FIRST INVESTORS SERIES FUND II, INC.
Supplement to Prospectus dated February 15, 1996
The following replaces footnote (5) under "Annual Fund Operating Expenses" on
page 2:
"(5) If management fees and expenses had not been waived or reimbursed,
Total Fund Operating Expenses for Class A shares would have been 2.32% for
U.S.A. Mid-Cap Opportunity Fund and 1.57% for Utilities Income Fund and, for
Class B shares, are estimated to be 3.02% for U.S.A. Mid-Cap Opportunity Fund
and 2.27% for Utilities Income Fund."
The following paragraph replaces the second paragraph under "How To Buy Shares"
on page 15:
"Due to emergency conditions, such as snow storms, the Woodbridge offices
of FIC and Administrative Data Management Corp. (the "Transfer Agent") may not
be open for business on a day when the NYSE is open for regular trading and,
therefore, would be unable to accept purchase orders. Should this occur,
purchase orders will be executed at the public offering price determined at the
close of regular trading on the NYSE on the next business day that these offices
are open for business."
The following language is added to "Waivers of Class A Shares Charges" on page
16:
"(6) any purchase by a participant in a Group Qualified Plan account, as
defined under "Retirement Plans," if the purchase is made with the proceeds from
a redemption of shares of a fund in another fund group on which either an
initial sales charge or a CDSC has been paid; and (7) any purchase in an IRA
account if the purchase is made with the proceeds of a distribution from a Group
Qualified Plan, as defined under "Retirement Plans," with a First Investors
fund. With respect to items (6) and (7) above, if shares are redeemed within 24
months of purchase, a CDSC of 1.00% will be deducted from the redemption
proceeds."
The following is added to "How To Buy Shares:"
"Electronic Funds Transfer. Shareholders who have an account with a U.S.
bank, or other financial institution that is an Automated Clearing House member,
may establish Electronic Funds Transfer. This permits shareholders to purchase
shares of a Fund through electronic funds transfer from a predesignated bank
account. The minimum amount which may be electronically transferred is $500 or
$50 for systematic investment programs and the maximum amount is $50,000. You
may purchase shares of a Fund through electronic funds transfer if the amount of
the purchase, together with all other purchases made by electronic funds
transfer into the account during the prior 30-day period, does not exceed
$100,000. Each Fund has the right, at its sole discretion, to limit or terminate
your ability to exercise the electronic funds transfer privilege at any time.
For additional information, see the SAI. Applications to establish Electronic
Funds Transfer are available from your FIC Representative or by calling
Shareholder Services at 1-800-423-4026."
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The following paragraph replaces the second paragraph under "How To Redeem
Shares" on page 20:
"Due to emergency conditions, such as snow storms, the Woodbridge offices
of FIC and the Transfer Agent may not be open for business on a day when the
NYSE is open for regular trading and, therefore, would be unable to accept
redemption requests. Should this occur, redemption requests will be executed at
the net asset value, less any applicable CDSC, determined at the close of
regular trading on the NYSE on the next business day that these offices are open
for business."
The following change is noted with respect to "Reinvestment after Redemption" on
page 21:
The ninety-day reinvestment privilege has been extended to six months from the
date of redemption.
The following is added to "How To Redeem Shares:"
"Electronic Funds Transfer. Shareholders who have established Electronic
Funds Transfer may have redemption proceeds electronically transferred to a
predesignated bank account. The minimum amount which may be electronically
transferred is $500 and the maximum amount is $50,000. You may redeem shares of
a Fund through electronic funds transfer if the amount of the redemption,
together with all other redemptions made by electronic funds transfer from the
account during the prior 30-day period, does not exceed $100,000. Each Fund has
the right, at its sole discretion, to limit or terminate your ability to
exercise the electronic funds transfer privilege at any time. For additional
information, see the SAI. Applications to establish Electronic Funds Transfer
are available from your FIC Representative or by calling Shareholder Services at
1-800-423-4026."
The following sentence replaces the first sentence under "Telephone
Transactions" on page 21:
"Unless you specifically decline to have telephone privileges, you, or any
person who we reasonably believe is authorized to act on your behalf, may redeem
or exchange noncertificated shares of a Fund by calling the Special Services
Department at 1-800-342-6221 weekdays (except holidays) between 9:00 A.M. and
5:00 P.M. (New York City time)."
The following replaces "Telephone Exchanges" on page 21:
"Telephone Exchanges. Exchange requests may be made by telephone (for
shares held on deposit only). Telephone exchanges to Money Market Funds are not
available if your address of record has changed within 60 days prior to the
exchange request."
The following replaces item (5) and the last sentence under "Telephone
Redemptions" on page 22:
"(5) the proceeds of the redemption, together with all redemptions made from the
account during the prior 30-day period, do not exceed $100,000. Telephone
redemption instructions will be accepted from any one owner or authorized
individual."
FISF596 May 13, 1996
FIRST INVESTORS SERIES FUND II, INC.
Growth & Income Fund
U.S.A. Mid-Cap Opportunity Fund
Utilities Income Fund
95 Wall Street 1-800-423-4026
New York, New York 10005
Statement of Additional Information
dated February 15, 1996
as amended May 13, 1996
This is a Statement of Additional Information ("SAI") for First Investors
Series Fund II, Inc. ("Series Fund II"), an open-end diversified management
investment company. Series Fund II offers three separate series, each of which
has different investment objectives and policies: First Investors Growth &
Income Fund, First Investors U.S.A. Mid-Cap Opportunity Fund and First Investors
Utilities Income Fund (each, a "Fund"). The investment objective of each Fund is
as follows:
Growth & Income Fund seeks long-term growth of capital and current income.
U.S.A. Mid-Cap Opportunity Fund seeks long-term capital growth. Prior
February 15, 1996, the Fund was known as Made In The U.S.A. Fund.
Utilities Income Fund primarily seeks high current income. Long-term
capital appreciation is a secondary objective.
There can be no assurance that any Fund will achieve its investment
objective.
This SAI is not a prospectus. It should be read in conjunction with the
Funds' Prospectus dated February 15, 1996, as amended May 13, 1996, which may be
obtained free of cost from the Funds at the address or telephone number noted
above.
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TABLE OF CONTENTS
Page
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Investment Policies...................................................... 3
Hedging and Option Income Strategies..................................... 9
Investment Restrictions.................................................. 17
Directors and Officers................................................... 23
Management............................................................... 25
Underwriter.............................................................. 27
Distribution Plans....................................................... 28
Determination of Net Asset Value......................................... 29
Allocation of Portfolio Brokerage........................................ 30
Reduced Sales Charges, Additional Exchange and
Redemption Information and Other Services.............................. 31
Taxes.................................................................... 39
Performance Information.................................................. 41
General Information...................................................... 45
Appendix A............................................................... 47
Appendix B............................................................... 49
Appendix C............................................................... 50
Appendix D............................................................... 52
Financial Statements..................................................... 59
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INVESTMENT POLICIES
Bankers' Acceptances. Each Fund may invest in bankers' acceptances.
Bankers' acceptances are short-term credit instruments used to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of interest for a
specific maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
Certificates of Deposit. Each Fund may invest in bank certificates of
deposit ("CDs") subject to the restrictions set forth in the Prospectus. The
Federal Deposit Insurance Corporation is an agency of the U.S. Government which
insures the deposits of certain banks and savings and loan associations up to
$100,000 per deposit. The interest on such deposits may not be insured if this
limit is exceeded. Current Federal regulations also permit such institutions to
issue insured negotiable CDs in amounts of $100,000 or more, without regard to
the interest rate ceilings on other deposits. To remain fully insured, these
investments currently must be limited to $100,000 per insured bank or savings
and loan association.
Convertible Securities. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security. First Investors Management Company, Inc.
("FIMCO" or "Adviser"), or for Growth & Income Fund, its subadviser, Wellington
Management Company ("WMC" or "Subadviser"), will decide to invest based upon a
fundamental analysis of the long-term attractiveness of the issuer and the
underlying common stock, the evaluation of the relative attractiveness of the
current price of the underlying common stock, and the judgment of the value of
the convertible security relative to the common stock at current prices.
Loans of Portfolio Securities. Growth & Income Fund and Utilities Income
Fund may loan securities to qualified broker-dealers or other institutional
investors provided: the borrower pledges to a Fund and agrees to maintain at all
times with the Fund collateral equal to not less than 100% of the value of the
securities loaned (plus accrued interest or dividend, if any); the loan is
terminable at will by the Fund; the Fund pays only reasonable custodian fees in
connection with the loan; and the Adviser or the Subadviser monitors the
creditworthiness of the borrower throughout the life of the loan. Such loans may
be terminated by a Fund at any time and the Fund may vote the proxies if a
material event affecting the investment is to occur. The market risk applicable
to any security loaned remains a risk of the Fund. The borrower must add to the
collateral whenever the market value of the securities rises above the level of
such collateral. 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.
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed
securities, including those representing an undivided ownership interest in a
pool of mortgage loans. Each of the certificates described below is
characterized by monthly payments to the security holder, reflecting the monthly
payments made by the mortgagees of the underlying mortgage loans. The payments
to the security holders (such as a Fund), like the payments on the underlying
loans, represent both principal and interest. Although the underlying mortgage
loans are for specified periods of time, such as twenty to thirty years,
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the borrowers can, and typically do, repay them sooner. Thus, the security
holders frequently receive prepayments of principal, in addition to the
principal which is part of the regular monthly payments. A borrower is more
likely to prepay a mortgage which bears a relatively high rate of interest.
Thus, in times of declining interest rates, some higher yielding mortgages might
be repaid resulting in larger cash payments to a Fund, and the Fund will be
forced to accept lower interest rates when that cash is used to purchase
additional securities.
Interest rate fluctuations may significantly alter the average maturity of
mortgage-backed securities, due to the level of refinancing by homeowners. When
interest rates rise, prepayments often drop, which should increase the average
maturity of the mortgage-backed security. Conversely, when interest rates fall,
prepayments often rise, which should decrease the average maturity of the
mortgage-backed security.
GNMA Certificates. Government National Mortgage Association ("GNMA")
certificates ("GNMA Certificates") are mortgage-backed securities, which
evidence an undivided interest in a pool of mortgage loans. GNMA Certificates
differ from bonds in that principal is paid back monthly by the borrower over
the term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that the Fund purchase are the "modified pass-through" type.
"Modified pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid and owed on the mortgage pool net of
fees paid to the "issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Department of Veteran Affairs
("VA"). The GNMA guarantee is backed by the full faith and credit of the U.S.
Government. GNMA also is empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. A Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional mortgage-backed
securities of the types described above. Interest received by the Fund will,
however, be distributed to shareholders. Foreclosures impose no risk to
principal investment because of the GNMA guarantee. As prepayment rates of the
individual mortgage pools vary widely, it is not possible to predict accurately
the average life of a particular issue of GNMA Certificates.
Yield Characteristics of GNMA Certificates. The coupon rate of interest on
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates by the amount of the fees paid
to GNMA and the issuer. The coupon rate by itself, however, does not indicate
the yield which will be earned on GNMA Certificates. First, Certificates may
trade in the secondary market at a premium or discount. Second, interest is
earned monthly, rather than semi-annually as with traditional bonds; monthly
compounding raises the effective yield earned. Finally, the actual yield of a
GNMA Certificate is influenced by the prepayment experience of the mortgage pool
underlying it. For example, if the higher-yielding mortgages from the pool are
prepaid, the yield on the remaining pool will be reduced.
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FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
issues two types of mortgage pass-through securities, mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool.
FNMA Securities. The Federal National Mortgage Association ("FNMA") issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates
and the full return of principal.
Risk of foreclosure of the underlying mortgages is greater with FHLMC and
FNMA securities because, unlike GNMA Certificates, FHLMC and FNMA securities are
not guaranteed by the full faith and credit of the U.S. Government.
Portfolio Turnover. Although each Fund generally will not invest for
short-term trading purposes, portfolio securities may be sold from time to time
without regard to the length of time they have been held when, in the opinion of
the Adviser or the Subadviser investment considerations warrant such action.
Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or
sales of portfolio securities for the fiscal year by (2) the monthly average of
the value of portfolio securities owned during the fiscal year. A 100% turnover
rate would occur if all the securities in a Fund's portfolio, with the exception
of securities whose maturities at the time of acquisition were one year or less,
were sold and either repurchased or replaced within one year. A high rate of
portfolio turnover generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Allocation of Portfolio Brokerage."
For the fiscal year ended October 31, 1994, the portfolio turnover rate for
Growth & Income Fund, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund
was 6%, 29% and 58%, respectively. For the fiscal year ended October 31, 1995,
the portfolio turnover rate for Growth & Income Fund and Utilities Income Fund
was 19% and 16%, respectively. See the Prospectus for the portfolio turnover
rate for U.S.A. Mid-Cap Opportunity Fund.
Repurchase Agreements. A repurchase agreement essentially is a short-term
collateralized loan. The lender (a Fund) agrees to purchase a security from a
borrower (typically a broker-dealer) at a specified price. The borrower
simultaneously agrees to repurchase that same security at a higher price on a
future date (which typically is the next business day). The difference between
the purchase price and the repurchase price effectively constitutes the payment
of interest. In a standard repurchase agreement, the securities which serve as
collateral are transferred to a Fund's custodian bank. In a "tri-party"
repurchase agreement, these securities would be held by a different bank for the
benefit of the Fund as buyer and the broker-dealer as seller. In a "quad-party"
repurchase agreement, the Fund's custodian bank also is made a party to the
agreement. Although each Fund may enter into repurchase agreements with banks
which are members of the Federal Reserve System or securities dealers who are
members of a national securities exchange or are market makers in government
securities, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund do not
currently intend to do so. 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
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agreement. Each Fund will always receive, as collateral, securities whose market
value, including accrued interest, which will at all times be at least equal to
100% of the dollar amount invested by the Fund in each agreement, and the Fund
will make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian. If the seller defaults, a
Fund might incur a loss if the value of the collateral securing the repurchase
agreement declines, and might incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy or similar proceedings
are commenced with respect to the seller of the security, realization upon the
collateral by a Fund may be delayed or limited. No Fund may enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 15% of such Fund's net assets would be invested in such repurchase
agreements and other illiquid investments.
Restricted and Illiquid Securities. No Fund will purchase or otherwise
acquire any security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restrictions
on resale. This policy includes foreign issuers' unlisted securities with a
limited trading market and repurchase agreements maturing in more than seven
days. This policy does not include restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, as amended ("1933 Act"),
which the Board of Directors or the Adviser or the Subadviser has determined
under Board- approved guidelines are liquid.
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. Securities that are freely marketable in the country where they are
principally traded, but would not be freely marketable in the United States,
will not be subject to this 15% limit. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such
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portfolio securities and a Fund might be unable to dispose of such securities
promptly or at reasonable prices.
Risk Factors of High Yield Securities. High yield, high risk securities
(commonly referred to as "junk bonds"), are subject to certain risks that may
not be present with investments of higher grade securities. These risks also
apply to lower-rated and certain unrated convertible securities.
Effect of Interest Rate and Economic Changes. The prices of High Yield
Securities tend to be less sensitive to interest rate changes than higher-rated
investments, but may be more sensitive to adverse economic changes or individual
corporate developments. Periods of economic uncertainty and changes generally
result in increased volatility in the market prices and yields of High Yield
Securities and thus in a Fund's net asset value. A strong economic downturn or a
substantial period of rising interest rates could severely affect the market for
High Yield Securities. In these circumstances, highly leveraged companies might
have greater difficulty in making principal and interest payments, meeting
projected business goals, and obtaining additional financing. Thus, there could
be a higher incidence of default. This would affect the value of such securities
and thus a Fund's net asset value. Further, if the issuer of a security owned by
a Fund defaults, that Fund might incur additional expenses to seek recovery.
Generally, when interest rates rise, the value of fixed rate debt
obligations, including High Yield Securities, tends to decrease; when interest
rates fall, the value of fixed rate debt obligations tends to increase. If an
issuer of a High Yield Security containing a redemption or call provision
exercises either provision in a declining interest rate market, a Fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if a Fund experiences unexpected net redemptions in a
rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which Fund expenses could be allocated and in a reduced rate of return for that
Fund. While it is impossible to protect entirely against this risk,
diversification of a Fund's portfolio and the Adviser's careful analysis of
prospective portfolio securities should minimize the impact of a decrease in
value of a particular security or group of securities in a Fund's portfolio.
The High Yield Securities Market. The market for below investment grade
bonds expanded rapidly in recent years and its growth paralleled a long economic
expansion. In the past, the prices of many lower-rated debt securities declined
substantially, reflecting an expectation that many issuers of such securities
might experience financial difficulties. As a result, the yields on lower-rated
debt securities rose dramatically. However, such higher yields did not reflect
the value of the income streams that holders of such securities expected, but
rather the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers' financial restructuring or default.
There can be no assurance that such declines in the below investment grade
market will not reoccur. The market for below investment grade bonds generally
is thinner and less active than that for higher quality bonds, which may limit a
Fund's ability to sell such securities at fair value in response to changes in
the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower rated securities, especially in a thinly traded
market.
Liquidity and Valuation. Lower-rated bonds are typically traded among a
smaller number of broker-dealers than in a broad secondary market. Purchasers of
High Yield Securities tend to be institutions, rather than individuals, which is
a factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many High Yield Securities may not
be as liquid
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as higher-grade bonds. A less active and thinner market for High Yield
Securities than that available for higher quality securities may result in more
volatile valuations of a Fund's holdings and more difficulty in executing trades
at favorable prices during unsettled market conditions.
The ability of a Fund to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective information
available and thus the responsibility of the Board of Directors to value High
Yield Securities becomes more difficult, with judgment playing a greater role.
Further, adverse publicity about the economy or a particular issuer may
adversely affect the public's perception of the value, and thus liquidity, of a
High Yield Security, whether or not such perceptions are based on a fundamental
analysis. See "Determination of Net Asset Value."
Legislation. Provisions of the Revenue Reconciliation Act of 1989 limit a
corporate issuer's deduction for a portion of the original issue discount on
"high yield discount" obligations (including certain pay-in-kind securities).
This limitation could have a materially adverse impact on the market for certain
High Yield Securities. From time to time, legislators and regulators have
proposed other legislation that would limit the use of high yield debt
securities in leveraged buyouts, mergers and acquisitions. It is not certain
whether such proposals, which also could adversely affect High Yield Securities,
will be enacted into law.
