UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM N-CSR
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-2981
FIRST INVESTORS SPECIAL BOND FUND, INC.
(Exact name of registrant as specified in charter)
--------
95 Wall Street
New York, NY 10005
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
1-212-858-8000
DATE OF FISCAL YEAR END: DECEMBER 31, 2003
DATE OF REPORTING PERIOD: DECEMBER 31, 2003
Item 1. Reports to Stockholders
The Annual Report to Stockholders follows
[Logo: "FIRST INVESTORS"]
First Investors
Special Bond Fund, Inc.
Annual Report
December 31, 2003
[Logo: "FIRST INVESTORS FINANCIAL NETWORK"]
Portfolio Managers' Letter
FIRST INVESTORS SPECIAL BOND FUND, INC.*
Dear Investor:
This is the annual report for the First Investors Special Bond Fund
for the year ended December 31, 2003. During the year, the Fund's
return on a net asset value basis was 28.3% and the Fund declared
dividends of 78 cents per share.
The largest influence on the Fund's results was the solid performance
of the overall high yield market, which rebounded after several poor
years. Continued low interest rates, declining default rates, improving
business fundamentals associated with a strengthening economy and a
return to confidence in the high yield market all contributed to the
market's performance during the year. Risk taking was generally
rewarded, as the lower-rated names far outperformed middle-rated and
higher-rated high yield bonds.
Top contributors to the Fund's performance during the year were those
securities and sectors that rebounded from low prices as a result of
better liquidity, renewed investor confidence or improved results. In
particular, the refining and cable television sectors, which had been
under heavy pressure from investors and which the Fund had overweighted,
recovered significantly during the reporting period. The Fund's holdings
in refiners Giant Industries and Tesoro Petroleum, and cable companies
Charter, Adelphia, MediaComm and RCN all aided performance. Other
companies whose bonds recovered from distressed levels during the year
to add to performance were specialty printer Mail-Well, as well as
automobile and truck parts suppliers such as Special Devices, Accuride
and Collins & Aikman. Holdings in chain and hoist maker Columbus
McKinnon also added to returns.
Portfolio Managers' Letter (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.*
Thank you for placing your trust in First Investors. As always, we
appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ RICHARD T. BOURKE
Richard T. Bourke
Co-Portfolio Manager
/s/ GREG MILLER
Greg Miller
Co-Portfolio Manager
January 31, 2004
* The Fund is only available through the purchase of variable annuity
contracts issued by First Investors Life Insurance Company. The annual
report does not reflect the additional expenses and charges that are
applicable to variable annuity contracts.
Cumulative Performance Information
FIRST INVESTORS SPECIAL BOND FUND, INC.
Comparison of change in value of $10,000 investment in the First Investors
Special Bond Fund, Inc. and the CS First Boston High Yield Index.
SPECIAL BOND FUND, INC.
GRAPH PLOTS
As of December 31, 2003
SPECIAL BOND CS FIRST BOSTON
FUND HIGH YIELD INDEX
Dec-93 $10,000 $10,000
Dec-94 9,891 9,903
Dec-95 11,944 11,624
Dec-96 13,509 13,068
Dec-97 14,987 14,718
Dec-98 15,181 14,804
Dec-99 16,128 15,289
Dec-00 15,069 14,493
Dec-01 15,066 15,333
Dec-02 15,398 15,809
Dec-03 19,758 20,226
(INSET BOX IN CHART READS:)
Average Annual Total Return*
One Year 28.31%
Five Years 5.41%
Ten Years 7.05%
S.E.C. 30-Day Yield 5.95%
The graph compares a $10,000 investment in the First Investors Special
Bond Fund, Inc. beginning 12/31/93 with a theoretical investment in the
CS First Boston High Yield Index (the "Index"). The Index is designed to
measure the performance of the high yield bond market. As of 12/31/03,
the Index consisted of 1,637 different issues, most of which are cash
pay, but also included in the Index are zero-coupon bonds, step bonds,
payment-in-kind bonds and bonds which are in default. As of 12/31/03,
approximately 5.69% of the market value of the Index was in default. The
bonds included in the Index have an average life of 7.3 years, an average
maturity of 7.3 years, an average duration of 3.8 years and an average
coupon of 9.14%. It is not possible to invest directly in this Index. In
addition, the Index does not take into account fees and expenses that an
investor would incur in purchasing securities in the Index. For purposes
of the graph and accompanying table it is assumed that all dividends and
distributions were reinvested.
* The Average Annual Total Return figures are for the periods ended
12/31/03. The returns shown do not reflect any sales charges, since the
Fund sells it shares solely to First Investors Life Variable Annuity Fund
A at net asset value. The returns do not reflect the fees and charges
that an individual would pay in connection with an investment in a
variable annuity contract. Results represent past performance and do not
indicate future results. Investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the original cost. The issuers of the high
yield bonds in which the Fund primarily invests pay higher interest rates
because they have a greater likelihood of financial difficulty, which
could result in their inability to repay the bonds fully when due. Prices
of high yield bonds are also subject to greater fluctuations. CS First
Boston High Yield Index figures are from CS First Boston Corporation and
all other figures are from First Investors Management Company, Inc.
