As filed with the Securities and Exchange Commission on December 3, 1999
1933 Act File No. 33-25623
1940 Act File No. 811-5690
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
(Check appropriate box or boxes.)
FIRST INVESTORS SERIES FUND
(Exact name of Registrant as Specified in Charter)
95 Wall Street
New York, New York 10005
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 858-8000
Ms. Concetta Durso
Secretary and Vice President
First Investors Fund For Income, Inc.
95 Wall Street
New York, New York 10005
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering: as soon as practicable after
this Registration Statement becomes effective under the Securities Act of
1933.
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940, as amended.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFFECTIVE IN ACCORDANCE WITH RULE 488 OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID RULE 488, MAY DETERMINE.
FIRST INVESTORS SERIES FUND
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Letter to Shareholders
Notice of Special Meeting
Form of Proxy
Part A - Prospectus/Proxy Statement
Part B -- Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
FIRST INVESTORS SERIES FUND
Form N-14 Cross Reference Sheet
Part A Item No. Prospectus/Proxy
AND CAPTION STATEMENT CAPTION
- ----------- -----------------
1. Beginning of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Table of Contents
of Prospectus
3. Synopsis Information and Risk Factors Synopsis; Principal Risks
4. Information About the Transaction Synopsis; Plan of Reorganization
5. Information About the Registrant Synopsis; Principal Risks; Plan of
Reorganization; Information About
the Funds
6. Information About the Company Being Synopsis; Principal Risks; Plan of
Acquired Reorganization; Information About
the Funds
7. Voting Information Voting Information
8. Interest of Certain Persons and Experts Not Applicable
9. Additional Information Required for Not Applicable
Re-offering by Persons Deemed to be
Underwriters
Part B Item No. Statement of Additional
AND CAPTION INFORMATION CAPTION
- ----------- -------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Additional Information About the Investment Strategies and Risks;
Registrant Investment Policies; Investment
Restrictions; Management;
Underwriter; General Information
13. Additional Information About the Investment Strategies and Risks;
Company Being Acquired Investment Policies; Investment
Restrictions; Management;
Underwriter; General Information
14. Financial Statements Financial Statements
PART C
------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
January __, 2000
Dear Executive Investors Trust--Blue Chip Fund Shareholder:
After careful consideration, the Board of Trustees of the Executive
Investors Trust--Blue Chip Fund ("Executive Blue Chip Fund") approved a plan to
reorganize the Executive Blue Chip Fund into the First Investors Series
Fund--Blue Chip Fund ("First Investors Blue Chip Fund"). The reorganization is
subject to the approval of the Executive Blue Chip Fund's shareholders. A
shareholders' meeting has been scheduled for February 25, 2000 at which
Executive Blue Chip Fund shareholders of record on _____ will be eligible to
vote either in person or by proxy. Enclosed you will find a notice of the
meeting, a proxy card, a proxy statement, a First Investors Blue Chip Fund
prospectus and a postage-paid return envelope.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE
REORGANIZATION. NO MATTER HOW LARGE OR SMALL YOUR INVESTMENT, YOUR VOTE IS
IMPORTANT, SO PLEASE REVIEW THE PROXY STATEMENT CAREFULLY. TO CAST YOUR VOTE,
SIMPLY MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE
POSTAGE-PAID ENVELOPE TODAY. IF YOU OWN YOUR SHARES JOINTLY, BOTH OWNERS MUST
SIGN THE CARD. REMEMBER, IT CAN BE EXPENSIVE FOR THE FUND - AND ULTIMATELY FOR
YOU AS A SHAREHOLDER - TO REMAIL PROXIES IF NOT ENOUGH RESPONSES ARE RECEIVED TO
CONDUCT THE MEETING.
While we encourage you to read the enclosed materials carefully, we will
attempt to address some possible questions in this letter.
WHAT IS THE FIRST INVESTORS BLUE CHIP FUND? The First Investors Blue Chip
Fund is a fund which is substantially similar to the Executive Blue Chip Fund.
It is advised by the same portfolio manager, has the same investment objectives,
and follows similar investment policies and strategies as the Executive Blue
Chip Fund. However, the First Investors Blue Chip Fund is a larger and older
fund.
WHAT IS THE EFFECT ON FUND EXPENSES? Executive Blue Chip Fund shareholders
should benefit from a reduction in fund expenses following the reorganization
(taking into account the scheduled elimination of fee waivers). The Board
determined that the reorganization would be in the best interests of the Funds
and their shareholders based upon, among other factors, the likelihood that it
would reduce expense ratios for all shareholders over the long term.
WILL THERE BE ANY TAX CONSEQUENCES? The reorganization will be done on a
tax free basis to both the Funds and the shareholders. You will receive First
January __, 2000
Page 2
Investors Blue Chip Fund shares that have exactly the same value as your
Executive Blue Chip Fund shares without owing any taxes as the result of the
reorganization.
If you have any questions about the proposal, please feel free to contact
your registered representative, or call us at 1-800-423-4026.
As always, we appreciate your confidence and look forward to serving you
for many years to come.
Sincerely,
-------------------
Glenn O. Head
President
Enclosures
EXECUTIVE INVESTORS TRUST
BLUE CHIP FUND
95 Wall Street, New York, New York 10005
212-858-8000
-----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
-----------
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of the
Executive Investors Trust, Blue Chip Fund portfolio ("Executive Blue Chip") will
be held on or about February 25, 2000, at 10:00 a.m., Eastern time, at the
offices of Executive Blue Chip, 95 Wall Street, New York, New York 10005 (the
"Meeting"), and at any adjournment of the Meeting, if the Meeting is adjourned
for any reason. The Meeting will be held for the purpose of considering and
voting on the following matters:
(1) To approve an Agreement and Plan of Reorganization and Termination
under which the First Investors Series Fund, Blue Chip Fund portfolio ("Series
Blue Chip") would acquire all of the assets of Executive Blue Chip in exchange
solely for shares of Series Blue Chip and the assumption by Series Blue Chip of
all of Executive Blue Chip's liabilities, followed by the distribution of those
shares to the shareholders of Executive Blue Chip and the termination of
Executive Blue Chip, all as described in the accompanying Prospectus/Proxy
Statement; and
(2) To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
Shareholders of record at the close of business on December __, 1999 are
entitled to notice of and to vote at the Meeting.
By Order of the Board of Trustees,
CONCETTA DURSO
Secretary
New York, New York
___________ __, 1999
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE MEETING, PLEASE MARK, DATE, SIGN AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER
TO AVOID THE ADDITIONAL EXPENSE TO EXECUTIVE BLUE CHIP OF FURTHER SOLICITATION,
WE ASK YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF FURTHER SOLICITATIONS
RETURN THE PROXY TO
PROXY DEPARTMENT
ADMINISTRATIVE DATA MANAGEMENT CORP.
581 MAIN STREET
WOODBRIDGE, NEW JERSEY 07095-1198
PROXY
EXECUTIVE INVESTORS TRUST - BLUE CHIP FUND
Please detach before mailing
- --------------------------------------------------------------------------------
EXECUTIVE INVESTORS TRUST - BLUE CHIP FUND
Special Meeting of Shareholders, February 25, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoint(s) as proxies Concetta Durso and Tammie Lee each
with power of substitution and hereby authorize(s) each of them to represent and
to vote all the shares shown below, held of record by the undersigned on
_________ ___, 2000, at the Special Meeting of Shareholders of the Executive
Investors Trust - Blue Chip Fund to be held on February 25, 2000, or any
adjournment thereof, with discretionary power to vote upon such other business
as may properly come before the meeting.
The undersigned hereby acknowledge(s) receipt of the Proxy Statement prepared on
behalf of the Board of Trustees. Please date and sign this proxy and return it
in the enclosed postage-paid envelop. Your Board of Trustees recommends that you
vote FOR the proposal in the Proxy Statement. Please indicate your vote by an
"X" in the appropriate box below. IF YOU SIMPLY SIGN THIS PROXY WITHOUT MARKING
ANY BOX, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY TO VOTE FOR THE PROPOSAL.
1. To approve an Agreement and Plan of Reorganization and Termination
between Executive Investors Trust - Blue Chip Fund ("Executive Blue Chip") and
First Investors Fund For Income, Inc. ("Fund For Income") and the transactions
contemplated thereby, including the transfer of substantially all the assets of
Executive Blue Chip to Fund For Income in exchange for Class A shares of Fund
For Income, the distribution of such shares to the shareholders of Executive
Blue Chip in complete liquidation of Executive Blue Chip.
FOR / / AGAINST / / ABSTAIN / /
---------------------------------------------------
Signature Date
---------------------------------------------------
Additional Signature if held jointly Date
BLUE CHIP FUND, A SERIES OF
FIRST INVESTORS SERIES FUND
95 WALL STREET
NEW YORK, NEW YORK 10005
1-800-423-4026
PROSPECTUS/PROXY STATEMENT
JANUARY __, 2000
This Prospectus/Proxy Statement ("Prospectus/Proxy") is being furnished to
shareholders of the Blue Chip Fund portfolio of the Executive Investors Trust
("Executive Blue Chip") in connection with the solicitation of proxies by its
Board of Trustees ("Board") for use at a special meeting of its shareholders
("Meeting") to be held at the office of Executive Blue Chip, 95 Wall Street, New
York, New York on or about February 25, 2000, at 10:00 a.m., Eastern time, and
at any adjournment of the Meeting, if the Meeting is adjourned for any reason.
As more fully described in this Prospectus/Proxy, the primary purpose of
the Meeting is to consider a proposed reorganization (the "Reorganization")
involving Executive Blue Chip and First Investors Series Fund, Blue Chip
portfolio ("First Investors Blue Chip") (each a "Fund" and together the "Funds")
and vote on an Agreement and Plan of Reorganization and Termination by and
between Executive Blue Chip and First Investors Blue Chip. Pursuant to the
Agreement, First Investors Blue Chip would acquire all of the assets of
Executive Blue Chip in exchange for Class A shares of First Investors Blue Chip
and the assumption by First Investors Blue Chip of all of the liabilities of
Executive Blue Chip. Those shares of First Investors Blue Chip would then be
distributed to the shareholders of Executive Blue Chip, so that each shareholder
of Executive Blue Chip would receive a number of full and fractional Class A
shares of First Investors Blue Chip having an aggregate value that, on the
effective date of the Reorganization, is equal to the aggregate net asset value
of the shareholder's shares of Executive Blue Chip. As soon as practicable
following the distribution of shares, Executive Blue Chip will be terminated.
Like Executive Blue Chip, First Investors Blue Chip is an open-end
diversified management investment company. Also like Executive Blue Chip, the
investment objective of First Investors Blue Chip is to seek high total
investment return consistent with the preservation of capital.
This Prospectus/Proxy sets forth concisely information about the
Reorganization, the Agreement and the Funds, and it should be retained for
future reference. Statements of Additional Information ("SAI"), dated January
__, 2000, relating to First Investors Series Fund and Executive Investors Trust
have been filed with the Securities and Exchange Commission ("SEC") and are
incorporated herein by reference. Additional information about the Funds'
investments is available in the Funds' annual and semi-annual reports to
shareholders. The Shareholder Manual relating to the Funds provides more
detailed information about the purchase, redemption and sale of Fund shares.
You can get free copies of reports, the SAIs and the Shareholder Manual,
request other information and discuss your questions about the Funds by
contacting the Funds at:
Administrative Data Management Corp.
581 Main Street
Woodbridge, NJ 07095-1198
Telephone: 1-800-423-4026
You can review and copy information about the Funds for a fee (including
proxy materials, the Funds' reports, Shareholder Manual and SAIs) at the Public
Reference Room of the SEC in Washington, D.C. You can also send your request and
a duplicating fee to the Public Reference Room of the SEC, Washington, DC
20549-6009. You can obtain information on the operation of the Public Reference
Room by calling 1-800-SEC-0330. Text-only versions of Fund documents can be
viewed online or downloaded from the SEC's Internet website at
http://www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
FUND FOR INCOME SHARES OR DETERMINED WHETHER THIS PROSPECTUS/PROXY STATEMENT IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
TABLE OF CONTENTS
PAGE
----
I. Synopsis...........................................................
II. Principal Risks....................................................
III. Plan of Reorganization.............................................
IV. Voting Information.................................................
V. Information About the Funds........................................
VI. Other Information..................................................
VII. Financial Highlights...............................................
Appendix A: Agreement and Plan of Reorganization and Termination......A-1
3
I. SYNOPSIS
--------
Pursuant to the Agreement, First Investors Blue Chip will acquire the
assets of Executive Blue Chip in exchange for Class A shares of First Investors
Blue Chip and the assumption by First Investors Blue Chip of Executive Blue
Chip's liabilities. Executive Blue Chip will distribute the shares of First
Investors Blue Chip to its shareholders, and Executive Blue Chip will be
liquidated. Shareholders of Executive Blue Chip will receive corresponding Class
A shares of First Investors Blue Chip.
The Reorganization is designed to be a tax-free reorganization under the
Internal Revenue Code of 1986, as amended ("Code"). This means that (1) neither
Executive Blue Chip nor its shareholders will recognize gain or loss with
respect to the Reorganization, and (2) First Investors Blue Chip and
shareholders of Executive Blue Chip, respectively, will have carryover basis and
holding periods with respect to the assets and shares, respectively, that each
will receive pursuant to the Reorganization.
Executive Blue Chip and First Investors Blue Chip are substantially
similar. They share a common Board of Directors/Trustees and have the same
investment objective. The primary service providers to the Funds, though
different legal entities, are essentially identical, including the Funds'
investment adviser and underwriter. These entities share the same offices and
staff, and the same research and support services. At the present time, the two
Funds follow identical investment management styles. The Funds also have similar
procedures with respect to purchase and redemption of shares, and exchange
rights.
Each Fund's investment objective is to seek high total investment return
consistent with the preservation of capital. Each Fund invests primarily in the
common stocks of large, well-established companies that are included in the
Standard and Poor's 500 Composite Stock Price Index ("S&P 500 Index"). These
stocks are defined by the Funds as "Blue Chip" stocks. The Funds select stocks
that they believe will have earnings growth in excess of the average company in
the S&P 500 Index. While each Fund attempts to diversify its investments so that
its weightings in different industries are similar to those of the S&P 500
Index, the Funds are not index funds and therefore will not necessarily mirror
the S&P 500 Index. Each Fund generally stays fully invested in stocks under all
market conditions.
II. PRINCIPAL RISKS
---------------
The principal risks of investing in First Investors Blue Chip and
Executive Blue Chip are identical. While Blue Chip stocks are regarded as among
the most conservative stocks, like all stocks they fluctuate in price in
response to movements in the overall securities markets, general economic
conditions, and changes in interest rates or investor sentiment. Fluctuations in
the prices of Blue Chip stocks at times can be substantial. Accordingly, the
value of your investment in a Fund will go up and down, which means that you
could lose money.
4
III. PLAN OF REORGANIZATION
----------------------
Pursuant to the Agreement, First Investors Blue Chip will acquire the
assets of Executive Blue Chip in exchange for Class A shares of beneficial
interest in First Investors Blue Chip and the assumption by First Investors Blue
Chip of Executive Blue Chip's liabilities. Executive Blue Chip will distribute
the shares of First Investors Blue Chip to its shareholders, and Executive Blue
Chip will be liquidated. The exchange of Executive Blue Chip assets for First
Investors Blue Chip shares will be at their respective net asset values,
determined in the manner used by each Fund to value its assets and its share
price. Thus, each Executive Blue Chip shareholder will receive PRO RATA the
number of full and fractional First Investors Blue Chip Class A shares having an
aggregate value equal to the value of his or her Executive Blue Chip shares.
As a condition of the Reorganization, the Funds will receive an opinion of
its counsel, Kirkpatrick & Lockhart LLP, to the effect that the Reorganization
will constitute a tax-free reorganization within the meaning of section
368(a)(1)(C) of the Code. This means that (1) no gain or loss will be recognized
to either Fund on the transfer of Executive Blue Chip's assets to the First
Investors Blue Chip, (2) First Investors Blue Chip's basis and holding period
for those assets will be the same as Executive Blue Chip's basis and holding
period immediately prior to the reorganization, (3) no gain or loss will be
recognized to Executive Blue Chip shareholders on their receipt of First
Investors Blue Chip shares, and (4) Executive Blue Chip shareholders' basis and
holding periods for First Investors Blue Chip shares will be the same as the
basis for their Executive Blue Chip shares immediately prior to the
reorganization.
Shareholders of the Funds should consult their tax advisers regarding the
effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion only relates to federal income
tax consequences of the Reorganization, those shareholders also should consult
their tax advisers about state and local tax consequences, if any, of the
Reorganization.
The Reorganization will occur as of the close of business on March 14,
2000, or at a later date when the conditions to the closing are satisfied
("Closing Date").
The assets of Executive Blue Chip to be acquired by First Investors Blue
Chip include all cash, cash equivalents, securities, receivables, claims and
rights of action, rights to register shares under applicable securities laws,
books and records, deferred and prepaid expenses shown as assets on Executive
Blue Chip's books and all other property owned by Executive Blue Chip. First
Investors Blue Chip will assume from Executive Blue Chip all liabilities, debts,
obligations and duties of Executive Blue Chip of whatever kind or nature;
provided, however, that Executive Blue Chip will use its best efforts to
discharge all of its known debts, liabilities, obligations and duties before the
Closing Date. First Investors Blue Chip will deliver its shares to Executive
Blue Chip, which will distribute the shares to Executive Blue Chip's
shareholders. The shares will be distributed by opening accounts on the books of
First Investors Blue Chip in the names of Executive Blue Chip shareholders and
by transferring to those accounts the shares previously credited to the account
of Executive Blue Chip on those books. Fractional shares in First Investors Blue
Chip will be rounded to the third decimal place.
5
The value of Executive Blue Chip's net assets to be acquired by First
Investors Blue Chip and the net asset value ("NAV") per share of the shares of
First Investors Blue Chip to be exchanged for those assets will be determined as
of the close of regular trading on the New York Stock Exchange on the Closing
Date ("Valuation Time"), using the valuation procedures described in each Fund's
then-current Prospectus and Statement of Additional Information. Executive Blue
Chip's net value shall be the value of its assets to be acquired by First
Investors Blue Chip, less the amount of Executive Blue Chip's liabilities, as of
the Valuation Time.
Executive Blue Chip offers one class of shares. First Investors Blue Chip
offers two classes of shares, designated Class A and Class B shares. Shares of
Executive Blue Chip and the Class A shares of First Investors Blue Chip are sold
at the public offering price, which includes a front-end sales load. The sales
loads on shares of Executive Blue Chip and Class A shares of First Investors
Blue Chip are different as are the fees adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended ("1940 Act"). Class B shares of First
Investors Blue Chip are sold at NAV, without any initial sales load, but are
subject to a contingent deferred sales charge ("CDSC") if they are redeemed
within certain designated time periods. Class A shareholders of First Investors
Blue Chip have identical rights as shareholders of Executive Blue Chip.
Shareholders of Executive Blue Chip will receive corresponding Class A shares of
First Investors Blue Chip.
As indicated above, the investment objective and policies of the two Funds
are the same. Based on its review of the investment portfolios of each Fund,
each Fund's investment adviser believes that all of the assets held by Executive
Blue Chip will be consistent with the investment policies of First Investors
Blue Chip and thus can be transferred to and held by First Investors Blue Chip
if the proposed Reorganization is approved.
On or before the Closing Date, Executive Blue Chip will declare as a
distribution substantially all of its net investment income and realized net
capital gain, if any, and distribute that amount plus any previously declared
but unpaid dividends, in order to continue to maintain its tax status as a
regulated investment company.
Executive Blue Chip and First Investors Blue Chip have each agreed to share
Reorganization expenses, in proportion to the total net assets of each Fund
because, in the opinion of their respective Boards, the reasonable expectation
of the cost savings and added efficiency to a unified fund will in the long term
accrue as a benefit to the shareholders of both Funds. All such expenses to be
assumed by the Funds are customary and appropriate to the transaction in
question, and it is anticipated that these fees shall be reasonable in amount
and not out of the ordinary. Such expenses include the fees and disbursements of
attorneys, printing, proxy solicitation, registration fees, any state stock
transfer stamps and taxes required in connection with the transfer of portfolio
securities from Executive Blue Chip to First Investors Blue Chip, and the
transfer of shares of First Investors Blue Chip to Executive Blue Chip, and the
expenses of liquidation.
6
At a meeting of the Board of the Funds held on October 21, 1999, the
Board, including its directors/trustees who are not "interested persons" as that
term is defined in the 1940 Act ("Independent Directors"), considered the merits
of the proposed Reorganization and voted to approve the Agreement (which is
substantially summarized herein), and the distribution to Executive Blue Chip
shareholders of this Prospectus/Proxy seeking approval of the Reorganization.
(This summary of the Agreement, and any other discussion of the Agreement
contained herein, is subject to the terms and conditions of the actual
Agreement, attached hereto as Appendix A.) The Board, including the Independent
Directors, found the proposed Reorganization to be in the best interests of each
respective Fund's shareholders and determined that the combination of the assets
of Executive Blue Chip and First Investors Blue Chip would best serve the
shareholders of both Funds. The combination should result in a reduction of
certain expenses, lower overall expense ratios (assuming any fee waivers and/or
expense assumptions are discontinued) and, thus, a reduction in the per share
expenses applicable to shareholders, including those of Executive Blue Chip.
The Board of Trustees of Executive Blue Chip has scheduled a Special
Meeting of its shareholders which will be held at the office of Executive Blue
Chip, 95 Wall Street, New York, New York on February 25, 2000 at 10:00 a.m.,
Eastern time, or any adjournment thereof, to consider and approve or disapprove
the Agreement.
In approving the Agreement, the Boards of the Funds considered, among other
factors, the objective and policies of each Fund, the assets and liabilities of
each Fund, the operations of the business and management of the two Funds, the
prospects of each Fund individually and combined, and the fairness to the
respective shareholders of each Fund as a result of the exchange of shares being
done on a net asset value basis. The Boards have determined that participation
in the transaction is in the best interests of the Funds and the interests of
existing shareholders of the Funds will not be diluted as a result of the
transaction. In connection with their approval of the proposed Reorganization,
and in making the necessary determination prior to such approval, the Boards of
the Funds reviewed all pertinent information and discussed all relevant issues.
In approving the proposed Reorganization, the Boards of the Funds specifically
considered the following factors:
A. COMMONALITY OF INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------
The Funds have an identical investment objective and identical management
styles. Both Funds seek high total investment return consistent with the
preservation of capital. Both Funds seek to achieve their respective investment
objectives by primarily investing in the common stocks of large,
well-established companies that are included in the S&P 500 Index (I.E., Blue
Chip stocks). Each Fund selects stocks it believes will have earnings growth in
excess of the average company in the S&P 500 Index, and each Fund generally
stays fully invested in stocks under all market conditions.
B. REDUCED EXPENSE RATIO
---------------------
7
The Reorganization should result in a lower expense ratio not only for the
current shareholders of the Executive Blue Chip, but for all shareholders of the
combined Fund, for three reasons. First, shareholders of Executive Blue Chip
will be subject to lower 12b-1 fees as a result of the Reorganization. Second,
the combined Fund will have a larger asset base over which to spread other fees
and expenses than the Funds standing alone. Third, the combination of the Funds
will eliminate duplicative legal and auditor's fees, printing costs and certain
registration fees.
C. TAX CONSIDERATIONS
------------------
The consummation of the proposed Reorganization is contingent upon receipt
of an opinion of counsel that no gain or loss for federal income tax purposes
will be recognized as a result of the proposed transaction. In contrast, if the
Executive Blue Chip were to liquidate and shareholders were to receive the net
asset value of their shares in liquidating distributions, gain or loss would be
recognized for Federal income tax purposes.
D. CONTINUITY OF SALES REPRESENTATIVE SERVICES
-------------------------------------------
The Reorganization should not result in any change which would prevent
existing sales representatives for substantially all Executive Blue Chip
shareholders from continuing to service the shareholders following the
Reorganization.
E. SHAREHOLDER SERVICES
--------------------
The First Investors group of mutual funds and the Executive Investors
group of mutual funds currently provide the same range of services to their
shareholders. With the consolidation of the operations of the Funds, the Board
anticipates that the services provided to shareholders may be done more
efficiently.
The consummation of the Reorganization is subject to a number of
conditions set forth in the Agreement, some of which may be waived by either
Fund. In addition, the Agreement may be amended in any mutually agreeable
manner, except that no amendment may be made subsequent to the Meeting that has
a material adverse effect on the interests of the shareholders of the Funds.