Short Sales. Although they do not intend to do so in the foreseeable
future, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund may borrow
securities for cash sale to others. This type of transaction is commonly known
as a "short sale." Each Fund will only make short sales "against the box," which
occurs when a Fund enters into a short sale with a security identical to one it
already owns or has the immediate and unconditional right, at no cost, to obtain
the identical security.
Warrants. Each Fund may purchase warrants, which are instruments that
permit a Fund to acquire, by subscription, the capital stock of a corporation at
a set price, regardless of the market price for such stock. Warrants may be
either perpetual or of limited duration. There is a greater risk that warrants
might drop in value at a faster rate than the underlying stock. Each Fund's
investments in warrants and stock rights will be limited to 5% of its total
assets, of which no more than 2% may not be listed on the New York or American
Stock Exchange.
When-Issued Securities. Each Fund may invest up to 10% of its net assets in
securities issued on a when-issued or delayed delivery basis at the time the
purchase is made. 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
the Fund on a when-issued basis may result in the Fund's incurring a loss or
missing an opportunity to make an alternative investment. When a Fund enters
into a commitment to purchase securities on a when-issued basis, it establishes
a separate account with its custodian consisting of cash or liquid high-grade
debt securities equal to the amount of the Fund's commitment, which are valued
at their fair market value. If on any day the market value of this segregated
account falls below the value of the Fund's commitment, the Fund will be
required to deposit additional cash or qualified securities into the account
until equal to the value of the Fund's commitment. When the securities to be
purchased are issued, 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
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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 other securities owned by a Fund and
when-issued securities may cause the realization of a capital gain or loss.
Zero Coupon and Pay-In-Kind Securities. Although there is no intention to
do so in the foreseeable future, U.S.A. Mid-Cap Opportunity Fund and Utilities
Income Fund may each invest in zero coupon and pay-in-kind securities. Zero
coupon securities are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date when the
securities begin paying current interest. They are issued and traded at a
discount from their face amount or par value, which discount varies depending on
the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer.
Pay-in-kind securities are those that pay interest through the issuance of
additional securities. The market prices of zero coupon and pay-in- kind
securities generally are more volatile than the prices of securities that pay
interest periodically and in cash and are likely to respond to changes in
interest rates to a greater degree than do other types of debt securities having
similar maturities and credit quality. Original issue discount earned on zero
coupon securities and the "interest" on pay-in-kind securities must be included
in a Fund's income. Thus, to continue to qualify for tax treatment as a
regulated investment company and to avoid a certain excise tax on undistributed
income, a Fund may be required to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. See "Taxes." These
distributions must be made from a Fund's cash assets or, if necessary, from the
proceeds of sales of portfolio securities. Each Fund will not be able to
purchase additional income-producing securities with cash used to make such
distributions, and its current income ultimately could be reduced as a result.
HEDGING AND OPTION INCOME STRATEGIES
Utilities Income Fund - Options and Futures Contracts
Although it does not intend to engage in these strategies in the coming
year, Utilities Income Fund may engage in certain options and futures contract
strategies to hedge its portfolio and in other circumstances permitted by the
Commodity Futures Trading Commission ("CFTC") and may engage in certain options
strategies to enhance income. The instruments described below are sometimes
referred to collectively as "Hedging Instruments" and are defined in Appendix C.
Certain special characteristics of and risks associated with using Hedging
Instruments are discussed below. In addition to the investment guidelines
(described below) adopted by the Board of Directors to govern the Fund's
investments in Hedging Instruments, use of these instruments is subject to the
applicable regulations of the Securities and Exchange Commission ("SEC"), the
several options and futures exchanges upon which options and futures contracts
are traded, the CFTC and various state regulatory authorities. In addition, the
Fund's ability to use Hedging Instruments will be limited by tax considerations.
See "Taxes."
Participation in the options or futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. If the Adviser's prediction of movements in the direction of
the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. The Fund might not employ any of the strategies
described below, and there can be no assurance that any
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strategy will succeed. The use of these strategies involve certain special
risks, including (1) dependence on the Adviser's ability to predict correctly
movements in the direction of interest rates and securities prices; (2)
imperfect correlation between the price of options, futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; and (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences.
The Fund may buy and sell put and call options on stock indices and
securities that are traded on national securities exchanges or in the
over-the-counter ("OTC") market to enhance income or to hedge the Fund's
portfolio. The Fund also may write put and covered call options to generate
additional income through the receipt of premiums, purchase put options in an
effort to protect the value of a security that it owns against a decline in
market value and purchase call options in an effort to protect against an
increase in the price of securities it intends to purchase. The Fund also may
purchase put and call options to offset previously written put and call options
of the same Fund. The Fund also may write put and call options to offset
previously purchased put and call options of the same Fund. Other than to effect
closing transactions, the Fund will write only covered call options, including
options on futures contracts.
The Fund may buy and sell financial futures contracts and options thereon
that are traded on a commodities exchange or board of trade for hedging
purposes. These futures contracts and related options may be on stock indices,
financial indices or debt securities. However, as a non-fundamental policy,
Series Fund II has undertaken to a certain state securities commission that the
Fund will not purchase interest rate futures contracts or options thereon.
Cover for Hedging and Option Income Strategies. The Fund will not use
leverage in its hedging and option income strategies. In the case of each
transaction entered into as a short hedge, the Fund will hold securities, or
other options or futures positions whose values are expected to offset ("cover")
its obligations hereunder. The Fund will not enter into a hedging or option
income strategy that exposes the Fund to an obligation to another party unless
it owns either (1) an offsetting ("covered") position in securities, or other
options or futures contracts or (2) cash, receivables and short-term debt
securities with a value sufficient at all times to cover its potential
obligations. The 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, high-grade debt securities in a
segregated account with its custodian in the prescribed amount. Securities or
other options or futures positions used for cover and securities held in a
segregated account cannot be sold or closed out while the hedging or option
income strategy is outstanding unless they are replaced with similar assets. As
a result, there is a possibility that the use of cover or segregation involving
a large percentage of the Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
Options Strategies. The Fund may purchase call options on securities that
the Adviser intends to include in the Fund's portfolio in order to fix the cost
of a future purchase. Call options also may be used as a means of participating
in an anticipated price increase of a security. In the event of a decline in the
price of the underlying security, use of this strategy would serve to limit the
Fund's potential loss to the option premium paid; conversely, if the market
price of the underlying security increases above the exercise price and the Fund
either sells or exercises the option, any profit eventually realized will be
reduced by the premium. The Fund may purchase put options in order to hedge
against a decline in the
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market value of securities held in its portfolio. The put option enables the
Fund to sell the underlying security at the predetermined exercise price; thus
the potential for loss to the Fund below the exercise price is limited to the
option premium paid. If the market price of the underlying security is higher
than the exercise price of the put option, any profit the Fund realizes on the
sale of the security will be reduced by the premium paid for the put option less
any amount for which the put option may be sold.
The Fund may write covered call options on securities to increase income in
the form of premiums received from the purchasers of the options. Because it can
be expected that a call option will be exercised if the market value of the
underlying security increases to a level greater than the exercise price, the
Fund will write covered call options on securities generally when the Adviser
believes that the premium received by the Fund, plus anticipated appreciation in
the market price of the underlying security up to the exercise price of the
option, will be greater than the total appreciation in the price of the
security. The strategy may be used to provide limited protection against a
decrease in the market price of the security in an amount equal to the premium
received for writing the call option less any transaction costs. Thus, if the
market price of the underlying security held by the Fund declines, the amount of
such decline will be offset wholly or in part by the amount of the premium
received by the Fund. If, however, there is an increase in the market price of
the underlying security and the option is exercised, the Fund will be obligated
to sell the security at less than its market value. The Fund gives up the
ability to sell the portfolio securities used to cover the call option while the
call option is outstanding. Such securities may also be considered illiquid in
the case of OTC options written by the Fund and therefore subject to investment
restrictions. See "Restricted and Illiquid Securities." In addition, the Fund
could lose the ability to participate in an increase in the value of such
securities above the exercise price of the call option because such an increase
would likely be offset by an increase in the cost of closing out the call option
(or could be negated if the buyer chose to exercise the call option at an
exercise price below the securities' current market value).
The Fund may purchase put and call options and write covered call options
on stock indices in much the same manner as the more traditional equity and debt
options discussed above, except that stock index options may serve as a hedge
against overall fluctuations in the securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a particular
security. A stock index assigns relative values to the stock included in the
index and fluctuates with changes in such values. Stock index options operate in
the same way as the more traditional equity options, except that settlements of
stock index options are effected with cash payments and do not involve delivery
of securities. Thus, upon settlement of a stock index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the stock index. The effectiveness of
hedging techniques using stock index options will depend on the extent to which
price movements in the stock index selected correlate with price movements of
the securities in which the Fund invests.
The Fund may write put options on securities or on a stock index. A put
option on a security 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. A written put option on a
stock index is similar to a written put option on a security except that, on
exercise, the writer pays the buyer a settlement payment in cash equal to the
difference between the exercise price and the value of the index. The operation
of put options in other respects, including their
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related risks and rewards, is substantially identical to that of call options.
The Fund may write covered put options in circumstances when the Adviser
believes that the market price of the securities will not decline below the
exercise price less the premiums received. If the put option is not exercised,
the Fund will realize income in the amount of the premium received. This
technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security would decline below the exercise price less the premiums
received, in which case the Fund would expect to suffer a loss.
Currently, many options on equity securities are exchange-traded, whereas
options on debt securities are primarily traded on the OTC market.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
guarantees completion of every exchange-traded option transaction. In contrast,
OTC options are contracts between the Fund and the opposite party with no
clearing organization guarantee. Thus, when the Fund purchases an OTC option, it
relies on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction.
Options Guidelines. In view of the risks involved in using options, the
Board of Directors has adopted non-fundamental investment guidelines to govern
the Fund's use of options that may be modified by the Board without shareholder
vote: (1) options will be purchased or written only when the Adviser believes
that there exists a liquid secondary market in such options; and (2) the Fund
may not 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 the Fund, exceeds 5%
of the Fund's total assets. However, this does not limit the amount of the
Fund's assets at risk to 5%.
Special Characteristics and Risks of Options Trading. The Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If the Fund wishes to terminate its obligation to sell
securities under a call option it has written, the Fund may purchase a call
option of the same series (that is, a call option identical in its terms to the
call option previously written); this is known as a closing purchase
transaction. Conversely, in order to terminate its right to purchase or sell
specified securities under a call or put option it has purchased, the 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 the Fund to
realize profits or limit losses on its options positions prior to the exercise
or expiration of the option.
The value of an option position will reflect, among other things, the
current market price of the underlying security or stock index, the time
remaining until expiration, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security or stock index
and general market conditions. For this reason, the successful use of options
depends upon the Adviser's ability to forecast the direction of price
fluctuations in the underlying securities or, in the case of stock index
options, fluctuations in the market sector represented by the index selected.
Options normally have expiration dates of up to nine months. Unless an
option purchased by the Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the amount of
the premium paid and any transaction costs.
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A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. The ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market. Although the Fund intends to purchase or write
only those exchange-traded options for which there appears to be a liquid
secondary market, there is no assurance that a liquid secondary market will
exist for any particular option at any particular time. Closing transactions may
be effected with respect to options traded in the OTC markets (currently the
primary markets for options on debt securities) only by negotiating directly
with the other party to the option contract or in a secondary market for the
option if such market exists. Although the Fund will enter into OTC options only
with dealers that agree to enter into, and that are expected to be capable of
entering into, closing transactions with the Fund, there is no assurance that
the Fund will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. In the event of insolvency of the opposite party, the
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 the Fund would have to exercise those options that it has
purchased in order to realize any profit. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because the Fund must maintain a covered
position with respect to any call option it writes, the Fund may not sell the
underlying assets used to cover an option during the period it is obligated
under the option. This requirement may impair the Fund's ability to sell a
portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Stock index options are settled exclusively in cash. If the Fund purchases
an option on a stock index, the option is settled based on the closing value of
the index on the exercise date. Thus, a holder of a stock index option who
exercises it before the closing index value for that day is available runs the
risk that the level of the underlying index may subsequently change. For
example, in the case of a call option, if such a change causes the closing index
value to fall below the exercise price of the option on the index, the
exercising holder will be required to pay the difference between the closing
index value and the exercise price of the option.
The Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, the Fund also
may save on commissions by using options as a hedge rather than buying or
selling individual securities in anticipation or as a result of market
movements.
Futures Strategies. The Fund may engage in futures strategies to attempt to
reduce the overall investment risk that would normally be expected to be
associated with ownership of the securities in which it invests. The Fund may
sell stock index futures contracts in anticipation of a general market or market
sector decline that could adversely affect the market value of the Fund's
portfolio. To the extent that a portion of the Fund's portfolio correlates with
a given stock index, the sale of futures contracts on that index could reduce
the risks associated with a market decline and thus provide an alternative to
the liquidation of securities positions. The Fund may purchase a stock index
futures contract if a significant market or market sector advance is
anticipated. Such a purchase would serve as a temporary substitute for the
purchase of individual stocks, which stocks may then be purchased in an orderly
fashion. This strategy may minimize the effect of all or part of an increase in
the market price of securities that the Fund intends to purchase. A rise in the
price of the securities should be partially or wholly offset by gains in the
futures position.
The Fund may purchase a call option on a stock index future to hedge
against a market advance in equity securities that the Fund plans to purchase at
a future date. The Fund may also write put options
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on a stock index futures contract as a partial hedge against a market advance in
equity securities the Fund plans to purchase at a future date. The Fund may
write covered call options on stock index futures as a partial hedge against a
decline in the prices of stocks held in the Fund's portfolio. The Fund also may
purchase put options on stock index futures contracts.
The Fund may use interest rate futures contracts and options thereon to
hedge the debt portion of its portfolio against changes in the general level of
interest rates. The Fund may purchase an interest rate futures contract when it
intends to purchase debt securities but has not yet done so. This strategy may
minimize the effect of all or part of an increase in the market price of those
securities because a rise in the price of the securities prior to their purchase
may either be offset by an increase in the value of the futures contract
purchased by 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. The Fund may sell an interest rate futures contract in order
to continue to receive the income from a debt security, while endeavoring to
avoid part or all of the decline in the market value of that security that would
accompany an increase in interest rates.
The Fund may purchase a call option on an interest rate futures contract to
hedge against a market advance in debt securities that the Fund plans to acquire
at a future date. The seller may also write a put option on an interest rate
futures contract as a partial hedge against a market advance in debt securities
that the Fund plans to acquire at a future date. The Fund also may write covered
call options on interest rate futures contracts as a partial hedge against a
decline in the price of debt securities held in the Fund's portfolio or purchase
put options on interest rate futures contracts in order to hedge against a
decline in the value of debt securities held in the Fund's portfolio. Series
Fund II, on behalf of the Fund, has undertaken to a certain state securities
commission that the Fund will not purchase interest rate futures contracts or
options thereon.
Futures Guidelines. In view of the risks involved in using futures
strategies described above, the Board of Directors has adopted non-fundamental
investment guidelines to govern the Fund's use of such investments that may be
modified by the Board without shareholder vote. The Fund will not purchase or
sell futures contracts or related options if, immediately thereafter, the sum of
the amount of initial margin deposits on the Fund's existing futures positions
and initial margin and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets. This does not limit the Fund's assets
at risk to 5%. The value of all futures sold will not exceed the total market
value of the 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,
the 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 10% or less of the contract value. This amount is
known as "initial margin." When writing a call or put option on a futures
contract, margin also must be deposited in accordance with applicable exchange
rules. Initial margin on futures contracts is in the nature of a performance
bond or good-faith deposit that is returned to the Fund upon termination of the
transaction, assuming all obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the 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
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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 the Fund's obligation to or from a clearing organization.
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 the 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 the Fund of futures contracts and related options will
depend upon the Adviser's ability to predict movements in the direction of the
overall securities and interest rate markets, which requires different skills
and techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current price level of the
underlying instrument but to the anticipated levels at some point in the future.
There is, in addition, the risk that the movements in the price of the futures
contract or related option will not correlate with the movements in prices of
the securities being hedged. In addition, if the 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, the 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, the 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 position or
related option 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 or related
options over the short term.
Positions in futures contracts and related options may be closed out only
on an exchange or board of trade that provides a secondary market for such
futures contracts or related options. Although the Fund
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<PAGE>
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, the Fund would
continue to be required to make variation margin payments.
Like options on securities, options on futures contracts have a limited
life. A purchased option that expires unexercised has no value.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on a futures contract, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements. In addition, although the maximum amount at risk when
the Fund purchases an option is the premium paid for the option and the
transaction costs, there may be circumstances when the purchase of an option on
a futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the level of the
underlying stock index or the value of the securities being hedged.
The Fund's activities in the futures and related options markets may result
in a higher portfolio turnover rate and additional transaction costs in the form
of added brokerage commissions; however, the Fund also may save on commissions
by using futures and related options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
Growth & Income Fund - Forward Currency Contracts
Growth & Income Fund may use forward currency contracts to protect against
uncertainty in the level of future exchange rates. The Fund will not speculate
with forward currency contracts or foreign currency exchange rates.
The Fund may enter into forward currency contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars or foreign currency, of the amount of foreign
currency involved in the underlying transaction. The Fund will thereby be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the currency exchange rates during the period between
the date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
The precise matching of the forward currency contract amounts and the value
of the securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date the forward
contract is entered into and the date it matures. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
(i.e., cash) market and bear the expense of such purchase if the market value of
the security is less than the amount of foreign currency the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign
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currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward currency contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transactions costs. The Fund may enter into formal
contracts or maintain a net exposure to such contracts only if the Fund
maintains cash, U.S. Government securities or liquid, high-grade debt securities
in a segregated account in an amount not less than the value of the Fund's total
assets committed to the consummation of the contract, as marked to market daily.
At or before the maturity date of a forward contract requiring the Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, the Fund may
close out a forward contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into an offsetting forward currency
contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and the offsetting contract. There can be no assurance that new forward
currency contracts or offsets always will be available for the Fund. Forward
currency contracts also involve a risk that the other party to the contract may
fail to deliver currency when due, which could result in substantial losses to
the Fund. The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
respective Fund and, unless identified as non-fundamental policies, may not be
changed without the affirmative vote of a majority of the outstanding voting
securities of that Fund, voting separately from any other series of Series Fund
II. As provided in the Investment Company Act of 1940, as amended ("1940 Act"),
a "vote of a majority of the outstanding voting securities of the Fund" means
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares of the Fund present at a
meeting, if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. Except with respect to borrowing, changes in
values of a particular Fund's assets or the assets of Series Fund II as a whole
will not cause a violation of the following investment restrictions so long as
percentage restrictions are observed by each Fund at the time it purchases any
security.