Portfolio of Investments
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
- ----------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- ----------------------------------------------------------------------------------------------------------
CORPORATE BONDS--88.7%
Aerospace/Defense--1.9%
$ 150M Alliant Techsystems, Inc., 8.5%, 2011 $ 165,750 $ 75
250M L--3 Communications Corp., 8%, 2008 261,563 118
- ----------------------------------------------------------------------------------------------------------
427,313 193
- ----------------------------------------------------------------------------------------------------------
Automotive--7.9%
225M Accuride Corp., 9.25%, 2008 232,312 105
75M Asbury Automotive Group, Inc., 9%, 2012 79,688 36
594M Cambridge Industries Liquidating Trust ++** 5,938 3
500M Collins & Aikman Products Co., 11.5%, 2006 462,500 209
175M Dana Corp., 9%, 2011 211,750 95
500M Special Devices, Inc., 11.375%, 2008 477,500 215
250M TRW Automotive, Inc., 9.375%, 2013 286,875 129
- ----------------------------------------------------------------------------------------------------------
1,756,563 792
- ----------------------------------------------------------------------------------------------------------
Chemicals--4.9%
150M Equistar Chemicals LP, 10.625%, 2011 + 166,500 75
100M Huntsman, LLC, 11.625%, 2010 + 102,500 46
100M IMC Global, Inc., 10.875%, 2013 + 110,000 50
150M Lyondell Chemical Co., 9.5%, 2008 157,500 71
Millennium America, Inc.:
90M 9.25%, 2008 98,550 44
110M 9.25%, 2008 + 120,450 54
150M Noveon, Inc., 11%, 2011 174,750 79
175M Resolution Performance Products, LLC, 13.5%, 2010 153,125 69
- ----------------------------------------------------------------------------------------------------------
1,083,375 488
- ----------------------------------------------------------------------------------------------------------
Consumer Non--Durables--.9%
200M AKI, Inc., 10.5%, 2008 209,000 94
- ----------------------------------------------------------------------------------------------------------
Energy--11.9%
300M Bluewater Finance, Ltd., 10.25%, 2012 313,500 141
500M Compagnie Generale de Geophysique, 10.625%, 2007 532,500 240
125M Dresser, Inc., 9.375%, 2011 136,563 62
250M El Paso Production Holding Co., 7.75%, 2013 + 247,500 111
1,000M Giant Industries, Inc., 11%, 2012 1,085,000 489
300M Tesoro Petroleum Corp., 9.625%, 2008 321,000 145
- ----------------------------------------------------------------------------------------------------------
2,636,063 1,188
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- ----------------------------------------------------------------------------------------------------------
Financial Services--2.4%
$ 500M Dow Jones Trac--X NA, High Yield, Series 2, Trust 3,
8%, 2009 + $ 524,375 $ 236
- ----------------------------------------------------------------------------------------------------------
Food/Beverage/Tobacco--3.7%
500M Canandaigua Brands, Inc., 8.5%, 2009 526,250 237
150M Land O'Lakes, Inc., 8.75%, 2011 132,000 60
150M Pilgrim's Pride Corp., 9.625%, 2011 165,750 75
- ----------------------------------------------------------------------------------------------------------
824,000 372
- ----------------------------------------------------------------------------------------------------------
Food/Drug--.7%
175M Di Giorgio Corp., 10%, 2007 165,375 74
- ----------------------------------------------------------------------------------------------------------
Forest Products/Containers--5.0%
250M AEP Industries, Inc., 9.875%, 2007 252,500 114
175M Potlatch Corp., 10%, 2011 196,000 88
200M Stone Container Corp., 9.75%, 2011 222,000 100
Tekni--Plex, Inc.:
175M 12.75%, 2010 191,625 86
130M 8.75%, 2013 + 136,175 62
100M Tembec Industries, Inc., 8.5%, 2011 104,000 47
- ----------------------------------------------------------------------------------------------------------
1,102,300 497
- ----------------------------------------------------------------------------------------------------------
Gaming/Leisure--4.8%
250M Circus & Eldorado/Silver Legacy, 10.125%, 2012 260,625 117
450M Isle of Capri Casinos, Inc., 8.75%, 2009 474,750 214
180M Outboard Marine Corp., 10.75%, 2008 ++** 225 --
300M Park Place Entertainment Corp., 9.375%, 2007 340,500 153
- ----------------------------------------------------------------------------------------------------------
1,076,100 484
- ----------------------------------------------------------------------------------------------------------
Health Care--6.3%
15M ALARIS Medical Systems, Inc., 7.25%, 2011 15,600 7
165M HCA, Inc., 5.25%, 2008 168,336 76
150M Insight Health Services Corp., 9.875%, 2011 159,750 72
150M MedQuest, Inc., 11.875%, 2012 164,625 74
75M Quintiles Transnational Corp., 10%, 2013 + 81,375 37
250M Sybron Dental Specialties, Inc., 8.125%, 2012 273,125 123
550M Tenet Healthcare Corp., 6.375%, 2011 533,500 240
- ----------------------------------------------------------------------------------------------------------
1,396,311 629
- ----------------------------------------------------------------------------------------------------------