III. VOTING INFORMATION
------------------
Proxy materials will be mailed to shareholders of Executive Blue Chip
beginning on or about January __, 2000. Holders of record of shares of
beneficial interest ("Shares") of Executive Blue Chip at the close of business
on ________ __, 1999 (the "Record Date") will be entitled to one vote per Share
on all business of the Meeting on which they are entitled to vote and any
adjournment or adjournments thereof. On the Record Date, there were outstanding
and entitled to vote ____________ Shares of Executive Blue Chip. This
solicitation of proxies is made by the Board of Executive Blue Chip on behalf of
the Fund.
8
The holders of a majority of the Executive Blue Chip's Shares outstanding
on the Record Date, represented in person or by proxy, must be present to form a
quorum for the transaction of business at the Meeting. In the event that a
quorum is present at the Meeting but sufficient votes to approve the proposed
Reorganization are not received, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies. Any
such adjournments will require the affirmative vote of a majority of those Fund
Shares represented at the Meeting in person or by proxy. If a quorum is present,
the persons named as proxies will vote those proxies that they are entitled to
vote FOR any such proposal in favor of an adjournment and will vote those
proxies required to be voted AGAINST any such proposal against such adjournment.
Abstentions and broker non-votes will be counted as Shares present for
determining whether a quorum is present, but will not be counted for or against
any adjournment. Accordingly, abstentions and broker non-votes effectively will
be a vote against adjournment. Broker non-votes are Shares held by a broker or
nominee as to which instructions have not been received from the beneficial
owners or persons entitled to vote, and the broker or nominee does not have
discretionary voting power. Abstentions and broker non-votes will not be
counted, however, as votes cast for purposes of determining whether sufficient
votes have been received to approve the proposed Reorganization.
All valid proxies received prior to the Meeting, or any adjournments
thereof, will be voted at the Meeting. All proxies will be voted in accordance
with the instructions of the shareholder. If no instruction is specified the
proxies will be voted FOR the matters set forth in the accompanying Notice of
Special Meeting of Shareholders and the persons named as proxies will use their
best judgment in connection with the transaction of such other business as may
properly come before the Meeting or any adjournments thereof. A shareholder who
executes a proxy retains the right to revoke it at any time insofar as it has
not been exercised. A proxy may be revoked by the subsequent execution and
submission of a revised proxy, by written notice of revocation to the secretary
of the Fund, or by voting in person at the Meeting.
The following persons are known to Executive Blue Chip to own of record or
beneficially more than 5% of its shares as of December 31, 1999 [TO BE ADDED]:
The trustees and officers of Executive Blue Chip, as a group, own less
than 1% of the shares of that Fund, and the trustees and officers of First
Investors Blue Chip, as a group, own less than 1% of either Class A or Class B
shares of that Fund.
VOTE REQUIRED
The favorable vote of the holders of a majority of the Shares of the
Executive Blue Chip present at the Meeting in person or by proxy is required to
approve the proposed Reorganization.
RECOMMENDATION OF THE TRUSTEES
9
The Board of Trustees of Executive Blue Chip have concluded that the
proposed Reorganization may benefit the Fund and its shareholders. Thus, the
Trustees recommend voting FOR the proposed Reorganization.
OTHER MATTERS
The Board is not aware of any matters to be presented for action at the
Meeting other than those set forth in this Prospectus/Proxy. If any other
business should come before the Meeting, the persons named in the accompanying
proxy will vote thereon in accordance with their best judgment.
METHOD AND EXPENSE OF SOLICITATION
The cost of preparing, assembling and mailing the proxy materials will be
borne by the Funds in proportion to the total net assets of each Fund determined
as of the Closing Date. In addition to the solicitation of proxies by the use of
the mails, the Executive Blue Chip may, if necessary to obtain the requisite
representation of shareholders, solicit proxies by telephone, telegraph and
personal interview by employees of First Investors Corporation or Executive
Investors Corporation and any of their affiliates, or through securities
dealers. While there is no current intent to do so, the Trustees have authorized
the officers of the Executive Blue Chip to retain the services of a proxy
soliciting firm if the officers determine that it is appropriate to do so. The
cost of soliciting proxies, including reimbursement to dealers and others who
forward proxy material to their clients, will be borne by the Funds in
proportion to the total net assets of each Fund as of the Closing Date.
IV. INFORMATION ABOUT THE FUNDS
---------------------------
OVERVIEW OF THE FUNDS
WHAT ARE THE INVESTMENT OBJECTIVES, PRIMARY INVESTMENT
STRATEGIES AND RISKS OF THE FUNDS?
The investment objectives, primary investment strategies and risks of both
Funds are the same. Each Fund seeks high total investment return consistent with
the preservation of capital.
Each Fund primarily invests in the common stocks of large,
well-established companies that are included in the S&P 500 Index. Each Fund
selects stocks that it believes will have earnings growth in excess of the
average company in the S&P 500 Index. While each Fund attempts to diversify its
investments so that its weightings in different industries are similar to those
of the S&P 500 Index, they are not index funds and therefore will not
necessarily mirror the S&P 500 Index. The Funds generally stay fully invested in
stocks under all market conditions.
While Blue Chip stocks are regarded as among the most conservative stocks,
like all stocks they fluctuate in price in response to movements in the overall
10
securities markets, general economic conditions, and changes in interest rates
or investor sentiment. Fluctuations in the prices of Blue Chip stocks at times
can be substantial. Accordingly, the value of your investment in the Funds will
go up and down, which means that you could lose money.
AN INVESTMENT IN THE FUNDS IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
HOW HAVE THE FUNDS PERFORMED?
FIRST INVESTORS BLUE CHIP
The bar chart and table below show you how the First Investors Blue Chip's
performance has varied from year to year and in comparison with a broad-based
index. This information gives you some indication of the risks of investing in
the Fund.
The Fund has two classes of shares, Class A shares and Class B shares. The
bar chart shows changes in the performance of the Fund's Class A shares from
year to year over the life of the Fund. The performance of Class B shares
differs from the performance of Class A shares shown in the bar chart only to
the extent that it does not have the same expenses. The bar chart does not
reflect sales charges that you may pay upon purchase or redemption of Fund
shares. If they were included, the returns would be less than those shown.
[UPDATE]
The chart below contains the following plot points:
1989 15.40%
1990 -3.50%
1991 27.52%
1992 6.56%
1993 7.77%
1994 -3.02%
1995 34.01%
1996 20.55%
1997 26.05%
1998 18.10%
During the periods shown, the highest quarterly return was _____% (for the
quarter ended _________, 199_) and the lowest quarterly return was ______% (for
the quarter ended _______, 199_). THE FUND'S PAST PERFORMANCE DOES NOT
NECESSARILY INDICATE HOW THE FUND WILL PERFORM IN THE FUTURE.
11
The following table shows how the average annual total returns for Class A
shares and Class B shares compare to those of the S&P 500 Index as of December
31, 1999. This table assumes that the maximum sales charge or CDSC was paid. The
S&P 500 Index is an unmanaged index generally representative of the market for
the stocks of large-sized U.S. companies. The S&P 500 Index does not take into
account fees and expenses that an investor would incur in holding the securities
in the S&P 500 Index. If it did so, the returns would be lower than those shown.
Inception Inception
Class A Shares Class B Shares
1 Year* 5 Years* (1/3/89) (1/12/95)
Class A Shares
Class B Shares
S&P 500 Index
* The annual returns are based upon calendar years.
EXECUTIVE BLUE CHIP
The bar chart and table below show you how the Executive Blue Chip's
performance has varied from year to year and in comparison with a broad-based
index. This information gives you some indication of the risks of investing in
the Fund.
The bar chart shows changes in the performance of the Fund's shares from
year to year over the life of the Fund. The bar chart does not reflect sales
charges that you may pay upon purchase or redemption of Fund shares. If they
were included, the returns would be less than those shown. [UPDATE].
12
1991 27.65%
1992 4.13%
1993 8.13%
1994 -1.21%
1995 36.30%
1996 20.62%
1997 26.58%
1998 17.81%
During the periods shown, the highest quarterly return was _____% (for the
quarter ended ___________, 199_), and the lowest quarterly return was ______%
(for the quarter ended ___________, 199_). THE FUND'S PAST PERFORMANCE DOES NOT
NECESSARILY INDICATE HOW THE FUND WILL PERFORM IN THE FUTURE.
The following table shows how the average annual total returns for the
Fund's shares compare to those of the S&P 500 Index as of December 31, 1999.
This table assumes that the maximum sales charge was paid. The S&P 500 Index is
an unmanaged index generally representative of the market for the stocks of
large-sized U.S. companies. The S&P 500 Index does not take into account fees
and expenses that an investor would incur in holding the securities in the S&P
500 Index. If it did so, the returns would be lower than those shown.
Inception
1 Year* 5 Years* (5/17/90)
Executive Blue Chip
S&P 500 Index
* The annual returns are based upon calendar years.
WHAT ARE THE FEES, EXPENSES AND CAPITALIZATION OF THE FUNDS?
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Funds. The shareholder fees are the same for the First
Investors Blue Chip and the surviving fund after the Reorganization ("Combined
Fund"). THERE WILL BE NO SHAREHOLDER FEES CHARGED IN CONNECTION WITH THE
REORGANIZATION.
13
Class A Class B
SHARES SHARES
------ ------
SHAREHOLDER FEES - FIRST INVESTORS BLUE CHIP
(fees paid directly from your
investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4%**
*A contingent deferred sales charge of 1.00% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge.
**4% in the first year; declining to 0% after the sixth year. Class B shares
convert to Class A shares after 8 years.
SHAREHOLDER FEES - EXECUTIVE BLUE CHIP
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 4.75%
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None*
*A contingent deferred sales charge of 1.00% will be assessed on certain
redemptions of the Fund's shares that are purchased without a sales charge.
Class A Class B
SHARES SHARES
------ ------
SHAREHOLDER FEES - COMBINED FUND
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).......... 6.25% None
Maximum deferred sales charge (load)
(as a percentage of the lower of purchase
price or redemption price)................... None* 4%**
*A contingent deferred sales charge of 1.00% will be assessed on certain
redemptions of Class A shares that are purchased without a sales charge. **4% in
the first year; declining to 0% after the sixth year. Class B shares convert to
Class A shares after 8 years.
The following table shows the current fees and expenses incurred for the
fiscal year ended September 30, 1999 with respect to First Investors Blue Chip,
the fiscal year ended December 31, 1999 with respect to Executive Blue Chip, and
PRO FORMA fees and expenses for the Combined Fund after giving effect to the
Reorganization.
14
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
DISTRIBUTION TOTAL
AND SERVICE ANNUAL FUND
MANAGEMENT (12B-1) OTHER OPERATING FEE NET
FEES(1) FEES(2) EXPENSES(3) EXPENSES(3) WAIVER EXPENSES
------- ------- ---------- ---------- ------ --------
First Investors
Blue Chip
Class A Shares
Class B Shares.
Executive Blue Chip
Combined Fund
Class A Shares
Class B Shares
(1) [fee waiver, if applicable]
(2) Because each Fund pays Rule 12b-1 fees, long-term shareholders could pay
more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc. (3) Each Fund
has an expense offset arrangement that may reduce the Fund's custodian fee based
on the amount of cash maintained by the Fund with its custodian. Any such fee
reductions are not reflected under Total Annual Fund Operating Expenses.
EXAMPLE
This example helps you to compare the costs of investing in Executive Blue
Chip with the cost of investing in First Investors Blue Chip and the cost of
investing in the Combined Fund assuming the Reorganization has been completed.
The example assumes that (1) you invest $10,000 in the specified Fund for the
time periods indicated; (2) your investment has a 5% return each year; and (3)
the Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, under these assumptions your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
IF YOU REDEEM YOUR SHARES:
FIRST INVESTORS BLUE CHIP
Class A shares $ $ $ $
Class B shares
EXECUTIVE BLUE CHIP
COMBINED FUND
Class A shares
Class B shares
IF YOU DO NOT REDEEM YOUR SHARES:
FIRST INVESTORS BLUE CHIP
Class A shares $ $ $ $
Class B shares *
EXECUTIVE BLUE CHIP
COMBINED FUND
Class A shares
Class B shares
15
*Assumes conversion to Class A shares eight years after purchase.
CAPITALIZATION
The following table shows the capitalization of First Investors Blue Chip and
Executive Blue Chip as of ________, 2000, and on a PRO FORMA combined basis
(unaudited) as of _______________, 2000 after giving effect to the
Reorganization:
COMBINED FUND
FIRST EXECUTIVE BLUE (PRO FORMA)
INVESTORS CHIP
BLUE CHIP
Net Assets.................. $ $ $
Net Asset Value Per Share... $ $ $
Shares Outstanding..........
THE FUNDS IN DETAIL
WHAT ARE THE FUNDS' OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RISKS?
OBJECTIVE: Each Fund seeks high total investment return consistent with the
preservation of capital.
PRINCIPAL INVESTMENT STRATEGIES: Each Fund invests at least 65% of its total
assets in common stocks of large, well-established companies that are
included in the S&P 500 Index. The S&P 500 Index consists of both U.S. and
foreign corporations.
Each Fund uses fundamental research to select stocks of companies with
strong balance sheets, relatively consistent records of achievement, and
potential earnings growth that is greater than that of the average company
included in the S&P 500 Index. The Funds attempt to stay broadly diversified and
sector neutral relative to the S&P 500 Index, but it may emphasize certain
industry sectors based on economic and market conditions. The Funds intend to
remain relatively fully invested in stocks under all market conditions rather
than attempt to time the market by maintaining large cash or fixed income
securities positions when market declines are anticipated. The Funds usually
will sell a stock when the reason for holding it is no longer valid, it shows
deteriorating fundamentals, or it falls short of the Funds' expectations.
PRINCIPAL RISKS: Any investment carries with it some level of risk. In
general, the greater the potential reward of an investment, the greater the
risk. The principal risks of the Funds are the same. Here are the principal
risks of owning the Funds:
MARKET RISK: Because the Funds primarily invest in common stocks, they are
subject to market risk. Stock prices in general may decline over short or even
extended periods not only because of company-specific developments but also due
16
to an economic downturn, a change in interest rates or a change in investor
sentiment, regardless of the success or failure of an individual company's
operations. Stock markets tend to run in cycles with periods when prices
generally go up, known as "bull" markets, and periods when stock prices
generally go down, referred to as "bear" markets. While Blue Chip stocks have
historically been the least risky and most liquid stocks, like all stocks they
fluctuate in value. Fluctuations of Blue Chip stocks can be sudden and
substantial. Accordingly, the value of your investment in the Funds will go up
and down, which means that you could lose money.
OTHER RISKS: While the Funds generally attempt to remain sector neutral relative
to the S&P 500 Index, it is not an index fund. The Funds may hold securities
other than those in the S&P 500 Index, may hold fewer securities than the index,
and may have sector or industry allocations different from the index, each of
which could cause the Funds to underperform the index.
ALTERNATIVE STRATEGIES: At times the Funds may judge that market, economic or
political conditions make pursuing the Funds' investment strategies inconsistent
with the best interests of its shareholders. The Funds then may temporarily use
alternative strategies that are mainly designed to limit each Fund's losses by
investing up to 100% of its assets in short-term money market instruments. If a
Fund does so, it may not achieve its investment objective.
FUND MANAGEMENT
First Investors Management Company, Inc. ("FIMCO") is the investment
adviser to the First Investors Blue Chip. Its address is 95 Wall Street, New
York, NY 10005. It currently serves as investment adviser to 53 mutual funds or
series of funds with total net assets of approximately $5 billion. FIMCO
supervises all aspects of the First Investors Blue Chip's operations and
determines the Fund's portfolio transactions. For the fiscal year ended
September 30, 1999, FIMCO received advisory fees of ____% of the First Investors
Blue Chip's average daily net assets.
Executive Investors Management Company, Inc. ("EIMCO") is the investment
adviser to the Executive Blue Chip. EIMCO's address is the same as FIMCO's
address. EIMCO currently is investment adviser to three mutual funds or series
of funds with total net assets of approximately $40 million. EIMCO supervises
all aspects of the Executive Blue Chip's operations and determines the Fund's
portfolio transactions. For the fiscal year ended December 31, 1999, EIMCO
received advisory fees of ___% of the Executive Blue Chip's average daily net
assets.
FIMCO and EIMCO share the same management, staff, offices and research
and support services. They are both wholly owned subsidiaries of First Investors
Consolidated Corporation.
Following the Reorganization, the management fee for the Combined Fund
is expected to be ____% of the Fund's average daily net assets. FIMCO will have
the responsibility of managing the Fund's combined assets following the
Reorganization. In addition, the directors and officers of First Investors Blue
17
Chip, its distributor, administrator and other service providers will serve the
Combined Fund in their current capacities.
Dennis T. Fitzpatrick serves as Co-Portfolio Manager of the Funds.
Mr. Fitzpatrick has been a member of FIMCO's and EIMCO's investment
management team since 1995. During 1995, Mr. Fitzpatrick was a Regional
Surety Manager at United States Fidelity & Guaranty Co. From 1988 to 1995,
he was Northeast Surety Manager at American International Group. Andrew
Wedeck also serves as Co-Portfolio Manager of the Funds. From April 1999 to
November 1999, Mr. Wedeck was a Research Analyst at Cramer Rosenthal
McGlynn. From April 1998 to March 1999, Mr. Wedeck was a personal money
management consultant for family members. From 1995 to March 1998, Mr.
Wedeck was an Equity Analyst at Stechler & Company. It is expected that Mr.
Fitzpatrick and Mr. Wedeck will serve as Co-Portfolio Managers of the
Combined Fund following the Reorganization.
BUYING AND SELLING SHARES
HOW AND WHEN DO THE FUNDS PRICE THEIR SHARES?
The share price (which is called "net asset value" or "NAV" per share)
for the Funds is calculated once each day as of 4:00 p.m., Eastern time, on each
day the New York Stock Exchange ("NYSE") is open for regular trading. In the
event that the NYSE closes early, the share price will be determined as of the
time of the closing.
To calculate the NAV, each Fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. The prices or NAVs of Class A shares and Class
B shares will generally differ because they have different expenses.
In valuing its assets, the Funds use the market value of securities for
which market quotations or last sale prices are readily available. If there are
no readily available quotations or last sale prices for an investment or the
available quotations are considered to be unreliable, the securities will be
valued at their fair value as determined in good faith pursuant to procedures
adopted by the Board of the Funds.
HOW DO I BUY SHARES?
In connection with the Reorganization, Executive Blue Chip shareholders
will receive Class A shares of First Investors Blue Chip. With respect to
purchases of Fund shares separate and apart from the Reorganization, you may buy
shares of First Investors Blue Chip or Executive Blue Chip through a First
Investors registered representative or through a registered representative of an
authorized broker-dealer ("Representative"). Investments in the Funds may be
made in any amount.
If we receive your order in our Woodbridge, N.J. offices in correct
form, as described in the Shareholder Manual, prior to the close of regular
trading on the NYSE, your transaction will be priced at that day's NAV. If you
18
place your order with your Representative prior to the close of regular trading
on the NYSE, your transaction will also be priced at that day's NAV provided
that your Representative transmits the order to our Woodbridge, NJ office by
5:00 p.m., Eastern time. Orders placed after the close of regular trading on the
NYSE will be priced at the next business day's NAV. The procedures for
processing transactions are explained in more detail in our Shareholder Manual
which is available upon request.
You can arrange to make systematic investments electronically from your
bank account or through payroll deduction. All the various ways you can buy
shares are explained in the Shareholder Manual. For further information on the
procedures for buying shares, please contact your Representative or call
Shareholder Services at 1-800-423-4026.
Each Fund reserves the right to refuse any order to buy shares if a Fund
determines that doing so would be in the best interests of the Fund and its
shareholders.
WHAT ARE THE SALES CHARGES AND EXPENSES FOR SHARES?
Class A shares of First Investors Blue Chip and shares of Executive Blue
Chip are sold at the public offering price which includes a front-end sales
load. The sales charge declines with the size of your purchase, as illustrated
below. THERE WILL BE NO SHAREHOLDER FEES CHARGED IN CONNECTION WITH THE
REORGANIZATION.
First Investors Blue Chip Class A Shares
----------------------------------------
Your investment SALES CHARGE AS A PERCENTAGE OF
offering price net amount invested
Less than $25,000 6.25% 6.67%
$25,000-$49,999 5.75 6.10
$50,000-$99,999 5.50 5.82
$100,000-$249,999 4.50 4.71
$250,000-$499,999 3.50 3.63
$500,000-$999,999 2.50 2.56
$1,000,000 or more 0* 0*
Executive Blue Chip Shares
Your investment SALES CHARGE AS A PERCENTAGE OF
offering price net amount invested
Less than $100,000 4.75% 4.99%
$100,000-$249,999 3.90 4.06
$250,000-$499,999 2.90 2.99
$500,000-$999,999 2.40 2.46
$1,000,000 or more 0* 0*
19
*If you invest $1,000,000 or more, you will not pay a front-end sales charge.
However, if you make such an investment and then sell your shares within 24
months of purchase, you will pay a contingent deferred sales charge ("CDSC") of
1.00%.
Following the reorganization, Executive Blue Chip Fund shareholders who
receive First Investors Blue Chip Fund shares will be entitled to purchase
additional shares of the First Investors Blue Chip Fund at the same sales charge
(if lower) that they would have paid if they had remained shareholders of the
Executive Blue Chip Fund. This right applies only to purchases of additional
shares of the First Investors Blue Chip Fund and will expire if the First
Investors Blue Chip Fund shares are completely liquidated or exchanged.
Each Fund has adopted a plan pursuant to Rule 12b-1 that allows the Fund
to pay distribution fees for the sale and distribution of its shares. Each Fund
pays Rule 12b-1 fees for the marketing of fund shares and for services provided
to shareholders. Executive Blue Chip's plan provides for payments at annual
rates (based on average daily net assets) of up to .50%. No more than .25% of
these payments may be for service fees. First Investors Blue Chip's plan provide
for payments at annual rates (based on average daily net assets) of up to .30%
on Class A shares. No more than .25% of these payments maybe for service fees.
These fees are paid monthly in arrears. Because these fees are paid out of each
Fund's assets on an on-going basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.
FOR ACTUAL PAST EXPENSES OF EXECUTIVE BLUE CHIP SHARES AND FIRST
INVESTORS BLUE CHIP CLASS A AND CLASS B SHARES, SEE THE SECTION ENTITLED "WHAT
ARE THE FEES, EXPENSES AND CAPITALIZATION OF THE FUNDS?" IN THIS
PROSPECTUS/PROXY STATEMENT.
HOW DO I SELL SHARES?
You may redeem your Fund shares on any day a Fund is open for business
by:
o Contacting your Representative who will place a redemption order
for you;
o Sending a written redemption request to Administrative Data
Management Corp., ("ADM") at 581 Main Street, Woodbridge, NJ
07095-1198;
o Telephoning the Special Services Department of ADM at
1-800-342-6221 (if you have elected to have telephone privileges); or
o Instructing us to make an electronic transfer to a predesignated bank
(if you have completed an application authorizing such transfers).
Your redemption request will be processed at the price next computed
after we receive the request in good order, as described in the Shareholder
Manual. For all requests, have your account number available.
Payment of redemption proceeds generally will be made within 7 days. If
you are redeeming shares which you recently purchased by check, payment may be
delayed to verify that your check has cleared. This may take up to 15 days from
the date of your purchase. You may not redeem shares by telephone or Electronic
Fund Transfer unless you have owned the shares for at least 15 days.
20
If your account falls below the minimum account balance for any reason
other than market fluctuation, each Fund reserves the right to redeem your
account without your consent or to impose a low balance account fee of $15
annually on 60 days prior notice. Each Fund may also redeem your account or
impose a low balance account fee if you have established your account under a
systematic investment program and discontinue the program before you meet the
minimum account balance. You may avoid redemption or imposition of a fee by
purchasing additional Fund shares during this 60-day period to bring your
account balance to the required minimum. If you own First Investors Blue Chip
Class B shares, you will not be charged a CDSC on a low balance redemption.
Each Fund reserves the right to make in-kind redemptions. This means
that it could respond to a redemption request by distributing shares of the
Fund's underlying investments rather than distributing cash.
CAN I EXCHANGE MY SHARES FOR THE SHARES OF OTHER FUNDS?
