ %] of average daily net assets, net of waiver,
for New York Insured Tax Free Fund; and [ %] of average daily net assets, net of
waiver, for Multi-State Insured Tax Free Fund.
[chart of advisory fee paid by each multi-state fund to be inserted]
Clark D. Wagner serves as Portfolio Manager of the Funds. Mr. Wagner also serves
as Portfolio Manager of certain other First Investors Funds. Mr. Wagner has been
Chief Investment Officer of FIMCO since 1992.
In addition to the investment risks of the Year 2000 which are disclosed above,
the ability of FIMCO and its affiliates to price the Funds' shares, process
purchase and redemption orders, and render other services could be adversely
affected if the computers or other systems on which they rely are not properly
programmed to operate after January 1, 2000. Additionally, because the services
provided by FIMCO and its affiliates depend on the interaction of their computer
systems with the computer systems of brokers, information services and other
parties, any failure on the part of such third party computer systems to deal
with the Year 2000 may have a negative effect on the services provided to the
Funds. FIMCO and its affiliates are taking steps that they believe are
reasonably designed to address the Year 2000 problem for computer and other
systems used by them and are obtaining assurances that comparable steps are
being taken by the Funds' other service providers. However, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Funds. Nor can the Funds estimate the extent of any impact.
BUYING AND SELLING SHARES
How and when do the Funds price their shares?
The share price (which is called "net asset value" or "NAV" per share) for each
Fund is calculated once each day as of 4 p.m., Eastern Standard Time ("E.S.T."),
on each day the New York Stock Exchange ("NYSE") is open for regular trading. In
the event that the NYSE closes early, the share price will be determined as of
the time of the closing.
To calculate the NAV, each Fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. The prices or NAVs of Class A shares and Class B shares will
generally differ because they have different expenses.
In valuing its assets, each Fund uses the market value of securities for which
market quotations or last sale prices are readily available. If there are no
readily available quotations or last sale prices for an investment or the
available quotations are considered to be unreliable, the securities will be
valued at their fair value as determined in good faith pursuant to procedures
adopted by the Board of Directors of the Funds.
How do I buy shares?
You may buy shares of each Fund through a First Investors registered
representative or through a registered representative of an authorized
37
<PAGE>
broker-dealer ("Representative"). Your Representative will help you complete and
submit an application. Your initial investment must be at least $1,000. However,
we offer automatic investment plans that allow you to open a Fund account with
as little as $50. You also may open certain retirement plan accounts with as
little as $500 even without an automatic investment plan.
Subsequent investments may be made in any amount.
If we receive your application or order in our Woodbridge, N.J. offices in
correct form, as described in the Shareholder Manual, prior to the close of
regular trading on the NYSE, your transaction will be priced at that day's NAV.
If you place your order with your Representative prior to the close of regular
trading on the NYSE, your transaction will also be priced at that day's NAV
provided that your Representative transmits the order to our Woodbridge, NJ
office by 5 p.m., E.S.T. Orders placed after the close of regular trading on the
NYSE will be priced at the next business day's NAV. The procedures for
processing transactions are explained in more detail in our Shareholder Manual
which is available upon request.
You can arrange to make systematic investments electronically from your bank
account or through payroll deduction. All the various ways you can buy shares
are explained in the Shareholder Manual. For further information on the
procedures for buying shares, please contact your Representative or call
Shareholder Services at 1-800-423-4026.
Each Fund reserves the right to refuse any order to buy shares if the Fund
determines that doing so would be in the best interests of the Fund and its
shareholders.
Which class of shares is best for me?
Each Fund has two classes of shares, Class A and Class B. While each class
invests in the same portfolio of securities, the classes have separate sales
charge and expense structures. Because of the different expense structures, each
class of shares generally will have different NAVs and dividends.
The principal advantages of Class A shares are the lower overall expenses, the
availability of quantity discounts on volume purchases and certain account
privileges that are available only on Class A shares. The principal advantage of
Class B shares is that all of your money is put to work from the outset.
Class A shares of a Fund are sold at the public offering price which includes a
front-end sales load. The sales charge declines with the size of your purchase,
as illustrated below.
Class A Shares
Your investment Sales Charge AS A PERCENTAGE OF
---------------------------------------------------------
offering price net amount invested
Less than $25,000 6.25% 6.67%
$25,000-$49,999 5.75 6.10
$50,000-$99,999 5.50 5.82
$100,000-$249,999 4.50 4.71
$250,000-$499,999 3.50 3.63
$500,000-$999,999 2.50 2.56
$1,000,000 or more 0* 0*
*If you invest $1,000,000 or more in Class A shares, you will not pay a
front-end sales charge. However, if you make such an investment and then sell
your shares within 24 months of purchase, you will pay a contingent deferred
sales charge ("CDSC") of 1.00%.
38
<PAGE>
Class B shares are sold at net asset value, without any initial sales charge.
However, you may pay a CDSC when you sell your shares. The CDSC declines the
longer you hold your shares, as illustrated below. Class B shares convert to
Class A shares after eight years.
Class B Shares
Year of Redemption CDSC as a Percentage of Purchase
------------------ Price or NAV at Redemption
--------------------------
Within the 1st or 2nd year...... 4%
Within the 3rd or 4th year...... 3
In the 5th year................. 2
In the 6th year................. 1
Within the 7th year and 8th year 0
There is no CDSC on Class B shares which are acquired through reinvestment of
dividends or distributions. The CDSC is imposed on the lower of the original
purchase price or the net asset value of the shares being sold. For purposes of
determining the CDSC, all purchases made during a calendar month are counted as
having been made on the first day of that month at the average cost of all
purchases made during that month.
To keep your CDSC as low as possible, each time you place a request to sell
shares, we will first sell any shares in your account that carry no CDSC. If
there is an insufficient number of these shares to meet your request in full, we
will then sell those shares that have the lowest CDSC.
Sales charges and CDSCs may be reduced or waived under certain circumstances and
for certain groups. Consult your Representative or call us directly at
1-800-423-4026 for details.
Each Fund has adopted a plan pursuant to Rule 12b-1 that allows the Fund to pay
distribution fees for the sale and distribution of its shares. Each class of
shares pays Rule 12b-1 fees for the marketing of fund shares and for services
provided to shareholders. The plans provide for payments at annual rates (based
on average daily net assets) of up to .30% on Class A shares and 1.00% on Class
B shares. No more than .25% of these payments may be for service fees. These
fees are paid monthly in arrears. Because these fees are paid out of a Fund's
assets on an on-going basis, the higher fees for Class B shares will increase
the cost of your investment and over time may cost you more than paying the
initial sales charge for Class A shares.
FOR ACTUAL PAST EXPENSES OF CLASS A AND CLASS B SHARES OF A FUND, SEE THE
APPROPRIATE SECTION IN THIS PROSPECTUS ENTITLED "WHAT ARE THE FEES AND EXPENSES
OF THE FUND?"
Because of the lower overall expenses on Class A shares, we recommend Class A
shares for purchases in excess of $250,000. If you are investing in excess of
$1,000,000, we will only sell Class A shares to you. For purchases below
$250,000, the class that is best for you generally depends upon the amount you
invest, your time horizon, and your preference for paying the sales charge
initially or later. If you fail to tell us what Class of shares you want, we
will purchase Class A shares for you.
How do I sell shares?
You may redeem your Fund shares on any day a Fund is open for business by:
. Contacting your Representative who will place a redemption order for
you;
39
<PAGE>
. Sending a written redemption request to Administrative Data
Management Corp., ("ADM") at 581 Main Street, Woodbridge, NJ
07095-1198;
. Telephoning the Special Services Department of ADM at 1-800-342-6221
(if you have elected to have telephone privileges); or
. Instructing us to make an electronic transfer to a predesignated
bank (if you have completed an application authorizing such
transfers).
Your redemption request will be processed at the price next computed after we
receive the request in good order, as described in the Shareholder Manual. For
all requests, have your account number available.
Payment of redemption proceeds generally will be made within 7 days. If you are
redeeming shares which you recently purchased by check, payment may be delayed
to verify that your check has cleared. This may take up to 15 days from the date
of your purchase. You may not redeem shares by telephone or Electronic Fund
Transfer unless you have owned the shares for at least 15 days.
If your account falls below the minimum account balance for any reason other
than market fluctuation, each Fund reserves the right to redeem your account
without your consent or to impose a low balance account fee of $15 annually on
60 days prior notice. Each Fund may also redeem your account or impose a low
balance account fee if you have established your account under a systematic
investment program and discontinue the program before you meet the minimum
account balance. You may avoid redemption or imposition of a fee by purchasing
additional Fund shares during this 60-day period to bring your account balance
to the required minimum. If you own Class B shares, you will not be charged a
CDSC on a low balance redemption.
Each Fund reserves the right to make in-kind redemptions. This means that it
could respond to a redemption request by distributing shares of the Fund's
underlying investments rather than distributing cash.
Can I exchange my shares for the shares of other First Investors Funds?
You may exchange shares of a Fund for shares of other First Investors Funds
without paying any additional sales charge. You can only exchange within the
same class of shares (i.e., Class A to Class A). Consult your Representative or
call ADM at 1-800-423-4026 for details.
Each Fund reserves the right to reject any exchange request that appears to be
part of a market timing strategy based upon the holding period of the initial
investment, the amount of the investment being exchanged, the Funds involved,
and the background of the shareholder or dealer involved. Each Fund is designed
for long-term investment purposes. It is not intended to provide a vehicle for
short-term market timing.
ACCOUNT POLICIES
What about dividends and capital gain distributions?
To the extent that it has net investment income, a Fund will declare on a daily
basis and pay, on a monthly basis, dividends from net investment income. Any net
realized capital gains will be declared and distributed on an annual basis,
usually after the end of a Fund's fiscal year. 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.
40
<PAGE>
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 choose to reinvest all dividends and other distributions at NAV in
additional shares of the same class of a Fund or certain other First Investors
Funds, or receive all dividends and other distributions in cash. If you do not
select an option when you open your account, all dividends and other
distributions will be reinvested in additional shares of a Fund. If you do not
cash a distribution check and do not notify ADM to issue a new check within 12
months, the distribution may be reinvested in a Fund. If any correspondence sent
by a Fund is returned as "undeliverable," dividends and other distributions
automatically will be reinvested in a Fund. No interest will be paid to you
while a distribution remains uninvested.
A dividend or other distribution paid on a class of shares will only be paid in
additional shares of the distributing class if the total amount of the
distribution is under $5 or a Fund has received notice of your death (until
written alternate payment instructions and other necessary documents are
provided by your legal representative).
What about taxes?
For individual shareholders, any income dividends paid by a Fund should
generally be exempt from federal income taxes, including the AMT. Dividends, if
any, paid by the Single State Insured Tax Free Funds should also be exempt from
state income taxes, if any, for individual resident shareholders of a particular
Fund's state and in certain cases, exempt from local taxes. For Florida
residents, income dividends should be exempt from the Florida intangible
personal property tax. Long-term capital gain distributions by a Fund are taxed
to you as long-term capital gains, regardless of how long you owned your Fund
shares. Short-term capital gains by a Fund are taxed to you as ordinary income.
You are taxed in the same manner whether you receive your capital gain
distributions in cash or reinvest them in additional Fund shares. Your sale or
exchange of Fund shares may be considered a taxable event for you. Depending on
the purchase price and the sale price of the shares you sell or exchange, you
may have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transactions.
How do I obtain a complete explanation of all account privileges and policies?
The Funds offer a full range of special privileges, including special investment
programs for group retirement plans, systematic investment programs, automatic
payroll investment programs, telephone privileges, check writing privileges, and
expedited redemptions by wire order or Automated Clearing House transfer. The
full range of privileges, and related policies, are described in a special
Shareholder Manual, which you may obtain on request. For more information on the
full range of services available, please contact us directly at 1-800-423-4026.
41
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
financial performance of each Fund for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rates that an investor would have earned (or lost) on an
investment in each Fund (assuming reinvestment of all dividends and
distributions). The information has been audited by ______________, whose
report, along with the Funds' financial statements, are included in the SAI,
which is available upon request.
<TABLE>
<CAPTION>
INSURED INTERMEDIATE TAX EXEMPT FUND
- ---------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------
1/1/98 - 1/1/97 - 1/1/96 - 1/1/95 - 1/1/94 -
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value,
Beginning of Period . . . . . . . . . $ 5.79 $ 5.85 $ 5.43 $ 5.79
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income . . . . . . . .29 .29 .30 .24
Net realized and unrealized gain
(loss) on investments . . . . . . . .14 (.06) .42 (.36)
-------- -------- ------- ---------
Total from Investment
Operations. . . . . . . . . . . .43 .23 .72 (.12)
-------- -------- ------- ---------
LESS DISTRIBUTIONS FROM
Net investment income. . . . . . . . .29 .29 .30 .24
Net realized gain . . . . . . . . . -- -- -- --
-------- -------- ------- ---------
Total Distributions . . . . . . . .29 .29 .30 .24
-------- -------- ------- ---------
Net Asset Value, End of Period . . . $ 5.93 $ 5.79 $ 5.85 $ 5.43
RATIOS/SUPPLEMENTAL DATA
Total Return** (%). . . . . . . . . . 7.68 4.07 13.50 (2.05)
Net Assets, End of Period
(in thousands) . . . . . . . . . . . $7,344 $7,415 $ 7,017 $5,688
RATIO TO AVERAGE NET ASSETS++
Expenses (%). . . . . . . . . . . . .53 .49 .35 .14
Net investment income (%) . . . . . 5.02 5.05 5.32 4.52
RATIO TO AVERAGE NET ASSETS BEFORE
EXPENSES WAIVED OR ASSUMED
Expenses (%). . . . . . . . . . . . 1.21 1.24 1.22 .96
Net investment income(%). . . . . . 4.34 4.30 4.45 3.70
Portfolio Turnover Rate (%) . . . . . 91 82 47 210
* 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
</TABLE>
42
<PAGE>
- -----------------------------------------
CLASS B
- -----------------------------------------
1/1/98 - 1/1/97 - 1/1/96 - 1/12/95* -
12/31/98 12/31/97 12/31/96 12/31/95
- -----------------------------------------
$ 5.80 $ 5.85 $ 5.45
------ ------ ------
.23 .23 .25
.13 (.05) .41
------ ------- ------
.36 .18 .66
------- ------- ------
.23 .23 .26
-- -- --
------- ------- ------
.23 .23 .26
------- ------- -------
$ 5.93 $5.80 $ 5.85
======= ======= =======
6.39 3.17 12.27
$808 $613 $378
1.53 1.49 1.35+
4.02 4.05 4.32+
1.91 1.94 2.22+
3.64 3.60 3.45+
91 82 47
43
<PAGE>
<TABLE>
<CAPTION>
INSURED TAX EXEMPT FUND
- ---------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------
1/1/98 - 1/1/97 - 1/1/96 - 1/1/95 - 1/1/94 -
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value,
Beginning of Year . . . . . . . . . $10.14 $10.37 $9.42 $10.56
------ ------ ----- ------
Income from Investment Operations
Net investment income . . . . . . .50 .51 .52 .56
Net realized and unrealized gain
(loss) on investments . . . . . .31 (.23) .96 (1.15)
------ ------ ----- -------
Total from Investment
Operations . . . . . . . . . . . .81 .28 1.48 (.59)
------ ------ ----- -------
Less Distributions from:
Net Investment Income . . . . . . .50 .51 .53 .55
Net realized gains . . . . . . . -- -- -- --
------ ------ ------ ------
Total Distributions . . . . . . .50 .51 .53 .55
------ ------- ------- ------
Net Asset Value, End of Year . . . . $10.45 $10.14 $10.37 $9.42
======= ====== ====== ======
TOTAL RETURN (%) + . . . . . . . . 8.27 2.81 16.01 (5.61)
- ------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(in millions) . . . . . . . . . . $1,192 $1,253 $1,373 $1,302
Ratio to Average Net Assets: (%) . .
Expenses . . . . . . . . . . . . . 1.14 1.14 1.14 1.18
Net Investment Income. . . . . . . 4.93 5.06 5.25 5.64
Portfolio Turnover Rate (%) . . . . 13 21 37 57
* Date shares first offered
+ Calculated without sales charge
(a) Annualized
</TABLE>
44
<PAGE>
- ----------------------------------------
CLASS B
- -----------------------------------------
1/1/98 - 1/1/97 - 1/1/96 - 1/12/95* -
12/31/98 12/31/97 12/31/96 12/31/95
- -----------------------------------------
$10.13 $10.37 $9.48
------ ------ -----
.43 .44 .44
.32 (.24) .89
------- -------- -------
.75 .20 1.33
------- ------- -------
.43 .44 .44
-- -- --
------- ------- -------
.43 .44 .44
------- ------- -------
$10.45 $10.13 $10.37
====== ====== ======
7.62 2.03 14.27
$3 $3 $2
1.85 1.83 1.88(a)
4.22 4.37 4.45(a)
13 21 37
45
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST INVESTORS NEW YORK
INSURED TAX FREE FUND, INC.
CLASS A
- -------
1/1/94 - 12/31/94 . . . $15.18 $.758 $(1.510) $(.752) $.768 $-- $.768
1/1/95 - 12/31/95 . . . 13.66 .738 1.331 2.069 .740 .059 .799
1/1/96 - 12/31/96 . . . 14.93 .719 (.298) .421 .720 .091 .811
1/1/97 - 12/31/97 . . . 14.54 .709 .395 1.104 .708 .076 .784
1/1/98 - 12/31/98 . . .
CLASS B
1/12/95* - 12/31/95 . . . 13.76 .616 1.232 1.848 .619 .059 .678
1/1/96 - 12/31/96 . . . 14.93 .617 (.306) .311 .620 .091 .711
1/1/97 - 12/31/97 . . . 14.53 .608 .406 1.014 .608 .076 .684
1/1/98 - 12/31/98 . . .
* Date Class B shares first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and/or the transfer agent.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARIZONA FUND
CLASS A
1/1/94 - 12/31/94 . . . $13.12 $.663 $(1.397) $(.734) $.676 $-- $.676
1/1/95 - 12/31/95 . . . 11.71 .665 1.448 2.113 .673 -- .673
1/1/96 - 12/31/96 . . . 13.15 .664 (.199) .465 .665 -- .665
1/1/97 - 12/31/97 . . . 12.95 .658 .511 1.169 .659 -- .659
1/1/98 - 12/31/98 . . .
CLASS B
1/12/95* - 12/31/95 . . 11.82 .544 1.340 1.884 .554 -- .554
1/1/96 - 12/31/96 . . . 13.15 .565 (.201) .364 .564 -- .564
1/1/97 - 12/31/97 . . . 12.95 .556 .500 1.056 .556 -- .556
1/1/98 - 12/31/98 . . .
CALIFORNIA FUND
CLASS A
1/1/94 - 12/31/94 . . . $12.12 $.598 $(1.328) $(.730) $.620 $-- $.620
1/1/95 - 12/31/95 . . . 10.77 .580 1.335 1.915 .589 .136 .725
1/1/96 - 12/31/96 . . . 11.96 .576 (.128) .448 .575 .073 .648
1/1/97 - 12/31/97 . . . 11.76 .569 .534 1.103 .570 .173 .743
1/1/98 - 12/31/98 . . .
CLASS B
1/12/95* - 12/31/95 . . 10.87 .472 1.227 1.699 .483 .136 .619
1/1/96 - 12/31/96 . . . 11.95 .486 (.123) .363 .480 .073 .553
1/1/97 - 12/31/97 . . . 11.76 .476 .532 1.008 .475 .173 .648
1/1/98 - 12/31/98 . . .
* Date Class B shares were first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and the transfer agent.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.71 (5.63) $8,803 .30 5.52 1.24 4.59 63
13.15 18.41 8,834 .50 5.27 1.15 4.62 36
12.95 3.69 8,383 .53 5.17 1.23 4.47 27
13.46 9.28 9,691 .50 5.03 1.16 4.37 24
13.15 16.20 173 1.30+ 4.62+ 1.95+ 3.95+ 36
12.95 2.89 289 1.33 4.37 2.03 3.67 27
13.45 8.36 437 1.30 4.23 1.96 3.57 24
$10.77 (6.10) $15,335 .97 5.27 1.22 5.02 83
11.96 18.16 16,547 .90 5.02 1.15 4.77 53
11.76 3.91 15,558 .84 4.93 1.19 4.58 30
12.12 9.66 15,601 .80 4.80 1.16 4.44 46
11.95 15.91 59 1.74+ 4.31+ 2.00+ 4.04+ 53
11.76 3.16 114 1.63 4.14 1.98 3.79 30
12.12 8.79 220 1.60 4.00 1.96 3.64 46
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COLORADO FUND
CLASS A
1/1/94 - 12/31/94 . . . $12.60 $.631 $(1.351) $(.720) $.640 $-- $.640
1/1/95 - 12/31/95 . . . 11.24 .668 1.340 2.008 .668 -- .668
1/1/96 - 12/31/96 . . . 12.58 .642 (.089) .553 .643 -- .643
1/1/97 - 12/31/97 . . . 12.49 .638 .498 1.136 .636 -- .636
1/1/98 - 12/31/98 . . .
CLASS B
1/12/95* - 12/31/95 . . 11.35 .564 1.239 1.803 .573 -- .573
1/1/96 - 12/31/96 . . . 12.58 .547 (.100) .447 .547 -- .547
1/1/97 - 12/31/97 . . . 12.48 .539 .501 1.040 .540 -- .540
1/1/98 - 12/31/98 . . .
CONNECTICUT FUND
CLASS A
1/1/94 - 12/31/94 . . . 13.05 .609 (1.480) (.871) .609 -- .609
1/1/95 - 12/31/95 . . . 11.57 .617 1.333 1.950 .620 -- .620
1/1/96 - 12/31/96 . . . 12.90 .619 (.202) .417 .617 -- .617
1/1/97 - 12/31/97 . . . 12.70 .613 .471 1.084 .614 -- .614
1/1/98 - 12/31/98 . . .
CLASS B
1/12/95* - 12/31/95 . . 11.67 .512 1.242 1.754 .524 -- .524
1/1/96 - 12/31/96 . . . 12.90 .522 (.204) .318 .518 -- .518
1/1/97 - 12/31/97 . . . 12.70 .516 .470 .986 .516 -- .516
1/1/98 - 12/31/98 . . .
* Date Class B shares were first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and the transfer agent.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.24 (5.77) $3,110 .20 5.41 1.43 4.18 108
12.58 18.25 3,525 .20 5.54 1.32 4.42 45
12.49 4.57 3,466 .38 5.20 1.40 4.17 20
12.99 9.37 3,424 .40 5.07 1.29 4.18 39
12.58 16.18 131 1.00+ 4.90+ 2.12+ 3.75+ 45
12.48 3.68 241 1.19 4.39 2.21 3.36 20
12.98 8.55 370 1.20 4.27 2.09 3.38 39
$11.57 (6.75) $14,848 .87 5.01 1.22 4.66 63
12.90 17.18 16,725 .85 4.98 1.20 4.63 26
12.70 3.37 15,203 .81 4.92 1.23 4.50 15
13.17 8.77 16,151 .80 4.78 1.17 4.41 14
12.90 15.28 857 1.71+ 4.12+ 2.07+ 3.76+ 26
12.70 2.57 1,505 1.61 4.12 2.02 3.71 15
13.17 7.95 2,891 1.60 3.98 1.97 3.61 14
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST INVESTORS MULTI-STATE
INSURED TAX FREE FUND
FLORIDA FUND
CLASS A
1/1/94 - 12/31/94 ....... $13.14 $.642 $(1.346) $(.704) $.646 $-- $.646
1/1/95 - 12/31/95 ....... 11.79 .640 1.527 2.167 .647 -- .647
1/1/96 - 12/31/96 ....... 13.31 .623 (.198) .425 .625 -- .625
1/1/97 - 12/31/97 ....... 13.11 .624 .547 1.171 .624 .037 .661
1/1/98 - 12/31/98 .......
CLASS B
1/12/95* - 12/31/95 ..... 11.87 .529 1.460 1.989 .549 -- .549
1/1/96 - 12/31/96 ....... 13.31 .530 (.204) .326 .526 -- .526
1/1/97 - 12/31/97 ....... 13.11 .531 .552 1.083 .526 .037 .563
1/1/98 - 12/31/98 .......
GEORGIA FUND
CLASS A
1/1/94 - 12/31/94 ....... $12.49 $.584 $(1.165) $(.581) $.579 $-- $.579
1/1/95 - 12/31/95 ....... 11.33 .653 1.387 2.040 .650 -- .650
1/1/96 - 12/31/96 ....... 12.72 .639 (.161) .478 .648 -- .648
1/1/97 - 12/31/97 ....... 12.55 .639 .578 1.217 .637 -- .637
1/1/98 - 12/31/98 .......
CLASS B
1/12/95* - 12/31/95 ..... 11.42 .529 1.303 1.832 .542 -- .542
1/1/96 - 12/31/96 ....... 12.71 .563 (.183) .380 .550 -- .550
1/1/97 - 12/31/97 ....... 12.54 .524 .584 1.108 .538 -- .538
1/1/98 - 12/31/98 .......
* Date Class B shares first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and/or the transfer agent.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.79 (5.39) $19,765 .62 5.24 1.19 4.67 98
13.31 18.77 22,229 .75 5.05 1.15 4.65 68
13.11 3.34 23,299 .83 4.80 1.16 4.47 55
13.62 9.18 23,840 .80 4.71 1.11 4.40 19
13.31 17.06 299 1.68+ 4.12+ 2.09+ 3.70+ 68
13.11 2.56 549 1.62 4.01 1.95 3.68 55
13.63 8.38 837 1.60 3.91 1.91 3.60 19
11.33 (4.69) 2,065 .20 4.99 1.93 3.26 78
12.72 18.40 3,047 .20 5.41 1.42 4.20 45
12.55 3.94 3,269 .38 5.17 1.44 4.11 37
13.13 10.00 3,152 .40 5.03 1.33 4.10 21
12.71 16.34 97 1.00+ 4.61+ 2.22+ 3.40+ 45
12.54 3.13 151 1.19 4.36 2.25 3.30 37
13.11 9.07 203 1.20 4.23 2.13 3.30 21
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST INVESTORS MULTI-STATE
INSURED TAX FREE FUND
MARYLAND FUND
CLASS A
1/1/94 - 12/31/94 ..... $13.15 $.644 $(1.373) $(.729) $.651 $-- $.651
1/1/95 - 12/31/95 ...... 11.77 .668 1.348 2.016 .666 -- .666
1/1/96 - 12/31/96 ...... 13.12 .650 (.235) .415 .655 -- .655
1/1/97 - 12/31/97 ...... 12.88 .652 .549 1.201 .651 -- .651
1/1/98 - 12/31/98 ......
CLASS B
1/12/95* - 12/31/95 .... 11.85 .561 1.279 1.840 .570 -- .570
1/1/96 - 12/31/96 ...... 13.12 .555 (.249) .306 .556 -- .556
1/1/97 - 12/31/97 ...... 12.87 .551 .556 1.107 .547 -- .547
1/1/98 - 12/31/98 ......
MASSACHUSETTS FUND
CLASS A
1/1/94 - 12/31/94 ..... $12.28 $.627 $(1.267) $(.640) $.630 $-- $.630
1/1/95 - 12/31/95 ..... 11.01 .612 1.227 1.839 .613 .016 .629
1/1/96 - 12/31/96 ..... 12.22 .603 (.256) .347 .602 .045 .647
1/1/97 - 12/31/97 ..... 11.92 .601 .356 .957 .603 .074 .677
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 .... 11.09 .508 1.155 1.663 .527 .016 .543
1/1/96 - 12/31/96 ...... 12.21 .514 (.263) .251 .506 .045 .551
1/1/97 - 12/31/97 ...... 11.91 .508 .353 .861 .507 .074 .581
1/1/98 - 12/31/98 ......
* Date Class B shares first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and/or the transfer agent.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.77 (5.59) $6,904 .45 5.27 1.34 4.37 44
13.12 17.50 8,666 .48 5.32 1.24 4.55 49
12.88 3.33 10,118 .51 5.10 1.24 4.37 13
13.43 9.59 10,705 .50 5.01 1.18 4.33 35
13.12 15.82 423 1.38+ 4.42+ 2.19+ 3.61+ 49
12.87 2.45 1,021 1.31 4.30 2.05 3.57 13
13.43 8.81 1,782 1.30 4.21 1.98 3.53 35
11.01 (5.30) 20,838 .95 5.45 1.20 5.20 64
12.22 17.07 23,180 .90 5.22 1.15 4.97 40
11.92 2.99 22,543 .86 5.08 1.18 4.76 45
12.20 8.27 22,852 .80 5.01 1.15 4.66 28
12.21 15.28 314 1.76+ 4.36+ 2.01+ 4.10+ 40
11.91 2.16 519 1.66 4.28 1.98 3.96 45
12.19 7.41 783 1.60 4.21 1.95 3.86 28
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MICHIGAN FUND
CLASS A
1/1/94 - 12/31/94 ....... $12.89 $.612 $(1.423) $(.811) $.609 $-- $.609
1/1/95 - 12/31/95 ....... 11.47 .634 1.331 1.965 .635 -- .635
1/1/96 - 12/31/96 ....... 12.80 .627 (.215) .412 .631 .011 .642
1/1/97 - 12/31/97 ....... 12.57 .610 .535 1.145 .609 .046 .655
1/1/98 - 12/31/98 .......
CLASS B
1/12/95* - 12/31/95 ..... 11.57 .528 1.241 1.769 .539 -- .539
1/1/96 - 12/31/96 ........ 12.80 .534 (.229) .305 .534 .011 .545
1/1/97 - 12/31/97 ........ 12.56 .511 .536 1.047 .511 .046 .557
1/1/98 - 12/31/98 ........
MINNESOTA FUND
CLASS A
1/1/94 - 12/31/94 ....... $11.77 $.592 $(1.282) $(.690) $.600 $-- $.600
1/1/95 - 12/31/95 ....... 10.48 .589 1.022 1.611 .591 -- .591
1/1/96 - 12/31/96 ....... 11.50 .592 (.210) .382 .592 -- .592
1/1/97 - 12/31/97 ....... 11.29 .599 .340 .939 .599 -- .599
1/1/98 - 12/31/98 .......
CLASS B
1/12/95* - 12/31/95 ..... 10.55 .515 .950 1.465 .515 -- .515
1/1/96 - 12/31/96 ........ 11.50 .493 (.205) .288 .498 -- .498
1/1/97 - 12/31/97 ........ 11.29 .508 .341 .849 .509 -- .509
1/1/98 -12/31/98 .........
* Date Class B shares were first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and the transfer agent.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.47 (6.36) $30,362 .93 5.11 1.18 4.86 60
12.80 17.47 36,837 .89 5.14 1.14 4.89 45
12.57 3.37 36,928 .88 5.03 1.13 4.78 43
13.06 9.37 39,581 .87 4.80 1.12 4.55 32
12.80 15.55 388 1.76+ 4.41+ 2.02+ 4.15+ 45
12.56 2.49 724 1.69 4.22 1.94 3.97 43
13.05 8.54 1,018 1.67 4.00 1.92 3.75 32
$10.48 (5.93) $7,375 .65 5.40 1.29 4.76 34
11.50 15.68 8,162 .65 5.29 1.31 4.63 53
11.29 3.47 8,304 .56 5.27 1.31 4.52 49
11.63 8.57 8,231 .50 5.27 1.21 4.56 15
11.50 14.13 .1 1.45+ 4.64+ 2.11+ 3.96+ 53
11.29 2.61 41 1.40 4.44 2.14 3.69 49
11.63 7.71 44 1.30 4.47 2.01 3.76 15
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST INVESTORS MULTI-STATE
INSURED TAX FREE FUND
MISSOURI FUND
CLASS A
1/1/94 - 12/31/94 ..... $12.50 $.617 $(1.384) $(.767) $.613 $-- $.613
1/1/95 - 12/31/95 ..... 11.12 .662 1.356 2.018 .668 -- .668
1/1/96 - 12/31/96 ..... 12.47 .637 (1.80) .457 .637 -- .637
1/1/97 - 12/31/97 ..... 12.29 .638 .490 1.128 .638 -- .638
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 11.22 .548 1.260 1.808 .548 -- .548
1/1/96 - 12/31/96 ..... 12.48 .538 (.189) .349 .539 -- .539
1/1/97 - 12/31/97 ..... 12.29 .537 .494 1.031 .541 -- .541
1/1/98 - 12/31/98 .....
NEW JERSEY FUND
CLASS A
1/1/94 - 12/31/94 ..... $13.51 $.659 $(1.448) $(.789) $.661 $-- $.661
1/1/95 - 12/31/95 ..... 12.06 .648 1.291 1.939 .652 .097 .749
1/1/96 - 12/31/96 ..... 13.25 .636 (.245) .391 .636 .015 .651
1/1/97 - 12/31/97 ..... 12.99 .630 .427 1.057 .629 .118 .648
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 12.14 .526 1.199 1.725 .528 .097 .625
1/1/96 - 12/31/96 ..... 13.24 .533 (.253) .280 .535 .015 .550
1/1/97 - 12/31/97 ..... 12.97 .525 .433 .958 .530 .118 .648
1/1/98 - 12/31/98 .....
* Date Class B shares first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and/or the transfer agent.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$11.12 (6.20) $1,611 .20 5.45 1.57 4.07 98
12.47 18.55 1,890 .20 5.58 1.42 4.36 50
12.29 3.84 1,925 .38 5.24 1.69 3.93 15
12.78 9.44 1,798 .40 5.13 1.46 4.07 12
12.48 16.41 .1 1.00+ 4.94+ 2.22+ 3.68+ 50
12.29 2.93 36 1.24 4.38 2.55 3.07 15
12.78 8.60 117 1.20 4.33 2.26 3.27 12
$12.06 (5.91) 55,379 .99 5.21 1.14 5.06 60
13.25 16.41 59,153 .99 5.06 1.14 4.91 30
12.99 3.09 58,823 .98 4.92 1.13 4.77 35
13.30 8.36 59,243 .96 4.81 1.11 4.66 22
13.24 14.45 957 1.81+ 4.24+ 1.97+ 4.08+ 30
12.97 2.22 1,603 1.78 4.12 1.93 3.97 35
13.28 7.56 2,011 1.76 4.01 1.91 3.86 22
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST INVESTORS MULTI-STATE
INSURED TAX FREE FUND
NORTH CAROLINA FUND
CLASS A
1/1/94 - 12/31/94 ..... 12.28 .594 (1.380) (.786) .594 -- .594
1/1/95 - 12/31/95 ..... 10.90 .608 1.391 1.999 .609 -- .609
1/1/96 - 12/31/96 ..... 12.29 .590 (.159) .431 .591 -- .591
1/1/97 - 12/31/97 ..... 12.13 .597 .530 1.127 .597 -- .597
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 10.99 .492 1.307 1.799 .499 -- .499
1/1/96 - 12/31/96 ..... 12.29 .496 (.161) .335 .495 -- .495
1/1/97 - 12/31/97 ..... 12.13 .497 .534 1.031 .501 -- .501
1/1/98 - 12/31/98 .....
OHIO FUND
CLASS A
1/1/94 - 12/31/94 ..... $12.66 $.613 $(1.353) $(.740) $.620 $-- $.620
1/1/95 - 12/31/95 ..... 11.30 .615 1.306 1.921 .619 .092 .711
1/1/96 - 12/31/96 ..... 12.51 .605 (.097) .508 .609 .059 .668
1/1/97 - 12/31/97 ..... 12.35 .607 .430 1.037 .606 .071 .677
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 11.40 .503 1.212 1.715 .513 .092 .605
1/1/96 - 12/31/96 ..... 12.51 .507 (.095) .412 .513 .059 .572
1/1/97 - 12/31/97 ..... 12.35 .507 .424 .931 .510 .071 .581
1/1/98 - 12/31/98 .....
* Date Class B shares first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and/or the transfer agent.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- ---------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$10.90 (6.45) $3,872 .20 5.22 1.44 3.99 61
12.29 18.72 4,984 .20 5.18 1.36 4.03 76
12.13 3.68 5,822 .38 4.94 1.31 4.02 43
12.66 9.56 6,697 .40 4.87 1.23 4.04 30
12.29 16.65 75 1.00+ 4.38+ 2.16+ 3.23+ 76
12.13 2.85 134 1.20 4.12 2.12 3.20 43
12.66 8.71 185 1.20 4.07 2.03 3.24 30
$11.30 (5.91) $18,169 .85 5.18 1.20 4.83 57
12.51 17.34 19,398 .87 5.07 1.22 4.72 70
12.35 4.23 20,123 .86 4.95 1.19 4.62 33
12.71 8.64 19,308 .80 4.88 1.18 4.50 25
12.51 15.30 282 1.76+ 4.33+ 2.13+ 3.95+ 70
12.35 3.43 279 1.66 4.15 1.99 3.82 33
12.70 7.73 335 1.60 4.08 1.98 3.70 25
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
INCOME FROM INVESTMENT OPERATIONS FROM
------------------------------------------------------------------- ---------------------------------
NET ASSET
VALUE NET REALIZED
--------- NET AND UNREALIZED TOTAL FROM NET NET TOTAL
BEGINNING OF INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT REALIZED DISTRI-
PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OREGON FUND
CLASS A
1/1/94 - 12/31/94 ..... $12.29 $.529 $(1.339) $(.810) $.610 $-- $.610
1/1/95 - 12/31/95 ..... 10.87 .626 1.289 1.915 .625 -- .625
1/1/96 - 12/31/96 ..... 12.16 .589 (.161) .428 .588 -- .588
1/1/97 - 12/31/97 ..... 12.00 .582 .582 1.164 .584 -- .584
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 10.97 .541 1.182 1.723 .543 -- .543
1/1/96 - 12/31/96 ..... 12.15 .495 (.161) .334 .494 -- .494
1/1/97 - 12/31/97 ..... 11.99 .485 .573 1.058 .488 -- .488
1/1/98 - 12/31/98 .....
PENNSYLVANIA FUND
CLASS A
1/1/94 - 12/31/94 ..... $13.16 $.627 $(1.447) $(.820) $.630 $-- $.630
1/1/95 - 12/31/95 ..... 11.71 .638 1.463 2.101 .635 .036 .671
1/1/96 - 12/31/96 ..... 13.14 .622 (.197) .425 .627 .028 .655
1/1/97 - 12/31/97 ..... 12.91 .624 .523 1.147 .624 .153 .777
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 11.81 .539 1.376 1.915 .549 .036 .585
1/1/96 - 12/31/96 ..... 13.14 .529 (.201) .328 .530 .028 .558
1/1/97 - 12/31/97 ..... 12.91 .526 .510 1.036 .523 .153 .676
1/1/98 - 12/31/98 .....
VIRGINIA FUND
CLASS A
1/1/94 - 12/31/94 ..... $13.06 $.611 $(1.383) $(.772) $.608 $-- $.608
1/1/95 - 12/31/95 ..... 11.68 .625 1.370 1.995 .629 .036 .665
1/1/96 - 12/31/96 ..... 13.01 .626 (.195) .431 .624 .067 .691
1/1/97 - 12/31/97 ..... 12.75 .615 .504 1.119 .617 .032 .649
1/1/98 - 12/31/98 .....
CLASS B
1/12/95* - 12/31/95 ... 11.76 .510 1.286 1.796 .520 .036 .556
1/1/96 - 12/31/96 ..... 13.00 .525 (.194) .331 .524 .067 .591
1/1/97 - 12/31/97 ..... 12.74 .513 .505 1.018 .516 .032 .548
1/1/98 - 12/31/98 .....
* Date Class B shares were first offered.
** Calculated without sales charges.
+ Annualized.
++ Net of expenses waived or assumed by the investment adviser and the transfer agent.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
RATIOS / SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS ++ WAIVED OR ASSUMED
---------------------- --------------------
NET ASSET
VALUE NET NET PORTFOLIO
- --------- NET ASSETS INVESTMENT INVESTMENT TURNOVER
END OF TOTAL RETURN END OF PERIOD EXPENSES INCOME EXPENSES INCOME RATE
PERIOD ** (%) (IN THOUSANDS) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10.87 (6.65) 4,696 .20 5.36 1.39 4.17 135
12.16 17.99 6,840 .20 5.36 1.23 4.33 36
12.00 3.68 9,917 .46 4.97 1.26 4.16 21
12.58 9.97 11,800 .50 4.78 .78 4.50 32
12.15 16.00 342 1.00+ 4.72+ 2.03+ 3.65+ 36
11.99 2.87 568 1.26 4.17 2.07 3.36 21
12.56 9.03 752 1.30 3.98 1.58 3.70 32
$11.71 (6.31) $33,542 .88 5.11 1.13 4.86 81
13.14 18.29 39,980 .86 5.07 1.11 4.82 48
12.91 3.39 42,228 .86 4.86 1.11 4.61 42
13.28 9.14 42,223 .85 4.79 1.10 4.54 37
13.14 16.49 247 1.72+ 4.20+ 1.98 3.94+ 48
12.91 2.61 781 1.66 4.06 1.91 3.81 42
13.27 8.23 1,739 1.65 3.99 1.90 3.74 37
$11.68 (5.97) $22,325 .85 5.01 1.20 4.66 55
13.01 17.42 25,193 .81 5.01 1.16 4.66 34
12.75 3.47 21,047 .79 4.93 1.20 4.52 30
13.22 9.03 22,136 .80 4.78 1.16 4.42 10
13.00 15.53 991 1.66+ 4.16+ 2.02+ 3.80+ 34
12.74 2.66 1,166 1.59 4.13 2.00 3.72 30
13.21 8.19 1,390 1.60 3.98 1.96 3.62 10
</TABLE>
62
<PAGE>
[FIRST INVESTORS LOGO]
INSURED INTERMEDIATE TAX EXEMPT
INSURED TAX EXEMPT
NEW YORK INSURED TAX FREE
MULTI-STATE INSURED TAX FREE
For investors who want more information about the Funds, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about each Fund's investments
is available in the Funds' annual and semi-annual reports to shareholders. In
the Funds' annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected each Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds and is incorporated by reference into this
prospectus.
SHAREHOLDER MANUAL: The Shareholder Manual provides more detailed information
about the purchase, redemption and sale of the Funds' shares.
You can get free copies of reports, the SAI and the Shareholder Manual, request
other information and discuss your questions about the Funds by contacting the
Funds at:
Administrative Data Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198
Telephone: 1-800-423-4026
You can review and copy information about the Funds for a fee (including the
Funds' reports, Shareholder Manual and SAI) at the Public Reference Room of the
Securities and Exchange Commission ("SEC") in Washington, D.C. You can also send
your request and a duplicating fee to the Public Reference Room of the SEC,
Washington, DC 20549-6009. You can obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. Text-only versions of Fund
documents can be viewed online or downloaded from the SEC's Internet website at
http://www.sec.gov.
(Investment Company Act File No.: First
Investors Insured Intermediate Tax
Exempt Fund 811-5690; First Investors
Insured Tax Exempt Fund, Inc. 811-2923;
First Investors New York Insured Tax
Free Fund, Inc. 811-3843; First
Investors Multi-State Insured Tax Free
Fund 811-4623)
63
<PAGE>
FIRST INVESTORS INSURED TAX EXEMPT FUND, INC.
FIRST INVESTORS INSURED INTERMEDIATE TAX EXEMPT FUND
FIRST INVESTORS NEW YORK INSURED TAX FREE FUND, INC.
FIRST INVESTORS MULTI-STATE INSURED TAX FREE FUND, INC.
95 Wall Street
New York, New York 10005
1-800-423-4026
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1999
This is a Statement of Additional Information ("SAI") for FIRST INVESTORS
INSURED INTERMEDIATE TAX EXEMPT FUND ("INSURED INTERMEDIATE TAX EXEMPT FUND"), a
series of FIRST INVESTORS SERIES FUND ("SERIES FUND"), FIRST INVESTORS INSURED
TAX EXEMPT FUND, INC. ("INSURED TAX EXEMPT FUND"), FIRST INVESTORS NEW YORK
INSURED TAX FREE FUND, INC. ("NEW YORK INSURED TAX FREE FUND"), and FIRST
INVESTORS MULTI-STATE INSURED TAX FREE FUND, INC. ("MULTI-STATE INSURED TAX FREE
FUND"). Each Fund is an open-end diversified management investment company.