Portfolio of Investments (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
- ----------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- ----------------------------------------------------------------------------------------------------------
Housing--1.7%
$ 100M Integrated Electrical Services, Inc., 9.375%, 2009 $ 105,500 $ 47
250M Nortek, Inc., 9.875%, 2011 276,875 125
- ----------------------------------------------------------------------------------------------------------
382,375 172
- ----------------------------------------------------------------------------------------------------------
Information Technology--.0%
150M Exodus Communications, Inc., 10.75%, 2009 ++** 188 --
- ----------------------------------------------------------------------------------------------------------
Investment/Financial Companies--.3%
125M Finova Group, Inc., 7.5%, 2009 75,625 34
- ----------------------------------------------------------------------------------------------------------
Manufacturing--3.4%
600M Columbus McKinnon Corp., 8.5%, 2008 564,000 254
200M Wolverine Tube, Inc., 7.375%, 2008 + 186,000 84
- ----------------------------------------------------------------------------------------------------------
750,000 338
- ----------------------------------------------------------------------------------------------------------
Media--Broadcasting--2.2%
150M Nexstar Finance, LLC, 12%, 2008 169,875 77
150M Sinclair Broadcasting Group, Inc., 8.75%, 2011 167,250 75
136M Young Broadcasting Corp., 10%, 2011 147,220 66
- ----------------------------------------------------------------------------------------------------------
484,345 218
- ----------------------------------------------------------------------------------------------------------
Media--Cable TV--6.3%
225M Adelphia Communications Corp., 10.25%, 2011 ++ 213,750 96
500M Charter Communications Holdings, LLC, 10%, 2009 447,500 202
500M Mediacom LLC/Mediacom Capital Corp., 8.5%, 2008 512,500 231
200M Quebecor Media, Inc., 11.125%, 2011 232,500 105
- ----------------------------------------------------------------------------------------------------------
1,406,250 634
- ----------------------------------------------------------------------------------------------------------
Media--Diversified--8.6%
460M Carmike Cinemas, Inc., 10.375%, 2009 485,300 219
500M Garden State Newspapers, Inc., 8.625%, 2011 533,750 240
600M Mail--Well I Corp., 8.75%, 2008 601,500 271
50M Six Flags, Inc., 9.625%, 2014 + 52,500 24
200M Universal City Development Partners, Ltd.,
11.75%, 2010 + 235,000 106
- ----------------------------------------------------------------------------------------------------------
1,908,050 860
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Principal $10,000 of
Amount Security Value Net Assets
- ----------------------------------------------------------------------------------------------------------
Metals/Mining--3.5%
$ 600M Commonwealth Aluminum Corp., 10.75%, 2006 $ 615,000 $ 277
160M Euramax International, Inc., 8.5%, 2011 + 171,600 78
- ----------------------------------------------------------------------------------------------------------
786,600 355
- ----------------------------------------------------------------------------------------------------------
Retail--General Merchandise--2.7%
250M General Nutrition Center, 8.5%, 2010 + 257,500 116
300M Michaels Stores, Inc., 9.25%, 2009 332,625 150
- ----------------------------------------------------------------------------------------------------------
590,125 266
- ----------------------------------------------------------------------------------------------------------
Services--5.7%
400M Allied Waste NA, Inc., 10%, 2009 434,000 196
325M Hydrochem Industrial Services, Inc., 10.375%, 2007 311,188 140
500M Kindercare Learning Centers, Inc., 9.5%, 2009 510,000 230
- ----------------------------------------------------------------------------------------------------------
1,255,188 566
- ----------------------------------------------------------------------------------------------------------
Telecommunications--1.1%
600M ICG Services, Inc., 10%, 2008 ++** 750 --
500M RCN Corp., 11%, 2008 ++ 235,000 107
500M Viatel, Inc., 12.5%, 2008 ++** 191 --
400M XO Communications, Inc., 9%, 2008 ++** 500 --
- ----------------------------------------------------------------------------------------------------------
236,441 107
- ----------------------------------------------------------------------------------------------------------
Utilities--.0%
125M AES Drax Energy, Ltd., 11.5%, 2010 ++ 1,406 1
- ----------------------------------------------------------------------------------------------------------
Wireless Communications--2.8%
300M Crown Castle International Corp., 9.375%, 2011 334,500 151
Triton Communications, LLC:
100M 8.75%, 2011 99,000 44
175M 9.375%, 2011 179,375 81
- ----------------------------------------------------------------------------------------------------------
612,875 276