You may exchange shares of First Investors Blue Chip for shares of other
First Investors Funds without paying any additional sales charge. You can only
exchange within the same class of shares (I.E., Class A to Class A). You may
exchange shares of Executive Blue Chip for shares of other Executive Investors
Funds without paying any additional sales charge. You may also exchange shares
of Executive Blue Chip for Class A shares of the First Investors Funds without
paying any additional sales charge; provided that, you held your shares for at
least one year from their date of purchase or acquired your shares through an
exchange from Class A shares of a First Investors Fund. Consult your
Representative or call ADM at 1-800-423-4026 for details.
Each Fund reserves the right to reject any exchange request that appears
to be part of a market timing strategy based upon the holding period of the
initial investment, the amount of the investment being exchanged, the funds
involved, and the background of the shareholder or dealer involved. Each Fund is
designed for long-term investment purposes. It is not intended to provide a
vehicle for short-term market timing.
ACCOUNT POLICIES
WHAT ABOUT DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS?
Each Fund will declare daily and pay on a monthly basis dividends from net
investment income. Any net realized capital gains will be declared and
distributed on an annual basis, usually after the end of each Fund's fiscal
year. Each Fund may make an additional distribution in any year if necessary to
avoid a federal excise tax on certain undistributed income and capital gain.
Dividends and other distributions paid on Class A shares of First
Investors Blue Chip and shares of Executive Blue Chip are calculated at the same
time and in the same manner. Dividends on Class B shares of First Investors Blue
21
Chip are expected to be lower than those for its Class A shares because of the
higher distribution fees borne by the Class B shares. Dividends on each class
also might be affected differently by the allocation of other class-specific
expenses. In order to be eligible to receive a dividend or other distribution,
you must own Fund shares as of the close of business on the record date of the
distribution.
You may choose to reinvest all dividends and other distributions at NAV
in additional shares of the same class of a Fund or certain other First
Investors Funds, or receive all dividends and other distributions in cash. If
you do not select an option when you open your account, all dividends and other
distributions will be reinvested in additional shares of that Fund. If you do
not cash a distribution check and do not notify ADM to issue a new check within
12 months, the distribution may be reinvested in that Fund. If any
correspondence sent by a Fund is returned as "undeliverable," dividends and
other distributions automatically will be reinvested in that Fund. No interest
will be paid to you while a distribution remains uninvested.
A dividend or other distribution paid on a class of shares will only be
paid in additional shares of the distributing class if the total amount of the
distribution is under $5 or the Fund has received notice of your death (until
written alternate payment instructions and other necessary documents are
provided by your legal representative).
WHAT ABOUT TAXES?
Any dividends or capital gain distributions paid by a Fund are taxable
to you unless you hold your shares in an individual retirement account, 403(b)
account, 401(k) account, or other tax-deferred account. Dividends (including
distributions of net short-term capital gains) are taxable to you as ordinary
income. Capital gain distributions (essentially, distributions of net long-term
capital gains) by a Fund are taxed to you as long-term capital gains, regardless
of how long you owned your Fund shares. You are taxed in the same manner whether
you receive your dividends and capital gain distributions in cash or reinvest
them in additional Fund shares. Your sale or exchange of Fund shares will be
considered a taxable event for you. Depending on the purchase price and the
sales price of the shares you sell or exchange, you may have a gain or a loss on
the transaction. You are responsible for any tax liabilities generated by your
transactions.
HOW DO I OBTAIN A COMPLETE EXPLANATION OF ALL ACCOUNT PRIVILEGES AND POLICIES?
Each Fund offers a full range of special privileges, including special
investment programs for group retirement plans, systematic investment programs,
automatic payroll investment programs, telephone privileges, check writing
privileges, and expedited redemptions by wire order or Automated Clearing House
transfer. The full range of privileges, and related policies, are described in a
special Shareholder Manual, which you may obtain on request. For more
information on the full range of services available, please contact us directly
at 1-800-423-4026.
VI. OTHER INFORMATION
-----------------
Each Fund is subject to the information requirements of the Securities
22
and Exchange Act of 1934 and the Investment Company Act of 1940, and in
accordance with those requirements files reports and other information with the
SEC. These reports, proxy material and other information can be inspected and
copied at the Public Reference Room maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and the Northeast Regional Office of the SEC,
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20459, at prescribed rates.
The Annual Report to shareholders of First Investors Blue Chip for the
period ended September 30, 1999, and the Semi-Annual Report to shareholders of
Executive Investors Trust for the period ended June 30, 1999, are included with
this Prospectus/Proxy.
23
V. FINANCIAL HIGHLIGHTS
--------------------
The financial highlights table is intended to help you understand the
Funds' financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned (or lost) on an
investment in each Fund (assuming reinvestment of all dividends and
distributions). The information has been audited by Tait, Weller & Baker, whose
report, along with the Funds' financial statements, are included in the SAI,
which is available upon request.
NEED TO UPDATE
FIRST INVESTORS BLUE CHIP
- -------------------------
------------------------------------------------------------------------------------------
PER SHARE DATA
------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS FROM
--------------------------------- -----------------------
NET
REALIZED
NET ASSET AND NET
VALUE NET UNREALIZED TOTAL INVEST- NET TOTAL
BEGINNING INVEST- GAIN FROM INCOME REALIZED DISTRI-
OF MENT (LOSS) ON INVESTMENT GAINS BUTIONS
PERIOD INCOME INVESTMENTS OPERATIONS
- ----------------------------------------------------------------------------------------------------------
CLASS A
1/1/95 - 12/31/95 13.46 .19 4.37 4.56 .20 .60 .80
1/1/96 - 12/31/96 17.22 .14 3.39 3.53 .17 1.11 1.28
1/1/97 - 12/31/97 19.47 .09 4.98 5.07 .08 1.62 1.70
1/1/98 - 9/30/98 22.84 .04 (.39) (.35) .03 -- .03
10/1/98 - 9/30/99
CLASS B
1/1/96 - 12/31/96 17.16 .06 3.32 3.38 .06 1.11 1.17
1/1/97 - 12/31/97 19.37 (.03) 4.91 4.88 -- 1.62 1.62
1/1/98 - 9/30/98 22.63 (.06) (.42) (.48) -- -- --
10/1/98 - 9/30/99
* Date Class B shares first offered
** Calculated without sales charges
+ Annualized
++ Net of expenses waived or assumed
24
- -------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------
RATIO TO AVERAGE
RATIO TO ASSETS BEFORE
AVERAGE EXPENSES WAIVED OR
NET ASSETS ++ ASSUMED
------------- ------------------
NET NET NET
NET ASSET ASSETS INVEST INVEST-
VALUE TOTAL END OF MENT MENT PORTFOLIO
END OF RETURN** PERIOD EXPENSES INCOME EXPENSES INCOME TURNOVER
PERIOD (%) MILLIONS) (%) (%) (%) (%) RATE (%)
- --------------------------------------------------------------------------------
17.22 34.01 170 1.49 1.23 1.74 .98 25
19.47 20.55 240 1.44 .78 1.67 .55 45
22.84 26.05 351 1.39 .40 1.64 .15 63
22.46 (1.55) 368 1.37+ .23+ 1.47+ .13+ 71
19.37 19.71 17 2.22 -- 2.37 (.16) 45
22.63 25.19 37 2.09 (.30) 2.34 (.55) 63
22.15 (2.12) 47 2.07+ (.47)+ 2.17+ (.57)+ 71
25
EXECUTIVE BLUE CHIP
[UPDATE]
- -----------------------------------------------------------------------------
PER SHARE DATA
------------------------------------------------------------
LESS
INCOME FROM INVESTMENT DISTRIBUTIONS
OPERATIONS FROM
---------------------- -------------
NET ASSET NET NET REALIZED NET
VALUE INVEST- AND UNREALIZED TOTAL FROM INVEST- NET TOTAL
BEGINNING MENT GAIN (LOSS) ON INVESTMENT MENT REALIZED DISTRI-
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAIN BUTIONS
- --------------------------------------------------------------------------------------------------------
1/1/95 - 12/31/95 12.75 .30 4.30 4.60 .29 .74 1.03
1/1/96 - 12/31/96 16.32 .22 3.13 3.35 .24 1.07 1.31
1/1/97 - 12/31/97 18.36 .19 4.68 4.87 .19 1.36 1.55
1/1/98 - 12/31/98 21.68 .11 3.74 3.85 .12 .58 .70
1/1/99 - 12/31/99
* Calculated without sales charges.
+ Net of expenses waived or assumed.
- --------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------------------------------------------
RATIO TO AVERAGE NET
RATIO TO AVERAGE ASSETS BEFORE EXPENSES
NET ASSETS+ WAIVED OR ASSUMED
---------- ----------------
TOTAL NET NET NET PORTFOLIO
RETURN* ASSETS EXPENSES INVEST- EXPENSES INVESTMENT TURNOVER
NET ASSET (%) END OF (%) INCOME (%) INCOME RATE (%)
VALUE PERIOD (%)
END (IN
OF PERIOD MILLIONS)
- -----------------------------------------------------------------------------------------
16.32 36.30 1 .50 1.99 2.20 .29 33
18.36 20.62 2 .75 1.33 2.28 (.20) 50
21.68 26.58 4 .75 .92 2.03 (.36) 163
24.83 17.81 5 1.00 .55 1.84 (.29) 96
26
AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of ________ __, 1999, between EXECUTIVE INVESTORS TRUST, a Massachusetts
business trust ("Target Trust"), on behalf of Blue Chip Fund, a segregated
portfolio of assets ("series") thereof ("Target Fund"), and FIRST INVESTORS
SERIES FUND, also a Massachusetts business trust ("Acquiring Trust"), on behalf
of Blue Chip Fund, a series thereof ("Acquiring Fund"). (Target Fund and
Acquiring Fund are sometimes referred to herein individually as a "Fund" and
collectively as the "Funds," and Target Trust and Acquiring Trust are sometimes
referred to herein individually as an "Investment Company" and collectively as
the "Investment Companies.") All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by either Fund
are made and shall be taken or undertaken by Target Trust on behalf of Target
Fund and by Acquiring Trust on behalf of Acquiring Fund.
The Investment Companies desire to effect a reorganization described in
section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"),
and intend this Agreement to be, and adopt it as, a "plan of reorganization"
within the meaning of the regulations under the Code ("Regulations"). The
reorganization will involve the transfer of Target Fund's assets to Acquiring
Fund in exchange solely for shares of beneficial interest ("shares") in
Acquiring Fund and the assumption by Acquiring Fund of Target Fund's
liabilities, followed by the constructive distribution of those shares PRO RATA
to the holders of shares in Target Fund ("Target Shares") in exchange therefor,
all on the terms and conditions set forth in this Agreement. The foregoing
transactions are referred to herein collectively as the "Reorganization."
Acquiring Fund's shares are divided into two classes, designated Class A
and Class B shares; only Acquiring Fund's Class A shares ("Acquiring Fund
Shares") are involved in the Reorganization. Target Fund has only a single class
of shares, which are similar to the Acquiring Fund shares.
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
--------------------------------------
1.1. Target Fund agrees to assign, sell, convey, transfer, and deliver all
of its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target Fund the number of full and fractional
(rounded to the third decimal place) Acquiring Fund Shares, determined
by dividing the net value of Target Fund (computed as set forth in
paragraph 2.1) by the net asset value ("NAV") of an Acquiring Fund
Share (computed as set forth in paragraph 2.2), and
(b) to assume all of Target Fund's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph 3.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on Target Fund's books, and other property owned by Target Fund
at the Effective Time (as defined in paragraph 3.1).
1.3. The Liabilities shall include (except as otherwise provided herein)
all of Target Fund's liabilities, debts, obligations, and duties of whatever
kind or nature, whether absolute, accrued, contingent, or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable at
the Effective Time, and whether or not specifically referred to in this
Agreement. Notwithstanding the foregoing, Target Fund agrees to use its best
efforts to discharge all its known Liabilities before the Effective Time.
1.4. At or immediately before the Effective Time, Target Fund shall
declare and pay to its shareholders a dividend and/or other distribution in an
amount large enough so that it will have distributed substantially all (and in
any event not less than 90%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and substantially all of its
realized net capital gain, if any, for its current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target Fund shall distribute the Acquiring Fund Shares received by
it pursuant to paragraph 1.1 to its shareholders of record, determined as of the
Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Acquiring Trust's transfer agent's opening accounts on Acquiring
Fund's share transfer books in the Shareholders' names and transferring such
Acquiring Fund Shares thereto. Each Shareholder's account shall be credited with
the respective PRO RATA number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares due that Shareholder. All outstanding
Target Shares, including any represented by certificates, shall simultaneously
be canceled on Target Fund's share transfer books. Acquiring Fund shall not
issue certificates representing the Acquiring Fund Shares issued in connection
with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months after
the Effective Time, Target Fund shall be terminated and any further actions
shall be taken in connection therewith as required by applicable law.
1.7. Any reporting responsibility of Target Fund to a public authority is
and shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target Fund's books of the
Target Shares constructively exchanged therefor shall be paid by the person to
whom such Acquiring Fund Shares are to be issued, as a condition of such
transfer.
2. VALUATION
---------
2.1. For purposes of paragraph 1.1(a), Target Fund's net value shall be
(a) the value of the Assets computed as of the close of regular trading on the
New York Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"),
using the valuation procedures set forth in Target Fund's then-current
prospectus and statement of additional information (collectively "P/SAI"), less
(b) the amount of the Liabilities as of the Valuation Time.
2
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures set
forth in Acquiring Fund's then-current P/SAI.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of Executive Investors Management Company, Inc. ("EIMCO")
and First Investors Management Company, Inc. ("FIMCO"), respectively.
3. CLOSING AND EFFECTIVE TIME
--------------------------
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Funds' principal office on
February __, 2000, or at such other place and/or on such other date as to which
the parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of the close of business on the date thereof or at
such other time as to which the parties may agree ("Effective Time"). If,
immediately before the Valuation Time, (a) the NYSE is closed to trading or
trading thereon is restricted or (b) trading or the reporting of trading on the
NYSE or elsewhere is disrupted, so that accurate appraisal of the net value of
Target and the NAV of an Acquiring Fund Share is impracticable, the Effective
Time shall be postponed until the first business day after the day when such
trading shall have been fully resumed and such reporting shall have been
restored.
3.2. Target Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target Fund to Acquiring
Fund, as reflected on Acquiring Fund's books immediately following the Closing,
does or will conform to such information on Target Fund's books immediately
before the Closing. Target Trust's custodian shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Assets held by the
custodian will be transferred to Acquiring Fund at the Effective Time and (b)
all necessary taxes in conjunction with the delivery of the Assets, including
all applicable federal and state stock transfer stamps, if any, have been paid
or provision for payment has been made.
3.3. Target Trust shall deliver to Acquiring Trust at the Closing a list
of the names and addresses of the Shareholders and the number of outstanding
Target Shares owned by each Shareholder, all as of the Effective Time, certified
by Target Fund's Secretary or Assistant Secretary. Acquiring Trust's transfer
agent shall deliver at the Closing a certificate as to the opening on Acquiring
Fund's share transfer books of accounts in the Shareholders' names. Acquiring
Trust shall issue and deliver a confirmation to Target Trust evidencing the
Acquiring Fund Shares to be credited to Target Fund at the Effective Time or
provide evidence satisfactory to Target Trust that such Acquiring Fund Shares
have been credited to Target Fund's account on Acquiring Fund's books. At the
Closing, each party shall deliver to the other such bills of sale, checks,
assignments, stock certificates, receipts, or other documents as the other party
or its counsel may reasonably request.
3.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to the
effect that the representations and warranties it made in this Agreement are
true and correct at the Effective Time except as they may be affected by the
transactions contemplated by this Agreement.
3
4. REPRESENTATIONS AND WARRANTIES
------------------------------
4.1. Target represents and warrants as follows:
4.1.1. Target Trust is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable shares
("Business Trust"), that is duly organized and validly existing under the laws
of the Commonwealth of Massachusetts; and a copy of its Amended and Restated
Declaration of Trust ("Target Declaration") is on file with the Secretary of the
Commonwealth of Massachusetts;
4.1.2. Target Trust is duly registered as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"), and such registration will be in full force and effect at the Effective
Time;
4.1.3. Target Fund is a duly established and designated series of Target
Trust;
4.1.4. At the Closing, Target Fund will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer, and
deliver the Assets free of any liens or other encumbrances; and upon delivery
and payment for the Assets, Acquiring Fund will acquire good and marketable
title thereto;
4.1.5. Target Fund's current P/SAI conform in all material respects to
the applicable requirements of the Securities Act of 1933, as amended ("1933
Act"), and the 1940 Act and the rules and regulations thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.1.6. Target Fund is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby will
not conflict with or violate, Massachusetts law or any provision of the Target
Declaration or Target Trust's By-laws or of any agreement, instrument, lease, or
other undertaking to which Target Fund is a party or by which it is bound or
result in the acceleration of any obligation, or the imposition of any penalty,
under any agreement, judgment, or decree to which Target Fund is a party or by
which it is bound, except as previously disclosed in writing to and accepted by
Acquiring Trust;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Acquiring Trust, all material contracts and other commitments of Target Fund
(other than this Agreement and investment contracts, including options, futures,
and forward contracts) will be terminated, or provision for discharge of any
liabilities of Target Fund thereunder will be made, at or prior to the Effective
Time, without either Fund's incurring any liability or penalty with respect
thereto and without diminishing or releasing any rights Target Fund may have had
with respect to actions taken or omitted or to be taken by any other party
thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by
Acquiring Trust, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to Target
Trust's knowledge) threatened against Target Trust with respect to Target Fund
or any of its properties or assets that, if adversely determined, would
materially and adversely affect its financial condition or the conduct of its
business; and Target Trust knows of no facts that might form the basis for the
4
institution of any such litigation, proceeding, or investigation and is not a
party to or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially or adversely affects its business or
its ability to consummate the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the part
of Target Trust's board of trustees, which has made the determinations required
by Rule 17a-8(a) under the 1940 Act; and, subject to approval by Target Fund's
shareholders, this Agreement constitutes a valid and legally binding obligation
of Target Fund, enforceable in accordance with its terms, except as the same may
be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium, and similar laws relating to or affecting creditors' rights and by
general principles of equity;
4.1.10. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by Target Fund's shareholders;
4.1.11. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the Securities Exchange Act of 1934, as amended
("1934 Act"), or the 1940 Act for the execution or performance of this Agreement
by Target Trust, except for (a) the filing with the Securities and Exchange
Commission ("SEC") of a registration statement by Acquiring Trust on Form N-14
relating to the Acquiring Fund Shares issuable hereunder, and any supplement or
amendment thereto ("Registration Statement"), including therein a
prospectus/proxy statement ("Proxy Statement"), and (b) such consents,
approvals, authorizations, and filings as have been made or received or as may
be required subsequent to the Effective Time;
4.1.12. On the effective date of the Registration Statement, at the time
of the shareholders' meeting referred to in paragraph 5.2, and at the Effective
Time, the Proxy Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the
rules and regulations thereunder and (b) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading; provided that the foregoing
shall not apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Acquiring Trust for
use therein;
4.1.13. The Liabilities were incurred by Target Fund in the ordinary
course of its business and are associated with the Assets; and there are no
Liabilities other than liabilities disclosed or provided for in its financial
statements referred to in paragraph 4.1.18 and liabilities incurred by Target
Fund in the ordinary course of its business subsequent to December 31, 1998
[PLEASE CONFIRM DATE], or otherwise previously disclosed to Acquiring Trust,
none of which has been materially adverse to the business, assets, or results of
Target Fund's operations;
4.1.14. Target Fund is a "fund" as defined in section 851(g)(2) of the
Code; it qualified for treatment as a regulated investment company under
Subchapter M of the Code ("RIC") for each past taxable year since it commenced
operations and will continue to meet all the requirements for such qualification
for its current taxable year; it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not apply to it; and
the Assets will be invested at all times through the Effective Time in a manner
that ensures compliance with the foregoing;
5
4.1.15. Target Fund is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case within the
meaning of section 368(a)(3)(A) of the Code;
4.1.16. Not more than 25% of the value of Target Fund's total assets
(excluding cash, cash items, and U.S. government securities) is invested in the
stock and securities of any one issuer, and not more than 50% of the value of
such assets is invested in the stock and securities of five or fewer issuers;
4.1.17. Target Fund's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the taxable
year ended December 31, 1998 [PLEASE CONFIRM THAT SUCH RETURN HAS BEEN FILED],
have been timely filed and all taxes payable pursuant to such returns have been
timely paid; and
4.1.18. Target Trust's financial statements for the year ended December
31, 1998 [PLEASE CONFIRM DATE], to be delivered to Acquiring Trust, fairly
represent Target Fund's financial position as of that date and the results of
its operations and changes in its net assets for the year then ended.
4.2. Acquiring Fund represents and warrants as follows:
4.2.1. Acquiring Trust is a Business Trust that is duly organized and
validly existing under the laws of the Commonwealth of Massachusetts; and a copy
of its Declaration of Trust ("Acquiring Declaration") is on file with the
Secretary of the Commonwealth of Massachusetts;
4.2.2. Acquiring Trust is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in full
force and effect at the Effective Time;
4.2.3. Acquiring Fund is a duly established and designated series of
Acquiring Trust;
4.2.4. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the Assets
in the Reorganization;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
Fund hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein, will be duly and validly issued and
outstanding shares of Acquiring Fund, fully paid and non-assessable;
4.2.6. Acquiring Fund's current P/SAI conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby will not conflict with or violate, Massachusetts law or any provision of
the Acquiring Declaration of Trust or Acquiring Trust's By-laws or of any
6
provision of any agreement, instrument, lease, or other undertaking to which
Acquiring Fund is a party or by which it is bound or result in the acceleration
of any obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Acquiring Fund is a party or by which it is bound,
except as previously disclosed in writing to and accepted by Target Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by Target
Trust, no litigation, administrative proceeding, or investigation of or before
any court or governmental body is presently pending or (to Acquiring Trust's
knowledge) threatened against Acquiring Trust with respect to Acquiring Fund or
any of its properties or assets that, if adversely determined, would materially
and adversely affect Acquiring Fund's financial condition or the conduct of its
business; and Acquiring Fund knows of no facts that might form the basis for the
institution of any such litigation, proceeding, or investigation and is not a
party to or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially or adversely affects its business or
its ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement have
been duly authorized as of the date hereof by all necessary action on the part
of Acquiring Trust's board of trustees (together with Target Trust's board of
trustees, the "Boards"), which has made the determinations required by Rule
17a-8(a) under the 1940 Act; and this Agreement constitutes a valid and legally
binding obligation of Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or filings
are required under the 1933 Act, the 1934 Act, or the 1940 Act for the execution
or performance of this Agreement by Acquiring Trust, except for (a) the filing
with the SEC of the Registration Statement and a post-effective amendment to
Acquiring Trust's registration statement on Form N-1A and (b) such consents,
approvals, authorizations, and filings as have been made or received or as may
be required subsequent to the Effective Time;
4.2.11. On the effective date of the Registration Statement, at the time
of the shareholders' meeting referred to in paragraph 5.2, and at the Effective
Time, the Proxy Statement will (a) comply in all material respects with the
applicable provisions of the 1933 Act, the 1934 Act, and the 1940 Act and the
rules and regulations thereunder and (b) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading; provided that the foregoing
shall not apply to statements in or omissions from the Proxy Statement made in
reliance on and in conformity with information furnished by Target Trust for use
therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(2) of the
Code; it qualified for treatment as a RIC for each past taxable year since it
commenced operations and will continue to meet all the requirements for such
qualification for its current taxable year; Acquiring Fund intends to continue
to meet all such requirements for the next taxable year; and it has no earnings
and profits accumulated in any taxable year in which the provisions of
Subchapter M of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued in
the ordinary course of its business as a series of an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
7
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, except to the extent it is required by the 1940
Act to redeem any of its shares presented for redemption at NAV in the ordinary
course of that business;
4.2.14. Following the Reorganization, Acquiring Fund (a) will continue
Target Fund's "historic business" (within the meaning of section 1.368-1(d)(2)
of the Regulations), (b) use a significant portion of Target Fund's "historic
business assets" (within the meaning of section 1.368-1(d)(3) of the
Regulations) in a business, (c) has no plan or intention to sell or otherwise
dispose of any of the Assets, except for dispositions made in the ordinary
course of that business and dispositions necessary to maintain its status as a
RIC, and (d) expects to retain substantially all the Assets in the same form as
it receives them in the Reorganization, unless and until subsequent investment
circumstances suggest the desirability of change or it becomes necessary to make
dispositions thereof to maintain such status;
4.2.15. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another business trust or a corporation or any "fund" thereof
(within the meaning of section 851(g)(2) of the Code) following the
Reorganization;
4.2.16. Immediately after the Reorganization, (a) not more than 25% of the
value of Acquiring Fund's total assets (excluding cash, cash items, and U.S.
government securities) will be invested in the stock and securities of any one
issuer and (b) not more than 50% of the value of such assets will be invested in
the stock and securities of five or fewer issuers;
4.2.17. Acquiring Fund does not directly or indirectly own, nor at the
Effective Time will it directly or indirectly own, nor has it directly or
indirectly owned, at any time during the past five years, any shares of Target
Fund;
4.2.18. Acquiring Fund's federal income tax returns, and all applicable
state and local tax returns, for all taxable years through and including the
taxable year ended September 30, 1998, have been timely filed and all taxes
payable pursuant to such returns have been timely paid; and
4.2.19. Acquiring Trust's financial statements for the year ended
September 30, 1999, to be delivered to Target Trust, fairly represent Acquiring
Fund's financial position as of that date and the results of its operations and
changes in its net assets for the year then ended.