Growth & Income Fund. Growth & Income Fund will not:
(1) Issue senior securities or borrow money, except that the Fund may
borrow money from a bank for temporary or emergency purposes in amounts not
exceeding 5% (taken at the lower of cost or current value) of its net assets
(not including the amount borrowed).
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(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) Pledge, mortgage or hypothecate any of its assets, except that the Fund
may pledge its assets to secure borrowings made in accordance with paragraph (1)
above, provided the Fund maintains asset coverage of at least 300% for all such
borrowings.
(5) Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, except that the Fund may purchase and sell securities
that are secured by real estate, securities of companies which invest or deal in
real estate, and interests in real estate investment trusts.
(6) 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.
(7) Make loans, except loans of portfolio securities and repurchase
agreements.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. The Fund will not:
(1) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market and securities eligible for resale under Rule 144A under the 1933 Act,
are not deemed illiquid for purposes of this limitation.
(2) Invest more than 5% of its total assets in securities of companies
(including predecessors) which have been in operation for less than three years.
(3) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets would be invested
in such securities, or except as part of a merger, consolidation or other
acquisition.
(4) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(5) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets, valued at the lower of cost or market, invested in warrants
(of which no more than 2% may be warrants not listed on the New York or American
Stock Exchange).
(6) Make short sales of securities.
18
<PAGE>
(7) Make investments for the purpose of exercising control or management.
(8) Purchase any securities on margin.
(9) Purchase or sell portfolio securities from or to the Adviser or any
director or officer thereof or of Series Fund II, as principals.
(10) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer or director of Series Fund II or of the Adviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers or
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
(11) Series Fund II, on behalf of the Fund, has filed the following
undertakings to comply with requirements of certain states in which shares of
the Fund are sold, which may be changed without shareholder approval:
(1) The Fund will not invest more than 10% of its total assets in
securities that are restricted as to public resale, excluding Rule 144A
securities.
(2) The Fund will not purchase puts, calls, straddles, spreads and any
combination thereof, if by reason of that purchase, the value of the Fund's
investments in all such securities exceeds 5% of the Fund's total assets.
U.S.A. Mid-Cap Opportunity Fund. U.S.A. Mid-Cap Opportunity Fund will not:
(1) Issue senior securities or borrow money, except that the Fund may
borrow money from a bank for temporary or emergency purposes in amounts not
exceeding 5% (taken at the lower of cost or current value) of its net assets
(not including the amount borrowed).
(2) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (a) as to 75% of the Fund's
total assets more than 5% of such assets would then be invested in securities of
a single issuer, or (b) 25% or more of the Fund's total assets would be invested
in a single industry.
(3) 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) Pledge, mortgage or hypothecate any of its assets, except that the Fund
may pledge its assets to secure borrowings made in accordance with paragraph (1)
above, provided the Fund maintains asset coverage of at least 300% for all such
borrowings.
(5) Buy or sell commodities or commodity contracts, including futures
contracts, or real estate or interests in real estate, although it may purchase
and sell securities which are secured by real estate, securities of companies
which invest or deal in real estate, and interests in real estate investment
trusts.
19
<PAGE>
(6) 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.
(7) Make investments for the purpose of exercising control or management.
(8) Purchase any securities on margin.
(9) Make loans, except through repurchase agreements.
(10) Purchase or sell portfolio securities from or to the Adviser or any
director or officer thereof or of Series Fund II, as principals.
(11) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer or director of Series Fund II or of the Adviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers or
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. The Fund will not:
(1) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market and securities eligible for resale under Rule 144A under the Securities
Act of 1933, as amended, are not deemed illiquid for purposes of this
limitation; the Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors.
(2) Purchase any security if as a result the Fund would then have more than
5% of its total assets invested in securities of companies (including
predecessors) less than three years old.
(3) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets would be invested
in such securities, or except as part of a merger, consolidation or other
acquisition.
(4) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(5) Write, purchase or sell options (puts, calls or combinations thereof).
(6) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets, valued at the lower of cost or market, invested in warrants
(of which no more than 2% may be warrants not listed on the New York or American
Stock Exchange).
(7) Make short sales of securities, except short sales "against the box."
20
<PAGE>
Series Fund II, on behalf of the Fund, has filed the following undertakings
to comply with requirements of certain states in which shares of the Fund are
sold, which may be changed without shareholder approval:
(1) The Fund will not invest more than 10% of its total assets in
securities that are restricted as to public resale, excluding Rule 144A
securities.
(2) The Fund will not invest in real estate limited partnerships or in
interests in real estate investment trusts that are not readily marketable.
Utilities Income Fund. Utilities Income Fund will not:
(1) Issue senior securities or borrow money, except that the Fund may
borrow money from a bank for temporary or emergency purposes in amounts not
exceeding 5% (taken at the lower of cost or current value) of its net assets
(not including the amount borrowed).
(2) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result as 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) 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) Pledge, mortgage or hypothecate any of its assets, except that the Fund
may pledge its assets to secure borrowings made in accordance with paragraph (1)
above, provided the Fund maintains asset coverage of at least 300% for all such
borrowings.
(5) Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, except that the Fund may purchase and sell futures
contracts, options on futures contracts, securities that are secured by real
estate, securities of companies which invest or deal in real estate, and
interests in real estate investment trusts.
(6) 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.
(7) Make investments for the purpose of exercising control or management.
(8) Purchase any securities on margin, except the Fund may make deposits of
margin in connection with futures contracts and options.
(9) Make loans, except loans of portfolio securities and repurchase
agreements.
(10) Purchase or sell portfolio securities from or to the Adviser or any
director or officer thereof or of Series Fund II, as principals.
21
<PAGE>
(11) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer or director of Series Fund II or of the Adviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers or
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. The Fund will not:
(1) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market and securities eligible for resale under Rule 144A under the 1933 Act,
are not deemed illiquid for purposes of this limitation.
(2) Invest more than 5% of its total assets in securities of companies
(including predecessors) which have been in operation for less than three years.
(3) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets would be invested
in such securities, or except as part of a merger, consolidation or other
acquisition.
(4) Purchase oil, gas or other mineral leases. However, the Fund may
purchase and sell the securities of companies engaged in the exploration,
development, production, refining, transporting and marketing of oil, gas or
minerals.
(5) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets, valued at the lower of cost or market, invested in warrants
(of which no more than 2% may be warrants not listed on the New York or American
Stock Exchange).
(6) Make short sales of securities, except short sales "against the box."
Series Fund II, on behalf of the Fund, has filed the following undertakings
to comply with requirements of certain states in which shares of the Fund are
sold, which may be changed without shareholder approval:
(1) The Fund will not invest in small emerging growth companies.
(2) The Fund will not purchase interest rate futures contracts or options
thereon.
(3) The Fund will not purchase puts, calls, straddles, spreads or any
combination thereof, if by reason of that purchase, the value of the Fund's
investments in all such securities exceeds 5% of the Fund's total assets.
(4) The Fund will not invest in real estate limited partnership interests
or in real estate investment trusts that are not readily marketable.
22
<PAGE>
(5) The Fund will not invest more than 10% of its total assets in
securities that are restricted as to public resale, excluding Rule 144A
securities.
DIRECTORS AND OFFICERS
The following table lists the Directors and executive officers of Series
Fund II, their 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*+ (70), President and Director. 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 (81), Director, 90 Buell Lane, East Hampton, NY 11937. Retired;
formerly Senior Vice President, James Talcott, Inc. (financial institution).
Roger L. Grayson* (39), Director. Director, FIC and FICC; President and
Director, First Investors Resources, Inc.; Commodities Portfolio Manager.
Kathryn S. Head*+ (40), Director, 581 Main Street, Woodbridge, NJ 07095.
President, FICC, EIMCO and FIMCO; President, ADM; Vice President, Chief
Financial Officer and Director, FIC and EIC; President and Director, First
Financial Savings Bank, S.L.A.
Rex R. Reed (73), Director, 1381 Fairway Oaks, Kiawah Island, SC 29455. Retired;
formerly Senior Vice President, American Telephone & Telegraph Company.
Herbert Rubinstein (74), Director, 145 Elm Drive, Roslyn, NY 11576. Retired;
formerly President, Belvac International Industries, Ltd. and President, Central
Dental Supply.
James M. Srygley (63), Director, 33 Hampton Road, Chatham, NJ 07982. Principal,
Hampton Properties, Inc. (property investment company).
John T. Sullivan* (64), Director and Chairman of the Board; Director, FIMCO,
FIC, FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
Robert F. Wentworth (66), Director, RR1, Box 2554, Upland Downs Road, Manchester
Center, VT 05255. Retired; formerly financial and planning executive with
American Telephone & Telegraph Company.
Joseph I. Benedek (38), Treasurer, 581 Main Street, Woodbridge, NJ 07095.
Treasurer, FIC FIMCO, EIMCO and EIC; Comptroller and Treasurer, FICC.
Concetta Durso (61), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
23
<PAGE>
Patricia D. Poitra (40), Vice President. Vice President, First Investors Series
Fund, First Investors U.S. Government Plus Fund and Executive Investors Trust;
Director of Equities, FIMCO.
Margaret Haggerty (30), Vice President. Portfolio Manager since November 1993;
Analyst from 1990 to 1993.
- ----------
* These Directors may be deemed to be "interested persons," as defined in the
1940 Act.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
All of the officers and Directors, except for Ms. Haggerty and Ms. Poitra,
hold identical or similar positions with 14 other registered investment
companies in the First Investors Family of Funds. Mr. Head is also an officer
and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation and School Financial Management
Services, Inc. Ms. Head is also an officer and/or Director of First Investors
Life Insurance Company, First Investors Credit Corporation, School Financial
Management Services, Inc., First Investors Credit Funding Corporation, N.A.K.
Realty Corporation, Real Property Development Corporation, First Investors
Leverage Corporation and Route 33 Realty Corporation.
The following table lists compensation paid to the Series Fund II Directors
for the fiscal year ended October 31, 1995.
<TABLE>
<CAPTION>
Total
Compensation
Pension or Estimated From First
Aggregate Retirement Benefits Annual Benefits Investors Family
Compensation Accrued as Part of Upon of Funds
Director From Fund* Fund Expenses Retirement Paid to Directors*
- -------- ------------ ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
James J. Coy $1,800 $-0- $-0- $37,200
Roger L. Grayson -0- -0- -0- -0-
Glenn O. Head -0- -0- -0- -0-
Kathryn S. Head -0- -0- -0- -0-
Rex R. Reed 1,800 -0- -0- 37,200
Herbert Rubinstein 1,800 -0- -0- 37,200
James M. Srygley 1,500 -0- -0- 31,000
John T. Sullivan -0- -0- -0- -0-
Robert F. Wentworth 1,800 -0- -0- 37,200
</TABLE>
* Compensation to officers and interested Directors of Series Fund II is paid
by the Adviser. In addition, compensation to non-interested Directors of
Series Fund II is currently voluntarily paid by the Adviser.
24
<PAGE>
MANAGEMENT
Adviser. Investment advisory services to each Fund are provided by First
Investors Management Company, Inc. pursuant to an Investment Advisory Agreement
("Advisory Agreement") dated June 13, 1994. The Advisory Agreement was approved
by the Board of Directors, including a majority of the Directors who are not
parties to the Funds' Advisory Agreement or "interested persons" (as defined in
the 1940 Act) of any such party ("Independent Directors"), in person at a
meeting called for such purpose and by a majority of the public shareholders of
each Fund.
Pursuant to the Advisory Agreement, FIMCO shall supervise and manage each
Fund's investments, determine each Fund's portfolio transactions and supervise
all aspects of each Fund's operations, subject to review by the Directors.
However, with respect to Growth & Income Fund, FIMCO has delegated these duties
to Wellington Management Company. See "Subadviser." The Advisory Agreement also
provides that FIMCO shall provide the Funds with certain executive,
administrative and clerical personnel, office facilities and supplies, conduct
the business and details of the operation of Series Fund II and each Fund and
assume certain expenses thereof, other than obligations or liabilities of the
Funds. The Advisory Agreement may be terminated at any time, with respect to a
Fund, without penalty by the Directors or by a majority of the outstanding
voting securities of such Fund, or by FIMCO, in each instance on not less than
60 days' written notice, and shall automatically terminate in the event of its
assignment (as defined in the 1940 Act). The Advisory Agreement also provides
that it will continue in effect, with respect to a Fund, for a period of over
two years only if such continuance is approved annually either by the Directors
or by a majority of the outstanding voting securities of such Fund, and, in
either case, by a vote of a majority of the Independent Directors voting in
person at a meeting called for the purpose of voting on such approval.
Under the Advisory Agreement, each Fund pays the Adviser an annual fee,
paid monthly, according to the following schedules:
U.S.A. Mid-Cap Opportunity Fund
Annual
Average Daily Net Assets Rate
- ------------------------ ------
Up to $200 million.................................................. 1.00%
In excess of $200 million up to $500 million........................ 0.75
In excess of $500 million up to $750 million........................ 0.72
In excess of $750 million up to $1.0 billion........................ 0.69
Over $1.0 billion................................................... 0.66
Growth & Income Fund, Utilities Income Fund
Annual
Average Daily Net Assets Rate
- ------------------------ ------
Up to $300 million.................................................. 0.75%
In excess of $300 million up to $500 million........................ 0.72
In excess of $500 million up to $750 million........................ 0.69
Over $750 million................................................... 0.66
25
<PAGE>
The SEC staff takes the position that annual advisory fees of 0.75% or greater
are higher than those paid by most investment companies.
For the fiscal year ended October 31, 1993, U.S.A. Mid-Cap Opportunity Fund
paid $42,072 in advisory fees. For the same period, the Adviser voluntarily
waived an additional $115,451 in advisory fees. In addition, for the same
period, expenses in the amount of $36,570 were voluntarily assumed or reimbursed
by the Adviser. For the period August 24, 1993 (commencement of operations)
through October 31, 1993, Utilities Income Fund paid $44,554 in advisory fees.
For the same period, the Adviser voluntarily waived an additional $113,242 in
advisory fees. In addition, for the same period, expenses in the amount of
$14,518 were voluntarily assumed or reimbursed by the Adviser. For the period
October 4, 1993 (commencement of operations) through October 31, 1993, Growth &
Income Fund's advisory fees amounted to $540, all of which were voluntarily
waived by the Adviser. In addition, for the same period, expenses in the amount
of $559 were voluntarily assumed or reimbursed by the Adviser.
For the fiscal year ended October 31, 1994, U.S.A. Mid-Cap Opportunity Fund
paid $31,266 in advisory fees. For the same period, the Adviser voluntarily
waived an additional $72,955 in advisory fees. For the fiscal year ended October
31, 1994, Growth & Income Fund paid $61,035 in advisory fees. For the same
period, the Adviser voluntarily waived an additional $95,778 in advisory fees.
For the fiscal year ended October 31, 1994, Utilities Income Fund paid $194,914
in advisory fees. For the same period, the Adviser voluntarily waived an
additional $266,649 in advisory fees. In addition, for the fiscal year ended
October 31, 1994, the Adviser voluntarily assumed or reimbursed expenses for
Growth & Income Fund, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund
in the amounts of $10,831, $73,772 and $140,086, respectively.
For the fiscal year ended October 31, 1995, U.S.A. Mid-Cap Opportunity Fund
paid $46,846 in advisory fees. For the same period, the Adviser voluntarily
waived an additional $33,991 in advisory fees. For the fiscal year ended October
31, 1995, Growth & Income Fund paid $261,607 in advisory fees. For the same
period, the Adviser voluntarily waived an additional $105,515 in advisory fees.
For the fiscal year ended October 31, 1995, Utilities Income Fund paid $334,586
in advisory fees. For the same period, the Adviser voluntarily waived an
additional $207,605 in advisory fees. In addition, for the fiscal year ended
October 31, 1995, the Adviser voluntarily assumed or reimbursed expenses for
Growth & Income Fund, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund
in the amounts of $114,393, $46,369 and $105,954, respectively.
Pursuant to certain state regulations, the Adviser has agreed to reimburse
a Fund if and to the extent that Fund's aggregate operating and management
expenses, including advisory fees but generally excluding interest, taxes,
brokerage commissions and extraordinary expenses, exceed any limitation on
expenses applicable to that Fund for any full fiscal year (unless a waiver of
such expense limitation is obtained). The amount of any such reimbursement is
limited to the amount of the advisory fees paid or accrued to the Adviser for
the fiscal year. For the fiscal year ended October 31, 1995, no reimbursement to
any Fund was required pursuant to these regulations.
The Adviser has an Investment Committee composed of George V. Ganter,
Margaret Haggerty, Glenn O. Head, Nancy W. Jones, Patricia D. Poitra, Michael
O'Keefe, Clark D. Wagner and Richard Guinnessey. The Committee usually meets
weekly to discuss the composition of the portfolio of each Fund and to review
additions to and deletions from the portfolios.
26
<PAGE>
Subadviser. Wellington Management Company has been retained by the Adviser
and Series Fund II as the investment subadviser to Growth & Income Fund under a
subadvisory agreement dated June 13, 1994 ("Subadvisory Agreement"). The
Subadvisory Agreement was approved by the Board of Directors, including a
majority of Independent Directors in person at a meeting called for such purpose
and by a majority of the shareholders of the Growth & Income Fund.
The Subadvisory Agreement provides that it will continue for a period of
more than two years from the date of execution only so long as such continuance
is approved annually by either the Board of Directors or a majority of the
outstanding voting securities of the Growth & Income Fund and, in either case,
by a vote of a majority of the Independent Directors voting in person at a
meeting called for the purpose of voting on such approval. The Subadvisory
Agreement provides that it will terminate automatically if assigned or upon the
termination of the Advisory Agreement, and that it may be terminated at any time
without penalty by the Board of Directors or a vote of a majority of the
outstanding voting securities of the Growth & Income Fund or by the Subadviser
upon not more than 60 days' nor less than 30 days' written notice. The
Subadvisory Agreement provides that WMC will not be liable for any error of
judgment or for any loss suffered by the Growth & Income Fund in connection with
the matters to which the Subadvisory Agreement relates, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation or
from willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations and duties.