SERIES FUND offers five separate series, one of which, INSURED INTERMEDIATE TAX
EXEMPT FUND, is described in this SAI. INSURED TAX EXEMPT FUND and NEW YORK
INSURED TAX FREE FUND each offer one series. MULTI-STATE INSURED TAX FREE FUND
offers 17 series: Arizona Fund, California Fund, Colorado Fund, Connecticut
Fund, Florida Fund, Georgia Fund, Maryland Fund, Massachusetts Fund, Michigan
Fund, Minnesota Fund, Missouri Fund, New Jersey Fund, North Carolina Fund, Ohio
Fund, Oregon Fund, Pennsylvania Fund and Virginia Fund (each a "Single State
Fund"). INSURED INTERMEDIATE TAX EXEMPT FUND, INSURED TAX EXEMPT FUND, NEW YORK
INSURED TAX FREE FUND, and each Single State Fund are referred to herein
collectively as "Funds."
This SAI is not a prospectus. It should be read in conjunction with the
Funds' Prospectus dated April 30, 1999, which may be obtained free of charge
from the Funds at the address or telephone number noted above. Information
regarding the purchase, redemption, sale and exchange of your Fund shares is
contained in the Shareholder manual, a separate section of the SAI that is a
distinct document and may also be obtained free of charge by contacting your
Fund at the address or telephone number noted above.
<PAGE>
TABLE OF CONTENTS
Investment Strategies and Risks..............................................3
Investment Policies..........................................................5
Futures and Options Strategies..............................................12
Investment Restrictions.....................................................18
Insurance...................................................................25
State Specific Risk Factors.................................................27
Portfolio Turnover..........................................................84
Directors or Trustees and Officers..........................................85
Management..................................................................87
Underwriter.................................................................89
Distribution Plans..........................................................91
Determination of Net Asset Value............................................93
Allocation of Portfolio Brokerage...........................................94
Purchase, Redemption and Exchange of Shares.................................95
Taxes.......................................................................95
Performance Information....................................................111
General Information........................................................119
Appendix A Description of Municipal Bond Ratings...........................126
Appendix B Description of Municipal Note Ratings...........................129
Appendix C Description of Commercial Paper Ratings.........................130
Appendix D.................................................................131
Financial Statements.......................................................138
Shareholder Manual.........................................................140
2
<PAGE>
INVESTMENT STRATEGIES AND RISKS
INSURED INTERMEDIATE TAX EXEMPT FUND AND INSURED TAX EXEMPT FUND
INSURED INTERMEDIATE TAX EXEMPT FUND and INSURED TAX EXEMPT FUND each 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 ("AMT") (a "Tax Preference Item").
INSURED INTERMEDIATE TAX EXEMPT FUND seeks to achieve its objective by
investing at least 80% of its total assets in various types of municipal
securities issued by or on behalf of various states, territories and possessions
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities ("Municipal Instruments"), the
interest on which is exempt from Federal income tax and is not a Tax Preference
Item. Under normal market conditions, the Fund will maintain a dollar-weighted
average maturity of three to ten years. See "Municipal Instruments," below.
INSURED TAX EXEMPT FUND seeks to achieve its objective by investing at
least 80% of its total assets in municipal bonds issued by or on behalf of
various states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is exempt from Federal income tax and
is not a Tax Preference Item. The Fund also may invest up to 20% of its total
assets in other types of Municipal Instruments, including certificates of
participation, municipal notes, municipal commercial paper and variable rate
demand instruments (collectively with municipal bonds, "Municipal Instruments").
The Fund generally invests in bonds with maturities of over fifteen years. See
"Municipal Instruments," below.
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. In addition, each Fund may invest up to 10% of its total
assets in municipal obligations on which the rate of interest varies inversely
with interest rates on other municipal obligations or an index (commonly
referred to as "inverse floaters"). INSURED INTERMEDIATE TAX EXEMPT 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 "Investment
Policies," below.
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, a division of The McGraw-Hill Companies, Inc. ("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 First Investors
Management Company, Inc. ("FIMCO" or "Adviser"). See "Debt Securities," below.
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
3
<PAGE>
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.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
NEW YORK INSURED TAX FREE FUND AND MULTI-STATE INSURED TAX FREE FUND
NEW YORK INSURED TAX FREE FUND seeks to provide a high level of interest
income which is exempt from Federal income tax, New York State and New York City
personal income taxes 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 issued by or on behalf of New York State and its municipal
governments and by public authorities in New York State, as well as by
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, New York State and New York City
personal income taxes and is not a Tax Preference Item.
Each Single State Fund seeks to achieve a high level of interest income
which is exempt from Federal income tax and, to the extent indicated for each
Fund, from state and local income taxes for residents of a particular state and
is not a Tax Preference Item. Each Fund seeks to achieve its objective by
investing at least 80% of its total assets in Municipal Instruments issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, the interest on which is
exempt from Federal income tax, state and local income taxes in the states for
whose residents the particular Fund is established and is not a Tax Preference
Item.
NEW YORK INSURED TAX FREE FUND may make loans of its portfolio securities,
and each Fund may 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 in which the rate of interest varies
inversely with interest rates on other municipal obligations or an index
("inverse floaters") and may acquire detachable call options relating to
municipal bonds. Each Fund may borrow money for temporary or emergency purposes
in amounts not exceeding 5% of its total assets and invest in repurchase
agreements.
Although each Fund generally invests in municipal bonds rated Baa or
higher by Moody's or BBB or higher by 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," below.
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," below. The
Adviser will carefully evaluate on a case-by-case basis whether to dispose of or
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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.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INVESTMENT POLICIES
DEBT SECURITIES. Each Fund may invest in debt securities. 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 debt securities.
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. If interest rates drop, the purchaser
could exercise the call option to acquire municipal bonds that yield
above-market rates. INSURED INTERMEDIATE TAX EXEMPT FUND may acquire detachable
call options relating to municipal bonds that it already owns or will acquire in
the immediate future and thereby, in effect, make such municipal bonds
non-callable so long as it continues to hold the detachable call option. INSURED
INTERMEDIATE TAX EXEMPT 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 or BBB by 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.
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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 noted, include
unrated securities deemed to be rated below investment grade by the Adviser.
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.
INVERSE FLOATERS. Each Fund may invest up to 10% of its net assets 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.
LOANS OF PORTFOLIO SECURITIES. Each 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 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 the Fund, it
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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 a Fund may vote the
proxies if a material event affecting the investment is to occur. The market
risk applicable to any security loaned remains a risk of a Fund. The borrower
must add to the collateral whenever the market value of the securities rises
above the level of such collateral. A Fund could incur a loss if the borrower
should fail financially at a time when the value of the loaned securities is
greater than the collateral. The primary objective of such lending function is
to supplement a Fund's income through investment of the cash collateral in
short-term interest bearing obligations. INSURED INTERMEDIATE TAX EXEMPT 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.
MUNICIPAL INSTRUMENTS. Each Fund may invest in the following types of
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 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" for a discussion of special tax consequences to "substantial users,"
or persons related thereto, of facilities financed by PABs or IDBs.
CERTIFICATES OF PARTICIPATION. Certificates of Participation ("COPs")
provide participation interests in lease revenues and each certificate
represents a proportionate interest in or right to the lease-purchase payment
made under municipal lease obligations or installment sales contracts. In
certain states, COPs constitute a majority of new municipal financing issues.
The possibility that a municipality will not appropriate funds for lease
payments is a risk of investing in COPs, although this risk is mitigated by the
fact that each COP will be covered by the insurance feature. The applicable
Fund's Board of Directors or Trustees (each, a "Board") has established
guidelines for determining the liquidity of the COPs in the applicable Fund's
portfolio and, subject to review by that Fund's Board, has delegated that
responsibility to the Adviser. Pursuant to these guidelines, the Adviser will
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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.
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.
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 Fund's 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.
VARIABLE RATE AND FLOATING RATE NOTES. Each Fund may invest in variable
rate and floating rate notes, which are derivatives, issued by municipalities.
Variable rate notes include master demand notes, which are obligations
permitting the holder to invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements between the Fund, as lender,
and the borrower. The interest rates on these notes fluctuate from time to time.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations.
The interest rate on a floating rate obligation is based on a known
lending rate, such as a bank's prime rate, and is adjusted automatically each
time such rate is adjusted. The interest rate on a variable rate obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Because these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such instruments generally will
be traded, and there is generally no established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the right of a Fund to redeem is dependent on the ability of the
borrower to pay agencies.
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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 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 TAX EXEMPT 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. A 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 TAX EXEMPT FUND may not enter into a repurchase agreement with more
than seven days to maturity if, as a result, more than 15% of the Fund's net
assets would be invested in such repurchase agreements and other illiquid
investments.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS. 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 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 Fund's Board or
the Adviser has determined under Board-approved guidelines are liquid.
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. 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.
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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.
Over-the-counter ("OTC") options and their underlying collateral are also
considered illiquid investments. While the Funds have no intention of investing
in options in the coming year, if any Fund does so, the assets used as cover for
OTC options written by the Fund would not be considered illiquid unless the OTC
options are sold to qualified dealers who agree that the Fund may repurchase any
OTC option it writes at a maximum price to be calculated by a formula set forth
in the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
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 or commercial paper rated within the highest grade by S&P or
Moody's and (3) 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 earning a specific return.
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
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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 on its books or 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 each year on zero coupon securities must be
accounted for by the Fund that holds the securities for purposes of determining
the amount it must distribute that year to continue to qualify for tax treatment
as a regulated investment company. See "Taxes." Thus, a Fund may be required to
distribute as a dividend an amount that is greater than the total amount of cash
it actually receives. 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
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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.
FUTURES AND OPTIONS STRATEGIES
While the Funds have the ability to engage in the futures and options
strategies discussed below, none of the Funds have the current intention of
doing so. Subject to the lack of any current intention to do so, 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 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 and the CFTC.
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 and (4) the possible absence of a liquid secondary market
for any particular instrument at any time.
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.
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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 OTC options written by a Fund, to the extent described under and
therefore subject to each Fund's limitation on investments in illiquid
securities. In addition, a 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).
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
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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, a
Fund's Board may adopt 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 the Fund's
total assets. However, this does not limit the amount of 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.
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
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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.
FUTURES GUIDELINES. To the extent that a Fund enters into futures
contracts or options thereon other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums required to
establish these positions (excluding the in-the-money amount for options that
are in-the-money at the time of purchase) will not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
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losses on any contracts into which the Fund has entered. This policy does not
limit a Fund's risk to 5%. The value of all futures sold will not exceed the
total market value of a Fund's portfolio.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES TRADING. No price is paid
upon entering into futures contracts. Instead, upon entering into a futures
contract, 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 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
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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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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 se of the
Fund" means that the affirmative vote of the lesser of (1) more than 50% of the
outstanding shares of the Fund or (2) 67% or more of the shares present at a
meeting, if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. 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 such
Fund at the time it purchases any security.
INSURED INTERMEDIATE TAX EXEMPT FUND. INSURED INTERMEDIATE TAX EXEMPT 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.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. The Fund will not:
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(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) 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) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that is not for BONA FIDE hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
(4) 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.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
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
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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.
(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 "Code").
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
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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) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that is not for BONA FIDE hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
(4) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
provided the Fund maintains asset coverage of at least 300% for pledged assets;
provided, however, this limitation will not prohibit escrow, collateral or
margin arrangements in connection with the Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
NEW YORK INSURED TAX FREE FUND. NEW YORK INSURED TAX FREE 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, except by purchase of debt obligations and through
repurchase agreements. However, the Fund's Board of Directors may, on the
request of broker-dealers or other institutional investors which they deem
qualified, authorize the Fund to loan securities to cover the borrower's short
position; provided, however, the borrower pledges to the Fund and agrees to
maintain at all times with the Fund cash collateral equal to not less than 100%
of the value of the securities loaned; and, further provided, that such loans
will not be made if the value of all such loans, repurchase agreements maturing
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in more than seven days and other illiquid assets is greater than an amount
equal to 15% of the Fund's net assets.
(3) Invest more than 25% of the Fund's total assets (taken at current
value) in the obligations of one or more issuers having their principal business
activities in the same industry.
(4) Purchase a Municipal Instrument unless it is an Insured Municipal
Instrument, or is already insured by a policy of insurance or, as to uninsured
municipal commercial paper or municipal notes, is supported by a letter of
credit or other similar guarantee obtained by the issuer or underwriter thereof.
(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under Federal securities laws.
(6) Buy or sell real estate or interests in oil, gas or mineral
exploration, or issue 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.
The Fund has adopted the following non-fundamental investment
restrictions, which may be changed without shareholder approval. The
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) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that is not for BONA FIDE hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
(4) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
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provided the Fund maintains asset coverage of at least 300% for pledged assets;
provided, however, this limitation will not prohibit escrow, collateral or
margin arrangements in connection with the Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
(6) With respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
(7) Invest in the securities of other investment companies or investment
trusts except to the extent permitted by law.
MULTI-STATE INSURED TAX FREE FUND. Each Single State 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 a 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) Purchase, as to 75% of each Fund's total assets (taken at current
value), the securities of any issuer (other than the U.S. Government) if, as a
result thereof, more than 5% of the total assets of such Fund would be invested
in the securities of such issuer. When the assets and revenues of an agency,
instrumentality or political subdivision issuing a Municipal Instrument or other
security are distinct from the assets and revenues of the government which
created the issuing entity, and the Municipal Instrument is supported by the
issuing entity's assets and revenues, the issuing entity is deemed to be the
sole issuer of the Municipal Instrument or security. If an industrial
development bond is supported only by the payments of the non-governmental
beneficiary of the industrial development bond, then such non-governmental
entity is deemed to be the sole issuer. With respect to pre-refunded bonds, the
Adviser considers an escrow account to be the issuer of such bonds when the
escrow account consists solely of U.S. Government obligations fully substituted
for the obligation of the issuing municipality.
(3) Purchase the securities of any issuer (other than the U.S. Government)
if, as a result thereof, any Fund would hold more than 10% of any class of
securities (including any class of voting securities) of such issuer.
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(4) Purchase the securities of an issuer if such purchase, at the time
thereof, would cause more than 5% of the value of the total assets of any Fund
to be invested in securities of issuers which, including predecessors, have a
record of less than three years' continuous operation.
(5) Purchase the securities of other investment companies or investment
trusts, except as they may be acquired as part of a merger, consolidation or
acquisition of assets.
(6) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under Federal securities laws.
(7) Buy or sell real estate or interests in oil, gas or mineral
exploration, or senior securities (as defined in the 1940 Act); provided,
however, each Fund may invest in Municipal Instruments secured by real estate or
interests in real estate.
(8) Make loans, except by purchase of debt obligations, publicly
distributed bonds or debentures (which are not considered loans), and through
repurchase agreements.
MULTI-STATE INSURED TAX FREE FUND, on behalf of each Single State Fund,
has adopted the following non-fundamental investment restrictions, which may be
changed without shareholder approval. These restrictions provide that each Fund
will not:
(1) Purchase any security if, as a result, more than 15% of its net assets
would be invested in illiquid securities, including repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
any securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees or the
Adviser, acting pursuant to authority delegated by the Trustees, may determine
that a readily available market exists for securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended, or any other
applicable rule, and therefore that such securities are not subject to the
foregoing limitation.
(2) Purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this restriction shall not prevent each 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) To the extent that the Fund enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that is not for BONA FIDE hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
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(4) Pledge assets, except that a Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
provided such 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 a Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that a 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.
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 Fund has purchased a Mutual Fund Insurance Policy ("Policy") from
AMBAC Assurance Corporation ("AMBAC"), a Wisconsin stock insurance company, with
its principal executive offices in New York City. The Policy guarantees the
payment of principal and interest on municipal bonds purchased by a Fund which
are eligible for insurance under the Policy. Municipal bonds are eligible for
insurance if they are approved by AMBAC prior to their purchase by a Fund. AMBAC
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 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 to insure such securities. In
determining eligibility for insurance, AMBAC has applied its own standards which
correspond generally to the standard it normally uses in establishing the
insurability of new issues of municipal bonds and which are not necessarily the
criteria which would be used in regard to the purchase of municipal bonds by 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; and (5) municipal bonds which are no longer owned
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by a Fund. AMBAC 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 so notifies a
Fund, the Fund will attempt to replace AMBAC with another insurer. If another
insurer cannot be found to replace AMBAC, the Fund may ask its shareholders to
approve continuation of its business without insurance.
In the event of nonpayment of interest or principal when due, in respect
of an insured municipal bond, AMBAC is obligated under the Policy to make such
payment not later than 30 days after it has been notified by a Fund that such
nonpayment has occurred (but not earlier than the date such payment is due).
AMBAC, as regards insurance payments it may make, will succeed to the rights of
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 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 is liable only for
those payments of interest and principal which are then due and owing and, after
making such payments, AMBAC will have no further obligations to 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 Fund may purchase a Secondary Market Insurance Policy from an
independent insurance company rated in the top rating category by S&P, Moody's,
Fitch IBCA, Inc. ("Fitch") or any other nationally recognized rating
organization which insures a particular bond for the remainder of its term at a
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 gain or loss
realized by a Fund upon the sale of the bond.
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In addition to the contract of insurance relating to each Fund, there is a
contract of insurance between AMBAC and Executive Investors Trust. Otherwise,
neither AMBAC nor any affiliate thereof, has any material business relationship,
direct or indirect, with the Funds.
AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by
the Office of the Commissioner of Insurance of the State of Wisconsin and
licensed to do business in 50 states, the District of Columbia, the Territory of
Guam and the Commonwealth of Puerto Rico, with admitted assets of approximately
$[ ] (unaudited) and statutory capital of approximately $[ ] (unaudited) as of
December 31, 1998. Statutory capital consists of AMBAC's policyholders' surplus
and statutory contingency reserve. S&P, Moody's and Fitch have each assigned a
triple-A claims-paying ability rating to AMBAC.
AMBAC has obtained a private letter ruling from the Internal Revenue
Service to the effect that the insuring of an obligation by AMBAC 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 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. Investors should understand that a private letter ruling may not be cited
as precedent by persons other than the taxpayer to whom it is addressed;
nevertheless, those rulings may be viewed as generally indicative of the
Internal Revenue Service's views on the proper interpretation of the Code and
the regulations thereunder.
AMBAC 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 contained above has been furnished by
AMBAC. No representation is made herein as to the accuracy or adequacy of such
information, or as to the existence of any adverse changes in such information,
subsequent to the date hereof.
STATE SPECIFIC RISK FACTORS
Set forth below is discussion of risk factors with respect to some of the
Funds that invest primarily in obligations of issuers from a particular state.
This information has been prepared by local counsel to each Fund.
RISK FACTORS FOR THE ARIZONA FUND. Arizona's economy continues on a path
of strong growth. Economists at Arizona State University project that the pace
may slow slightly, but no signs of any serious imbalances are present. Arizona's
economy has been strengthened by five consecutive years of substantial tax
reductions, and Arizona is among the fastest growing states. The state's
population increased by approximately 22% during the 6-year period from 1990 to
1996. During 1997, Arizona's population was estimated at approximately 4.5
million. Homebuilding and commercial construction is extremely strong, and
Phoenix now ranks as the sixth largest city in the United States with a
population of approximately 1.2 million. This growth in population will require
corresponding increases in revenues of Arizona issuers to meet increased demands
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for infrastructure development and various services, and the performance of the
State's economy will be critical to providing such increased revenues.
Arizona's economy relies in part on services, construction, manufacturing
dominated by electrical, transportation and military equipment, high technology,
government, tourism, and the military. The Arizona economy has generally
performed above the national average in recent years. State unemployment rates
have remained generally comparable to the national average in recent years.
Arizona has held a steady position among the top five states in employment
growth since May 1993. In August 1997, Arizona's rate of job creation ranked
third in the nation. Arizona's personal income increased approximately 7.3
percent in 1997. Although Arizona's economy is continuing to expand, restrictive
government spending, a decline in the construction sector, and resizing of the
defense industry are expected to restrain the pace of expansion. The condition
of the national economy will continue to be a significant factor influencing
Arizona's economy.
Arizona is required by law to maintain a balanced budget. To achieve this
objective, the State has, in the past, utilized a combination of spending
reductions and tax increases. Although personal income taxes have been cut by
28%, at the end of 1997 the state had a budget surplus of approximately $900
million.
With respect to issuers of the securities in which the Arizona Fund will
invest, Arizona's state constitution limits the amount of debt payable from
general tax revenue that may be contracted by the State to $350,000. However,
certain other issuers have the power to issue obligations payable from a source
of revenue that affects the whole or large portions of the State. For example,
the Transportation Board of the State of Arizona Department of Transportation
may issue obligations for highways that are paid from revenues generated from,
among other sources, state gasoline taxes. Salt River Project Agricultural &
Improvement District, an agricultural improvement district that operates the
Salt River Project (a Federal reclamation project and an electrical system that
generates, purchases, and distributes electric power to residential, commercial,
industrial, and agricultural power users in a 2,900 square-mile service area
around Phoenix), may issue obligations payable from a number of sources.
Arizona's state constitution also restricts the debt payable from general
tax revenues of certain of the State's political subdivisions and municipal
corporations. No county, city, town, school district, or other municipal
corporation of the State may for any purpose become indebted in any manner in an
amount exceeding six percent of the taxable property in such county, city, town,
school district, or other municipal corporation without the approval of a
majority of the qualified electors thereof voting at an election provided by law
to be held for that purpose; provided, however, that (i) under no circumstances
may any county or school district of the State become indebted in an amount
exceeding 15% (or 30% in the case of a unified school district) of such taxable
property, and (ii) any incorporated city or town of the State with such approval
may be allowed to become indebted up to an additional 20% for (a) supplying such
city or town water, artificial light, or sewers, when the works for supplying
such water, light, or sewers are or shall be owned and controlled by the
municipality, and (b) the acquisition and development by the incorporated city
or town of land or interests therein for open space preserves, parks,
playgrounds, and recreational facilities. Irrigation, power, electrical,
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agricultural improvements, drainage, flood control, and tax levying public
improvement districts are, however, exempt from the restrictions of the Arizona
Constitution. There are also restrictions relating to such entities implemented
by statute.
Annual property tax levies for the payment of general obligation bonded
indebtedness of political subdivisions and municipal corporations are unlimited
as to rate or amount (other than for purposes of refunding when there are
certain limits). Other obligations may be issued by such entities, sometimes
without an election, which are payable from, among other sources, project
revenues, special assessments, and excise taxes.
Arizona political subdivisions and municipal corporations are subject to
certain other limitations on their ability to assess taxes and levies that could
affect their ability to meet their financial obligations. Subject to certain
exceptions, the maximum amount of property taxes levied by any Arizona county,
city, town, or community college district for their operations and maintenance
expenditures cannot exceed the amount levied in a proceeding year by more than
two percent. Certain taxes are specifically exempt from this limit, including
taxes levied for debt service payments.
In 1994, the Supreme Court of Arizona ruled that Arizona's statutory
financing system for public education was not in compliance with the Arizona
Constitution and directed the Arizona Legislature (the "Legislature") public
school funding in Arizona. The Supreme Court further ordered that the ruling
would have prospective application only, that financing for public education
should continue under existing statutes, and that bonded indebtedness incurred
under the existing statues, as long as they are in effect, is valid and
enforceable. In an effort to respond to the Supreme Court's decision, the
Legislature established a school capital equity fund (the "Initial Fund") with
an initial appropriation of $30 million and a subsequent appropriation of $70
million. The Initial Fund was available to school districts that met certain
established criteria. In 1997, the Supreme Court ruled that (i) the creation of
the Initial Fund did not cure the constitutional defect in the State's financing
for public education, and (ii) the Legislature must adopt a constitutional
funding system for public education by June 30, 1998. If a constitutional
funding system is not adopted by June 30, 1998, the State Superintendent of
Public Instruction and State Board of Education will not be permitted to
distribute funds to the school districts of the State.
In 1997, the Legislature established the "Assistance to Build Classrooms
Fund" (the "ABC Fund"). The ABC Fund was designed, along with the amounts
available in the Initial Fund, to assist those school districts that did not
meet a minimum level of capital funding on a per student basis. A hearing was
held to determine whether the legislation establishing the ABC Fund, in
conjunction with the legislation providing for the Initial Fund (collectively,
the "Remedial Legislation"), brought the statutory financing system for public
education into compliance with the Arizona Constitution. The court held that it
did not. The Governor of Arizona filed a special action in the Supreme Court
challenging such ruling, but the Supreme Court ruled that the Remedial
Legislation did not solve the public school funding problem. In establishing the
ABC Fund, the Legislature provided that the Remedial Legislation would be
revoked automatically if the Supreme Court held that such legislation did not
satisfy the requirements of the Arizona Constitution, and, therefore, the
Remedial Legislation has been revoked.
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It is unclear how the Legislature may respond to the Supreme Court's
direction to enact curative legislation or what the effect on Arizona school
districts will be. No assurance can be given that the Supreme Court will approve
any legislative response or that the Supreme Court will not take further action
in this matter. The effect of any legislative or judicial action cannot be
determined at this time.
If a constitutional funding system is not adopted by June 30, 1998, and if
the Supreme Court orders the State Superintendent of Public Instruction and the
State Board of Education not to distribute funds to the school districts,
certain school districts may experience severe adverse financial consequences
that may adversely affect the market value of their bonds and may, if severe
enough, cause the bankruptcy or insolvency of such districts and affect timely
payment of their bonds. Such bonds may be held with respect to the Arizona
Series.
RISK FACTORS FOR THE CALIFORNIA FUND. Changes in the California
Constitution and other laws during the last several years have restricted the
ability of California taxing entities to increase real property tax revenues
and, by limiting various other taxes, have resulted in a reduction in the
absolute amount, or in the rate of growth, of certain components of state and
local revenues. These actions have raised additional questions about the ability
of California state and municipal issuers to obtain sufficient revenue to pay
their bond obligations. In 1978, California voters approved an amendment to the
California Constitution known as "Proposition 13." Proposition 13 limits ad
valorem taxes on real property and restricts the ability of taxing entities to
increase real property taxes. Legislation passed subsequent to Proposition 13
provided for the assumption of certain local obligations by the State. Much of
this aid to local governments, however, was eliminated during the recent
recession, which was most acute in California from 1990 to 1995. During the same
period, the California legislature attempted to offset this loss of aid by
providing additional funding sources (such as sales taxes) to local governments
and by reducing certain mandates for local services. There can, of course, be no
assurance that local governments will receive sufficient state assistance to
meet their obligations in a timely manner.
Article XIIIB of the State's Constitution may also have an adverse impact
on California state and municipal issuers. Article XIIIB restricts the State
from spending certain appropriations in excess of an appropriations limit
imposed for each State and local government entity. This appropriations limit is
adjusted annually for changes in State per capita personal income and population
and, when applicable, transfers among government units of financial
responsibility for providing services or of financial sources for the provision
of those services. The appropriations limit has exceeded the appropriations
subject thereto in each of the most recent three fiscal years and is projected
to exceed those appropriations in both the 1998-1999 fiscal year and the
1999-2000 fiscal year. Payments of debt service on bonds authorized by the
voters are exempt from this limitation. Revenues in excess of this
appropriations limit are divided equally between transfers to K-14 school
districts and refunds to taxpayers.
In 1988, Proposition 98 was enacted by the voters of California.
Proposition 98 changed state funding of public education below university level,
primarily by guaranteeing K-12 schools a minimum share of General Fund revenues.
Currently, the Proposition 98 formulas require the allocation of approximately
35% of General Fund revenues to such educational support.
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In November, 1996, the voters of California approved Proposition 218.
Proposition 218, like Proposition 13, amended the California Constitution. It
requires any special tax, levy or fee imposed or increased since January 1,
1995, without voter consent to be validated by a vote and certain new taxes,
fees, charges and assessments and increases therein to be approved by voters
prior to their implementation by government agencies. Since the passage of
Proposition 218, the bond ratings of several large California cities, including
Los Angeles and San Diego, have been downgraded by municipal bond ratings
services.
Expenditures exceeded revenues for four of the six fiscal years ending
with 1992-1993, and the State accumulated and sustained a budget deficit
approaching $2.8 billion at its peak at June 30, 1993. This accumulated deficit
was financed with revenue anticipation notes and warrants which matured in
subsequent fiscal years. All of these notes have been paid, and there has been
no need to resort to this cross-year borrowing since the 1994-1995 fiscal year.
The accumulated deficit was eliminated by the end of 1996.
In August, 1998, the Legislature approved a $75.4 billion budget for the
1998-1999 fiscal year which included a general fund budget of $57.3 billion, up
from $49 billion in fiscal 1997. The 1998-1999 budget included approximately
$1.4 billion in tax cuts.
Like in other states, the budgetary process in California often becomes a
negotiation among various political groups which is not resolved until after the
commencement of the relevant fiscal year. On July 21, 1998, after the beginning
of the 1998-1999 fiscal year but prior to the adoption of the 1998-1999 budget,
a state trial court issued a preliminary injunction prohibiting the State
Controller from paying moneys from the State Treasury for the 1998-1999 fiscal
year, with certain limited exceptions, in the absence of a State budget,
irrespective of any continuing appropriation . (HOWARD JARVIS TAXPAYERS
ASSOCIATION V. KATHLEEN CONNELL). This injunction has been stayed pending
appeal. No date has been set for the argument of this appeal.
In January, 1999, the newly-elected Governor submitted a proposed $77.5
billion budget, with a $60.3 billion General Fund budget for 1998-99 which
projects a slight deficit to be financed from the state's reserves. This budget
projects that General Fund revenues will be lower than previously anticipated
due to the overseas economic downturn. This budget also assumes receipt of
approximately $560 million as a first installment from the settlement of the
tobacco litigation, one-time revenue from the sale of certain assets and
approximately $400 million of federal aid above the levels currently received.
The federal government has publicly announced its belief that it is entitled to
a portion of the tobacco settlement that has been awarded to the states. As of
the date hereof, this claim has not been resolved. There can be no assurance
that this claim will be resolved in favor of the a\states or that the projected
extra federal aid will be forthcoming.
The rights of owners of California governmental securities are subject to
the limitations on legal remedies against the governmental entity issuing such
securities, including a limitation on enforcement of judgments against funds
needed to service the public welfare and interest, and in some instances a
limitation on the enforcement of judgments against the entity's funds of a
fiscal year other than the fiscal year in which the payments were due.
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The CALIFORNIA FUND holds securities of certain agencies that invested in
the Orange County Investment Pool (an investmentality of Orange County) (the
"Pool"), including the Orange County Transportation Authority ("OCTA") and the
South Orange County Public Finance Authority ("SOCPA"). As of the date of this
SAI, all principal and interest payments have been made by OCTA and SOCPA when
due, but there is no guarantee that they will be made in the future. Both
securities issues are insured by a nationally recognized municipal bond
insurance corporation. As of the date of this SAI, neither security has had its
rating downgraded by a nationally recognized rating agency. However, although
each insurance company that has insured obligations of entities who were
invested in the Pool has indicated its intention to honor its policies, there
can be no assurance at this time that each such insurance company will have the
ability to pay the debt service on these obligations when due or whether it may
raise defenses with respect to such policy.
In addition, should OCTA and/or SOCPA not make debt service payments when
due, enforceability of either's obligations may become subject to the Federal
Bankruptcy Code and applicable bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or affecting the enforcement of
creditors' rights generally, now or hereafter in effect; equity principles which
may limit the specific enforcement under State law of certain remedies; the
exercise by the United States of America of the powers delegated to it by the
Constitution; and the reasonable and necessary exercise, in certain exceptional
situations, of the police powers inherent in the sovereignty of the State of its
governmental bodies in the interest of serving a significant and legitimate
public purpose. Bankruptcy proceedings, or the exercise of powers by the federal
or state governments, if initiated, could subject the owners of the securities
of any governmental entity to judicial discretion and interpretation of their
rights in bankruptcy or otherwise, and consequently may entail risks of delay,
limitation, or modification of their rights.
RISK FACTORS FOR THE COLORADO FUND. The COLORADO FUND will concentrate its
investments in debt obligations of the State of Colorado and its local
government entities (the "Colorado Obligations"). The information contained
herein is not intended to be a complete discussion of all relevant risk factors,
and there may be other factors not discussed herein that may adversely affect
the value of and the payment of interest and principal on the Colorado
Obligations.
The State of Colorado issues no general obligation bonds secured by the
full faith and credit of the State due to limitations contained in the State
constitution. Several agencies and instrumentalities of the State, however, are
authorized by statute to issue bonds secured by revenue from specific projects
and activities. Additionally, the State currently is authorized to issue
short-term revenue anticipation notes.
There are approximately 2,000 units of local government in Colorado,
including counties, statutory cities and towns, home-rule cities and counties,
school districts and a variety of water, sewer and other special districts, all
with various constitutional and statutory authority to levy taxes and incur
indebtedness. The major sources of revenue for payment of indebtedness of these
local governments are the ad valorem property tax, which presently is imposed
and collected solely at the local level, sales and use taxes (for cities and
counties) and revenue from special projects. Residential real property is
assessed at 9.74% of its actual value for ad valorem taxes collected in 1999.
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All other property is assessed at 29% of its actual value, except producing
mines and oil and gas properties. Oil and gas properties are assessed at 87.5%.
In 1997, the last year for which such information is currently available,
the assessed valuation of all real and personal property in Colorado was
$38,536,664,770, an increase of 14.7% from 1996 levels. In 1996 and 1997,
$2,784,138,646 and $3,032,963,241, respectively, were collected in property
taxes throughout Colorado. Sales and use taxes collected at the local level from
January 1, 1998 through June 30, 1998 (the most recent information available)
increased approximately 9.4% over those collected for the same period in 1997.
Colorado's economy has been robust for most of the 1990s, fueled in part
by large public construction projects, a healthy tourist economy, and increased
employment in the wholesale and retail trade and general services sectors and in
high tech manufacturing. Now, most of the large public works projects are
completed and increases in tourism have slowed since the voters failed in 1993
to approve an extension of the statewide tourism tax. For these and other
reasons, the growth of the Colorado economy is slowing. The unemployment rate is
increasing (3.4% in November 1998), although it still is below average for the
United States (4.4%), and Colorado's total non-agricultural employment, while at
record highs, has shown a lower growth rate recently.
Employment in the service and trade industries represents approximately
55% of the State's nonagricultural wage and salary jobs, and government
employment represents approximately 16%. Manufacturing represents only 10% and,
while total jobs in the sector are stable, manufacturing is slowly falling as a
percentage of total employment.
A 1992 amendment to the State Constitution (the "TABOR Amendment")
restricts growth of State and local government spending to the rate of inflation
plus a growth factor (measured by population, school enrollment or construction,
depending on the governmental entity); and requires voter approval of (a) all
new taxes or tax increases and (b) the issuance of most types of debt. Though
the TABOR Amendment has not yet had a material adverse effect on the credit
quality of State and local governments, it will likely reduce the financial
flexibility of all levels of government in Colorado over time. In particular,
local governments dependent on taxes on residential property are being squeezed
between the TABOR Amendment requirements of voter approval for increased mill
levies and an earlier State Constitutional amendment (the "Gallagher Amendment")
which has had the effect of lowering the assessment rate on residential property
from 21% to 9.74% over the past 12 years. Younger or rapidly growing residential
communities with large infrastructure requirements may have particular
difficulty finding the revenues needed to finance their growth.
RISK FACTORS FOR THE CONNECTICUT FUND. Traditionally, Connecticut has been
viewed primarily as a manufacturing and industrial state. While manufacturing
remains an important sector of the State's economy, other sectors, particularly,
finance, insurance, real estate, trade (wholesale and retail) and services have
expanded to provide diversification tending to somewhat dilute the influence of
manufacturing. In December of 1998, manufacturing provided approximately 16% of
total Connecticut employment, while the service sector provided approximately
31% of the State's employment. The finance, insurance and real estate sector
provided approximately 8% of the State's employment. A growing sector of the
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State's economy is exports, which grew 14% in 1997 to $7.8 billion and comprised
over 6% of estimated Gross State Product.
In the early 1990's, a variety of factors, including difficulties in the
banking and insurance industries in New England (which resulted in the
tightening of credit), the reduction in defense employment (resulting from an
overall decline in federal defense spending), and the softening of the real
estate and construction markets, impeded the growth of the Connecticut economy.
Since 1993, however, the State's economy has recovered. Helped by a strong
national economy, the State's economy continued to grow during Fiscal Year 1998
and indicators of future economic activity are showing an upward trend. For
instance, in October 1998, the increase in new housing permits was 20.3% higher
than in the same month of the prior year.
Connecticut's seasonally adjusted October 1998 unemployment rate of 3.8%
represents a decrease from the 1997 unemployment rate of 4.7% and is lower than
the October 1998 national unemployment rate of 4.6%. During the first three
quarters of 1998, the State's job growth in non-farm employment was
approximately 2.4%, greater than the national average job growth rate of 1.4%
for the same period. The fastest growing industries in the state are securities
services, amusement and recreational services, hotel and lodging, social
services, business services, and general building contracting. Much of the
State's job growth has been fueled by small and medium sized businesses.
However, although the overall employment picture for the State is improving,
many of Connecticut's urban centers still have above average rates of
unemployment.
Connecticut's per capita income for 1997, at $35,954, was the highest in
the nation and 42.1% above the national average. However, State median household
income, adjusted for inflation, has declined by 25% since 1989. In addition, the
State is one of the top five in the nation for income inequality, which may
threaten the State's long-term prospects for growth.
The three major sources of revenue for the State are the personal income
tax, the sales and use taxes, and the corporation business tax. According to the
State Comptroller, the personal income tax raised approximately $3.2 billion in
Fiscal Year 1998, an increase of $.4 billion over Fiscal Year 1997.
According to the State Comptroller, Fiscal Year 1998 ended with a General
Fund operating surplus of $389 million, the largest surplus in more than a
decade. The surplus was primarily due to strong revenue growth (a 6.2% increase
over the prior year). The State Comptroller reported a surplus from the State's
General Fund operations of approximately $93 million for Fiscal Year 1993
(excluding proceeds received from deficit financing); a surplus of $51 million
for Fiscal Year 1994, a deficit of $242 million for Fiscal Year 1995, a surplus
of $198 million for Fiscal Year 1996, and a surplus of $252 million for Fiscal
Year 1997. On January 28, 1999, the State Comptroller's office reported that the
General Fund is projected to show an operating surplus of approximately $416
million for Fiscal Year 1999.
The State's General Fund balance sheet, however, which is presented using
Generally Accepted Accounting Principles, showed a cumulative deficit of $694.3
million at the end of Fiscal Year 1998, an increase of $24.3 million from the
prior year. Over the past five years, the General Fund balance sheet deficit has
increased by almost 50%. The State Comptroller attributes the difference between
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the General Fund's operating surplus and the increase in balance sheet deficit
primarily to the State's use of modified cash accounting for annual budgeting
purposes.
Fiscal Year 1998 expenditures from the General Fund increased by 5.6% over
the prior year. In her November 3, 1998 letter to the Governor, the State
Comptroller expressed concern that the State's constitutional cap on spending,
for the first time since its inception in 1991, was exceeded by $194.1 million
in 1998.
In addition to the General Fund, the State also operates several Special
Revenue Funds which are often used as a means of earmarking or reserving certain
revenues to finance particular activities. These include, among others, the
Transportation Fund, the Grant and Loan Programs Fund and the Housing Programs
Fund. These Special Revenue Funds are generally funded by each fund's operating
revenues. When the operations of all of the State's governmental funds are
considered, the State showed an overall surplus of $7 million in Fiscal Year
1998. This surplus follows nine consecutive years of operating deficits.
Connecticut's net State bonded debt was $9.3 billion at the end of Fiscal
Year 1998. In Fiscal Year 1998, the State issued $70 million in bonds. Debt
service for bonded debt, as a percentage of governmental expenditures, increased
to 10.7% for Fiscal Year 1998 from 9.1% for Fiscal Year 1997. Connecticut has
the highest per capita debt in the nation. Public bonded debt per capita
increased to $2,820 in Fiscal Year 1998 from $2,774 for the prior year.
In addition to bonded debt, the State has other long-term obligations
which, for Fiscal Year 1998, primarily consisted of unfunded pension obligations
of $6.761 billion, unfunded payments to employees for compensated absences of
$264 million, unfunded workers' compensation payments of $279 million, and
capital leases of $48 million. When these obligations are added to the State's
bonded debt, Connecticut's total State debt for Fiscal Year 1998 was
approximately $16.7 billion, a $233 million increase over the prior year. This
high debt level could impact bond ratings, increase interest cost on all
borrowings, and reduce the State's flexibility in future budgets due to the
higher fixed costs for debt service. As of December 31, 1998, Connecticut
general obligation bonds were rated Aa3, AA, and AA by Moody's, S&P, and Fitch
Investors Service, respectively.
The authorization and issuance of State and municipal debt, including the
purpose, amount and nature thereof, the method and manner of incurring such
debt, the maturity and terms of repayment thereof, and other related matters are
governed by statute. Pursuant to various public acts or special bond acts, the
State has authorized and issued bonds for a variety of projects and purposes.
The State has no constitutional or other limit on its power to issue obligations
or incur indebtedness other than that it may only borrow for public purposes.
Section 3-21 of the Connecticut General Statutes does, however, provide that no
indebtedness for borrowed money payable from the General Fund tax receipts of
the State may be authorized by the General Assembly except such as shall not
cause the aggregate amount of such indebtedness (with certain exclusions) to
exceed 1.6 times the total estimated General Fund tax receipts of the State
during the Fiscal Year in which any such authorization will become effective.
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In general, the State has borrowed money through the issuance of general
obligation bonds, the payment of which is made from the General Fund and backed
by the full faith and credit of the State. However, the State also has the power
to authorize, and has authorized and issued, revenue bonds payable from project
revenues and to some extent, supported by a pledge of certain taxes. Such bonds
are not backed by the full faith and credit of the State. For example, the State
adopted legislation that provides for the issuance of the transportation-related
special tax obligation bonds, the proceeds of which are to be used to pay for
improvements to the State's transportation system. The bonds are payable solely
from motor vehicle, motor fuel and other transportation-related taxes and fees,
charges and other receipts pledged therefor and deposited in the Special
Transportation Fund. The amount of revenues for any such project is dependent on
the occurrence of future events and may thus differ materially from projected
amounts.
In addition, the State has established various Statewide authorities and
two regional water authorities, one of which has since become independent, to
finance revenue producing projects. Five of such Statewide authorities have the
power to incur, under certain circumstances, indebtedness for which the State
has contingent or, in limited cases, direct liability. In addition, recent State
statutes have been enacted with respect to certain bonds issued by the City of
West Haven for which the State has direct guarantee liability. From time to
time, pursuant to public or special acts, the State has created or authorized
the creation of other authorities with power to incur indebtedness and to
finance projects, such as a Statewide health and educational facilities
authority. Indebtedness of such authorities does not constitute a liability or
debt of the State.
The State is a party to numerous legal proceedings. According to the State
Attorney General, most of these proceedings are unlikely to have a material
adverse affect on the State's finances. There are, however, several legal
proceedings which, if decided against the State, may result in material future
expenditures for expanded services or capital facilities or may impair future
revenue sources. It is not possible to determine the outcome of these
proceedings or to estimate the effects of adverse decisions on the State's
financial position.
RISK FACTORS FOR THE FLORIDA FUND. The following information is a brief
summary of factors affecting the economy of the state and does not purport to be
a complete description. This summary is based on publicly available information.
The Florida Fund has not independently verified the information.
Municipal instruments of Florida issuers may be adversely affected by
political, economic and legal conditions and developments within the state of
Florida. In addition, the Florida constitution and statutes mandate a balanced
budget as a whole, and require each of the separate funds (General Revenue Fund,
Trust Funds and Working Capital Fund) within the budget to be kept in balance
from currently available revenues each State fiscal year (July 1 - June 30). The
balanced budget requirement necessitates a continuous evaluation of receipts and
expenditures and makes Florida vulnerable to a sharp unexpected decrease in
revenues.
The state of Florida is not authorized by law to issue obligations to fund
governmental operations; but is authorized to issue bonds pledging its full
faith and credit to finance or refinance the cost of state fixed capital outlay
projects upon approval by a vote of the electors. However, Florida may issue
revenue bonds without a vote to finance or refinance the cost of state fixed
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capital outlay projects which are payable solely from funds other than state tax
revenues. Municipal instruments issued by cities, counties and other
governmental authorities are payable either from their general revenues
(including ad valorem and other taxes) within their jurisdiction or revenues
from the underlying project. Revenue obligations issued by such governmental
bodies and other entities are customarily payable only from revenues from the
particular project or projects involved. The limitations on the state of Florida
and its governmental agencies and Florida local governmental agencies may
inhibit the ability of such issuers to repay existing municipal indebtedness and
otherwise may affect their credit standing. In addition, the ability of such
issuers to repay revenue bonds will be dependent on the success of the
particular project to which such bonds relate.