4.3. Each Fund represents and warrants as follows:
4.3.1. The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of its
Target Shares constructively surrendered in exchange therefor;
4.3.2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of their
Target Shares before the Reorganization to any person related (within the
meaning of section 1.368-1(e)(3) of the Regulations) to either Fund or (ii) any
portion of the Acquiring Fund Shares to be received by them in the
Reorganization to any person related (within such meaning) to Acquiring Fund;
(b) does not anticipate dispositions of those Acquiring Fund Shares at the time
of or soon after the Reorganization to exceed the usual rate and frequency of
dispositions of shares of Target Fund as a series of an open-end investment
8
company, (c) expects that the percentage of Shareholder interests, if any, that
will be disposed of as a result of or at the time of the Reorganization will be
DE MINIMIS, and (d) does not anticipate that there will be extraordinary
redemptions of Acquiring Fund Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4.3.4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
substantially the same liabilities that Target Fund held or was subject to
immediately prior thereto (in addition to the assets and liabilities Acquiring
Fund then held or was subject to), plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
4.3.5. The fair market value of the Assets on a going concern basis will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those to
which the Assets are subject;
4.3.6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
4.3.7. Pursuant to the Reorganization, Target Fund will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the fair market
value of the net assets, and at least 70% of the fair market value of the gross
assets, held by Target Fund immediately before the Reorganization. For the
purposes of this representation, any amounts used by Target Fund to pay its
Reorganization expenses and to make redemptions and distributions immediately
before the Reorganization (except (a) redemptions not made as part of the
Reorganization and (b) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982 of
the Code) will be included as assets held thereby immediately before the
Reorganization;
4.3.8. None of the compensation received by any Shareholder who is an
employee of or service provider to Target Fund will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder; none of
the Acquiring Fund Shares received by any such Shareholder will be separate
consideration for, or allocable to, any employment agreement, investment
advisory agreement, or other service agreement; and the consideration paid to
any such Shareholder will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services;
4.3.9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" (within the meaning of section 304(c) of the
Code) of Acquiring Fund; and
4.3.10. Neither Fund will be reimbursed for any expenses incurred by it or
on its behalf in connection with the Reorganization unless those expenses are
solely and directly related to the Reorganization (determined in accordance with
the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) ("Reorganization
Expenses").
9
5. COVENANTS
---------
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that --
(a) such ordinary course will include declaring and paying customary
dividends and other distributions and changes in operations
contemplated by each Fund's normal business activities, and
(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that (1) Target Fund shall not
dispose of more than an insignificant portion of its historic business
assets during such period without Acquiring Fund's prior consent and
(2) if Target Fund's shareholders approve this Agreement (and the
transactions contemplated hereby), then between the date of such
approval and the Closing, the Funds shall coordinate their respective
portfolios so that the transfer of the Assets to Acquiring Fund will
not cause it to fail to be in compliance with all of its investment
policies and restrictions immediately after the Closing.
5.2. Target Fund covenants to call a shareholders' meeting to consider and
act on this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated hereby.
5.3. Target Fund covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.4. Target Fund covenants that it will assist Acquiring Trust in
obtaining information Acquiring Trust reasonably requests concerning the
beneficial ownership of Target Shares.
5.5. Target Fund covenants that its books and records (including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Acquiring Trust at the Closing.
5.6. Each Fund covenants to cooperate in preparing the Proxy Statement in
compliance with applicable federal and state securities laws.
5.7. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and possession
of all the Assets, and (b) Target Fund, title to and possession of the Acquiring
Fund Shares to be delivered hereunder, and otherwise to carry out the intent and
purpose hereof.
5.8. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate to continue its operations after
the Effective Time.
5.9. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
10
6. CONDITIONS PRECEDENT
--------------------
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated
hereby, as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time, and (c) the following further conditions that, at
or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by the Boards and shall have been approved by
Target Fund's shareholders in accordance with the Target Declaration and
applicable law.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an unfavorable
report with respect to the Reorganization under section 25(b) of the 1940 Act
nor instituted any proceedings seeking to enjoin consummation of the
transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on either Fund's assets or properties, provided that either
Investment Company may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Target Trust shall have received an opinion of Kirkpatrick & Lockhart
LLP ("Counsel") substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Acquiring
Trust, a Business Trust duly organized and validly existing under the laws
of the Commonwealth of Massachusetts with power under the Acquiring
Declaration to own all its properties and assets and, to the knowledge of
Counsel, to carry on its business as presently conducted;
6.4.2.This Agreement (a) has been duly authorized, executed, and
delivered by Acquiring Trust on behalf of Acquiring Fund and (b) assuming
due authorization, execution, and delivery of this Agreement by Target
Trust on behalf of Target Fund, is a valid and legally binding obligation
of Acquiring Trust with respect to Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by general
principles of equity;
6.4.3.The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated by this Agreement, will be duly authorized, validly issued
and outstanding, and fully paid and non-assessable;
11
6.4.4.The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Acquiring Declaration or Acquiring Trust's By-laws or any
provision of any agreement (known to Counsel, without any independent
inquiry or investigation) to which Acquiring Trust (with respect to
Acquiring Fund) is a party or by which it is bound or (to the knowledge of
Counsel, without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Acquiring Trust (with respect
to Acquiring Fund) is a party or by which it is bound, except as set forth
in such opinion or as previously disclosed in writing to and accepted by
Target Trust;
6.4.5.To the knowledge of Counsel (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Acquiring
Trust on behalf of Acquiring Fund of the transactions contemplated herein,
except those obtained under the 1933 Act, the 1934 Act, and the 1940 Act
and those that may be required under state securities laws;
6.4.6.Acquiring Trust is registered with the SEC as an investment
company, and to the knowledge of Counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.4.7.To the knowledge of Counsel (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Acquiring Trust (with respect to Acquiring Fund) or any
of its properties or assets attributable or allocable to Acquiring Fund
and (b) Acquiring Trust (with respect to Acquiring Fund) is not a party to
or subject to the provisions of any order, decree, or judgment of any
court or governmental body that materially and adversely affects Acquiring
Fund's business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by Target Trust.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (2) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (3) limit such opinion to applicable federal
and state law, and (4) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with Counsel who have devoted substantive attention
to matters directly related to this Agreement and the Reorganization.
6.5. Acquiring Trust shall have received an opinion of Counsel
substantially to the effect that:
6.5.1.Target Fund is a duly established series of Target Trust, a
Business Trust duly organized and validly existing under the laws of the
Commonwealth of Massachusetts with power under the Target Declaration to
own all its properties and assets and, to the knowledge of Counsel, to
carry on its business as presently conducted;
6.5.2.This Agreement (a) has been duly authorized, executed, and
delivered by Target Trust on behalf of Target Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Acquiring
Trust on behalf of Acquiring Fund, is a valid and legally binding
obligation of Target Trust, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
12
6.5.3.The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Target Declaration or Target Trust's By-laws or any provision
of any agreement (known to Counsel, without any independent inquiry or
investigation) to which Target Trust (with respect to Target Fund) is a
party or by which it is bound or (to the knowledge of Counsel, without any
independent inquiry or investigation) result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement,
judgment, or decree to which Target Trust (with respect to Target Fund) is
a party or by which it is bound, except as set forth in such opinion or as
previously disclosed in writing to and accepted by Acquiring Trust;
6.5.4.To the knowledge of Counsel (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Target Trust
on behalf of Target Fund of the transactions contemplated herein, except
those obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
those that may be required under state securities laws;
6.5.5.Target Trust is registered with the SEC as an investment
company, and to the knowledge of Counsel no order has been issued or
proceeding instituted to suspend such registration; and
6.5.6.To the knowledge of Counsel (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Target Trust (with respect to Target Fund) or any of its
properties or assets attributable or allocable to Target Fund and (b)
Target Trust (with respect to Target Fund) is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects Target's business,
except as set forth in such opinion or as otherwise disclosed in writing
to and accepted by Acquiring Trust.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel, (2) make assumptions regarding the authenticity,
genuineness, and/or conformity of documents and copies thereof without
independent verification thereof, (3) limit such opinion to applicable federal
and state law, and (4) define the word "knowledge" and related terms to mean the
knowledge of attorneys then with Counsel who have devoted substantive attention
to matters directly related to this Agreement and the Reorganization.
6.6. Each Investment Company shall have received an opinion of Counsel,
addressed to and in form and substance satisfactory to it, as to the federal
income tax consequences mentioned below ("Tax Opinion"). In rendering the Tax
Opinion, Counsel may rely as to factual matters, exclusively and without
independent verification, on the representations made in this Agreement which
such Counsel may treat as representations made to it, or in separate letters
addressed to Counsel, and the certificates delivered pursuant to paragraph 3.4.
The Tax Opinion shall be substantially to the effect that, based on the facts
and assumptions stated therein and conditioned on consummation of the
Reorganization in accordance with this Agreement, for federal income tax
purposes:
13
6.6.1.Acquiring Fund's acquisition of the Assets in exchange solely
for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target Fund's distribution of those shares PRO
RATA to the Shareholders constructively in exchange for their Target
Shares, will qualify as a reorganization within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the Code;
6.6.2.Target Fund will recognize no gain or loss on the transfer of
the Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares
and Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
6.6.3. Acquiring Fund will recognize no gain or loss on its receipt
of the Assets in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
6.6.4.Acquiring Fund's basis for the Assets will be the same as
Target Fund's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target Fund's
holding period therefor;
6.6.5.A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund
Shares pursuant to the Reorganization; and
6.6.6.A Shareholder's aggregate basis for the Acquiring Fund Shares
to be received by it in the Reorganization will be the same as the
aggregate basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares, and its holding period for those
Acquiring Fund Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the Shareholder at the
Effective Time.
Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that no
opinion is expressed as to the effect of the Reorganization on the Funds or any
Shareholder with respect to any asset as to which any unrealized gain or loss is
required to be recognized for federal income tax purposes at the end of a
taxable year (or on the termination or transfer thereof) under a mark-to-market
system of accounting.
At any time before the Closing, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's shareholders' interests.
7. FINDERS FEES AND EXPENSES
-------------------------
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Except as otherwise provided herein, the total Reorganization
Expenses will be borne entirely by the Funds in proportion to their respective
total net assets as of the close of business on the last business day prior to
the Closing.
14
8. ENTIRE AGREEMENT; NO SURVIVAL
-----------------------------
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
9. TERMINATION OF AGREEMENT
------------------------
This Agreement may be terminated at any time at or prior to the Effective
Time, whether before or after approval by Target Fund's shareholders:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed at
or prior to the Effective Time, (b) if a condition to its obligations has not
been met and it reasonably appears that such condition will not or cannot be
met, or (c) if the Closing has not occurred on or before February __, 2000; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the trustees or officers of
either Investment Company, to the other Fund.
10. AMENDMENT
---------
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by Target Fund's shareholders, in any manner
mutually agreed upon in writing by the parties; provided that following such
approval no such amendment shall have a material adverse effect on the
Shareholders' interests.
11. MISCELLANEOUS
-------------
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the Commonwealth of Massachusetts; provided that, in the
case of any conflict between such laws and the federal securities laws, the
latter shall govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3. The parties acknowledge that each Investment Company is a Business
Trust. Notice is hereby given that this instrument is executed on behalf of each
Business Trust's trustees solely in their capacities as trustees, and not
individually, and that each Business Trust's obligations under this instrument
are not binding on or enforceable against any of its trustees, officers, or
shareholders but are only binding on and enforceable against the respective
Funds' assets and property. Each Fund agrees that, in asserting any rights or
claims under this Agreement, it shall look only to the other Fund's assets and
property in settlement of such rights or claims and not to such other Fund's
shareholders or trustees.
15
11.4. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been executed by each Investment Company and
delivered to the other. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
ATTEST: EXECUTIVE INVESTORS TRUST,
on behalf of its series,
Blue Chip Fund
By:
- --------------------------- ---------------------------
ATTEST: FIRST INVESTORS SERIES FUND,
on behalf of its series,
Blue Chip Fund
By:
- --------------------------- ---------------------------
FIRST INVESTORS SERIES FUND II, INC.
GROWTH & INCOME FUND
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
FIRST INVESTORS SERIES FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
FIRST INVESTORS GLOBAL FUND, INC.
95 Wall Street
New York, New York 10005
1-800-423-4026
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY __, 2000
This is a Statement of Additional Information ("SAI") for FIRST INVESTORS
SERIES FUND II, INC. ("SERIES FUND II"), FIRST INVESTORS SERIES FUND ("SERIES
FUND") and FIRST INVESTORS GLOBAL FUND, INC. ("GLOBAL FUND"), each an open-end
diversified management investment company. SERIES FUND II offers four separate
series, three of which are described in this SAI and each of which has different
investment objectives and policies: FIRST INVESTORS GROWTH & INCOME FUND, FIRST
INVESTORS MID-CAP OPPORTUNITY FUND AND FIRST INVESTORS UTILITIES INCOME FUND.
SERIES FUND offers five separate series, three of which are described in this
SAI and each of which has different investment objectives and policies: FIRST
INVESTORS BLUE CHIP Fund, FIRST INVESTORS SPECIAL SITUATIONS FUND and FIRST
INVESTORS TOTAL RETURN FUND. GLOBAL FUND offers one series. (Each series is
referred to as a "Fund").
This SAI is not a prospectus. It should be read in conjunction with the
Series Fund Prospectus/Proxy Statement dated January __, 2000 which may be
obtained free of cost from the Funds at the address or telephone number noted
above. Information regarding the purchase, redemption and exchange of your Fund
shares is contained in the Shareholder Manual, a separate section of the SAI
that is a distinct document and may also be obtained free of charge by
contacting a Fund at the address or telephone number noted above.
TABLE OF CONTENTS
-----------------
PAGE
----
Investment Strategies and Risks.............................................
Investment Policies.........................................................
Futures and Options Strategies..............................................
Portfolio Turnover..........................................................
Investment Restrictions.....................................................
Directors/Trustees and Officers.............................................
Management..................................................................
Underwriter.................................................................
Distribution Plans..........................................................
Determination of Net Asset Value............................................
Allocation of Portfolio Brokerage...........................................
Purchase, Redemption and Exchange of Shares.................................
Taxes.......................................................................
Performance Information.....................................................
General Information.........................................................
Financial Statements........................................................
Pro Forma Financial Statements and Schedules................................
Appendix A..................................................................
Appendix B..................................................................
Appendix C..................................................................
Shareholder Manual: A Guide to your First Investors Mutual Fund Account....
INVESTMENT STRATEGIES AND RISKS
GROWTH & INCOME FUND
The Fund seeks its objective by investing, under normal market conditions,
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 stock. The portion of the Fund's assets invested in
equity securities and in debt securities may vary from time to time due to
changes in interest rates and economic and other factors. The Fund is not
designed for investors seeking a steady flow of income distributions. Rather,
the Fund's policy of investing in income producing securities is intended to
provide investors with a more consistent total return than may be achieved by
investing solely in growth stocks.
The convertible debt securities in which the Fund may invest are not
subject to any limitations as to ratings and may include high, medium, lower and
unrated securities. Although the Fund may invest up to 20% of its total assets
in convertible debt securities rated below Baa by Moody's Investors Service,
Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") (so-called
"junk bonds") (including convertible debt securities that have been downgraded),
or in unrated convertible debt securities that are of comparable quality as
determined by First Investors Management Company, Inc. ("FIMCO" or "Adviser"),
it does not anticipate investing more than 5% of its total net assets in such
securities in the coming year. Convertible debt securities rated lower than BBB
by S&P or Baa by Moody's, commonly referred to as "junk bonds," are speculative
and generally involve a higher risk of loss of principal and income than
higher-rated securities. See "Debt Securities," below, and Appendix A for a
description of convertible debt security ratings.
The Fund may invest up to 35% of its total assets in the following
instruments: money market instruments, including U.S. bank certificates of
deposit, bankers' acceptances, commercial paper issued by domestic corporations
and repurchase agreements; fixed income securities, including obligations issued
or guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities ("U.S. Government Obligations"), including mortgage-backed
securities, and corporate debt securities rated at least Baa by Moody's or BBB
by S&P, commonly known as "investment grade securities" or unrated securities
that are of comparable quality as determined by the Adviser; and common stock
and securities convertible into common stock of companies that are not paying a
dividend if there exists the potential for growth of capital or future income.
It is the Fund's policy to attempt to sell, within a reasonable time period, a
debt security which has been downgraded below investment grade (other than
convertible debt securities, as previously discussed), provided that such
disposition is in the best interests of the Fund and its shareholders. See "Debt
Securities," below, and Appendix A for a description of corporate and
convertible debt security ratings.
Because the Fund invests in bonds and convertible debt securities, it is
subject to interest rate risk. The market value of a bond or convertible debt
security is affected by changes in interest rates. When interest rates rise, the
market value of a bond declines. When interest rates decline, the market value
of a bond increases. Generally, the longer a bond's maturity, the greater its
sensitivity to interest rates. A bond's value can also be affected by changes in
the credit rating of the financial condition of its issuer.
2
The Fund's investments in bonds are also subject to the risk of default.
This risk is greater in the case of its investments in high yield bonds. These
bonds generally provide higher income in an effort to compensate investors for
their higher risk of default (failure to make required interest or principal
payments). High yield bond issuers include small or relatively new companies
lacking the history or capital to merit investment grade status, former blue
chip companies downgraded because of financial problems, and companies which
have elected to borrow heavily.
Generally, the prices of equity securities could be affected by such
factors as a change in a company's earnings, fluctuations in interest rates or
changes in the rate of economic growth. To the extent the Fund invests in
issuers with small capitalizations, the Fund would be subject to greater risk
than may be involved in investing in companies with larger capitalizations.
These securities generally include newer and less seasoned companies which are
more speculative than securities issued by well-established issuers. Other risks
may include less available information about the issuer, the absence of a
business history or historical pattern of performance, as well as normal risks
which accompany the development of new products, markets or services.
The Fund may invest up to 20% of its total assets in securities of
well-established foreign companies in developed countries which are traded on a
recognized domestic or foreign securities exchange. Foreign investments involve
additional risks, including currency fluctuations, political instability,
differences in financial reporting standards, and less stringent regulation of
securities markets. Although such foreign securities may be denominated in
foreign currencies, the Fund anticipates that the majority of its foreign
investments will be in American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs"). While the Fund may invest in both ADRs and GDRs,
it currently intends to invest only in ADRs. See "Foreign Securities" and
"American Depository Receipts and Global Depository Receipts," below. While the
Fund may enter into forward currency contracts to protect against uncertainty in
the level of future exchange rates, it does not currently intend to use this
authority. In any event, the Adviser will not attempt to time actively either
short-term market trends or short-term currency trends in any market. See
"Futures and Options Strategies."
The Fund may also borrow money for temporary or emergency purposes in
amounts not exceeding 5% of its net assets, make loans of portfolio securities
and invest in securities issued on a "when-issued" or delayed delivery basis. In
addition, in any period of market weakness or of uncertain market or economic
conditions, the Fund may establish a temporary defensive position to preserve
capital by having up to 100% of its assets invested in short-term fixed income
securities or retained in cash or cash equivalents.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
MID-CAP OPPORTUNITY FUND
The Fund seeks its objective of long-term capital growth by investing,
under normal market conditions, at least 65% of its total assets in common
stocks of companies that have a medium market capitalization. The Fund seeks to
invest in equity securities that the Adviser believes demonstrate outstanding
growth records and potential based on the Adviser's fundamental analysis of the
company. The companies in which the Fund invests will be primarily those with
3
medium market capitalization (often known as "mid-cap"). The Fund defines
mid-cap stocks as those with market capitalizations of less than 90% of the
weighted market capitalization of the Standard & Poor's 400 Mid-Cap Index
(currently $7.6 billion). The Fund's definition of "mid-cap" will change with
market conditions. Market capitalization is the total market value of a
company's outstanding common stock. Growth equity securities tend to have
above-average price to earnings ratios and less-than-average current yields
compared to non-growth equity securities. The payment of dividend income will
not be a primary consideration in the selection of equity investments.
The Fund's focus on growth stocks increases the potential volatility of
its share price. Growth stocks are stocks of companies which are expected to
increase their earnings faster than the overall market. If expectations are not
met, the prices of these stocks may decline drastically even if earnings do
increase. Investments in growth companies may lack the dividend yield that can
cushion stock prices in market downturns.
The Fund may invest up to 35% of its total assets in small capitalization
stocks, large capitalization stocks, U.S. Government Obligations, including
mortgage-backed securities, and investment grade debt securities or unrated
securities that are of comparable quality as determined by the Adviser,
repurchase agreements, investment grade securities convertible into common
stock, warrants to purchase common stock and zero coupon and pay-in-kind
securities. The Fund may invest up to 15% of its total assets in ADRs. The Fund
may borrow money for temporary or emergency purposes in an amount not exceeding
5% of its net assets and invest in securities issued on a "when-issued" or
delayed delivery basis. The Adviser continually monitors the investments in the
Fund's portfolio and carefully evaluates on a case-by-case basis whether to
dispose of or retain a debt security that has been downgraded below investment
grade. No more than 5% of the Fund's net assets will remain invested in such
downgraded securities. See "Debt Securities," below, and Appendix A for a
description of corporate bond ratings.
To a limited degree, the Fund may invest in foreign securities. Foreign
investments involve additional risks, including currency fluctuations, political
instability, differences in financial reporting standards, and less stringent
regulation of securities markets.
In any period of market weakness or of uncertain market or economic
conditions, the Fund may establish a temporary defensive position to preserve
capital by having all or part of its assets invested in short-term fixed income
securities or retained in cash or cash equivalents, including U.S. Government
Obligations, mortgage-backed securities, bank certificates of deposit, bankers'
acceptances and commercial paper issued by domestic corporations.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
UTILITIES INCOME FUND
The Fund seeks its objective by investing, under normal market conditions,
at least 65% of its total assets in equity and debt securities issued by
companies primarily engaged in the public utilities industry. Equity securities
in which the Fund may invest include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks and warrants to purchase
common or preferred stocks. Debt securities in which the Fund may invest will be
rated at the time of investment at least A by Moody's or S&P or, if unrated,
4
will be of comparable quality as determined by the Adviser. The Fund's policy is
to attempt to sell, within a reasonable time period, a debt security in its
portfolio which has been downgraded below A, provided that such disposition is
in the best interests of the Fund and its shareholders. See "Debt Securities,"
below, and Appendix A for a description of corporate bond ratings. The portion
of the Fund's assets invested in equity securities and in debt securities will
vary from time to time due to changes in interest rates and economic and other
factors.
The Fund defines utilities companies as those that are primarily engaged
in the ownership or operation of facilities used to provide electricity, gas,
water or telecommunications (including telephone, telegraph and satellite, but
not public broadcasting or cable television). For these purposes, "primarily
engaged" means that (1) more than 50% of the company's assets are devoted to the
ownership or operation of one or more facilities as described above, or (2) more
than 50% of the company's operating revenues are derived from the business or
combination of any of the businesses described above. It should be noted that
based on this definition, the Fund may invest in companies which are also
involved to a significant degree in non-public utilities activities.
Utilities stocks generally offer dividend yields that exceed those of
industrial companies and their prices tend to be less volatile than stocks of
industrial companies. However, utilities stocks can still be affected by the
risks of the stock of industrial companies. The Fund has a policy to concentrate
its investments in the securities of companies in the public utilities industry.
Because the Fund concentrates its investments in public utilities companies, the
value of its shares will be especially affected by factors peculiar to the
utilities industry, and may fluctuate more widely than the value of shares of a
fund that invests in a broader range of industries. See "Utilities Industries."