Under the Subadvisory Agreement, the Adviser will pay to the Subadviser a
fee at an annual rate of 0.325% of the average daily net assets of Growth &
Income Fund up to and including $50 million; 0.275% of the average daily net
assets in excess of $50 million up to and including $150 million; 0.225% of the
average daily net assets in excess of $150 million up to and including $500
million; and 0.200% of the average daily net assets in excess of $500 million.
For the fiscal year ended October 31, 1995 the Adviser paid the Subadviser fees
of $157,067.
UNDERWRITER
Series Fund II has entered into an Underwriting Agreement ("Underwriting
Agreement") with First Investors Corporation ("Underwriter" or "FIC") which
requires the Underwriter to use its best efforts to sell shares of the Funds.
Pursuant to the Underwriting Agreement, the Underwriter shall bear all expenses
of sales material or literature, including prospectuses and proxy materials, to
the extent such materials are used in connection with the sale of the Funds'
shares, unless the Funds have agreed to bear such costs pursuant to a plan of
distribution. See "Distribution Plans." The Underwriting Agreement was approved
by the Board of Directors, including a majority of the Independent Directors.
The Underwriting Agreement provides that it will continue in effect from year to
year, with respect to a Fund, only so long as such continuance is specifically
approved at least annually by the Board of Directors or by a vote of a majority
of the outstanding voting securities of such Fund, and in either case by the
vote of a majority of the Independent Directors, voting in person at a meeting
called for the purpose of voting on such approval. The Underwriting Agreement
will terminate automatically in the event of its assignment.
For the fiscal year ended October 31, 1993, FIC received underwriting
commissions with respect to U.S.A. Mid-Cap Opportunity Fund of $485,701. For the
same period, FIC allowed an additional $7,653, to unaffiliated dealers. For the
period February 22, 1993 (commencement of operations) through October 31, 1993,
FIC received underwriting commissions with respect to Utilities Income Fund of
27
<PAGE>
$2,518,361. For the same period, FIC allowed an additional $23,008 to
unaffiliated dealers. For the period October 4, 1993 (commencement of
operations) through October 31, 1993, FIC received underwriting commissions with
respect to Growth & Income Fund of $187,995, none of which was allowed to
unaffiliated dealers.
For the fiscal year ended October 31, 1994, FIC received underwriting
commissions with respect to Growth & Income Fund, U.S.A. Mid-Cap Opportunity
Fund and Utilities Income Fund of $1,187,272, $32,881 and $1,045,980,
respectively. For the same period, FIC allowed an additional $257 with respect
to Growth & Income Fund and $588 with respect to U.S.A. Mid-Cap Opportunity Fund
to unaffiliated dealers.
For the fiscal year ended October 31, 1995, FIC received underwriting
commissions with respect to Growth & Income Fund, U.S.A. Mid-Cap Opportunity
Fund and Utilities Income Fund of $1,958,002, $88,203 and $1,614,848,
respectively. For the same period, FIC allowed to unaffiliated dealers an
additional $7,252 with respect to Growth & Income Fund, $5,486 with respect to
U.S.A. Mid- Cap Opportunity Fund and $7,080 with respect to Utilities Income
Fund.
DISTRIBUTION PLANS
As stated in the Funds' Prospectus, pursuant to a separate plan of
distribution for each class of shares adopted by Series Fund II pursuant to Rule
12b-1 under the 1940 Act ("Class A Plan" and "Class B Plan" and, collectively,
"Plans"), each Fund is authorized to compensate the Underwriter for certain
expenses incurred in the distribution of that Fund's shares and the servicing or
maintenance of existing Fund shareholder accounts.
Each Plan was approved by the Board of Directors, including a majority of
the Independent Directors, and by a majority of the outstanding voting
securities of the relevant class of each Fund. Each Plan will continue in effect
from year to year, with respect to a Fund, as long as its continuance is
approved annually be either the Board of Directors or by a vote of a majority of
the outstanding voting securities of the relevant class of shares of such Fund.
In either case, to continue, each Plan must be approved by the vote of a
majority of the Independent Directors. The Board reviews quarterly and annually
a written report provided by the Treasurer of the amounts expended under the
applicable Plan and the purposes for which such expenditures were made. While
each Plan is in effect, the selection and nomination of the Independent
Directors will be committed to the discretion of such Independent Directors then
in office.
Each Plan can be terminated at any time, with respect to a Fund, by a vote
of a majority of the Independent Directors or by a vote of a majority of the
outstanding voting securities of the relevant class of shares of that Fund. Any
change to the Class B Plan that would materially increase the costs to that
class of shares of a Fund or any material change to the 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 Independent Directors.
In reporting amounts expended under the Plans to the Directors, 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
28
<PAGE>
class to the sales of both classes of shares. The fees paid by one class of a
Fund's shares will not be used to subsidize the sale of any other class of that
Fund's shares.
In adopting the Class A Plan, the Board of Directors considered all
relevant information and determined that there is a reasonable likelihood that
the Class A Plan will benefit each Fund and their shareholders. The Board
believes that the amounts spent pursuant to the Fund's Class A 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.
For the fiscal year ended October 31, 1995, Growth & Income Fund, U.S.A.
Mid-Cap Opportunity Fund and Utilities Income Fund accrued $143,005, $23,924 and
$213,442, respectively, in fees pursuant to the Class A Plan. Of such amounts,
$79,348, $3,061 and $26,822, respectively, was voluntarily waived by the
Underwriter. For the fiscal year ended October 31, 1995, Growth & Income Fund,
U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund accrued $12,812,
$1,096 and $11,449, respectively, in fees pursuant to the Class B Plan.
The Underwriter incurred the following Class A Plan-related expenses for
the fiscal year ended October 31, 1995:
<TABLE>
<CAPTION>
Compensation Compensation to
Fund Advertising to sales personnel* Underwriter**
---- ----------- ------------------- -------------
<S> <C> <C> <C>
U.S.A. Mid-Cap Opportunity Fund $-0- $ 7,151 $ 16,773
Growth & Income Fund -0- 45,644 97,361
Utilities Income Fund -0- 67,049 146,393
</TABLE>
* Represents service fees.
** Represents distribution fees.
For the period January 12, 1995 (commencement of offering of Class B shares
to October 31, 1996, U.S.A. Mid-Cap Opportunity Fund, Growth & Income Fund and
Utilities Income Fund paid $1,096, $12,812 and $11,449, respectively, in fees
pursuant to the Class B Plan. With respect to the Class B Plan, all amounts were
paid to the Underwriter as distribution fees.
DETERMINATION OF NET ASSET VALUE
Except as provided herein, a security listed or traded on an exchange or
the Nasdaq national market system is valued at its last sale price on the
exchange or market system where the security is primarily traded, and lacking
any sales on a particular day, the security is valued at the mean between the
closing bid and asked prices on that day. Each security traded in the market
(including securities listed on exchanges whose primary market is believed to be
OTC) is valued at the mean between the last bid and asked prices based upon
quotes furnished by a market maker for such securities. In the absence of market
quotations, a Fund will determine the value of bonds based upon quotes furnished
by market makers, if available, or in accordance with the procedures described
herein. In that connection, the Board of Directors has determined that a Fund
may use an outside pricing service. The pricing service uses quotations obtained
from investment dealers or brokers for the particular securities being
evaluated, information with respect to market transactions in comparable
securities and other available information
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in determining value. This service is furnished by Interactive Data Corporation.
Short-term debt securities that mature in 60 days or less are valued at
amortized cost if their original term to maturity from the date of purchase was
60 days or less, or by amortizing their value on the 61st day prior to maturity
if their term to maturity from the date of purchase exceeded 60 days, unless the
Board of Directors determines that such valuation does not represent fair value.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Series
Fund II's officers in a manner specifically authorized by the Board of
Directors.
With respect to each Fund, "when-issued securities" are reflected in the
assets of the Fund as of the date the securities are purchased. Such investments
are valued thereafter at the mean between the most recent bid and asked prices
obtained from recognized dealers in such securities. For valuation purposes,
with respect to Growth & Income Fund, quotations of foreign securities in
foreign currencies are converted into U.S. dollar equivalents using the foreign
exchange equivalents in effect.
The Board of Directors may suspend the determination of a Fund's net asset
value per share separately for each class of shares for the whole or any part of
any period (1) during which trading on the New York Stock Exchange ("NYSE") is
restricted as determined by the SEC or the NYSE is closed for other than weekend
and holiday closings, (2) during which an emergency, as defined by rules of the
SEC in respect to the U.S. market, exists as a result of which disposal by a
Fund of securities owned by it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (3) for such other period as the
SEC has by order permitted.
ALLOCATION OF PORTFOLIO BROKERAGE
Purchases and sales of portfolio securities by the Fund may be principal
transactions. In principal transactions, portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There will usually be no brokerage commissions paid by a Fund
for such purchases. Purchases from underwriters will include the underwriter's
commission or concession and purchases from dealers serving as market makers
will include the spread between the bid and asked price. Certain money market
instruments may be purchased by a Fund directly from an issuer, in which no
commission or discounts are paid. Each Fund may purchase fixed income securities
on a "net" basis with dealers acting as principal for their own accounts without
a stated commission, although the price of the security usually includes a
profit to the dealer.
Each Fund may deal in securities which are not listed on a national
securities exchange or the Nasdaq national market system but are traded in the
OTC market. Each Fund also may purchase listed securities through the "third
market." When transactions are executed in the OTC market, a Fund seeks to deal
with the primary market makers, but when advantageous it utilizes the services
of brokers.
In effecting portfolio transactions, the Adviser or the Subadviser seeks
best execution of trades either (1) at the most favorable and competitive rate
of commission charged by any broker or member of an exchange, or (2) with
respect to agency transactions, at a higher rate of commission if reasonable in
relation to brokerage and research services provided to a Fund or the Adviser or
the Subadviser by such member or broker. Such services may include, but are not
limited to, any one or more of the following: information as to the availability
of securities for purchase or sale and statistical or factual information or
opinions pertaining to investments. The Adviser or Subadviser may use research
and services provided
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to it by brokers in servicing all the funds in the First Investors Group of
Funds; however, not all such services may be used by the Adviser or the
Subadviser in connection with a Fund. No portfolio orders are placed with an
affiliated broker, nor does any affiliated broker-dealer participate in these
commissions.
The Adviser or Subadviser may combine transaction orders placed on behalf
of a Fund and any other fund in the First Investors Group of Funds, any Fund of
Executive Investors Trust and First Investors Life Insurance Company, affiliates
of the Funds for the purpose of negotiating brokerage commissions or obtaining a
more favorable transaction price; and where appropriate, securities purchased or
sold may be allocated, in terms of price and amount, to a Fund according to the
proportion that the size of the transaction order actually placed by a Fund
bears to the aggregate size of the transaction orders simultaneously made by
other participants in the transaction.
For the fiscal year ended October 31, 1993, U.S.A. Mid-Cap Opportunity Fund
paid $51,648 in brokerage commissions. For the period February 22, 1993
(commencement of operations) through October 31, 1993, Utilities Income Fund
paid $139,950 in brokerage commissions. Of that amount, $600 was paid in
brokerage commissions to brokers who furnished research services on portfolio
transactions in the amount of $200,850. For the period October 4, 1993
(commencement of operations) through October 31, 1993, Growth & Income Fund did
not pay any brokerage commissions.
For the fiscal year ended October 31, 1994, U.S.A. Mid-Cap Opportunity Fund
and Utilities Income Fund paid $24,767 and $236,585, respectively, in brokerage
commissions. For the fiscal year ended October 31, 1994, Growth & Income Fund
paid $23,249 in brokerage commissions. Of that amount $6,732 was paid in
brokerage commissions to brokers who furnished research services on portfolio
transactions in the amount of $4,704,802.
For the fiscal year ended October 31, 1995 Growth & Income Fund paid
$40,513 in brokerage commissions. Of that amount, $4,973 was paid in brokerage
commissions to brokers who furnished research services on portfolio transactions
in the amount of $3,545,732. For the fiscal year ended October 31, 1995, U.S.A.
Mid-Cap Opportunity Fund paid $16,178 in brokerage commissions. Of that amount,
$2,345 was paid in brokerage commissions to brokers who furnished research
services on portfolio transactions in the amount of $1,387,834. For the fiscal
year ended October 31, 1995, Utilities Income Fund paid $76,984 in brokerage
commissions. Of that amount, $20,160 was paid in brokerage commissions to
brokers who furnished research services on portfolio transactions in the amount
of $8,245,784.
REDUCED SALES CHARGES, ADDITIONAL EXCHANGE AND
REDEMPTION INFORMATION AND OTHER SERVICES
Reduced Sales Charges--Class A Shares
Reduced sales charges are applicable to purchases made at one time of Class
A shares of any one or more of the Funds or of any one or more of the Eligible
Funds, as defined in the Prospectus, by "any person," which term shall include
an individual, or an individual's spouse and children under the age of 21, or a
trustee or other fiduciary of a single trust, estate or fiduciary account
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under section 401 of the Internal Revenue Code of
1986, as amended (the "Code")), although more than one beneficiary is
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involved; provided, however, that the term "any person" shall not include a
group of individuals whose funds are combined, directly or indirectly, for the
purchase of redeemable securities of a registered investment company, nor shall
it include a trustee, agent, custodian or other representative of such a group
of individuals.
Ownership of Class A and Class B shares of any Eligible Fund, except as
noted below, qualify for a reduced sales charge on the purchase of Class A
shares. Class A shares purchased at net asset value, Class A shares of the Money
Market Funds, or shares owned under a Contractual Plan are not eligible for the
purchase of Class A shares of a Fund at a reduced sales charge through a Letter
of Intent or the Cumulative Purchase Privilege.
Letter of Intent. Any of the eligible persons described above may, within
90 days of their investment, sign a statement of intent ("Letter of Intent") in
the form provided by the Underwriter, covering purchases of Class A shares of
any one or more of the Funds and of the other Eligible Funds to be made within a
period of thirteen months, provided said shares are currently being offered to
the general public and only in those states where such shares may be legally
sold, and thereby become eligible for the reduced sales charge applicable to the
total amount purchased. A Letter of Intent filed after the date of investment is
considered retroactive to the date of investment for determination of the
thirteen-month period. The Letter of Intent is not a binding obligation on
either the investor or the Fund. During the term of a Letter of Intent,
Administrative Data Management Corp. ("Transfer Agent") will hold Class A shares
representing 5% of each purchase in escrow, which shares will be released upon
completion of the intended investment.
Purchases of Class A Shares made under a Letter of Intent are made at the
sales charge applicable to the purchase of the aggregate amount of shares
covered by the Letter of Intent as if they were purchased in a single
transaction. The applicable quantity discount will be based on the sum of the
then current public offering price (i.e., net asset value plus applicable sales
charge) of all Class A shares and the net asset value of all Class B shares of a
Fund and of the other Eligible Funds, including Class B shares of the Money
Market Funds, currently owned, together with the aggregate offering price of
purchases to be made under the Letter of Intent. If all such shares are not so
purchased, a price adjustment is made, depending upon the actual amount invested
within such period, by the redemption of sufficient Class A shares held in
escrow in the name of the investor (or by the investor paying the commission
differential). A Letter of Intent can be amended (1) during the thirteen-month
period if the purchaser files an amended Letter of Intent with the same
expiration date as the original Letter of Intent, or (2) automatically after the
end of the period, if total purchases credited to the Letter of Intent qualify
for an additional reduction in the sales charge. The Letter of Intent privilege
may be modified or terminated at any time by the Underwriter.
Cumulative Purchase Privilege. Upon written notice to FIC, Class A shares
of a Fund are also available at a quantity discount on new purchases if the then
current public offering price (i.e., net asset value plus applicable sales
charge) of all Class A shares and the net asset value of all Class B shares of a
Fund and of the other Eligible Funds, including Class B shares of the Money
Market Funds, previously purchased and then owned, plus the value of Class A
shares being purchased at the current public offering price, amount to $25,000
or more. Such quantity discounts may be modified or terminated at any time by
the Underwriter.
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Purchase of Shares. When you open a Fund account, you must specify which
class of shares you wish to purchase. If not, your order will be processed as
follows: (1) if you are opening an account with a new registration with First
Investors your order will not be processed until the Fund receives notification
of which class of shares to purchase; (2) if you have existing First Investors
accounts solely in either Class A shares or Class B shares with the identical
registration, your investment in the Fund will be made in the same class of
shares as your existing account(s); (3) if you are an existing First Investors
shareholder and own a combination of Class A and Class B shares with an
identical registration, your investment in the Fund will be made in Class B
shares; and (4) if you own in the aggregate at least $250,000 in any combination
of classes, your investment will be made in Class A shares.
Systematic Investing
First Investors Money Line. This service allows you to invest in a Fund
through automatic deductions from your bank checking account. Scheduled
investments in the minimum amount of $50 may be made on a bi-weekly,
semi-monthly, monthly, quarterly, semi-annual or annual basis. Shares of the
Fund are purchased at the public offering price determined at the close of
business on the day your designated bank account is debited and a confirmation
will be sent to you after every transaction. You may change the amount or
discontinue this service at any time by calling Shareholder Services or writing
to Administrative Data Management Corp., 581 Main Street, Woodbridge, NJ
07095-1198, Attn: Control Dept. Money Line application forms are available from
your Representative or by calling Shareholder Services at 1-800-423-4026.
Automatic Payroll Investment. You also may arrange for automatic
investments in the minimum amount of $50 into a Fund on a systematic basis
through salary deductions, provided your employer has direct deposit
capabilities. Shares of the Fund are purchased at the public offering price
determined as of the close of business on the day the electronic fund transfer
is received by the Fund, and a confirmation will be sent to you after every
transaction. You may change the amount or discontinue the service by contacting
your employer. An application is available from your Representative or by
calling Shareholder Services at 1-800-423-4026. Arrangements must also be made
with your employer's payroll department.
Cross-Investment of Cash Distributions. You may elect to invest in Class A
shares of a Fund at net asset value all the cash distributions from the same
class of shares of another Eligible Fund. The investment will be made at the net
asset value per share of the Fund, generally determined as of the close of
business, on the business day immediately following the record date of any such
distribution. You may also elect to invest cash distributions of a Fund's Class
A shares into the same class of another Eligible Fund, including the Money
Market Funds. If your distributions are to be invested in a new account, you
must invest a minimum of $50 per month. See "Dividends and Other Distributions"
in the Prospectus. To arrange for cross-investing, call Shareholder Services at
1-800-423-4026.