- ----------------------------------------------------------------------------------------------------------
Total Value of Corporate Bonds (cost $20,082,913) 19,690,243 8,874
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--5.1%
1,000M U.S. Treasury Notes, 7%, 2006 (cost $1,031,286) 1,120,430 505
- ----------------------------------------------------------------------------------------------------------
Portfolio of Investments (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
- ----------------------------------------------------------------------------------------------------------
Amount
Invested
For Each
Shares or $10,000 of
Warrants Security Value Net Assets
- ----------------------------------------------------------------------------------------------------------
COMMON STOCKS--2.0%
Media--Cable TV--1.0%
2,061 *Echostar Communications Corporation-- Class "A" $ 70,074 $ 32
2,111 *NTL, Inc. 147,242 66
- ----------------------------------------------------------------------------------------------------------
217,316 98
- ----------------------------------------------------------------------------------------------------------
Media--Diversified--1.0%
1,500 *MediaNews Group, Inc. -- Class "A" 225,000 102
- ----------------------------------------------------------------------------------------------------------
Telecommunications--.0%
1,450 *ICG Communications, Inc. 9,570 4
1,571 *World Access, Inc. 2 --
- ----------------------------------------------------------------------------------------------------------
9,572 4
- ----------------------------------------------------------------------------------------------------------
Total Value of Common Stocks (cost $640,908) 451,888 204
- ----------------------------------------------------------------------------------------------------------
PREFERRED STOCKS--.6%
Consumer Non--Durables--.0%
29 *Leiner Health Products, Inc.** -- --
- ----------------------------------------------------------------------------------------------------------
Manufacturing--.6%
363 Day International Group, Inc., 12.25%, 2010, PIK 127,975 58
- ----------------------------------------------------------------------------------------------------------
Total Value of Preferred Stocks (cost $292,927) 127,975 58
- ----------------------------------------------------------------------------------------------------------
WARRANTS--.0%
Telecommunications
250 *GT Group Telecom, Inc. (expiring 2/1/10)
(cost $22,587) + 187 --
- ----------------------------------------------------------------------------------------------------------
Total Value of Investments (cost $22,070,621) 96.4% 21,390,723 9,641
Other Assets, Less Liabilities 3.6 796,939 359
- ----------------------------------------------------------------------------------------------------------
Net Assets 100.0% $22,187,662 $10,000
==========================================================================================================
* Non--income producing
** Security valued at fair value (see Note 1A)
+ See Note 5
++ In default as to principal and/or interest payment
See notes to financial statements
Statement of Assets and Liabilities
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
- ----------------------------------------------------------------------------------------
Assets
Investments in securities, at value
(identified cost $22,070,621) (Note 1A) $21,390,723
Cash 341,865
Interest receivable 483,977
Other assets 4,373
-----------
Total Assets 22,220,938
-----------
Liabilities
Accrued advisory fee 14,646
Accrued expenses 18,630
-----------
Total Liabilities 33,276
-----------
Net Assets $22,187,662
===========
Net Assets Consist of:
Capital paid in $29,915,626
Accumulated deficit in net investment income (75,563)
Accumulated net realized loss on investment transactions (6,972,503)
Net unrealized depreciation in value of investments (679,898)
-----------
Total $22,187,662
===========
Net Asset Value, Offering Price and Redemption Price Per Share
($22,187,662 divided by 2,388,071 shares outstanding),
25,000,000 shares authorized, $1.00 par value (Note 2) $9.29
=====
See notes to financial statements
Statement of Operations
FIRST INVESTORS SPECIAL BOND FUND, INC.
Year Ended December 31, 2003
- -----------------------------------------------------------------------------------------------------
Investment Income
Income:
Interest $2,026,463
Dividends (Note 1E) 997
-----------
Total income $2,027,460
Expenses (Notes 1 and 4):
Advisory fee 155,596
Professional fees 18,873
Custodian fees 4,406
Other expenses 13,616
-----------
Total expenses 192,491
Less - Custodian fees paid indirectly (1,800)
-----------
Net expenses 190,691
-----------
Net investment income 1,836,769
Realized and Unrealized Gain (Loss)
on Investments (Note 3):
Net realized loss on investments (1,519,663)
Net unrealized appreciation of investments 4,897,672
-----------
Net gain on investments 3,378,009
-----------
Net Increase in Net Assets Resulting
from Operations $5,214,778
===========
See notes to financial statements
Statement of Changes in Net Assets
FIRST INVESTORS SPECIAL BOND FUND, INC.