The Fund may invest up to 35% of its total assets in the following
instruments: debt securities (rated at least A by Moody's or S&P) and common and
preferred stocks of non-utilities companies; U.S. Government Obligations;
mortgage-backed securities; cash; and money market instruments consisting of
prime commercial paper, bankers' acceptances, certificates of deposit and
repurchase agreements. The Fund may invest in securities on a "when-issued" or
delayed delivery basis and make loans of portfolio securities. The Fund may
invest up to 10% of its total assets in ADRs. The Fund may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its net assets.
The Fund also may invest in zero coupon and pay-in-kind securities. In addition,
in any period of market weakness or of uncertain market or economic conditions,
the Fund may establish a temporary defensive position to preserve capital by
having up to 100% of its assets invested in short-term fixed income securities
or retained in cash or cash equivalents.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
BLUE CHIP FUND
The Fund seeks its objective by investing, under normal market conditions,
at least 65% of its total assets in common stocks of "Blue Chip" companies that
the Adviser believes have potential earnings growth that is greater than the
average company included in the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). The Fund also may invest up to 35% of its total assets in the
equity securities of non-Blue Chip companies that the Adviser believes have
significant potential for growth of capital or future income consistent with the
5
preservation of capital. When market conditions warrant, or when the Adviser
believes it is necessary to achieve the Fund's objective, the Fund may invest up
to 25% of its total assets in fixed-income securities. It is the Fund's policy
to remain relatively fully invested in equity securities under all market
conditions rather than to attempt to time the market by maintaining large cash
or fixed-income securities positions when market declines are anticipated. The
Fund is appropriate for investors who are comfortable with a fully invested
stock portfolio.
The Fund defines Blue Chip companies as those companies that are included
in the S&P 500. Blue Chip companies are considered to be of relatively high
quality and generally exhibit superior fundamental characteristics, which may
include: potential for consistent earnings growth, a history of profitability
and payment of dividends, leadership position in their industries and markets,
proprietary products or services, experienced management, high return on equity
and a strong balance sheet. Blue Chip companies usually exhibit less investment
risk and share price volatility than smaller, less established companies.
Examples of Blue Chip companies are Microsoft Corp., General Electric Co.,
Pepsico Inc. and Bristol-Myers Squibb Co.
The Fund primarily invests in stocks of growth companies. These are
companies which are expected to increase their earnings faster than the overall
market. If earnings expectations are not met, the prices of these stocks may
decline substantially even if earnings do increase. Investments in growth
companies may lack the dividend yield that can cushion stock prices in market
downturns.
The fixed-income securities in which the Fund may invest include money
market instruments (including prime commercial paper, certificates of deposit of
domestic branches of U.S. banks and bankers' acceptances), U.S. Government
Obligations (including mortgage-backed securities) and corporate debt
securities. However, no more than 5% of the Fund's net assets may be invested in
corporate debt securities rated below Baa by Moody's or BBB by S&P. The Fund may
borrow money for temporary or emergency purposes in amounts not exceeding 5% of
its total assets. The Fund may also invest up to 10% of its total assets in
ADRs, enter into repurchase agreements and make loans of portfolio securities.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
SPECIAL SITUATIONS FUND
The Fund seeks its objective by investing, under normal market conditions,
at least 65% of its total assets in the common stock of companies with small
market capitalization that the Adviser considers to be undervalued or less well
known in the current marketplace and to have potential for capital growth. The
Fund may invest up to 35% of its total assets in other common stocks and in
preferred stock that is convertible into common stock issued by U.S.
corporations, and in the common stock of companies located outside the United
States, including companies with larger market capitalization if the Fund
determines that they present good opportunities for growth.
The Fund seeks to invest in the common stock of companies that the Adviser
believes are undervalued in the current market in relation to fundamental
economic values such as earnings, sales, cash flow and tangible book value; that
are early in their corporate development (i.e., before they become widely
recognized and well known and while their reputations and track records are
6
still emerging); or that offer the possibility of greater earnings because of
revitalized management, new products or structural changes in the economy. Such
companies primarily are those with small market capitalizations (often knows as
"small-cap." The Fund defines small-cap stocks as those with market
capitalizations of less than 90% of the weighted market capitalization of the
Standard & Poor's 600 Small-Cap Index. The Fund's definition of small-cap will
change with market conditions. The Adviser believes that, over time, these
securities are more likely to appreciate in price than securities whose market
prices have already reached their perceived economic value. In addition, the
Fund intends to diversify its holdings among as many companies and industries as
the Adviser deems appropriate.
Companies that are early in their corporate development may be dependent
on relatively few products or services, may lack adequate capital reserves, may
be dependent on one or two management individuals and may have less of a track
record or historical pattern of performance. In addition, there may be less
information available as to the issuers and their securities may not be well
known to the general public and may not yet have wide institutional ownership.
Securities of these companies may have more potential for growth but also
greater risk than that normally associated with larger, older or better-known
companies.
Investments in securities of companies with small market capitalizations
are generally considered to offer greater opportunity for appreciation and to
involve greater risk of depreciation than securities of companies with larger
market capitalization. These include the equity securities of companies which
represent new or changing industries and those which, in the opinion of the
Adviser, represent special situations, the potential future value of which has
not been fully recognized. Growth securities of companies with small market
capitalizations which represent a special situation bear the risk that the
special situation will not develop as favorably as expected, or the situation
may deteriorate. For example, a merger with favorable implications may be
blocked, an industrial development may not enjoy anticipated market acceptance
or a bankruptcy may not be as profitably resolved as had been expected. Because
the securities of most companies with small market capitalizations are not as
broadly traded as those of companies with larger market capitalizations, these
securities are often subject to wider and more abrupt fluctuations in market
price. In the past, there have been prolonged periods when these securities have
substantially underperformed or outperformed the securities of larger
capitalization companies. In addition, smaller capitalization companies
generally have fewer assets available to cushion an unforeseen adverse
occurrence and thus such an occurrence may have a disproportionately negative
impact on these companies.
The majority of the Fund's investments are expected to be securities of
U.S. issuers that are traded on a U.S. securities exchange, or in the
over-the-counter ("OTC") market. The depth and liquidity of the market for
small-cap stocks may vary from time to time and from security to security.
The Fund may invest up to 15% of its total assets in common stocks issued
by foreign companies which are traded on a recognized domestic or foreign
securities exchange. In addition to the fundamental analysis of companies and
their industries which it performs for U.S. issuers, the Adviser evaluates the
economic and political climate of the country in which the company is located
and the principal securities markets in which such securities are traded.
Although the foreign stocks in which the Fund invests are primarily denominated
7
in foreign currencies, the Fund also may invest in ADRs. The Adviser does not
attempt to time actively either short-term market trends or short-term currency
trends in any market. See "Foreign Securities" and "American Depository
Receipts."
The Fund may invest up to 5% of its total assets in the securities of
other registered investment companies. Such investments will probably involve
additional advisory or distribution fees. The Fund may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets
and enter into repurchase agreements.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
TOTAL RETURN FUND
The Fund seeks its objective by employing a flexible investment strategy
which emphasizes investments in stocks, bonds and money market instruments. The
percentage of the portfolio that is allocated to any one class of assets is
flexible rather than fixed. On a regular basis, the Fund reviews and determines
whether to adjust its asset allocations based upon its views on market
conditions, the relative values of the asset classes and economic trends. The
Fund may invest in domestic and foreign common stocks and other equity
securities, such as preferred stocks, securities convertible into common stocks
and warrants to purchase common stock. The Fund also may invest in debt
securities, including money market instruments (consisting of prime commercial
paper, certificates of deposit of domestic branches of U.S. banks and bankers'
acceptances), U.S. Government Obligations (including mortgage-backed
securities), municipal bonds rated Baa or better by Moody's or BBB or better by
S&P and corporate and foreign debt securities. The Fund also may borrow money
for temporary or emergency purposes in amounts not exceeding 5% of its total
assets, enter into repurchase agreements and make loans of portfolio securities.
The Fund may invest up to 5% of its net assets in zero coupon and pay-in-kind
securities and may invest up to 10% of its net assets in securities issued on a
when-issued or delayed delivery basis. There is the possibility that 100% of the
Fund's total assets could be invested in corporate debt securities and municipal
bonds. No more than 25% of the Fund's net assets may be invested in corporate
debt securities and municipal bonds rated below Baa by Moody's or BBB by S&P.
See "High Yield Securities" and Appendix A for a description of corporate and
municipal bond ratings.
The equity securities in which the Fund generally invests include both
growth and value equity securities. Growth equity securities include securities
of seasoned companies, i.e., companies with above-average earnings growth as
compared to the average of the stocks in the S&P 500, other companies which the
Adviser believes demonstrate changing or accelerating growth profiles and
smaller companies with outstanding growth records and potential based on the
Adviser's fundamental analysis of the company. Growth equity securities tend to
have above-average price to earnings ratios and less-than-average current yields
as compared to other equity securities. Value equity securities tend to have
below average price to earnings ratios, low price to book value and potentially
high current yields.
The majority of the Fund's equity investments are expected to be
securities listed on the NYSE other national securities exchanges or securities
that have an established OTC market, although the depth and liquidity of the OTC
market may vary from time to time and from security to security. The Fund may
invest in newer and less seasoned companies with small to medium market
capitalizations. The Fund's ability to invest in unseasoned companies with
8
above-average earnings growth, other companies with changing or accelerating
growth profiles and smaller companies with outstanding growth records and
potential subjects the Fund to greater risk than may be involved in investing in
securities which are not selected for such growth characteristics.
The Fund may invest up to 25% of its total assets in foreign securities.
Foreign securities include equity and debt securities issued by foreign
companies and government instrumentalities which usually are denominated in
foreign currencies. Although the foreign securities in which the Fund invests
are primarily denominated in foreign currencies, the Fund also may invest in
ADRs. In addition to the fundamental analysis of companies and their industries
which it performs for U.S. issuers, the Adviser evaluates the economic and
political climate of the country in which the company is located and the
principal securities markets in which such securities are traded. The Fund does
not purchase foreign securities which are not traded on a recognized domestic or
foreign securities exchange. The Adviser does not attempt to time actively
either short-term market trends or short-term currency trends in any market. See
"Foreign Securities" and "American Depository Receipts."
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
GLOBAL FUND
The Fund, under normal market conditions, invests in common stocks,
preferred stocks and bonds and other debt obligations issued by companies or
governments of at least three countries, including the United States. Currently,
the Fund primarily is invested in common stocks. The emphasis is on
high-quality, medium to large capitalization companies with an established
market throughout the world and the United States, with opportunistic investment
in smaller companies and/or emerging markets. Investments in foreign markets
involve special risks and considerations which are in addition to the usual
risks inherent in domestic investments. See "Foreign Securities," below.
The Fund may purchase securities traded on any foreign stock exchange. The
Fund may also purchase ADRs and GDRs. See "American Depository Receipts and
Global Depository Receipts," below. The Fund also may invest up to 25% of its
total assets in unlisted securities of foreign issuers; provided, however, that
no more than 10% of the value of its net assets may be invested in such
securities with a limited trading market. The investment standards for the
selection of unlisted securities are the same as those used in the purchase of
securities traded on a stock exchange. The Fund will invest in debt securities
rated in the three highest rating categories by either Moody's or S&P or, if
unrated, determined to be of comparable quality by Wellington Management
Company, LLP ("WMC" or the "Subadviser"). See Appendix A for a description of
such bond ratings.
The Fund may invest in securities convertible into common stocks,
preferred stocks, warrants and repurchase agreements and may purchase securities
on a when-issued or delayed delivery basis. The Fund also may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets
and make loans of portfolio securities. For temporary defensive purposes, the
Fund may invest up to 100% of its total assets in U.S. Government obligations
and cash equivalents denominated in U.S. dollars.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
9
INVESTMENT POLICIES
AMERICAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECEIPTS. Each Fund may
invest in ADRs and GLOBAL FUND and GROWTH & INCOME FUND may invest in GDRs. ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
the underlying securities of foreign issuers. Generally, ADRs are denominated in
U.S. dollars and are designed for use in the U.S. securities markets. Thus,
these securities are not denominated in the same currency as the underlying
securities into which they may be converted. ADRs are subject to many of the
risks inherent in investing in foreign securities. ADRs are not considered by
the Fund to be foreign securities. ADRs may be purchased through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the underlying security and a depository, whereas a depository may
establish an unsponsored facility without participation by the issuer of the
depository security. Holders of unsponsored depository receipts generally bear
all the costs of such facilities and the depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts of the deposited securities.
GDRs are issued globally and evidence a similar ownership arrangement to
ADRs. Generally, GDRs are not denominated in U.S. dollars and are designed for
trading in non-U.S. securities markets. Like ADRs, GDRs may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. As with ADRs, the issuers of the securities underlying
unsponsored GDRs are not obligated to disclose material information in the U.S.
and, therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the market value
of the GDRs. GDRs also involve the risks of other investments in foreign
securities. For purposes of certain investment limitations, GDRs are considered
to be foreign securities by the Funds.
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"). The Federal Deposit Insurance Corporation is an agency of the
U.S. Government which insures the deposits of certain banks and savings and loan
associations up to $100,000 per deposit. The interest on such deposits may not
be insured if this limit is exceeded. Current Federal regulations also permit
such institutions to issue insured negotiable CDs in amounts of $100,000 or
more, without regard to the interest rate ceilings on other deposits. To remain
fully insured, these investments currently must be limited to $100,000 per
insured bank or savings and loan association.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
While no securities investment is without some risk, investments in convertible
securities generally entail less risk than the issuer's common stock, although
10
the extent to which such risk is reduced depends in large measure upon the
degree to which the convertible security sells above its value as a fixed income
security. The Adviser 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.
DEBT SECURITIES. Each Fund may invest in debt securities. The market value
of debt securities is influenced significantly by changes in the level of
interest rates. Generally, as interest rates rise, the market value of debt
securities decreases. Conversely, as interest rates fall, the market value of
debt securities increases. Factors which could result in a rise in interest
rates, and a decrease in market value of debt securities, include an increase in
inflation or inflation expectations, an increase in the rate of U.S. economic
growth, an expansion in the Federal budget deficit, or an increase in the price
of commodities such as oil. In addition, the market value of debt securities is
influenced by perceptions of the credit risks associated with such securities.
Credit risk is the risk that adverse changes in economic conditions can affect
an issuer's ability to pay principal and interest. GLOBAL FUND may invest in
debt securities that, at the time of purchase, are rated in the three highest
rating categories by at least one nationally recognized statistical rating
organization rating that security, such as S&P and Moody's, or, if unrated,
deemed to be of comparable quality by the Subadviser. The Adviser or, for GLOBAL
FUND, its Subadviser, continually monitor the investments in each Fund's
portfolio and carefully evaluates on a case-by-case basis whether to dispose of
or retain a debt security that has been downgraded.
FOREIGN GOVERNMENT OBLIGATIONS. GLOBAL FUND and TOTAL RETURN FUND may
invest in foreign government obligations, which generally consist of obligations
supported by national, state or provincial governments or similar political
subdivisions. Investments in foreign government debt obligations involve special
risks. The issuer of the debt may be unable or unwilling to pay interest or
repay principal when due in accordance with the terms of such debt, and the Fund
may have limited legal resources in the event of default. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance.
FOREIGN SECURITIES. GLOBAL FUND may sell a security denominated in a
foreign currency and retain the proceeds in that foreign currency to use at a
future date (to purchase other securities denominated in that currency) or the
Fund may buy foreign currency outright to purchase securities denominated in
that foreign currency at a future date. Investing in foreign securities involves
more risk than investing in securities of U.S. companies. GLOBAL Fund currently
does not intend to hedge its foreign investments against the risk of foreign
currency fluctuations. Accordingly, changes in the value of foreign currencies
can significantly affect the Fund's share price, irrespective of developments
relating to the issuers of securities held by the Fund. In addition, the Fund
will be affected by changes in exchange control regulations and fluctuations in
the relative rates of exchange between the currencies of different nations, as
well as by economic and political developments. Other risks involved in foreign
securities include the following: there may be less publicly available
information about foreign companies comparable to the reports and ratings that
are published about companies in the United States; foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies;
11
some foreign stock markets have substantially less volume than U.S. markets, and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies; there may be less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than exist in the United States; and there may be the possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could affect assets of the GLOBAL FUND held in
foreign countries.
GLOBAL FUND may also invest in the securities of issuers in less developed
foreign countries. The Fund's investments in emerging markets include
investments in countries whose economies or securities markets are not yet
highly developed. Special considerations associated with these investments (in
addition to the considerations regarding foreign investments generally) may
include, among others, greater political uncertainties, an economy's dependence
on revenues from particular commodities or on international aid or development
assistance, currency transfer restrictions, a limited number of potential buyers
for such securities and delays and disruptions in securities settlement
procedures.
HIGH YIELD SECURITIES-RISK FACTORS. BLUE CHIP FUND, TOTAL RETURN FUND and
GROWTH & INCOME FUND may invest in high yield, high risk securities (commonly
referred to as "junk bonds") ("High Yield Securities"). High Yield Securities
are subject to greater risks than those that are present with investments of
higher grade securities, as discussed below. These risks also apply to
lower-rated and certain unrated convertible securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. Debt obligations,
including convertible debt securities, rated lower than Baa by Moody's or BBB by
S&P, commonly referred to as "junk bonds" are speculative and generally involve
a higher risk or loss of principal and income than higher-rated securities. 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 significant 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 the Fund's net
asset value. Further, if the issuer of a security owned by the Fund defaults,
the 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, the Fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if the Fund experiences unexpected net redemptions in
a rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which Fund expenses could be allocated and in a reduced rate of return for the
Fund. While it is impossible to protect entirely against this risk,
diversification of the Fund's portfolio and the Adviser's careful analysis of
prospective portfolio securities helps to minimize the impact of a decrease in
value of a particular security or group of securities in the 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
12
economic expansion. At times in the past, the prices of many lower-rated debt
securities have 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 the Fund's ability to sell such securities at
reasonable prices 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.
CREDIT RATINGS. The credit ratings issued by credit rating services
may not fully reflect the true risks of an investment. For example, credit
ratings typically evaluate the safety of principal and interest payments, not
market value risk, of High Yield Securities. Also, credit rating agencies may
fail to change on a timely basis a credit rating to reflect changes in economic
or company conditions that affect a security's market value.
LIQUIDITY AND VALUATION. Lower-rated bonds are typically traded
among a smaller number of broker-dealers than in a broad secondary market.
Purchasers of High Yield Securities tend to be institutions, rather than
individuals, which is a factor that further limits the secondary market. To the
extent that no established retail secondary market exists, many High Yield
Securities may not be as liquid as higher-grade bonds. A less active and thinner
market for High Yield Securities than that available for higher quality
securities may result in more volatile valuations of the 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 or Trustees, as
applicable (hereinafter referred to as the "Board" or "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.
LOANS OF PORTFOLIO SECURITIES. While they have no present intention of
doing so in the coming year, GROWTH & INCOME FUND, UTILITIES INCOME FUND, GLOBAL
FUND, BLUE CHIP FUND and TOTAL RETURN 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
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.
13
MONEY MARKET INSTRUMENTS. Each Fund may invest in money market
instruments. Investments in commercial paper are limited to obligations rated
Prime-1 by Moody's or A-1 by S&P. Commercial paper includes notes, drafts, or
similar instruments payable on demand or having a maturity at the time of
issuance not exceeding nine months, exclusive of days of grace or any renewal
thereof. Investments in certificates of deposit are made only with domestic
institutions with assets in excess of $500 million.
MORTGAGE-BACKED SECURITIES. BLUE CHIP FUND, TOTAL RETURN FUND, GROWTH &
INCOME FUND, UTILITIES INCOME FUND and MID-CAP OPPORTUNITY 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, generally represent both principal and interest. Although the
underlying mortgage loans are for specified periods of time, such as twenty to
thirty years, the borrowers can, and typically do, repay them sooner. Thus, the
security holders frequently receive prepayments of principal, in addition to the
principal which is part of the regular monthly payments. A borrower is more
likely to prepay a mortgage which bears a relatively high rate of interest.
Thus, in times of declining interest rates, some higher yielding mortgages might
be repaid resulting in larger cash payments to a Fund, and the Fund will be
forced to accept lower interest rates when that cash is used to purchase
additional securities.
Interest rate fluctuations may significantly alter the average maturity of
mortgage-backed securities by changing the rates at which homeowners refinance
mortgages. 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. In the case of GNMA
Certificates, 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
14
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.
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.
MUNICIPAL BONDS. TOTAL RETURN FUND may invest in municipal bonds.
Municipal bonds are debt obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, generally to
obtain funds for various public purposes and have a time to maturity, at
issuance, of more than one year. The two principal classifications of municipal
bonds are "general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith and credit for the payment of
principal and interest. Revenue bonds generally are payable only from revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special tax or other specific revenue source. There are
variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields on municipal bonds depend on, among other things, general money market
conditions, conditions of the municipal bond market, the size of a particular
offering, the maturity of the obligation and the rating of the issuer.
15
Generally, the value of municipal bonds varies inversely to changes in interest
rates. See Appendix A for a description of municipal bond ratings. Distributions
of interest income from municipal bonds in the Fund's portfolio will be taxable
to shareholders the same as distributions of interest income from other
securities held by the Fund. See "Taxes."
PREFERRED STOCK. Each Fund may invest in preferred stock. A preferred
stock is a security which has a blend of the characteristics of a bond and
common stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a bond and,
unlike common stock, its participation in the issuer's growth may be limited.
Preferred stock has preference over common stock in the receipt of dividends and
in any residual assets after payment to creditors should the issuer be
dissolved. Although the dividend is set at a fixed annual rate, in some
circumstances it can be changed or omitted by the issuer.
REPURCHASE AGREEMENTS. While each Fund has no present intention of doing
so in the coming year, it may invest in 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, the Funds currently do
not 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
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 SECURITIES AND ILLIQUID INVESTMENTS. None of the Funds may
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 Fund's Board or the Adviser has
determined under Board-approved guidelines are liquid.
16
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. Securities that are freely marketable in the country where they are
principally traded, but would not be freely marketable in the United States,
will not be subject to this 15% limit. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such portfolio securities and a Fund might be unable to dispose of such
securities promptly or at reasonable prices.
Over-the-counter ("OTC") options and their underlying collateral are also
considered illiquid investments. UTILITIES INCOME FUND, BLUE CHIP FUND, AND
TOTAL RETURN FUND may invest in options though these Funds have no intention of
investing in options in the coming year. The assets used as cover for OTC
options written by a Fund would not be considered illiquid unless the OTC
options are sold to qualified dealers who agree that a Fund may repurchase any
OTC option it writes at a maximum price to be calculated by a formula set forth
in the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option
U.S. GOVERNMENT OBLIGATIONS. BLUE CHIP FUND, TOTAL RETURN FUND, GROWTH
& INCOME FUND and UTILITIES INCOME FUND may invest in U.S. Government
Obligations. U.S. Government Obligations include: (1) U.S. Treasury
obligations (which differ only in their interest rates, maturities and times
of issuance), and (2) obligations issued or guaranteed by U.S. Government
agencies and instrumentalities that are backed by the full faith and credit
of the United States (such as securities issued by the FHA, GNMA, the
Department of Housing and Urban Development, the Export-Import Bank, the
General Services Administration and the Maritime Administration and certain
securities issued by the FMHA and the Small Business Administration). The
range of maturities of U.S. Government Obligations is usually three months to
thirty years.
17
UTILITIES INDUSTRIES. The UTILITIES INCOME FUND invests primarily in
utilities companies. Many utilities companies, especially electric and gas and
other energy-related utilities companies, have historically been subject to the
risk of increases in fuel and other operating costs, changes in interest rates
on borrowings for capital improvement programs, changes in applicable laws and
regulations, and costs and operating constraints associated with compliance with
environmental regulations.
In recent years, regulatory changes in the United States have increasingly
allowed utilities companies to provide services and products outside their
traditional geographical areas and lines of business, creating new areas of
competition with the utilities industries. This trend toward deregulation and
the emergence of new entrants have caused non-regulated providers of utilities
services to become a significant part of the utilities industries. The Adviser
believes that the emergence of competition and deregulation will result in
certain utilities companies being able to earn more than their traditional
regulated rates of return, while others may be forced to defend their core
business from increased competition and may be less profitable.