Investment of Systematic Withdrawal Plan Payments. You may elect to invest
in Class A shares of a Fund at net asset value through payments from a
Systematic Withdrawal Plan you maintain with any other Eligible Fund. Scheduled
investments may be made on a monthly, quarterly, semi-annual or annual basis.
You may also elect to invest Systematic Withdrawal Plan payments of Class A
shares from a Fund into the same class of another Eligible Fund, including the
Money Market Funds. If your Systematic Withdrawal Payments are to be invested in
a new account, you must invest a minimum of $50 per month. See "Systematic
Withdrawal Plan," below. To arrange for Systematic Withdrawal Plan investments,
call Shareholder Services at 1-800-423-4026.
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Systematic Withdrawal Plan. Shareholders who own noncertificated shares may
establish a Systematic Withdrawal Plan ("Withdrawal Plan"). If you have a Fund
account with a value of at least $5,000, you may elect to receive monthly,
quarterly, semi-annual or annual checks for any designated amount (minimum $25).
You may have the payments sent directly to you or persons you designate.
Regardless of the amount of your Fund account, you may also elect to the have
the Systematic Plan payments automatically (i) invested at net asset value in
shares of the same class of any other Eligible Fund, including the Money Market
Funds, or (ii) paid to First Investors Life Insurance Company for the purchase
of a life insurance policy or a variable annuity. If your Systematic Plan
payments are to be invested in a new Eligible Fund account, you must invest a
minimum of $600 per year. If you own Class B shares in a non-retirement account,
your Plan payments will be subject to the applicable contingent deferred sales
charge ("CDSC"). Dividends and other distributions, if any, are reinvested in
additional shares of the same class of the Fund. Shareholders may add shares to
the Withdrawal Plan or terminate the Withdrawal Plan at any time. Withdrawal
Plan payments will be suspended when a distributing Fund has received notice of
a shareholder's death on an individual account. Payments may recommence upon
receipt of written alternate payment instructions and other necessary documents
from the deceased's legal representative. Withdrawal payments will also be
suspended when a payment check is returned to the Transfer Agent marked as
undeliverable by the U.S. Postal Service after two consecutive mailings.
Shareholders who own Class B shares in a retirement account may establish a
Plan and elect to receive up to 8% of the value of their account (calculated as
set forth below) each year without incurring any CDSC. Shares not subject to a
CDSC (such as shares representing reinvestment of distributions) will be
redeemed first and will count toward the 8% limitation. If the shares not
subject to a CDSC are insufficient for this purpose, then shares subject to the
lowest CDSC will be redeemed next until the 8% limit is reached. The 8% figure
is calculated on a pro rata basis at the time of the first payment made pursuant
to the Plan and recalculated thereafter on a pro rata basis at the time of each
Plan payment. Therefore, shareholders who have chosen the Plan based on a
percentage of the value of their account of up to 8% will be able to receive
Plan payments without incurring a CDSC. However, shareholders who have chosen a
specific dollar amount (for example, $100 per month) for their periodic Plan
payment should be aware that the amount of that payment not subject to a CDSC
may vary over time depending on the value of their account. For example, if the
value of the account is $15,000 at the time of payment, the shareholder will
receive $100 free of the CDSC (8% of $15,000 divided by 12 monthly payments).
However, if at the time of a payment the value of the account has fallen to
$14,000, the shareholder will receive $93.33 free of any CDSC (8% of $14,000
divided by 12 monthly payments) and $6.67 subject to the lowest applicable CDSC.
This privilege may be revised or terminated at any time.
The withdrawal payments derived from the redemption of sufficient shares in
the account to meet designated payments in excess of dividends and other
distributions may deplete or possibly extinguish the initial investment,
particularly in the event of a market decline, and may result in a capital gain
or loss depending on the shareholder's cost. Purchases of additional shares of a
Fund concurrent with withdrawals are ordinarily disadvantageous to shareholders
because of tax liabilities and sales charges. To establish a Withdrawal Plan,
call Shareholder Services at 1-800-423-4026.
Electronic Funds Transfer. Fund shares will be purchased on the day the
Fund receives the funds, which is normally two days after the electronic funds
transfer is initiated. The electronic transfer normally will be initiated on the
next bank business day after the redemption request is received and will
ordinarily be received by the predesignated bank account within two days after
transmission. However,
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once the funds are transmitted, the time of receipt and the availability of the
funds are not within the Funds' control. No dividends are paid on the proceeds
of redeemed shares awaiting electronic transmittal.
Conversion of Class B Shares. Class B Shares of a Fund will automatically
convert to Class A shares of that Fund, based on the relative net asset values
per share of the two classes, as of the close of business on the first business
day of the month in which the eighth anniversary of the initial purchase of such
Class B shares occurs. For these purposes, the date of initial purchase shall
mean (1) the first business day of the month in which such Class B shares were
issued, or (2) for Class B shares obtained through an exchange or a series of
exchanges, the first business day of the month in which the original Class B
shares were issued. For conversion purposes, Class B shares purchased through
the reinvestment of dividends and other distributions paid in respect of Class B
shares will be held in a separate sub-account. Each time any Class B shares in
the shareholder's regular account (other than those in the sub-account) convert
to Class A shares, a pro rata portion of the Class B shares in the sub-account
also will convert to Class A shares. The portion will be determined by the ratio
that the shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and other
distributions.
The availability of the conversion feature is subject to the continuing
applicability of a ruling of the Internal Revenue Service ("IRS"), or an opinion
of counsel, that: (1) the dividends and other distributions paid on Class A and
Class B shares will not result in "preferential dividends" under the Code; and
(2) the conversion of shares does not constitute a taxable event. If the
conversion feature ceased to be available, the Class B shares of the Fund would
not be converted and would continue to be subject to the higher ongoing expenses
of the Class B shares beyond eight years from the date of purchase. FIMCO has no
reason to believe that these conditions for the availability of the conversion
feature will not continue to be met.
If Series Fund implements any amendments to its Class A Plan that would
increase materially the costs that may be borne under such Plan by Class A
shareholders, a new target class into which Class B shares will convert will be
established, unless a majority of Class B shareholders, voting separately as a
class, approve the proposal.
Waivers of CDSC on Class B Shares. The CDSC imposed on Class B shares does
not apply to: (a) any redemption pursuant to the tax-free return of an excess
contribution to an individual retirement account ("IRA") or other qualified
retirement plan if the Fund is notified at the time of such request; (b) any
redemption of a lump-sum or other distribution from qualified retirement plans
or accounts provided the shareholder has attained the minimum age of 70 1/2
years and has held the Class B shares for a minimum period of three years; (c)
any redemption by advisory accounts managed by the Adviser or any of its
affiliates or for shares held by the Adviser or any of its affiliates; (d) any
redemption by a tax-exempt employee benefit plan if continuance of the
investment would be improper under applicable laws or regulations; (e) any
redemption or transfer of ownership of Class B shares following the death or
disability, as defined in Section 72(m)(7) of the Code, of a shareholder if the
Fund is provided with proof of death or disability and with all documents
required by the Transfer Agent within one year after the death or disability;
and (f) any redemption of shares purchased during the period April 29, 1996
through June 30, 1996 with the proceeds from a redemption of shares of a fund in
another fund group for which no sales charge was paid, other than a money market
fund or shares held in a retirement plan account. For more information on what
specific documents are required, call Shareholder Services at 1-800-423- 4026.
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Signature Guarantees. The words "Signature Guaranteed" must appear in
direct association with the signature of the guarantor. Members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Medallion Signature Program), SEMP (Stock Exchanges Medallion Program) and FIC
are eligible signature guarantors. Although each Fund reserves the right to
require signature guarantees at any other time, signature guarantees are
required whenever: (1) the amount of the redemption is over $50,000, (2) an
exchange in the amount over $50,000 is made into the Money Market Funds, (3) a
redemption check is to be made payable to someone other than the registered
accountholder, other than major financial institutions, as determined solely by
the Fund and its agent, on behalf of the shareholder, (4) a redemption check is
to be mailed to an address other than the address of record, preauthorized bank
account, or to a major financial institution for the benefit of a shareholder,
(5) an account registration is being transferred to another owner, (6) a
transaction requires additional legal documentation; (7) the redemption request
is for certificated shares; (8) your address of record has changed within 60
days prior to a redemption request; (9) multiple owners have a dispute or give
inconsistent instructions; and (10) the authority of a representative of a
corporation, partnership, association or other entity has not been established
to the satisfaction of a Fund or its agents. ERISA Title I 403(b) Plans and
401(k) Plans are exempt from the signature guarantee requirement except for
exchanges or redemption in amounts greater than $50,000.
Reinvestment after Redemption. If you redeem Class A or Class B shares in
your Fund account, you can reinvest within six months from the date of
redemption all or any part of the proceeds in shares of the same class of the
same Fund or any other Eligible Fund (including the Money Market Funds), at net
asset value, on the date the Transfer Agent receives your purchase request. If
you reinvest the entire proceeds of a redemption of Class B shares for which a
CDSC has been paid, you will be credited for the amount of the CDSC. If you
reinvest less than the entire proceeds, you will be credited with a pro rata
portion of the CDSC. All credits will be paid in Class B shares of the fund into
which the reinvestment is being made. The period you owned the original Class B
shares prior to redemption will be added to the period of time you own Class B
shares acquired through reinvestment for purposes of determining (a) the
applicable CDSC upon a subsequent redemption and (b) the date on which Class B
shares automatically convert to class A shares. If your reinvestment is into a
new account, other than the Money Market Funds, it must meet the minimum
investment and other requirements of the fund into which the reinvestment is
being made. If you reinvest into a new Money Market Fund within one year from
the date of redemption, the minimum investment is $500. To take advantage of
this option, send your reinvestment check along with a written request to the
Transfer Agent within six months from the date of your redemption. Include your
account number and a statement that you are taking advantage of the
"Reinvestment Privilege."
Telephone Transactions. Fund shares not held in certificate form may be
exchanged or redeemed by telephone provided you have not declined telephone
privileges. For corporations, partnerships, trusts and certain other accounts,
additional documents are required to activate telephone privileges. Telephone
exchanges are available between nonretirement accounts and between IRA and
403(b) accounts of the same class of shares registered in the same name.
Telephone exchanges are also available from an individually registered
nonretirement account to an IRA account of the same class of shares in the same
name (provided an IRA application is on file). Telephone exchanges are not
available for exchanges of Fund shares for plan units.
As stated in the Funds' Prospectus, Series Fund II, the Adviser, the
Underwriter and their officers, directors and employees will not be liable for
any loss, damage, cost or expense arising out of any
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instruction (or any interpretation of such instruction) received by telephone
which they reasonably believe to be authentic. In acting upon telephone
instructions, these parties use procedures which are reasonably designed to
ensure that such instructions are genuine, such as (1) obtaining some or all of
the following information: account number, address, social security number and
such other information as may be deemed necessary; (2) recording all telephone
instructions; and (3) sending written confirmation of each transaction to the
shareholder's address of record.
Retirement Plans
Profit-Sharing/Money Purchase Pension/401(k) Plans. FIC offers prototype
Profit-Sharing, Money Purchase Pension and Code section 401(k) Retirement Plans
("Retirement Plans") approved by the IRS for corporations, sole proprietorships
and partnerships. The Custodial Agreement for such a Money Purchase Pension and
Profit-Sharing Retirement Plan provides that First Financial Savings Bank,
S.L.A. ("First Financial Savings"), an affiliate of FIC, will furnish all
required custodial services.
FIC offers additional versions of prototype qualified retirement plans for
eligible employers, including 401(k), money purchase, profit-sharing and target
benefit plans.
Currently, there are no annual service fees chargeable to participants in
connection with a Retirement Plan account. Participants are, however, charged
$5.00 for opening a Retirement Plan account, other than a 401(k) Retirement Plan
account. Each Fund currently pays the annual $10.00 custodian fee for each
Retirement Plan account, if applicable, maintained with such Fund. This policy
may be changed at any time by a Fund on 45 days' written notice. First Financial
Savings has reserved the right to waive its fees at any time or to change the
fees on 45 days' prior written notice.
The Retirement Plan documents contain further specific information about
the Retirement Plans and may be obtained from your Representative. Prior to
establishing a Retirement Plan, you are advised to consult with your legal and
tax advisers.
Individual Retirement Accounts. A qualified individual may purchase shares
of a Fund through an IRA or, as an employee of a qualified employer, through a
simplified employee pension-IRA ("SEP- IRA") or a salary reduction simplified
employee pension-IRA ("SARSEP-IRA") furnished by FIC. Under the related
Custodial Agreements, First Financial Savings acts as custodian of each of these
retirement plans.
The Funds offer IRA accounts with specific provisions tailored to meet the
needs of certain groups of investors. The custodian fees are disclosed in the
IRA documents provided to investors in such accounts.
A taxpayer generally may make an annual IRA contribution no greater than
the lesser of (a) 100% of his or her compensation or (b) $2,000 (or $2,250 when
also contributing to a spousal IRA). However, contributions are deductible only
under certain conditions. The requirements as to SEP-IRAs and SARSEP-IRAs are
described in IRS Forms 5305-SEP and 5305A-SEP, respectively, which are provided
to employers. Employers are required to provide copies of these forms to their
eligible employees. A disclosure statement setting forth complete details of the
IRA should be given to each participant before the contribution is invested.
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Currently, there are no annual service fees chargeable to a participant in
connection with an IRA, SEP-IRA or SARSEP-IRA. Each Fund currently pays the
annual $10.00 custodian fee for each IRA account maintained with such Fund. This
policy may be changed at any time by a Fund on 45 days' written notice to the
holder of any IRA, SEP-IRA or SARSEP-IRA. First Financial Savings has reserved
the right to waive its fees at any time or to change the fees on 45 days' prior
written notice to the holder of any IRA.
An application and other documents necessary to establish an IRA, SEP-IRA
or SARSEP-IRA, are available from your Representative. Prior to establishing an
IRA, SEP-IRA or SARSEP-IRA, you are advised to consult with your legal and tax
advisers.
Retirement Benefit Plans for Employees of Eligible Organizations. FIC makes
available model custodial accounts under Section 403(b)(7) of the Code
("Custodial Accounts") to provide retirement benefits for employees of certain
eligible public educational institutions and other eligible non-profit
charitable, religious and humane organizations. The Custodial Accounts are
designed to permit contributions (up to a "maximum exclusion allowance") by
employees through salary reduction. First Financial Savings acts as custodian of
these accounts.
Contributions may be made to a Custodial Account under the Optional
Retirement Program for Employees of Texas Institutions of Higher Education
("ORP"), either by salary reduction agreement or otherwise, in accordance with
the terms and conditions of the ORP, and under the Texas Deferred Compensation
Plan Program for eligible state employees by salary reduction agreement.
Currently, there are no annual service fees chargeable to participants in
connection with a Custodial Account. Each Fund currently pays the annual $10.00
custodian fee for each Custodial Account maintained with such Fund. This policy
may be changed at any time by a Fund on 45 days' written notice to a Custodial
Account participant. First Financial Savings has reserved the right to waive its
fees at any time or to change the fees on 45 days' prior written notice to a
Custodial Account participant.
An application and other documents necessary to establish a Custodial
Account are available from your Representative. Persons desiring to create a
Custodial Account are advised to confer with their legal and tax advisers
concerning the specifics of this type of retirement benefit plan.
Mandatory income tax withholding, at the rate of 20%, may be required on
"eligible rollover" distributions made from any of the foregoing retirement
plans (other than IRAs, including SEP-IRAs and SARSEP-IRAs). If the recipient
elects to directly transfer an eligible rollover distribution to an "eligible
retirement plan" that permits acceptance of such distributions, no withholding
will apply. For distributions that are not "eligible rollover" distributions,
the recipient can elect, in writing, not to require any withholding. This
election must be submitted immediately before, or must accompany, the
distribution request. The amount, if any, of any such optional withholding
depends on the amount and type of the distribution. Appropriate election forms
are available from the Custodian or Shareholder Services. Other types of
withholding nonetheless may apply.
Distribution Fees. A participant/shareholder's account under any of the
foregoing retirement plans (including IRAs) may be charged a distribution fee
(at the time of withdrawal) of $7.00 for a single distribution of the entire
account and $1.00 for each periodic distribution therefrom.
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<PAGE>
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Code, a Fund -- each Fund being treated as a separate
corporation for these purposes -- must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income, net short-term capital gain and, for Growth
& Income Fund, net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements. For
each Fund these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or, for Growth & Income Fund, foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in securities or, for Growth &
Income Fund, those currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months -- options or futures, or foreign currencies (or forward contracts
thereon) that are not directly related to the Fund's principal business of
investing in securities (or options and futures with respect thereto)
("Short-Short Limitation"); (3) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government securities, securities of other RICs and
other securities, with those other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (4) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. Government securities or the securities of other
RICs) of any one issuer.
Dividends and other distributions declared by a Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from a Fund's investment company taxable income
may be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
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<PAGE>
Dividends and interest received by Growth & Income Fund may be subject to
income, withholding or other taxes imposed by foreign countries that would
reduce the yield on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
Growth & Income Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, if the Fund holds
stock of a PFIC, it will be subject to Federal income tax on a portion of any
"excess distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If Growth & Income Fund invests in a PFIC and elects to treat the PFIC as a
"qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) -- which probably would have to be distributed to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax -even if those
earnings and gain were not received by the Fund. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Proposed regulations have been published pursuant to which open-end RICs,
such as Growth & Income Fund, would be entitled to elect to "mark-to-market"
their stock in certain PFICs. "Marking-to- market," in this context, means
recognizing as gain for each taxable year the excess, as of the end of that
year, of the fair market value of such a PFIC's stock over the adjusted basis in
that stock (including mark-to-market gain for each prior year for which an
election was in effect).
For Growth & Income Fund, income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) will qualify as
permissible income under the Income Requirement. Income from the Fund's
disposition of foreign currencies and forward currency contracts that are not
directly related to its principal business of investing in securities will be
subject to the Short-Short Limitation if they are held for less than three
months.
U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund may acquire zero
coupon or other securities issued with original issue discount. As the holder of
those securities, each such Fund must include in its income the original issue
discount that accrues on the securities during the taxable year, even if the
Fund receives no corresponding payment on the securities during the year.
Similarly, each such Fund must include in its gross income securities it
receives as "interest" on pay-in-kind securities. Because each Fund annually
must distribute substantially all of its investment company taxable income,
including any original issue discount and other non-cash income to satisfy the
Distribution Requirement and to avoid imposition of the Excise Tax, the 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
40
<PAGE>
investment company taxable income and/or net capital gain. In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the Short-Short Limitation, any such gains would reduce a
Fund's ability to sell other securities, or options, futures or certain forward
contracts held for less than three months that it might wish to sell in the
ordinary course of its portfolio management.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses Utilities Income Fund and Growth &
Income Fund realize in connection therewith. Income from transactions in 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.