Florida's economy has diversified and has shifted emphasis from resource
manufacturing to tourism, other services and trade. Economic development efforts
are broadening. Nevertheless, economic developments affecting the service
industry, the tourism industry and high-tech manufacturing could have severe
effects on the Florida economy. Due to the development of amusement and
educational theme parks, the seasonal and cyclical character of Florida's
tourist industry has been reduced. However, a decline in the national economy,
competition from other tourist destinations, crime and international
developments all may affect Florida tourism.
While Florida's population growth has traditionally helped its economy to
perform above the national average, the rapid population growth experienced by
the state in the 1980's has slowed down in the 1990's. The state of Florida has
grown dramatically. In 1950, Florida was the twentieth most populous state with
a population of 2.8 million. In 1980, Florida was the seventh most populous
state with a population of 9.7 million. As of July 1997, Florida's population
was approximately 14.7 million, ranking Florida as the fourth most populous
state nationally and the most populous of the southeastern states.
Florida's growth is partially caused by the number of retirees moving to
take advantage of the favorable climate. In-migration has historically been a
major driving force of Florida's economy. However, nationally, the growth in the
number of young adults and retirees, the two groups most likely to move to
Florida, is expected to decline significantly, as a result of changes in the
overall age structure of the U.S. population. Demographers expect Florida's
population growth in the 1990's to be significantly below the level of the
1980's. Since 1985, the State's average annual rate of population increase has
been approximately 2.3%, as compared to an approximately 1.0% average annual
increase for the nation as a whole. The average annual rate of population
increase during the period 1991 to 1997 was 1.8%, based on 1997 estimates. The
state's annual population growth is expected to continue at close to 230,000
throughout the 1990's.
Florida's population growth is one reason why Florida's economy has
generally performed better than the nation as a whole. However, continued
population growth is no assurance of a strong economy. In addition, despite
projections for slower overall population growth, an acceleration in the growth
rate of Florida's school age population and over-80 population is expected,
increasing the demands for government services particularly in the education and
health care areas.
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While Florida is a leading site for retirement, it is also attracting a
significant number of working-age people. For instance, since 1985, the prime
working-age population (18-44 years of age) has grown at an average annual rate
of approximately 2.2%. As expected, job seekers moving to the State are settling
primarily in the metropolitan areas, such as Metro-Dade, Orlando, Tampa, St.
Petersburg and Jacksonville. As of July 1997, Florida had approximately 856,000
persons between the ages of 15-19, 996,000 persons between the ages of 20-39,
and 1,056,000 persons between the ages of 40 and 64. The share of Florida's
total working-age population (18-59 years of age) to total state population is
approximately 54% and is not expected to change appreciably through the year
2000.
Due to the large number of retirees, Florida's personal income has
generally been insulated from certain economic effects. Florida's per capita
personal income grew by about 4.1% in 1997, compared to the national average of
about 4.7% during 1992 through 1997. However, because Florida has a
proportionally greater retirement age population, property income (dividends,
interest, and rent) and transfer payments (including social security and pension
benefits, among other sources of income) are a relatively more important source
of income than in the nation, generally, and the southeast. Property income, and
transfer payments are typically less sensitive to national business cycles than
employment income and therefore, have traditionally acted as a stabilizing force
within Florida's economy during weak economic periods. Florida's retirement age
population, living in part on interest income, will be adversely affected by any
drops in interest rates. Efforts at both the state and federal level are
underway to reduce health care expenditures and Florida relies more than most
other states on federal Medicare and Medicaid dollars targeted to the elderly.
In addition, cuts in entitlements such as Social Security could have an adverse
impact on Florida's economy. Feared entitlement cuts themselves have the effect
of reducing the consumer confidence of Florida's elderly population.
The service sector is Florida's largest employer. Florida is predominantly
a service-oriented state, in the bottom fifth of states in per capita value
added to the economy by manufacturing. In contrast, the southeast and the nation
have a greater proportion of manufacturing jobs which tend to pay higher wages.
Consolidations, restructurings and failures in the service sector, in recent
years, have adversely affected the Florida economy. In addition, manufacturing
jobs in Florida differ substantially from those available nationwide and in the
southeast, which are more concentrated in areas such as heavy equipment, primary
metals, chemicals and textile mill products. Florida has a concentration of
manufacturing jobs in high-tech and high value-added sectors, such as electrical
and electronic equipment, as well as printing and publishing. These kinds of
manufacturing jobs tend to be less cyclical than other forms of manufacturing
employment. Florida's manufacturing sector has kept pace with the nation, at
about 6% of the total U.S. manufacturing employment, since the beginning of the
1990's. However, defense cutbacks and a diminished space program will make it
difficult to expand or even maintain Florida's existing small high-tech
manufacturing base. The success or failure of efforts to increase the number of
high-tech jobs in connection with the Venture Star space plant, Lockheed Martin
Corp.'s reusable launch vehicle in Florida's East Coast and the impact of
initiatives to develop technology based businesses along Florida's I-4 corridor
may effect Florida's ability to expand or maintain a high-tech manufacturing
base.
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In the area of international trade, Florida is considered well positioned
to take advantage of strong economic growth in Latin America. Florida's exports
to its top five Latin American markets (Brazil, Columbia, Argentina, Venezuela
and Dominican Republic) reached $10 billion in 1994. However, poor economic
conditions in Asia could affect Latin American countries, negatively impacting
upon Florida's trade with Latin America.
During the period 1985 - 1996, the state's population increased an
estimated 26.1%. In the same period of time, Florida's total employment grew by
approximately 28.5%. Florida's population grew about 1.6% during the period of
July 1, 1997 to July 1, 1998. In 1997, Florida's job base grew by about 2.6%,
however, a large portion of the new jobs were temporary positions. In 1998,
Florida's service industries constituted about 90% of total non-farm employment.
The average unemployment rate in Florida from 1986 to 1997 has been
approximately 6.2%, while the national average has been approximately 6.2%. In
January, 1998, however, the unemployment rate in Florida was 4.6% compared with
4.7% nationally.
Florida's economy has been and currently is dependent on the highly
cyclical construction and construction related manufacturing sectors. Florida's
single and multi-family housing starts accounted for approximately 8.5% of total
U.S. housing starts in 1995, although Florida's population is 5.4% of the U.S.
population. Total housing starts grew about 1% between 1996 and 1997.
Traditionally, Florida's rapid growth in population has been a driving force
behind Florida's construction industry. However, factors such as a tight labor
market, Federal tax reform, the availability and cost of financing,
overdevelopment, impact and other development fees and Florida's growth
management legislation and comprehensive planning requirements may adversely
affect construction activity. Lower interest rates will tend to stimulate
construction, while increased rates will diminish construction activity.
Tourism is one of Florida's most important industries. Approximately 42.5
million domestic and international tourists visited Florida in 1996. In terms of
business activities and state tax revenues, tourists in Florida effectively
represented additional residents, spending their dollars predominantly at eating
and drinking establishments, hotels and motels, and amusement and recreation
parks. Visitors to the state tend to arrive by aircraft slightly more so than by
automobile. The state's tourist industry over the years has become more
sophisticated, attracting visitors year-round, thus, to a degree, reducing its
seasonality. Besides a sub-tropical climate and clean beaches that attract
people in the winter months, the state has added, among other attractions, a
variety of amusement and educational theme parks. This diversification has
helped to reduce the seasonal and cyclical character of the industry and has
effectively stabilized tourist related employment as a result. However, economic
uncertainties in Asia, Europe and Latin America and the value of the Canadian
dollar may reduce international tourism to Florida.
The greatest single source of tax receipts in Florida is the sales and use
tax, which accounted for approximately $12.92 billion of revenue in the
1997-1998 fiscal year. The state's dependence on sales taxes keeps the state
susceptible to economic downturns which could cause a reduction in sales tax
collections.
Florida depends more on sales taxes than most other states. This reliance
has increased over time primarily because of a constitutional prohibition of a
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personal income tax and the reservation of ad valorem property taxes to local
governments. The State does not levy ad valorem taxes on real property or
tangible personal property. Counties, school districts and municipalities are
authorized by law, and special districts may be authorized by law, to levy ad
valorem taxes.
Slightly less than 10% of the sales tax is designated for local
governments and is distributed to the counties in which it is collected for
local use by such counties and their municipalities. In addition, local
governments may have (by referendum) limited authority to assess discretionary
sales surtaxes within their counties.
Due to its involvement in a wide range of activities and the complexity of
its system of taxation, Florida is a party to various legal actions. The
outcomes of some of these actions could significantly reduce Florida's ability
to collect taxes, force Florida to refund taxes already collected, require the
State to pay damage awards, or result in the loss of valuable state property.
Furthermore, past and pending litigation, to which Florida is not a party, may
create precedents which may effectively result in future costs or revenue
losses. In addition, the issuers may be involved in a variety of litigation
which could have a significant adverse impact on their financial standing.
Florida's local governments operate in a restrictive legal and political
fiscal environment. They are faced with State imposed revenue raising and
revenue expenditure constraints, fast paced population growth, and citizens'
expectations for expanded services without higher property taxes. The Florida
Constitution preempts to the State all revenue sources not specifically provided
by law, except for the ad valorem property tax. It also limits levies of local
governments to 10 mills ($10 per thousand dollars of taxable assessed
valuation). A constitutionally mandated homestead tax exemption ($25,000) also
has eroded the tax base of many less populated counties. In addition, a recent
constitutional amendment limits the ability of local governments to increase the
assessed valuation of homestead property, which, together with the 10 mill
limitation, could have a substantial adverse affect on local governments in the
future. The State also requires that agricultural property be assessed according
to its value in current use rather than its fair market value. Florida's local
governments cannot impose a personal income or payroll tax.
Florida's Growth Management Act requires local governments to prepare
growth plans for approval by the State. These growth plans must insure that new
development will not be permitted unless adequate infrastructure such as roads,
sewer, water and parks are available concurrently with the development. Known as
"concurrency," this requirement has put heavy economic and political pressure on
local governments. In addition, the Growth Management Act has spawned litigation
involving local governments, which itself consumes resources, and in which an
adverse outcome can adversely affect the local governments involved.
In November, 1994, the voters of Florida approved the State legislature's
joint resolution to amend the Florida Constitution. This amendment limits the
amount of taxes, fees, licenses and charges imposed by the legislature and
collected during any fiscal year to the amount of revenues allowed for the prior
fiscal year, plus an adjustment for growth. Growth is defined as the amount
equal to the average annual rate of growth in Florida personal income over the
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most recent twenty quarters times the State revenues allowed for the prior
fiscal year. The revenues allowed for any fiscal year can be increased by a
two-thirds vote of the State legislature. Any excess revenues generated must be
put into the Budget Stabilization Fund until it is fully funded and then
refunded to taxpayers. Included among the categories of revenues which are
exempt from the revenue limitation, however, are revenues pledged to State
bonds.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
Federal income tax rates, the supply of tax-exempt bonds, the size of offerings,
maturity of the obligations, the credit quality and rating of the issues and
perceptions with respect to the level of interest rates.
General obligation bonds issued by the state of Florida have consistently
been rated Aa2, AA+, and AA by Moody's, S & P, and Fitch IBCA. Inc.,
respectively. There is no assurance that such ratings will be maintained for any
given period of time or that they may not be lowered, suspended or withdrawn
entirely by such rating agencies, or either of them if circumstances warrant.
Any such downward change in, suspension of, or withdrawal of such ratings, may
have an adverse affect on the market price of Florida municipal instruments.
Moreover, the rating of a particular series of revenue bonds or municipal
obligations relates primarily to the project, facility, governmental entity or
other revenue source which will fund repayment.
Florida's rapid growth is straining resources but has also permitted the
expansion of local governments and creates greater economic depth and diversity.
While infrastructure developments have lagged behind population growth, it is
expected that more infrastructure projects will be created, thereby increasing
Florida's governmental indebtedness and the issuance of additional municipal
instruments.
While the bond ratings and some of the information presented above may
indicate that Florida is in satisfactory economic health, there can be no
assurance that there will not be a decline in economic conditions or that
particular municipal instruments in the portfolio of the FLORIDA FUND will not
be adversely affected by any changes in the economy. In addition, the economic
condition in Florida as a whole is only one factor affecting individual
municipal instruments, which are subject to the influence of a multitude of
local political, economic and legal conditions and developments.
RISK FACTORS FOR THE GEORGIA FUND. The GEORGIA FUND will concentrate its
investments in debt obligations of the State of Georgia and guaranteed revenue
debt of its instrumentalities (the "Georgia Obligations"). The Georgia
Obligations may be adversely affected by economic and political conditions and
economic and legal developments within the State of Georgia. The information
contained in this summary of risk factors for the Georgia Fund is not intended
to be a complete discussion of all relevant risk factors. There may be other
factors not discussed herein, such as Year 2000 risks, that may adversely affect
the value of the payment of interest and principal on the Georgia Obligations.
For fiscal 1999 and 2000, the Georgia General Assembly authorized
$482,390,000 and $__________ in general obligation debt, respectively, with
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existing obligations at the end of fiscal year 1998 totaling $4,505,775,000. The
1998C and 1998D series of Georgia general obligation bonds are rated Aaa, AAA
and AAA by Moody's, S&P, and Fitch, respectively.
Georgia continues to experience steady growth in both the economic and
demographic arenas, though Georgia's economy has slowed from pre-1996 Olympic
Games levels. Georgia's net revenue collections for the fiscal year ending June
30, 1998, amounted to $11,204,520,190.48, a 6.5% increase from the previous
fiscal year. Estimated revenue from taxes and fees for fiscal year 1999 is
projected to be $__________.
According to the Department of Labor for the State of Georgia, Georgia's
current unemployment rate is approximately 4.0%, placing Georgia below the
national average unemployment rate. Georgia's low unemployment rate is not
expected to decrease significantly. Total employment in Georgia is projected to
increase by approximately sixteen percent by the year 2005, with large increases
forecasted in service industries. Georgia's population is expected to grow
steadily with projected population to increase to over 8.5 million people by the
year 2010.
While Georgia's immediate financial future appears sound, should the
above-mentioned trends slow or reverse themselves, the Georgia economy and state
revenues could be adversely affected. There can be no assurance that the events
discussed above will not negatively affect the market value of the Georgia
Obligations or the ability of either the state or its instrumentalities to pay
interest and repay principal on the Georgia Obligations in a timely manner.
RISK FACTORS FOR THE MARYLAND FUND. Some of the significant financial
considerations relating to the investments of the Maryland Fund are summarized
below. This information is derived principally from official statements and
preliminary official statements released on or before July 8, 1998, relating to
issues of Maryland obligations and does not purport to be a complete
description.
The State's total expenditures for the fiscal years ending June 30, 1995,
June 30, 1996 and June 30, 1997 were $13.528 billion, $14.169 billion and
$14.787 billion, respectively. As of July 8, 1998, it was estimated that total
expenditures for fiscal year 1998 would be $15.851 billion. The State's General
Fund, the fund from which all general costs of State government are paid and to
which taxes and other revenues not specifically directed by law to be deposited
in separate funds are deposited or credited, representing approximately 55% -
60% of each year's total budget, had an unreserved surplus on a budgetary basis
of $132.5 million in fiscal year 1995, an unreserved surplus of $13.1 million in
fiscal year 1996, and an unreserved surplus of $207.2 million in fiscal year
1997 (of which $144.5 million was designated for fiscal year 1998 operations).
The State Constitution mandates a balanced budget.
In April 1997, the General Assembly approved the $15.438 billion 1998
fiscal year budget. The 1998 Budget includes $3.1 billion in aid to local
governments (reflecting a $206 million increase in funding over 1997). When the
1998 Budget was enacted, it was estimated that the General Fund unreserved
surplus on a budgetary basis at June 30, 1998, would be approximately $27.9
million; as of July 8, 1998 that surplus estimation had risen to $317.2 million.
The Revenue Stabilization Account of the State Reserve Fund was established in
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1986 to retain State revenues for future needs and to reduce the need for future
tax increases. It is estimated that the balance of the Revenue Stabilization
Account as of June 30, 1998 was $617.6 million. The 1998 Budget does not include
any proposed expenditures dependent on additional revenue from new or
broad-based taxes.
In April of 1998, the General Assembly approved the $16.613 billion 1999
Budget. The 1999 Budget includes $3.3 billion in aid to local governments
(reflecting a $169.1 million increase over 1998), and $75.5 million in net
General Fund deficiency appropriations for fiscal year 1998.1 It is estimated
that the general fund surplus on a budgetary basis at June 30, 1999 will be
approximately $14.5 million. In addition, it is estimated that the balance in
the Revenue Stabilization Account of the State Reserve Fund at June 30, 1999
will be $634 million (after a $185.2 million transfer to the General Fund).
The public indebtedness of Maryland and its instrumentalities is divided
into three basic types. The State issues general obligation bonds for capital
improvements and for various State-sponsored projects. The State Constitution
prohibits the contracting of State debt unless the debt is authorized by a law
levying an annual tax or taxes sufficient to pay the debt service within 15
years and prohibiting the repeal of the tax or taxes or their use for another
purpose until the debt has been paid. The Department of Transportation of
Maryland issues limited, special obligation bonds for transportation purposes
payable primarily from specific, fixed-rate excise taxes and other revenues
related mainly to highway use. Certain authorities issue obligations payable
solely from specific non-tax enterprise fund revenues and for which the State
has no liability and has given no moral obligation assurance.
According to recent available ratings, general obligation bonds of the
State of Maryland are rated "Aaa" by Moody's and "AAA" by S&P, as are those of
the largest county of the State, i.e., Montgomery County in the suburbs of
Washington, D.C. General obligation bonds of Baltimore County, a separate
political entity surrounding Baltimore City and the third largest county in the
State, are rated "Aaa" by Moody's and "AAA" by S&P. General obligation bonds of
Prince George's County, the second largest county, which is also in the suburbs
of Washington, D.C., are rated "Aa" by Moody's and "AA-" by S&P. The general
obligation bonds of those other counties of the State that are rated by Moody's
carry an "A" rating or better except for those of Allegheny County, which are
rated "Baa". The general obligation bonds of Baltimore City, one of the most
populous municipalities in Maryland, are rated "A1" by Moody's and "A" by S&P.
The Washington Suburban Sanitary District, a bi-county agency providing water
and sewerage services in Montgomery and Prince George's Counties, issues general
obligation bonds rated "A" by Moody's and "AA" by S&P. Most Maryland Health and
Higher Education Authority and State Department of Transportation revenue bonds
issues have received an "A" rating or better from Moody's. See Appendix A for a
description of municipal bond ratings.
While the ratings and other factors mentioned above indicate that Maryland
and its principal subdivisions and agencies are overall in satisfactory economic
- -------------------------
1 The Budget incorporates the first full year of the five-year phase-in of
the 10% reduction in personal income taxes estimated to result in a reduction of
revenues of $300 million in fiscal year 1999.
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health, there can, of course, be no assurance that this will continue or that
particular bond issues may not be adversely affected by changes in state or
local economic or political conditions.
RISK FACTORS FOR THE MASSACHUSETTS FUND. Some of the significant financial
considerations relating to the investments of the Massachusetts Fund are
summarized below. This information is derived principally from official
statements and preliminary official statements released on or before February 1,
1999, relating to issues of Massachusetts obligations and does not purport to be
a compete description.
Annual expenditures by the Commonwealth of Massachusetts for programs and
services provided by state government for fiscal years 1990 and 1991 exceeded
total current year revenues. The fiscal 1990 and 1991 budgetary deficits were in
effect funded by the issue of $1.42 billion of bonds. Total revenues and other
sources exceeded total expenditures and other uses in fiscal 1992, 1993, 1994,
1995, 1996, 1997 and 1998 by approximately $312.3 million, $13.1 million, $26.8
million, $136.7 million, $446.4 million, $221.0 million and $798.1 million,
respectively.
The Commonwealth's fiscal 1999 budget is based on estimated total revenues
and other sources of approximately $19.726 billion. Total expenditures and other
uses for fiscal 1999 are estimated at approximately $20.060 billion. The fiscal
1999 budget proposes that the difference between estimated revenues and other
sources and estimated expenditures and other uses be provided for by application
of the beginning fund balances for fiscal 1999. The fiscal 1999 budget is based
upon numerous spending and revenue estimates, the achievement of which cannot be
assured.
On January 27, 1999 the Governor submitted his fiscal 2000 budget
recommendations to the legislature which provide for budgeted expenditures and
other uses of approximately $20.556 billion. The recommended fiscal 2000
spending level is approximately $496 million above the fiscal 1999 budgeted
expenditures and other uses of $20.060 billion. The Governor's recommendations
project fiscal 1999 ending fund balances of approximately $906 million. The
Governor's recommendations are, of course, subject to legislative consideration.
In Massachusetts the tax on personal property and real estate is the
principal source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2", an initiative petition adopted by the voters of thE
Commonwealth of Massachusetts on November 4, 1980, limits the power of
Massachusetts cities and towns and certain tax-supported districts and public
agencies to raise revenue from property taxes to support their operations,
including the payment of debt service, by limiting the amount by which the total
property taxes may increase from year to year. The reductions in local revenues
and anticipated reductions in local personnel and services resulting from
Proposition 2 1/2 created strong demand for substantial increases iN
Commonwealth funded local aid, which increased significantly in fiscal years
1982 through 1989. The effect of this increase in local aid was to shift a major
part of the impact of Proposition 2 1/2 to the Commonwealth. Because oF
decreased Commonwealth revenues, local aid declined significantly in fiscal
1990, 1991 and 1992. Local aid increased somewhat in each fiscal year from 1993
through 1998 and is expected to increase again in fiscal 1999.
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Limitations on Commonwealth tax revenues have been established by enacted
legislation approved by the Governor on October 25, 1986 and by public approval
of an initiative petition on November 4, 1986. The two measures are inconsistent
in several respects, including the methods of calculating the limits and the
exclusions from the limits. The initiative petition, unlike its legislative
counterpart, contains no exclusion for debt service on Commonwealth bond and
notes or for payments on Commonwealth guarantees. Commonwealth tax revenues in
fiscal 1987 exceeded the limit imposed by the initiative petition resulting in
an estimated $29.2 million reduction which was distributed to taxpayers in the
form of a tax credit against calendar year 1987 personal income tax liability
pursuant to the provisions of the initiative petition. Tax revenues since fiscal
1988 have not exceeded the limit set by either the initiative petition or the
legislative enactment.
The Commonwealth maintains financial information on a budgetary basis.
Since fiscal year 1986, the Comptroller also has prepared annual financial
statements in accordance with generally accepted accounting principals (GAAP) as
defined by the Government Accounting Standards Board. GAAP basis financial
statements indicate that the Commonwealth ended fiscal 1990, 1991, 1992, 1993
and 1994 with fund deficits of approximately $1.896 billion, $761.2 million,
$381.6 million, $184.1 million and $72 million, respectively. GAAP basis
financial statements for fiscal 1995 indicate that the Commonwealth ended such
year with a fund equity of approximately $287.4 million. GAAP basis financial
statements for fiscal 1996 indicate that the Commonwealth ended such year with a
fund equity of $709.2 million. GAAP basis financial statements for fiscal 1997
indicate that the Commonwealth ended such year with a fund equity of $1.096
billion. GAAP basis financial statements for fiscal 1998 indicate that the
Commonwealth ended such year with a fund equity of $1.841 billion.
RISK FACTORS FOR THE MICHIGAN FUND. The information set forth below is
derived in part from the official statements prepared in connection with the
issuance of Michigan municipal bonds and similar obligations and other sources
that are generally available to investors. The information is provided as
general information intended to give a recent historical description and is not
intended to indicate future or continuing trends in the financial or other
positions of the State of Michigan (the "State").
The principal sectors of Michigan's economy are manufacturing of durable
goods (including automobiles and components and office equipment), tourism and
agriculture. The durable goods manufacturing sector in Michigan and in other
states tends to be more vulnerable to economic downturns and the component
industries have been characterized as having excess capacity, resulting in plant
closings and permanent reductions in the workforce, many of which have occurred
in Michigan. Although the Michigan unemployment rate has recently been lower
than the national unemployment rate, over the last ten years the Michigan
unemployment rate has been typically much higher than the national average. The
market value and marketability of bonds issued by the State and local units of
government may be affected adversely by the same factors that affect Michigan's
economy generally. The ability of the State and its local units of government to
pay the principal of and the interest on their bonds may be affected by such
factors, by the possibility of an unfavorable resolution of lawsuits against the
State in the areas of corrections, highway maintenance, social services, court
funding, tax collection, and budgetary reductions to school districts, and by
certain constitutional, statutory and charter limitations.
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The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the special revenue funds. The
majority of the revenues from State taxes are from the State's personal income
tax, single business tax, use tax and sales tax. Significant portions of tax
revenues are designated for the State's School Aid Fund and are transferred to
school districts for the financing of primary and secondary school operations.
The Michigan State General Fund balances for the 1989-90 and 1990-91
fiscal years were negative $310 million and $169.4 million, respectively. This
negative balance had been eliminated as of the end of fiscal year 1991-92, which
ended September 30, 1992. General Fund surplus at the end of fiscal years
1992-93 through 1996-97 was transferred, as required by statute, to the
Counter-Cyclical Budget and Economic Stabilization Fund ("BSF"), which reflected
a positive balance of $1.152 billion at September 30, 1997. The State's Annual
Financial report for fiscal years ending September 30 is generally available at
the end of March of the following year.
Beginning in 1993, the Michigan Legislature enacted several statutes which
significantly affect Michigan property taxes and the financing of primary and
secondary school operations. The property tax and school finance reform measures
included a ballot proposal ("Proposal A") and constitutional amendment which was
approved by voters on March 15, 1994. Under Proposal A as approved, the State
sales and use tax rates were increased from 4% to 6%, the State income tax and
cigarette tax were increased, the Single Business Tax imposed on business
activity within the state was decreased and, beginning in 1994, a State property
tax of 6 mills is now imposed on all real and personal property currently
subject to the general property tax. Proposal A contains additional provisions
regarding the ability of local school districts to levy supplemental property
taxes for operating purposes as well as a limit on assessment increases for each
parcel of property, beginning in 1995 to the lesser of 5% or the rate of
inflation.
Under Proposal A, much of the additional revenue generated by the new
taxes will be dedicated to the State School Aid Fund. Proposal A shifts
significant portions of the cost of local school operations from local school
districts to the State and raises additional State revenues to fund these
additional State expenses. These additional revenues will be included within the
State's constitutional revenue limitations and may impact the State's ability to
raise additional revenues in the future.
In July, 1997, the Michigan Supreme Court issued a decision in cases filed
by many of Michigan's local school districts against the State regarding the
manner in which the State disburses funds to school districts for special
education and special education transportation, bilingual education, driver
education and school lunch programs, including a case captioned DONALD DURANT V.
STATE OF MICHIGAN. The court held that monetary damages estimated at over $900
million were owed to the 84 school districts involved in Durant and over 400
other Michigan school districts, and legislation has been enacted to pay such
damages from the BSF over a 15 year period. Similar constitutional challenges to
the funding of special education services and transportation have been filed by
another 100 school districts in a new matter (Durant II) that was remanded to
the Michigan Court of Appeals in September 1998. The ultimate resolution of
those claims is not presently determinable.
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Currently, the State's general obligation bonds are rated Aa1 by Moody's
and AA+ by Standard & Poor's, following rating increases announced earlier in
1998. To the extent that the portfolio of Michigan obligations is comprised of
revenue or general obligations of local governments or authorities, rather than
general obligations of the State of Michigan, ratings on such Michigan
obligations will be different from those given to the State of Michigan and
their value may be independently affected by economic matters not directly
impacting the State.
RISK FACTORS FOR THE MINNESOTA FUND. The information set forth below is
derived from official statements prepared in connection with the issuance of
obligations of the State of Minnesota and other sources that are generally
available to investors. The information is provided as general information
intended to give a recent historical description and is not intended to indicate
further or continuing trends in the financial or other positions of the State of
Minnesota. Such information constitutes only a brief summary, relates primarily
to the State of Minnesota, does not purport to include details relating to all
potential issuers within the State of Minnesota whose securities may be
purchased by the Minnesota Fund, and does not purport to be a complete
description.
The State of Minnesota has experienced certain budgeting and financial
problems since 1980. However, in recent years, Accounting General Fund Balances
have been positive.
In February 1992 the Commissioner of Finance estimated the Accounting
General Fund balance at June 30, 1993, at negative $569 million. The balance at
June 30, 1995, was projected at negative $1.75 billion.
The 1992 Legislature reduced expenditures by $262 million for the biennium
ending June 30, 1993, enacted revenue measures expected to increase revenue by
$149 million, and reduced the budget reserve by $160 million to $240 million.
After the Legislature adjourned in April 1992, the Commissioner of Finance
estimated the Accounting General Fund balance at June 30, 1993, at $2.4 million,
and projected the balance at June 30, 1995, at negative $837 million. A November
1992 forecast estimated the balance at June 30, 1993, at positive $217 million
and projected the balance at June 30, 1995, at negative $769 million.
A March 1993 forecast projected an Accounting General Fund balance at June
30, 1995, at negative $163 million out of a budget for the biennium of
approximately $16.7 billion, and estimated a balance at June 30, 1997, at
negative $1.6 billion out of a budget of approximately $18.7 billion.
The 1993 Legislature authorized $16.519 billion in spending for the
1993-1995 biennium, an increase of 13.0 percent from 1991-1993 expenditures.
Resources for the 1993-1995 biennium were projected to be $16.895 billion,
including $657 million carried forward from the previous biennium. The $16.238
billion in projected non-dedicated and dedicated revenues was 10.3 percent
greater than in the previous biennium and included $175 million from revenue
measures enacted by the 1993 Legislature. The Legislature increased the health
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care provider tax to raise $79 million, transferred $39 million into the
Accounting General Fund and improved collection of accounts receivable to
generate $41 million.
After the Legislature adjourned in May 1993, the Commissioner of Finance
estimated that at June 30, 1995, the Accounting General Fund balance would be
$16 million and the budget reserve, as approved by the 1993 Legislature, would
be $360 million. The Accounting General Fund balance at June 30, 1993, was $463
million.
The Commissioner of Finance, in a November 1993 forecast, estimated the
Accounting General Fund balance at June 30, 1995, at $430 million, due to
projected increases in revenues and reductions in expenditures, and the balance
at June 30, 1997, at $389 million. The Commissioner recommended that the budget
reserve be increased to $500 million. He estimated that if current laws and
policies continued unchanged, revenue would grow 7.7 percent and expenditures
6.0 percent in the 1995-1997 biennium.
A March 1994 forecast projected an Accounting General Fund balance at June
30, 1995, at $623 million, principally due to a projected $235 million increase
in revenues to $16.6 billion for the biennium. The balance at June 30, 1997, was
estimated to be $247 million.
The 1994 Legislature provided for a $500 million budget reserve;
appropriated to school districts $172 million to allow the districts, for
purposes of state aid calculations, to reduce the portion of property tax
collections that the school districts must recognize in the fiscal year during
which they receive the property taxes; increased expenditures $184 million; and
increased expected revenues $4 million.
Of the $184 million in increased expenditures, criminal justice
initiatives totaled $45 million, elementary and higher education $31 million,
environment and flood relief $18 million, property tax relief $55 million, and
transit $11 million. A six-year strategic capital budget plan was adopted with
$450 million in projects financed by bonds supported by the Accounting General
Fund. Other expenditure increases totaled $16.5 million.
Included in the expected revenue increase of $4 million were conformity
with federal tax changes to increase revenues $27.5 million, a sales tax
phasedown on replacement capital equipment and miscellaneous sales tax
exemptions decreasing revenues $17.3 million, and other measures decreasing
revenues $6.2 million.
After the Legislature adjourned in May 1994, the Commissioner of Finance
estimated the Accounting General Fund balance at June 30, 1995, at $130 million.
The Commissioner of Finance, in a November 1994 forecast, estimated the
Accounting General Fund balance at June 30, 1995, at $268 million, due to
projected increases in revenues and decreases in expenditures, and the balance
at June 30, 1997, at $190 million.
A February 1995 forecast projected an Accounting General Fund balance at
June 30, 1995, at $383 million, due to a $93.5 million increase in projected
revenues and a $21.0 million decrease in expenditures. The balance at June 30,
1997, was projected at $250 million.
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The 1995 Legislature authorized $18.220 billion in spending for the
1995-1997 biennium, an increase of $1.395 billion, 8.3 percent, from 1993-1995
expenditures. Resources for the 1995-1997 biennium were projected to be $18.774
billion, including $921 million carried forward from the previous biennium.
The Legislature authorized 7.1 percent more spending for elementary and
secondary education in the 1995-1997 biennium than in 1993-1995, 0.9 percent
more in local government aids, 14.2 percent more for health and human services,
2.3 percent more for higher education, and 25.1 percent more for corrections.
The Legislature set the budget reserve at $350 million and established a
supplementary reserve of $204 million in view of predicted federal cutbacks.
After the Legislature adjourned in May 1995, the Commissioner of Finance
estimated that at June 30, 1997, the Accounting General Fund balance would be
zero. The Accounting General Fund balance at June 30, 1995, was $481 million.
The Commissioner of Finance, in a November 1995 forecast, estimated the
Accounting General Fund balance at June 30, 1997, at $824 million, due to a $490
million increase in revenues from those projected in May 1995, a $199 million
reduction in projected expenditures, and a $135 million increase in the amount
carried forward from the 1993-1995 biennium. An improved national economic
outlook increased projected net sales tax revenue $257 million and reduced
projected human services expenditures $231 million. The Commissioner estimated
the Accounting General Fund balance at June 30, 1999, at negative $28 million.
Only $15 million of the $824 million projected 1995-1997 surplus was
available for spending. The statutes require that an additional $15 million be
placed in the supplementary budget reserve, and an additional $794 million must
be appropriated to school districts to allow the districts, for purposes of
state aid calculations, to eliminate the 48 percent of property tax collections
that the school districts must recognize in the fiscal year during which they
receive the property taxes.
A February 1996 forecast projected an Accounting General Fund balance at
June 30, 1997, at $873 million, due to a $104 million increase in projected
revenues, a $19 million increase in expenditures, and a $36 million reduction in
the June 30, 1995, ending balance. The amount available for spending increased
from $15 million to $64 million.
In February 1996, the Commissioner of Finance estimated the Accounting
General Fund balance at June 30, 1999, at $54 million.
The 1996 Legislature reduced the State of Minnesota's commitment to
eliminate the so-called school recognition shift. The 1995 Legislature had voted
to allow school districts, for purposes of state aid calculations, to eliminate
the 48 percent of property tax collections that the school districts must
recognize in the fiscal year during which they receive the property taxes. The
1996 Legislature raised the percentage for the 1995-1997 biennium from zero to 7
percent, saving the State $116 million.
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The 1996 Legislature increased expenditures $130 million, including $37
million for elementary education and youth development; $14 million for higher
education; $17 million for health systems and human services reforms; $16
million for public safety and criminal justice; and $36 million for
transportation, environment and technology. The Legislature also approved $614
million in capital projects to be funded by general obligation bonds and
appropriations and increased expected revenues $5 million.
After the Legislature adjourned in April 1996, the Commissioner of Finance
estimated the Accounting General Fund balance at June 30, 1997, at $1 million.
The Accounting General Fund balance at June 30, 1996, was $445 million.
The Commissioner of Finance, in a November 1996 forecast, estimated the
Accounting General Fund balance at June 30, 1997, at $793 million, due to a $646
million increase in revenues from those projected in April 1996, a $209 million
reduction in expenditures, and $63 million in other changes. The longest period
of national economic growth since World War II, through mid-1999, was forecast.
Individual income taxes were forecast to be $427 million more than projected in
April 1996, and sales taxes $81 million more. Of the $209 million reduction in
forecast expenditures, $199 million were health and human services expenditures.
Existing statutes require the first $114 million of the forecast balance
to be dedicated to a new education aid reserve for use in the 1997-1999
biennium. Another $157 million must be used to increase from 85 to 90 percent
the portion of state aid to school districts that is paid in the fiscal year
during which the districts become entitled to the aid.
In November 1996, the Commissioner of Finance estimated the Accounting
General Fund balance at June 30, 1999, at $1.4 billion.
A February 1997 forecast projected an Accounting General Fund balance at
June 30, 1997, at $866 million (after taking into account the $114 million and
$157 million items referred to above), due to a $236 million increase in
projected revenues and a $108 million decrease in expenditures. The balance at
June 30, 1999, was projected at $1.7 billion.
The 1997 Legislature, in a regular session and June and August special
sessions, authorized $20.924 billion in spending for the 1997-1999 biennium, an
increase of $2.231 billion, or 11.8 percent, from 1995-1997 expenditures.
Resources for the 1997-1999 biennium were projected to be $21.946 billion,
including $1.630 billion carried forward from the previous biennium.
The Legislature authorized 14.8 percent more spending for elementary and
secondary education spending in the 1997-1999 biennium than in 1995-1997, 17.6
percent more for health and human services, 12.5 percent more in local
government aids, 10.7 percent more for higher education, and 0.3 percent more
for all other expenditures. The Legislature set the General Fund budget reserve
at $522 million. The cash flow account was set at $350 million, and a property
tax reform reserve account of $46 million was created for future restructuring
of the property tax system. Other reserves totaled $72 million.
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After the Legislature adjourned its second special session in August 1997,
the Commissioner of Finance estimated that at June 30, 1999, the Accounting
General Fund balance would be positive $32 million. The Accounting General Fund
balance at June 30, 1997 was an estimated $861 million.
The Commissioner of Finance, in a November 1997 forecast, estimated the
Accounting General Fund balance at June 30, 1999, at $1.360 billion, $1.328
billion more than estimated after the 1997 legislature adjourned, due to a $729
million increase in projected revenues, a $256 million reduction in projected
expenditures, $21 million increase in dedicated reserves, and a $364 million
increase in the projected amount carried forward from the 1995-1997 biennium.
Higher than anticipated individual income tax payments were the major source of
$272 million in additional revenues in the first half of 1997, and human
services savings were the principal source of $92 million in reduced
expenditures. The Commissioner estimated the Accounting General Fund balance at
June 30, 2001, at $1.284 billion.
Only $453 million of the $1.360 billion projected 1997-1999 surplus was
available for spending. The statutes allocate the first $81 million of the
forecast balance to fund K-12 education tax credits and deductions enacted in
1997. Sixty percent of the remainder plus interest, $826 million, is added to a
property tax reform account.
A February 1998 forecast projected an Accounting General Fund balance at
June 30, 1999, at $1.045 billion, due to a $507 million increase in projected
revenues, a $90 million decrease in expenditures, and a $5 million increase in
dedicated reserves. The balance at June 30, 2001, was projected at $2.137
billion.
The 1998 Legislature increased spending $125 million for K-12 education
aids, $90 million to reduce the school property tax recognition shift percentage
to zero, $73 million for higher education, and $148 million for all other
operations. The legislature also approved $999 million in capital improvements,
to be funded by $509 million in bonds and $502 million in appropriations.
After the Legislature adjourned in April 1998, the Commissioner of Finance
estimated the Accounting General Fund balance at June 30, 1999, at $35 million.
The Commissioner of Finance, in a November 1998 forecast, estimated the
Accounting General Fund balance at June 30, 1999, at $953 million, due to an
$803 million increase in non-tobacco revenues, the receipt of $61 million in
tobacco settlement revenues, and a $262 million reduction in expenditures. A
total of $609 million of the $1.562 billion of estimated available revenues is
statutorily dedicated to reserves, tax reduction, and cash to replace bonding.
The Commissioner of Finance in November 1998 estimated the structural
balance at June 30, 2001, at $821 million.
The State of Minnesota has no obligation to pay any bonds of its political
or governmental subdivisions, municipalities, governmental agencies, or
instrumentalities. The creditworthiness of local general obligation bonds is
dependent upon the financial condition of the local government issuer, and the
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creditworthiness of revenue bonds is dependent upon the availability of
particular designated revenue sources or the financial conditions of the
underlying obligors. Although most of the bonds owned by the Minnesota Fund are
expected to be obligations other than general obligations of the State of
Minnesota itself, there can be no assurance that the same factors that adversely
affect the economy of the State generally will not also affect adversely the
market value or marketability of such other obligations, or the ability of the
obligors to pay the principal of or interest on such obligations.
At the local level, the property tax base has recovered after its growth
was slowed in many communities in the early 1990s by overcapacity in certain
segments of the commercial real estate market. Local finances are also affected
by the amount of state aid that is made available. Further, various of the
issuers within the State of Minnesota, as well as the State of Minnesota itself,
whose securities may be purchased by the Minnesota Fund, may now or in the
future be subject to lawsuits involving material amounts. It is impossible to
predict the outcome of these lawsuits. Any losses with respect to these lawsuits
may have an adverse impact on the ability of these issuers to meet their
obligations.
The Department of Finance acknowledged in 1995 that the State of
Minnesota's accounting system was not Year 2000 (Y2K) compliant and the systems
vendor would deliver a compliant version upgrade in the future. In mid-1997,
State of Minnesota technical staff, along with the systems vendor, began a $6.5
million project to install the new compliant version of the accounting software.
According to the most recent Official Statement, the State of Minnesota and the
systems vendor were finishing up the remediation and testing stages of the
project, and expected to implement the new software version on November 30,
1998. There can, however, be no assurance that such implementation will be done
in a timely manner. Further, even if the State of Minnesota successfully
addresses its Year 2000 compliance there can be no assurance that any other
organization or governmental agency with which the State of Minnesota
electronically interacts, including vendors and the federal government, will be
Year 2000 compliant. In the event of any such occurrences, the State of
Minnesota may face material adverse consequences with respect to its revenues
and operations. Local issuers in the State of Minnesota may face similar
problems.
Legislation enacted in 1995 provides that it is the intent of the
Minnesota legislature that interest income on obligations of Minnesota
governmental units, and exempt-interest dividends that are derived from interest
income on such obligations, be included in the net income of individuals,
estates, and trusts for Minnesota income tax purposes if it is judicially
determined that the exemption by Minnesota of such interest or such
exempt-interest dividends unlawfully discriminates against interstate commerce
because interest income on obligations of governmental issuers located in other
states, or exempt-interest dividends derived from such obligations, is so
included. This provision applies to taxable years that begin during or after the
calendar year in which such judicial decision becomes final, regardless of the
date on which the obligations were issued, and other remedies apply for previous
taxable years. The United States Supreme Court in 1995 denied certiorari in a
case in which an Ohio state court upheld an exemption for interest income on
obligations of Ohio governmental issuers, even though interest income on
obligations of non-Ohio governmental issuers was subject to tax. In 1997, the
United States Supreme Court denied certiorari in a subsequent case from Ohio,
involving the same taxpayer and the same issue, in which the Ohio Supreme Court
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refused to reconsider the merits of the case on the ground that the previous
final state court judgment barred any claim arising out of the transaction that
was the subject of the previous action. It cannot be predicted whether a similar
case will be brought in Minnesota or elsewhere, or what the outcome of such case
would be. Should an adverse decision be rendered, the value of the securities
purchased by the Minnesota Fund might be adversely affected, and the value of
the shares of the Minnesota Fund might also be adversely affected.
In October 1998 the State's bond ratings were Aaa by Moody's, AAA by S&P,
and AAA by Fitch.
Economic difficulties and the resultant impact on State and local
government finances may adversely affect the market value of obligations in the
portfolio of the Minnesota Fund or the ability of respective obligors to make
timely payment of the principal and interest on such obligations.
RISK FACTORS FOR THE MISSOURI FUND. The following is a discussion of
certain risk factors relevant to the Missouri Fund. The Missouri Fund will
concentrate its investments in debt obligations of the State of Missouri and its
local governmental entities ("Missouri Obligations"). The value of and the
payment of interest and principal on the Missouri Obligations may be adversely
affected by economic and political conditions and developments within or without
the State of Missouri. The information contained herein is not intended to be a
complete discussion of all relevant risk factors, and there may be other factors
not discussed herein that may adversely affect the value of the Missouri
Obligations. The facts discussed herein were obtained primarily from published
information regarding Missouri state entities. The information relates
exclusively to the State of Missouri and is not intended to include any details
relating to debt obligations of local governmental entities located in the State
of Missouri that may be acquired by the Missouri Fund. The discussion is limited
to the general economic conditions in the State of Missouri.
Population. The following information was obtained from the report of the
Bureau of the Census, United States Department of Commerce, in the 1991
Statistical Abstract of the United States (the "1990 Census"). As of 1990, the
population of the State of Missouri was 5,117,073, which caused Missouri to rank
15th in total population among the states. The portion of Missouri's population
that was comprised of individuals classified as minorities was 13.1% as compared
to the United States ("U.S.") average of 24.4%. According to the 1990 Census,
the population of the State of Missouri increased 4.1% from 1980 to 1990, while
the population of the U.S. increased 9.8% during the same period. Comparatively,
during the decade between 1970 and 1980, Missouri's population increased 5.1%
while the U.S. population increased 11.4%. The Missouri Department of Economic
Development has projected that the population of Missouri will increase 3.5%
from 1990 to 2000 and 2.4% from 2000 to 2010, so that Missouri will have a total
estimated population of approximately 5,458,000 by 2010. Without an adequate
population to support a meaningful tax base, state tax revenues may not be
sufficient for the State of Missouri to make payments on its debt obligations.