- -----------------------------------------------------------------------------------------------------
Year Ended December 31 2003 2002
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets from Operations
Net investment income $ 1,836,769 $ 2,002,732
Net realized loss on investments (1,519,663) (2,714,834)
Net unrealized appreciation of investments 4,897,672 1,121,587
----------- -----------
Net increase in net assets resulting from operations 5,214,778 409,485
----------- -----------
Dividends to Shareholders
Net investment income (1,864,508) (2,017,139)
----------- -----------
Capital Share Transactions *
Proceeds from shares sold 44,332 23,541
Reinvestment of dividends 1,864,508 2,017,139
Cost of shares redeemed (2,528,932) (3,033,647)
----------- -----------
Net decrease in net assets resulting
from share transactions (620,092) (992,967)
----------- -----------
Net increase (decrease) in net assets 2,730,178 (2,600,621)
Net Assets
Beginning of year 19,457,484 22,058,105
----------- -----------
End of the year (including accumulated
deficit in net investment income of $(75,563) and
$(61,884), respectively) $22,187,662 $19,457,484
=========== ===========
*Capital Shares Issued and Redeemed
Sold 5,042 3,005
Issued for dividends reinvested 212,029 248,778
Redeemed (293,043) (372,487)
----------- -----------
Net decrease in capital shares (75,972) (120,704)
=========== ===========
See notes to financial statements
Notes to Financial Statements
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
1. Significant Accounting Policies--The Fund is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, open-end
management investment company. The investment objective of the Fund is to
seek high current income without undue risk to principal and secondarily to
seek growth of capital.
A. Security Valuation--Except as provided below, a security listed or
traded on an exchange or the Nasdaq Stock Market is valued at its last sale
price on the exchange or market where the security is principally traded,
and lacking any sales, the security is valued at the mean between the
closing bid and asked prices. Securities traded in the over-the-counter
market (including securities listed on exchanges whose primary market is
believed to be over-the-counter) are 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. For valuation
purposes, where applicable, quotations of foreign securities in foreign
countries are translated to U.S. dollar equivalents using the foreign
exchange quotation in effect. Short-term debt securities that mature in 60
days or less are valued on the amortized cost method which approximates
market value. Securities for which market quotations are not readily
available or determined to be unreliable, and any 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. At December 31, 2003, the Fund held seven
securities that were fair valued by its Valuation Committee with an
aggregate value of $7,792 representing .04% of the Fund's net assets.
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 the Fund to
continue to comply with the special provisions of the Internal Revenue Code
applicable to regulated 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. As of December 31, 2003, the Fund had capital loss carryovers of
$6,962,823 of which $253,501 expires in 2004, $636,995 in 2007, $365,853 in
2008, $1,284,606 in 2009, $2,764,915 in 2010, and $1,656,953 in 2011.
C. Distributions to Shareholders--Dividends to shareholders from net
investment income are declared daily and paid quarterly. Distributions from
net realized capital gains, if any, are normally declared and paid
annually. Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. These
differences are primarily due to differing treatments for capital loss
carryforwards and post-October capital losses.
D. Use of Estimates--The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those
estimates.
E. 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 is recorded on the ex-dividend
date. Shares of stock received in lieu of cash dividends on the preferred
stock holdings are recognized as dividend income and recorded at the market
value of the shares received. For the year ended December 31, 2003, the
Fund recognized $997 from these taxable "pay-in-kind" distributions.
Interest income and estimated expenses are accrued daily. Bond premiums and
discounts are amortized/accreted using the interest method. For the year
ended December 31, 2003, the Fund's custodian has provided credits in the
amount of $1,800 against custodian charges based on the uninvested cash
balances of the Fund.
2. Capital Stock--Shares of the Fund are sold only through the purchase of
First Investors Life Variable Annuity Fund A contracts issued by First
Investors Life Insurance Company.
3. Security Transactions--For the year ended December 31, 2003, purchases
and sales of investment securities, other than United States Government
obligations and short-term corporate notes, aggregated $4,518,326 and
$5,138,482, respectively.
As of December 31, 2003, the cost of investments for federal income tax
purposes was $22,152,381. Accumulated net unrealized depreciation on
investments was $761,658, consisting of $1,726,269 gross unrealized
appreciation and $2,487,927 gross unrealized depreciation.
4. Advisory Fee and Other Transactions With Affiliates--Certain officers
and directors of the Fund are officers and directors of its investment
adviser, First Investors Management Company, Inc. ("FIMCO") and/or its
transfer agent, Administrative Data Management Corp. Directors of the Fund
who are not "interested persons" of the Fund as defined in the 1940 Act
are remunerated by the Fund. For the year ended December 31, 2003, total
directors fees accrued by the Fund amounted to $300.
The Investment Advisory Agreement provides as compensation to FIMCO an
annual fee, payable monthly, at the rate of .75% on the first $250 million
of the Fund's average daily net assets, declining by .03% on each $250
million thereafter, down to .66% on average daily net assets over $750
million.
Notes to Financial Statements (continued)
FIRST INVESTORS SPECIAL BOND FUND, INC.
December 31, 2003
5. Rule 144A Securities--Under Rule 144A, certain restricted securities are
exempt from the registration requirements of the Securities Act of 1933 and
may only be resold to qualified institutional investors. At December 31,
2003, the Fund held fourteen 144A securities with an aggregate value of
$2,391,662 representing approximately 10.8% of the Fund's net assets. These
securities are valued as set forth in Note 1A.
6. Concentration of Credit Risk--The Fund's investment in high yield
securities, whether rated or unrated, may be considered speculative and
subject to greater market fluctuations and risk of loss of income and
principal than lower-yielding, higher-rated, fixed-income securities. The
risk of loss due to default by the issuer may be significantly greater for
the holders of high-yielding securities, because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer.