However, income from Utilities Income Fund's disposition of options and futures
contracts will be subject to the Short-Short Limitation if they are held for
less than three months.
If a Fund satisfies certain requirements, then any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund intends that, when it engages in hedging strategies, it will qualify for
this treatment, but at the present time it is not clear whether this treatment
will be available for all of the Fund's hedging transactions. To the extent this
treatment is not available, a Fund may be forced to defer the closing out of
options or futures beyond the time when it otherwise would be advantageous to do
so, in order for the Fund to continue to qualify as a RIC.
PERFORMANCE INFORMATION
A Fund may advertise its performance in various ways.
Each Fund's "average annual total return" ("T") is an average annual
compounded rate of return. The calculation produces an average annual total
return for the number of years measured. It is the rate of return based on
factors which include a hypothetical initial investment of $1,000 ("P") over a
number of years ("n") with an Ending Redeemable Value ("ERV") of that
investment, according to the following formula:
T=[(ERV/P)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
41
<PAGE>
for the period is deducted. All dividends and other distributions are assumed to
have been reinvested at net asset value on the initial investment ("P").
Return information may be useful to investors in reviewing a Fund's
performance. However, certain factors should be taken into account before using
this information as a basis for comparison with alternative investments. No
adjustment is made for taxes payable on distributions. Return will fluctuate
over time and return for any given past period is not an indication or
representation by a Fund of future rates of return on its shares. At times, the
Adviser may reduce its compensation or assume expenses of a Fund in order to
reduce the Fund's expenses. Any such waiver or reimbursement would increase the
Fund's return during the period of the waiver or reimbursement.
Average annual return and total return computed at the public offering
price (maximum sales charge for Class A shares and applicable CDSC for Class B
shares) for the periods ended October 31, 1995 are set forth in the tables
below:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
One Year Life of Fund(1) 1/12/95(2) to 10/31/95
----------------- ----------------- ----------------------
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S.A. Mid-Cap Opportunity Fund 16.76% N/A 5.91% N/A N/A 20.13%
Utilities Income Fund 13.74 N/A 3.70 N/A N/A 21.73
Growth & Income Fund 11.98 N/A 7.51 N/A N/A 22.70
<CAPTION>
TOTAL RETURN:
One Year Life of Fund(1) 1/12/95(2) to 10/31/95
----------------- ----------------- ----------------------
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S.A. Mid-Cap Opportunity Fund 16.76% N/A 20.09% N/A N/A 15.80%
Utilities Income Fund 13.74 N/A 10.25 N/A N/A 17.02
Growth & Income Fund 11.98 N/A 16.20 N/A N/A 17.78
</TABLE>
Average annual total return and total return may also be based on
investment at reduced sales charge levels or at net asset value. Any quotation
of return not reflecting the maximum sales charge will be greater than if the
maximum sales charge were used. Average annual return and total return computed
at net asset value for the periods ended October 31, 1995 are set forth in the
tables below:
- ----------
(1) The inception dates for Class A shares of the Funds are as follows: U.S.A.
Mid-Cap Opportunity Fund -- August 24, 1992; Utilities Income Fund --
February 22, 1993; and Growth & Income Fund -- October 4, 1993.
(2) The commencement date for the offering of Class B shares is January 12,
1995.
42
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
One Year Life of Fund(1) 1/12/95(2) to 10/31/95
----------------- ----------------- ----------------------
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S.A. Mid-Cap Opportunity Fund 24.59% N/A 8.09% N/A N/A 26.40
Utilities Income Fund 21.35 N/A 6.20 N/A N/A 28.22
Growth & Income Fund 19.51 N/A 10.92 N/A N/A 29.18
TOTAL RETURN:
<CAPTION>
One Year Life of Fund(1) 1/12/95(2) to 10/31/95
----------------- ----------------- ----------------------
Class A Class B Class A Class B Class A Class B
Shares Shares Shares Shares Shares Shares
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S.A. Mid-Cap Opportunity Fund 24.59% N/A 28.14% N/A N/A 22.73%
Utilities Income Fund 21.35 N/A 17.55 N/A N/A 20.62
Growth & Income Fund 19.51 N/A 23.99 N/A N/A 21.99
</TABLE>
Each Fund may include in advertisements and sales literature, information,
examples and statistics to illustrate the effect of compounding income at a
fixed rate of return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and capital gain
distributions in additional shares. These examples may also include hypothetical
returns comparing taxable versus tax-deferred growth which would pertain to an
IRA, section 403(b)(7) Custodial Account or other qualified retirement program.
The examples used will be for illustrative purposes only and are not
representations by the Funds of past or future yield or return. Examples of
typical graphs and charts depicting such historical performances, compounding
and hypothetical returns are included in Appendix D.
From time to time, in reports and promotional literature, the Funds may
compare their performance to, or cite the historical performance of, Overnight
Government repurchase agreements, U.S. Treasury bills, notes and bonds,
certificates of deposit, and six-month money market certificates or indices of
broad groups of unmanaged securities considered to be representative of, or
similar to, the Funds' portfolio holdings, such as:
Lipper Analytical Services, Inc. ("Lipper") is a widely-recognized
independent service that monitors and ranks the performance of regulated
investment companies. The Lipper performance analysis includes the
reinvestment of capital gain distributions and income dividends but does
not take sales charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend dates
accumulated for the quarter and reinvested at quarter end.
- ----------
1 The inception dates for Class A shares of the Funds are as follows: U.S.A.
Mid-Cap Opportunity Fund - August 24, 1992; Utilities Income Fund -
February 22, 1993; and Growth & Income Fund - October 4, 1993.
2 The commencement date for the offering of Class B shares is January 12,
1995.
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<PAGE>
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication of
Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds with
at least three years of performance history are assigned ratings from one
star (lowest) to five stars (highest). Morningstar ratings are calculated
from the funds' three-, five-, and ten-year average annual returns (when
available) and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are adjusted for
fees and sales loads. Ten percent of the funds in an investment category
receive five stars, 22.5% receive four stars, 35% receive three stars,
22.5% receive two stars, and the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad Investment-Grade Bond Index and the components of the Index.
Telerate Systems, Inc., a computer system to which the Adviser subscribes
which daily tracks the rates on money market instruments, public corporate
debt obligations and public obligations of the U.S. Treasury and agencies
of the U.S. Government.
The Wall Street Journal, a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in addition to
indices prepared by the research departments of such financial
organizations as Lehman Bros., Merrill Lynch, Pierce, Fenner and Smith,
Inc., First Boston, Salomon Brothers, Morgan Stanley, Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette, Value Line, Datastream International, James
Capel, S.G. Warburg Securities, County Natwest and UBS UK Limited,
including information provided by the Federal Reserve Board, Moody's, and
the Federal Reserve Bank.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices," a
monthly corporate government index publication which lists principal,
coupon and total return on over 100 different taxable bond indices which
Merrill Lynch tracks. They also list the par weighted characteristics of
each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly publication
which tracks principal, coupon and total return on the Lehman Govt./Corp.
Index and Lehman Aggregate Bond Index, as well as all the components of
these Indices.
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average of 30 stocks are unmanaged lists of common stocks
frequently used as general measures of stock market performance. Their
performance figures reflect changes of market prices and quarterly
reinvestment of all distributions but are not adjusted for commissions or
other costs.
The Consumer Price Index, prepared by the U.S. Bureau of Labor Statistics,
is a commonly used measure of inflation. The Index shows changes in the
cost of selected consumer goods and does not represent a return on an
investment vehicle.
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<PAGE>
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
The Russell 2500 Index, prepared by the Frank Russell Company, consists of
U.S. publicly traded stocks of domestic companies that rank from 500 to
3000 by market capitalization. The Russell 2500 tracks the return on these
stocks based on price appreciation or depreciation and does not include
dividends and income or changes in market values caused by other kinds of
corporate changes.
The Russell 2000 Index, prepared by the Frank Russell Company, consists of
U.S. publicly traded stocks of domestic companies that rank from 1000 to
3000 by market capitalization. The Russell 2000 tracks the return on these
stocks based on price appreciation or depreciation and does not include
dividends and income or changes in market values caused by other kinds of
corporate changes.
Reuters, a wire service that frequently reports on global business.
Standard & Poor's Utilities Index is an unmanaged capitalization weighted
index comprising common stock in approximately 40 electric, natural gas
distributors and pipelines, and telephone companies. The Index assumes the
reinvestment of dividends.
Moody's Stock Index, an unmanaged index of utility stock performance.
From time to time, in reports and promotional literature, performance
rankings and ratings reported periodically in national financial publications
such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may
also be used. In addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL STREET
JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be cited.
GENERAL INFORMATION
Audits And Reports. The accounts of the Funds are audited twice a year by
Tait, Weller & Baker, independent certified public accountants, Two Penn Center
Plaza, Philadelphia, PA, 19102-1707. Shareholders of each Fund receive
semi-annual and annual reports, including audited financial statements, and a
list of securities owned.
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; $.65 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;
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. The $5 administrative fee for exchange transactions into a
Fund, which is generally to be charged to the shareholder, is being borne on a
voluntary basis by the Fund for an indefinite period. Upon request from
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<PAGE>
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 1990 and $10.00 per year for each account
history covering the period 1974 through 1982. Account histories prior to 1974
will not be provided. For the fiscal year ended October 31, 1995, Growth &
Income Fund, U.S.A. Mid-Cap Opportunity Fund and Utilities Income Fund paid
$134,247, $30,814 and $186,056, respectively, in transfer agent fees. The
Transfer Agent's telephone number is 1-800-423-4026.
5% Shareholders. As of December 26, 1995, the following persons
beneficially owned more than 5% of the outstanding Class B shares of U.S.A.
Mid-Cap Opportunity Fund:
Shareholder % of Shares
- ----------- -----------
Leslie Dunbar 7.8%
3400 Cynder Avenue
Brooklyn, NY 11203
Rocco Luongo 7.4
44 Pullaski Drive
N. Arlington, NJ 07031
Brian K. Holloway 15.2
9 Hartman Drive
Hamilton Square, NJ 08690
Diane R. Napoli 14.9
1114 Gilham Street
Philadelphia, PA
Joann E. Taylor 5.8
14660 F. Pearthshire
Houston, TX 77079
Trading by Portfolio Managers and Other Access Persons. Pursuant to Section
17(j) of the 1940 Act and Rule 17j-1 thereunder, Series Fund II and the Adviser
have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Fund. Among other things,
access persons, other than the disinterested Directors of Series Fund II: (a)
must have all non-exempt trades pre-cleared by the Adviser; (b) are restricted
from short-term trading; (c) must have duplicate statements and transactions
confirmations reviewed by a compliance officer; and (d) are prohibited from
purchasing securities of initial public offerings.
46
<PAGE>
APPENDIX A
DESCRIPTION OF CORPORATE BOND AND
CONVERTIBLE SECURITY RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C Debt rated "BB," "B," "CCC," "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal. "BB" indicates the least degree of speculation and "C" the
highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic
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<PAGE>
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
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.
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<PAGE>
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.
APPENDIX B
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.
49
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Prime-1 Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
APPENDIX C
Although it does not presently intend to engage in these strategies in coming
year, Utilities Income Fund may use some or all of the following hedging
instruments:
Options on Equity and Debt Securities--A call option is a short-term
contract pursuant to which the purchaser of the option, in return for a premium,
has the right to buy the security underlying the option at a specified price at
any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option during the
option term, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract that gives its purchaser, in return
for a premium, the right to sell the underlying security at a specified price
during the option term. The writer of the put option, who receives the premium,
has the obligation, upon exercise of the option during the option term, to buy
the underlying security at the exercise price.
Options on Stock Indexes--A stock index assigns relative values to the
stocks included in the index and fluctuates with changes in the market values of
those stocks. A stock index option operates in the same way as a more
traditional stock option, except that exercise of a stock index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of a stock index option, the purchaser will realize, and the
writer will pay, an amount based on the difference between the exercise price
and the closing price of the stock index.
Stock Index Futures Contracts--A stock index futures contract is a
bilateral agreement pursuant to which one party agrees to accept, and the other
party agrees to make, delivery of an amount of cash equal to a specified dollar
amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical
50
<PAGE>
delivery of the stocks comprising the index is made. Generally, contracts are
closed out prior to the expiration date of the contract.
Interest Rate Futures Contracts--Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
Options on Futures Contracts--Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.
51
<PAGE>
APPENDIX D
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
52
<PAGE>
[The following table is represented as graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a diference of
$331,215.
25 years old .............. 533,443
35 years old .............. 202,228
45 years old .............. 62,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
53
<PAGE>
[The following table is represented as chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1995.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
54
<PAGE>
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1995........................ 1.00
1996........................ 1.03
1997........................ 1.06
1998 ....................... 1.09
1999 ....................... 1.13
2000 ....................... 1.16
2001 ....................... 1.19
2002 ....................... 1.23
2003 ....................... 1.27
2004 ....................... 1.30
2005 ....................... 1.34
2006 ....................... 1.38
2007 ....................... 1.43
2008 ....................... 1.47
2009 ....................... 1.51
2010 ....................... 1.56
2011 ....................... 1.60
2012 ....................... 1.65
2013 ....................... 1.70
2014 ....................... 1.75
2015 ....................... 1.81
2016 ....................... 1.86
2017 ....................... 1.92
2018 ....................... 1.97
2019 ....................... 2.03
2020 ....................... 2.09
2021 ....................... 2.16
2022 ....................... 2.22
2023 ....................... 2.29
2024 ....................... 2.36
2025 ....................... 2.43
Inflation erodes your buying power. $100 in 1966, could purchase the same amount
of goods and service as $21 in 1995.* Projecting inflation at 3%, goods and
services costing $100 today will cost $243 in the year 2025.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
55
<PAGE>
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1995(1)
Total Number of Percentage of
Number of Positive Positive
Periods Periods Periods
------- ------- -------
1-Year Periods 70 50 71%
5-Year Periods 66 59 89%
10-Year Periods 61 59 97%
15-Year Periods 56 56 100%
20-Year Periods 51 51 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. (2)
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Large Company Stocks .......... 14.80
The following chart illustrates for the period shown that long-term corpoate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1981 -- 1995(1)
Inflation ..................... 3.93
U.S. Treasury Bills ........... 7.11
Long-Term Corp. bonds ......... 13.46
(1) Sources: Stocks, Bonds, Bill and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago.
(2) Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, reeturns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
56
<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
---------------------------------------------
your tax-free yield 31.0% 36.0% 39.6%
------------------- ----- ----- -----
3.00% 4.35% 4.69% 4.97%
3.50% 5.07% 5.47% 5.79%
4.00% 5.80% 6.25% 6.62%
4.50% 6.52% 7.03% 7.45%
5.00% 7.25% 7.81% 8.25%
5.50% 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.