Economy. Missouri's economy is divided primarily among agriculture,
manufacturing, services, trade and government. The U.S. Bureau of Labor
Statistics reported in January 1998, that Missouri's largest non-agricultural
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employers were services with 28.0% of the non-agricultural work force, trade
(wholesale and retail) with 23.5% of the non-agricultural work force,
manufacturing with 16.0% of the non-agricultural work force and government with
15.6% of the non-agricultural work force. According to the U.S. Department of
Commerce, Missouri's gross state product, the aggregate of all economic activity
and wealth produced in the State of Missouri, rose from $53.1 billion in 1980 to
$101.5 billion in 1990, representing an average annual increase of approximately
6.7%. During the same period, the U.S. gross national product increased
approximately 7.0% per year. The annual per capita personal income for the State
of Missouri for 1994, 1995 and 1996 was $20,717, $21,627 and $22,864,
respectively, while the U.S. annual per capita income for the same years was
$21,846, $23,193 and $24,231. The University of Missouri in Columbia, Missouri
(the "University") has projected that the per capita income for Missouri
residents will increase 3.9% in calendar year 1998 and will rise approximately
4.5% in both 1999 and 2000; while per capita income for U.S. residents will
increase 3.4%, 4.8% and 4.9%, respectively, during the same periods. Inadequate
state gross product or per capita income could adversely affect the State's tax
revenues and, therefore, its ability to meet its current debt obligations.
Employment. The Missouri Department of Labor and Industrial Relations has
reported that Missouri's unemployment rates for fiscal years 1995, 1996 and 1997
were 4.6%, 4.3% and 4.2%, respectively, while the U.S. unemployment rates for
the same periods were 5.7%, 5.7% and 5.2%. The University has projected that
Missouri's unemployment rate for calendar year 1998 will be 3.6%, dropping to
3.5% in 1999, and remaining at 3.5% in the year 2000, while the U.S.
unemployment rate for the same periods will be 4.5% in each of years 1998-2000.
If the State has significant unemployment in future years, the State's tax
revenues may not be adequate to pay its debt obligations.
State Revenues. The State of Missouri operates from a General Revenue Fund
("General Fund"). The General Fund includes funds received from tax revenues and
federal grants. For fiscal year 1997, the State derived approximately 17.0% of
the General Fund revenue from sales and use taxes, 33.9% from individual income
taxes and 4.7% from corporate income taxes.
The Missouri Constitution imposes a limit on the amount of taxes that may
be imposed by the General Assembly during any fiscal year. This limit is related
to total state revenues for fiscal year 1981, as defined in Article X, Sections
16 through 24 of the Missouri State Constitution, and is adjusted annually in
accordance with a formula related to increases in the average personal income of
Missouri residents for certain designated periods. Inadequate tax revenues due
to the constitutional limitations may adversely affect the State's ability to
pay its debt obligations.
Federal grants account for approximately 26.4% of the General Fund
revenues for fiscal year 1997. No assurances can be given that the amount of
federal grants previously provided to the State will continue, and the amount of
federal grants received by the State may have an effect on its ability to pay
its debts.
The U.S. District Courts in St. Louis and Kansas City ordered the State to
make payments totaling $227.1 million during fiscal year 1997 and $273.9 million
during fiscal year 1996 to fund the State's share of certain court-ordered
desegregation plans. These amounts constituted approximately 3.5% of the State's
General Fund revenue (exclusive of federal grants) for fiscal year 1997 and 4.5%
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of the State's General Fund revenue (exclusive of federal grants) for fiscal
year 1996. In 1997, the U.S. District Court approved a plan in which the State
would be required to make desegregation payments totaling $314 million during
the 1996-1997, 1997-1998, and 1998-1999 school years. After the 1998-1999 school
year, the State, under the plan approved by the District Court, will no longer
be obligated to make court-ordered desegregation payments.
The Missouri State Constitution mandates a balanced annual state budget.
The requirement of a balanced state budget may affect the ability of the State
of Missouri to repay its debt obligations. For fiscal year 1996, the General
Fund revenue, minus federal grants, amounted to $5,778.0 million, which
represented a 7.2% increase in General Fund revenue over the previous fiscal
year. The balance in the General Fund as of the end of the 1996 fiscal year was
$1,482.1 million. This represented a 90.0% increase in the General Fund balance
from the end of fiscal year 1995.
For fiscal year 1997, the State budgeted, exclusive of federal grants,
$6,000.3 million in General Fund revenue, which represented a 3.8% increase from
the actual revenue amount for fiscal year 1996. However, for fiscal year 1997,
the actual General Fund revenue, exclusive of federal grants, was approximately
$6,199 million, which was 3.3% higher than budgeted and represented a 7.3%
increase from fiscal year 1996 The actual General Fund balance at the end of
fiscal year 1997 was $1,705.1 million, which was 15.1% higher than the balance
at the end of fiscal year 1996. This increase, along with increases in fiscal
years 1992, 1993, 1994, 1995 and 1996 helped to offset decreases in fiscal years
1990 and 1991 which had reduced the General Fund balance from $436.5 million at
the end of fiscal year 1989 to $214.7 million at the end of fiscal year 1991.
For fiscal year 1998, the State of Missouri budgeted, exclusive of federal
grants, $6,245 million in General Fund revenue, which represents a 0.7% increase
from the actual revenue amount for fiscal year 1997. There are no assurances
that the revenues and fund balances budgeted will be attained in the future.
Decreases in revenues and the General Fund balance could adversely affect the
State's ability to pay its debt obligations.
State Bond Indebtedness. The State of Missouri is barred by Article III,
Section 37 of the Missouri State Constitution from issuing debt instruments to
fund government operations. However, it is authorized to issue bonds to finance
or refinance the cost of capital projects upon approval by the voters. In the
past, the State has issued two types of bonds to raise capital - general
obligation bonds and revenue bonds. The State has authorized and issued general
obligation bonds through two state agencies for two specific needs. Water
Pollution Control Bonds have been issued to provide funds for the protection of
the environment through the control of water pollution. State Building Bonds
have been issued to provide funds to improve state buildings and property.
Payments on the general obligation bonds are made from the General Fund.
Therefore, if the State is unable to increase its tax revenues, the State's
ability to make the payments on the existing obligations may be adversely
affected.
In addition to state general obligation bonds, the State of Missouri has
statutes that enable certain local political or governmental authorities, such
as cities, counties and school districts, to issue general obligation bonds.
These local general obligation bonds are required to be registered with the
State Auditor's Office. Local general obligation bonds are backed by the general
revenues (including ad valorem and other taxes) of the particular local
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governmental or political authority issuing such bonds. The State of Missouri
generally has no obligation with respect to such bonds.
The State is also authorized to issue revenue bonds. Revenue bonds
generally provide funds for a specific project, and repayments are generally
limited to the revenues from that project. However, the State may enact a tax
specifically to repay the State's revenue bonds. Therefore, a reduction of
revenues from a project financed by revenue bonds may adversely affect the
State's ability to make payments on such bonds. No assurances can be given that
the State will receive sufficient revenues from the projects, or that the State
will enact and collect a tax to be used to make the required payments on such
bonds.
As of June 30, 1997, according to the Committee on Legislative Research of
the State of Missouri, the State of Missouri had outstanding total state general
obligation bond debt amounting to $1,017,490,000 in principal and $549,133,521
in interest to be paid over the period such debt remains outstanding. On the
same date, the State had outstanding total state revenue bond debt amounting to
$114,680,000 in principal and $53,781,402 in interest to be paid over the period
such debt remains outstanding. In addition to the state bond debt, as of June
30, 1997, the total outstanding principal amount of debt issued by independent
statutory authorities in Missouri was $12,432,950,539. Factors that may
adversely affect the ability of the issuers to repay their debts include (1)
statutory and constitutional limitations on the State of Missouri, and its
agencies and local political and governmental authorities and (2) the success of
the projects to which the debts relate.
Missouri Bond Ratings. S&P and Moody's rating service of state bond
issuers generally rate a bond issuer's ability to repay debt obligations. The
general obligation bonds issued by the State of Missouri are currently rated AAA
by S&P and Aaa by Moody's, the highest rating for each agency. However,
prolonged uncertainty over the State's current financial outlook could impair
the State's ability to maintain such ratings. No assurances can be given that
the State's current ratings will be maintained for any given period or that such
ratings will not be lowered, suspended or withdrawn entirely by either rating
agency. Any reduction in, suspension of, or withdrawal of such ratings may have
an adverse effect on the resale market price of Missouri bonds. With respect to
the rating of revenue bonds, such rating generally depends on the amount of the
revenue from the specific project.
RISK FACTORS FOR THE NEW JERSEY FUND. The State of New Jersey and public
entities therein are authorized to issue two general classes of indebtedness,
the interest on which is exempt from Federal income taxation: general obligation
bonds and special obligation or revenue bonds. Both classes of bonds may be
included in the NEW JERSEY FUND portfolio. The repayment of principal and
interest on general obligation bonds is secured by the full faith and credit of
the issuing entity, backed up by such entity's taxing authority, without
recourse to any specific project or source of revenue. Special obligation or
revenue bonds are typically repaid only from revenues received in connection
with the project for which the bonds are issued, special excise taxes, or other
special revenue sources and are issued by entities without taxing power. Unless
specifically guaranteed, neither the State of New Jersey, any county,
municipality nor any political subdivisions thereof (except for the issuing
entity) are liable for the payment of principal of or interest on revenue bonds.
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General obligation bonds are repaid from revenues obtained through the
issuing entity's general taxing authority. The current political climate
encourages maintaining or even lowering current tax levels. New Jersey law,
however, requires taxes to be levied to repay debt.
Any reduction in the amount of revenue generated by a facility or project
financed by special obligation bonds will affect the issuing entity's ability to
pay debt service on such bonds and no assurance can be given that sufficient
revenues will be obtained from the facility or project to make such payments,
although in some instances repayment may be guaranteed or otherwise secured.
There are several types of public agencies in New Jersey that are
authorized to issue revenue bonds for essential public purposes, including
utilities authorities, improvement authorities, sewerage authorities, housing
authorities, parking authorities, redevelopment agencies and various other
authorities and agencies. These public agencies have issued bonds for the
construction of hospitals, housing facilities, pollution control facilities,
water and sewage facilities, power and electric facilities, resource recovery
facilities and other public projects or facilities.
Certain difficulties may occur in the construction or operation of such
facilities or projects that would adversely affect the amount of revenues
derived therefrom in order to support the issuing entity's payment obligation on
the bonds issued therefor. Hospital facilities, for example, are subject to
changes in Medicare and Medicaid reimbursement regulations, attempts by Federal
and state legislature to limit costs for health care and management's ability to
complete construction projects on a timely basis as well as to maintain
projected rates of occupancy and utilization. At any given time, there may be
several proposals pending on a Federal and state level concerning health care
which may further affect a hospital's debt service obligation. Housing
facilities may be subject to increases in operating costs, management's ability
to maintain occupancy levels, rent restrictions and availability of Federal or
state subsidies, while power and electric facilities and resource recovery
facilities may be subject to increased costs resulting from environmental
restrictions, fluctuations in fuel costs, delays in licensing procedures and the
general regulatory framework in which these facilities operate. All of these
entities are constructed and operated under rigid regulatory guidelines.
The New Jersey Economic Development Authority (the "EDA") is a major
issuer of special obligation bonds on a conduit basis in connection with its
authority, pursuant to New Jersey law, to make loans and extend credit for the
financing of projects for public purposes. The EDA issues the bonds and loans
the proceeds to a borrower who agrees to repay the EDA amounts sufficient to pay
principal and interest on the bonds when the same becomes due.
Some borrowers that financed facilities with proceeds of industrial
development bonds issued by the EDA have defaulted on their repayment
obligations to the EDA. Since these special obligation bonds were payable only
from money received from the specific projects that were funded or from other
sources pledged by the borrower to support its repayment obligation, the EDA was
unable to pay debt service to the holders of the bonds issued for the respective
projects. However, because each issue of special obligation bonds depends on its
own revenue for repayment, these defaults should not affect the ability of the
EDA to pay debt service on other bonds it issues in the future on behalf of
qualified borrowers.
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New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,077 persons per square mile, it is the most
densely populated of all the states. New Jersey is located at the center of the
megalopolis which extends from Boston to Washington, and which includes over
one-fifth of the country's population. The extensive facilities of the Port
Authority of New York and New Jersey, the Delaware River Port Authority and the
South Jersey Port Corporation across the Delaware River from Philadelphia
augment the air, land and water transportation complex which has influenced most
of New Jersey's economy. This central location in the northeastern corridor, the
transportation and port facilities and proximity to New York City make New
Jersey an attractive location for corporate headquarters and international
business offices. A number of Fortune Magazine's top 500 companies maintain
headquarters or major facilities in New Jersey, and many foreign-owned firms
have located facilities in New Jersey.
New Jersey's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic seashore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. Since 1976,
casino gambling in Atlantic City has been an important New Jersey tourist
attraction.
New Jersey's population grew rapidly in the years following World War II,
before slowing to an annual rate of 0.27 percent in the 1970s. Between 1980 and
1990, the annual growth rose to 0.51 percent and between 1990 and 1997,
accelerated to .53 percent (according to the U.S. Census Bureau, Population
Division, 1996 estimates). While this rate of growth is less than that for the
United States, it compares favorably with other Middle Atlantic States.
The small increase in New Jersey's total population during the past
quarter century masks the redistribution of population within New Jersey. There
has been a significant shift from the northeastern industrial areas toward the
four coastal counties (Cape May, Atlantic, Ocean and Monmouth) and toward the
central New Jersey counties of Hunterdon, Somerset and Middlesex.
After enjoying an extraordinary boom during the mid-1980s, New Jersey as
well as the rest of the Northeast slipped into a slowdown well before the onset
of the national recession which officially began in July 1990 (according to the
National Bureau of Economic Research). By the beginning of the national
recession of 1990-1991, construction activity had already been declining in New
Jersey for nearly two years, growth had tapered off markedly in the service
sectors and the long-term downward trend of factory employment had accelerated,
partly because of a leveling off of industrial demand nationally. The onset of
recession caused an acceleration of New Jersey's job losses in construction and
manufacturing, as well as an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities, trucking and
warehousing.
In its seventh year of expansion, New Jersey has benefited and will
continue to benefit from national growth. While the latest national indicators
show that economic growth strongly accelerated during the first quarter of 1998,
the inflation rate remained low. After very robust economic growth of 5.5% in
the first quarter of 1998, inflation-adjusted gross domestic product slowed to
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1.4% in the second quarter. This second quarter pace is slower, but is positive
and more sustainable.
Business investment expenditures and consumer spending have increased
substantially in New Jersey as in other parts of the nation. Capital and
consumer spending may continue to rise due to the sustained character of
economic growth and the interest-sensitive homebuilding industry may continue to
provide stimulus in New Jersey. It is expected that the employment and income
growth that has and is taking place will lead to further growth in consumer
outlays. Reasons for continued optimism in New Jersey include increasing
employment levels and a higher-than-national level of per capita personal
income. Also, several expansions of existing hotel-casinos and plans for several
new casinos in Atlantic City will mean additional job creation.
In addition, the New Jersey growth potential is not yet as limited by
labor supply constraints affecting some other parts of the country. The region's
manufacturers and trade-related service sectors could also get a lift from
continued recovery in Western Europe and Mexico and from relatively high
economic growth in South America. At the same time, New Jersey appears to be
less dependent on exports to East Asian countries that currently have financial
difficulties than many other states, especially those on the West Coast.
Looking further ahead, prospects for New Jersey are favorable. While
growth is likely to be slower than in the nation, the locational advantages that
have served New Jersey well for many years will still be there. Structural
changes that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service industries.
To the extent that any adverse conditions exist in the future that affect
the ability of public agencies within New Jersey to pay debt service on their
obligations, the value of the NEW JERSEY FUND may be immediately and
substantially affected.
RISK FACTORS FOR NEW YORK INSURED TAX FREE FUND. New York Insured is
highly sensitive and vulnerable to the fiscal stability of New York State (the
"State") and its subdivisions, agencies, instrumentalities and authorities that
issue the Municipal Instruments in which New York Insured concentrates its
investments. The following information as to certain risk factors associated
with New York Insured Tax Free Fund's concentration in Municipal Instruments
issued by New York issuers is only a brief summary, does not purport to be a
complete description, and is based upon disclosure in Official Statements
relating to offers of Municipal Instruments, and other publicly available
information, prior to the end of February, 1999. 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 after the date thereof.
The Legislature adopted the debt service component of the State budget for
the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for the current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue it operations and provide for other purposes.
ECONOMIC AND FINANCIAL FACTORS. The economic and financial condition of
the State may be affected by various financial, social, economic and political
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factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
also by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections.
Continued growth in the State economy is projected in 1999 and 2000 for
employment, wages and personal income, although the growth rate is expected to
moderate from the 1998 pace. However, a continuation of international financial
and economic turmoil may result in a sharper slowdown than currently projected.
Personal income is estimated to have grown by 4.9 percent in 1998, fueled in
part by a continued large increase in financial sector bonus payments at the
beginning of the year, and is projected to grow 4.2 percent in 1999 and 4.0
percent in 2000. Increases in bonus payments in 1999 and 2000 are projected to
be modest, a distinct shift from the torrid rate of the last few years. Overall
employment growth is anticipated to continue at a modest rate, reflecting the
slowing growth in the national economy, continued spending restraint in
government, and restructuring in the manufacturing, health care, social service
and banking sectors.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have recently failed to
predict accurately the timing and magnitude of changes in the national and the
State economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience results in
the current fiscal year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements. Given the recent volatility in the international economy and
domestic financial markets, such uncertainties are particularly present at this
time. The timing and impact of changes in economic conditions are difficult to
estimate with a high degree of accuracy. Unforeseeable events may occur. The
actual rate of change in any, or all, of the categories that form the basis of
these forecasts may differ substantially and adversely from the outlook
described herein.
EXECUTIVE BUDGET. The Governor presented his 1999-2000 Executive Budget to
the Legislature on January 27, 1999. The Executive Budget contains financial
projections for the State's 1998-99 through 2001-2002 fiscal years and a
proposed Capital Program and Financing Plan for the 1999-2000 through 2003-2004
fiscal years. The Governor is expected to prepare amendments to his Executive
Budget, as permitted under law. These amendments are expected to be reflected in
a revised State Financial Plan to be released on or before February 26, 1999.
There can be no assurance that the Legislature will enact into law the Executive
Budget as proposed by the Governor, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth herein.
The 1999-2000 State Financial Plan is projected to have receipts in excess
of disbursements on a cash basis in the General Fund, after accounting for the
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transfer of available receipts from 1998-1999 to 1999-2000. Total General Fund
receipts, including transfers from other funds, are projected to be $38.66
billion, an increase of $1.88 billion over projected receipts in the current
fiscal year. General Fund disbursements, including transfers to other funds, are
projected to be $37.10 billion, an increase of $482 million over 1998-99. State
Funds spending (i.e., General Fund plus other dedicated funds, with the
exception of federal aid) is projected to total $49.33 billion, an increase of
$867 million or 1.8 percent from the current year. Under the Governor's
recommendations, spending from All Governmental Funds is also expected to grow
by 1.8 percent, increasing by $1.25 billion to $72.66 billion.
The State is projected to close the 1999-2000 fiscal year with a balance
in the General Fund of $2.36 billion. The balance is comprised of $1.79 billion
in tax reduction reserves, $473 million in the Tax Stabilization Reserve Fund
and $100 million in the Contingency Reserve Fund.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employments have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on a computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.
The Division of the Budget ("DOB") has expressed its opinion that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in this Annual Information Statement. In the past, the
State has taken management actions and made use of internal sources to address
potential State Financial Plan shortfalls, and DOB believes it could take
similar actions should variances occur in it projections for the current fiscal
year. The projections assume no changes in federal tax law, which could
substantially alter the current receipts forecast. In addition, these
projections do not include funding for new collective bargaining agreements
after the current contracts expire on April 1, 1999. Each percentage increase in
employee wages would add roughly $70 million in new State Financial Plan costs.
Collective bargaining commitments at current inflationary rates would increase
labor costs by approximately $480 million by the end of the projection period.
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Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions of the federal government have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. To address a potential imbalance in any
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year, and
under the State Constitution, the Governor is required to propose a balanced
budget each year. There can be no assurance, however, that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring receipts
and disbursements in future fiscal years. For example, the fiscal effects of tax
reductions adopted in the last several fiscal years (including 1998-99) are
projected to grow more substantially beyond the 1998-99 fiscal year, with the
incremental annual cost of all currently enacted tax reductions estimated at
over $4 billion by the time they are fully effective in State fiscal year
2002-03. These actions will place pressure on future budget balance in New York
State.
The State's outyear projections may change substantially as the budget
process for 1999-2000 continues. The Governor is expected to propose amendments
to the 1999-2000 Executive Budget, as permitted under law. These amendments may
materially and adversely impact the projections set forth herein and are likely
to include additional funding for public schools. Actual results for the fiscal
year may also differ materially and adversely from the projections set forth
herein. Finally, the Legislature may not enact the Governor's proposals or the
State's actions may be insufficient to preserve budgetary balance or to align
recurring receipts and disbursements in either 1999-2000 or in future fiscal
years.
The fiscal effects of tax reductions adopted in the last several fiscal
years and those proposed by the Governor in the 1999-2000 Executive Budget are
projected to grow more substantially beyond the 1999-2000 fiscal year. The
incremental annual cost of enacted or proposed tax reductions is estimated to
peak at $2.1 billion in 2000-01, then gradually decline to about $1 billion in
2003-04.
Over the long-term, uncertainties with regard to the economy present the
largest potential risk to future budget balance in New York State. For example,
a downturn in the financial markets or the wider economy is possible, a risk
that is heightened by the lengthy expansion currently underway. The securities
industry is more important to the New York economy than the national economy,
potentially amplifying the impact of an economic downturn. A large change in
stock market performance during the forecast horizon could result in wage and
unemployment levels that are significantly different from those embodied in the
forecast. Merging and downsizing by firms, as a consequence of deregulation or
continued foreign competition, may also have more significant adverse effects on
employment than expected. Finally, a "forecast error" of one percentage point in
the estimated growth of receipts could cumulatively raise or lower results by
over $1 billion by 2002.
An ongoing risk to the State Financial Plan arises from the potential
impact of certain litigation and federal disallowances now pending against the
State, which could produce adverse effects on the State's projections of
receipts and disbursements. The State Financial Plan assumes no significant
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litigation or federal disallowance or other federal actions that could affect
State finances, but has significant reserves in the event of such an action.
To guard against these risks, that State has projected reserves of $2.36
billion in 1999-2000, comprised of $1.79 billion that the Governor is proposing
to set aside as a tax reduction reserve, $473 million in the Tax Stabilization
Reserve Fund and $100 million in the Contingency Reserve Fund.
RECEIPTS. The 1999-2000 State Financial Plan projects General Fund
receipts (including transfers from other funds) of $38.66 billion, an increase
of $1.88 billion over the estimated 1998-99 level. After adjusting for tax law
and administrative changes, recurring growth in the General Fund tax base is
projected to be approximately 3 percent during 1999-2000.
The forecast of General Fund receipts in 1999-2000 reflects the next stage
of the School Tax Relief (STAR) property tax reduction program, which has an
incremental cost of $638 million in 1999-2000, as well as the continuing impact
of earlier tax reduction totaling approximately $2 billion. In addition, the
Executive Budget reflects several new tax reduction proposals that are projected
to have only a modest impact on receipts in 1999-2000 and 2000-01, but are
expected to reduce receipts by 1.04 billion annually when fully phased in at the
end of 2003-04.
The largest new tax cut proposals call for further reductions in the
personal income tax to benefit middle income taxpayers. These proposals increase
the income threshold where the top tax rate of 6.85 percent applies and doubles
the value of the dependent exemption of $2,000. The fully effective annual cost
of these proposals is $600 million in fiscal year 2003-04. In addition, the
Executive Budget includes several other targeted tax cut proposals, including:
reducing certain energy taxes; lowering the alternative minimum tax on
corporations from 3 percent to 2.5 percent; extending the business tax rate
reductions enacted for general corporations last year to banks and insurance
companies; creating a New York Capital Asset Exclusion for investments in a New
York business; creating a new credit for job creation in cities; expanding the
Qualified Emerging Technology Credit; conforming the estate tax to recent
federal changes; eliminating several nuisance taxes and fees, including minimum
taxes imposed on petroleum and aviation businesses; and expanding the income tax
credit benefits provided to farmers to ease school property tax burdens.
Together, these targeted reductions will have a full annual value of
approximately $440 million.
Personal income tax collections for 1999-2000 are projected to reach
$22.83 billion, an increase of $2.65 billion (13.2 percent) over 1998-1999. This
increase is due in part to refund reserve transactions which serve to increase
reported 1999-2000 personal income tax receipts by $1.77 billion. Collections
also benefit from the estimated increase in income tax liability of 13.5 percent
in 1998 and 5.3 percent in 1999. The large increases in liability in recent
years have been supported by the continued surge in taxable capital gains
realizations. This activity is related at least partially to recent changes in
the federal tax treatment of such income. The growth in capital gains income is
expected to plateau in 1999, Growth in 1999-2000 personal income tax receipts is
partially offset by the diversion of such receipts into the School Tax Relief
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Fund, which finances the STAR tax reduction program. For 1999-2000, $1.22
billion will be deposited into this fund, an increase of $638 million.
User taxes and fees are projected at $7.16 billion in 1999-2000, a
decrease of $72 million from the current year. The decline in this category
reflects the incremental impact of already-enacted tax reductions, and the
diversion of $30 million of additional motor vehicles registration fees to the
Dedicated Highway and Bridge Trust Fund. Adjusted for these changes, the
underlying growth of user taxes and fees is projected at 2.5 percent. The
largest source of receipts in this category is the sales and use tax, which
accounts for nearly 80 percent of projected receipts. The continuing base of the
sales tax is projected to grow 4.4. percent in the coming year, and assumes the
Legislature will not enact additional "sales-tax free" weeks that would affect
receipts before December 1, 1999, when the sales and use tax on clothing and
footwear under $100 is eliminated.
Business tax receipts are expected to total $4.53 billion in 1999-2000,
$267 million below 1998-99 estimated results. The impact of tax reductions
scheduled in law, as well as slower growth in the underlying tax base, explain
the decline in the category of the State Financial Plan.
Receipts from other taxes, which are comprised primarily of receipts from
estate and gift taxes and pari-mutuel taxes on wagering, are expected to decline
$119 million to $980 million in 1999-2000. The ongoing effect of tax cuts
already in law is the main reason for the decline. In addition, this category
formerly included receipts from the real property gains tax that was repealed in
1996, and receipts from the real property transfer tax that, since 1996, have
been earmarked to support various environmental programs.
Miscellaneous receipts includes license revenues, income from fees and
fines, abandoned property proceeds, investment income, and a portion of the
assessments levied on medical providers. Miscellaneous receipts are expected to
total $1.24 billion in 1999-2000, a decline of $292 million from 1998-99.
Roughly $165 million of this decline is attributable to the ongoing phase-out of
medical provider assessments. In addition, the Executive Budget proposes
eliminating medical provider assessments on April 1, 1999, one year earlier than
planned, which accounts for another $26 million of the year-to-year decline in
miscellaneous receipts (the remainder of the provider assessment savings is
reflected in lower General Fund disbursements). Transfers to the General Fund
consist primarily of tax revenues in excess of debt service requirements. State
sales tax proceeds in excess of amounts needed to support debt service payments
for the Local Government Assistance Corporation account for 82 percent of the
1999-2000 receipts in this category. Transfers to the General Fund decline $63
million in 1999-2000, reflecting lower projected receipts from the real estate
transfer tax.
DISBURSEMENTS. The 1999-2000 State Financial Plan projects General Fund
disbursements and transfers to other funds of $37.10 billion, an increase of
$482 million over projected spending for the current year. Grants to local
governments constitute approximately 67 percent of all General Fund spending,
and include payments to local governments, non-profit providers and individuals.
Disbursements in this category are projected to decrease $87 million (0.4
percent) to $24.81 billion in 1999-2000, in part due to a $175 million decline
in proposed spending for legislative initiatives.
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General Fund spending for school aid is projected at $9.99 billion on a
State fiscal year basis, an increase of $292 million (3.0 percent) from the
current fiscal year. The Executive Budget recommends additional funding for
operating aid building aid, and textbook and computer aids. It also funds the
remainder of aid payable for the 1998-99 school year. These increase are
partially offset by the elimination of categorical grants, reductions in BOCES
aid, and other formula modifications. A new Educational Improvement block grant
replaces categorical programs such as pre-kindergarten and minor maintenance to
give school districts greater flexibility in meeting locally-determined needs.
Medicaid spending is estimated to total $5.50 billion in 1999-2000, a
modest decline of $87 million or 1.6 percent from 1998-99. To achieve program
savings, the Executive Budget recommends a series of cost containment actions,
including restructuring rates paid to providers for certain services, shifting
treatments for certain services to outpatient settings, and maximizing allowable
federal funds. At the same time, medical providers would benefit from the
proposed acceleration of the phase-out of provider assessments already scheduled
in law. The State had planned to eliminate provider assessments on April 1,
2000; the Executive Budget proposes eliminating them one year earlier. As a
result, health care providers will not be required to pay $223 million in
assessments in 1999-2000.
Spending on welfare is projected at $1.49 billion, a decline of $41
million (2.7 percent) from 1998-99. Since 1994-95, State spending on welfare has
fallen by $709 million, or 32 percent, driven by significant welfare changes
initiated at the State and federal levels and a large, steady decline in the
number of people receiving benefits. Several trends have contributed to falling
caseloads, including the State's strong economic performance over the past three
years; State, federal and local welfare-to-work initiatives that have expanded
training and support services to assist recipients in becoming self-sufficient;
tightened eligibility review for applicants; and aggressive fraud prevention
measures.
Local assistance spending for Children and Families Services is projected
at $864 million in 1999-2000, down $42 million (4.7 percent) from 1998-99. The
decline in General Fund spending is offset by higher spending on child care and
child welfare services that is occurring with federal Temporary Assistance for
Needy Families ("TANF") funds, which has allowed the State to lower General Fund
spending while still expanding services in this area.
In Mental Health, the State projects spending of $619 million in
1999-2000, an increase of $40 million (7 percent) over 1998-99, including $23
million in additional funding for the Community Reinvestment Program. Mental
Retardation and Development Disabilities spending increases by $17 million to
$576 million. Major components of spending growth include an inflation
adjustment for Medicaid programs, annualization of new community services from
1998-99, and the first year of the NYS-CARES initiative that is projected to
invest $129 million in State funds over the next five years to develop
community-based beds for persons on waiting lists.
Spending for all other local assistance programs will total $5.72 billion
in 1999-2000, decline of $266 million from 1998-99. Lower spending of $175
million for legislative member items in 1999-2000 accounts for the majority of
the year-to-year change. Proposed actions to restructure the State's tuition
assistance program produce a decline of $17 million from the previous fiscal
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year. Unrestricted aid to local governments is estimated at $882 million, $9
million below 1998-99 levels.
AUTHORITIES. The fiscal stability of the State is related, in part, to the
fiscal stability of its public authorities (i.e., public benefit corporations
created by State law, other than local authorities). There are numerous public
authorities, with various responsibilities, including those which finance,
construct and/or operate revenue producing public facilities. As of December 31,
1998, there were 17 public authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of all
State public authorities was $84 billion, only a portion of which constitutes
State-supported or State-related debt.
Public authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself and may issue bonds and
notes within the amounts and restrictions set forth in legislative
authorization. State legislation authorizes financing techniques for public
authorities such as State (i) guarantees of public authority obligations, (ii)
lease-purchase and contractual-obligation financing arrangements and (iii)
statutory moral obligation provisions. The State's access to the public credit
markets could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities, particularly
those using the financing techniques specified above, were to default on their
respective obligations. The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authority operating expenses and
debt service costs are generally paid by revenues generated by the project
financed or operated, such as tolls charged for the use of highways, bridges or
tunnels, charges for public power, electric and gas utility services, rentals
charged for housing units, and charges for occupancy at medical care facilities.
In addition, certain statutory arrangements provide for State local assistance
payments, otherwise payable to localities, to be made under certain
circumstances to certain public authorities. The State has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under these arrangements. However, in the event
that such local assistance payments are so diverted, the affected localities
could seek additional State assistance.
Some public authorities also receive moneys from State appropriations to
pay for the operating costs of certain of their programs. For example, the
Metropolitan Transportation Authority receives the bulk of this money in order
to carry out mass transit and commuter services.
MUNICIPALITIES. The counties, cities, towns and villages of the State are
political subdivisions of the State with the powers granted by the State
Constitution and statutes. As the sovereign, the State retains broad powers and
responsibilities with respect to the finances and welfare of such subdivisions
as well as school districts, fire districts and other district corporations,
especially in the areas of education and social services. Certain localities
have experienced financial problems and have requested and received additional
State assistance during the last several State fiscal years. The fiscal
stability of the State is thus related to the fiscal stability of its
localities, including The City of New York. A number of factors could affect
localities during the State's 1998-1999 and 1999-2000 fiscal years and
thereafter.
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NEW YORK CITY
The fiscal health of the State may be affected by the fiscal health of The
City of New York ("the City"), which continues to require significant financial
assistance form the State. The City depends on State aid both to enable the City
to balance its budget and to meet its cash requirements. The State could also be
affected by the ability of the City, and certain entities issuing debt for the
benefit of the City, to market their securities successfully in the public
credit markets. The City has achieved balanced operating results for each of its
fiscal years since 1981 as reported in accordance with the then-applicable GAAP
standards. Although the City has balanced its budget since 1981, estimates of
the City's future revenues and expenditures, which are based on numerous
assumptions, are subject to various uncertainties. If, for example, expected
Federal or State aid is not forthcoming; if unforeseen developments in the
economy significantly reduce revenues derived from economically sensitive taxes,
or necessitate increased expenditures for public assistance; if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's financial plan; or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for The City of New York
("MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "Control Period" existed from 1975 to 1986, during which the
City was subject to certain statutorily-prescribed fiscal controls. Although the
Control Board terminated the Control Period in 1986 when certain statutory
conditions were met and suspended certain Control Board powers, upon the
occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to the public credit markets, the
Control Board is required by law to reimpose a Control Period. Currently, the
City and its Covered Organizations (i.e., those which receive or may receive
moneys from the City directly, indirectly or contingently) operate under a
four-year financial plan which the City prepares annually and periodically
updates. The City's financial plan includes its capital, revenue and expense
projections and outlines proposed gap-closing programs for years with projected
budget gaps.
The City's projections are based on various assumptions and contingencies,
some of which are uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements.
Implementation of the City's financial plan is also dependent upon the
ability of the City and certain entities issuing debt for the benefit of the
City to market their securities successfully. The City issues securities to
finance, refinance and rehabilitate infrastructure and other capital needs, as
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well as for seasonal financing needs. In order to help the City to avoid
exceeding its State Constitutional general debt limit, the State created the New
York City Transitional Finance Authority to finance a portion of the City's
capital program. Despite this additional financing mechanism, the City currently
projects that, if no further action is taken, it will reach its debt limit in
City fiscal year 1999-2000. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. On November 25, 1997 the State Supreme
Court found the legislation establishing the TFA to be constitutional and
granted the defendants' motion for summary judgment. The plaintiffs appealed the
decision. On July 30, 1998, the Appellate Division, Third Department, affirmed
the Supreme Court decision. Plaintiffs filed a notice of appeal with the New
York Court of Appeals asserting an appeal as of right of the Appellate Division
order. That appeal was dismissed on September 22, 1998. Plaintiffs subsequently
filed motion for leave to appeal to the Court of Appeals. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as compliance with the financial plan, as modified, by the
City and its Covered Organizations. According to recent staff reports, while
economic recovery in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1996-97.
Subsequent staff reports indicate that the City projected a substantial surplus
for the City in 1997-98. Although several sectors of the City's economy have
expanded recently, especially tourism and business and professional services,
City tax revenues remain heavily dependent on the continued profitability of the
securities industries and the course of the national economy. Staff reports have
indicated that recent City budgets have been balanced in part through the use of
non-recurring resources and that the City's Financial Plan tends to rely in part
on actions outside its direct control. These reports have also indicated that
the City has not yet brought its long-term expenditure growth in line with
recurring revenue growth and that the City is likely to continue to face
substantial gaps between forecast revenues and expenditures in future years that
must be closed with reduced expenditures and/or increased revenues. In addition
to these monitoring agencies, the Independent Budget Office (IBO) has been
established pursuant to the City Charter to provide analysis to elected
officials and the public on relevant fiscal and budgetary issues affecting the
City.
OTHER LOCALITIES
Certain localities outside The City of New York have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1998-99
fiscal year.
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Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance. On June 30,
1998, the City of Yonkers satisfied the statutory conditions for ending the
supervision on its finances by a State-ordered control board. Pursuant to State
law, the control board's powers over City finances lapsed six months after the
satisfaction of these conditions, on December 31, 1998.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities and twenty-eight municipalities received more than $32 million
in targeted unrestricted aid in the 1997-98 budget. Both of these emergency aid
packages were largely continued through the 1998-99 budget. The State also
dispersed an additional $21 million among all cities, towns and villages after
enacting a 3.9 percent increase in General Purpose State Aid in 1997-98 and
continued this increase in 1998-99.
The appropriation and allocation of general purpose local government aid
among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommended a new formula by June 30, 1999, which may change
the way aid is allocated.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than The City of New York was approximately $20.0 billion. A
small portion (approximately $77.2 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than The City of New York authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal years ending in 1996.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or not control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
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authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
LITIGATION. An additional risk to the State Financial Plan arises from the
potential impact of certain litigation and of federal disallowances now pending
against the State, which could adversely affect the State's projections of
receipts and disbursements. The State Financial Plan assumes no significant
litigation or federal disallowance or other federal actions that could affect
State finances, but has significant reserves in the event of such an action.
Various legal proceedings in which the State is involved concern State finances,
State programs and miscellaneous civil rights, real property, contract and other
tort claims in which the State is a defendant and the potential monetary claims
against the State sought are substantial, generally in excess of $100 million.
These proceedings or the initiation of new proceedings could adversely affect
the financial condition of the State in the 1997-98 fiscal year or thereafter.
There can be no assurance that adverse decisions in legal proceedings against
the State would not exceed the amount of the resources available for the payment
of judgments.
YEAR 2000 COMPLIANCE. The State is currently addressing Year 2000 ("Y2K")
data processing issues. Since its inception, the computer industry has used a
two-digit date convention to represent the year. In the year 2000, the date
field will contain "00" and, as a result, many computer systems and equipment
may not be able to process dates properly or may fail since they may not be able
to distinguish between the years 1900 and 2000. The Year 2000 issue not only
affects computer programs, but also the hardware, software and networks they
operate on. In addition, any system or equipment that is dependent on an
embedded chip, such as telecommunication equipment and security systems, may
also be adversely affected.
In 1996, the State established The Year 2000 Data Change Initiative to
facilitate and coordinate the State's Y2K compliance effort. The Office for
Technology ("OFT"), under the direction of the Governor's Office of State
Operations, is responsible for monitoring the State's compliance progress and
for providing assistance and resources to state agencies. Each agency is
responsible for bringing their individual systems into Year 2000 compliance.
Year 2000 compliance has been identified by the Governor as the State's number
one technology priority.
In 1997, OFT completed a risk assessment of 712 State Data processing
systems and prioritized those systems for purposes of Year 2000 compliance. The
State has estimated that investment of at least $140 million will be required to
bring The State's approximately 350 mission critical and high priority systems
into Year 2000 compliance. Mission-critical systems are those that may impact
the public safety, safety and welfare of The State and it s citizens, and for
which failure could have a material and adverse impact on State operations.
High-priority systems are critical for a State agency to fulfill its mission or
deliver services. The State allocated over $117 million in centralized Year 2000
funding in 1998-99 to those agencies that maintain mission-critical and
high-priority systems. Agencies are also expending funds from their capital
budgets to address the Year 2000 compliance issue. The State is planning on
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spending an additional $19 million in 1999-2000 for Year 2000 embedded chip
compliance, and is also making a contingent appropriation available for unseen
emergencies. The Year 200 compliance effort may require additional funding above
amounts assumed in the State Financial Plan, but those amounts are not assumed
to be material.
OFT is monitoring compliance progress for the State's mission-critical and
high-priority systems and is reporting compliance progress to the Governor's
office on a quarterly basis. As of December 1998, the State had completed 93
percent of overall compliance effort on its mission-critical systems; 18 systems
are now Year 200 compliant and the remaining systems are on schedule to be
compliant by the first quarter of 1999. As of December 1998, the State has
completed 70 percent of overall compliance effort on the high-priority systems;
168 are now Year 2000 compliant and the remaining systems are on schedule to be
compliant by the second quarter of 1999. Compliance testing is expected to be
completed by the end of calender 1999.
The State is also addressing a number of issues related to bringing its
mission-critical systems into compliance, including: testing throughout 1999 of
over 800 data exchange interfaces with federal, state, local and private data
partners; completion of an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Year 2000 compliance
status information and assurances.
Since problems could be identified during the compliance testing phase
that could produce compliance delays, the State is also requiring its agencies
to complete contingency plans for priority systems and business process by the
first quarter of 1999. These plans will be integrated into the State Emergency
Response Plan and coordinated by the State Emergency Management Office. In
addition, the State Public Service Commission has ordered that all State
regulated utilities complete Year 2000 activities for mission-critical systems,
including contingency plans, by July 1, 1999. The State has also been working
with local governments since December 1996 to raise awareness, promote action
and provide assistance with Year 2000 compliance.
While New York State is taking what it believes to be appropriate action
to address Year 2000 compliance, there can be no guarantee that all of the
State's systems and equipment will be Year 2000 compliant and that there will
not be adverse impact upon State operations or finances as a result. Since Year
2000 compliance by outside parties is beyond the State's control to remediate,
the failure of outside parties to achieve Year 2000 compliance could have an
adverse impact on State operations or finances as well.
RISK FACTORS FOR THE NORTH CAROLINA FUND. North Carolina state and
municipal securities may be adversely affected by economic and political
conditions and developments within the State of North Carolina.
ECONOMIC PROFILE. The economic profile of the State consists of a
combination of agriculture, industry and tourism. The State is moving away from
its traditional agricultural base towards a service and goods-producing economy.
The State labor force reflects this increased emphasis toward non-agricultural
production. According to the North Carolina Employment Security Commission,
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total non-agricultural employment as of December, 1998, was approximately
3,821,600 jobs, of which 820,800 were in the manufacturing industry. While total
nonagricultural employment has risen since 1991, when total non-agricultural
employment was approximately 3,072,200, manufacturing industry jobs are down
from 826,100 in 1991. Total non-agricultural employment is slightly higher than
in 1997, when there were approximately 3,666,800 jobs in this category, but the
number of manufacturing industry employees has again dropped from 847,300 in
1997. A majority of the employment that was available within the
non-manufacturing industry as of December, 1998, was provided by retail trade,
the services industry and the government sector. In December, 1998, retail trade
provided approximately 686,700 jobs, services provided approximately 926,300
jobs and the government sector provided approximately 618,800 jobs. All these
figures were increased over 1997.
Based upon the available 1990 official census estimates of population
growth, the population of North Carolina increased 11.4% from 5,880,095 in 1980
to 6,632,448 in 1990. The Employment Security Commission estimates the
unadjusted unemployment rate in 1998 at 3.5% of the labor force, as compared
with the nationwide seasonally adjusted unemployment rate of 4.3%. This places
North Carolina unemployment at its lowest level since 1989. The North Carolina
annual average unemployment rate over the past nine years has ranged from a high
of 5.9% in 1992 to a low of 3.5% in 1989.
Agriculture remains a basic economic element in North Carolina. North
Carolina ranked eighth (8th) in the nation in total farm income again in 1997.