7. Tax Components of Distributions to Shareholders--Distributions to
shareholders on a tax basis during the years ended December 31, 2003 and
2002, consisting entirely of ordinary income, were $1,864,508 and
$2,017,139, respectively.
As of December 31, 2003, the components of distributable earnings (deficit)
on a tax basis were as follows:
Accumulated Total
Undistributed Capital Distributable
Ordinary Loss Unrealized Earnings
Income Carryover Depreciation (Deficit)
------ --------- ------------ -------------
Special Bond $6,197 $(6,972,503)* $(761,658) $(7,727,964)
* Includes post-October losses of ($9,680).
Differences between book distributable earnings and tax distributable
earnings consist primarily of post-October losses and amortization of bond
premiums and discounts.
For the year ended December 31, 2003, to reflect permanent differences
between book and tax reporting, the Fund reclassified $287,903 from
accumulated net realized loss on investment transactions to capital paid in.
Financial Highlights
FIRST INVESTORS SPECIAL BOND FUND, INC.
The following table sets forth the operating performance data for a share
of capital stock outstanding, total return, ratios to average net assets
and other supplemental data for each year indicated.
Year Ended December 31
----------------------------------------------------------------------------
2003 2002 2001* 2000 1999
------------ ------------ ------------ ------------ ------------
Per Share Data
- --------------
Net Asset Value,
Beginning of Year $ 7.90 $ 8.53 $ 9.47 $11.37 $11.86
------------ ------------ ------------ ------------ ------------
Income from Investment Operations
Net investment income .76 .80 .90 1.08 1.10
Net realized and
unrealized gain (loss)
on investments 1.41 (.62) (.90) (1.78) (.39)
------------ ------------ ------------ ------------ ------------
Total from Investment
Operations $2.17 .18 -- (.70) .71
------------ ------------ ------------ ------------ ------------
Less Dividends from
Net Investment Income .78 .81 .94 1.20 1.20
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Year $ 9.29 $ 7.90 $ 8.53 $ 9.47 $11.37
============ ============ ============ ============ ============
Total Return (%) + 28.31 2.20 (.01) (6.57) 6.24
- ------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Year
(in thousands) $22,188 $19,457 $22,058 $24,135 $30,194
Ratio to Average Net Assets: (%)
Expenses .93 .93 .90 .89 .87
Net Investment Income 8.84 9.77 9.80 10.09 9.38
Portfolio Turnover Rate (%) 23 18 35 37 32
* Prior to January 1, 2001, the Fund did not amortize premiums on debt
securities. The per share data and ratios prior to 2001 have not been
restated. The cumulative effect of this accounting change had no impact
on total net assets of the Fund.
+ The effect of fees and charges incurred at the separate account level are
not reflected in these performance figures.
See notes to financial statements
Independent Auditors' Report
To the Shareholders and Board of Directors of
First Investors Special Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
First Investors Special Bond Fund, Inc., including the portfolio of
investments, as of December 31, 2003, and 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 the financial
highlights for each of the five years in the period then ended. 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 auditing standards generally
accepted in the United States of America. 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 December 31,
2003, 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 Special Bond Fund, Inc. as of December 31, 2003, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United
States of America.
Tait, Weller & Baker
Philadelphia, Pennsylvania
February 2, 2004
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FIRST INVESTORS SPECIAL BOND FUND, INC.
Directors and Officers*
Position
Held with Principal Number of Other
Fund and Occupation Portfolios in Trusteeships/
Name, Date of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------ ------- ------- -------- ----
DISINTERESTED DIRECTORS
Robert M. Grohol 1/16/1932 Director None/Retired 50 None
c/o First Investors since 6/30/00
Management Company, Inc.
95 Wall Street
New York, NY 10005
Rex R. Reed 3/19/1922 Director None/Retired 50 None
c/o First Investors since 3/31/84
Management Company, Inc.
95 Wall Street
New York, NY 10005
Herbert Rubinstein 6/14/1921 Director None/Retired 50 None
c/o First Investors since 9/20/79
Management Company, Inc.
95 Wall Street
New York, NY 10005
James M. Srygley 10/17/1932 Director Owner 50 None
c/o First Investors since 1/19/95 Hampton
Management Company, Inc. Properties
95 Wall Street
New York, NY 10005
Robert F. Wentworth 7/5/1929 Director None/Retired 50 None
c/o First Investors since 10/15/92
Management Company, Inc.