Certain utilities, especially gas and telephone utilities, have in recent
years been affected by increased competition, which could adversely affect the
profitability of such utilities companies. In addition, expansion by companies
engaged in telephone communication services of their non-regulated activities
into other businesses (such as cellular telephone services, data processing,
equipment retailing, computer services and financial services) has provided the
opportunity for increases in earnings and dividends at faster rates than have
been allowed in traditional regulated businesses. However, technological
innovations and other structural changes also could adversely affect the
profitability of such companies. Although the Adviser seeks to take advantage of
favorable investment opportunities that may arise from these structural changes,
there can be no assurance that the Fund will benefit from any such changes.
Foreign utilities companies may be more heavily regulated than U.S.
utilities companies, which may result in increased costs or otherwise adversely
affect the operations of such companies. The securities of foreign utilities
companies also have lower dividend yields than U.S. utilities companies. The
Fund's investments in foreign issuers may include recently privatized
enterprises, in which the Fund's participation may be limited or otherwise
affected by local law. There can e no assurance that governments with
privatization programs will continue such programs or that privatization will
succeed in such countries.
Because securities issued by utilities companies are particularly
sensitive to movement in interest rates, the equity securities of such companies
are more affected by movements in interest rates than are the equity securities
of other companies.
Each of these risks could adversely affect the ability and inclination of
public utilities companies to declare or pay dividends and the ability of
holders of common stock, such as UTILITIES INCOME FUND, to realize any value
from the assets of the company upon liquidation or bankruptcy.
WARRANTS. Each Fund except BLUE CHIP 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.
18
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.
WHEN-ISSUED SECURITIES. GROWTH & INCOME FUND, UTILITIES INCOME FUND AND
TOTAL RETURN FUND may invest up to 10%, and MID-CAP OPPORTUNITY FUND and GLOBAL
FUND may invest up to 5%, of each 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 the value of the account is 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 the sale of the
when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities a Fund is committed to purchase. Sale of
securities in the segregated account or sale of the when-issued securities may
cause the realization of a capital gain or loss.
ZERO COUPON AND PAY-IN-KIND SECURITIES. MID-CAP OPPORTUNITY FUND,
UTILITIES INCOME FUND and TOTAL RETURN 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 each year on zero coupon securities and the "interest" on pay-in-kind
securities must be accounted for by the Fund that holds the securities for
purposes of determining the amount it must distribute that year to continue to
qualify for tax treatment as a regulated investment company. See "Taxes." Thus,
a Fund may be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from a Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. 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.
19
FUTURES AND OPTIONS STRATEGIES
GLOBAL FUND is the only Fund that currently anticipates using financial
futures or options as part of its investment strategy. Other Funds that are
authorized to purchase and sell futures and option contracts but at this time
have no intention of doing so for the coming year include: UTILITIES INCOME FUND
and TOTAL RETURN FUND which may purchase and sell futures contracts and options
on futures contracts to hedge their portfolios, and UTILITIES INCOME FUND, BLUE
CHIP FUND, and TOTAL RETURN FUND which may purchase and sell options on
securities and indices to enhance income. Certain special characteristics of and
risks associated with using these instruments are discussed below. In addition
to the investment guidelines (described below) adopted by each Fund's Board to
govern a Fund's investments in futures and options, use of these instruments is
subject to the applicable regulations of the Securities and Exchange Commission
("SEC"), the several options and futures exchanges upon which options and
futures contracts are traded and the Commodities Futures Trading Commission
("CFTC"). In addition, a Fund's ability to use these instruments will be limited
by tax considerations. See "Taxes."
To the extent that they participate in the options or futures markets, the
Funds will incur investment risks and transaction costs to which the Funds 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 Funds may leave the Funds in a worse
position than if such strategies were not used. The Funds might not employ any
of the strategies described below, and there can be no assurance that any
strategy will succeed. The use of these strategies involve certain special
risks, including (1) dependence on the Adviser's ability to predict correctly
movements in the direction of interest rates and securities prices; (2)
imperfect correlation between the price of options, futures contracts and
options thereon and movements in the prices of the securities being hedged; (3)
the fact that skills needed to use these strategies are different from those
needed to select portfolio securities; and (4) the possible absence of a liquid
secondary market for any particular instrument at any time.
FUTURES AND OPTIONS ON FUTURES STRATEGIES. GLOBAL FUND expects to use
stock index futures contracts and options thereon in anticipation of a
significant market or market sector advance. The purchase of a stock index
futures contract affords a hedge against not participating in such advance at a
time when the Fund is not fully invested. Such purchase of a futures contract
would serve as a temporary substitute for the purchase of individual stocks
which may then be purchased in a orderly fashion. Further, stock index futures
contracts and options thereon may be purchased to maintain a desired percentage
of the Fund invested in stocks in the event of a large cash flow into the Fund,
or to generate additional income from cash held by the Fund. Stock index futures
and options thereon may also be used to adjust country exposure. When the Fund
purchases a stock index futures contract on foreign stocks, an accompanying
foreign currency forward or foreign currency futures contract is executed to
provide the same currency exposure that would result from directly owning the
underlying foreign stocks. Failure to obtain such currency exposure would
constitute a hedge back into U.S. dollars with respect to such index futures
positions. The value of the Fund's futures positions shall not exceed 5% of the
total assets in 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 Funds are required to deposit with their custodian in a segregated
20
account in the name of the futures broker through which the transaction is
effected and amount of cash, U.S. Government securities or other liquid,
high-grade debt instruments generally equal to 3%-5% 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 a Fund upon
termination of the transaction, assuming all obligations have been satisfied.
Under certain circumstances, such as periods of high volatility, a Fund may be
required by an exchange to increase the level of its initial margin payment.
Additionally, initial margin requirements may be increased generally in the
future by regulatory action. Subsequent payments, called "variation margin," to
and from the broker, are made on a daily basis as the value of the futures
position varies, a process known as "marking to market." Variation margin does
not involve borrowing to finance the futures transactions, but rather represents
a daily settlement of a Fund's obligation to or from a clearing organization. A
Fund is also obligated to make initial and variation margin payments when it
writes options on futures contracts.
Holders and writers of futures positions and options thereon can enter
into offsetting closing transactions, by selling or purchasing, respectively, a
futures position or options position with the same terms as the position or
option held or written. Positions in futures contracts and options thereon may
be closed only on an exchange or board of trade providing a secondary market for
such futures or options.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or related option may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
prices could move to the daily limit for several consecutive trading days with
little or no trading and thereby prevent prompt liquidation of unfavorable
positions. In such event, it may not be possible for a Fund to close a position
and, in the event of adverse price movements a Fund would have to make daily
cash payments of variation margin (except in the case of purchased options).
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
Successful use by a Fund of futures contracts and related options will
depend upon the Adviser's ability to predict movements in the direction of the
overall securities, currency and interest rate markets, which requires different
skills and techniques than predicting changes in the prices of individual
securities. 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 underlying instruments or currencies. In addition, if a Fund has
insufficient cash, it may have to sell assets from its portfolio to meet daily
variation margin requirements. Any such sale of assets may or may not be made at
prices that reflect the rising market. Consequently, a Fund may need to sell
assets at a time when such sales are disadvantageous to a Fund. If the price of
the futures contract or related option moves more than the price of the
21
underlying instruments or currencies, a Fund will experience either a loss or a
gain on the futures contract or related option that may or may not be completely
offset by movement in the price of the instruments or currencies that are the
subject of the hedge.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between price movements in the futures or related
option position and the securities or currencies 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 or currencies because of price
distortions in the futures market. As a result, a correct forecast of general
market trends may not result in successful hedging through the use of futures
contracts and related options over the short term.
Positions in futures contracts and related options may be closed out only
on the exchange or board of trade that provides a secondary market for such
futures contracts or related options. Although a Fund intends to purchase or
sell futures contracts and related options only on the exchanges or boards of
trade where there appears to be a liquid secondary market for such futures and
related options, there is no assurance that such a market will exist for any
particular contract or option at any particular time. In such event, it may not
be possible to close a futures or option position and, in the event of adverse
price movements, a Fund would continue to be required to make variation margin
payments.
Options on futures contracts have a limited life. The ability to establish
and close out options on futures will be subject to the development and
maintenance of liquid secondary markets on the relevant exchanges or boards of
trade. There can be no certainty that liquid secondary markets for all options
on futures contracts will develop.
Purchasers of options on futures contracts pay a premium in cash at the
time of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on a futures contract, however, must post initial margin and
are subject to additional margin calls that could be substantial in the event of
adverse price movements, In addition, although the maximum amount at risk when s
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 s 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 securities or currencies being hedged.
A 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, a Fund also may save on commissions by
using futures and related options as a hedge rather than buying or selling
individual securities or currencies in anticipation or as a result of market
movements.
SPECIAL RISKS RELATED TO FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS. Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. Further, settlement
of a foreign currency futures contract may occur within the country issuing the
underlying currency. In that case, a Fund must accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign restrictions
or regulations regarding the maintenance of foreign banking arrangements by U.S.
residents, and may be required to pay any fees, taxes or charges associated with
such delivery that are assessed in the issuing country.
22
Options on foreign currency futures contracts may involve certain
additional risks. Trading of such options is relatively new. The ability to
establish and close out positions on such options is subject to the maintenance
of a liquid secondary market. To reduce this risk, a Fund will not purchase or
write options on foreign currency futures contracts unless and until, in the
Adviser's opinion, the market for such options has developed sufficiently that
the risks in connection with such options are not greater than the risks in
connection with transactions in the underlying futures contracts. Compared to
the purchase or sale of foreign currency futures contracts, the purchase of call
or put options thereon involves less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a foreign currency futures contract would result in a loss, such as
when there is no movement in the price of the underlying currency or futures
contract.
FUTURES GUIDELINES. To the extent that a Fund enters into futures
contracts or options thereon other than for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums required to
establish these positions (excluding the in-the-money amount for options that
are in-the-money at the time of purchase) will not exceed 5% of the liquidation
value of the Fund's portfolio, after taking into account unrealized profits and
losses on any contracts into which the Fund has entered. This policy does not
limit a Fund's assets at risk to 5%. The value of all futures sold will not
exceed the total market value of a Fund's portfolio.
COVER FOR FUTURES AND OPTIONS STRATEGIES. No Fund will use leverage in its
futures and options strategies. No Fund will write options or purchase or sell
futures contracts unless it owns either (1) an offsetting ("covered") position
in securities, or other options or futures contracts or (2) cash and liquid
securities with a value sufficient at all times to cover its potential
obligations. A Fund will comply with guidelines established by the SEC with
respect to coverage of such instruments by mutual funds and, if required, will
set aside cash and liquid 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 a Fund's assets could
impede portfolio management and decrease a Fund's liquidity.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. A Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If a Fund wishes to terminate its obligation to sell
securities under a call option it has written, a 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, a Fund may write an
option of the same series, as the option held; this is known as a closing sale
transaction. Closing transactions essentially permit a Fund to realize profits
or limit losses on its options positions prior to the exercise or expiration of
the option.
The value of an option position will reflect, among other things, the
current market price of the underlying security or 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 index and general
market conditions. For this reason, the successful use of options depends upon
23
the Adviser's ability to forecast the direction of price fluctuations in the
underlying securities or, in the case of index options, fluctuations in the
market sector represented by the index selected.
Options normally have expiration dates of up to nine months. Unless an
option purchased by a Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the amount of
the premium paid and any transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. The ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market. Although a 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 a Fund will enter into OTC options only with dealers
that agree to enter into, and that are expected to be capable of entering into,
closing transactions with a Fund, there is no assurance that a Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
In the event of insolvency of the opposite party, a Fund may be unable to
liquidate an OTC option. Accordingly, it may not be possible to effect closing
transactions with respect to certain options, with the result that a Fund would
have to exercise those options that it has purchased in order to realize any
profit. With respect to options written by a Fund, the inability to enter into a
closing transaction may result in material losses to a Fund. For example,
because a Fund must maintain a covered position or segregate assets with respect
to any call option it writes, a Fund may not sell the underlying assets used to
cover an option during the period it is obligated under the option. This
requirement may impair a Fund's ability to sell a portfolio security or make an
investment at a time when such a sale or investment might be advantageous.
Index options are settled exclusively in cash. If a Fund purchases an
option on an index, the option is settled based on the closing value of the
index on the exercise date. Thus, a holder of an 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.
A Fund's activities in the options markets may result in a higher
portfolio turnover rate and additional brokerage costs; however, a Fund also may
save on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
FORWARD CURRENCY CONTRACTS STRATEGIES. GROWTH & INCOME FUND, SPECIAL
SITUATIONS FUND, TOTAL RETURN FUND and GLOBAL FUND may use forward currency
contracts to protect against uncertainty in the level of future foreign currency
exchange rates. The GLOBAL FUND currently is the only Fund that intends to use
this authority in the coming year. The Funds will not speculate with forward
currency contracts or foreign currency exchange rates.
While the Funds generally do not attempt to hedge its foreign security
holdings against the risk of changes in foreign currency exchange rates, it will
24
use forward currency contracts to hedge cash positions during the settlement of
transactions and in between transactions. For example, when a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when a Fund anticipates the receipt in a foreign currency of
dividend or interest payments on a security that it holds, a Fund may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such payment, as the case may be, by entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars or foreign currency, of the
amount of foreign currency involved in the underlying transaction. A Fund will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received. When the Fund uses foreign currency contracts in
connection with stock index futures contracts, as noted previously it is doing
so to replicate the experience of owning the foreign securities and not to hedge
against foreign currency fluctuations.
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 currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency a Fund is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward currency contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing a Fund
to sustain losses on these contracts and transactions costs. Unless a Fund's
obligations under a forward contract are covered with positions in securities,
currencies or other forward contracts, a Fund will enter into a forward contract
only if the Fund maintains cash or liquid assets in a segregated account in an
amount not less than the value of a 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 a Fund to
sell a currency, a 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 a Fund will obtain, on the same maturity date, the same amount
of the currency that it is obligated to deliver. Similarly, a Fund may close out
a forward contract requiring it to purchase a specified currency by entering
into a second contract entitling it to sell the same amount of the same currency
on the maturity date of the first contract. A Fund would realize a gain or loss
as a 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 the Fund will be able to
enter into new or offsetting forward currency contracts. Forward currency
contracts also involve a risk that the other party to the contract may fail to
25
deliver currency or pay for currency when due, which could result in substantial
losses to a Fund. The cost to a Fund of engaging in forward currency contracts
varies with factors such as the currencies involved, the length of the contract
period and the market conditions then prevailing. Because forward currency
contracts are usually entered into on a principal basis, no fees or commissions
are involved.
PORTFOLIO TURNOVER
Although each Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold from time to time without regard to
the length of time they have been held when, in the opinion of the Adviser,
investment considerations warrant such action. Portfolio turnover rate is
calculated by dividing (1) the lesser of purchases or sales of portfolio
securities for the fiscal year by (2) the monthly average of the value of
portfolio securities owned during the fiscal year. A 100% turnover rate would
occur if all the securities in a Fund's portfolio, with the exception of
securities whose maturities at the time of acquisition were one year or less,
were sold and either repurchased or replaced within one year. A high rate of
portfolio turnover (100% or more) generally leads to higher transaction costs
and may result in a greater number of taxable transactions. See "Allocation of
Portfolio Brokerage."
For the fiscal year ended September 30, 1998, the portfolio turnover rate
for GROWTH & INCOME FUND, MID-CAP OPPORTUNITY FUND, UTILITIES INCOME FUND, BLUE
CHIP FUND, SPECIAL SITUATIONS FUND, TOTAL RETURN FUND and GLOBAL FUND was 36%,
102%, 83%, 71%, 70%, 111% and 82%, respectively. For the fiscal year ended
September 30, 1999, the portfolio turnover rate for GROWTH & INCOME FUND,
MID-CAP OPPORTUNITY FUND, UTILITIES INCOME FUND, BLUE CHIP FUND, SPECIAL
SITUATIONS FUND, TOTAL RETURN FUND and GLOBAL FUND was __%, __%, __%, __%, __%,
__% and __%, respectively.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
respective Fund and, unless identified as non-fundamental policies, may not be
changed without the affirmative vote of a majority of the outstanding voting
securities of that Fund, voting separately from any other Fund. 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 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 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, 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.
26
(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) Concentrate its investments in any particular industry.
(5) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (1) above, provided the Fund maintains asset coverage of at least 300%
for all such borrowings.
(6) 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.
(7) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make 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; the Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Directors.
(2) Make investments for the purpose of exercising control or management.
(3) Purchase any securities on margin.
(4) Purchase or sell portfolio securities from or to the Adviser or any
director or officer thereof or of SERIES FUND II, as principals.
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.
27
(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.
(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) Write, purchase or sell options (puts, calls or combinations thereof).
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).
28
(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) Concentrate its investments in any particular industry, except that
the Fund may concentrate its investments in securities of companies in the
public utilities industry.
(5) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (1) above, provided the Fund maintains asset coverage of at least 300%
for all such borrowings.
(6) 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.
(7) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make investments for the purpose of exercising control or management.
(9) Purchase any securities on margin, except the Fund may make deposits
of margin in connection with futures contracts and options.
(10) Make loans, except loans of portfolio securities and repurchase
agreements.
(11) Purchase or sell portfolio securities from or to the Adviser or any
director or officer thereof or of SERIES FUND II, as principals.
(12) 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; the Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Directors.
(2) Make short sales of securities, except short sales "against the box."
29
BLUE CHIP FUND will not:
--------------
(1) Make short sales of securities to maintain a short position.
(2) Issue senior securities, borrow money or pledge its assets except
that the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 5% (taken at the lower of cost or current value) of its
total assets (not including the amount borrowed) and pledge its assets to secure
such borrowings.
(3) Make loans, except loans of portfolio securities (limited to 10% of
the Fund's total assets).
(4) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (1) as to 75% of the Fund's
total assets (taken at current value), more than 5% of such assets would then be
invested in securities of a single issuer, or (2) 25% or more of the Fund's
total assets (taken at current value) would be invested in a single industry.
(5) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(6) Pledge, mortgage or hypothecate any of its assets except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (2) above, provided the Fund maintains asset coverage of at least 300%
for pledged assets.
(7) Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities which are
secured by real estate and securities of companies which invest or deal in real
estate.
(8) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(9) Make investments for the purpose of exercising control or management.
(10) Purchase any securities on margin.
(11) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of Series Fund, as principals.
(12) Invest in any securities of any issuer if, to the knowledge of Series
Fund, any officer, director or Trustee of Series Fund or of the Adviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers, directors or Trustees who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
The following investment restriction is not fundamental and may be changed
without shareholder approval. The investment restriction provides that the Fund
will not:
30
Purchase any security if, as a result, more than 15% of its net assets
would be invested in illiquid securities, including repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
any securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees, or the
Fund's investment adviser acting pursuant to authority delegated by the
Trustees, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended, or any other applicable rule, and therefore that such securities are
not subject to the foregoing limitation; the Adviser will monitor the liquidity
of such restricted securities under the supervision of the Board of Trustees.
SPECIAL SITUATIONS FUND will not:
-----------------------
(1) Make short sales of securities "against the box" in excess of 10% of
the Fund's total assets.
(2) Issue senior securities or borrow money, except that the Fund may
borrow money from a bank for temporary or emergency purposes in amounts not
exceeding 5% (taken at the lower of cost or current value) of its total assets
(not including the amount borrowed).
(3) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) as to 75% of the Fund's
total assets (taken at current value), more than 5% of such assets would then be
invested in securities of a single issuer, or (ii) 25% or more of the Fund's
total assets (taken at current value) would be invested in a single industry.
(4) Purchase more than 10% of the outstanding voting securities of any
one issuer or more than 10% of any class of securities of one issuer (all debt
and all preferred stock of an issuer are each considered a single class for this
purpose).
(5) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
paragraph (2) above, provided the Fund maintains asset coverage of at least 300%
for all such borrowings.
(6) Buy or sell commodities or commodity contracts including futures
contracts, or real estate or interests in real estate, although it may purchase
and sell securities which are secured by real estate, securities of companies
which invest or deal in real estate and interests in real estate investment
trusts.
(7) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make investments for the purpose of exercising control or management.
(9) Purchase any securities on margin.
(10) Make loans, except through repurchase agreements.
(11) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of Series Fund, as principals.
31
(12) Invest in any securities of any issuer if, to the knowledge of Series
Fund, any officer, director or Trustee of Series Fund or of the Adviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers, directors or Trustees who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. These investment restrictions provide that
the Fund will not:
(1) Invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days or in other illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions as to resale. Securities that have
legal or contractual restrictions as to resale but have a readily available
market are not deemed illiquid for purposes of this limitation; the Adviser will
monitor the liquidity of such restricted securities under the supervision of the
Board of Trustees.
(2) Write, purchase or sell options (puts, calls or combinations
thereof).
TOTAL RETURN FUND will not:
-----------------
(1) Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 5% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed 5% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced within three
business days to the extent necessary to comply with the 5% limitation. This
policy shall not prohibit deposits of assets to provide margin or guarantee
positions in connection with transactions in options, futures contracts, swaps,
forward contracts, and other derivative instruments or the segregation of assets
in connection with such transactions.
(2) Issue senior securities.
(3) Make loans, except loans of portfolio securities (limited to 10% of
the Fund's total assets).
(4) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) as to 75% of the Fund's
total assets (taken at current value), more than 5% of such assets would then be
invested in securities of a single issuer, or (ii) 25% or more of the Fund's
total assets (taken at current value) would be invested in a single industry.
(5) Purchase more than 10% of the outstanding voting securities of any one
issuer or more than 10% of any class of securities of one issuer (all debt and
all preferred stock of an issuer are each considered a single class for this
purpose).
(6) Buy or sell real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and securities of
companies which invest or deal in real estate, including limited partnership
interests.
32
(7) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(8) Make investments for the purpose of exercising control or management.
(9) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of Series Fund, as principals.
(10) Invest in any securities of any issuer if, to the knowledge of Series
Fund, any officer, director or Trustee of Series Fund or of the Adviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers, directors or Trustees who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be
changed without shareholder approval. These investment restrictions provide that
the Fund will not:
(1) Purchase any security if, as a result, more than 15% of its net
assets would be invested in illiquid securities, including repurchase agreements
not entitling the holder to payment of principal and interest within seven days
and any securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market. The
Trustees, or the Fund's investment adviser acting pursuant to authority
delegated by the Trustees, may determine that a readily available market exists
for securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended, or any other applicable rule, and therefore that such
securities are not subject to the foregoing limitation; the Adviser will monitor
the liquidity of such restricted securities under the supervision of the Board
of Trustees.
(2) Purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this restriction shall not prevent the Fund from
purchasing or selling options, futures contracts, caps, floors and other
derivative instruments, engaging in swap transactions or investing in securities
or other instruments backed by physical commodities).
(3) Enter into futures contracts or options on futures contracts for
non-bona fide hedging purposes if immediately thereafter the aggregate margin
deposits on all outstanding futures contracts positions held by the Fund and
premiums paid on outstanding options on futures contracts, after taking into
account unrealized profits and losses, would exceed 5% of the market value of
the total assets of the Fund, or enter into any futures contracts or options on
futures contracts if the aggregate amount of the Fund's commitments under
outstanding futures contracts positions and options on future contracts written
by the Fund would exceed the market value of the total assets of the Fund.
(4) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
provided the Fund maintains asset coverage of at least 300% for pledged assets;
provided, however, this limitation will not prohibit escrow, collateral or
margin arrangements in connection with the Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
33
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
GLOBAL FUND will not:
-----------
(1) Borrow money, except from banks and only for temporary or emergency
purposes and then in amounts not in excess of 5% of its total assets taken at
cost or value, whichever is the lesser.
(2) Make loans to other persons, except that the Fund's Board of
Directors may, on the request of broker-dealers or other institutional investors
that it deems qualified, authorize the Fund to lend securities for the purpose
of covering short positions of the borrower, but only when the borrower pledges
cash collateral to the Fund and agrees to maintain such collateral so that it
amounts at all times to at least 100% of the value of the securities. Such
security loans will not be made if as a result the aggregate of such loans
exceed 10% of the value of the Fund's total assets. The purchase of a portion of
an issue of publicly distributed debt securities is not considered the making of
a loan. This restriction is not intended to prohibit the Fund from investing in
repurchase agreements.
(3) With respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
(4) Invest more than 15% of the value of its total assets in warrants.
(5) Invest more than 25% of the value of its total assets in securities
of foreign issuers, other than American Depository Receipts, that are not listed
on a recognized U.S. or foreign securities exchange, including no more than 10%
of the value of its assets in securities with a limited trading market.
(6) Invest 25% or more of the value of its total assets in a particular
industry at one time. The Fund, however, is not limited in the amount of its
total assets that may be invested in any particular country.