57
<PAGE>
Financial Statements
as of October 31, 1995
58
<PAGE>
Portfolio of Investments
FIRST INVESTORS GROWTH & INCOME FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--83.4%
Automotive--.8%
19,592 Ford Motor Company $ 563,270 $ 84
- -------------------------------------------------------------------------------------
Banks--8.7%
20,000 Crestar Financial Corporation 1,140,000 170
25,000 First Bank System, Inc. 1,243,750 185
12,000 First Fidelity Bancorp. 784,500 117
11,500 J.P. Morgan & Company 886,937 132
12,000 Republic New York Corporation 703,500 105
25,000 Wachovia Corporation 1,103,125 165
- -------------------------------------------------------------------------------------
5,861,812 874
- -------------------------------------------------------------------------------------
Business Services--.8%
17,000 Sysco Corporation 516,375 77
- -------------------------------------------------------------------------------------
Chemicals--5.7%
19,000 Air Products and Chemicals, Inc. 980,875 146
10,000 Du Pont (E.I.) de Nemours & Company 623,750 93
45,000 Engelhard Corporation 1,119,375 167
15,000 Loctite Corporation 708,750 106
15,000 Witco Chemical Corporation 423,750 63
- -------------------------------------------------------------------------------------
3,856,500 575
- -------------------------------------------------------------------------------------
Computers & Office Equipment--1.4%
10,000 Hewlett-Packard Company 926,250 138
- -------------------------------------------------------------------------------------
Drugs--8.2%
9,500 American Home Products Corporation 841,938 125
12,000 Bristol-Myers Squibb Company 915,000 136
12,000 Johnson & Johnson 978,000 146
21,000 Pfizer, Inc. 1,204,875 180
12,000 Smithkline Beecham PLC (ADR) 622,500 93
16,238 Zeneca Group PLC (ADR) 915,417 136
- -------------------------------------------------------------------------------------
5,477,730 816
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric Utilities--3.0%
30,000 Baltimore Gas & Electric Company 802,500 120
15,000 DQE, Inc. 412,500 61
27,000 Pacific Gas & Electric Company 793,125 119
- -------------------------------------------------------------------------------------
2,008,125 300
- -------------------------------------------------------------------------------------
Electrical Equipment--3.2%
15,000 General Electric Company 948,750 141
27,000 York International Corporation 1,181,250 176
- -------------------------------------------------------------------------------------
2,130,000 317
- -------------------------------------------------------------------------------------
Electronics--.8%
13,000 AMP, Inc. 510,250 76
- -------------------------------------------------------------------------------------
Energy Services--2.2%
35,000 Dresser Industries, Inc. 726,250 108
12,000 Schlumberger, Ltd. 747,000 112
- -------------------------------------------------------------------------------------
1,473,250 220
- -------------------------------------------------------------------------------------
Energy Sources--4.8%
17,500 Amoco Corporation 1,117,813 167
15,000 Exxon Corporation 1,145,624 171
35,000 Unocal Corporation 918,750 137
- -------------------------------------------------------------------------------------
3,182,187 475
- -------------------------------------------------------------------------------------
Financial Services--1.6%
27,000 American Express Company 1,096,875 163
- -------------------------------------------------------------------------------------
Food/Beverage/Tobacco--1.0%
20,000 Cadbury Schweppes PLC (ADR) 667,500 99
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Portfolio of Investments
FIRST INVESTORS GROWTH & INCOME FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Household Products--5.6%
15,000 Avon Products, Inc. 1,066,875 159
12,000 Colgate-Palmolive Company 831,000 124
20,000 Dial Corporation 487,500 73
19,000 Kimberly-Clark Corporation 1,379,875 206
- -------------------------------------------------------------------------------------
3,765,250 562
- -------------------------------------------------------------------------------------
Insurance--3.8%
21,000 Ace Ltd. 714,000 106
15,000 American International Group, Inc. 1,265,625 190
7,000 Marsh & McLennan Companies, Inc. 573,125 85
- -------------------------------------------------------------------------------------
2,552,750 381
- -------------------------------------------------------------------------------------
Machinery & Manufacturing--3.1%
10,000 Illinois Tool Works, Inc. 581,250 87
12,000 Ingersoll-Rand Company 424,500 63
19,000 Minnesota Mining & Manufacturing Company 1,080,625 161
- -------------------------------------------------------------------------------------
2,086,375 311
- -------------------------------------------------------------------------------------
Media--6.4%
18,000 Gannett Company 978,750 146
16,000 Knight-Ridder, Inc. 888,000 132
10,000 *Scholastic Corporation 617,500 92
24,000 *Viacom, Inc.- Class "B" 1,200,000 179
15,000 Vodafone Group PLC (ADR) 613,125 91
- -------------------------------------------------------------------------------------
4,297,375 640
- -------------------------------------------------------------------------------------
Medical Products--1.8%
30,000 Abbott Laboratories 1,192,500 178
- -------------------------------------------------------------------------------------
Paper & Forest Products--1.8%
6,600 Georgia-Pacific Corporation 544,500 81
18,000 International Paper Company 666,000 99
- -------------------------------------------------------------------------------------
1,210,500 180
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate Investment Trusts--1.1%
30,000 Mark Centers Trust 322,500 48
13,300 Storage USA, Inc. 389,025 58
- -------------------------------------------------------------------------------------
711,525 106
- -------------------------------------------------------------------------------------
Retail--5.9%
12,800 Intimate Brands, Inc. 214,400 32
20,000 J.C. Penney Company 842,500 126
27,000 May Department Stores Company 1,059,750 158
35,000 Talbots, Inc. 848,750 126
46,000 Wal-Mart Stores, Inc. 994,750 148
- -------------------------------------------------------------------------------------
3,960,150 590
- -------------------------------------------------------------------------------------
Software & Services--2.4%
10,000 Automatic Data Processing, Inc. 715,000 106
25,000 *BMC Software, Inc. 890,625 133
- -------------------------------------------------------------------------------------
1,605,625 239
- -------------------------------------------------------------------------------------
Telephone--6.7%
22,000 A T & T Corp. 1,408,000 210
10,000 BCE, Inc. 336,250 50
15,000 NYNEX Corporation 705,000 105
16,000 SBC Communications, Inc. 894,000 133
24,500 US West Communications Group 1,166,813 174
- -------------------------------------------------------------------------------------
4,510,063 672
- -------------------------------------------------------------------------------------
Transportation--1.9%
40,000 Canadian Pacific Ltd. 640,000 95
10,000 Union Pacific Corporation 653,750 98
- -------------------------------------------------------------------------------------
1,293,750 193
- -------------------------------------------------------------------------------------
Travel & Leisure--.7%
12,000 McDonald's Corporation 492,000 73
- -------------------------------------------------------------------------------------
Total Value of Common Stocks
(cost $47,435,152) 55,947,987 8,339
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Portfolio of Investments
FIRST INVESTORS GROWTH & INCOME FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
Shares or For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCKS--1.9%
Energy Sources--1.3%
5,000 Unocal Corporation 7% (Note 5) $ 256,250 $ 37
12,000 Valero Energy Corporation 6 1/4% 609,000 91
- -------------------------------------------------------------------------------------
865,250 128
- -------------------------------------------------------------------------------------
Real Estate Investment Trusts--.6%
18,000 Security Capital Pacific Trust "A" 7% 427,500 64
- -------------------------------------------------------------------------------------
Total Value of Convertible
Preferred Stocks (cost $1,315,959) 1,292,750 192
- -------------------------------------------------------------------------------------
CONVERTIBLE BONDS--4.2%
Communications Equipment--.9%
$ 600M General Instrument Corporation,
5%, 6/15/00 603,000 90
- -------------------------------------------------------------------------------------
Energy Sources--1.4%
1,000M Noble Affiliates, 4 1/4%, 11/1/03 947,500 141
- -------------------------------------------------------------------------------------
Household Products--.6%
485M McKesson Corporation, 4 1/2%, 3/1/04 431,650 64
- -------------------------------------------------------------------------------------
Travel & Leisure--1.3%
900M AMR Corporation, 61/8%, 11/1/24 868,500 130
- -------------------------------------------------------------------------------------
Total Value of Convertible Bonds
(cost $3,091,138) 2,850,650 425
- -------------------------------------------------------------------------------------
EQUITY-LINKED SECURITIES--.2%
Computers & Office Equipment
1,000 Salomon Inc. (Hewlett-Packard)
5 1/4%, 1/1/97 (cost $76,375) 100,500 15
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--9.0%
$ 6,054M Swiss Bank Capital Markets, Inc.,
5.87%, 11/1/95 (collateralized by
$6,140M U.S. Treasury Note,
5 3/4%, 9/30/97) (cost $6,054,000) 6,054,000 902
- -------------------------------------------------------------------------------------
Total Value of Investments (cost $57,972,624) 98.7% 66,245,887 9,873
Other Assets, Less Liabilities 1.3 849,239 127
- -------------------------------------------------------------------------------------
Net Assets 100.0% $67,095,126 $10,000
=====================================================================================
</TABLE>
*Non-income producing
See notes to financial statements
<PAGE>
Portfolio of Investments
FIRST INVESTORS MADE IN THE U.S.A. FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--72.3%
Basic Industry--2.5%
9,200 *Interpool, Inc. $ 147,200 $ 161
4,400 Schulman (A), Inc. 82,500 91
- -------------------------------------------------------------------------------------
229,700 252
- -------------------------------------------------------------------------------------
Capital Goods--3.0%
4,600 Case Corporation 175,375 192
2,800 *Varity Corporation 101,500 112
- -------------------------------------------------------------------------------------
276,875 304
- -------------------------------------------------------------------------------------
Consumer Durables--3.0%
5,600 Harley-Davidson, Inc. 149,800 164
4,300 Masco Corporation 120,937 133
- -------------------------------------------------------------------------------------
270,737 297
- -------------------------------------------------------------------------------------
Consumer Non-Durables--2.6%
2,000 Eastman Kodak Company 125,250 137
4,800 Newell Company 115,800 127
- -------------------------------------------------------------------------------------
241,050 264
- -------------------------------------------------------------------------------------
Consumer Services--18.2%
2,300 Advo, Inc. 58,650 65
2,700 *Barnes & Noble, Inc. 98,550 108
7,200 *Cannondale Corporation 115,200 126
11,600 *Cinar Films, Inc. - Class "B" 139,200 153
1,300 Dayton Hudson Corporation 89,375 98
4,100 *Franklin Electronic Publishers, Inc. 169,637 186
4,400 *Fred Meyer, Inc. 81,950 90
8,500 *Home Shopping Network, Inc. 69,062 76
9,700 *La Quinta Inns, Inc. 249,775 274
4,600 *Tele-Comm. Liberty Media Group Series "A" 113,275 124
3,200 Time Warner, Inc. 116,800 128
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Portfolio of Investments
FIRST INVESTORS MADE IN THE U.S.A. FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Services (continued)
8,100 *US Office Products Company 138,713 152
2,500 *Viacom Inc.-Class "B" 125,000 137
3,300 Walgreen Company 94,050 103
- -------------------------------------------------------------------------------------
1,659,237 1,820
- -------------------------------------------------------------------------------------
Financial--3.7%
5,000 *American Travellers Corporation 111,875 122
1,300 Federal National Mortgage Association 136,337 150
5,500 *Penn Treaty American Corporation 86,625 95
- -------------------------------------------------------------------------------------
334,837 367
- -------------------------------------------------------------------------------------
Health Care/Miscellaneous--8.8%
4,200 Dentsply International, Inc. 144,900 158
4,200 *Living Centers of America, Inc. 108,675 119
6,100 *Mid Atlantic Medical Services, Inc. 121,238 133
6,700 *Pacific Physicians Services, Inc. 106,363 117
5,200 *Quantum Health Resources, Inc. 55,250 61
2,900 Stryker Corporation 130,863 144
3,400 Teva Pharmaceutical Industries Ltd. (ADR) 133,450 146
- -------------------------------------------------------------------------------------
800,739 878
- -------------------------------------------------------------------------------------
Technology--29.6%
2,300 A T & T Corp. 147,200 162
3,800 *Adaptec, Inc. 169,100 185
5,400 *Atmel Corporation 168,750 185
2,000 Autodesk, Inc. 68,000 75
1,900 Automatic Data Processing, Inc. 135,850 149
1,900 *Avid Technology, Inc. 83,125 91
1,800 *Cisco Systems, Inc. 139,500 153
3,000 Computer Associates International, Inc. 165,000 181
2,700 *Concentra Corporation 25,650 28
5,000 *EMC Corporation 77,500 85
3,950 *Filenet Corporation 179,231 197
2,800 *IMNET Systems, Inc. 71,050 78
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
Shares or For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology (continued)
4,800 *Intersolv $ 75,600 $ 83
2,400 *LSI Logic Corporation 113,100 124
2,000 *Microsoft Corporation 200,000 219
5,000 National Semiconductor Corporation 121,875 134
1,700 *NETCOM On-Line Communication Services, Inc. 99,025 109
2,800 Nokia Corp. AB 156,100 171
6,800 *Quantum Corporation 118,150 130
2,900 *Symantec Corporation 70,506 77
4,100 U.S. West Communications Group 195,263 214
5,000 *VLSI Technology, Inc. 117,500 129
- -------------------------------------------------------------------------------------
2,697,075 2,959
- -------------------------------------------------------------------------------------
Telecommunications--.9%
1,200 *Ascend Communications, Inc. 78,000 86
- -------------------------------------------------------------------------------------
Total Value of Common Stocks
(cost $5,615,721) 6,588,250 7,227
- -------------------------------------------------------------------------------------
SHORT-TERM CORPORATE NOTES--25.3%
$ 300M A T & T Corp., 5.65%, 11/14/95 299,388 328
460M A T & T Corp., 5.73%, 11/21/95 458,535 503
450M BellSouth Telecommunications Inc.,
5.70%, 11/3/95 449,858 493
250M Chevron Oil, Inc., 5.68%, 11/16/95 249,408 274
150M Chevron Oil, Inc., 5.65%, 11/30/95 149,318 164
300M GTE North, 5.75%, 11/7/95 299,712 329
400M Nestles Capital, 5.69%, 11/9/95 399,495 438
- -------------------------------------------------------------------------------------
Total Value of Short-Term
Corporate Notes (cost $2,305,714) 2,305,714 2,529
- -------------------------------------------------------------------------------------
Total Value of Investments (cost $7,921,435) 97.6% 8,893,964 9,756
Other Assets, Less Liabilities 2.4 222,132 244
- -------------------------------------------------------------------------------------
Net Assets 100.0% $9,116,096 $10,000
=====================================================================================
</TABLE>
*Non-income producing
See notes to financial statements
<PAGE>
Portfolio of Investments
FIRST INVESTORS UTILITIES INCOME FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--88.5%
Electric Power--43.8%
35,000 American Electric Power Company $ 1,334,375 $ 154
50,000 Baltimore Gas & Electric Company 1,337,500 154
25,000 Boston Edison Company 684,375 78
35,000 Carolina Power & Light Company 1,146,250 132
55,000 Cinergy Corporation 1,560,625 180
40,000 Detroit Edison Company 1,350,000 155
65,000 DPL, Inc. 1,543,750 177
55,000 DQE, Inc. 1,512,500 174
40,000 Duke Power Company 1,790,000 206
10,000 Empresa Nacional De Electricidad (ADR) 502,500 58
50,000 FPL Group, Inc. 2,093,750 241
45,000 General Public Utilities Corporation 1,406,250 162
40,000 Houston Industries, Inc. 1,855,000 213
40,000 Illinova Corporation 1,135,000 131
30,000 New England Electric System 1,170,000 135
30,000 NIPSCO Industries, Inc. 1,095,000 125
40,000 Northeast Utilities 990,000 114
30,000 Northern States Power Company 1,417,500 163
35,000 Ohio Edison Company 800,625 92
70,000 PacifiCorp 1,321,250 152
30,000 Peco Energy Company 877,500 101
40,000 Pinnacle West Capital Corporation 1,100,000 127
40,000 Portland General Corporation 1,085,000 125
50,000 Public Service Company of Colorado 1,706,250 196
50,000 Public Service Enterprise Group, Inc. 1,468,750 169
45,000 SCE Corporation 765,000 88
60,000 Southern Company 1,432,500 165
55,000 Teco Energy, Inc. 1,299,375 150
30,000 Texas Utilities Company 1,102,500 127
40,000 Wisconsin Energy Corporation 1,180,000 136
- -------------------------------------------------------------------------------------
38,063,125 4,380
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
$10,000 of
Shares Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Energy--4.8%
35,000 Enron Corporation 1,203,125 138
30,000 NICOR, Inc. 806,250 93
55,000 Pacific Enterprises 1,361,250 157
30,000 Panhandle Eastern Corporation 757,500 87
- -------------------------------------------------------------------------------------
4,128,125 475
- -------------------------------------------------------------------------------------
Natural Gas--17.9%
30,000 Atlanta Gas Light Company 1,158,750 133
22,000 Atmos Energy Corporation 401,500 46
20,000 Bangor Hydro-Electric Company 235,000 27
30,000 Brooklyn Union Gas Company 753,750 87
30,000 El Paso Natural Gas Company 810,000 93
25,000 Kansas City Power & Light Company 621,875 72
45,000 MCN Corporation 978,750 113
30,000 National Fuel Gas Company 892,500 103
40,000 New Jersey Resources Corporation 1,000,000 115
35,000 Piedmont Natural Gas Company 770,000 89
35,000 Questar Corporation 1,054,375 121
20,000 Scana Corporation 507,500 58
30,000 Sonat, Inc. 862,500 99
20,000 Tenneco, Inc. 877,500 101
20,000 TNP Enterprises, Inc 362,500 42
45,000 UGI Corporation 945,000 109
35,000 Unicom Corporation 1,146,250 132
35,000 Washington Energy Company 643,125 74
20,000 Wicor, Inc. 592,500 68
25,000 Williams Companies, Inc. 965,625 111
- -------------------------------------------------------------------------------------
15,579,000 1,793
- -------------------------------------------------------------------------------------
Technology--1.2%
2,000 Motorola, Inc. 131,250 15
25,000 Sprint Corporation 962,500 111
- -------------------------------------------------------------------------------------
1,093,750 126
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Portfolio of Investments
FIRST INVESTORS UTILITIES INCOME FUND
(A Series of First Investors Series Fund II, Inc.)
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
Shares or For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone/Utilities--19.3%
40,000 Ameritech Corporation $ 2,160,000 $ 249
40,000 Bell Atlantic Corporation 2,545,000 293
35,000 BellSouth Corporation 2,677,500 308
30,000 Frontier Corporation 810,000 93
65,000 GTE Corporation 2,681,250 309
25,000 NYNEX Corporation 1,175,000 135
40,000 SBC Communications, Inc. 2,235,000 257
15,000 Telefonica De Espana (ADR) 564,375 65
40,000 US West Communications Group 1,905,000 219
- -------------------------------------------------------------------------------------
16,753,125 1,928
- -------------------------------------------------------------------------------------
Telecommunications/Long Distance--1.5%
20,000 A T & T Corp. 1,280,000 147
- -------------------------------------------------------------------------------------
Total Value of Common Stocks
(cost $68,280,382) 76,897,125 8,849
- -------------------------------------------------------------------------------------
PREFERRED STOCKS--.1%
Financial Services
5,000 US West Financing 7.96% (cost $125,000) 126,875 15
- -------------------------------------------------------------------------------------
CORPORATE BONDS--6.4%
Electric & Gas Utilities--4.3%
$ 500M Baltimore Gas & Electric Co.,
7.52%, 2000 521,845 60
500M Consolidated Edison Co. of New York,
6 5/8%, 2002 505,599 58
500M Duke Power Co., 5 7/8%, 2003 478,709 55
500M Idaho Power Co., 6.4%, 2003 492,620 57
700M Pennsylvania Power & Light Co.,
6 7/8%, 2003 711,931 82
500M SCE Capital Corp., 7 3/8%, 2003 517,339 60
500M Union Electric Co., 6 3/4%, 2008 506,285 58
- -------------------------------------------------------------------------------------
3,734,328 430
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone--1.5%
$ 500M BellSouth Telecommunications Inc.,
6 3/8%, 2004 $ 499,546 $ 56
250M Southern Bell Telephone &
Telegraph Co., Inc., 8 1/8%, 2017 259,561 30
500M United Telephone of Florida,
6 1/4%, 2003 491,305 57
- -------------------------------------------------------------------------------------
1,250,412 143
- -------------------------------------------------------------------------------------
Telecommunications/Long Distance--.6%
500M A T & T Corp., 7 1/2%, 2006 536,368 62
- -------------------------------------------------------------------------------------
Total Value of Corporate Bonds
(cost $5,544,603) 5,521,108 635
- -------------------------------------------------------------------------------------
SHORT-TERM CORPORATE NOTES--4.1%
500M Appalachian Power Company,
5 3/4%, 11/7/95 499,521 58
1,500M GTE South, Inc., 5 3/4%, 11/9/95 1,498,083 172
1,600M Nestle Capital Corporation,
5.7%, 11/2/95 1,599,747 184
- -------------------------------------------------------------------------------------
Total Value of Short-Term
Corporate Notes (cost $3,597,351) 3,597,351 414
- -------------------------------------------------------------------------------------
Total Value of Investments (cost $77,547,336) 99.1% 86,142,459 9,913
Other Assets, Less Liabilities .9 757,536 87
- -------------------------------------------------------------------------------------
Net Assets 100.0% $86,899,995 $10,000
=====================================================================================
</TABLE>
See notes to financial statements
<PAGE>
Statement of Assets and Liabilities
First Investors SERIES Fund II, Inc.