Total gross agricultural income in 1997 was approximately $8.3 billion, up from
$7.9 billion in 1996. Meat animals moved slightly ahead of poultry and eggs as
the leading source of agricultural non-crop income in the State. Income from the
production of meat animals such as hogs, cattle and sheep for 1997 was
approximately $2.24 billion, accounting for approximately 26.9% of the gross
agricultural income. These figures are up from $1.9 billion in 1996. In
addition, tobacco production remains the leading source of agricultural crop
income in the State. Income from the production of tobacco for 1997 was
approximately $1.2 billion, accounting for approximately 14.4% of the gross
agricultural income. The amount of income received was up from the previous high
of $1.1 billion in 1992. However, the percentage of the State's gross
agricultural income from tobacco sales continues to decline from 21.2% in 1992,
and 14.8% in 1994. Federal legislation, regulatory measures and civil lawsuits
regarding tobacco production and marketing, along with international
competition, have and are expected to continue to affect tobacco farming in
North Carolina. Changes in such factors or any other adverse conditions in the
tobacco farming sector could have negative effects on farm income and the North
Carolina economy as a whole.
In 1997, there were approximately 57,000 farms in the State, compared to
59,000 in 1993 and 72,000 in 1978. Even though the total number of farms in
North Carolina has decreased, the diversity of agriculture in North Carolina and
a continuing push in agriculture marketing efforts have protected farm income
from some of the wide variations that have been experienced in other states
where most of the agricultural economy is dependent on a small number of
agricultural commodities. According to the State Commissioner of Agriculture, in
1997 North Carolina ranked first in the nation in the production of flue-cured
tobacco, total tobacco, turkeys raised and sweet potatoes; second in the
production of Christmas trees, the number of hogs and pigs on farms, hogs and
pigs cash receipts, and trout sales; third in production of cucumbers for
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pickles, poultry and egg products cash receipts, and greenhouse and nursery cash
receipts; fourth in net farm income, commercial broilers, peanuts, and
strawberries; sixth in burley tobacco, blueberries and cash receipts from
livestock, dairy and poultry; and seventh in watermelons, cotton, catfish sold
and all commodities cash receipts. A strong agribusiness sector also supports
farmers with farm inputs (fertilizer, insecticide, pesticide and farm machinery)
and processing of commodities produced by farmers (vegetable canning and
cigarette manufacturing).
The North Carolina Department of Commerce, Travel and Tourism Division,
has reported in 1997 approximately $10.1 billion was spent on travel and tourism
in the State, up 4.1% from 1996. Travel and tourism income for the State
continues to increase from approximately $9.8 billion in 1996, $9.2 billion in
1995, $8.5 billion in 1994 and $8.0 billion in. In 1997 the State's travel
industry generated more than $761 million in state and local taxes and provided
approximately 171,000 full-time tourism-related jobs. The number of visitors to
North Carolina in 1997 is estimated at 41,131,000.
LEGISLATIVE AND JUDICIAL DEVELOPMENTS. The following represents an
overview of the State budgetary system and a discussion of legislation passed by
the General Assembly in recent years along with current judicial developments
affecting the State budget and fiscal health.
In North Carolina the issuance of municipal debt is overseen by the North
Carolina Local Government Commission. This Commission is composed of nine
members including the State Treasurer, the Secretary of State, the State
Auditor, and the Secretary of Revenue. This Commission handles the approval,
sale, and delivery of all local bonds and notes issued in North Carolina and
monitors certain fiscal and accounting standards prescribed by The Local
Government Budget and Fiscal Control Act. No unit of local government can incur
bonded indebtedness without the Commission's prior approval. If approved, the
obligations are sold by the Commission on a sealed bid basis. The Commission
then monitors the local unit's debt service through a system of monthly reports.
Over the past twenty years, North Carolina State debt obligations have
maintained ratings of Aaa in Moody's and AAA in S&P. There can be no assurance
that the State's current ratings will be maintained for any given period or that
such ratings will not be lowered, suspended or withdrawn entirely by either
rating agency.
The North Carolina State Constitution requires that the total expenditures
of the State for the fiscal period covered by the budget shall not exceed the
total receipts during that fiscal period plus the surplus remaining in the State
Treasury at the beginning of the period. The State has not realized any revenue
shortfalls in recent fiscal years. For the three most recent fiscal periods
ending June 30, 1996, 1997 and 1998 the State realized total budgetary credit
balances of approximately $726.5 million, $759.3 million, and $729.2 million,
respectively. However, during the 1989-90 and 1990-91 fiscal years, the State
had revenue shortfalls of approximately $282.2 million and $644.5 million,
respectively, requiring the Governor and General Assembly to mandate significant
spending constraints through reductions in spending authorizations and hiring
restrictions to fulfill the constitutional requirement of maintaining a balanced
budget. Therefore, even though the State has not experienced any revenue
shortfalls in recent years, there is no guarantee that a budgetary credit
balance will continue to be realized in future periods.
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The State budget is based upon a correlation between estimated revenues
and expenditures for the State and various State and non-State factors. These
factors include State and national economic conditions, federal government
legislation and policies, and international activities and economic conditions.
The General Fund and the Highway Fund represent the two major operating funds.
Revenues from the General Fund are used to finance virtually all
non-highway operations of the State Government, while revenues from the Highway
Fund, the majority of which are generated by taxes and fees related to motor
vehicles and highway use, are primarily used for the maintenance and upkeep of
the State highway system.
In 1996, the Governor recommended a comprehensive tax package similar to
the package recommended in 1995. The objective of the Governor's Comprehensive
Tax Policy continued to be the reduction of the tax burden on individuals and
families, and the enactment of tax incentives to encourage economic growth and
job creation. The Governor proposed (1) to reduce the sales tax on food from 4%
to 3%; (2) to increase the homestead exemption from $15,000 to $18,000 and the
maximum income eligibility from $11,000 to $15,000; (3) to lower the corporate
income tax rate, over a 4-year period, from 7.75% to 6.75%; and (4) to institute
a 7% income tax credit, taken over seven years, for investments and new
machinery and equipment. Most of the Governor's recommended tax relief program
was enacted by the General Assembly, with some modifications. The 1996 General
Assembly enacted a 1996-97 State Budget of $19.1 billion, comprised of $10.6
billion from the General Fund, $1.6 billion from the Highway Fund and Highway
Trust Fund, $4.9 billion from Federal Funds, and $2.0 billion from other
receipts such as tuition, fees, and other miscellaneous charges.
The 1996 General Assembly was advised by the Secretary of Revenue and the
Attorney General that certain provisions of the North Carolina Tax Code were
unconstitutional given recent Supreme Court decisions. These provisions gave
preferential tax treatment to North Carolina domiciled companies in apparent
violation of the Interstate Commerce Clause of the United States Constitution.
To avoid potential future lawsuits, legislation eliminated the following
preferences: (1) Income tax credit for distributing wine manufactured from
grapes grown in North Carolina; (2) Individual income tax credit for dividends
earned from North Carolina domiciled companies; and (3) Corporate income
deductions for dividends from North Carolina domiciled companies. In addition,
the income tax credit for qualified business investments was modified by
eliminating the requirement that companies must be domiciled in North Carolina.
Additional questions were raised in 1996 when the United States Supreme
Court declared the North Carolina intangibles tax unconstitutional in FULTON
CORPORATION V. JUSTUS. The North Carolina General Assembly initially responded
to the FULTON decision by announcing its intention to refund during the last
quarter of 1996, pending the approval by the State Supreme Court, intangibles
taxes which were paid under protest from 1991 (the date the case was originally
filed) until January, 1995 (the effective date of the General Assembly's repeal
of the tax). No such action, however, was taken. On December 27, 1996, the North
Carolina Superior Court, Wake County, certified a class action law suit against
the State of North Carolina seeking a refund of all intangibles taxes paid,
whether said taxes were paid with or without protest, during the 1991 through
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1994 tax years. During the 1997 legislative session, Senate Bill 388 (S.L.
1997-17) and House Bill 96 (S.L. 1997-318) were passed and collectively directed
that no further action would be taken to collect additional taxes from the North
Carolina taxpayers, and that a refund would be paid to qualified out-of-state
companies who had previously paid the higher intangibles tax. This appeared to
finally resolve the issue addressed by the FULTON decision. However, in
December, 1998, the North Carolina Supreme Court ruled in SMITH V. STATE OF
NORTH CAROLINA that the scope of the relief given to taxpayers in the 1997
legislation was too narrow. By its exclusion of certain taxpayers from
eligibility for refunds, the Court held that the legislation violated the
uniformity provision of the North Carolina Constitution. The full economic
impact of this decision on the State's budget is not yet fully defined.
In May 1998, the North Carolina Supreme Court handed down a decision in
the class action lawsuit referred to as "Bailey/Emory/Patton." This decision
resulted in a loss to North Carolina of income tax revenue levied on government
pension payments. For several years, the State of North Carolina had exempted
the pension income for state and local government retirees from the State's
income tax, as an incentive to recruit more government employees. This
exemption, however, did not extend to North Carolinians with Federal government
or private pensions, who were required to pay income tax on their pensions. In
1989, the U.S. Supreme Court ruled that federal employees must be treated the
same as employees of other levels of government under taxation policy. In short,
the Court held that if North Carolina wanted to exempt state and local
government pensions from taxation, it would have to exempt Federal retiree
pensions as well. Or, if the State wanted to tax Federal retiree pensions fully,
it would have to do the same for state and local government pensions.
Rather than fully exempt Federal pensions, North Carolina legislators
exempted the first $400 of government pensions from taxation for all levels of
government. This change resulted in state and local government retirees being
required to pay income taxes on their pensions, which they did not previously
do. To mitigate the tax, the State simultaneously granted a 7% increase in state
and local pension incomes. For the state and local retirees, this pension offset
the new tax liability. Yet some state government retirees filed litigation
against the State for this change. These retirees argued that the promise from
the State to exempt pensions from taxation was a bilateral contract, which could
not be unilaterally broken. The North Carolina Supreme Court accepted the
retirees' argument, and the parties agrees to refund government employees
(including Federal retirees) $799 million over two years. The second half of the
payment ($399 million) is due in 1999.
Both the 1995 and 1996 Sessions of the North Carolina General Assembly
enacted significant tax relief packages, reducing individual income, corporate
income, sales and use, and other General Fund tax schedules. Additional
reductions in General Fund taxes were enacted by the 1997 Session. Overall, the
1997 tax law changes reduced General Fund revenue by an estimated $96 million,
bringing the 3-year total reductions since 1996 to $734 million in 1998-99.
The 1998 General Assembly enacted a 1997-99 State Budget of $42.6 billion
($20.4 billion for 1997-98, and $22.2 billion (adjusted) for 1998-99), comprised
of $24.6 billion from the General Fund, $3.6 billion from the Highway Fund and
Highway Trust Fund, $10.7 billion from Federal Funds, and $3.7 billion from
other receipts such as tuition, fees, and other miscellaneous charges. For the
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sixth consecutive year, General Fund collections significantly exceeded the
budget estimate. Since the budget reform package was introduced in 1991, the
General Fund cash balance has risen from a negative $200 million during 1990-91
to as high as $1.9 billion during the 1997-98 fiscal year. Continued growth in
General Fund revenue is expected for 1998-99.
Consistent with the increase in North Carolina total personal income,
baseline (economy-driven) tax revenue growth was 5.3% for 1997-98, and is
projected at 6.2% for 1998-99, after adjusting for 1997-98 capital gains. As
consumer attitudes remain positive, sales and use tax receipts are projected to
expand at a 6.0% average rate for the 1997-99 biennium. Corporate income taxes
should also increase.
Following a record year in 1996-97, investment income is projected to
continue to expand during the upcoming biennium along with investable cash
balances. Judicial fees should again grow in 1998-99 due to the court fee
increase enacted by the 1997 Session of the General Assembly, which is estimated
to yield an additional $12.6 million in fee income. Disproportionate Share
(Medicaid) Payments will represent $85.0 million in non-tax revenue to the
General Fund during the 1998-99 fiscal year.
RISK FACTORS FOR THE OHIO FUND. The Ohio Fund will invest most of its net
assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio, political
subdivisions of the State, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Fund is therefore
susceptible to general or particular economic, political or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in particular
Ohio Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
The timely payment of principal of and interest on Ohio Obligations has
been guaranteed by bond insurance purchased by the issuers, the Ohio Fund or
other parties. Those Ohio Obligations may not be subject to the factors referred
to in this section of the SAI.
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Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1997 is 11,186,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However, in
recent years the State rates were below the national rates (4.2% versus 4.5% in
1998). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
The 1992-93 biennium presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences an
interim appropriations act was enacted effective July 1, 1991; it included GRF
debt service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
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other funds were transferred late in the FY to the GRF, and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million was transferred into the BSF. The significant GRF fund
balance, after leaving in the GRF an unreserved and undesignated balance of $70
million, was transferred to the BSF and other funds including school assistance
funds and, in anticipation of possible federal program changes, a human services
stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF, and the $263 million balance to a State
income tax reduction fund.
The GRF appropriations act for the 1998-99 biennium was passed on June 25,
1997 and promptly signed (after selective vetoes) by the Governor. All necessary
GRF appropriations for State debt service and lease rental payments then
projected for the biennium were included in that act. Subsequent legislation
increased the fiscal year 1999 GRF appropriation level for elementary and
secondary education, with the increase funded in part by mandated small
percentage reductions in State appropriations for various State agencies and
institutions. Expressly exempt from those reductions are all appropriations for
debt service, including lease rental payments.
The BSF had a February 3, 1999 balance of over $906 million.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
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By 14 constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At February 3, 1999, $1.11 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding. The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($23.9 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no more
than $120 million of which may be issued in any calendar year (over $1 billion
outstanding) and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be outstanding at any one
time ($85.1 million outstanding, with no more than $50 million to be issued in
any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.3 billion of
which were outstanding or awaiting delivery at February 3, 1999.
Aggregate FY 1998 rental payments under various capital lease and lease
purchase agreements were approximately $9.1 million. In recent years, State
agencies have also participated in transportation and office building projects
that may have some local as well as State use and benefit, in connection with
which the State enters into lease purchase agreements with terms ranging from 7
to 20 years. Certificates of participation, or special obligation bonds of the
State or a local agency, are issued that represent fractionalized interests in
or are payable from the State's anticipated payments. The State estimates
highest future FY payments under those agreements (as of February 3, 1999) to be
approximately $25.8 million (of which $22 million is payable from sources other
than the GRF, such as federal highway money distributions). State payments under
all those agreements are subject to biennial appropriations, with the lease
terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
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to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 119 districts
(as of February 3, 1999) from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, has been
pending questioning the constitutionality of Ohio's system of school funding.
The Ohio Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. The parties await eventual trial court decision
on the adequacy of steps taken to date by the State to enhance school funding
consistent with the Supreme Court decision. A small number of the State's 612
local school districts have in any year required special assistance to avoid
year-end deficits. A program has provided for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totalled $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), $113.2 million for 12 districts in FY 1997 (including $90 million to one
for restructuring its prior loans), and $23.4 million for 10 districts in FY
1998.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
26 cities and villages; for 20 of them the fiscal situation was resolved and the
procedures terminated (two cities are in preliminary "fiscal watch" status). As
of February 3, 1999, a school district "fiscal emergency" provision was applied
to six districts, and 10 were on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
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unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
RISK FACTORS FOR THE OREGON FUND. Oregon's economy is increasingly reliant
on the semiconductor, export and manufacturing industries which are particularly
vulnerable to international recessionary cycles. Oregon's growth and economic
expansion of the past five years has recently slowed considerably in response to
an unstable Asian economy. In 1990, Oregon voters approved Measure 5, a property
tax limitation measure that puts a cap on local ad valorem property taxes, and
in 1996 voters approved Measure 47, which reduced most property taxes by ten
percent and limits future increases. While the State has been able to replace
lost property tax revenues with increased revenues from income tax, Measures 5
and 47 may still effect the State's credit rating, causing the State to pay a
higher interest rate on the money it borrows. There is a relatively inactive
trading market for municipal instruments of Oregon issuers in other than general
obligations of the State; if the Oregon Fund were forced to sell a large volume
of these instruments for any reason, the value of the OREGON FUND's portfolio
may be adversely affected.
RISK FACTORS FOR THE PENNSYLVANIA FUND. Pennsylvania may incur debt to
rehabilitate areas affected by disaster, debt approved by the electorate, debt
for certain capital projects (for projects such as highways, public
improvements, transportation assistance, flood control, redevelopment
assistance, site development and industrial development) and tax anticipation
debt payable in the fiscal year of issuance. Pennsylvania had outstanding
general obligation debt of $4,724.5 million at June 30, 1998. Pennsylvania is
not permitted to fund deficits between fiscal years with any form of debt. All
year-end deficit balances must be funded within the succeeding fiscal year's
budget. At December 1, 1998, all outstanding general obligation bonds of
Pennsylvania were rated AA by S & P and Aa3 by Moody's (see Appendix A). There
can be no assurance that the current ratings will remain in effect in the
future. The Pennsylvania Fund assumes no obligation to update this rating
information. Over the five-year period ending June 30, 2003, Pennsylvania has
projected that it will issue bonds totaling $2,984.5 million and retire bonded
debt in the principal amount of $2,350.9 million. Certain agencies created by
Pennsylvania have statutory authorization to incur debt for which Pennsylvania
appropriations to pay debt service thereon is not required. As of June 30, 1998,
total combined debt outstanding for these agencies was $8,518 million. The debt
of these agencies is supported by assets of, or revenues derived from, the
various projects financed and is not an obligation of Pennsylvania. Some of
these agencies, however, are indirectly dependent on Pennsylvania
appropriations. The only obligations of agencies in Pennsylvania that bear a
moral obligation of Pennsylvania are those issued by the Pennsylvania Housing
Finance Agency ("PHFA"), a state-created agency which provides housing for lower
and moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia (the "Hospital Authority"), an agency created by the
City of Philadelphia to acquire and prepare various sites for use as
intermediate care facilities for the mentally retarded. As of June 30, 1998,
PHFA has $2,716.4 million of revenue bonds and notes outstanding.
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Numerous local government units in Pennsylvania issue general obligation
debt, including counties, cities, boroughs, townships and school districts.
School district obligations are supported indirectly by Pennsylvania. The
issuance of non-electoral general obligation debt is limited by constitutional
and statutory provision. Electoral debt., i.e., that approved by the voters, is
unlimited. In addition, local government units and municipal and other
authorities may issue revenue obligations that are supported by the revenues
generated from particular projects or enterprises. Examples include municipal
authorities (frequently operating water and sewer systems), municipal
authorities formed to issue obligations benefiting hospitals and educational
institutions, and industrial development authorities, whose obligations benefit
industrial or commercial occupants. In some cases, sewer or water revenue
obligations are guaranteed by taxing bodies and have the credit characteristics
of general obligation debt.
Pennsylvania historically has been identified as a heavy industry state,
although that reputation has changed with the decline of the coal, steel and
railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the service
sector, including trade, medical and health services, education and financial
institutions. Manufacturing has fallen behind both the services sector and the
trade sector as the largest single source of employment in Pennsylvania.
Since 1985, employment in Pennsylvania has grown at an annual rate of 1.03
percent, while employment for the Middle Atlantic region and for the United
States for the same period has grown by approximately .41 percent and 1.8
percent per year, respectively. Pennsylvania's average annual unemployment rate
since 1986 has generally not been more than one percent greater or lesser than
the nation's annual average unemployment rate. The seasonally adjusted
unemployment rate for Pennsylvania for December, 1998 was 4.4 percent compared
to 4.3 percent for the United States. The unadjusted unemployment rate for
Pennsylvania and the United States for December, 1998 was 3.8 percent and 4.0
percent, respectively. The population of Pennsylvania, 12.02 million people as
of July 1, 1997, according to the U. S. Bureau of the Census, represents an
increase from the July 1, 1988 estimate of 11.85 million. Per capita income in
Pennsylvania for calendar year 1996 of $25,678 was higher than the per capita
income of the United States of $25,298. Pennsylvania's General Fund, which
receives all tax receipts and most other revenues and through which debt service
on all general obligations of Pennsylvania are made, closed fiscal years ended
June 30, 1995, June 30, 1996 and June 30, 1997 with positive fund balances of
$688 million, $635 million and $1,365 million, respectively.
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. For
example, COUNTY OF ALLEGHENY V. COMMONWEALTH OF PENNSYLVANIA involves litigation
regarding the state constitutionality of the statutory scheme for county funding
of the judicial system, and in PENNSYLVANIA ASSOCIATION OF RURAL AND SMALL
SCHOOLS V. CASEY, the constitutionality of Pennsylvania's system for funding
local school districts has been challenged. No estimates for the amount of these
claims are available.
RISK FACTORS FOR THE VIRGINIA FUND. The Commonwealth of Virginia has a
tradition of low debt, and a large proportion of its general obligation bonds is
supported by particular revenue-producing projects. Virginia is one of only nine
states in the nation with a "triple A" bond rating for its general obligation
debt from the three raking agencies. The ratings reflect the Commonwealth's long
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standing record of sound fiscal management, its diversified economic base and
low debt ratios.
Use of non-general obligation debt, which is not subject to constitutional
limits on borrowing, has changed the Commonwealth's debt profile. During the
last decade, the Commonwealth has expended its limited obligation borrowings
through various financing vehicles such as the Virginia Public Building
Authority, the Virginia College Building Authority and a substantial
transportation bonding program. In 1991, the Virginia Supreme Court in a case
know as the Dykes decision, on a split vote upheld on rehearing, the ability of
counties to enter into obligations which were "subject to appropriation" and
confirmed that such obligations were not to be considered as "debts" under the
Virginia Constitution.
While the Commonwealth has a long history of sound financial operations,
variations of a cyclical nature have occurred during the past several years. As
the Virginia Constitution requires a balanced budget, the 1998-2000 biennium
budget, as adopted by the Virginia General Assembly at its 1998 session,
reflected spending cuts, deferrals and fund transfers (principally from state
lottery proceeds) to accommodate anticipated modest revenue growth. In fact,
revenue growth in FY 1998 was stronger than expected and the Commonwealth
concluded the fiscal year ending June 30, 1998 with a General Fund ending
balance (on a budgeting basis) of $1,444.2 million, of which $1,411.2 million
was reserved or designated, including $542.2 million for the Revenue
Stabilization Reserve Fund and $743.3 million designated for other
appropriations or reappropriations in fiscal year 1999. The Commonwealth is
currently projecting a surplus of $ ______ for the fiscal year ending June 30,
1999. There are no provisions in the Commonwealth's budget for general tax
increases.
The Virginia General Assembly at its 1998 session passed the Personal
Property Tax Relief Act, which provides significant reduction in the personal
property tax (or "car tax") imposed by Virginia localities. Under the terms of
the Act, the Commonwealth will assume financial responsibility for a significant
portion of the personal property taxes imposed by localities phased in over a
five-year period and beginning with a 12.5% reduction in the first year and a
20% reduction in year two. The personal property tax reduction was paid
initially to the taxpayers directly from the Commonwealth. Going forward, the
Commonwealth will reimburse the localities for the reduced personal property
taxes. When combined with significant financial assistance for school capital
construction for localities, the "car tax" relief will have an estimated effect
on the biennium budget of $533 million. The 1999 General Assembly is considering
legislation to reduce the state portion of the sales and use tax that is imposed
on food items, again an initiative to be phased in over a number of years. The
projected effect on the biennium budget is $_______ million.
Virginia's economy is affected generally by economic trends throughout the
country and in the Mid-Atlantic region, and it is particularly influenced by
Federal civilian and military installations and the growth of suburban
communities around Washington, D.C. Also significant to the economy of Virginia
are manufacturing (such as electronic equipment, shipbuilding and chemical
products), minerals (chiefly coal), service sector occupations (including
banking and insurance), agriculture and tourism. Virginia's economy has remained
strong as national economic growth has continued the recovery that began at the
end of the 1990-91 recession. Virginia continues to outpace the nation in many
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measures of economic growth such as personal income, total wages and salaries,
total nonagricultural employment and retail sales. In addition, Virginia's
unemployment rate of 3.4 percent for FY 1998 remained lower than the nation's
and is down from 4.3 percent for FY 1997. The FY 1998 unemployment rate is the
lowest since 1974 when the Bureau of Labor Statistics began its current method
of computing the unemployment rate. Virginia personal income grew to $183
billion (estimated) in FY 1998, a rate of 6.0 percent, slightly above the
national growth rate of 5.9 percent.
PORTFOLIO TURNOVER
Although each Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Adviser, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in a Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to high transaction costs and may result
in a greater number of taxable transactions. See "Allocation of Portfolio
Brokerage." For the fiscal years ended December 31, 1997 and 1998, INSURED
INTERMEDIATE TAX EXEMPT FUND's portfolio turnover rate was 91% and __%,
respectively, INSURED TAX EXEMPT FUND's portfolio turnover rate was 13% and __%,
respectively, and NEW YORK INSURED TAX FREE FUND's portfolio turnover rate was
24% and __%, respectively. For the fiscal years ended December 31, 1997 and
1998, the portfolio turnover rate for each Single State Fund was as follows:
Fiscal Year Fiscal Year
Ended Ended
December 31, 1997 December 31, 1998
----------------- -----------------
ARIZONA FUND 47% __%
CALIFORNIA FUND 46 __
COLORADO FUND 39 __
CONNECTICUT FUND 14 __
FLORIDA FUND 19 __
GEORGIA FUND 21 __
MARYLAND FUND 35 __
MASSACHUSETTS FUND 28 __
MICHIGAN FUND 32 __
MINNESOTA FUND 15 __
MISSOURI FUND 12 __
NEW JERSEY FUND 22 __
NORTH CAROLINA FUND 30 __
OHIO FUND 25 __
OREGON FUND 32 __
PENNSYLVANIA FUND 37 __
VIRGINIA FUND 10 __
84
<PAGE>
DIRECTORS OR TRUSTEES AND OFFICERS
Each Fund's Board of Directors or Trustees, as part of its overall
management responsibility, oversees various organizations responsible for that
Fund's day-to-day management. The following table lists the Directors or
Trustees and executive officers of INSURED INTERMEDIATE TAX EXEMPT FUND, INSURED
TAX EXEMPT FUND, NEW YORK INSURED TAX FREE FUND, and/or MULTI-STATE INSURED TAX
FREE 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*+ (73), President and Director/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 (84), Emeritus Director/Trustee, 90 Buell Lane, East Hampton, NY
11937. Retired; formerly Senior Vice President, James Talcott, Inc. (financial
institution).
KATHRYN S. HEAD*+ (42), Director/Trustee, 581 Main Street, Woodbridge, NJ 07095.
President and Director, FICC, ADM and FIMCO; Vice President and Director, FIC
and EIC; President EIMCO; Chairman, President and Director, First Financial
Savings Bank, S.L.A.
LARRY R. LAVOIE* (51), Director/Trustee. Assistant Secretary, ADM, EIC, EIMCO,
FICC, and FIMCO; Secretary and General Counsel, FIC.
REX R. REED** (76), Director/Trustee, 259 Governors Drive, Kiawah Island, SC
29455. Retired; formerly Senior Vice President, American Telephone & Telegraph
Company.
HERBERT RUBINSTEIN** (77), Director/Trustee, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
NANCY SCHAENEN** (67), Director/Trustee, 56 Midwood Terrace, Madison, NJ 07940.
Trustee, Drew University and DePauw University.
JAMES M. SRYGLEY** (66), Director/Trustee, 33 Hampton Road, Chatham, NJ 07982.
Principal, Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (66), Director/Trustee and Chairman of the Board; Director,
FIMCO, FIC, FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (69), Director/Trustee, RR1, Box 2554, Upland Downs Road,
Manchester Center, VT 05255. Retired; formerly financial and planning executive
with American Telephone & Telegraph Company.
85
<PAGE>
JOSEPH I. BENEDEK (41), Treasurer and Principal Accounting Officer, 581 Main
Street, Woodbridge, NJ 07095. Treasurer, FIC, FIMCO, EIMCO and EIC; Comptroller
and Treasurer, FICC.
CONCETTA DURSO (63), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
NANCY W. JONES (54), Vice President. Vice President, First Investors Asset
Management Company, Inc. and First Investors Series Fund; Portfolio Manager,
FIMCO.
GEORGE V. GANTER (46), Vice President. Vice President, First Investors Asset
Management Company, Inc., First Investors Special Bond Fund, Inc., and Executive
Investors Trust; Portfolio Manager, FIMCO.
CLARK D. WAGNER (39), Vice President. Vice President, MULTI-STATE INSURED TAX
FREE FUND, NEW YORK INSURED TAX FREE FUND, INC., Executive Investors Trust, and
First Investors Government Fund, Inc.; Chief Investment Officer, FIMCO.
- ------------------------
* These Directors/Trustees may be deemed to be "interested persons," as defined
in the 1940 Act.
** These Directors/Trustees are members of the Board's Audit Committee.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
The Directors and officers, as a group, owned less than 1% of either Class
A or Class B shares of each Fund.
All of the officers and Directors, except for Ms. Jones, Mr. Ganter and
Mr. Wagner, hold identical or similar positions with the other registered
investment companies in the First Investors Family of Funds. Mr. Head is also an
officer and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation and School Financial Management
Services, Inc. Ms. Head is also an officer and/or Director of First Investors
Life Insurance Company, First Investors Credit Corporation, School Financial
Management Services, Inc., First Investors Credit Funding Corporation, N.A.K.
Realty Corporation, Real Property Development Corporation, First Investors
Leverage Corporation and Route 33 Realty Corporation.
The following table lists compensation paid to the Directors or Trustees
of each Fund for the fiscal year ended December 31, 1998.
86
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
AGGREGATE
AGGREGATE AGGREGATE COMPENSATION AGGREGATE TOTAL COMPENSATION
COMPENSATION COMPENSATION FROM COMPENSATION FROM FIRST INVESTORS
TRUSTEE FROM FROM MULTI-STATE FROM NEW YORK FAMILY OF
SERIES INSURED TAX INSURED TAX FREE INSURED TAX FUNDS PAID TO
FUND* EXEMPT FUND* FUND* FREE FUND* DIRECTORS/TRUSTEES
------------ ------------ ---------------- ------------- --------------------
James J. Coy** $0 $0 $0 $0 $0
Roger L. Grayson*** $0 $0 $0 $0 $0
Glenn O. Head $0 $0 $0 $0 $0
Kathryn S. Head $0 $0 $0 $0 $0
Larry R. Lavoie+ $0 $0 $0 $0 $0
Rex R. Reed $[ ] $[ ] $[ ] $[ ] $[ ]
Herbert Rubinstein $[ ] $[ ] $[ ] $[ ] $[ ]
James M. Srygley $[ ] $[ ] $[ ] $[ ] $[ ]
John T. Sullivan $0 $0 $0 $0 $0
Robert F. Wentworth $[ ] $[ ] $[ ] $[ ] $[ ]
Nancy Schaenen $[ ] $[ ] $[ ] $[ ] $[ ]
</TABLE>
* Compensation to officers and interested Directors or Trustees of the
Funds is paid by the Adviser.
** On March 27, 1997, Mr. Coy resigned as a Director/Trustee of the
Funds. Mr. Coy currently serves as an Emeritus Director/Trustee.
*** On August 20, 1998, Mr. Grayson resigned as a Director/Trustee of the
Funds.
+ On September 17, 1998, Mr. Lavoie was elected by the Board of each Fund
to serve as Director or Trustee, as applicable.
++ The First Investors Family of Funds consists of 15 separate registered
investment companies.
There are no pension or retirement benefits proposed to be paid under any
existing plan to any Director/Trustee by any Fund, its subsidiaries or any
investment company in First Investors Family of Funds.
MANAGEMENT
Investment advisory services to each Fund are provided by FIMCO 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 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
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
87
<PAGE>
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 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
Fund's Directors or Trustees or by a majority of the outstanding voting
securities of the Fund, and, in either case, by a vote of a majority of the
Fund's Independent Directors or Trustees voting in person at a meeting called
for the purpose of voting on such approval.
Under each Advisory Agreement, each Fund pays the Adviser an annual fee,
paid monthly, according to the following schedule:
Annual
Average Daily Net Assets Rate
- ------------------------ ------
Up to $250 million..................................................... 0.75%
In excess of $250 million up to $500 million........................... 0.72
In excess of $500 million up to $750 million........................... 0.69
Over $750 million...................................................... 0.66
The Adviser has an Investment Committee composed of Dennis T. Fitzpatrick,
George V. Ganter, Richard Guinnessey, David Hanover, Glenn O. Head, Kathryn S.
Head, Nancy W. Jones, Michael O'Keefe, Patricia D. Poitra, Clark D. Wagner and
Matthew Wright. The Committee usually meets weekly to discuss the composition of
the portfolio of each Fund and to review additions to and deletions from the
portfolios.
For the fiscal years ended December 31, 1996, 1997 and 1998, INSURED TAX
EXEMPT FUND paid $8,971,924, $8,394,852 and $________, respectively, in advisory
fees. For the fiscal years ended December 31, 1996, 1997 and 1998, INSURED
INTERMEDIATE TAX EXEMPT FUND paid $28,735, $31,756 and $________, respectively,
in advisory fees. For the same periods, the Adviser voluntarily waived $15,775,
$16,181 and $________, respectively, in advisory fees. For the fiscal years
ended December 31, 1996, 1997 and 1998, the Adviser voluntarily assumed expenses
for INSURED INTERMEDIATE TAX EXEMPT FUND in the amounts of $17,521, $14,764, and
$_______, respectively. For the fiscal year ended December 31, 1996, NEW YORK
INSURED TAX FREE FUND'S advisory fees were $1,560,042. For the fiscal years
ended December 31, 1997 and 1998, NEW YORK INSURED TAX FREE FUND'S advisory fees
were $_________, net of a waiver of $______, and $ ____________, net of a waiver
of $ ___________, respectively. For the fiscal years ended December 31, 1996,
1997 and 1998, the advisory fees for each Single State Fund were as follows:
88
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ----------------------- -------------------------
ADVISORY ADVISORY ADVISORY
FEES PAID WAIVED FEES PAID WAIVED FEES PAID WAIVED
------------- ------ ------------- ------ --------------- ------
ARIZONA FUND $26,244 $39,365 $27,731 $41,596
CALIFORNIA FUND 79,511 39,755 76,622 38,311
COLORADO FUND 5,249 21,354 7,434 20,443
CONNECTICUT FUND 79,378 46,237 84,693 42,347
FLORIDA FUND 105,908 65,431 120,464 60,232
GEORGIA FUND 5,070 20,076 6,763 18,598
MARYLAND FUND 22,998 52,298 34,866 52,299
MASSACHUSETTS FUND 115,570 57,785 115,772 57,887
MICHIGAN FUND 183,687 91,843 192,800 96,401
MINNESOTA FUND 23,793 38,278 25,010 37,516
MISSOURI FUND 2,797 11,237 3,867 10,634
NEW JERSEY FUND 356,775 89,194 362,925 90,731
NORTH CAROLINA FUND 8,394 32,903 12,358 33,984
OHIO FUND 92,492 53,424 96,209 48,105
OREGON FUND 20,635 44,975 34,558 6,501
PENNSYLVANIA FUND 206,105 103,052 220,283 110,141
VIRGINIA FUND 112,307 66,048 112,117 56,058
</TABLE>
In addition, for the fiscal year ended December 31, 1998, the Adviser
voluntarily reimbursed expenses for the Funds as follows: ARIZONA FUND -
$______; CALIFORNIA FUND - $______; COLORADO FUND - $______; CONNECTICUT FUND -
$______; FLORIDA FUND - $______; GEORGIA FUND - $______; MARYLAND FUND -
$______; MASSACHUSETTS FUND - $______; MINNESOTA FUND - $______; MISSOURI Fund -
$_____; NORTH CAROLINA FUND - $______; OHIO FUND - $______; OREGON Fund -
$______; and VIRGINIA FUND - $______.
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 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 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 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
Fund's Board of Directors or Trustees, including a majority of the Independent
Directors or Trustees. Each Underwriting Agreement provides that it will
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<PAGE>
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
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 the applicable Fund's Disinterested 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, 1996, 1997 and 1998, FIC received
underwriting commissions with respect to INSURED TAX EXEMPT FUND of $793,591,
$465,427 and $________, respectively. For the same periods, FIC reallowed an
additional $46,262, $35,092 and $_________, respectively, to unaffiliated
dealers. For the fiscal years ended December 31, 1996, 1997 and 1998, FIC
received underwriting commissions with respect to INSURED INTERMEDIATE TAX
EXEMPT FUND of $36,336, $44,019 and $________, respectively. For the same
periods, FIC reallowed an additional $4,543, $7,864 and $______, respectively,
to unaffiliated dealers. For the fiscal years ended December 31, 1996, 1997 and
1998, FIC received underwriting fees with respect to NEW YORK INSURED TAX FREE
FUND of $367,316, $226,611 and $________, respectively. For the same periods
relating to NEW YORK INSURED TAX FREE FUND, FIC reallowed an additional $7,893,
$27,388 and $_______, respectively, to unaffiliated dealers. For the fiscal
years ended December 31, 1996, 1997 and 1998, underwriting fees with respect to
MULTI-STATE INSURED TAX FREE FUND were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------------------- ------------------------------- -------------------------------
AMOUNTS ADDITIONAL AMOUNTS AMOUNTS ADDITIONAL AMOUNTS AMOUNTS ADDITIONAL AMOUNTS
RECEIVED REALLOWED TO RECEIVED REALLOWED TO RECEIVED REALLOWED TO
BY FIC UNAFFILIATED DEALERS BY FIC UNAFFILIATED DEALERS BY FIC UNAFFILIATED DEALERS
-------- -------------------- -------- -------------------- -------- --------------------
ARIZONA FUND $32,744 8,473 $47,265 $28,254
CALIFORNIA FUND 34,287 62,012 34,549 40,919
COLORADO FUND 23,887 513 22,986 3,371
CONNECTICUT FUND 73,371 1,192 88,353 3,157
FLORIDA FUND 85,251 49,977 90,128 21,909
GEORGIA FUND 25,802 -0- 9,904 1,479
MARYLAND FUND 50,732 51,489 28,980 34,323
MASSACHUSETTS FUND 91,291 11,839 69,708 7,469
MICHIGAN FUND 80,095 76,362 64,340 78,672
MINNESOTA FUND 22,753 -0- 15,731 7,662
MISSOURI FUND 10,431 257 2,496 -0-
NEW JERSEY FUND 212,267 29,821 165,891 6,121
NORTH CAROLINA FUND 33,156 18,160 29,711 17,527
OHIO FUND 76,251 33,032 47,202 15,307
OREGON FUND 167,278 6,528 104,286 3,273
PENNSYLVANIA FUND 102,567 166,931 66,376 81,858
VIRGINIA FUND 109,041 4,237 64,270 10,550
</TABLE>
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<PAGE>
DISTRIBUTION PLANS
As stated in the Funds' Prospectus, pursuant to a separate plan of
distribution for each class of shares adopted by each 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 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 be either the applicable
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 Fund. Each 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 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 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 Fund's Independent
Directors or Trustees.
In adopting each Plan, each 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.
In reporting amounts expended under the Plans to the Directors or
Trustees, in the event that the expenses are not related solely to one class,
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, 1998, INSURED INTERMEDIATE TAX
EXEMPT FUND accrued $______ 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, 1998, INSURED TAX EXEMPT FUND paid $_________ in 12b-1 fees
pursuant to its Class A Plan. For the fiscal year ended December 31, 1998, NEW
YORK INSURED paid $588,985 pursuant to its Class A Plan. For the fiscal year
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<PAGE>
ended December 31, 1998, each Fund of Multi-State Insured paid the following
amounts pursuant to their Class A Plan: ARIZONA FUND - $______; CALIFORNIA FUND
- - $______; COLORADO FUND - $_____; CONNECTICUT FUND - $______; FLORIDA FUND -
$______; GEORGIA FUND - $_____; MARYLAND FUND - $______; MASSACHUSETTS FUND -
$______; MICHIGAN FUND - $______; MINNESOTA FUND - $______; MISSOURI FUND -
$_____; NEW JERSEY FUND - $_______; NORTH CAROLINA FUND - $______; OHIO FUND -
$______; OREGON FUND - $______; PENNSYLVANIA FUND - $______; and VIRGINIA FUND -
$______. 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
- ---- --------------- --------------- ---------------
INSURED TAX EXEMPT FUND $________ $________ $________
NEW YORK INSURED
ARIZONA FUND
CALIFORNIA FUND
COLORADO FUND
CONNECTICUT FUND
FLORIDA FUND
GEORGIA FUND
MARYLAND FUND
MASSACHUSETTS FUND
MICHIGAN FUND
MINNESOTA FUND
MISSOURI FUND
NEW JERSEY FUND
NORTH CAROLINA FUND
OHIO FUND
OREGON FUND
PENNSYLVANIA FUND
VIRGINIA FUND
For the fiscal year ended December 31, 1998, INSURED TAX EXEMPT FUND and
INSURED INTERMEDIATE TAX EXEMPT FUND paid $_____ and $_____, respectively, in
12b-1 fees pursuant to their respective Class B Plan.
For the fiscal year ended December 31, 1998 NEW YORK INSURED TAX FREE FUND
paid $______ pursuant to its Class B Plan. For the fiscal year ended December
31, 1998, each Single State Fund paid the following amounts pursuant to its
Class B Plan: ARIZONA FUND - $_____; CALIFORNIA FUND - $_____; COLORADO FUND -
$_____; CONNECTICUT FUND - $______; FLORIDA FUND - $_____; GEORGIA FUND -
$_____; MARYLAND FUND - $______; MASSACHUSETTS FUND - $_____; MICHIGAN FUND -
$_____; MINNESOTA FUND - $___; MISSOURI FUND - $___; NEW JERSEY FUND - $______;
NORTH CAROLINA FUND - $_____; OHIO FUND - $_____; OREGON FUND - $_____;
PENNSYLVANIA FUND - $______; and VIRGINIA FUND - $______. For the same period,
the Underwriter incurred the following Class B Plan-related expenses with
respect to each Fund:
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<PAGE>
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
- ---- --------------- --------------- ---------------
INSURED TAX EXEMPT FUND
INSURED INTERMEDIATE TAX
EXEMPT FUND
NEW YORK INSURED
ARIZONA FUND
CALIFORNIA FUND
COLORADO FUND
CONNECTICUT FUND
FLORIDA FUND
GEORGIA FUND
MARYLAND FUND
MASSACHUSETTS FUND
MICHIGAN FUND
MINNESOTA FUND
MISSOURI FUND
NEW JERSEY FUND
NORTH CAROLINA FUND
OHIO FUN
OREGON FUND
PENNSYLVANIA FUND
VIRGINIA FUND
DETERMINATION OF NET ASSET VALUE
The municipal bonds 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 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 may retain any insured municipal bond which is in default in the
payment of principal or interest until the default has been cured or the
principal and interest outstanding are paid by an insurer or the issuer of any
letter of credit or other guarantee supporting such municipal bond. In such
case, it is each Fund's policy to value the defaulted bond daily based upon the
value of a comparable bond which is insured and not in default. In selecting a
comparable bond, each Fund will consider security type, rating, market condition
and yield.
Each 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.
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<PAGE>
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser may purchase or sell portfolio securities on behalf of a Fund
in agency or principal transactions. In agency transactions, a Fund generally
pays brokerage commissions. In principal transactions, a Fund generally does not
pay commissions, however the price paid for the security may include an
undisclosed dealer commission or "mark-up" or selling concessions. The Adviser
normally purchases fixed-income securities on a net basis from primary market
makers acting as principals for the securities. The Adviser may purchase certain
money market instruments directly from an issuer without paying commissions or
discounts. The Adviser may also purchase securities traded in the OTC market. As
a general practice, OTC securities are usually purchased from market makers
without paying commissions, although the price of the security usually will
include undisclosed compensation. However, when it is advantageous to a Fund,
the Adviser may utilize a broker to purchase OTC securities and pay a
commission.
In purchasing and selling portfolio securities on behalf of the Fund, the
Adviser will seek to obtain best execution. A Fund may pay more than the lowest
available commission in return for brokerage and research services.
Additionally, upon instruction by the Board, the Adviser may use dealer
concessions available in fixed-price underwritings to pay for research and other
services. Research and other services may include information as to the
availability of securities for purchase or sale, statistical or factual
information or opinions pertaining to securities, reports and analysis
concerning issuers and their creditworthiness, and Lipper's Directors'
Analytical Data concerning Fund performance and fees. The Adviser generally uses
the research and other services to service all the funds in the First Investors
Family of Funds, rather than the particular Funds whose commissions or dealer
concessions may pay for research or other services. In other words, a Fund's
brokerage or dealer concessions may be used to pay for a research service that
is used in managing another fund within the First Investors Fund Family. The
Lipper's Directors' Analytical Data is used by the Adviser and a Fund's Board to
analyze a Fund's performance relative to other comparable funds.
In selecting the broker-dealers to execute a Fund's portfolio
transactions, the Adviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order, the
trading characteristics of the security involved, the difficulty in executing
the order, the research and other services provided, the expertise, reputation
and reliability of the broker-dealer, access to new offerings, and other factors
bearing upon the quality of the execution. The Adviser does not place portfolio
orders with an affiliated broker, or allocate brokerage commission business to
any broker-dealer for distributing Fund shares. Moreover, no broker-dealer
affiliated with the Adviser participates in commissions generated by portfolio
orders placed on behalf of the Fund.