(7) Underwrite securities of other issuers, except to the extent that the
purchase and sale of restricted securities may be deemed to be underwriting.
(8) Purchase or sell real estate, commodities or commodity contracts.
However, the Fund may purchase interests in real estate investment trusts whose
securities are registered under the 1933 Act and are readily marketable, and may
purchase or sell options on securities, securities indices and foreign
currencies, stock index futures, interest rate futures and foreign currency
futures, as well as options on such futures contracts.
(9) Invest in companies for the purpose of exercising control or
management.
(10) Purchase any securities on margin or sell any securities short,
except to make margin deposits in connection with the use of options, futures
contracts and options on futures contracts.
34
(11) Purchase or retain securities of any issuer if any officer or
Director of the Fund or the Adviser owns beneficially more than 1/2 of 1% of the
securities of such issuer and, together such officers and Directors own more
than 5% of the securities of such issuer.
(12) Purchase or sell portfolio securities from or to the Adviser or any
Director or officer thereof or of the Fund, as principals.
(13) Buy or sell puts, calls, straddles or spreads, except with respect
to options on securities, securities indices and foreign currencies or on
futures contracts.
(14) Issue senior securities.
(15) Invest more than 5% of the value of its total assets in securities
of issuers that have been in business for less than three years.
(16) Invest in securities of other domestic investment companies, except
in connection with a merger of another investment company, although the Fund may
purchase the securities of foreign investment companies or investment trusts in
the open market where no commissions or profits accrue to a sponsor or dealer
other than customary broker's commission, provided such securities do not have
an aggregate value (at cost) of more than 10% of the value of the Fund's total
net assets. Investment in securities of other investment companies may cause a
duplication of management and/or advisory fees.
The following investment restrictions are not fundamental and may be
changed without prior shareholder approval. These restrictions provide that the
Fund may not.
(1) Purchase any security if, as a result, more than 15% of its net
assets would be invested in illiquid securities, including repurchase agreements
not entitling the holder to payment of principal and interest within seven days
and any securities that are illiquid by virtue of legal or contractual
restrictions on resale or the absence of a readily available market. The
Directors, or the Fund's investment adviser acting pursuant to authority
delegated by the Directors, may determine that a readily available market exists
for securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended, or any other applicable rule, and therefore that such
securities are not subject to the foregoing limitation.
(2) Pledge, mortgage or hypothecate any of its assets, except that the
Fund may pledge its assets to secure borrowings made in accordance with
fundamental investment restriction (1) above, provided the Fund maintains asset
coverage of at least 300% for all such borrowings.
DIRECTORS/TRUSTEES AND OFFICERS
The following table lists the Directors and executive officers of SERIES
FUND II, SERIES FUND AND GLOBAL FUND, 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*+ (74), President and Director. Chairman of the Board and
Director, Administrative Data Management Corp. ("ADM"), FIMCO, Executive
Investors Management Company, Inc. ("EIMCO"), First Investors Asset Management
35
Company, Inc. ("FIAMCO"), First Investors Corporation ("FIC"), Executive
Investors Corporation ("EIC") and First Investors Consolidated Corporation
("FICC").
KATHRYN S. HEAD*+ (43), Director, 581 Main Street, Woodbridge, NJ 07095.
President and Director, FICC, ADM and FIMCO; Vice President, Chief Financial
Officer and Director, FIC and EIC; President, EIMCO; Chairman, President and
Director, First Financial Savings Bank, S.L.A.
LARRY R. LAVOIE* (52), Director. Assistant Secretary, ADM, EIC, EIMCO, FIAMCO,
FICC and FIMCO; President, FIAMCO; Secretary and General Counsel, FIC.
REX R. REED** (77), Director, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN** (78), Director, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
NANCY SCHAENEN** (68), Director, 56 Midwood Terrace, Madison, NJ 07940. Trustee,
Drew University and DePauw University.
JAMES M. SRYGLEY** (67), Director, 39 Hampton Road, Chatham, NJ 07982.
Principal, Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (67), Director and Chairman of the Board; Director, FIMCO,
FIC, FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (70), Director, 217 Upland Downs Road, Manchester Center,
VT 05255. Retired; formerly financial and planning executive with American
Telephone & Telegraph Company.
JOSEPH I. BENEDEK (42), Treasurer and Principal Accounting Officer, 581 Main
Street, Woodbridge, NJ 07095. Treasurer, FIMCO and EIMCO.
CONCETTA DURSO (64), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
PATRICIA D. POITRA (43), Vice President. Vice President, First Investors Series
Fund, First Investors U.S. Government Plus Fund and Executive Investors Trust;
Director of Equities, FIMCO.
CLARK D. WAGNER (40), Vice President. Vice President, First Investors
Multi-State Insured Tax Free Fund, Executive Investors Trust, First Investors
Series Fund, First Investors New York Insured Tax Free Fund, Inc. and First
Investors Government Fund, Inc.; Chief Investment Officer, FIMCO.
These Directors may be deemed to be "interested persons," as defined in the
1940 Act.
** These Directors are members of the Board's Audit Committee.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
The Directors and officers, as a group, owned less than 1% of either Class
A or Class B shares of each Fund.
36
All of the officers and Directors, except for Ms. Poitra and Mr. Wagner,
hold identical or similar positions with the other registered investment
companies in the First Investors Family of Funds. Mr. Head is also an officer
and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation and School Financial Management
Services, Inc. Ms. Head is also an officer and/or Director of First Investors
Life Insurance Company, First Investors Credit Corporation, School Financial
Management Services, Inc., First Investors Credit Funding Corporation, N.A.K.
Realty Corporation, Real Property Development Corporation, First Investors
Leverage Corporation and Route 33 Realty Corporation.
The following table lists compensation paid to the Directors of each Fund
for the fiscal year ended September 30, 1999.
TOTAL
COMPENSATION
FROM FIRST
AGGREGATE AGGREGATE AGGREGATE INVESTORS
COMPENSATION COMPENSATION COMPENSATION FAMILY OF
FROM FROM FROM FUNDS PAID TO
SERIES FUND II* SERIES FUND*++ GLOBAL FUND* DIRECTOR+++
James J. Coy** $0 $0 $0 $?
Roger L. Grayson*** $0 $0 $0 -0-
Glenn O. Head $0 $0 $0 -0-
Kathryn S. Head $0 $0 $0 -0-
Larry R. Lavoie+ $0 $0 $0 -0-
Rex R. Reed $0 $0 $0 $
Herbert Rubinstein $0 $ $0 $
Nancy Schaenen $0 $ $0 $
James M. Srygley $0 $ $0 $
John T. Sullivan $0 $0 $0 -0-
Robert F. Wentworth $0 $0 $0 $
- --------
* Compensation to officers and interested Directors of the Funds is paid by
the Adviser.
** On March 27, 1997, Mr. Coy resigned as a Director of the Funds. Mr. Coy
currently serves as an emeritus Director.
*** On August 20, 1998, Mr. Grayson resigned as a Director of the Funds.
+ On September 17, 1998, Mr. Lavoie was elected by the Board of Directors to
serve as a Director.
++ Does not include compensation with respect to the Insured Intermediate Tax
Exempt Fund.
+++ The First Investors Family of Funds consist of 15 separate registered
investment companies.
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
37
by each Fund's Board, 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 each Advisory Agreement, FIMCO shall supervise and manage each
Fund's investments, determine each Fund's portfolio transactions and supervise
all aspects of each Fund's operations, subject to review by the Directors. 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 each Fund and
assume certain expenses thereof, other than obligations or liabilities of the
Funds. An 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). Each Advisory Agreement also provides
that it will continue in effect, with respect to a Fund, for a period of over
two years only if such continuance is approved annually either by the 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 Agreements, each Fund is obligated to pay the Adviser
an annual fee, paid monthly, according to the following schedules:
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
GLOBAL FUND
Annual
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ------
Up to $250 million.......................................... 1.00%
In excess of $250 million up to $500 million................ 0.97
In excess of $500 million up to $750 million................ 0.94
Over $750 million........................................... 0.91
38
BLUE CHIP FUND, TOTAL RETURN FUND, SPECIAL SITUATIONS FUND
Annual
AVERAGE DAILY NET ASSETS RATE
- ------------------------ ------
Up to $200 million.......................................... 1.00%
In excess of $200 million up to $500 million................ 0.75
In excess of $500 million up to $750 million................ 0.72
In excess of $750 million up to $1.0 billion................ 0.69
Over $1.0 billion........................................... 0.66
The following tables reflect the advisory fees paid, advisory fees waived
and expenses reimbursed with respect to each Fund for the fiscal years ended
October 31, 1997, December 31, 1997, September 30, 1998 and September
30, 1999.
FISCAL YEAR ENDED 10/31/97
--------------------------
ADVISORY ADVISORY
FEES FEES EXPENSES
PAID WAIVED REIMBURSED
---- ------ ----------
MID-CAP OPPORTUNITY FUND $86,930 $28,977 $38,900
GROWTH & INCOME FUND 561,048 125,042 17,942
UTILITIES INCOME FUND 601,030 169,147 137,128
FISCAL YEAR ENDED 12/31/97
---------------------------
ADVISORY ADVISORY
FEES FEES EXPENSES
PAID WAIVED REIMBURSED
---- ------ ----------
BLUE CHIP FUND $2,451,280 $817,093 $-0-
SPECIAL SITUATIONS FUND 1,411,573 470,525 -0-
TOTAL RETURN FUND 474,344 158,115 -0-
GLOBAL FUND 2,883,822 -0- -0-
FISCAL YEAR ENDED 9/30/98
-------------------------
ADVISORY ADVISORY
FEES FEES EXPENSES
PAID WAIVED REIMBURSED
---- ------ ----------
MID-CAP OPPORTUNITY FUND $243,554 $81,184 $35,000
GROWTH & INCOME FUND $1,931,302 $0 $0
UTILITIES INCOME FUND $886,819 $0 $0
BLUE CHIP FUND $2,447,114 $375,000 $0
SPECIAL SITUATIONS FUND $1,215,398 $375,000 $0
TOTAL RETURN FUND $422,293 $140,764 $0
GLOBAL FUND $2,298,343 $0 $0
FISCAL YEAR ENDED 9/30/99
-------------------------
ADVISORY ADVISORY
FEES FEES EXPENSES
PAID WAIVED REIMBURSED
---- ------ ----------
MID-CAP OPPORTUNITY FUND $ $ $0
GROWTH & INCOME FUND $ $0 $0
UTILITIES INCOME FUND $ $0 $0
BLUE CHIP FUND $ $0 $0
SPECIAL SITUATIONS FUND $ $0 $0
TOTAL RETURN FUND $ $ $0
GLOBAL FUND $ $0 $0
39
The Adviser has an Investment Committee composed of Dennis T.
Fitzpatrick, George V. Ganter, Michael Deneka, David Hanover, Glenn O. Head,
Kathryn S. Head, Nancy W. Jones, Michael O'Keefe, Patricia D. Poitra, Clark
D. Wagner, and Matthew Wright. The Committee usually meets weekly to discuss
the composition of the portfolio of each Fund and to review additions to and
deletions from the portfolios.
First Investors Consolidated Corporation ("FICC") owns all of the
voting common stock of the Adviser and all of the outstanding stock of First
Investors Corporation and the Funds' transfer agent. Mr. Glenn O. Head
controls FICC and, therefore, controls the Adviser.
Prior to January 1, 1998, Wellington Management Company, LLP was the
subadviser to GROWTH & INCOME FUND. For the fiscal year ended October 31, 1997,
the Adviser paid Wellington Management Company, LLP fees of $489,484.
SUBADVISER. Wellington Management Company, LLP has been retained by the
Adviser and GLOBAL FUND as the investment subadviser to GLOBAL FUND under a
subadvisory agreement dated June 13, 1994 ("Subadvisory Agreement"). The
Subadvisory Agreement was approved by the Board of Directors of the Fund,
including a majority of Independent Directors in person at a meeting called for
such purpose and by a majority of the shareholders of the GLOBAL 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 GLOBAL FUND's Board of Directors or a majority of
the outstanding voting securities of the 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
GLOBAL FUND's Board of Directors or a vote of a majority of the outstanding
voting securities of the Fund or by the Subadvisor 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
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 0.400% of the average daily net assets of GLOBAL 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. This fee will
be computed daily and paid monthly. For the fiscal years ended December 31,
1997, September 30, 1998 and September 30, 1999, the Adviser paid the Subadviser
fees of $786,373, $623,514 and $_______, respectively
Each Fund bears all expenses of its operations other than those assumed by
the Adviser or Underwriter under the terms of its advisory or underwriting
agreements. Fund expenses include, but are not limited to: the advisory fee;
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of communicating to existing shareholders, including
preparing, printing and mailing prospectuses and shareholder reports to such
shareholders; and proxy and shareholder meeting expenses.
40
UNDERWRITER
SERIES FUND II, SERIES FUND AND GLOBAL FUND have 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. The Underwriting Agreement was
approved by each Fund's Board, 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 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, 1997, FIC received underwriting
commissions with respect to GROWTH & INCOME FUND, MID-CAP OPPORTUNITY FUND and
UTILITIES INCOME FUND of $2,689,581, $365,416 and $586,037, respectively. For
the same period, FIC allowed to unaffiliated dealers an additional $8,575 with
respect to GROWTH & INCOME FUND, $1,353 with respect to MID-CAP OPPORTUNITY FUND
and $770 with respect to UTILITIES INCOME FUND.
For the fiscal year ended December 31, 1997, FIC received underwriting
commissions with respect to BLUE CHIP FUND, SPECIAL SITUATIONS FUND, TOTAL
RETURN FUND AND GLOBAL FUND of $3,445,078, $1,787,009, $372,980 and $1,410,014,
respectively. or the same period, FIC allowed to unaffiliated dealers an
additional $22,793 with respect to BLUE CHIP FUND, $19,149 with respect to
SPECIAL SITUATIONS FUND, $0 with respect to TOTAL RETURN FUND and $5,856 with
respect to GLOBAL FUND.
For the fiscal year ended September 30, 1998, FIC received underwriting
commissions with respect to GROWTH & INCOME FUND, MID-CAP OPPORTUNITY FUND,
UTILITIES INCOME FUND, BLUE CHIP FUND, SPECIAL SITUATIONS FUND, TOTAL RETURN
FUND AND GLOBAL FUND of $3,063,270, $583,003, $766,650, $2,563,743, $1,334,822,
$398,189, and $814,076, respectively. For the same period, FIC allowed to
unaffiliated dealers an additional $12,781 with respect to GROWTH & INCOME FUND,
$3,970 with respect to MID-CAP OPPORTUNITY FUND, $1,729 with respect to
UTILITIES INCOME FUND, $10,859 with respect to BLUE CHIP FUND, $8,944 with
respect to SPECIAL SITUATIONS FUND, $472 with respect to TOTAL RETURN FUND and
$2,883 with respect to GLOBAL FUND.
For the fiscal year ended September 30, 1999, FIC received underwriting
commissions with respect to GROWTH & INCOME FUND, MID-CAP OPPORTUNITY FUND,
UTILITIES INCOME FUND, BLUE CHIP FUND, SPECIAL SITUATIONS FUND, TOTAL RETURN
FUND AND GLOBAL FUND of $______, $_______, $_______, $________, $__________,
$_________, and $_______, respectively. For the same period, FIC allowed to
unaffiliated dealers an additional $______ with respect to GROWTH & INCOME FUND,
$_____ with respect to MID-CAP OPPORTUNITY FUND, $_____ with respect to
UTILITIES INCOME FUND, $______ with respect to BLUE CHIP FUND, $_____ with
respect to SPECIAL SITUATIONS FUND, $___ with respect to TOTAL RETURN FUND and
$_____ with respect to GLOBAL FUND.
41
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, SERIES FUND AND
GLOBAL FUND pursuant to Rule 12b-1 under the 1940 Act ("Class A Plan" and "Class
B Plan" and, collectively, "Plans"), each Fund is authorized to compensate the
Underwriter for certain expenses incurred in the distribution of that Fund's
shares and the servicing or maintenance of existing Fund shareholder accounts.
Each Class A Plan is a compensation plan exempt for the Global Fund Class A Plan
which is a reimbursement plan. Each Class B Plan is a compensation plan.
Each Plan was approved by each Fund's Board, 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 by
either the Board 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 by a vote of a majority of the
applicable Fund's Independent Directors or by a vote of a majority of the
outstanding voting securities of the relevant class of shares of such Fund. Any
change to any Plan that would materially increase the costs to that class of
shares of such Fund may not be instituted without the approval of the
outstanding voting securities of the class of shares of such Fund as well as any
class of shares that converts into that class. Such changes also require
approval by a majority of the applicable Fund's Independent Directors.
In adopting each Plan, the Board considered all relevant information and
determined that there is a reasonable likelihood that each Plan will benefit
each Fund and their class of shareholders. The Board believes that the amounts
spent pursuant to each Plan have assisted each Fund in providing ongoing
servicing to shareholders, in competing with other providers of financial
services and in promoting sales, thereby increasing the net assets of each Fund.
In reporting amounts expended under the Plans to the Directors, in the
event tht the expenses are not related solely to one class, FIMCO will allocate
expenses attributable to the sale of each class of a Fund's shares to such class
based on the ratio of sales of such class to the sales of both classes of
shares. The fees paid by one class of a Fund's shares will not be used to
subsidize the sale of any other class of that Fund's shares.
For the fiscal year ended September 30, 1999, GROWTH & INCOME FUND,
MID-CAP OPPORTUNITY FUND, UTILITIES INCOME FUND, BLUE CHIP FUND, SPECIAL
SITUATIONS FUND, TOTAL RETURN FUND AND GLOBAL FUND paid $_______, $______,
$_______, $_______, $_______, $_______ and $________, respectively, in fees
pursuant to the Class A Plan. For the same period, the Underwriter incurred the
following Class A Plan-related expenses with respect to each Fund:
42
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
GROWTH & INCOME FUND $ $ $
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
For the fiscal year ended September 30, 1999, GROWTH & INCOME FUND,
MID-CAP OPPORTUNITY FUND, UTILITIES INCOME FUND, BLUE CHIP FUND, SPECIAL
SITUATIONS FUND, TOTAL RETURN FUND AND GLOBAL FUND paid $_______, $______,
$_______, $_______, $_______, $______ and $______, respectively, in fees
pursuant to the Class B Plan. For the same period, the Underwriter incurred the
following Class B Plan-related expenses with respect to each Fund:
COMPENSATION TO COMPENSATION TO COMPENSATION TO
FUND UNDERWRITER DEALERS SALES PERSONNEL
GROWTH & INCOME FUND $ $ $
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
DEALER CONCESSIONS. With respect to Class A shares of each Fund, the Fund will
reallow a portion of the sales load to the dealers selling the shares as shown
in the following table:
SALES CHARGES AS % OF CONCESSION TO
OFFERING NET AMOUNT DEALERS AS % OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- -------------------- ----- -------- --------------
Less than $25,000................... 6.25% 6.67% 5.13%
$25,000 but under $50,000........... 5.75 6.10 4.72
$50,000 but under $100,000.......... 5.50 5.82 4.51
$100,000 but under $250,000......... 4.50 4.71 3.69
$250,000 but under $500,000......... 3.50 3.63 2.87
$500,000 but under $1,000,000....... 2.50 2.56 2.05
DETERMINATION OF NET ASSET VALUE
Except as provided herein, a security listed or traded on an exchange or
the Nasdaq Stock Market is valued at its last sale price on the exchange or
market where the security is principally traded, and lacking any sales on a
particular day, the security is valued at the mean between the closing bid and
asked prices. Securities traded in the over-the-counter market ("OTC")
(including securities listed on exchanges whose primary market is believed to be
OTC) are valued at the mean between the last bid and asked prices based upon
quotes furnished by market makers for such securities. Securities may also be
priced by pricing services. Pricing services use quotations obtained from
43
investment dealers or brokers for the particular securities being evaluated,
information with respect to market transactions in comparable securities and
other available information in determining value. Short-term debt securities
that mature in 60 days or less are valued at amortized cost. Securities for
which market quotations are not readily available and other assets are valued on
a consistent basis at fair value as determined in good faith by or under the
supervision of the particular Fund's officers in a manner specifically
authorized by the Board.
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 or by the pricing service.
For valuation purposes, where applicable, quotations of foreign securities in
foreign currencies are converted into U.S. dollar equivalents using the foreign
exchange equivalents in effect.
Each Fund's Board 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.
EMERGENCY PRICING PROCEDURES. In the event that the Funds must halt
operations during any day that they would normally be required to price under
Rule 22c-1 under the 1940 Act due to an emergency ("Emergency Closed Day"), the
Funds will apply the following procedures:
1. The Funds will make every reasonable effort to segregate orders
received on the Emergency Closed Day and give them the price that they would
have received but for the closing. The Emergency Closed Day price will be
calculated as soon as practicable after operations have resumed and will be
applied equally to sales, redemptions and repurchases that were in fact received
in the mail or otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Funds on an Emergency Closed Day, even if neither the Funds nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order the order will be considered
received by a Fund when the postal service has delivered it to FIC's offices in
Woodbridge, New Jersey prior to the close of regular trading on the NYSE, or at
such other time as may be prescribed in its prospectus; and
(b) In the case of a wire order, including a Fund/SERV order, the
order will be considered received when it is received in good form by a FIC
branch office or an authorized dealer prior to the close of regular trading on
the NYSE, or such other time as may be prescribed in its prospectus.
3. If the Funds are unable to segregate orders received on the Emergency
Closed Day from those received on the next day the Funds are open for business,
the Funds may give all orders the next price calculated after operations resume.
44
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Funds may determine not to price their
portfolio securities if such prices would lead to a distortion of the NAV for
the Funds and their shareholders.
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser may purchase or sell portfolio securities on behalf of the
Fund in agency or principal transactions. In agency transactions, the Fund
generally pays brokerage commissions. In principal transactions, the Fund
generally does not pay commissions, however the price paid for the security may
include an undisclosed dealer commission or "mark-up" or selling concessions.
The Adviser normally purchases fixed-income securities on a net basis from
primary market makers acting as principals for the securities. The Adviser may
purchase certain money market instruments directly from an issuer without paying
commissions or discounts. The Adviser may also purchase securities traded in the
OTC market. As a general practice, OTC securities are usually purchased from
market makers without paying commissions, although the price of the security
usually will include undisclosed compensation. However, when it is advantageous
to the Fund the Adviser may utilize a broker to purchase OTC securities and pay
a commission.
In purchasing and selling portfolio securities on behalf of the Fund, the
Adviser will seek to obtain best execution. The Fund may pay more than the
lowest available commission in return for brokerage and research services.
Research and other services may include information as to the availability of
securities for purchase or sale, statistical or factual information or opinions
pertaining to securities, reports and analysis concerning issuers and their
creditworthiness, and Lipper's Directors' Analytical Data concerning Fund
performance and fees. The Adviser generally uses the research and other services
to service all the funds in the First Investors Family of Funds, rather than the
particular Funds whose commissions may pay for research or other services. In
other words, a Fund's brokerage may be used to pay for a research service that
is used in managing another Fund within the First Investors Fund Family. The
Lipper's Directors' Analytical Data is used by the Adviser and the Fund Board to
analyze a fund's performance relative to other comparable funds.
In selecting the broker-dealers to execute the Fund's portfolio
transactions, the Adviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order, the
trading characteristics of the security involved, the difficulty in executing
the order, the research and other services provided, the expertise, reputation
and reliability of the broker-dealer, access to new offerings, and other factors
bearing upon the quality of the execution. The Adviser does not place portfolio
orders with an affiliated broker, or allocate brokerage commission business to
any broker-dealer for distributing fund shares. Moreover, no broker-dealer
affiliated with the Adviser participates in commissions generated by portfolio
orders placed on behalf of the Fund.
The Adviser may combine transaction orders placed on behalf of a Fund and
any other fund in the First Investors Group of Funds, any Fund of Executive
Investors Trust and First Investors Life Insurance Company, affiliates of the
Funds for the purpose of negotiating brokerage commissions or obtaining a more
favorable transaction price; and where appropriate, securities purchased or sold
may be allocated in accordance with written procedures approved by the Board of
Directors.
45
The following tables reflect the total commissions paid, commissions paid
to brokers who furnished research services and the amount of portfolio
transactions for which commissions were paid to brokers for research services,
with respect to each Fund for the fiscal years ended October 31, 1997, December
31, 1997, September 30, 1998 and September 30, 1999.