October 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
FIRST INVESTORS
------------------------------------------
GROWTH & MADE IN THE UTILITIES
INCOME FUND U.S.A. FUND INCOME FUND
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments in securities:
At identified cost ................... $57,972,624 $7,921,435 $77,547,336
=========== ========== ===========
At value (Note 1A) ................... $66,245,887 $8,893,964 $86,142,459
Cash ................................... 188,838 182,162 246,870
Receivables:
Capital shares sold .................. 643,339 56,428 356,231
Dividends and interest ............... 175,294 5,027 496,695
Deferred organization expenses (Note 1E) 9,250 -- 7,250
----------- ---------- -----------
Total Assets ........................... 67,262,608 9,137,581 87,249,505
----------- ---------- -----------
Liabilities
Payable for capital shares redeemed .... 94,360 4,107 255,521
Accrued expenses ....................... 40,003 11,739 58,167
Accrued advisory fee ................... 33,119 5,639 35,822
----------- ---------- -----------
Total Liabilities ...................... 167,482 21,485 349,510
----------- ---------- -----------
Net Assets ............................. $67,095,126 $9,116,096 $86,899,995
=========== =========== ===========
Net Assets Consist of:
Capital paid in ........................ $58,808,093 $7,586,506 $82,784,809
Undistributed net investment income .... 125,227 35,596 322,202
Accumulated net realized gain (loss)
on investment transactions ........... (111,457) 521,465 (4,802,139)
Net unrealized appreciation
in value of investments .............. 8,273,263 972,529 8,595,123
----------- ----------- -----------
Total .................................. $67,095,126 $9,116,096 $86,899,995
=========== =========== ===========
Capital shares outstanding (Note 4):
Class A .............................. 8,127,781 604,898 14,173,985
Class B .............................. 463,153 20,535 547,115
Net asset value and redemption
price per share--Class A ............. $ 7.81 $14.58 $ 5.90
Maximum offering price per share--Class A
(Net asset value/.9375)* ............. $ 8.33 $15.55 $ 6.29
Net asset value and offering
price per share--Class B ............. $ 7.78 $14.51 $ 5.86
</TABLE>
*On purchases of $25,000 or more, the sales charge is reduced.
See notes to financial statements
<PAGE>
Statement of Operations
FIRST INVESTORS SERIES FUND II, INC.
Year Ended October 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FIRST INVESTORS
- ---------------------------------------------------------------------------------------
GROWTH & MADE IN THE UTILITIES
INCOME FUND U.S.A. FUND INCOME FUND
------------ ----------- -----------
<S> <C> <C> <C>
Investment Income
Income:
Dividends ............................... $1,311,468 $ 54,841 $ 3,365,225
Interest ................................ 324,373 92,192 562,837
---------- ---------- -----------
Total income .............................. 1,635,841 147,033 3,928,062
---------- ---------- -----------
Expenses (Notes 1E and 3):
Advisory fee ............................ 367,122 80,837 542,191
Shareholder servicing costs ............. 180,916 41,186 260,465
Distribution plan expenses-Class A ...... 143,005 23,924 213,442
Distribution plan expenses-Class B ...... 12,812 1,096 11,449
Professional fees ....................... 27,000 19,388 38,457
Reports and notices to shareholders ..... 30,500 8,413 37,278
Custodian fees .......................... 13,655 5,790 12,064
Amortization of organization expenses ... 3,000 4,055 3,000
Other expenses .......................... 11,227 7,838 28,550
---------- ---------- -----------
Total expenses ............................ 789,237 192,527 1,146,896
Less: Expenses waived or assumed .......... (299,256) (83,421) (385,381)
Custodian fees paid indirectly ............ (5,055) (5,454) (11,984)
---------- ---------- -----------
Net expenses .............................. 484,926 103,652 749,531
---------- ---------- -----------
Net investment income ..................... 1,150,915 43,381 3,178,531
---------- ---------- -----------
Realized and Unrealized Gain (Loss)
on Investments (Note 2):
Net realized gain (loss)
on investments .......................... 59,975 1,220,064 (725,427)
Net unrealized appreciation
of investments .......................... 7,741,415 460,706 12,245,737
---------- ---------- -----------
Net gain on investments ................... 7,801,390 1,680,770 11,520,310
---------- ---------- -----------
Net Increase in Net Assets
Resulting from Operations ............... $8,952,305 $1,724,151 $14,698,841
========== ========== ===========
</TABLE>
See notes to financial statements
<PAGE>
Statement of Changes in Net Assets
FIRST INVESTORS SERIES FUND II, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FIRST INVESTORS
--------------------------------------------------------------------------------------------
GROWTH & MADE IN THE UTILITIES
INCOME FUND U.S.A. FUND INCOME FUND
--------------------------------------------------------------------------------------------
Year Ended October 31 1995 1994 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Net Assets
from Operations
Net investment income ............ $ 1,150,915 $ 472,794 $ 43,381 $ 47,052 $ 3,178,531 $ 2,822,358
Net realized gain (loss)
on investments ................. 59,975 (171,432) 1,220,064 78,601 (725,427) (4,076,712)
Net unrealized appreciation
(depreciation) of investments .. 7,741,415 531,848 460,706 (529,046) 12,245,737 (5,288,144)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net
assets resulting
from operations ................ 8,952,305 833,210 1,724,151 (403,393) 14,698,841 (6,542,498)
------------ ------------ ------------ ------------ ------------ ------------
Distributions to Shareholders from:
Net investment income--Class A ... (1,115,624) (363,271) (47,512) (133,361) (3,123,462) (2,645,975)
Net investment income--Class B ... (25,337) -- -- -- (49,998) --
Net realized gains--Class A ...... -- -- -- -- -- (144,159)
------------ ------------ ------------ ------------ ------------ ------------
Total distributions ............ (1,140,961) (363,271) (47,512) (133,361) (3,173,460) (2,790,134)
------------ ------------ ------------ ------------ ------------ ------------
Capital Share Transactions(a)
Class A:
Proceeds from shares sold ...... 27,027,606 32,133,753 1,771,094 690,866 19,911,865 23,969,216
Value of distributions
reinvested ................... 1,092,153 356,387 47,031 132,333 2,975,959 2,643,337
Cost of shares redeemed ........ (6,745,463) (1,877,923) (2,312,636) (8,221,415 (13,152,876) (12,981,948)
------------ ------------ ------------ ------------ ------------ ------------
21,374,296 30,612,217 (494,511) (7,398,216) 9,734,948 13,630,605
------------ ------------ ------------ ------------ ------------ ------------
Class B:
Proceeds from shares sold ........ 3,403,974 -- 297,505 -- 2,987,201 --
Value of distributions reinvested 25,204 -- -- -- 48,361 --
Cost of shares redeemed .......... (9,090) -- (15,000) -- (66,853) --
------------ ------------ ------------ ------------ ------------ ------------
3,420,088 -- 282,505 -- 2,968,709 --
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
from capital share transactions 24,794,384 30,612,217 (212,006) (7,398,216) 12,703,657 13,630,605
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in net assets .................. 32,605,728 31,082,156 1,464,633 (7,934,970) 24,229,038 4,297,973
Net Assets
Beginning of year ................. 34,489,398 3,407,242 7,651,463 15,586,433 62,670,957 58,372,984
------------ ------------ ------------ ------------ ------------ ------------
End of year+ ...................... $ 67,095,126 $ 34,489,398 $ 9,116,096 $ 7,651,463 $ 86,899,995 $ 62,670,957
============ ============ ============ ============ ============ ============
+ Includes undistributed
net investment income of ......... $ 125,227 $ 112,273 $ 35,596 $ 35,672 $ 322,202 $ 314,131
============ ============ ============ ============ ============ ============
(a) Capital Shares Issued
and Redeemed
Class A:
Sold ........................... 3,750,649 4,869,140 130,597 59,608 3,733,022 4,434,791
Issued for distributions
reinvested ................... 151,589 54,795 3,962 11,130 557,233 509,896
Redeemed ....................... (932,605) (285,184) (179,150) (703,703) (2,460,412) (2,454,714)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in Class A capital shares
outstanding .................. 2,969,633 4,638,751 (44,591) (632,965) 1,829,843 2,489,973
============ ============ ============ ============ ============ ============
Class B:
Sold ........................... 461,042 -- 21,568 -- 550,886 --
Issued for distributions
reinvested ................... 3,305 -- -- -- 8,714 --
Redeemed ....................... (1,194) -- (1,033) -- (12,485) --
------------ ------------ ------------ ------------ ------------ ------------
Net increase in Class B
capital shares outstanding ... 463,153 -- 20,535 -- 547,115 --
============ ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements
<PAGE>
Notes to Financial Statements
FIRST INVESTORS SERIES FUND II, INC.
1. Significant Accounting Policies--First Investors Series Fund II, Inc. (the
"Fund"), a Maryland corporation, is registered under the Investment Company Act
of 1940 (the "1940 Act") as a diversified, open-end management investment
company. The Fund consists of three Series, First Investors Growth & Income
Fund, First Investors Made In The U.S.A. Fund and First Investors Utilities
Income Fund, and accounts separately for the assets, liabilities and operations
of each Series. The objective of each Series is as follows:
Growth & Income Fund seeks long-term growth of capital and current income. This
Series seeks to achieve its objective by investing at least 65% of its total
assets in securities that provide the potential for growth and offer income,
such as dividend-paying stocks and securities convertible into common stocks.
Made In The U.S.A. Fund seeks long-term capital growth. This Series seeks to
achieve its objective by investing at least 75% of its total assets in common
and preferred stocks of companies that its investment adviser considers to have
potential for capital growth. In addition, at least 65% of the Series' total
assets normally will be invested in securities of issuers that (1) have at least
two-thirds of their employees located in the United States, or (2) produce in
the United States at least two-thirds of the value of the parts constituting the
products sold by the issuer, or (3) provide in the United States at least
two-thirds of the value of the services provided by the issuer.
Utilities Income Fund primarily seeks high current income. Long-term capital
appreciation is a secondary objective. This Series seeks to achieve its
objectives by investing at least 65% of its total assets in equity and debt
securities issued by companies primarily engaged in the public utilities
industry.
A. Security Valuation--Except as provided below, a security listed or traded on
an exchange or the NASDAQ National Market System is valued at its last sale
price on the exchange or system where the security is principally traded, and
lacking any sales, the security is valued at the mean between the closing bid
and asked prices. Each security traded in the over-the-counter market (including
securities listed on exchanges whose primary market is believed to be over-the-
counter) is valued at the mean between the last bid and asked prices based upon
quotes furnished by a market maker for such securities. Securities may also be
priced by a pricing service. The pricing service uses quotations obtained from
investment dealers or brokers, information with respect to market transactions
in comparable securities and other available information in determining value.
Short-term corporate notes which are purchased at a discount are valued at
amortized cost. Securities for which market quotations are not readily available
and other assets are valued on a consistent basis at fair value as determined in
good faith by or under the supervision of the Fund's officers in a manner
specifically authorized by the Board of Directors.
B. Federal Income Taxes--No provision has been made for federal income taxes on
net income or capital gains, since it is the policy of each Series to continue
to comply with the special provisions of the Internal Revenue Code applicable to
investment companies and to make sufficient distributions of income and capital
gains (in excess of any available capital loss carryovers) to relieve it from
all, or substantially all, such taxes.
<PAGE>
At October 31, 1995, capital loss carryovers were as follows:
Year Capital
Loss Carryovers Expire
--------------------------
Total 2002 2003
---------- ---------- ---------
GROWTH &
INCOME FUND ............ $ 111,457 $ 111,457 $ --
UTILITIES
INCOME FUND ............ 4,727,380 3,991,114 736,266
C. Distributions to Shareholders--Dividends from net investment income of the
Growth & Income Fund and Utilities Income Fund are declared and paid quarterly
and dividends from net investment income of the Made In The U.S.A. Fund are
declared and paid annually. Distributions from net realized capital gains of all
Series are normally declared and paid annually. Income dividends and capital
gain distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for capital loss
carryforwards, deferral of wash sales and amortization of deferred organization
expenses.
D. Expense Allocation--Expenses directly charged or attributable to a Series are
paid from the assets of that Series. General expenses of the Fund are allocated
among and charged to the assets of each Series on a fair and equitable basis,
which may be based on the relative assets of each Series or the nature of the
services performed and relative applicability to each Series.
E. Deferred Organization Expenses--The organization expenses of each Series are
being amortized over a five year period. Investors purchasing shares of a Series
bear such expenses only as they are amortized against the investment income of
that Series.
First Investors Management Company,Inc. ("FIMCO"), the Fund's investment
adviser, has agreed that in the event any of the initial Class A shares of a
Series purchased by FIMCO are redeemed during the amortization period, the
redemption proceeds will be reduced by a pro rata portion of any unamortized
organization expenses in the same proportion as the number of initial Class A
shares of the Series being redeemed bears to the number of initial Class A
shares of the Series outstanding at the time of redemption.
F. Other--Security transactions are accounted for on the date the securities are
purchased or sold. Cost is determined, and gains and losses are based, on the
identified cost basis for both financial statement and federal income tax
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
2. Purchases and Sales of Securities--For the year ended October 31, 1995,
purchases and sales of securities, excluding U.S. Treasury Bills and short-term
corporate notes, were as follows:
Cost of Proceeds
Purchases of Sales
----------- -----------
GROWTH & INCOME FUND ............. $29,152,887 $ 8,569,978
MADE IN THE U.S.A. FUND .......... 6,735,922 9,162,458
UTILITIES INCOME FUND ............ 23,335,212 11,079,946
<PAGE>
Notes to Financial Statements
FIRST INVESTORS SERIES FUND II, INC.
At October 31, 1995, aggregate cost and net unrealized appreciation of
securities for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Aggregate Unrealized Unrealized Unrealized
Cost Appreciation Depreciation Appreciation
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
GROWTH & INCOME FUND .......... $57,972,624 $9,228,364 $955,101 $8,273,263
MADE IN THE U.S.A. FUND ....... 7,921,435 1,409,673 437,144 972,529
UTILITIES INCOME FUND ......... 77,622,095 9,154,206 633,842 8,520,364
</TABLE>
3. Advisory Fee and Other Transactions With Affiliates--Certain officers and
directors of the Fund are officers and directors of its investment adviser,
FIMCO, its underwriter, First Investors Corporation ("FIC"), its transfer agent,
Administrative Data Management Corp. ("ADM") and/or First Financial Savings
Bank, S.L.A. ("FFS"), custodian of the Fund's Individual Retirement Accounts.
Officers and directors of the Fund received no remuneration from the Fund for
serving in such capacities. Their remuneration (together with certain other
expenses of the Fund) is paid by FIMCO or FIC.
The Investment Advisory Agreement provides as compensation to FIMCO for each
Series other than the Made In The U.S.A. Fund, an annual fee, payable monthly,
at the rate of .75% on the first $300 million of each Series' average daily net
assets, .72% on the next $200 million, .69% on the next $250 million and .66% on
average daily net assets over $750 million. The annual fee for the Made In The
U.S.A. Fund is payable monthly, at the rate of 1.00% on the first $200 million
of the Series' average daily net assets, .75% on the next $300 million,
declining by .03% on each $250 million thereafter, down to .66% on average daily
net assets over $1 billion. For the year ended October 31, 1995, total advisory
fees accrued to FIMCO were $990,150 of which $347,111 was waived. In addition,
expenses of $311,716 were assumed by FIMCO.
Pursuant to certain state regulations, FIMCO has agreed to reimburse each Series
if and to the extent that the Series' aggregate operating expenses, including
advisory fees but generally excluding interest, taxes, brokerage commissions and
extraordinary expenses, exceed any limitation on expenses applicable to that
Series in those states (unless waivers of such limitations have been obtained).
The amount of any such reimbursement is limited to the Series' yearly advisory
fee. For the year ended October 31, 1995, no reimbursement was required pursuant
to these provisions.
For the year ended October 31, 1995, FIC, as underwriter, received $3,661,053 in
commissions from the sale of Fund shares, after allowing $19,818 to other
dealers. Shareholder servicing costs included $351,117 in transfer agent fees
and out of pocket expenses accrued to ADM and $131,450 in custodian fees paid to
FFS.
Pursuant to a Distribution Plan adopted under Rule 12b-1 of the 1940 Act, each
Series is authorized to pay FIC a fee equal to .30% of the average net assets of
the Class A shares and 1% of the average net assets of the Class B shares on an
annualized basis each fiscal year, payable monthly. The fee consists of a
distribution fee and a service fee. The service fee is paid for the ongoing
servicing of clients who are shareholders of that Series. For the year ended
October 31, 1995, these fees on the Class A shares amounted to $380,371 (of
which
<PAGE>
$109,231 was waived by FIC) and $25,357 on the Class B shares.
Wellington Management Company serves as an investment sub-adviser to the Growth
& Income Fund. The subadviser is paid by FIMCO and not by the Series.
The Fund's Custodian has provided credits in the amount of $22,493 against
custodian charges based on the uninvested cash balances of the Fund. The Fund
could possibly have used these cash balances to produce income for the Fund if
they were not used to offset custodian charges of the Fund.
4. Capital--Each Series sells two classes of shares, Class A and Class B, each
with a public offering price that reflects different sales charges and expense
levels. Class A shares are sold with an initial sales charge of up to 6.25% of
the amount invested and together with the Class B shares are subject to 12b-1
fees as described in Note 3. Class B shares are sold without an initial sales
charge, but are generally subject to a contingent deferred sales charge which
declines in steps from 4% to 0% during a six-year period. Class B shares
automatically convert into Class A shares after eight years. Realized and
unrealized gains or losses, investment income and expenses (other than 12b-1
fees and certain other class expenses) are allocated daily to each class of
shares based upon the relative proportion of net assets of each class. Of the
100,000,000 shares originally designated, the Fund has classified 50,000,000
shares as Class A and 50,000,000 shares as Class B.
5. Rule 144A Securities--Rule 144A provides a non-exclusive safe harbor
exemption from the registration requirements of the Securities Act of 1933 for
specified resales of restricted securities to qualified investors. At October
31, 1995, the Growth & Income Fund held one 144A security with a value of
$256,250, representing less than 1% of the Series' net assets. This security is
valued as disclosed in Note 1A.
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Independent Auditor's Report
To the Shareholders and Board of Directors of
First Investors Series Fund II, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolios of investments, of First Investors Growth & Income Fund, First
Investors Made In The U.S.A. Fund and First Investors Utilities Income Fund
(comprising First Investors Series Fund II, Inc.), as of October 31, 1995, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
financial highlights for each of the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Investors Growth & Income Fund, First Investors Made In The U.S.A. Fund and
First Investors Utilities Income Fund as of October 31, 1995, and the results of
their operations, changes in their net assets and financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
November 30, 1995