The Adviser may combine transaction orders placed on behalf of the Funds
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 each Fund's
Board. Each Fund's Board of Directors or Trustees has authorized and directed
the Adviser to use dealer concessions available in fixed-price underwritings of
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municipal bonds to pay for research services which are beneficial in the
management of each Fund's portfolio. The Funds did not pay brokerage commissions
for the fiscal years ending December 31, 1996, 1997 and 1998. [With the approval
of INSURED TAX EXEMPT FUND's Board of Directors, $_______ of principal
transactions were used to acquire research and other services which benefited
the Fund.]
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Information regarding the purchase, redemption and exchange of Fund shares
is contained in the Shareholder Manual, a separate section of the SAI that is a
distinct document and may be obtained free of charge by contacting your Fund.
REDEMPTIONS-IN-KIND. If each Fund's Board should determine that it would
be detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution in kind of securities from the portfolio of
the Fund. If shares are redeemed in kind, the redeeming shareholder will likely
incur brokerage costs in converting the assets into cash. The method of valuing
portfolio securities for this purpose is described under "Determination of Net
Asset Value."
TAXES
FEDERAL INCOME TAX
To continue to qualify for treatment as a regulated investment company
("RIC") under the Code, a Fund - each Fund being treated as a separate
corporation for these purposes - must distribute to its shareholders for each
taxable year at least 90% of 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) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. Government securities, securities of
other RICs and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets; and (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer. If a Fund failed to qualify for treatment as a RIC for
any taxable year, (1) it would be taxed at corporate rates on the full amount of
its taxable income for that year without being able to deduct the distributions
it makes to its shareholders and (2) the shareholders would treat all those
distributions, including distributions that otherwise would be "exempt-interest
dividends" (SEE below), as taxable dividends (that is, ordinary income) to the
extent of the Fund's earnings and profits. In addition, the Fund could be
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required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for RIC treatment.
Dividends paid by a Fund will qualify as "exempt-interest dividends" as
defined in the Prospectuses, and thus will be excludable from gross income for
Federal income tax purposes by its shareholders, if the Fund satisfies the
requirement that, at the close of each quarter of its taxable year, at least 50%
of the value of its total assets consists of securities the interest on which is
excludable from gross income under section 103(a); each Fund intends to continue
to satisfy this requirement. The aggregate dividends excludable from a Fund's
shareholders' gross income may not exceed its net tax-exempt income.
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 are reported
by shareholders (or taxed to them in the case of taxable distributions) for the
year in which that December 31 falls.
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 any portion of the loss that is not disallowed
will be treated as long-term, instead of short-term, capital loss to the extent
of any capital gain distributions received on those shares.
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 (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.
Tax-exempt interest attributable to certain PABs (including, to the extent
a Fund receives interest on those bonds, a proportionate part of the
exempt-interest dividends it pays) is a Tax Preference Item. Exempt-interest
dividends received by a corporate shareholder also may be indirectly subject to
the Federal AMT without regard to whether the Fund's tax-exempt interest was
attributable to those bonds. Entities or other persons who are "substantial
users" (or persons related to "substantial users") of facilities financed by
PABs or IDBs should consult their tax advisers before purchasing shares of a
Fund because, for users of certain of these facilities, the interest on those
bonds is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs 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 a Fund) plus 50%
of their benefits exceeds certain base amounts. Exempt-interest dividends from a
Fund still are tax-exempt to the extent described above; they are only included
in the calculation of whether a recipient's income exceeds the established
amounts.
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Each Fund may acquire zero coupon municipal securities issued with
original issue discount. As a holder of those securities, a Fund must account
for the portion of the original issue discount that accrues on the securities
during the taxable year, even if the Fund receives no corresponding payment on
them during the year. 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. Each 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).
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 (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 under
circumstances described in the Prospectus, distributions of the interest earned
thereon will be taxable to its shareholders as ordinary income to the extent of
its earnings and profits. Moreover, if a Fund realizes capital gain as a result
of market transactions, any distributions of that gain will be taxable to its
shareholders. There also may be collateral Federal income tax consequences
regarding the receipt of exempt-interest dividends by shareholders such as S
corporations, financial institutions and property and casualty insurance
companies. A shareholder falling into any such category should consult its tax
adviser concerning its investment in shares of a Fund.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the gains
and losses a Fund will realize in connection therewith. Gains from options and
futures derived by a Fund with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option or futures contract or short sale) with
respect to any debt instrument (other than "straight debt") or partnership
interest the fair market value of which exceeds its adjusted basis - and enters
into a "constructive sale" of the same or substantially similar property, the
Fund will be treated as having made an actual sale thereof, with the result that
gain will be recognized at that time. A constructive sale generally consists of
a short sale, an offsetting notional principal contract or futures contract
entered into by a Fund or a related person with respect to the same or
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substantially similar property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially similar property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction
during any taxable year that otherwise would be treated as a constructive sale
by a Fund if the transaction is closed within 30 days after the end of that year
and the Fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the Fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially similar or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
STATE INCOME TAXES
ARIZONA. In the opinion of ____________, Arizona tax counsel to
MULTI-STATE INSURED TAX FREE FUND, distributions from the ARIZONA FUND that are
received by investors that are individuals, corporations, trusts, and estates
who are subject to Arizona income tax will not be subject to tax in Arizona to
the extent that those distributions are attributable to interest on tax-exempt
obligations of the State of Arizona or interest on obligations of the United
States, puerto Rico, the Virgin islands or Guam. Other distributions from the
ARIZONA FUND, including those related to short-term and long-term capital gains,
generally will be taxable under Zrizona law when received by Arizona taxpayers.
Interest on indebtedness incurred (directly and indirectly) by an investor
to purchase or carry an investment in the ARIZONA FUND should not be deductible
for Arizona income tax purposes to the extent that the ARIZONA FUND holds
tax-exempt obligations of the state of Arizona or obligations of the United
States, Puerto Rico, the Virgin Islands or Guam. The discussion of Arizona taxes
in the Prospectus assumes that in each taxable year the ARIZONA FUND qualifies
and elects to be taxed as a RIC for Federal income tax purposes. In addition,
such discussion assumes that in each taxable year the ARIZONA FUND qualifies to
pay exempt-interest dividends by complying with the requirements of the Code
that at least 50% of its assets at the close of each quarter of its taxable year
is invested in state, municipal or other obligations, the interest on which is
excluded from gross income for Federal income tax purposes pursuant to section
103(a) of the Code.
CALIFORNIA. In the opinion of _____________________________, California
tax counsel to MULTI-STATE INSURED TAX FREE FUND, under existing law, and
assuming that the Federal tax treatment of the CALIFORNIA FUND will be as set
forth elsewhere in this Statement of Additional Information, distributions made
to individuals, estates or trusts by the CALIFORNIA FUND are not includible in
gross income for California personal income tax purposes to the extent that such
distributions are treated as exempt-interest dividends under the Code, and are
attributable to California tax-exempt interest, less allocable nondeductible
expenses. Such treatment will result provided that the CALIFORNIA FUND qualifies
as a regulated investment company under the Code, properly designates such
exempt-interest dividends under California law and satisfies the requirement of
California law that at least 50% of its assets at the close of each quarter of
its taxable year be invested in qualified tax-exempt obligations. The
designation requirement is met by the CALIFORNIA FUND notifying shareholders
within 60 days after the close of a taxable year to the extent that dividends
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are exempt-interest dividends. It is important that California shareholders
retain this designation each year in order to establish that exempt-interest
dividends are tax-exempt under California law. Qualified tax-exempt obligations
under California law generally include obligations issued by California or a
local government within California, as well as direct U.S. Government
obligations. Direct U.S. Government obligations do not include securities
guaranteed by U.S. Government agencies such as the Federal National Mortgage
Association ("FNMA" or "Fannie Mae"), the Government National Mortgage
Association ("GNMA" or "Ginnie Mae") or similar agencies. A portion of any
discount attributable to a stripped tax-exempt bond or a stripped coupon may be
treated as taxable when distributed to shareholders. Distributions of the
CALIFORNIA FUND that are derived from sources other than those described above,
including interest on certain non-California obligations such as repurchase
agreements and municipal instruments of other states, will not be treated as
tax-exempt for California personal income tax purposes and are also includible
in income subject to the California alternative minimum tax.
Distributions treated as capital gains dividends under the Code will
currently be taxed as ordinary income for California personal income tax
purposes.
Corporations subject to the California franchise tax or California
corporate income tax are required to include in their gross income and in income
subject to the corporate alternative minimum tax all distributions received from
the CALIFORNIA FUND, including exempt-interest dividends.
California law generally follows Federal law on matters such as denial or
limitation of deductions for short-term losses where exempt-interest dividends
have recently been received, wash sales, limitations on tax basis for certain
sales charges and the nondeductibility of interest on indebtedness incurred by
shareholders to purchase or carry shares of tax-exempt instruments, such as the
CALIFORNIA FUND.
It is the intent of MULTI-STATE INSURED TAX FREE FUND, as represented to
and relied upon by California tax counsel in rendering their opinion, that
except when acceptable investments are unavailable for the CALIFORNIA FUND, the
CALIFORNIA FUND will maintain at least 80% of the value of its net assets in
debt obligations of the State of California, its localities and political
subdivisions, which are exempt from regular Federal income tax and California
personal income tax.
The foregoing description relates only to certain aspects of the
California tax treatment of an investment in shares of the CALIFORNIA FUND, it
is not intended as an exhaustive analysis of all possible tax consequences
applicable to all investors. Investors may be subject to other California tax
consequences depending upon their particular situations and should consult their
own tax advisers for appropriate tax advice.
CONNECTICUT. In the opinion of Kelley Drye & Warren, Connecticut tax
counsel to MULTI-STATE INSURED TAX-FREE FUND, shareholders who are Connecticut
resident individuals will not be subject to the Connecticut personal income tax
on distributions from the CONNECTICUT FUND to the extent that these
distributions qualify as (I) exempt-interest dividends, as defined in section
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852(b)(5) of the Code, issued by or on behalf of the State of Connecticut, any
political subdivision thereof, of any public instrumentality, state or local
authority, district or similar public entity created under the laws of the State
of Connecticut, or (ii) "exempt dividends" for Connecticut tax purposes.
Distributions to Connecticut shareholders of the CONNECTICUT FUND that are
attributable to sources other than those described above will generally be
includible in the Connecticut income of such shareholders.
Corporate shareholders of the CONNECTICUT FUND subject to tax in
Connecticut will be required to include in net income, for purposes of
calculating the Connecticut corporation business tax, distributions made by the
CONNECTICUT FUND and gains resulting from the redemption or sale of shares of
the CONNECTICUT FUND. Such corporate shareholders, in determining net income,
will be entitled to deduct 70% of the amount of includable distributions that
qualify as dividends under Section 316 of the Code.
FLORIDA. In the opinion of Rudnick & Wolfe, Florida tax counsel to
MULTI-STATE INSURED TAX FREE FUND, under existing law, shareholders of the
Florida Series will not be subject to the Florida intangible personal property
tax on their ownership of FLORIDA FUND shares or on distributions of income or
gains made by the FLORIDA FUND to the extent that such distributions are
attributable solely to investment in: (i) obligations issued by the United
States government and its agencies, instrumentalities or territories (including
Puerto Rico, Guam and the U.S. Virgin Islands) (collectively, "Exempt
Instruments"); or (ii) to money, notes, bonds, and other obligations issued by
the State of Florida and its municipalities, counties, and other taxing
districts ("Florida Instruments"). If the FLORIDA FUND is not invested solely in
Exempt Instruments and Florida Instruments, then the Florida intangible personal
property tax ("Intangible Tax") will apply as follows:
(a) The portion of the net asset value of the FLORIDA FUND'S
portfolio that is attributable to Exempt Instruments will be exempt from
the Intangible Tax.
(b) If the remaining portion of the net asset value of the FLORIDA
FUND'S portfolio, after removing the portion representing Exempt
Instruments, represents assets which are themselves exempt from the
Intangible Tax, then this portion will also be exempt from the Intangible
Tax.
(c) If the remaining portion of the net asset value of the FLORIDA
FUND'S portfolio, after removing the portion representing Exempt
Instruments, represents any asset which is subject to the Intangible Tax
under Florida law, then the remaining portion of the net asset value of
the Florida Fund portfolio will be subject to the Intangible Tax.
Shareholders of the FLORIDA SERIES will be exempt from the Intangible Tax
on their shares to the extent that the net asset value of the Florida Series'
portfolio is exempt. (The FLORIDA FUND has no present intention of investing in
assets which will be subject to the Intangible Tax.)
Because Florida does not impose an income tax on individuals, individual
shareholders will not be subject to any Florida income tax on income or gains
distributed by the FLORIDA FUND or on gains resulting from the redemption or
exchange of shares of the FLORIDA FUND. Corporate shareholders will be subject
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to the Florida income tax on all distributions received from the FLORIDA FUND,
regardless of the tax-exempt status of interest received from the FLORIDA FUND
which is attributable to bonds under section 103(a) of the Code or any other
Federal law; however, if a corporation does not have its commercial domicile
within the state of Florida, its non-business income generated from the FLORIDA
FUND is not allocated as Florida income subject to Florida corporate income tax.
Non-business income includes capital gains and interest to the extent they do
not arise from transactions and activities in the regular course of a taxpayer's
business.
For Florida state income tax purposes, the FLORIDA FUND itself will not be
subject to the Florida income tax so long as it has no income subject to Federal
taxation.
Shareholders of the FLORIDA FUND will be subject to Florida estate tax on
their FLORIDA FUND shares only if they are Florida residents, certain natural
persons not domiciled in Florida, or certain natural persons not residents of
the United States. However, the Florida estate tax is limited to the amount of
the credit allowable under the Code (currently section 2011 and in some cases
section 2102 of the Code) for death taxes actually paid to the several states.
Neither interests held by shareholders of the FLORIDA FUND nor Exempt
Instruments nor money, notes, bonds, and other obligations issued by the State
of Florida and its municipalities, counties, and other taxing districts held by
the FLORIDA FUND will be subject to the Florida ad valorem property tax, the
Florida sales and use tax or the Florida documentary stamp tax.
GEORGIA. In the opinion of Kutak Rock, Georgia tax counsel to MULTI-STATE
INSURED TAX FREE FUND, shareholders of the GEORGIA FUND that are individuals,
estates, trusts, and corporations subject to Georgia income tax may exclude from
income for Georgia income tax purposes, distributions from the GEORGIA FUND that
are derived from interest on obligations issued by the State of Georgia or any
political subdivision thereof, exempt from federal taxation under section 103(a)
of the Code. Individuals, estates, trusts and corporations may exclude from
income for Georgia income tax purposes, dividend distributions from the GEORGIA
FUND on obligations of the United States or of any authority, commission,
instrumentality or possession thereof exempt from state income tax under federal
law.
Capital gains recognized as a result of the sale of shares in the GEORGIA
FUND can not be excluded for purposes of calculating the Georgia income tax by
individuals, estates, trusts or corporations.
Georgia tax counsel urges each potential investor in the GEORGIA FUND to
consult his or her own tax advisor regarding all GEORGIA FUND income tax related
matters specifically pertaining to them.
MARYLAND. In the opinion of Ober, Kaler, Grimes & Shriver, Maryland tax
counsel to MULTI-STATE INSURED TAX FREE FUND, holders of shares of the MARYLAND
FUND who are individuals, corporations, estates or trusts and who are subject to
Maryland state and local income taxes will not be subject to tax in Maryland on
MARYLAND FUND dividends to the extent that such dividends qualify as
exempt-interest dividends of a RIC under section 852(b)(5) of the Code and are
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attributable to (1) interest on tax-exempt obligations of the State of Maryland
or its political subdivisions or authorities, (2) interest on obligations of the
United States or an authority, commission, instrumentality, possession or
territory of the United States, or (3) gain realized by the MARYLAND FUND from
the sale or exchange of bonds issued by Maryland or a political subdivision of
Maryland or of the United States or an authority, commission or instrumentality
of the United States. To the extent that distributions of the MARYLAND FUND are
attributable to sources other than those described above, such as (1) interest
on obligations issued by states other than Maryland or (2) income from
repurchase agreements, such distributions will not be exempt from Maryland state
and local income taxes. In addition, gain realized by a shareholder upon a
redemption or exchange of MARYLAND FUND shares will be subject to Maryland
taxation. If the MARYLAND FUND fails to qualify as a RIC for Federal income tax
purposes, it would be subject to Maryland corporate income tax and distributions
would be taxable as ordinary income to the shareholders. Maryland presently
includes in taxable net income Tax Preference Items. Interest paid on certain
PABs constitutes a Tax Preference Item. Accordingly, subject to a threshold
amount, 50% of any distributions on the MARYLAND FUND attributable to such
private activity bonds will not be exempt from Maryland state and local income
taxes. Interest on indebtedness incurred (directly or indirectly) by a
shareholder of the MARYLAND FUND to purchase or carry shares of the MARYLAND
FUND will not be deductible for Maryland state and local income tax purposes to
the extent such interest is allocable to exempt-interest dividends.
MASSACHUSETTS. In the opinion of Palmer & Dodge LLP, Massachusetts tax
counsel to Multi-State Insured, holders of shares of the MASSACHUSETTS FUND who
are subject to Massachusetts personal income tax will not be subject to tax on
distributions from the MASSACHUSETTS FUND to the extent that these distributions
(1) qualify as exempt interest dividends of a regulated investment company
within the meaning of Code section 852(b)(5) that are directly attributable to
interest on obligations issued by the Commonwealth of Massachusetts, its
instrumentalities or its political subdivisions that is exempt from
Massachusetts taxation or (2) qualify as capital gain dividends as defined in
Code section 852(b)(3)(C), that are attributable to gain on obligations issued
by the Commonwealth of Massachusetts, its instrumentalities or political
subdivisions that is exempt from Massachusetts taxation. If a holder of shares
of the MASSACHUSETTS FUND is a corporation subject to the Massachusetts
corporate excise tax, distributions received from the MASSACHUSETTS FUND are
includable in gross income and generally may not be deducted by such a corporate
holder in computing its net income. The shares of the MASSACHUSETTS FUND will be
includable in the gross estate of a deceased individual holder who is a resident
of Massachusetts for purposes of the Massachusetts Estate Tax.
Distributions to holders of shares of the MASSACHUSETTS FUND who are
subject to Massachusetts personal income tax that do not qualify as
exempt-interest dividends, as defined in Code section 852(b)(5), or capital gain
dividends, as defined in Code section 852(b)(3)(C), directly attributable to
interest or capital gain exempt from Massachusetts taxation on obligations
issued by the Commonwealth of Massachusetts, its instrumentalities or its
political subdivisions will generally be subject to Massachusetts income tax.
Among the items that will not be subject to Massachusetts income tax are the
following: exempt-interest dividends attributable to interest on obligations
issued by the Commonwealth of Puerto Rico, the government of Guam, the
government of the Virgin Islands or their respective authorities, and
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distributions attributable to interest on obligations of the United States
exempt from state income taxation. The MASSACHUSETTS FUND must identify the
items not subject to tax in a written notice to the shareholders. The holders of
shares of the MASSACHUSETTS FUND may recognize taxable gain or loss upon an
exchange or redemption of their shares.
MICHIGAN. In the opinion of Dickinson Wright PLLC, Michigan tax counsel to
MULTI-STATE INSURED TAX FREE FUND, holders of the MICHIGAN FUND will not be
subject to the Michigan income tax or single business tax on MICHIGAN FUND
dividends to the extent that such distributions qualify as exempt-interest
dividends of a RIC under Code section 852(b)(5) which are attributable to
interest on tax-exempt obligations of the State of Michigan, its political or
governmental subdivisions, or its governmental agencies or instrumentalities (as
well as certain other Federally tax exempt obligations, the interest on which is
exempt from Michigan tax, such as certain obligations of Puerto Rico). To the
extent that distributions on the MICHIGAN FUND are attributable to sources other
than those described above, such distributions, including, but not limited to,
long or short-term capital gains, will not be exempt from Michigan income tax or
single business tax. To the extent that distributions on the MICHIGAN FUND are
not subject to Michigan income tax, they are not subject to the uniform city
income tax imposed by certain Michigan cities.
MINNESOTA. In the opinion of Faegre & Benson LLP, Minnesota tax counsel to
MULTI-STATE INSURED TAX FREE FUND, provided that the MINNESOTA FUND qualifies as
a regulated investment company under the Code, and subject to the discussion in
the paragraph below, shareholders of the MINNESOTA FUND who are individuals,
estates, or trusts and who are subject the regular Minnesota personal income tax
will not be subject to such tax on MINNESOTA FUND dividends to the extent that
such distributions qualify as exempt-interest dividends of a regulated
investment company under section 8252(b)(5) of the Code which are derived from
interest income on tax-exempt obligations of the State of Minnesota, or its
political or governmental subdivisions, municipalities, governmental agencies or
instrumentalities ("Minnesota Sources"). The foregoing will apply, however, only
if the portion of the exempt-interest dividends form such Minnesota Sources that
is paid to all shareholders represent 95% or more of the exempt-interest
dividends that are paid by the MINNESOTA FUND. If the 95% test is not met, all
exempt-interest dividends that are paid by the MINNESOTA FUND are not derived
from the Minnesota Sources, such dividends generally will be subject to the
regulator Minnesota personal income tax. Other distributions of the MINNESOTA
FUND, including distributions from net short-term and long-term capital gains,
are generally not exempt from the regular Minnesota personal income tax.
Pursuant to Minnesota legislation enacted in 1995, exempt-interest
dividends that are derived from interest income on obligations of the Minnesota
Sources described above may become subject to tax in the case of individuals,
estates, and trusts if the exemption of such income were judicially determined
to discriminate against interstate commerce. See "Risk Factors for the Minnesota
Fund" for further discussion of this legislation.
Subject to certain limitations that are set forth in the Minnesota Rules,
MINNESOTA FUND dividends, if any, that are derived from interest on certain
United States obligations are not subject to the regular Minnesota personal
income tax or the Minnesota alternative minimum tax, in the case of shareholders
of the MINNESOTA FUND who are individuals, estates or trusts.
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MINNESOTA FUND distributions, including exempt-interest dividends, are not
excluded in determining the Minnesota franchise tax on corporations that is
measured by taxable income and alternative minimum taxable income. Such
distributions may also be taken into account in certain cases in determining the
minimum fee that is imposed on corporations, S corporations and partnerships.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the MINNESOTA FUND will generally not be deductible for regular
Minnesota personal income tax purposes or Minnesota AMT purposes, in the case of
shareholders who are individuals, estates or trusts. Except during temporary
defensive periods or when acceptable investments are unavailable to the
MINNESOTA FUND, at least 80% of the value of the net assets of the MINNESOTA
FUND will be maintained in debt obligations the interest on which is exempt from
the Federal income tax and the Minnesota personal income tax, subject to the
discussion in the Prospectus and this SAI relating to legislation enacted in
Minnesota in 1995. The MINNESOTA FUND seeks to invest so that the 95% test
described above will be met.
Minnesota presently imposes an AMT on individuals, estates, and trusts
that is based, in part, on such taxpayers' Federal alternative minimum taxable
income, which includes Federal Tax Preference Items. Accordingly, the portion of
exempt-interest dividends that constitutes a Tax Preference Item for purposes of
the Federal AMT, even though it is derived from the Minnesota Sources described
above, will be included in the base upon which such Minnesota AMT is computed.
(The MINNESOTA FUND has no present intention of investing in tax-exempt
securities that are subject to the Federal AMT.) In addition, the entire portion
of exempt-interest dividends that is derived from sources other than the
Minnesota Sources generally is also subject to the Minnesota AMT imposed on
individuals, estates, and trusts. Further, should the 95% test that is described
above fail to be met, all of the exempt-interest dividends that are paid by the
MINNESOTA FUND, including all of those that are derived from the Minnesota
Sources, generally will be subject to the Minnesota AMT imposed on such
shareholders.
MISSOURI. In the opinion of ________________, Missouri tax counsel to
MULTI-STATE INSURED TAX FREE FUND, if a dividend paid by the MISSOURI FUND
qualifies as an exempt-interest dividend under the Code, the portion of such
exempt-interest dividend that is attributable to interest received by the
MISSOURI FUND on obligations of (1) Missouri or its political subdivisions
("Missouri Obligations"), or (2) territories or possessions of the United States
(to the extent Federal law exempts interest on such obligations from state
taxation), will not be subject to the Missouri income tax when received by a
shareholder of the MISSOURI FUND, provided that the MISSOURI FUND properly
designates such portion as an exempt dividend (a "Missouri Dividend") under
Missouri law. At the present time, the MISSOURI FUND does not intend to invest
in obligations the interest on which is subject to Federal income taxation.
However, to the extent any dividend (or portion thereof) paid by the MISSOURI
FUND is attributable to net interest earned by the MISSOURI FUND on obligations
of the United States, such dividend (or portion thereof) will not be subject to
the Missouri income tax when received by a shareholder of the MISSOURI FUND,
provided (1) the MISSOURI FUND properly designates such dividend (or portion
thereof) as a "state income tax exempt-interest dividend" under Missouri law,
and (2) the MISSOURI FUND and the shareholder meet certain recordkeeping
requirements specified under Missouri law. Except as provided in the preceding
paragraphs, the State of Missouri has no special exemption provisions for (1)
dividends received by shareholders of a RIC or (2) capital gains realized by
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shareholders of a RIC upon the sale or exchange of shares of such RIC. Thus, in
the case of shareholders who are subject to the Missouri income tax and who,
under applicable law, are required to include capital gain, dividend and
interest income in their Missouri taxable income, all dividends, except Missouri
Dividends and dividends properly designated as "state income tax exempt-interest
dividends" under Missouri law, paid by the MISSOURI FUND to such shareholders,
and all gains realized by such shareholders on the redemption or sale of shares
of the MISSOURI FUND, will be subject to the Missouri income tax.
Except as set forth in paragraph (a) below, dividends received by (1) an
individual shareholder of the MISSOURI FUND who is not engaged in a trade or
business, or (2) any other shareholder of the MISSOURI FUND (a "Business
Taxpayer") who holds shares of the MISSOURI FUND for investment purposes and not
as part of its ordinary trade or business, will not be subject to the city
earnings and profits tax of St. Louis or Kansas City, Missouri (the "City Tax").
With respect to dividends received by a Business Taxpayer who holds shares as
part of its ordinary trade or business, each dividend (or portion thereof) paid
by the MISSOURI FUND that is attributable to interest earned on Missouri
Obligations, or on obligations of the United States or its possessions, will not
be subject to the City Tax; however, except as set forth in paragraph (b) below,
other dividends received by such Business Taxpayer (and all gains realized by
such Business Taxpayer on the redemption or sale of shares of the MISSOURI FUND)
will be subject to the applicable City Tax, to the extent such Business Taxpayer
is otherwise subject to such tax.
(a) The taxing authorities in St. Louis take the position that all of the
assets of a partnership or corporation having its business domicile in St. Louis
should be treated as held as part of such entity's ordinary trade or business.
Under this position, dividends received on shares of the MISSOURI FUND held by
such partnership or corporation, whether or not held for investment purposes,
could be subject to the City Tax of St. Louis. There is no express authority for
this position, and a taxpayer could take the position that dividends received by
any corporation or partnership that holds shares of the MISSOURI FUND for
investment purposes ("Investment Dividends") should not be subject to the City
Tax of St. Louis. Therefore, __________________ specifically refrains from
expressing an opinion as to whether Investment Dividends received by a
partnership or corporation having its business domicile in St. Louis (to the
extent such Investment Dividends are not attributable to interest earned on
Missouri Obligations, or on obligations of the United States or its possessions
to the City Tax of St.
Louis.
(b) The enabling statutes for the City Tax do not indicate whether
obligations of territories (as opposed to possessions) of the United States are
exempt from the City Tax. Therefore, _________________ specifically refrains
from expressing an opinion as to whether dividends attributable to interest
earned on obligations of territories of the United States are exempt from the
City Tax.
NEW YORK. In the opinion of Hawkins, Delafield &Wood, tax counsel to NEW
YORK INSURED TAX FREE FUND, New York resident individual shareholders will not
be subject to the personal income taxes imposed by New York State and by New
York City on distributions from NEW YORK INSURED TAX FREE FUND to the extent
that these distributions qualify as exempt-interests dividends, as defined in
section 852(b)(5) of the Code, and are attributable to interest on obligations
issued by or on behalf of the State of New York or any political subdivision
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thereof. Information concerning NEW YORK INSURED TAX FREE FUND income
attributable to sources other than from New York and the tax treatment of
interest on indebtedness incurred to purchase or carry shares of NEW YORK
INSURED is provided in the SAI. NEW YORK INSURED distributions are not excluded
from the determination of the franchise and corporation taxes that are based on
entire net income and respectively imposed by the State and City of New York.
Distributions to New York resident individual shareholders of NEW YORK
INSURED that are attributable to sources other than from obligations issued by
or on behalf of the State of New York or any political subdivision thereof will
generally be includable in New York personal income of such shareholder.
Additionally, interest on indebtedness incurred or continued to purchase or
carry shares of NEW YORK INSURED will not be deductible for New York personal
income tax purposes to the extent that such interest is allocable to
exempt-interest dividends paid by NEW YORK INSURED.
NEW JERSEY. In the opinion of Hawkins, Delafield & Wood, New Jersey tax
counsel to Multi-State Insured, provided that the NEW JERSEY FUND qualifies as a
qualified investment fund under New Jersey law, shareholders of the NEW JERSEY
FUND who are New Jersey residents individuals, estates and trusts will not be
subject to the New Jersey Gross Income Tax on (1) distributions of the interest
and capital gains made by the NEW JERSEY FUND to the extent that such
distributions are with respect to New Jersey state and local bonds and (2) on
gains resulting from the redemption or sale of shares of the NEW JERSEY FUND. A
description of a qualified investment fund and of New Jersey state and local
bonds is contained in the SAI. A corporate shareholder of the NEW JERSEY FUND
subject to the New Jersey Corporation Business Tax or the New Jersey Corporation
Income Tax will be required to include in its corporate tax base (1)
distributions of interest and capital gains made by the NEW JERSEY FUND and (2)
gains resulting from the redemption or sale of shares of the NEW JERSEY FUND.
Qualified investment funds described in N.J.S.A. 54A:6-14.1 are any
investment company or trust registered with the Securities and Exchange
Commission, or any series of such investment company or trust, which for the
calendar year in which the distribution is paid (a) has no investments other
than interest-bearing obligations, obligations issued at a discount, cash and
cash items (including receivables), and financial options, futures, forward
contracts or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto;
and (b) has not less than 80% of the aggregate principal amount of all of its
investments, excluding cash and cash items (including receivables) and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto to the extent the instruments are authorized by
section 851(b) of the Code, in obligations described in N.J.S.A. 54A:6-14.
New Jersey state and local bonds described in N.J.S.A. 54A:6-14 are
obligations (1) issued by or on behalf of the State of New Jersey or any county,
municipality, school or other district, agency, authority, commission,
instrumentality, public corporation, body corporate and politic or political
subdivision of the State of New Jersey, and (2) obligations statutorily free
from state or local taxation under any New Jersey or United States laws.
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Except when acceptable investments are unavailable to the NEW JERSEY FUND,
it will maintain at least 80% of the value of its investments in debt
obligations which are exempt from Federal income tax and New Jersey Gross Income
Tax. The NEW JERSEY FUND will not invest in discount obligations other than
those described in N.J.S.A. 54A:6-14.
NORTH CAROLINA. This opinion of Wyrick Robbins Yates & Ponton LLP, North
Carolina tax counsel to MULTI-STATE INSURED TAX FREE FUND, is based on the
current provisions of Chapter 105 of the North Carolina General Statutes and the
North Carolina Administrative Code and the current administrative position of
the North Carolina Department of Revenue (the "Revenue Department") as found in
rules, bulletins and statements issued by the Revenue Department.
Individual shareholders of the NORTH CAROLINA FUND who are subject to
North Carolina income taxation will not be subject to such tax on NORTH CAROLINA
FUND dividend distributions to the extent that such distributions represent
interest on (a) direct obligations of the United States or its possessions, (b)
obligations of the State of North Carolina, its political subdivisions or a
commission, an authority, or another agency of the State of North Carolina or
its political subdivisions, or (c) obligations of nonprofit educational
institutions organized or chartered under the laws of the State of North
Carolina. (All such obligations giving rise to interest exempt from North
Carolina taxation are collectively referred to as "North Carolina Exempt
Obligations".) Corporate shareholders of THE NORTH CAROLINA FUND that are
subject to North Carolina income taxation will not be subject to such tax on
NORTH CAROLINA FUND dividend distributions to the extent of the net of (i)
distributions representing interest from North Carolina Exempt Obligations, less
(ii) related expenses.
The above exemptions from North Carolina income tax do not apply to
capital gain distributions received from the NORTH CAROLINA FUND, except that
distributions of gains are exempt from North Carolina income tax to the extent
attributable to the disposition of certain obligations issued before July 1,
1995 by the State of North Carolina or its agencies or political subdivisions.
The non-taxability of dividends paid by the NORTH CAROLINA FUND to a
shareholder is conditioned upon the NORTH CAROLINA FUND'S providing a supporting
statement to the shareholder verifying the amount received by the shareholder
that represents distributions on North Carolina Exempt Obligations. In the
absence of a supporting statement, the total amount designated by the NORTH
CAROLINA FUND as exempt from tax is subject to North Carolina income tax. The
NORTH CAROLINA FUND will provide to the shareholders a supporting statement that
meets the Revenue Department's requirements.
Interest earned on obligations that are merely backed or guaranteed by the
United States Government do not represent direct obligations of the United
States or its possessions and do not qualify for exemption from North Carolina
income taxation. For instance, interest income realized on obligations of the
Federal National Mortgage Association and interest paid by the issuer of
mortgage-backed certificates guaranteed by the Federal government, Federal
agencies or corporations formed by the Federal government is not considered
income from obligations of the United States and is subject to North Carolina
income taxation. Also, interest paid in connection with repurchase agreements
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issued by banks and savings and loan associations is subject to North Carolina
income taxation.
Interest from obligations issued under the borrowing power of Puerto Rico,
the Virgin Islands, Guam, a Federal Land Bank, a Federal Home Loan Bank, a
Federal Intermediate Bank, Farm Home Administration, Export-Import Bank of the
United States, Tennessee Valley Authority, Banks for Cooperatives, U.S. Treasury
bonds, notes, bills, certificates and savings bonds, Production Credit
Association, Student Loan Marketing Association, Commodity Credit Corporation,
Federal Deposit Insurance Corporation, Federal Farm Credit Bank, Federal
Financing Bank, Federal Savings and Loan Insurance Corporation, General
Insurance Fund, United States Postal Service, Resolution Funding Corporation, or
Financing Corporation (chartered by the Federal Housing Finance Board under 12
U.S.C. ss.1441) is considered to be interest from direct obligations of the
United States or its possessions and is tax-exempt for North Carolina income tax
purposes.
In general, a shareholder of the NORTH CAROLINA FUND who is subject to
North Carolina income tax will recognize capital gains for North Carolina income
tax purposes to the same extent a shareholder would for Federal income tax
purposes when the NORTH CAROLINA FUND makes a capital gain distribution or a
shareholder redeems or exchanges shares, except that distributions of gains are
exempt from North Carolina income tax to the extent attributable to the
disposition of certain obligations issued before July 1, 1995 by the State of
North Carolina, its political subdivisions, or their respective agencies.
OHIO. In the opinion of Squire, Sanders & Dempsey L.L.P., Ohio tax counsel
to MULTI-STATE INSURED TAX FREE Fund, provided that the OHIO FUND continues to
qualify as a RIC for Federal income tax purposes and that at all times at least
50 percent of the value of the total assets of the OHIO FUND consists of
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof or agencies or instrumentalities of the State or its political
subdivisions ("Ohio Obligations") or similar obligations of other states or
their subdivisions, shareholders of the OHIO FUND who are otherwise subject to
the Ohio personal income tax, or municipal or school district income taxes in
Ohio will not be subject to such taxes on distributions with respect to shares
of the OHIO FUND to the extent that such distributions are properly attributable
to (1) interest on and profits made on the sale, exchange or other disposition
of Ohio Obligations or (2) interest on obligations of the United States or its
territories or possessions or of any authority, commission or instrumentality of
the United States that is exempt from state income taxes under the laws of the
United States (e.g., obligations issued by the Governments of Puerto Rico, the
Virgin Islands and Guam and their authorities and municipalities) ("Federal and
Possessions Obligations").
It is further the opinion of Squire, Sanders & Dempsey L.L.P. that,
subject to the proviso stated in the previous paragraph, shareholders who are
otherwise subject to the Ohio corporation franchise tax will not be required to
include distributions with respect to shares of the OHIO FUND in their tax base
for purposes of computing such tax on the net income basis to the extent that
such distributions are (1) properly attributable to interest on or profits made
on the sale, exchange or other disposition of Ohio Obligations, (2)
exempt-interest dividends for Federal income tax purposes, or (3) properly
attributable to interest on Federal and Possessions Obligations, provided, in
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the case of interest Possessions Obligations, such interest is excluded from
gross income for federal income tax purposes. However, shares of the OHIO FUND
will be includable in a shareholder's tax base for purposes of computing the
Ohio corporation franchise tax on the net worth basis. Corporate shareholders
that are subject to Ohio municipal income tax will not be subject to such tax on
distributions received from the OHIO FUND to the extent such distributions
consist of interest on or gain from the sale, exchange, or other disposition of
Ohio Obligations.
Except when acceptable investments are unavailable to the OHIO FUND, it
will maintain at least 80% of the value of its net assets in obligations that
are exempt from Federal income tax and that are exempt from Ohio personal income
tax and the net income base of the Ohio corporation franchise tax.
OREGON. In the opinion of Weiss, Jensen, Ellis & Howard, Oregon tax
counsel to Multi-State Insured Tax Free Fund, shareholders of the OREGON FUND
who are subject to the Oregon personal income tax will not be required to
include in their Oregon personal income distributions from the OREGON FUND to
the extent that (1) such distributions qualify as exempt-interest dividends of a
RIC under section 852(b)(5) of the Code that are attributable to interest from
tax-exempt obligations of the State of Oregon or its political subdivisions or
authorities; (2) such distributions are attributable to interest from
obligations issued by the territories of Guam, Puerto Rico, Samoa, Virgin
Islands, or their authorities, or the Commonwealth of Puerto Rico or its
authority; or (3) such distributions are attributable to interest from
obligations issued by the U.S. Government, its agencies and instrumentalities
and are exempted from state income tax under the laws of the United States. To
the extent that distributions from the OREGON FUND are attributable to sources
other than those described in the preceding sentence, such distributions will
not be exempt from the Oregon personal income tax. Also, distributions that
qualify as capital gain dividends under section 852(b)(3)(C) of the Code and
that are includable in Federal gross income will be includable as capital gains
in Oregon income of a shareholder.
Interest on indebtedness incurred (directly or indirectly) by a
shareholder of the OREGON FUND to purchase or carry shares of the OREGON FUND
will not be deductible for purposes of the Oregon personal income tax.
Shareholders of the OREGON FUND that are otherwise subject to the Oregon
corporate excise tax must include in income distributions with respect to shares
of the OREGON FUND.
PENNSYLVANIA. In the opinion of Kirkpatrick & Lockhart LLP, Pennsylvnaia
tax counsel to Multi-State Insured Tax Free Fund, Individual shareholders of the
PENNSYLVANIA FUND who are otherwise subject to the Pennsylvania personal income
tax will not be subject to that tax on distributions of interest by the
PENNSYLVANIA FUND that are attributable to obligations issued by Pennsylvania,
public authorities, commissions, boards or agencies created by Pennsylvania,
political subdivisions of Pennsylvania or public authorities created by any such
political subdivision or obligations of the United States and certain qualifying
agencies, instrumentalities, territories and possessions of the United States
("Exempt Obligations"). Distributions of gains on Exempt Obligations will be
subject to Pennsylvania personal income taxes in the hands of shareholders who
are otherwise subject to the Pennsylvania personal income tax. Distributions
attributable to most other sources will not be exempt from Pennsylvania personal
income tax.
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Shares of the PENNSYLVANIA FUND that are held by individual shareholders
who are Pennsylvania residents will be exempt from the Pennsylvania county
personal property tax to the extent that the PENNSYLVANIA FUNDS portfolio
consists of Exempt Obligations on the annual assessment date. Non-residents of
the Commonwealth of Pennsylvania are not subject to this tax. Individual
shareholders who are residents of Allegheny County, the City of Pittsburgh or
the School District of Pittsburgh, have no obligation to pay a personal property
tax. Corporations are not subject to Pennsylvania personal property taxes. For
shareholders who are residents of the City of Philadelphia, distributions of
interest derived from Exempt Obligations are not taxable for purposes of the
Philadelphia School District investment net income tax provided that the
PENNSYLVANIA FUND reports to its investors the percentage of Exempt Obligations
held by it for the year. The PENNSYLVANIA FUND will report such percentage to
its shareholders.
The Pennsylvania Department of Revenue takes the position that a RIC is a
separate entity under Pennsylvania corporate net income tax law and, therefore,
the characteristics of income received by such company, to the extent that such
income would otherwise be includable in Pennsylvania corporate taxable income,
will not flow through to a corporate shareholder. However, because the
Pennsylvania corporate net income tax is based upon Federal taxable income,
items excluded from Federal taxable income and not required to be added to
taxable income by Pennsylvania law will also be excluded from Pennsylvania
corporate taxable income. Accordingly, "exempt-interest dividends," which are
not required to be so added, are also excluded from the Pennsylvania corporate
taxable income. Gains on Exempt Obligations are, however, subject to the
corporate net income tax in the hands of a corporate shareholder. The
Pennsylvania Department of Revenue also takes the position that shares of funds
similar to the PENNSYLVANIA FUND are not considered exempt assets of a
corporation for the purpose of determining its capital stock value subject to
the Pennsylvania capital stock and franchise taxes.
Except when acceptable investments are unavailable to the PENNSYLVANIA
FUND, at least 80% of the value of its net assets will be maintained in debt
obligations of the Commonwealth of Pennsylvania, its localities and political
subdivisions, which are exempt from Federal income tax and Pennsylvania personal
income tax and personal property taxes.
VIRGINIA. In the opinion of Sands, Andersen, Marks & Miller, a
Professional Corporation, Virginia tax counsel to Multi-State Insured Tax Free
Fund, interest on exempt obligations in the Virginia Fund passed through to
shareholders in qualifying distributions will retain its exempt status in the
hands of the shareholders. Accordingly, individual shareholders of the VIRGINIA
FUND subject to Virginia personal income tax will not be required to include in
their gross income, for Virginia personal income tax purposes, distributions
made by the VIRGINIA FUND that are exclusively (1) both tax-exempt for Federal
income tax purposes and derived from interest on obligations of the Commonwealth
of Virginia or any of its political subdivisions, or (2) without regard to any
exemption from Federal income tax, are derived from interest in certain
obligations for which a Virginia income tax exemption is independently provided,
including, among others, obligations issued under the Virginia Public Finance
Act, certain revenue bonds for transportation facilities, and obligations issued
by the Virginia Housing Development Authority, the Virginia Education Loan
Authority, and industrial development authorities created pursuant to the
Virginia Industrial Development and Revenue Bond Act. If a distribution includes
both taxable and tax-exempt interest, the entire distribution is included in the
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gross income of the shareholder for Virginia personal income tax purposes unless
the exempt portion is designated with reasonable certainty. Counsel has been
advised that, in the event any such commingled distributions are made by the
Virginia Fund, the Virginia Fund intends to provide such designation in a manner
acceptable to the Virginia Department of Taxation, to shareholders of the
Virginia Fund.
In general, an individual shareholder of the VIRGINIA FUND who is a
Virginia resident will recognize capital gains for Virginia income tax purposes
to the same extent that he or she would for Federal income tax purposes when the
VIRGINIA FUND makes a capital gains distribution or the shareholder redeems or
sells shares. In certain instances, however, legislation creating the entity
issuing debt obligations expressly exempts profit on the sale of the obligation
from Virginia income taxation.
Interest on indebtedness incurred (directly or indirectly) by shareholders
to purchase or carry shares of the VIRGINIA FUND will not be deductible for
Virginia income tax purposes.