95 Wall Street
New York, NY 10005
Position(s)
Held with Principal Number of Other
Fund and Occupation(s) Portfolios in Trusteeships/
Name, Date of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------ ------- ------- -------- ----
INTERESTED DIRECTORS**
Glenn O. Head 8/16/1925 Director Chairman of 50 None
c/o First Investors since 1968 First Investors
Management Company, Inc. Corporation,
95 Wall Street Chairman of
New York, NY 10005 First Investors
Consolidated
Corporation,
Chairman of
First Investors
Management
Company, Inc.,
Chairman of
Administrative Data
Management Corp.,
and officer of
other affiliated
companies***
Kathryn S. Head 12/31/1955 Director Vice President 50 None
c/o First Investors since 3/17/94 of First Investors
Management Company, Inc. Corporation,
581 Main Street President of
Woodbridge, NJ 07095 President First Investors
since 11/15/01 Consolidated
Corporation,
President of
First Investors
Management
Company, Inc.,
President of
Administrative Data
Management Corp.,
Chairman of
First Investors
Federal Savings
Bank and
officer of
other affiliated
companies***
FIRST INVESTORS SPECIAL BOND FUND, INC.
Directors and Officers* (continued)
Position
Held with Principal Number of Other
Fund and Occupation(s) Portfolios in Trusteeships/
Name, Date of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------ ------- ------- -------- ----
INTERESTED DIRECTORS** (continued)
Larry R. Lavoie 9/12/1947 Director General Counsel 50 None
c/o First Investors since 9/17/98 First Investors
Management Company, Inc. Corporation
95 Wall Street and other
New York, NY 10005 affiliated
companies***
John T. Sullivan 1/18/1932 Director Of Counsel 50 None
c/o First Investors since 9/20/79 Hawkins,
Management Company, Inc. Delafield &
95 Wall Street Wood; Director
New York, NY 10005 and Chairman
of Executive
Committee of
First Investors
Corporation
* Each Director serves for an indefinite term with the Fund, until
his/her successor is elected.
** Mr. Head and Ms. Head are interested directors because (a) they are
indirect owners of more than 5% of the voting stock of the adviser and
principal underwriter of the Funds, (b) they are officers, directors
and employee of the adviser and principal underwriter of the Funds.
Ms. Head is an officer of the Funds and the daughter of Mr. Head.
Mr. Lavoie is an interested director of the Funds because he indirectly
owns securities issued by and is an officer of the adviser and
principal underwriter of the Funds. Mr. Sullivan is an interested
director because he is a director and Chairman of the Executive
Committee of First Investors Corporation and he indirectly owns
securities issued by the adviser and principal underwriter of the
Funds.
*** Other affiliated companies consist of: First Investors Realty
Company, Inc., First Investors Life Insurance Company, First Investors
Leverage Corporation, Route 33 Realty Corporation, First Investors
Credit Funding Corporation, N.A.K. Realty Corporation, Real Property
Development Corporation, School Financial Management Services, Inc.,
First Investors Federal Savings Bank, First Investors Credit
Corporation and First Investors Resources, Inc.
Position
Held with Principal Number of Other
Fund and Occupation(s) Portfolios in Trusteeships/
Name, Date of Birth Length of During Past Fund Complex Directorships
and Address Service 5 Years Overseen Held
- ------------ ------- ------- -------- ----
OFFICERS WHO ARE NOT DIRECTORS
Joseph I. Benedek 8/2/1957 Treasurer Treasurer 50 None
c/o First Investors since 1988 and Principal
Management Company, Inc. Accounting Officer
581 Main Street
Woodbridge, NJ 07095
FIRST INVESTORS SPECIAL BOND FUND, INC.
Shareholder Information
Investment Adviser
First Investors Management Company, Inc.
95 Wall Street
New York, NY 10005
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
Administrative Data Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036
Auditors
Tait, Weller & Baker
1818 Market Street
Philadelphia, PA 19103
It is the Fund's practice to mail only one copy of its annual and
semi-annual reports to any address at which more than one shareholder with
the same last name has indicated that mail is to be delivered. Additional
copies of the reports will be mailed if requested by any shareholder in
writing or by calling 800-423-4026. The Fund will ensure that separate
reports are sent to any shareholder who subsequently changes his or her
mailing address.
This report is authorized for distribution only to existing shareholders,
and, if given to prospective shareholders, must be accompanied or preceded
by the Fund's prospectus.
Item 2. Code of Ethics
The Registrant's Board of Directors/Trustees ("Board") has
adopted a Code of Ethics that applies to the First Investors Funds'
("Funds") principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the Funds or a third party. The Code of Ethics is attached to this
report as Exhibit A.
During the period of the report, there have been no amendments to the
Code of Ethics or waivers, implicit or otherwise, from its provisions.
Item 3. Audit Committee Financial Expert
The independent director currently serving as the audit committee
financial expert is Robert F. Wentworth.
The Registrant's Board has unanimously determined that Mr. Wentworth
satisfied the definition of an audit committee financial expert as
set forth in the instructions to Form N-CSR under the Investment
Company Act of 1940. Specifically, the Board determined that
Mr. Wentworth has all of the following: (i) an understanding of
generally accepted accounting principles and financial
statements; (ii) the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals,
and reserves; (iii) experience preparing, auditing, analyzing or
evaluating financial statements that present the breadth and level of
complexity of accounting issues that are generally comparable to the
breadth and complexity of issues that can reasonably be expected to be
raised by the Funds' financial statements, or experience actively
supervising one or more persons engaged in such activities; (iv) an
understanding of internal controls and procedures for financial reports;
and (v) an understanding of audit committee functions. Furthermore, he
had acquired these attributes through education and many years of
relevant experience in various financial positions with American
Telephone and Telegraph Company, including the positions of
Director - Accounting, Director - Finance, Director - Financial
Reporting and Analysis, Controller, and Director of Business Planning.