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)^(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
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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, 1998 are set forth in the tables
below:
AVERAGE ANNUAL TOTAL RETURN1,2
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
-------- ---------- --------- ------------
Class A Class B Class A Class B Class A Class B Class A3 Class B4
INSURED TAX EXEMPT FUND ____% ____% ____% N/A ____% N/A ____% ____%
INSURED INTERMEDIATE
TAX EXEMPT FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW YORK INSURED ____ ____ ____ N/A ____ N/A ____ ____
ARIZONA FUND ____ ____ ____ N/A N/A N/A ____ ____
CALIFORNIA FUND ____ ____ ____ N/A ____ N/A ____ ____
COLORADO FUND ____ ____ ____ N/A N/A N/A ____ ____
CONNECTICUT FUND ____ ____ ____ N/A N/A N/A ____ ____
FLORIDA FUND ____ ____ ____ N/A N/A N/A ____ ____
GEORGIA FUND ____ ____ ____ N/A N/A N/A ____ ____
MARYLAND FUND ____ ____ ____ N/A N/A N/A ____ ____
MASSACHUSETTS FUND ____ ____ ____ N/A ____ N/A ____ ____
MICHIGAN FUND ____ ____ ____ N/A ____ N/A ____ ____
MINNESOTA FUND ____ ____ ____ N/A ____ N/A ____ ____
MISSOURI FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW JERSEY FUND ____ ____ ____ N/A ____ N/A ____ ____
NORTH CAROLINA FUND ____ ____ ____ N/A N/A N/A ____ ____
OHIO FUND ____ ____ ____ N/A ____ N/A ____ ____
OREGON FUND ____ ____ ____ N/A N/A N/A ____ ____
PENNSYLVANIA FUND ____ ____ ____ N/A N/A N/A ____ ____
VIRGINIA FUND ____ ____ ____ N/A N/A N/A ____ ____
</TABLE>
- -----------------------
1 All average annual total return figures reflect the maximum sales charge of
6.25%. Prior to July 1, 1993, the maximum sales charge was 6.90%. Prior to
January 29, 1989 the maximum sales charge was 7.25%. Certain expenses of the
Funds have been waived or reimbursed from commencement of operations through
December 31, 1998. Accordingly, return figures are higher than they would
have been had such expenses not been waived or reimbursed.
2 Certain expenses of the Funds have been waived from commencement of
operations through December 31, 1998. Accordingly, return figures are higher
than they would have been had such expenses not been waived.
3 The inception dates for the Funds are as follows: INSURED INTERMEDIATE TAX
EXEMPT FUND -- November 22, 1993; INSURED TAX EXEMPT FUND -- ____; NEW YORK
INSURED TAX FREE FUND -- ____; ARIZONA FUND -- November 1, 1990; CALIFORNIA
FUND-- February 23, 1987; COLORADO FUND, MISSOURI FUND, NORTH CAROLINA FUND
and OREGON FUND -- May 4, 1992; CONNECTICUT FUND and MARYLAND FUND --
October 8, 1990; FLORIDA FUND -- October 5, 1990; GEORGIA FUND -- May 1,
1992; MASSACHUSETTS FUND, MICHIGAN FUND, MINNESOTA FUND and OHIO FUND --
January 1, 1987; NEW JERSEY FUND -- September 13, 1988; PENNSYLVANIA FUND
and VIRGINIA FUND -- April 30, 1990.
4 The commencement of offering of Class B shares is January 12, 1995.
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TOTAL RETURN1,2
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
-------- ---------- --------- ------------
Class A Class B Class A Class B Class A Class B Class A2 Class B3
------- ------- ------- ------- ------- ------- -------- --------
INSURED TAX EXEMPT FUND ____% ____% ____% N/A ____% N/A ____% ____%
INSURED INTERMEDIATE
TAX EXEMPT FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW YORK INSURED ____ ____ ____ N/A ____ N/A ____ ____
ARIZONA FUND ____ ____ ____ N/A N/A N/A ____ ____
CALIFORNIA FUND ____ ____ ____ N/A ____ N/A ____ ____
COLORADO FUND ____ ____ ____ N/A N/A N/A ____ ____
CONNECTICUT FUND ____ ____ ____ N/A N/A N/A ____ ____
FLORIDA FUND ____ ____ ____ N/A N/A N/A ____ ____
GEORGIA FUND ____ ____ ____ N/A N/A N/A ____ ____
MARYLAND FUND ____ ____ ____ N/A N/A N/A ____ ____
MASSACHUSETTS FUND ____ ____ ____ N/A ____ N/A ____ ____
MICHIGAN FUND ____ ____ ____ N/A ____ N/A ____ ____
MINNESOTA FUND ____ ____ ____ N/A ____ N/A ____ ____
MISSOURI FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW JERSEY FUND ____ ____ ____ N/A ____ N/A ____ ____
NORTH CAROLINA FUND ____ ____ ____ N/A N/A N/A ____ ____
OHIO FUND ____ ____ ____ N/A ____ N/A ____ ____
OREGON FUND ____ ____ ____ N/A N/A N/A ____ ____
PENNSYLVANIA FUND ____ ____ ____ N/A ____ N/A ____ ____
VIRGINIA FUND ____ ____ ____ N/A ____ N/A ____ ____
</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 total return and total return
computed at net asset value for the periods ended December 31, 1998 are set
forth in the tables below.
- -----------------------
1 All average annual total return figures reflect the maximum sales charge of
6.25%. Prior to July 1, 1993, the maximum sales charge was 6.90%. Prior to
January 29, 1989 the maximum sales charge was 7.25%. Certain expenses of the
Funds have been waived or reimbursed from commencement of operations through
December 31, 1998(?). Accordingly, return figures are higher than they would
have been had such expenses not been waived or reimbursed.
2 Certain expenses of the funds have been waived from commencement of
operations through December 31, 1998. Accordingly, return figures are higher
than they would have been had such expenses not been waived.
3 The inception dates for the Funds are as follows: INSURED INTERMEDIATE TAX
EXEMPT FUND -- November 22, 1993; INSURED TAX EXEMPT FUND -- _____; NEW YORK
INSURED TAX FREE FUND -- _____; ARIZONA FUND -- November 1, 1990; CALIFORNIA
FUND -- February 23, 1987; COLORADO FUND, MISSOURI FUND, NORTH CAROLINA FUND
and OREGON FUND -- May 4, 1992; CONNECTICUT FUND and MARYLAND FUND --
October 8, 1990; FLORIDA FUND -- October 5, 1990; GEORGIA FUND -- May 1,
1992; MASSACHUSETTS FUND, MICHIGAN FUND, MINNESOTA FUND and OHIO FUND --
January 1, 1987; NEW JERSEY FUND -- September 13, 1988; PENNSYLVANIA FUND
and VIRGINIA FUND -- April 30, 1990.
4 The commencement of offering of Class B shares is January 12, 1995.
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<PAGE>
AVERAGE ANNUAL TOTAL RETURN1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
-------- ---------- --------- ------------
Class A Class B Class A Class B Class A Class B Class A2 Class B3
------- ------- ------- ------- ------- ------- -------- --------
INSURED TAX EXEMPT FUND ____% ____% ____% N/A ____% N/A ____% ____%
INSURED INTERMEDIATE
TAX EXEMPT FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW YORK INSURED ____ ____ ____ N/A ____ N/A ____ ____
ARIZONA FUND ____ ____ ____ N/A N/A N/A ____ ____
CALIFORNIA FUND ____ ____ ____ N/A ____ N/A ____ ____
COLORADO FUND ____ ____ ____ N/A N/A N/A ____ ____
CONNECTICUT FUND ____ ____ ____ N/A N/A N/A ____ ____
FLORIDA FUND ____ ____ ____ N/A N/A N/A ____ ____
GEORGIA FUND ____ ____ ____ N/A N/A N/A ____ ____
MARYLAND FUND ____ ____ ____ N/A N/A N/A ____ ____
MASSACHUSETTS FUND ____ ____ ____ N/A ____ N/A ____ ____
MICHIGAN FUND ____ ____ ____ N/A ____ N/A ____ ____
MINNESOTA FUND ____ ____ ____ N/A ____ N/A ____ ____
MISSOURI FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW JERSEY FUND ____ ____ ____ N/A ____ N/A ____ ____
NORTH CAROLINA FUND ____ ____ ____ N/A N/A N/A ____ ____
OHIO FUND ____ ____ ____ N/A ____ N/A ____ ____
OREGON FUND ____ ____ ____ N/A N/A N/A ____ ____
PENNSYLVANIA FUND ____ ____ ____ N/A N/A N/A ____ ____
VIRGINIA FUND ____ ____ ____ N/A N/A N/A ____ ____
</TABLE>
- -----------------------
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through December 31, 1998. Accordingly, return
figures are higher than they would have been had such expenses not been
waived or reimbursed.
2 The inception dates for the Funds are as follows: INSURED INTERMEDIATE TAX
EXEMPT FUND -- November 22, 1993; INSURED TAX EXEMPT FUND _____; NEW YORK
INSURED TAX FREE FUND -- _____; ARIZONA FUND -- November 1, 1990; CALIFORNIA
FUND -- February 23, 1987; COLORADO FUND, MISSOURI FUND, NORTH CAROLINA FUND
and OREGON FUND -- May 4, 1992; CONNECTICUT FUND and MARYLAND FUND --
October 8, 1990; FLORIDA FUND -- October 5, 1990; GEORGIA FUND -- May 1,
1992; MASSACHUSETTS FUND, MICHIGAN FUND, MINNESOTA FUND and OHIO FUND --
January 1, 1987; NEW JERSEY FUND -- September 13, 1988; PENNSYLVANIA FUND
and VIRGINIA FUND -- April 30, 1990.
3 The commencement of offering of Class B shares is January 12, 1995.
114
<PAGE>
TOTAL RETURN1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
-------- ---------- --------- ------------
Class A Class B Class A Class B Class A Class B Class A2 Class B3
------- ------- ------- ------- ------- ------- -------- --------
INSURED TAX EXEMPT FUND ____% ____% ____% N/A ____% N/A ____% ____%
INSURED INTERMEDIATE
TAX EXEMPT FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW YORK INSURED ____ ____ ____ N/A ____ N/A ____ ____
ARIZONA FUND ____ ____ ____ N/A N/A N/A ____ ____
CALIFORNIA FUND ____ ____ ____ N/A ____ N/A ____ ____
COLORADO FUND ____ ____ ____ N/A N/A N/A ____ ____
CONNECTICUT FUND ____ ____ ____ N/A N/A N/A ____ ____
FLORIDA FUND ____ ____ ____ N/A N/A N/A ____ ____
GEORGIA FUND ____ ____ ____ N/A N/A N/A ____ ____
MARYLAND FUND ____ ____ ____ N/A N/A N/A ____ ____
MASSACHUSETTS FUND ____ ____ ____ N/A ____ N/A ____ ____
MICHIGAN FUND ____ ____ ____ N/A ____ N/A ____ ____
MINNESOTA FUND ____ ____ ____ N/A ____ N/A ____ ____
MISSOURI FUND ____ ____ ____ N/A N/A N/A ____ ____
NEW JERSEY FUND ____ ____ ____ N/A ____ N/A ____ ____
NORTH CAROLINA FUND ____ ____ ____ N/A N/A N/A ____ ____
OHIO FUND ____ ____ ____ N/A ____ N/A ____ ____
OREGON FUND ____ ____ ____ N/A N/A N/A ____ ____
PENNSYLVANIA FUND ____ ____ ____ N/A N/A N/A ____ ____
VIRGINIA FUND ____ ____ ____ N/A N/A N/A ____ ____
</TABLE>
- -----------------------
1 Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through December 31, 1998. Accordingly, return
figures are higher than they would have been had such expenses not been
waived or reimbursed.
2 The inception dates for the Funds are as follows: INSURED INTERMEDIATE TAX
EXEMPT FUND -- November 22, 1993; INSURED TAX EXEMPT FUND -- _____; NEW YORK
INSURED TAX FREE FUND -- _____; ARIZONA FUND -- November 1, 1990; CALIFORNIA
FUND -- February 23, 1987; COLORADO FUND, MISSOURI FUND, NORTH CAROLINA FUND
and OREGON FUND -- May 4, 1992; CONNECTICUT FUND and MARYLAND FUND --
October 8, 1990; FLORIDA FUND -- October 5, 1990; GEORGIA FUND -- May 1,
1992; MASSACHUSETTS FUND, MICHIGAN FUND, MINNESOTA FUND and OHIO FUND --
January 1, 1987; NEW JERSEY FUND -- September 13, 1988; PENNSYLVANIA FUND
and VIRGINIA FUND -- April 30, 1990.
3 The commencement of offering of Class B shares is January 12, 1995.
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.
115
<PAGE>
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.
To calculate a taxable bond yield which is equivalent to a tax-exempt bond
yield (for Federal tax purposes), shareholders may use the following formula:
Tax Free Yield
-------------- = Taxable Equivalent Yield
1 - Your Tax Bracket
To calculate a taxable bond yield which is equivalent to a tax-exempt bond
yield (for state and Federal tax purposes), shareholders may use the following
formula:
Tax Free Yield
-------------- = Taxable Equivalent Yield
1 - [[(1-Your Federal Tax Bracket)
x State Rate]
+ Your Federal Tax Bracket]
The yield and tax-equivalent yield for INSURED TAX EXEMPT FUND Class A
shares for the thirty day period ended December 31, 1998 (assuming a Federal tax
rate of 28%) was ____% and ____%, respectively. The yield and tax-equivalent
yield for INSURED TAX EXEMPT FUND Class B shares for the same period (assuming a
Federal tax rate of 28%) was ____% and ____%, respectively. The yield and
tax-equivalent yield (assuming a Federal tax rate of 28%) for INSURED
INTERMEDIATE TAX EXEMPT FUND Class A shares for the thirty days ended December
31, 1998 was ____% and ____%, respectively. The yield and tax-equivalent yield
for INSURED INTERMEDIATE TAX EXEMPT FUND Class B shares for the same period
(assuming a Federal tax rate of 28%) was ____% and ____%, respectively. The
maximum Federal tax rate during this period was 39.6%. During this period,
certain expenses of INSURED INTERMEDIATE TAX EXEMPT 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 yield
and tax-equivalent yield of NEW YORK INSURED TAX FREE FUND and each Single State
Fund for the thirty days ended December 31, 1998 (assuming a Federal tax rate of
28% as well as the maximum rate for the appropriate state) is shown below.
During this period, certain expenses of these Funds have been waived or
reimbursed. Accordingly, yield and tax-exempt yield figures are higher than they
would have been had such expenses not been waived or reimbursed. During this
period, the maximum Federal tax rate was 39.6%.
116
<PAGE>
YIELD TAX-EQUIVALENT YIELD
--------------------- --------------------
Class A Class B Class A Class B
Shares Shares Shares Shares
------- ------- ------- -------
New York Insured Tax
Free Fund ____% ____% ____% ____%
Arizona Fund ____ ____ ____ ____
California Fund ____ ____ ____ ____
Colorado Fund ____ ____ ____ ____
Connecticut Fund ____ ____ ____ ____
Florida Fund ____ ____ ____ ____
Georgia Fund ____ ____ ____ ____
Maryland Fund ____ ____ ____ ____
Massachusetts Fund ____ ____ ____ ____
Michigan Fund ____ ____ ____ ____
Minnesota Fund ____ ____ ____ ____
Missouri Fund ____ ____ ____ ____
New Jersey Fund ____ ____ ____ ____
North Carolina Fund ____ ____ ____ ____
Ohio Fund ____ ____ ____ ____
Oregon Fund ____ ____ ____ ____
Pennsylvania Fund ____ ____ ____ ____
Virginia Fund ____ ____ ____ ____
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 that 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, 1998 for Class A shares of INSURED INTERMEDIATE TAX EXEMPT FUND and INSURED
TAX EXEMPT FUND calculated using the offering price was ____% and ____%,
respectively. The distribution rate for the twelve month period ended December
31, 1998 for Class A shares of INSURED INTERMEDIATE TAX EXEMPT FUND and INSURED
TAX EXEMPT FUND calculated at net asset value was ____% and ____%, respectively.
The distribution rate for the twelve-month period ended December 31, 1998 for
Class B shares of INSURED INTERMEDIATE TAX EXEMPT FUND and INSURED TAX EXEMPT
FUND calculated using net asset value was ____% and ____%, respectively. During
this period certain expenses of INSURED INTERMEDIATE TAX EXEMPT FUND were
waived. Accordingly, the distribution rates are higher than they would have been
had such expenses not been waived. The distribution rate for the Class A shares
of NEW YORK INSURED TAX FREE FUND and each Single State Fund for the
twelve-month period ended December 31, 1998 calculated using both offering price
and net asset value is shown below. The distribution rate for each Fund's Class
B shares for the twelve-month period ended December 31, 1998 calculated using
net asset value is also shown below. During these periods certain expenses of
MULTI-STATE INSURED TAX FREE FUND were waived or reimbursed. Accordingly,
distribution rates are higher than they would have been if such expenses had not
been waived or reimbursed.
117
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A SHARES
DISTRIBUTION RATE CALCULATED USING CLASS B SHARES
---------------------------------- DISTRIBUTION RATE CALCULATED
OFFERING PRICE NET ASSET VALUE USING NET ASSET VALUE
-------------- --------------- ---------------------
NEW YORK INSURED ____% ____% ___%
ARIZONA FUND ____ ____ ____
CALIFORNIA FUND ____ ____ ____
COLORADO FUND ____ ____ ____
CONNECTICUT FUND ____ ____ ____
FLORIDA FUND ____ ____ ____
GEORGIA FUND ____ ____ ____
MARYLAND FUND ____ ____ ____
MASSACHUSETTS FUND ____ ____ ____
MICHIGAN FUND ____ ____ ____
MINNESOTA FUND ____ ____ ____
MISSOURI FUND ____ ____ ____
NEW JERSEY FUND ____ ____ ____
NORTH CAROLINA FUND ____ ____ ____
OHIO FUND ____ ____ ____
OREGON FUND ____ ____ ____
PENNSYLVANIA FUND ____ ____ ____
VIRGINIA FUND ____ ____ ____
</TABLE>
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. Examples of typical graphs and charts depicting such
historical performance, compounding and hypothetical returns are included in
Appendix D.
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, 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 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
118
<PAGE>
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.
GENERAL INFORMATION
INSURED TAX EXEMPT FUND and NEW YORK INSURED TAX FREE FUND were
incorporated in the state of Maryland on ________ and _________, respectively.
INSURED TAX EXEMPT FUND's authorized capital stock consists of ___ million
shares of common stock, all of one series, with a par value per share of $0.01.
NEW YORK INSURED TAX FREE FUND's authorized capital stock consists of _________
shares of common stock, all of one series, with a par value per share of $__.
Each Fund is authorized to issue shares of common stock in such separate and
distinct series and classes of series as the particular Fund's Board of
Directors shall from to time establish. The shares of common stock of each Fund
are presently divided into 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 Funds do not hold annual shareholder meetings. If requested to do so
by the holders of at least 10% of a Fund's outstanding shares, the Fund's Board
of Directors will call a special meeting of shareholders for any purpose,
including the removal of Directors. Each share of each Fund has equal voting
rights except as noted above.
SERIES FUND and MULTI-STATE INSURED TAX FREE FUND were organized as
Massachusetts business trusts on September 23, 1988 and ____________,
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<PAGE>
respectively. Each 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 its 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 and the shares of beneficial interest of
MULTI-STATE INSURED TAX FREE FUND are divided into seventeen separate and
distinct series, each having two classes, designated Class A shares and Class B
shares. Neither Fund holds annual shareholder meetings. If requested to do so by
the holders of at least 10% of a Fund's outstanding shares, the 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.
AUDITS AND REPORTS. The accounts of the Funds are audited twice a year by
__________________________________. Shareholders of each Fund receive
semi-annual and annual reports, including audited financial statements, and a
list of securities owned.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusettes Avenue,
N.W., Washington, D.C. 20036, serves as counsel to the Funds.
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. Efforts to locate a shareholder will be conducted in accordance with
SEC rules and regulations prior to escheatment of funds to the appropriate state
treasury. The Transfer Agent may deduct the costs of its efforts to locate a
shareholder from the shareholder's account. These costs may include a percentage
of the account if a search company charges such a fee in exchange for its
location services. The Transfer Agent is not responsible for any fees that
states and/or their representatives may charge for processing the return of
funds to investors whose funds have been escheated. The Transfer Agent's
telephone number is 1-800-423-4026.
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<PAGE>
5% SHAREHOLDERS. As of April 1, 1999, the following owned of record or
beneficially 5% or more of the outstanding Class A shares of each of the Funds
listed below:
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
INSURED INTERMEDIATE TAX
EXEMPT FUND
INSURED INTERMEDIATE TAX
EXEMPT FUND
COLORADO FUND
CONNECTICUT FUND
GEORGIA FUND
MARYLAND FUND
MISSOURI FUND
As of April 1, 1999 the following owned of record or beneficially 5% or
more of the outstanding Class B shares of each of the Funds listed below:
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
INSURED INTERMEDIATE TAX
EXEMPT FUND
121
<PAGE>
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
INSURED TAX EXEMPT FUND
NEW YORK INSURED TAX FREE
FUND
ARIZONA FUND
CALIFORNIA FUND
COLORADO FUND
CONNECTICUT FUND
122
<PAGE>
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
FLORIDA FUND
GEORGIA FUND
MARYLAND FUND
MASSACHUSETTS FUND
123
<PAGE>
FUND % OF SHARES SHAREHOLDER
- ---- ----------- -----------
MICHIGAN FUND
MISSOURI FUND
NEW JERSEY FUND
NORTH CAROLINA FUND
OHIO FUND
OREGON FUND
PENNSYLVANIA FUND
VIRGINIA FUND
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<PAGE>
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 Funds. 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 provide
duplicate statements and transactions confirmations to a compliance officer; and
(d) are prohibited from purchasing securities of initial public offerings.
SHAREHOLDER LIABILITY. Under Massachusetts law, shareholders of Series
Fund and Multi-State Insured Tax Free Fund, both of which are Massachusetts
business trusts, may, under certain circumstances, be held personally liable for
the obligations of the Funds. The Declarations of Trust of each Fund, however,
contain express disclaimers of shareholder liability for acts or obligations of
the Funds and require that notice of such disclaimers be given in each
agreement, obligation, or instrument entered into or executed by either of the
Funds or its Trustees. The Declarations of Trust provides for indemnification
out of the property of each Fund of any shareholder held personally liable for
the obligations of the Fund. The Declarations of Trust also provides that each
Fund shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the 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 either 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 Declarations of Trust further provides that Trustees will
not be liable for errors of judgment or mistakes of fact or law, but nothing in
the Declarations 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. Each Fund may have an obligation to indemnify its Trustees and officers
with respect to litigation.
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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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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<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.
129
<PAGE>
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.
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
PRIME-1 Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial
markets and assured sources of alternate liquidity.
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<PAGE>
APPENDIX D
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference. This assumes a hypothetical investment of $10,000.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate. this assumes monthly installment with a constant hypothetical
return rate of 8%.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
131
<PAGE>
[The following table is represented as a graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a difference of
$331,215.
25 years old .............. 573,443
35 years old .............. 242,228
45 years old .............. 103,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
132
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1996.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
1996 .................. 6,000.00
The performance of the Dow Jones Industrial Average is not indicative of
the performance of any particular investment. It does not take into account fees
and expenses associated with purchasing mutual fund shares. Individuals cannot
invest directly in any index. Please note that past performance does not
guarantee future results.
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<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1996 ....................... 20.16135
1996 ....................... 100.00
1997 ....................... 103.00
1998 ....................... 106.00
1999 ....................... 109.00
2000 ....................... 113.00
2001 ....................... 116.00
2002 ....................... 119.00
2003 ....................... 123.00
2004 ....................... 127.00
2005 ....................... 130.00
2006 ....................... 134.00
2007 ....................... 138.00
2008 ....................... 143.00
2009 ....................... 147.00
2010 ....................... 151.00
2011 ....................... 156.00
2012 ....................... 160.00
2013 ....................... 165.00
2014 ....................... 170.00
2015 ....................... 175.00
2016 ....................... 181.00
2017 ....................... 186.00
2018 ....................... 192.00
2019 ....................... 197.00
2020 ....................... 203.00
2021 ....................... 209.00
2022 ....................... 216.00
2023 ....................... 222.00
2024 ....................... 229.00
2025 ....................... 236.00
2026 ....................... 243.00
Inflation erodes your buying power. $100 in 1966, could purchase five times the
goods and service as in 1996 ($100 vs. $20).* Projecting inflation at 3%, goods
and services costing $100 today will cost $243 in the year 2026.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
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<PAGE>
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1996*
Total Number of Percentage of
Number of Positive Positive
Rolling Period Periods Periods Periods
-------------- ------- ------- -------
1-Year 71 51 72%
5-Year 67 60 90%
10-Year 62 60 97%
15-Year 57 57 100%
20-Year 52 52 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. **
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Large Company Stocks .......... 16.79
The following chart illustrates for the period shown that long-term corporate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Long-Term Corp. bonds ......... 13.66
* Source: Used with permission. (c)1997 Ibbotson Associates, Inc. All rights
reserved. [Certain provisions of this work were derived from copyrighted
works of Roger G. Ibbotson and Rex Sinquefield.]
** Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, returns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
135
<PAGE>
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal Tax Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
136
<PAGE>
[The following table is represented as a graph in the printed document.]
The following graph illustrates how income has affected the gains from stock
investments since 1965.
S&P 500 Dividends Reinvested S&P 500 Principal Only
12/31/64 10,000 10,000
12/31/65 11,269 10,906
12/31/66 10,115 9,478
12/31/67 12,550 11,383
12/31/68 13,948 12,255
12/31/69 12,795 10,863
12/31/70 13,299 10,873
12/31/71 15,200 12,046
12/31/72 18,088 13,929
12/31/73 15,431 11,510
12/31/74 11,346 8,090
12/31/75 15,570 10,642
12/31/76 19,296 12,680
12/31/77 17,915 11,221
12/31/78 19,092 11,340
12/31/79 22,645 12,736
12/31/80 30,004 16,019
12/31/81 28,528 14,460
12/31/82 34,674 16,595
12/31/83 42,496 19,461
12/31/84 45,161 19,733
12/31/85 59,489 24,930
12/31/86 70,594 28,575
12/31/87 74,301 29,154
12/31/88 86,641 32,769
12/31/89 114,093 41,699
12/31/90 110,549 38,964
12/31/91 144,230 49,214
12/31/92 155,218 51,411
12/31/93 170,863 55,039
12/31/94 173,120 54,191
12/31/95 238,175 72,676
12/31/96 292,863 87,403
11/30/97 383,977 112,732
Source: First Investors Management Company, Inc. Standard & Poor's is a
registered trademark. The S&P 500 is an unmanaged index comprising 500 common
stocks spread across a variety of industries. The total returns represented
above compare the impact of reinvestment of dividends and illustrates past
performance of the index. The performance of any index is not indicative of the
performance of a particular investment and does not take into account the
effects of inflation or the fees and expenses associated with purchasing mutual
fund shares. Individuals cannot invest directly in any index. Mutual fund shares
will fluctuate in value, therefore, the value of your original investment and
your return may vary. Moreover, past performance is no guarantee of future
results.
137
<PAGE>
Financial Statements
as of December 31, 1998
138
<PAGE>
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
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, 1998
electronically filed with the Commission on ________, __, 1999 (Accession
Number: 0000928816-99-0000__).
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, 1998 electronically filed
with the Commission on _____________, (Accession Number: 000104789-99-00__).
First Investors New York Insured Tax Free Fund, Inc. (2-86489) incorporates by
reference the financial statements and report of independent auditors contained
in the Annual Report to shareholders for the fiscal year ended December 31, 1998
electronically filed with the Commission on ____________, 1999 (Accession
Number: 0000928816-99-0000__).
First Investors Multi-State Insured Tax Free Fund (33-4077) incorporates by
reference the financial statements and report of independent auditors contained
in the Annual Report to shareholders for the fiscal year ended December 31, 1998
electronically filed with the Commission on _____________, 1999 (Accession
Number: 0000928816-99-0000__).
139
<PAGE>
FIRST INVESTORS LOGO
Shareholder Manual
A Guide to Your
First Investors
Mutual Fund Account
as of February 19, 1999
<PAGE>
INTRODUCTION
Investing in mutual funds doesn't have to be complicated. In addition to a wide
variety of mutual funds, First Investors offers personalized service. Your
registered representative is available to answer your questions and help you
process your transactions. In the event you wish to process a transaction
directly, the material provided in this easy-to-follow guide tells you how to
contact us and explains our policies and procedures. Please note that there are
special rules for money market funds. Please read this manual completely to gain
a better understanding of how shares are bought, sold, exchanged, and
transferred. In addition, the manual provides you with a description of the
services we offer to simplify investing. The services, privileges and fees
referenced in this manual are subject to change. You should call our Shareholder
Services Department at 1 (800) 423-4026 before initiating any transaction. This
manual must be preceded or accompanied by a First Investors mutual fund
prospectus. For more complete information on any First Investors Fund, including
charges and expenses, refer to the prospectus. Read the prospectus carefully
before you invest or send money.
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
<PAGE>
TABLE OF CONTENTS
HOW TO BUY SHARES
To Open An Account ......................................................... 5
To Open a Retirement Account ............................................... 6
Minimum Initial Investment ................................................. 6
Additional Investments ..................................................... 6
Acceptable Forms of Payment ................................................ 6
Share Classes .............................................................. 6
Share Class Specification .................................................. 7
Class A Shares ............................................................. 7
Sales Charge Waivers & REductions on Class A Shares ........................ 7
Class B Shares ............................................................. 9
How To Pay ................................................................. 10
Wire Transfers ............................................................. 11
Distribution Cross-Investment .............................................. 12
HOW TO SELL SHARES
REDEMPTION OPTIONS ......................................................... 13
Written Redemptions ........................................................ 13
Telephone Redemptions ...................................................... 13
Electronic Funds Transfer .................................................. 13
Systematic Withdrawal Plans ................................................ 14
Expedited Wire Redemptions ................................................. 14
HOW TO EXCHANGE SHARES
Exchange Methods ........................................................... 15
Exchange Conditions ........................................................ 16
Exchanging Funds With.
Automatic Investments or
Systematic Withdrawals ..................................................... 16
WHEN AND HOW ARE FUND SHARES PRICED? ....................................... 17
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED? .... 17
Purchases .................................................................. 17
Redemptions ................................................................ 18
Exchanges .................................................................. 18
Orders Placed Via First Investors Registered Representatives ............... 18
Special Rules for Money Market Funds ....................................... 19
SPECIAL RULES FOR MONEY MARKET ACCOUNTS .................................... 18
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS ................................ 19
SIGNATURE GUARANTEE ARE REQUIRED............................................ 19
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS ..................... 20
Security MEasures .......................................................... 20
Eligibility ................................................................ 20
NON-RETIREMENT ACCOUNTS .................................................... 20
RETIREMENT ACCOUNTS ........................................................ 20
Shareholder Services ....................................................... 21
OTHER SERVICES ............................................................. 22
Reinvestment Privilege ..................................................... 22
Certificate Shares ......................................................... 22
Money Market Fund Draft Checks ............................................. 22
Return Mail ................................................................ 23
Transferring Shares ........................................................ 23
ACCOUNT STATEMENTS
Transaction Confirmation Statements ........................................ 24
Master Account Statements .................................................. 24
Annual and Semi-Annual Reports ............................................. 24
DIVIDENDS AND DISTRIBUTIONS
Dividends and Distributions ................................................ 25
Buying a Dividend .......................................................... 25
TAX FORMS .................................................................. 26
4
<PAGE>
HOW TO BUY SHARES
First Investors offers a wide variety of mutual funds to meet your financial
needs ("FI Funds"). Your First Investors registered representative will review
your financial objectives and risk tolerance, explain our product line and
services, and help you select the right investments. Call our Shareholder
Services Department at 1 (800) 423-4026 for the number of the First Investors
office near you or visit us on-line at www.firstinvestors.com
o TO OPEN AN ACCOUNT
Before investing, you must establish an account with your broker/dealer. At
First Investors Corporation ("FI") you do this by completing and signing a
Master Account Agreement ("MAA"). After you determine the fund(s) you want to
purchase, deliver your completed MAA and your check, made payable to First
Investors Corporation, to your registered representative. New client accounts
must be established through your registered representative. You need to tell us
how you want your shares registered when you open a new Fund account. Please
keep the following information in mind:
- -JOINT ACCOUNTS. For any account with two or more owners, all owners must sign
requests to process transactions. Telephone privileges allow any one of the
owners to process transactions independently.
- -GIFTS AND TRANSFERS TO MINORS. Custodial accounts for a minor may be
established under your state's Uniform Gifts/Transfers to Minors Act. Custodial
accounts are registered under the minor's social security number.
TRUSTS. A trust account may be opened only if you have a valid written trust
document.
- -TRANSFER ON DEATH (TOD). TOD registrations, available on all FI Funds in all
states, allow individual and joint account owners to name one or more
beneficiaries. The ownership of the account automatically passes to the named
beneficiaries in the event of the death of all account owners.
- -DIVIDENDS AND CAPITAL GAINS. Fund distributions will be automatically
reinvested in your account unless you request otherwise.
_______________________________________________________________________________
SOME REGISTRATIONS REQUIRE ADDITIONAL PAPERWORK.
_______________________________________________________________________________
TYPE OF ACCOUNT ADDITIONAL DOCUMENTS REQUIRED
Corporations
Partnership
& Trusts First Investors Certificate of Authority
Transfer On Death First Investors TOD Registration Request Form
(TOD)
Estates Original or Certified Copy of Death Certificate
Certified Copy of Letters Testamentary/Administration
First Investors Executor's Certification &
Indemnification Form
Conservatorships Copy of court document appointing Conservator/Guardian
& Guardianships
_______________________________________________________________________________
5
<PAGE>
oTO OPEN A RETIREMENT ACCOUNT
Fund shares may be purchased for your retirement account by completing the MAA
and the appropriate retirement plan application. First Investors offers
retirement plans for both individuals and employers as follows:
INDIVIDUAL RETIREMENT ACCOUNTS
including Roth, Traditional, and Rollover IRAs.
SIMPLE IRAS offered by employers.
SEP-IRAS (SIMPLIFIED EMPLOYEE PENSION PLANS) for small business owners or people
with income from self-employment, including SARSEP IRAs.
403(B)(7) accounts for employees of eligible tax-exempt organizations such as
schools, hospitals and charitable organizations.
401(K) plans for employers.
MONEY PURCHASE PENSION & PROFIT SHARING plans for sole proprietors.
For more information about these plans call your registered representative or
our Shareholder Services Department at 1 (800) 423-4026.
oMINIMUM INITIAL INVESTMENT
You can open a non-retirement account with a check made payable to First
Investors Corporation for as little as $1,000. The minimum is waived if you open
an account through one of our Automatic Investment Programs (see "How to Pay")
or through a full exchange from another FI Fund. You can open a First Investors
Traditional IRA or Roth IRA with as little as $500 (except for the Cash
Management Fund which requires a $1,000 investment). Other retirement accounts
may have lower initial investment requirements at the Fund's discretion.
oADDITIONAL INVESTMENTS
Once you have established an account, you can add to it through your registered
representative or by sending us a check directly. There is no minimum
requirement on additional purchases into existing fund accounts. Remember to
include your FI Fund account number on your check made payable to First
Investors Corporation. Mail checks to: First Investors Corporation Attn: Dept.
Cp 581 Main Street Woodbridge, NJ 07095-1198
oACCEPTABLE FORMS OF PAYMENT
The following forms of payment are acceptable:
- -checks made payable to First Investors Corporation
- -Money Line electronic funds transfers
- -federal funds wire transfers For your protection, never give your registered
representative cash or a check made payable to your registered representative.
We do not accept:
- -Third party checks
- -Traveler's checks
- -Checks drawn on non-US banks
- -Money orders
- -Cash
oSHARE CLASSES
All FI Funds are available in Class A and Class B shares. Direct purchases into
Class B share money market accounts are not accepted. Class B money market fund
shares may only be acquired through an exchange from another Class B share
account or through Class B share dividend cross-reinvestment.
Each class of shares has its own cost structure. As a result, different classes
6
<PAGE>
of shares in the same fund generally have different prices. Class A shares have
a front-end sales charge. Class B shares have a contingent deferred sales charge
("CDSC"). While both classes have a Rule 12b-1 fee, the fee on Class B shares is
generally higher. The principal advantages of Class A shares are that they have
lower overall expenses, the availability of quantity discounts on sales charges,
and certain account privileges that are not offered on Class B shares. The
principal advantage of Class B shares is that all your money is put to work from
the outset. Your registered representative can help you decide which class of
shares is best for you.
oSHARE CLASS SPECIFICATION
It's very important to specify which class of shares you wish to purchase when
you open a new account. All First Investors account applications have a place to
designate your preference. If you do not specify which class of shares you want
to purchase, Class A shares will automatically be purchased.
oCLASS A SHARES
When you buy Class A shares, you pay the offering price - the net asset value of
the fund plus a front-end sales charge. The front-end sales charge declines with
larger investments.
_______________________________________________________________________________
CLASS A SALES CHARGES
_______________________________________________________________________________
As a % OF AS a % of your
Investment offering price investment
up to $24,999 6.25% 6.67%
$25,000 - $49,999 5.75% 6.10%
$50,000 - $99,999 5.50% 5.82%
$100,000 - $249,999 4.50% 4.71%
$250,000 - $499,999 3.50% 3.63%
$500,000 - $999,999 2.50% 2.56%
Investments of $1 million or more will only be made in Class A shares at the
Fund's net asset value.
Generally, you should consider purchasing Class A shares if you plan to invest
$250,000 or more either initially or over time.
_______________________________________________________________________________
_______________________________________________________________________________
oSALES CHARGE WAIVERS & REDUCTIONS ON CLASS A SHARES
If you qualify for one of the sales charge reductions or waivers, it is very
important to let us know at the time you place your order. Include a written
statement with your check explaining which privilege applies. If you do not
include this statement we cannot guarantee that you will receive the reduction
or waiver.
CLASS A SHARES MAY BE PURCHASED WITHOUT A SALES CHARGE:
1: By an officer, trustee, director, or employee of the Fund, the Fund's adviser
or subadviser, First Investors Corporation, or any affiliates of First Investors
Corporation.
2: By a former officer, trustee, director, or employee of the Fund,
First Investors Corporation, or their affiliates provided the person worked for
the company for at least 5 years and retired or terminated employment in good
standing.
7
<PAGE>
3: By a FI registered representative or an authorized dealer, or by his/her
spouse, child (under age 21) or grandchild (under age 21).
4: When fund distributions are reinvested in Class A shares.
5: When Systematic Withdrawal Plan payments are reinvested in Class A shares.
6: When qualified retirement plan loan repayments are reinvested in Class A
shares.
7: With the liquidation proceeds from a First Investors Life Variable Annuity
Fund A, C, or D contract within one year of the contract's maturity date.
8:When dividends (at least $50 a year) from a First Investors Life Insurance
Company policy are invested into an EXISTING account.
9: When a group qualified plan (401(k) plans, money purchase pension plans,
profit sharing plans and 403(b) plans that are subject to Title I of ERISA) is
reinvesting redemption proceeds from another fund on which a sales charge or
CDSC was paid.
10: With distribution proceeds from a First Investors group qualified plan
account into an IRA.
11: By participant directed group qualified plans with 100 or more eligible
employees or $1,000,000 or more in assets.
12: In amounts of $1 million or more.
13: By individuals under a Letter of Intent or Cumulative Purchase Privilege of
$1 million or more.
FOR ITEMS 9 THROUGH 13 ABOVE: A CDSC OF 1.00% WILL BE
DEDUCTED IF SHARES ARE REDEEMED WITHIN 2 YEARS OF PURCHASE.
SALES CHARGES ON CLASS A SHARES MAY BE REDUCED FOR:
1: Participant directed group qualified retirement plans with 99 or fewer
eligible employees. The initial sales charge is reduced to 3.00% of the offering
price.
2: Certain unit trust holders ("unitholders") who elect to invest the entire
amount of principal, interest, and/or capital gains distributions from their
unit investment trusts in Class A shares. Unitholders of various series of New
York Insured Municipals-Income Trust sponsored by Van Kampen Merrit, Inc.,
unitholders of various series of the Multistate Tax Exempt trust sponsored by
Advest Inc., and unitholders of various series of the Insured Municipal Insured
National Trust, J.C. Bradford & Co. as agent, may buy Class A shares of a FI
Fund with unit trust distributions at the net asset value plus a sales charge of
1.5%. Unitholders of various tax-exempt trusts, other than the New York Trust,
sponsored by Van Kampen Merritt Inc. may buy Class A shares of a FI Fund at the
net asset value plus a sales charge of 1.0%.
Unitholders may make additional purchases, other than those made by unit trust
distributions, at the Fund's regular offering price.
CUMULATIVE PURCHASE PRIVILEGE The Cumulative Purchase Privilege lets you add the
value of all your existing FI Fund accounts (Class A and Class B shares) to the
amount of your next Class A share investment to reach sales charge discount
breakpoints. For example, if the combined value of your existing FI Fund
accounts is $25,000, your next purchase will be eligible for a sales charge
discount at the $25,000 level. Cumulative Purchase discounts are applied to
purchases as indicated in the first column of the Class A Sales Charge table.
All your accounts registered with the same social security number will be linked
together under the Cumulative Purchase Privilege. In addition, your spouse's
accounts and custodial accounts held for minor children residing at your home
can also be linked to your accounts upon request.
8
<PAGE>
- -Conservator accounts are linked to the social security number of the ward, not
the conservator.
- -Sole proprietorship accounts are linked to personal/family accounts only if the
account is registered with a social security number, not an employer
identification number ("EIN").
- -Testamentary trusts and living trusts may be linked to other accounts
registered under the same trust EIN, but not to the personal accounts of the
trustee(s).
- -Estate accounts may only be linked to other accounts registered under the same
EIN of the estate or social security number of the decedent.
- -Church and religious organizations may link accounts to others registered with
the same EIN but not to the personal accounts of any member.
LETTER OF INTENT
A Letter of Intent ("LOI") lets you purchase at a discounted sales charge level
even though you do not yet have sufficient investments to qualify for that
discount level. An LOI is a commitment by you to invest a specified dollar
amount during a 13-month period. The amount you agree to invest determines the
sales charge you pay. Under an LOI, you can reduce the initial sales charge on
Class A share purchases based on the total amount you agree to invest in both
Class A and Class B shares during the 13 month period. Purchases made up to 90
days before the date of the LOI may be included.
Your LOI can be amended in two ways. First, you may file an amended LOI to raise
or lower the LOI amount during the 13 month period. Second, your LOI will be
automatically amended if you invest more than your LOI amount during the
13-month period and qualify for an additional sales charge reduction.
By purchasing under an LOI, you acknowledge and agree to the following:
- -You authorize First Investors to reserve 5% of your total intended investment
in shares held in escrow in your name until the LOI is completed.
- -First Investors is authorized to sell any or all of the escrow shares to
satisfy any additional sales charges owed in the event you do not fulfill the
LOI.
- -Although you may exchange all your shares, you may not sell the reserve shares
held in escrow until you fulfill the LOI or pay the higher sales charge.
oCLASS B SHARES
Class B shares are sold without an initial sales charge, putting all your money
to work for you immediately. If you redeem Class B shares within 6 years of
purchase, a CDSC will be imposed. The CDSC declines from 4% to 0% over a 6-year
period, as shown in the chart below. Class B share money market fund shares are
not sold directly. They can only be acquired through an exchange from another
Class B fund account. Class B shares, and the dividend and distribution shares
they earn, automatically convert to Class A shares after 8 years, reducing
future annual expenses.
Generally, you should consider purchasing Class B shares if you intend to invest
less than $250,000 and you would rather pay higher ongoing expenses than an
initial sales charge.
CLASS B SALES CHARGES
THE CDSC DECLINES OVER TIME AS SHOWN IN THE TABLE BELOW:
________________________________________________________________
Year 1 2 3 4 5 6 7+
________________________________________________________________
CDSC 4% 4% 3% 3% 2% 1% 0%
________________________________________________________________
9
<PAGE>
If shares redeemed are subject to a CDSC, the CDSC will be based on the lesser
of the original purchase price or redemption price. There is no CDSC on shares
acquired through dividend and capital gains reinvestment. We call these "free
shares."
Anytime you sell shares, your shares will be redeemed in the following manner to
ensure that you pay the lowest possible CDSC:
FIRST-Class B shares representing dividends and capital gains that are not
subject to a CDSC.
SECOND-Class B shares held more than six years which are not subject to a CDSC.
THIRD-Class B shares held longest which will result in the lowest CDSC.
For purposes of calculating the CDSC, all purchases made during the calendar
month are deemed to have been made on the first business day of the month at the
average cost of the shares purchased during that period.
SALES CHARGE WAIVERS ON CLASS B SHARES
The CDSC on Class B shares does not apply to:
1: Appreciation on redeemed shares above their original purchase price.
2: Redemptions due to death or disability (as defined in section 72(m)(7) of the
Internal Revenue Code) requested within one year of death. Additional
documentation is required.
3: Distributions from employee benefit plans due to termination or plan
transfer.
4: Redemptions to remove an excess contribution from an IRA or qualified
retirement plan.
5: Distributions upon reaching required minimum age 70 1/2 provided you have
held the shares for at least three years.
6: Annual redemptions of up to 8% of your account's value redeemed by a
Systematic Withdrawal Plan. Free shares not subject to a CDSC will be redeemed
first and will count towards the 8% limit.
7: Shares redeemed from advisory accounts managed by or held by the Fund's
investment advisor or any of its affiliates.
8: Tax-free returns of excess contributions from employee benefit plans.
9: Redemptions of non-retirement shares purchased with proceeds from the sale of
shares of another fund group between April 29, 1996 and June 30, 1996 that did
not pay a sales charge (other than money market fund accounts or retirement plan
accounts).
10: Redemptions by the Fund when the account falls below the minimum.
11: Redemptions to pay account fees.
Include a written statement with your redemption request explaining which
exemption applies. If you do not include this statement we cannot guarantee that
you will receive the waiver.
oHOW TO PAY
You can invest using one or more of the
following options:
- -CHECK:
You can buy shares by writing a check payable to
First Investors Corporation. If you are opening a new fund account, your check
must meet the fund minimum. When making purchases to an existing account,
remember to include your fund account number on your check.
- -AUTOMATIC INVESTMENT PROGRAMS:
We offer several automatic investment programs to simplify
investing.
- -MONEY LINE:
With our Money Line program, you can open an account with as little as $50 a
month or $600 each year in a FI Fund account by transferring funds
electronically from your bank account. You can invest up to $10,000 a month
through Money Line.
10
<PAGE>
Money Line allows you to select the payment amount and frequency that is best
for you. You can make automatic investments bi-weekly, semi-monthly, monthly,
quarterly, semi-annually, or annually. The date you select as your Money Line
investment date is the date on which shares will be purchased. THE PROCEEDS MUST
BE AVAILABLE IN YOUR BANK ACCOUNT TWO BUSINESS DAYS PRIOR TO THE INVESTMENT
DATE.
HOW TO APPLY:
1: Complete the Electronic Funds Transfer ("EFT") section of the application to
provide complete bank information and authorize EFT fund share purchases. Attach
a voided check. A signature guarantee of all shareholders and bank account
owners is required.
PLEASE ALLOW AT LEAST 10 BUSINESS DAYS FOR INITIAL PROCESSING.
2: Complete the Money Line section of the application to specify the amount,
frequency and date of the investment.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
HOW TO CHANGE:
Provided you have telephone privileges, you may call Shareholder Services at 1
(800) 423-4026 to:
- -Increase the payment up to $999.99.
- -Decrease the payment.
- -Discontinue the service.
To change investment amounts, reallocate or cancel Money Line, you must notify
us at least 3 business days prior to the investment date.
You must send a signature guaranteed written request to Administrative Data
Management Corp. to:
- -Increase the payment to $1,000 or more.
- -Change bank information.
A medallion signature guarantee (see Signature Guarantee Policy) is required to
increase a Money Line payment to $2,500 or more. Changing banks or bank account
numbers requires 10 days notice. Money Line service will be suspended upon
notification that all account owners are deceased.
AUTOMATIC PAYROLL INVESTMENT: With our Automatic Payroll Investment service
("API") you can systematically purchase shares by salary reduction. To
participate, your employer must offer direct deposit and permit you to
electronically transfer a portion of your salary. Contact your company payroll
department to authorize the salary reductions. If not available, you may
consider our Money Line program.
Shares purchased through API are bought at the offering price on the day the
electronic transfer is received by the Fund.
HOW TO APPLY:
1: Complete an API Application.
2: Complete an API
Authorization Form.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
oWire Transfers:
You may purchase shares via a federal funds wire transfer from your bank account
into your EXISTING First Investors account. Federal fund wire transfer proceeds
are not subject to a holding period and are available to you immediately upon
receipt, as long as we have been notified properly.
YOU MUST CALL US AT 1 (800) 423-4026 TO ADVISE US OF AN INCOMING FEDERAL FUNDS
WIRE and provide us with the federal funds wire transfer confirmation number,
the amount of the wire, and the fund account number to receive same day credit.
11
<PAGE>
There are special rules for money market fund accounts. To wire federal funds to
an existing First Investors account (other than money markets), instruct your
bank to wire your investment to: FIRST FINANCIAL SAVINGS BANK, S.L.A. ABA #
221272604 ACCOUNT # 0306142 YOUR NAME YOUR FIRST INVESTORS FUND ACCOUNT#
oDISTRIBUTION CROSS-INVESTMENT:
You can invest the dividends and capital gains from one fund account, excluding
the money market funds, into another fund account in the same class of shares.
The shares will be purchased at the net asset value on the day after the record
date of the distribution.
- -You must invest at least $50 a month or $600 a year into a NEW account.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
You may establish a Distribution Cross-Investment service by contacting your
registered representative or calling Shareholder Services at 1 (800) 423-4026.
oSYSTEMATIC WITHDRAWAL PLAN PAYMENT INVESTMENTS:
You can invest Systematic Withdrawal Plan payments (see How to Sell Shares) from
one fund account in shares of another fund account.
- -Payments are invested without a sales charge.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
- -Both accounts must be in the same class of shares.
- -You must invest at least $600 a year if into a new account.
- -You can invest on a monthly, quarterly, semi-annual, or annual basis.
Redemptions are suspended upon notification that all account owners are
deceased. Service will recommence upon receipt of written alternative payment
instructions and other required documents from the decedent's legal
representative.
HOW TO SELL SHARES
You can sell your shares on any day the New York Stock Exchange is open for
regular trading. In the mutual fund industry, a sale is referred to as a
"redemption." Redemption proceeds are generally mailed within three days. If the
shares being redeemed were purchased by check, payment may be delayed to verify
that the check has been honored, which may take up to 15 days from the date of
purchase. Shareholders may not redeem shares by telephone or electronic funds
transfer unless the shares have been owned for at least 15 days.
Redemptions of shares are not subject to the 15 day verification period if the
shares were purchased via:
- -Automatic Payroll Investment
- -FIC registered representative payroll checks -First Investors Life Insurance
Company checks
- -Federal funds wire payments
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<PAGE>
oREDEMPTION OPTIONS
For trusts, estates, attorneys-in-fact, corporations, partnerships, and other
entities, additional documents are required to redeem shares. Call Shareholder
Services at 1 (800) 423-4026 for more information.
WRITTEN REDEMPTIONS
You can write a letter of instruction or contact your First Investors registered
representative for a liquidation request form. A written liquidation request in
good order 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 to
redeem;
4: Share certificates (if they were issued to you);
5: Original signatures of all owners exactly as your account is registered;
6: Signature
guarantees, if required (see Signature Guarantee Policy).
Written redemption requests should be mailed to:
ADMINISTRATIVE DATA MANAGEMENT CORP.
581 MAIN STREET
WOODBRIDGE, NJ 07095-1198
TELEPHONE REDEMPTIONS
You, or any person we believe is authorized to act on your behalf, may redeem
shares which have been owned for at least 15 days by calling our Special
Services Department at 1 (800) 342-6221 from 9:00 a.m. to 5:00 p.m., EST,
provided:
- -Telephone privileges are available for your account registration (see Telephone
Privileges);
- -You have telephone privileges (see Telephone Privileges);
- -You do not hold share certificates (issued shares);
- -The redemption check is made payable to the registered owner(s) or
pre-designated bank;
- -The redemption check is mailed to your address of record;
- -Your address of record has not changed within the past 60 days;
- -The redemption amount is $50,000 or less; AND -The redemption amount, combined
with the amount of all telephone redemptions made within the previous 30 days
does not exceed $100,000.
ELECTRONIC FUNDS TRANSFER
The Electronic Funds Transfer ("EFT") service allows you to redeem shares and
electronically transfer proceeds to your bank account.
YOU MUST ENROLL IN THE ELECTRONIC FUNDS TRANSFER SERVICE AND PROVIDE COMPLETE
BANK ACCOUNT INFORMATION BEFORE USING THE PRIVILEGE. Signature guarantees of all
shareholders and all bank account owners are required. Please allow at least 10
business days for initial processing. We will send any proceeds during the
processing period to your address of record. Call your registered representative
or Shareholder Services at 1 (800) 423-4026 for an application.
You may call Shareholder Services or send written instructions to Administrative
Data Management Corp. to request an EFT redemption of shares which are held at
least 15 days. Each EFT redemption:
1: Must be electronically transferred to your pre-designated bank account;
2: Must be at least $500;
3: Cannot exceed $50,000;
4: Cannot exceed $100,000 when added to the total amount of all EFT
redemptions made within the previous 30 days.
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<PAGE>
If your redemption does not qualify for an EFT redemption, you may request to
have the redemption proceeds mailed to you.
The Electronic Funds Transfer service may also be used to purchase shares (see
Money Line) and transfer systematic withdrawal payments (see Systematic
Withdrawal Plans) and dividend distributions (see Other Services) to your bank
account.
SYSTEMATIC WITHDRAWAL PLANS
Our Systematic Withdrawal Plan allows you to redeem a specific dollar amount or
percentage from your account on a regular basis. Your payments can be mailed to
you or a pre-authorized payee by check, transferred to your bank account
electronically (if you have enrolled in the EFT service) or invested in shares
of another FI fund in the same class of shares through our Systematic Withdrawal
Plan Payment investment service (see How to Buy Shares).
You can receive payments on a monthly, quarterly, semi-annual, or annual basis.
Your account must have a value of at least $5,000 in non-certificated shares
("unissued shares"). The $5,000 minimum account balance is waived for required
minimum distributions from retirement plan accounts. The minimum Systematic
Withdrawal Plan payment is $25 (waived for Required Minimum Distributions on
retirement accounts or FIL premium payments).
Once you establish the Systematic Withdrawal Plan, you should not make
additional investments into this account (except money market funds). Buying
shares during the same period as you are selling shares is not advantageous to
you because of sales charges.
If you own Class B shares, you may establish a Systematic Withdrawal Plan and
redeem up to 8% of the value of your account annually without a CDSC.
If you own Class B shares of a retirement account and you are receiving your
Required Minimum Distribution through a Systematic Withdrawal Plan, up to 8% of
the value of your account may be redeemed annually without a CDSC. However, if
your Required Minimum Distribution exceeds the 8% limit, the applicable CDSC
will be charged if the additional shares were held less than 3 years and you
have not reached age 70-1/2.
To establish a Systematic Withdrawal Plan, complete the appropriate section of
the account application or contact your registered representative or call
Shareholder Services at 1 (800) 423-4026.
oEXPEDITED WIRE REDEMPTIONS (MONEY MARKET FUNDS ONLY)
Enroll in our Expedited Redemption service to wire proceeds from your FI money
market account to your bank account. Call Shareholder Services at 1 (800)
423-4026 for an application or to discuss specific requirements.
- -Each wire under $5,000 is subject to a $10 fee. -Six wires of $5,000 or more
are permitted without charge each month. Each additional wire is $10.00.
- -Wires must be directed to your pre-authorized bank account.
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<PAGE>
HOW TO EXCHANGE SHARES
The exchange privilege gives you the flexibility to change investments as your
goals change without incurring a sales charge. Since an exchange is a redemption
and a purchase, it creates a gain or loss which is reportable for tax purposes.
You should consult your tax advisor before requesting an exchange. Read the
prospectus of the FI Fund you are purchasing carefully. Review the differences
in objectives, policies, risk, privileges and restrictions.
<TABLE>
<CAPTION>
______________________________________________________________________________
EXCHANGE METHODS
_______________________________________________________________________________
METHOD STEPS TO FOLLOW
<S> <C>
Through Your FI
Registered Representative Call your registered representative.
___________________________________________________________________________________
By Phone Call Special Services from 9:00 a.m. to 5:00 p.m., EST
(800) 342-6221 Orders received after the close of the New York Stock
Exchange, usually 4:00 p.m., est, are processed the following business day.
1.You must have telephone privileges
(see Telephone Transactions)
2.Certificate shares cannot be exchanged by phone.
3.For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required.
____________________________________________________________________________________
By Mail to: 1.Send us written instructions signed by all account
ADM exactly as the account is registered.
owners 2. Include your fund account number.
ATTN: EXCHANGE DEPT. 3. Indicate either the dollar amount, number of shares
581 MAIN STREET or percent of the account you want to exchange.
WOODBRIDGE, NJ 07095-119 4. Specify the existing account number or the name of
the new Fund you are exchanging into.
5. Include any outstanding share certificates for the
shares you want to exchange.
6. For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required. Call Shareholder Services at 1 (800)
423-4026.
____________________________________________________________________________________
</TABLE>
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<PAGE>
oEXCHANGE CONDITIONS
1: You may only exchange shares within the same Class.
2: Exchanges can only be
made into identically owned accounts.
3: Partial exchanges into a new fund account must meet the new fund's minimum
initial investment.
4: The fund you are exchanging into must be eligible for
sale in your state.
5: If your request does not clearly indicate the amount to
be exchanged or the accounts involved, no shares will be exchanged.
6: Amounts
exchanged from a non-money market fund to a money market fund may be exchanged
back at net asset value. Dividends earned from money market fund shares will be
subject to a sales charge.
7: If you are exchanging from a money market fund to
a fund with a sales charge, there will be a sales charge on any shares that were
not previously subject to a sales charge. Your request must be in writing and
include a statement acknowledging that a sales charge will be paid. If you
exchange Class B shares of a fund for shares of a Class B money market fund, the
CDSC will not be imposed and the holding period used to calculate the CDSC will
carry over to the acquired shares.
8: FI Funds reserve the right to reject any
exchange order which in the opinion of the Fund is part of a market timing
strategy. In the event that an exchange is rejected, neither the redemption nor
the purchase side of the exchange will be processed.
oEXCHANGING FUNDS WITH AUTOMATIC INVESTMENTS OR SYSTEMATIC WITHDRAWALS
Let us know if you want to continue automatic investments into the original fund
or the fund you are exchanging into ("receiving fund") or if you want to change
the amount or allocation into both. Also inform us if you wish to continue,
terminate, or change a preauthorized systematic withdrawal. Without specific
instructions, we will amend account privileges as outlined below:
________________________________________________________________________________
EXCHANGE EXCHANGE EXCHANGE A
ALL SHARES TO ALL SHARES TO PORTION OF
ONE FUND MULTIPLE SHARES TO ONE OR
FUNDS MULTIPLE FUNDS
________________________________________________________________________________
MONEY LINE ML moves to ML stays with ML stays with
(ML) Receiving Fund Original Fund Original Fund
AUTOMATIC PAYROLL API moves to API Stays with API stays with
INVESTMENT (API) Receiving Fund Original Fund Original Fund
SYSTEMATIC SWP moves to SWP SWP stays
WITHDRAWALS Receiving Fund Canceled with Original Fund (SWP)
________________________________________________________________________________
16
<PAGE>
WHEN AND HOW ARE FUND SHARES PRICED?
Each FI Fund prices its shares each day that the New York Stock Exchange
("NYSE") is open for trading. The share price is calculated as of the close of
trading on the NYSE (generally 4:00 p.m., EST) except for shares of the money
market funds which are priced as of 12:00 noon. These days are referred to as
"Trading Days" in this Manual.
Each Fund calculates the net asset value of each class of its shares separately
by taking the total value of class assets, subtracting class expenses, and
dividing the difference by the total number of shares in the class. The price
that you will pay for a share is the NAV plus any applicable front-end sales
charge. You receive the NAV price if you redeem or exchange your shares, less
any applicable CDSC.
Fund prices are on our website (www.firstinvestors.com) the next day. The prices
for our larger funds are also reported in many newspapers, including The Wall
Street Journal and The New York Times. Special pricing procedures are employed
during emergencies. For a description of these procedures you can request, free
of charge, a copy of a Statement of Additional Information.
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED?
The processing and price for a purchase, redemption or exchange depends upon how
your order is placed. As indicated below, special rules apply to money market
transactions.
oPURCHASES
Purchases that are made by written application or order are processed when they
are received in "good order" by our Woodbridge, NJ office. To be in good order,
all required paperwork must be completed and payment received. If your order is
received prior to the close of trading on the NYSE, it will receive that day's
price (except in the case of the money market funds which are discussed below).
This procedure applies whether your purchase order is given to your registered
representative or mailed directly by you to our Woodbridge, NJ office.
As described previously in "How to Buy Shares," certain types of purchases can
only be placed by written application. For example, purchases in connection with
the opening of retirement accounts may only be made by written application.
Furthermore, rollovers of retirement accounts will be processed only when we
have received both written application and the proceeds of the rollover. Thus,
for example, if it takes 30 days for another fund group to send us the proceeds
of a retirement account, your purchase of First Investors funds will not occur
until we receive the proceeds.
Some types of purchases may be phoned or electronically transmitted to us by
your broker/dealer. If you give your order to a First Investors registered
17
<PAGE>
representative before the close of trading on the NYSE and the order is phoned
to our Woodbridge, NJ office prior to 5:00 p.m., EST, your shares will be
purchased at that day's price (except money market funds which are discussed
below). If you are buying a First Investors Fund through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements. Payment is due within three business days
of placing an order by phone or electronic means or the trade may be cancelled.
(In such event, you will be liable for any loss resulting from the
cancellation.) To avoid cancellation of your orders, you may arrange to open a
money market account and use it to pay for subsequent purchases.
Purchases made pursuant to our Automatic Investment Programs are processed as
follows:
- -Money Line purchases are processed on the dates you select on your application.
- -Automatic Payroll Investment Service purchases are processed on the dates that
we receive funds from your employer.
oREDEMPTIONS
As described previously in "How To Sell Shares", certain redemption orders may
only be made by written instructions or application. Unless you have declined
Telephone Privileges, most redemptions can be made by phone by you or your
registered representative.
Written redemption orders will be processed when received in good order in our
Woodbridge, NJ office. Phone redemption orders will be processed when received
in our Woodbridge, NJ office.
If your redemption order is received prior to the close of trading on the NYSE,
you will receive that day's price (except in the case of money market funds
which are discussed below). If you are redeeming through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements.
oEXCHANGES
Exchanges can generally be made by written instructions or, unless you have
declined Telephone Privileges, by phone by you or your registered
representative. Exchange orders are processed when we receive them in good order
in our Woodbridge, NJ office.
Exchange orders received prior to the close of trading on the NYSE will be
processed at that day's prices (except in the case of exchanges into or out of
money market funds which are discussed below).
oORDERS PLACED VIA FIRST INVESTORS REGISTERED REPRESENTATIVES
All orders placed through a First Investors registered representative must be
reviewed and approved by a principal officer of the branch office before being
mailed or transmitted to the Woodbridge, NJ office.
oORDERS PLACED VIA DEALERS
It is the responsibility of the Dealer to forward or transmit orders to the Fund
promptly and accurately. A fund will not be liable for any change in the price
per share due to the failure of the Dealer to place the order in a timely
fashion. Any such disputes must be settled between you and the Dealer.
18
<PAGE>
oSPECIAL RULES FOR MONEY MARKET FUNDS
A money market fund share purchase will not be made until we receive the funds
for the purchase. The funds for the purchase will not be deemed to have been
received until the morning of the next Trading Day following the Trading Day on
which your purchase check is received in our Woodbridge, NJ office. If a check
is received in our Woodbridge, NJ office after the close of regular trading on
the NYSE, the funds for the purchase will not be deemed to have been received
until the morning of the second following Trading Day.
If you make your purchase by wire transfer prior to 12:00 p.m., EST, and you
have previously advised us that the wire is on the way, the funds for the
purchase will be deemed to have been received on that same day. You must call
beforehand and give us your name, account number, the amount of the wire, and a
federal reference number documenting the transfer. If we fail to receive such
advance notification, the funds for your purchase will not be deemed to have
been received until the morning of the next Trading Day following receipt of the
federal wire and your account information. To wire funds to an existing First
Investors money market account, instruct your bank to wire your investment, as
applicable, to: CASH MANAGEMENT FUND BANK OF NEW YORK ABA #021000018 ACCOUNT
8900005696 YOUR NAME YOUR FIRST INVESTORS ACCOUNT # TAX-EXEMPT MONEY MARKET FUND
BANK OF NEW YORK ABA #021000018 ACCOUNT 8900023198 YOUR NAME YOUR FIRST
INVESTORS ACCOUNT #
Purchases by Money Line and Automatic Payroll Investment are processed in the
same manner as those in other Funds.
Requests for redemptions or exchanges out of or into our money market funds must
be received in writing or by phone prior to 12:00 p.m., EST, on a Trading Day,
to be processed the same day. Redemption or exchange orders received after 12:00
p.m., EST, but before the close of regular trading on the NYSE, will be
processed on the morning of the following Trading Day.
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS
A fund reserves the right to reject or restrict any specific purchase request if
the fund determines that doing so is in the best interest of the fund and its
shareholders. Investments in a fund are designed for long-term purposes and are
not intended to provide a vehicle for short-term market timing. The funds also
reserve the right to reject any exchange that in the funds' opinion is part of a
market timing strategy. In the event that a fund rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.
SIGNATURE GUARANTEE POLICY
A signature guarantee protects you from the risk of a
fraudulent signature and is generally required for non-standard and large dollar
transactions. A signature guarantee may be obtained from your First Investors
registered representative or eligible guarantor institutions including banks,
savings associations, credit unions and brokerage firms which are members of the
Securities Transfer Agents Medallion Program ("STAMP"), the New York Stock
Exchange Medallion Signature Program ("MSP"), or the Stock Exchanges Medallion
Program ("SEMP"). Please note that a notary public stamp or seal is not
acceptable. The words "Signature Guaranteed" must appear beside the signature of
the guarantor.
- -SIGNATURE GUARANTEES ARE REQUIRED:
1: For redemptions over $50,000.
2: For redemption checks made payable to any person(s) other than the registered
shareholder(s) or a major financial institution for the benefit of the
registered shareholder(s).
3: For redemption checks mailed to an address other than the address of record
(unless the check is mailed to a financial institution on your behalf).
4: For redemptions when the address of record has changed within 60 days of the
request.
5: When a stock certificate is mailed to an address other than the address of
record or to the dealer on the account.
6: When shares are transferred to a new registration.
7: When issued shares are redeemed.
8: To establish any EFT service.
19
<PAGE>
9: For requests to change the address of record to a P.O. box or a "c/o" street
address.
10: If multiple account owners of one account give inconsistent instructions.
11: When a transaction requires additional legal documentation.
12: When the authority of a representative of a corporation, partnership, trust,
or other entity has not been satisfactorily established.
13: When an address on an account which was coded "Do Not Mail" to suppress
check and dividend mailings due to a previously unknown address is updated.
14: Any other instance whereby a fund or its transfer agent deems it necessary
as a matter of prudence.
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS 1 (800) 342-6221
You automatically receive telephone privileges when you open a First Investors
individual, joint, or custodial account unless you decline the option on your
account application or send the Fund written instructions. For trusts, estates,
attorneys-in-fact, corporations, partnerships, and other entities, additional
documents are required. Call Shareholder Services at 1 (800) 423-4026 for
assistance.
Telephone privileges allow you to exchange or redeem shares and authorize other
transactions by calling Special Services at 1 (800) 342-6221 from 9:00 a.m. to
5:00 p.m., EST, on any day the NYSE is open. Your First Investors registered
representative may also use telephone privileges to execute your transactions.
oSECURITY MEASURES For your protection, the following security measures are
taken:
1: Telephone requests are recorded to verify accuracy.
2: Some or all of
the following information is obtained:
- -Account number -Address -Social security
number
- -Other information as deemed necessary
3: A written confirmation of each
transaction is mailed to you.
We will not be liable for following instructions
if we reasonably believe the instructions are genuine based on our verification
procedures.
oELIGIBILITY
NON-RETIREMENT ACCOUNTS:
You can exchange or redeem shares of any non-retirement account by phone. Shares
must be owned for 15 days for telephone redemption. Telephone exchanges and
redemptions are not available on guardianship and conservatorship accounts.
RETIREMENT ACCOUNTS:
You can exchange between shares of any participant directed IRA, 403(b) or
401(k) Simplifier plan where First Financial Savings Bank, S.L.A. is Custodian.
You may also exchange shares from an individually registered non-retirement
account to an IRA account registered to the same owner (provided an IRA
application is on file). Telephone exchanges are permitted on 401(k) Flexible
plans, money purchase pension plans and profit sharing plans if a First
Investors Qualified Retirement Plan Application is on file with the fund.
Contact your First Investors registered representative or call Shareholder
Services at 1 (800) 423-4026 to obtain a Qualified Retirement Plan Application.
Telephone redemptions are not permitted on First Investors retirement accounts.
20
<PAGE>
SHAREHOLDER SERVICES:
1 (800) 423-4026
PROVIDED YOU HAVE NOT DECLINED TELEPHONE PRIVILEGES, CALL US TO UPDATE OR
CORRECT:
- -Your address or phone number.
- -Your birth date (important for retirement distributions).
- -Your distribution option to reinvest or pay in cash (non-retirement accounts
only) or initiate cross reinvestment of dividends.
- -The amount of your Money Line or Automatic Payroll Investment payment.
- -The allocation of your Money Line or Automatic Payroll Investment payment.
- -The amount of your Systematic Withdrawal payment.
TO REQUEST:
- -A duplicate copy of a statement or tax form.
- -A history of your account (the fee can be debited from your non-retirement
account).
- -A share certificate to be mailed to your address of record.
- -A stop payment on a dividend, redemption or money market check.
- -Suspension (up to six months) or cancellation of Money Line.
- -Cancellation of your Systematic Withdrawal Plan.
- -Cancellation of cross-reinvestment of dividends.
- -Money market fund draft checks.
21
<PAGE>
OTHER SERVICES
oREINVESTMENT PRIVILEGE
If you sell some or all of your Class A or Class B shares, you may be entitled
to reinvest all or a portion of the proceeds in the same class of shares of a FI
fund within six months of the redemption without a sales charge.
If you reinvest proceeds into a new fund account, you must meet the fund's
minimum initial investment requirement.
If you reinvest all the proceeds from a Class B share redemption, you will be
credited, in additional shares, for the full amount of the CDSC. If you reinvest
a portion of a Class B share redemption, you will be credited with a pro-rated
percentage of the CDSC.
The reinstatement privilege does not apply to automated purchases, automated
redemptions, or reinvestments in Class B shares of less than $1,000. Please
notify us if you qualify for this privilege. For more information, call
Shareholder Services at 1 (800) 423-4026.
oCERTIFICATE SHARES
Every time you make a purchase of Class A shares, we will credit shares to your
fund account. We do not issue shares certificates unless you specifically
request them. Certificates are not issued on any Class B shares or on Class A
money market funds.
Having us credit shares on your behalf eliminates the expense of replacing lost,
stolen, or destroyed certificates. If a certificate is lost, stolen, or damaged,
you will be charged a replacement fee of the greater of 2% of the current value
of the certificated shares or $25.
In addition, certificated shares cannot be redeemed or exchanged until they are
returned with your transaction request. The share certificate must be properly
endorsed and signature guaranteed.
oMoney Market Fund Draft Checks
Free draft check writing privileges are available when you open a First
Investors Cash Management Fund or a First Investors Tax Exempt Money Market Fund
account. Checks may be written for a minimum of $500. Draft checks are not
available for Class B share accounts, retirement accounts, guardianships and
conservatorships. Complete the Money Market Fund Check Redemption section of the
account application to apply for draft checks. To order additional checks, call
Shareholder Services at 1 (800) 423-4026.
Additional documentation is required to establish check writing privileges for
trusts, corporations, partnerships and other entities. Call Shareholder Services
at 1 (800) 423-4026 for further information.
_______________________________________________________________________________
FEE TABLE
Call Shareholder Services at 1 (800) 423-4026 or send your request to FIC, Attn:
Correspondence Dept., 581 Main Street, Woodbridge N.J. 07095-1198 to request a
copy of the following records:
ACCOUNT HISTORY STATEMENTS CANCELLED CHECKS
1974 - 1982* $10 per year fee There is a $10 fee for a copy of a
1983 - present $5 total fee for all years cancelled dividend, liquidation, or
Current & investment check requested. There
Two Prior Years Free cancelled money market draft check.
DUPLICATE TAX FORMS
Current Year Free
Prior Year(s) $7.50 per tax form
per year
* ACCOUNT HISTORIES ARE NOT AVAILABLE
PRIOR TO 1974.
22
<PAGE>
oRETURN MAIL
If mail is returned to the fund marked undeliverable by the U.S. Postal Service
after two consecutive mailings, and the fund is unable to obtain a current
shareholder address, the account status will be changed to "Do Not Mail" to
discontinue future mailings and prevent unauthorized persons from obtaining
account information.
You can remove the "Do Not Mail" status on your account by submitting written
instructions including your current address signed by all shareholders with a
signature guarantee (see Signature Guarantee Policy). Additional requirements
may apply for certain accounts. Call Shareholder Services at 1 (800) 423-4026
for more information.
Returned dividend checks and other distributions will be reinvested in the fund
when an account's status has been changed to "Do Not Mail". No interest will be
paid on outstanding checks prior to reinvestment. All future dividends and other
distributions will be reinvested in additional shares until new instructions are
provided. If you cannot be located within a period of time mandated by your
state of residence your fund shares may be turned over to your state (in other
words forfeited).
Prior to turning over assets to your state, the fund will seek to obtain a
current shareholder address in accordance with Securities and Exchange
Commission rules. A search company may be employed to locate a current address.
The fund may deduct the costs associated with the search from your account.
oTRANSFERRING SHARES
A transfer is a change of share ownership from one customer to another. Unlike
an exchange, transfers occur within the same fund. You can transfer your shares
at any time.
To transfer shares, submit a letter of instruction including:
- -Your account number.
- -Dollar amount, percentage, or number of shares to be transferred.
- -Existing account number receiving the shares (IF ANY).
- -The name(s), registration, and taxpayer identification number of the customer
receiving the shares.
- -The signature of each account owner requesting the transfer with signature
guarantee(s).
In addition, we will request that the transferee complete a Master Account
Agreement to establish a brokerage account with First Investors Corporation and
validate his or her social security number to avoid back-up withholding. If the
transferee declines to complete an MAA, all transactions in the account must be
on an unsolicited basis and the account will be so coded.
Depending upon your account registration, additional documentation may be
required to transfer shares. Transfers due to the death or disability of a
shareholder also require additional documentation. Please call our Shareholder
Services Department at 1 (800) 423-4026 for specific transfer requirements
before initiating a request.
A transfer is a change of ownership and may trigger a taxable event. You should
consult your tax advisor before initiating a transfer.
23
<PAGE>
ACCOUNT STATEMENTS
oTRANSACTION CONFIRMATION STATEMENTS
You will receive a confirmation statement immediately after most transactions.
These include:
- -shareorder purchases
- -check investments
- -redemptions
- -exchanges
- -transfers
- -systematic withdrawals
Money Line and Automatic Payroll Investment purchases are not confirmed for each
transaction. They will appear on your next regularly scheduled monthly or
quarterly statement (see Dividend Schedule under "Dividends and Distributions").
A separate confirmation statement is generated for each fund account you own. It
provides:
- -Your fund account number -The date of the transaction
- -A description of the transaction (PURCHASE, REDEMPTION, ETC.)
- -The number of shares bought or sold for the transaction
- -The dollar amount of the transaction
- -The dollar amount of the dividend payment (IF APPLICABLE)
- -The total share balance in the account -The dollar amount of any dividends or
capital gains paid
- -The number of shares held by you, held for you (INCLUDING ESCROW SHARES), and
the total number of shares you own.
The confirmation statement also provides a perforated Investment Stub with your
preprinted name, registration, and fund account number for future investments.
oMASTER ACCOUNT STATEMENTS
If First Investors Corporation is your broker, you will receive a Master Account
Statement for all your identically owned First Investors fund accounts on at
least a quarterly basis. The Master Account Statement will also include a recap
of any First Investors Life Insurance and Executive Investors Trust accounts you
may own. Joint accounts registered under your taxpayer identification number
will appear on a separate Master Account Statement but may be mailed in the same
envelope upon request.
The Master Account Statement provides the following information for each First
Investors fund you own:
- -fund name
- -fund's current market value
- -total distributions paid year-to-date
- -total number of shares owned
oANNUAL AND SEMI-ANNUAL REPORTS
You will also receive an Annual and a Semi-Annual Report. These financial
reports show the assets, liabilities, revenues, expenses, and earnings of the
fund as well as a detailed accounting of all portfolio holdings. You will
receive one report per household.
24
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
oDIVIDENDS AND DISTRIBUTIONS
For funds that declare daily dividends, you start earning dividends on the day
your purchase is made. For FI money market funds, you start earning dividends on
the day federal funds are credited to your fund account. The funds declare
dividends from net investment income and distribute the accrued earnings to
shareholders as noted below:
________________________________________________________________________________
DIVIDEND PAYMENT SCHEDULE
________________________________________________________________________________
MONTHLY: QUARTERLY: ANNUALLY (IF ANY):
Cash Management Fund Blue Chip Fund Global Fund
Fund for Income Growth & Income Fund Special Situations Fund
Government Fund Total Return Fund Mid-Cap Opportunity Fund
Insured Intermediate Tax-Exempt Utilities Income Fund
Insured Tax Exempt Fund
Investment Grade Fund
High Yield Fund
Multi-State Insured Tax Free Fund
New York Insured Tax Free Fund
Tax-Exempt Money Market Fund
________________________________________________________________________________
Capital gains distributions, if any, are paid annually, usually near the end of
the fund's fiscal year. On occasion, more than one capital gains distribution
may be paid during one year. Dividend and capital gains distributions are
automatically reinvested to purchase additional fund shares unless otherwise
instructed. Dividend payments of less than $5.00 are automatically reinvested to
purchase additional fund shares.
oBUYING A DIVIDEND
If you buy shares shortly before the record date of the dividend, the entire
dividend you receive may be taxable even though a part of the distribution is
actually a return of your purchase price. This is called "buying a dividend."
There is no advantage to buying a dividend because a fund's net asset value per
share is reduced by the amount of the dividend.
25
<PAGE>
<TABLE>
<CAPTION>
TAX FORMS
TAX FORM DESCRIPTION MAILED BY
<S> <C> <C>
_________________________________________________________________________________________________
1099-DIV Consolidated report lists all taxable dividend and capital gains January 31
distributions for all of the shareholder's accounts. Also includes
foreign taxes paid and any federal income tax withheld due to backup
withholding.
_________________________________________________________________________________________________
1099-B Lists proceeds from all redemptions including systematic January
31 withdrawals and exchanges. A separate form is issued for each
fund account. Includes amount of federal income tax withheld due
to backup withholding.
_________________________________________________________________________________________________
1099-R Lists taxable distributions from a retirement account. A separate January 31
form is issued for each fund account. Includes federal
income tax withheld due to IRS withholding requirements.
_________________________________________________________________________________________________
5498 Provided to shareholders who made an annual IRA May 31
contribution or rollover purchase. Also provides the account's
fair market value as of the last business day of the previous year.
A separate form is issued for each fund account.
_________________________________________________________________________________________________
1042-S Provided to non-resident alien shareholders to report the amount March 15
of fund dividends paid and the amount of federal taxes
withheld. A separate form is issued for each fund account.
_________________________________________________________________________________________________
Cost Basis Uses the "average cost-single category" method to show the cost January 31
Statement basis of any shares sold or exchanged. Information is provided
to assist shareholders in calculating capital gains or losses. A
separate statement, included with Form 1099-B, is issued for each
fund account. This statement is not reported to the IRS and does
not include money market funds or retirement accounts.
_________________________________________________________________________________________________
Tax Savings Consolidated report lists all amounts not subject to federal, January 31
Report for state and local income tax for all the shareholder's accounts.
Non-Taxable Also includes any amounts subject to alternative minimum tax.
Income
_________________________________________________________________________________________________
Tax Savings Provides the percentage of income paid by each fund that may January 31
Summary be exempt from state income tax.
_________________________________________________________________________________________________
</TABLE>
THE OUTLOOK
Today's strategies for tomorrow's goals are brought into focus in the OUTLOOK,
the quarterly newsletter for clients of First Investors Corporation. This
informative tool discusses the products and services we offer to help you take
advantage of current market conditions and tax law changes. The OUTLOOK'S
straight forward approach and timely articles make it a valuable resource. As
always, your registered representative is available to provide you with
additional information and assistance. Material contained in this publication
should not be considered legal, financial, or other professional advice.
26
<PAGE>
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
<PAGE>
PART C. OTHER INFORMATION
-------------------------
Item 23. Exhibits
--------
(a)(i) Amended and Restated Declaration of Trust1
(ii) Supplemental Declaration of Trust2
(b) By-laws1
(c) Shareholders' rights are contained in (a) Articles III, VIII, X,
XI and XII of Registrant's Amended and Restated Declaration of
Trust dated 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
(d) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc.1
(e) Underwriting Agreement between Registrant and First Investors
Corporation1
(f) Bonus, profit sharing or pension plans - none
(g)(i) Custodian Agreement between Registrant and Irving Trust Company1
(ii) Supplement to Custodian Agreement between Registrant and The
Bank of New York1
(h)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.1
(ii) Schedule A to Administration Agreement2
(i) Consent of Counsel3
(j)(i) Consent of Independent Accountants3
(ii) Powers of Attorney1
(k) Financial statements omitted from prospectus -none
(l) Initial capital agreements - none
(m)(i) Amended and Restated Class A Distribution Plan1
(ii) Class B Distribution Plan1
(n) Financial Data Schedules3
<PAGE>
(o) 18f-3 Plan1
- --------------
1 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 33-25623) filed on April 23,
1996.
2 Incorporated by reference from Post-Effective Amendment No. 22 to
Registrant's Registration Statement (File No. 33-25623) filed on May 15,
1997.
3 To be filed subsequently.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
--------------------------------------------------------------
There are no persons controlled by or under common control with the
Registrant.
Item 25. INDEMNIFICATION
---------------
Article XI, Section 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
<PAGE>
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office or (B) not to have acted
in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office,
(A) by the court or other body approving the settlement; or
(B) by at least a majority or those Trustees who are neither
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.
<PAGE>
The general effect of this Indemnification will be to indemnify the
officers and Trustees of the Registrant from costs and expenses arising from any
action, suit or proceeding to which they may be made a party by reason of their
being or having been a Trustee or officer of the Registrant, except where such
action is determined to have arisen out of the willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
the Trustee's or officer's office.
The Registrant's Investment Advisory Agreement provides as follows:
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Company or any Series in connection with the
matters to which this Agreement relate except a loss resulting from the willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement. Any person, even though also an officer, partner, employee, or agent
of the Manager, who may be or become an officer, Board member, employee or agent
of the Company shall be deemed, when rendering services to the Company or acting
in any business of the Company, to be rendering such services to or acting
solely for the Company and not as an officer, partner, employee, or agent or one
under the control or direction of the Manager even though paid by it.
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 30 herein.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
First Investors Management Company, Inc. offers investment management
services and is a registered investment adviser. Affiliations of the officers
and directors of the Investment Adviser are set forth in Part B, Statement of
Additional Information, under "Directors or Trustees and Officers."
<PAGE>
Item 27. 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.
First Investors Life Variable Annuity Fund A
First Investors Life Variable Annuity Fund C
First Investors Life Variable Annuity Fund D
First Investors Life Level Premium Variable Life Insurance
(Separate Account B)
(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
Joseph I. Benedek Treasurer Treasurer
581 Main Street
Woodbridge, NJ 07095
Lawrence A. Fauci Senior Vice President None
95 Wall Street and Director
New York, NY 10005
Kathryn S. Head Vice President Trustee
581 Main Street and Director
Woodbridge, NJ 07095
<PAGE>
Louis Rinaldi Senior Vice None
581 Main Street President
Woodbridge, NJ 07095
Frederick Miller Senior Vice President None
581 Main Street
Woodbridge, NJ 07095
Larry R. Lavoie Secretary and Trustee
95 Wall Street General Counsel
New York, NY 10005
Matthew Smith Vice President None
581 Main Street
Woodbridge, NJ 07095
Jeremiah J. Lyons Director None
56 Weston Avenue
Chatham, NJ 07928
Anne Condon Vice President None
581 Main Street
Woodbridge, NJ 07095
Jane W. Kruzan Director None
232 Adair Street
Decatur, GA 30030
Elizabeth Reilly Vice President None
581 Main Street
Woodbridge, NJ 07095
Robert Flanagan Vice President- None
95 Wall Street Sales Administration
New York, NY 10005
William M. Lipkus Chief Financial Officer None
581 Main Street
Woodbridge, NJ 07095
(c) Not applicable
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
Physical possession of the books, accounts and records of the
Registrant are held by First Investors Management Company, Inc. and its
affiliated companies, First Investors Corporation and Administrative Data
Management Corp., at their corporate headquarters, 95 Wall Street, New York, NY
10005 and administrative offices, 581 Main Street, Woodbridge, NJ 07095, except
for those maintained by the Registrant's Custodian, The Bank of New York, 48
Wall Street, New York, NY 10286.
Item 29. MANAGEMENT SERVICES
-------------------
Not Applicable.
<PAGE>
Item 30. UNDERTAKINGS
------------
The Registrant undertakes to carry out all indemnification provisions
of its Declaration of Trust, Advisory Agreement and Underwriting Agreement in
accordance with Investment Company Act Release No. 11330 (September 4, 1980) and
successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the provisions under Item 27 herein, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes to furnish a copy of its latest annual
report to shareholders, upon request and without charge, to each person to whom
a prospectus is delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 27 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 22d day of February, 1999.
FIRST INVESTORS SERIES FUND
By: /s/ Glenn O. Head
-----------------
Glenn O. Head
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 27 to this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Glenn O. Head Principal Executive February 22, 1999
- ---------------------------------------- Officer and Director
Glenn O. Head
/s/ Joseph I. Benedek Principal Financial February 22, 1999
- ---------------------------------------- and Accounting Officer
Joseph I. Benedek
Kathryn S. Head* Trustee February 22, 1999
- ----------------------------------------
Kathryn S. Head
/s/ Larry R. Lavoie Trustee February 22, 1999
- ----------------------------------------
Larry R. Lavoie
Herbert Rubinstein* Trustee February 22, 1999
- ----------------------------------------
Herbert Rubinstein
Nancy Schaenen* Trustee February 22, 1999
- ----------------------------------------
Nancy Schaenen
James M. Srygley* Trustee February 22, 1999
- ----------------------------------------
James M. Srygley
<PAGE>
John T. Sullivan* Trustee February 22, 1999
- ----------------------------------------
John T. Sullivan
Rex R. Reed* Trustee February 22, 1999
- ----------------------------------------
Rex R. Reed
Robert F. Wentworth* Trustee February 22, 1999
- ----------------------------------------
Robert F. Wentworth
</TABLE>
*By: /s/ Larry R. Lavoie
-------------------
Larry R. Lavoie
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
23(a)(i) Amended and Restated Declaration of Trust1
23(a)(ii) Supplemental Declaration of Trust2
23(b) By-laws1
23(c) Shareholders rights are contained in (a) Articles
III, VIII, X, XI and XII of Registrant's Amended and
Restated Declaration of Trust dated 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.
23(d) Investment Advisory Agreement between Registrant and
First Investors Management Company, Inc.1
23(e) Underwriting Agreement between Registrant and First
Investors Corporation1
23(f) Bonus or Profit Sharing Contracts--None
23(g)(i) Custodian Agreement between Registrant and Irving Trust
Company1
23(g)(ii) Supplement to Custodian Agreement between Registrant
and The Bank of New York1
23(h)(i) Administration Agreement between Registrant, First
Investors Management Company, Inc., First Investors
Corporation and Administrative Data Management Corp.1
23(h)(ii) Schedule A to Administration Agreement2
23(i) Consent of Counsel3
23(j)(i) Consent of independent accountants3
<PAGE>
23(j)(ii) Powers of Attorney1
23(k) Omitted Financial Statements -- None
23(l) Initial Capital Agreements -- None
23(m)(i) Amended and Restated Class A Distribution Plan1
23(m)(ii) Class B Distribution Plan1
23(n) Financial Data Schedules3
23(o) Rule 18f-3 Plan1
- --------------
1 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 33-25623) filed on April 23,
1996.
2 Incorporated by reference from Post-Effective Amendment No. 22 to
Registrant's Registration Statement (File No. 33-25623) filed on May 15,
1997.
3 To be filed subsequently.
<PAGE>