Mr. Wentworth also has many years experience serving on the Audit
Committees of First Investors Funds and other organizations. Finally,
Mr. Wentworth is independent as defined in the instructions to the Form.
Item 4. Principal Accountant Fees and Services
Fiscal Year Ended
December 31,
-----------------
2003 2002
---- ----
(a) Audit Fees $14,900 $15,000
(b) Audit-Related Fees $ 0 $ 0
(c) Tax Fees $ 2,500 $ 2,500
Nature of fees: tax returns preparation and tax compliance
(d) All Other Fees $ 0 $ 0
(e)(1) Audit committee's pre-approval policies
The Audit Committee has adopted a charter under which it has the duties,
among other things,
(a) to pre-approve, and to recommend to the full Board, the
selection, retention or termination of the independent auditors to
provide audit, review or attest services to the Funds and, in
connection therewith, evaluate the independence of the auditors and to
obtain the auditors' specific representations as to their independence;
(b) to pre-approve all non-audit services to be provided to the
Funds by the independent auditor;
(c) to pre-approve all non-audit services to be provided by the
Funds' independent auditor to the Funds' investment adviser or to any
entity that controls, is controlled by or is under common control with
the Funds investment adviser and that provides ongoing services to the
Funds, if the engagement relates directly to the operations and
financial reporting of the Funds;
(d) to establish, if deemed necessary or appropriate as an
alternative to Audit Committee pre-approved of services to be provided
by the independent auditor as required by paragraphs (b) and (c) above,
policies and procedures to permit such services to be pre-approved by
other means, such as by action of a designated member and members of
the Audit Committee, subject to subsequent Committee review and
oversight;
(e) to meet with the Funds' independent auditors, including
meetings without management representatives, as necessary (i) to review
the arrangements for, and scope of, the annual audit, any special audits
and any other services to be provided to the Fund's by the auditors;
(ii) to discuss any matters of concern relating to the Fund's financial
statements, including any adjustments to such statements recommended by
the auditors, or other results of said audit(s); and (iii) to review the
form of opinion the auditors propose to render to the Board and
shareholders;
(f) to receive and consider (i) information and comments from the
auditors with respect to the Funds' accounting and financial reporting
policies, procedures and internal control over financial reporting
(including the Funds' critical accounting policies and practices) and
to consider management's responses to any such comments; (ii) reports
from the auditors regarding any material written communications between
the auditors and management; and (iii) reports from the auditors
regarding all non-audit services provided to any entity in the Funds'
investment company complex that were not pre-approved by the Audit
Committee or pursuant to pre-approved policies and procedures
established by the Audit Committee and associated fees;
(g) to review and approve the fees charged by the auditors for
audit and non-audit services for the Funds; and
(h) to report its activities to the full Board on a regular basis
and to make such recommendations with respect to the above and other
matters as the Audit Committee may deem necessary or appropriate.
(e)(2) None, or 0%, of the services relating to the Audit-Related Fees,
Tax Fees and All Other Fees paid by the Registrant and Related Entities
disclosed above were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee
approval after the start of the engagement with respect to services other
than audit review or attest services, if certain conditions are satisfied).
(f) Not Applicable
(g) Aggregate non-audit fees billed by the Registrant's accountant
for services rendered to the Registrant and the Registrant's investment
adviser or any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the
Registrant for the two fiscal years ended December 31, 2003 and 2002
were $35,000 and $32,000, respectively.
(h) Not Applicable
Item 5. Audit Committee of Listed Registrant
Audit Committee Members -
Robert M. Grohol
Rex R. Reed
Herbert Rubinstein
James M. Srygley
Robert F. Wentworth
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies & Procedures for Closed-End
Management Investment Companies
Not applicable for Registrant
Item 8. [Reserved]
Item 9. Controls and Procedures
(a) The Registrants' Principal Executive Officer and Principal
Financial Officer have concluded that the Registrants' disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940, as amended) are effective, based on their evaluation of these
disclosure controls and procedures as of a date within 90 days of the
filing date of this report.
(b) There were no significant changes in the Registrants' internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Item 10. Exhibits
(a) Code of Ethics - Filed herewith
(b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Filed herewith
(c) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First Investors Special Bond Fund, Inc.
(Registrant)
By /S/ KATHRYN S. HEAD
Kathryn S. Head
President and Principal Executive Officer
Date: March 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
First Investors Special Bond Fund, Inc.
(Registrant)
By /S/ JOSEPH I. BENEDEK
Joseph I. Benedek
Treasurer and Principal Financial Officer
Date: March 1, 2004