FISCAL YEAR ENDED 10/31/97
--------------------------
TRANSACTIONS
FOR WHICH
COMMISSIONS COMMISSIONS
TOTAL PAID FOR PAID FOR
COMMISSIONS RESEARCH RESEARCH
PAID SERVICES SERVICES
---- ------- ---------
MID-CAP OPPORTUNITY FUND $111,995 $17,242 $6,861,292
GROWTH & INCOME FUND 146,190 46,196 50,452,086
UTILITIES INCOME FUND 277,318 13,624 6,820,235
FISCAL YEAR ENDED 12/31/97
--------------------------
TRANSACTIONS
FOR WHICH
COMMISSIONS COMMISSIONS
TOTAL PAID FOR PAID FOR
COMMISSIONS RESEARCH RESEARCH
PAID SERVICES SERVICES
---- -------- --------
BLUE CHIP FUND $497,747 $270,364 $198,146,829
SPECIAL SITUATIONS FUND 285,203 126,202 51,723,575
TOTAL RETURN FUND 101,918 41,817 24,738,675
GLOBAL FUND 940,540 44,537 45,620,259
FISCAL YEAR ENDED 9/30/98
-------------------------
TRANSACTIONS
FOR WHICH
COMMISSIONS COMMISSIONS
TOTAL PAID FOR PAID FOR
COMMISSIONS RESEARCH RESEARCH
PAID SERVICES SERVICES
---- -------- --------
MID-CAP OPPORTUNITY FUND $89,618 $12,996 $5,787,100
GROWTH & INCOME FUND $257,106 $30,162 $23,988,319
UTILITIES INCOME FUND $245,565 $31,740 $23,906,565
BLUE CHIP FUND $699,323 $55,969 $52,726,903
SPECIAL SITUATIONS FUND $249,971 $26,598 $11,528,675
TOTAL RETURN FUND $108,028 $23,685 $20,827,238
GLOBAL FUND $1,169,770 $25,798 $24,747,557
FISCAL YEAR ENDED 9/30/99
-------------------------
TRANSACTIONS
FOR WHICH
COMMISSIONS COMMISSIONS
TOTAL PAID FOR PAID FOR
COMMISSIONS RESEARCH RESEARCH
PAID SERVICES SERVICES
---- -------- --------
MID-CAP OPPORTUNITY FUND
GROWTH & INCOME FUND
UTILITIES INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
46
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Information regarding the purchase, redemption and exchange of Fund shares
is contained in the Shareholder Manual, a separate section of the SAI that is a
distinct document and may be obtained free of charge by contacting your Fund.
REDEMPTIONS-IN-KIND. If each Fund's Board should determine that it would
be detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution in kind of securities from the portfolio of
the Fund. In this connection, Series Fund II has elected to be governed by Rule
18f-1 under the 1940 Act. Pursuant to Rule 18f-1 Series Fund II is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder. With respect
to all Funds, if shares are redeemed in kind, the redeeming shareholder will
likely incur brokerage costs in converting the assets into cash. The method of
valuing portfolio securities for this purpose is described under "Determination
of Net Asset Value."
TAXES
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended, 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 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 foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) 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 (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer. If a Fund failed to qualify as a RIC for any taxable year, it would
be taxed on the full amount of its taxable income for that year without being
able to deduct the distributions it makes to its shareholders and the
shareholders would treat all those distributions, including distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), as dividends (that is, ordinary income) to the extent of the
Fund's earnings and profits.
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.
47
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.
Dividends and interest received by GROWTH & INCOME FUND, SPECIAL
SITUATIONS FUND, GLOBAL FUND and TOTAL RETURN FUND, and gains realized by these
Funds, may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions ("foreign taxes") that would reduce the yield
and/or total return on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of a Fund's total assets at
the close of any taxable year consists of securities of foreign corporations, it
will be eligible to, and may, file an election with the Internal Revenue Service
that would enable its shareholders, in effect, to benefit from any foreign tax
credit or deduction available with respect to any foreign taxes paid by it.
Pursuant to any such election, a Fund would treat those taxes as dividends paid
to its shareholders and each shareholder (1) would be required to include in
gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) would be required to treat that share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as the shareholder's own income from those
sources, and (3) could either deduct the taxes deemed paid by the shareholder in
computing taxable income or, alternatively, use the foregoing information in
calculating the tax credit against the shareholder's Federal income tax. Each
Fund that makes this election will report to its shareholders shortly after each
taxable year their respective shares of its income from sources within, and
taxes paid to, foreign countries and U.S. possessions. Individuals who have no
more than $300 ($600 for married persons filing jointly) of creditable foreign
taxes included on Form 1099 and all of whose foreign source income is "qualified
passive income" may elect each year to be exempt from the extremely complicated
foreign tax credit limitation and will be able to claim a foreign tax credit
without having to file the detailed Form 1116 that otherwise is required.
GROWTH & INCOME FUND, SPECIAL SITUATIONS FUND, TOTAL RETURN AND GLOBAL
FUND may each invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation - other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which a Fund is a U.S. shareholder that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
48
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, if a Fund holds
stock of a PFIC, it will be subject to Federal income tax on a portion of any
"excess distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), 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 QEF's annual ordinary earnings and net capital gain - which
probably would have to be distributed by the Fund to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax - even if those earnings and
gain were not distributed to the Fund by the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
Each Fund may elect to "mark-to-market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the PFIC's stock
over a Fund's adjusted basis in that stock as of the end of that year. Pursuant
to the election, a Fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included by the Fund for prior
taxable years. A Fund's adjusted basis in each PFIC's stock subject to the
election would be adjusted to reflect the amounts of income included and
deductions taken thereunder (and under regulations proposed in 1992 that
provided a similar election with respect to the stock of certain PFICs).
GLOBAL FUND'S use of hedging strategies, such as selling (writing) and
purchasing options and futures contracts and entering into forward currency
contracts, involve complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gains from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), futures and options
thereon, and forward currency contracts derived by GLOBAL FUND with respect to
its business of investing in securities or foreign currencies, will qualify as
permissible income under the Income Requirement.
MID-CAP OPPORTUNITY FUND, TOTAL RETURN FUND and UTILITIES INCOME FUND may
acquire zero coupon or other securities issued with original issue discount. As
a holder of those securities, each such Fund must include in its income the
portion of the original issue discount that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment on them during
the year. Similarly, each such Fund must include in its gross income securities
it receives as "interest" on pay-in-kind securities. Because each Fund annually
must distribute substantially all of its investment company taxable income,
including any original issue discount and other non-cash income, to satisfy the
Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
will be made from a Fund's cash assets or from the proceeds of sales of
portfolio securities, if necessary. A Fund may realize capital gains or losses
from those sales, which would increase or decrease its investment company
taxable income and/or net capital gain.
49
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis -
and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures or forward contract entered into by a Fund or a related person with
respect to the same or substantially similar property. In addition, if the
appreciated financial position is itself a short sale or such a contract,
acquisition of the underlying property or substantially similar property will be
deemed a constructive sale.
PERFORMANCE INFORMATION
A Fund may advertise its top holdings from time to time. A Fund may also
advertise its performance in various ways.
Each Fund's "average annual total return" ("T") is an average annual
compounded rate of return. The calculation produces an average annual total
return for the number of years measured. It is the rate of return based on
factors which include a hypothetical initial investment of $1,000 ("P") over a
number of years ("n") with an Ending Redeemable Value ("ERV") of that
investment, according to the following formula:
T=[(ERV/P)(1/n)]-1
The "total return" uses the same factors, but does not average the rate of
return on an annual basis. Total return is determined as follows:
(ERV-P)/P = TOTAL RETURN
Total return is calculated by finding the average annual change in the
value of an initial $1,000 investment over the period. In calculating the ending
redeemable value for Class A shares, each Fund will deduct the maximum sales
charge of 6.25% (as a percentage of the offering price) from the initial $1,000
payment and, for Class B shares, the applicable CDSC imposed on a redemption of
Class B shares held for the period is deducted. All dividends and other
distributions are assumed to have been reinvested at net asset value on the
initial investment ("P").
Return information may be useful to investors in reviewing a Fund's
performance. However, certain factors should be taken into account before using
this information as a basis for comparison with alternative investments. No
adjustment is made for taxes payable on distributions. Return information will
fluctuate over time and return information for any given past period will not be
an indication or representation of future rates of return. 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 period ended September 30, 1999 are set forth in the tables
below:
50
AVERAGE ANNUAL TOTAL RETURN: (1, 2)
ONE YEAR FIVE YEARS LIFE OF FUND
-------- ---------- ------------
Class A Class B Class A Class B Class A Class B
SHARES SHARES(3) SHARES SHARES(3) SHARES SHARES(3)
------ ------ ------ ------ ------ ------
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
GROWTH & INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
TOTAL RETURN: (1, 2)
Class A Class B Class A Class B Class A Class B
SHARES SHARES(3) SHARES SHARES(3) SHARES SHARES(3)
------ ------ ------ ------ ------ ------
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
GROWTH & INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
1 All Class A total return figures assume the maximum front-end sales charge of
6.25% and dividends reinvested at net asset value. All Class B total return
figures assume the maximum applicable CDSC. Prior to July 1, 1993, the maximum
front-end sales charge was 6.90%. Prior to December 29, 1989, the maximum
front-end sales charge was 7.25% for BLUE CHIP FUND and 8.50% for GLOBAL FUND.
2 Certain expenses of the Funds have been waived from commencement of operations
through September 30, 1999. Accordingly, return figures are higher than they
would have been had such expenses not been waived.
3 The commencement date for the offering of Class B shares is January 12, 1995.
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 period ended September 30, 1999 are set forth in the
tables below:
51
AVERAGE ANNUAL TOTAL RETURN: (1)
ONE YEAR FIVE YEARS LIFE OF FUND
-------- ---------- ------------
Class A Class B Class A Class B Class A Class B
SHARES SHARES(2) SHARES SHARES(2) SHARES SHARES(2)
------ ------ ------ ------ ------ ------
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
GROWTH & INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
TOTAL RETURN: (1)
ONE YEAR FIVE YEARS LIFE OF FUND
-------- ---------- ------------
Class A Class B Class A Class B Class A Class B
SHARES SHARES(2) SHARES SHARES(2) SHARES SHARES(2)
------ ------ ------ ------ ------ ------
MID-CAP OPPORTUNITY FUND
UTILITIES INCOME FUND
GROWTH & INCOME FUND
BLUE CHIP FUND
SPECIAL SITUATIONS FUND
TOTAL RETURN FUND
GLOBAL FUND
1 Certain expenses of the Funds have been waived from commencement of operations
through September 30, 1999. Accordingly, return figures are higher than they
would have been had such expenses not been waived.
2 The commencement date for the offering of Class B shares is January 12, 1995
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 performance, compounding and
hypothetical returns are included in Appendix C.
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
52
return data on indices utilizes actual dividends on ex-dividend dates
accumulated for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication
of Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds
with at least three years of performance history are assigned ratings from
one star (lowest) to five stars (highest). Morningstar ratings are
calculated from the 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., Credit Suisse First Boston, Salomon Smith Barney, Morgan Stanley
Dean Witter & Co., Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette,
Value Line, Datastream International, HBSC James Capel, Warburg Dillion
Read, 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.
Reuters, a wire service that frequently reports on global business.
53
The Consumer Price Index, prepared by the U.S. Bureau of Labor
Statistics, is a commonly used measure of inflation. The Index shows
changes in the cost of selected consumer goods and does not represent a
return on an investment vehicle.
The Credit Suisse First Boston High Yield Index is designed to
measure the performance of the high yield bond market.
The Lehman Brothers Aggregate Index is an unmanaged index which
generally covers the U.S. investment grade fixed rate bond market,
including government and corporate securities, agency mortgage
pass-through securities, and asset-backed securities.
The Lehman Brothers Corporate Bond Index includes all publicly
issued, fixed rate, nonconvertible investment grade dollar-denominated,
corporate debt which have at least one year to maturity and an outstanding
par value of at least $100 million.
Moody's Stock Index, an unmanaged index of utility stock
performance.
The Morgan Stanley All Country World Free Index is designed to
measure the performance of stock markets in the United States, Europe,
Canada, Australia, New Zealand and the developed and emerging markets of
Eastern Europe, Latin America, Asia and the Far East. The index consists
of approximately 60% of the aggregate market value of the covered stock
exchanges and is calculated to exclude companies and share classes which
cannot be freely purchased by foreigners.
The Morgan Stanley World Index is designed to measure the
performance of stock markets in the United States, Europe, Canada,
Australia, New Zealand and the Far East. The index consists of
approximately 60% of the aggregate market value of the covered stock
exchanges.
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
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.
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 Salomon Brothers Government Index is a market
capitalization-weighted index that consists of debt issued by the U.S.
Treasury and U.S. Government sponsored agencies.
The Salomon Brothers Mortgage Index is a market
capitalization-weighted index that consists of all agency pass-throughs
and FHA and GNMA project notes.
54
The Standard & Poor's 400 Midcap Index is an unmanaged
capitalization-weighted index that is generally representative of the U.S.
market for medium cap stocks.
The 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 Standard & Poor's Smallcap 600 Index is a
capitalization-weighted index that measures the performance of selected
U.S. stocks with a small market capitalization.
The Standard & Poor's Utilities Index is a
capitalization-weighted index of 37 stocks designed to measure the
performance of the utilities sector of the S&P 500 Index. 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
SERIES FUND is a Massachusetts business trust organized on September 23,
1988. SERIES FUND is authorized to issue an unlimited number of shares of
beneficial interest, no par value, in such separate and distinct series and
classes of shares as the Board of Trustees shall from time to time establish.
The shares of beneficial interest of Series Fund are presently divided into five
separate and distinct series, each having two classes, designated Class A shares
and Class B shares. Series Fund does not hold annual shareholder meetings. If
requested to do so by the holders of at lest 10% of Series Fund's outstanding
shares, Series Fund's Board of Trustees will call a special meeting of
shareholders for any purpose, including the removal of Trustees. Each share of
each Fund has equal voting rights except as noted above.
GLOBAL FUND was incorporated in the state of Maryland on March 9, 1981.
GLOBAL FUND'S authorized capital stock consists of 100 million shares of common
stock, all of one series, with a par value per share of $1.00. The Fund is
authorized to issue shares of common stock in such separate and distinct series
and classes of shares as the Fund's Board of Directors shall from time to time
establish. The shares of common stock of the Fund are presently divided into two
classes, designated Class A shares and Class B shares. Each class of the Fund
represents interests in the same assets of the Fund. The Fund does not hold
annual shareholder meetings. If requested to do so by the holders of at least
10% of the Fund's outstanding shares, the Fund's Board of Directors will call a
special meeting of shareholders for any purpose, including the removal of
Directors. Each share of the Fund has equal voting rights except as noted above.
55
SERIES FUND II is a Maryland corporation organized on April 1, 1992.
SERIES FUND II is authorized to issue 400 million shares of common stock, $0.001
par value, in such separate and distinct series and classes of shares as SERIES
FUND II'S Board of Directors shall from time to time establish. The shares of
common stock of SERIES FUND II are presently divided into four separate and
distinct series, each having two classes, designated Class A shares and Class B
shares. Each class of a Fund represents interests in the same assets of that
Fund. SERIES FUND II does not hold annual shareholder meetings. If requested to
do so by the holders of at least 10% of a Fund's outstanding shares, the Board
of Directors will call a special meeting of shareholders for any purpose,
including the removal of Directors. Each share of each Fund has equal voting
rights except as noted above. Prior to December 31, 1997, the Mid-Cap
Opportunity Fund was known as U.S.A. Mid-Cap Opportunity Fund and prior to
February 15, 1996 it was known as Made in the U.S.A. Fund.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of each Fund, except for the Global Fund,
and employs foreign sub-custodians to provide custody of foreign assets for
SPECIAL SITUATIONS FUND and TOTAL RETURN FUND. Brown Brothers Harriman & Co., 40
Water Street, Boston, MA 02109, is custodian of the securities and cash of the
GLOBAL FUND and employs foreign subcustodians to provide custody of the GLOBAL
FUND'S foreign assets.
AUDITS AND REPORTS. The accounts of the Funds are audited twice a year by
Tait, Weller & Baker, independent certified public accountants, 8 Penn Center
Plaza, Philadelphia, PA, 19103-2108. Shareholders of each Fund receive
semi-annual and annual reports, including audited financial statements, and a
list of securities owned.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue,
N.W., Washington, D.C. 20036 serves as counsel to the Funds.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of FIMCO and FIC, acts as transfer agent
for the Funds and as redemption agent for regular redemptions. The fees charged
to each Fund by the Transfer Agent are $5.00 to open an account; $3.00 for each
certificate issued; $.75 per account per month; $10.00 for each legal transfer
of shares; $.45 per account per dividend declared; $5.00 for each exchange of
shares into a Fund; $5.00 for each partial withdrawal or complete liquidation;
$1.00 for each Systematic Withdrawal Plan check; $4.00 for each shareholder
services call; $20.00 for each item of correspondence; and $1.00 per account per
report required by any governmental authority. Additional fees charged to the
Funds by the Transfer Agent are assumed by the Underwriter. The Transfer Agent
56
reserves the right to change the fees on prior notice to the Funds. Upon request
from shareholders, the Transfer Agent will provide an account history. For
account histories covering the most recent three year period, there is no
charge. The Transfer Agent charges a $5.00 administrative fee for each account
history covering the period 1983 through 1994 and $10.00 per year for each
account history covering the period 1974 through 1982. Account histories prior
to 1974 will not be provided. If any communication from the Transfer Agent to a
shareholder is returned from the U.S. Postal Service marked as "Undeliverable"
two consecutive times, the Transfer Agent will cease sending any further
materials to the shareholder until the Transfer Agent is provided with a correct
address. Efforts to locate a shareholder will be conducted in accordance with
SEC rules and regulations prior to forfeiture of funds to the appropriate state
treasury. The Transfer Agent may deduct the costs of its efforts to locate a
shareholder from the shareholder's account. These costs may include a percentage
of the account if a search company charges such a fee in exchange for its
location services. The Transfer Agent is not responsible for any fees that
states and/or their representatives may charge for processing the return of
funds to investors whose funds have been escheated. The Transfer Agent's
telephone number is 1-800-423-4026.
5% SHAREHOLDERS. As of December 31, 1999 . . [UPDATE]
----------------
SHAREHOLDER LIABILITY. SERIES FUND is organized as an entity known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable for the
obligations of SERIES FUND. The Declaration of Trust however, contains an
express disclaimer of shareholder liability for acts or obligations of SERIES
FUND and requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Fund or the Trustees.
The Fund's Declaration of Trust provides for indemnification out of the property
of the Fund of any shareholder held personally liable for the obligations of
SERIES FUND. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk
of a shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Fund itself would be unable to meet its
obligations. The Adviser believes that, in view of the above, the risk of
personal liability to shareholders is immaterial and extremely remote. The
Declaration of Trust further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office. SERIES
FUND may have an obligation to indemnify Trustees and officers with respect to
litigation.
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to
Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Funds and the
Adviser have adopted Codes of Ethics restricting personal securities trading by
portfolio managers and other access persons of the Funds. Among other things,
such persons, except the Director or Trustees of the Funds, as applicable: (a)
must have all non-exempt trades pre-cleared; (b) are restricted from short-term
trading; (c) must provide duplicate statements and transactions confirmations to
a compliance officer; and (d) are prohibited from purchasing securities of
initial public offerings.
57
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
Registrants incorporate by reference the financial statements and report of
independent auditors contained in the annual reports to shareholders for the
fiscal year ended September 30, 1999 electronically filed with the Commission on
____________, 1999 (Accession Number: ____________________).
PRO FORMA FINANCIAL STATEMENTS AND SCHEDULES
APPENDIX A
DESCRIPTION OF CORPORATE BOND AND
CONVERTIBLE SECURITY RATINGS
STANDARD & POOR'S
- -----------------
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 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.
58
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.
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.
59
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.
60
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S
- -----------------
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. Ratings are
graded into several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
MOODY'S INVESTORS SERVICE, INC.
- -------------------------------
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
PRIME-1 Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
61
APPENDIX C
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference. This assumes a hypothetical investment of $10,000.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate. this assumes monthly installment with a constant hypothetical
return rate of 8%.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
48
[The following table is represented as a graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a difference of
$331,215.
25 years old .............. 573,443
35 years old .............. 242,228
45 years old .............. 103,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
49
[The following table is represented as a chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1996.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
1996 .................. 6,000.00
The performance of the Dow Jones Industrial Average is not indicative of
the performance of any particular investment. It does not take into account fees
and expenses associated with purchasing mutual fund shares. Individuals cannot
invest directly in any index. Please note that past performance does not
guarantee future results.
50
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1996 ....................... 20.16135
1996 ....................... 100.00
1997 ....................... 103.00
1998 ....................... 106.00
1999 ....................... 109.00
2000 ....................... 113.00
2001 ....................... 116.00
2002 ....................... 119.00
2003 ....................... 123.00
2004 ....................... 127.00
2005 ....................... 130.00
2006 ....................... 134.00
2007 ....................... 138.00
2008 ....................... 143.00
2009 ....................... 147.00
2010 ....................... 151.00
2011 ....................... 156.00
2012 ....................... 160.00
2013 ....................... 165.00
2014 ....................... 170.00
2015 ....................... 175.00
2016 ....................... 181.00
2017 ....................... 186.00
2018 ....................... 192.00
2019 ....................... 197.00
2020 ....................... 203.00
2021 ....................... 209.00
2022 ....................... 216.00
2023 ....................... 222.00
2024 ....................... 229.00
2025 ....................... 236.00
2026 ....................... 243.00
Inflation erodes your buying power. $100 in 1966, could purchase five times the
goods and service as in 1996 ($100 vs. $20).* Projecting inflation at 3%, goods
and services costing $100 today will cost $243 in the year 2026.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
51
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1996*
Total Number of Percentage of
Number of Positive Positive
Rolling Period Periods Periods Periods
-------------- ------- ------- -------
1-Year 71 51 72%
5-Year 67 60 90%
10-Year 62 60 97%
15-Year 57 57 100%
20-Year 52 52 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. **
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Large Company Stocks .......... 16.79
The following chart illustrates for the period shown that long-term corporate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Long-Term Corp. bonds ......... 13.66
* Source: Used with permission. (c)1997 Ibbotson Associates, Inc. All rights
reserved. [Certain provisions of this work were derived from copyrighted
works of Roger G. Ibbotson and Rex Sinquefield.]
** Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, returns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
52
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal Tax Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
53
[The following table is represented as a graph in the printed document.]
The following graph illustrates how income has affected the gains from stock
investments since 1965.
S&P 500 Dividends Reinvested S&P 500 Principal Only
12/31/64 10,000 10,000
12/31/65 11,269 10,906
12/31/66 10,115 9,478
12/31/67 12,550 11,383
12/31/68 13,948 12,255
12/31/69 12,795 10,863
12/31/70 13,299 10,873
12/31/71 15,200 12,046
12/31/72 18,088 13,929
12/31/73 15,431 11,510
12/31/74 11,346 8,090
12/31/75 15,570 10,642
12/31/76 19,296 12,680
12/31/77 17,915 11,221
12/31/78 19,092 11,340
12/31/79 22,645 12,736
12/31/80 30,004 16,019
12/31/81 28,528 14,460
12/31/82 34,674 16,595
12/31/83 42,496 19,461
12/31/84 45,161 19,733
12/31/85 59,489 24,930
12/31/86 70,594 28,575
12/31/87 74,301 29,154
12/31/88 86,641 32,769
12/31/89 114,093 41,699
12/31/90 110,549 38,964
12/31/91 144,230 49,214
12/31/92 155,218 51,411
12/31/93 170,863 55,039
12/31/94 173,120 54,191
12/31/95 238,175 72,676
12/31/96 292,863 87,403
11/30/97 383,977 112,732
Source: First Investors Management Company, Inc. Standard & Poor's is a
registered trademark. The S&P 500 is an unmanaged index comprising 500 common
stocks spread across a variety of industries. The total returns represented
above compare the impact of reinvestment of dividends and illustrates past
performance of the index. The performance of any index is not indicative of the
performance of a particular investment and does not take into account the
effects of inflation or the fees and expenses associated with purchasing mutual
fund shares. Individuals cannot invest directly in any index. Mutual fund shares
will fluctuate in value, therefore, the value of your original investment and
your return may vary. Moreover, past performance is no guarantee of future
results.
54
FIRST INVESTORS LOGO
Shareholder Manual
A Guide to Your
First Investors
Mutual Fund Account
as of March 8, 1999
INTRODUCTION
Investing in mutual funds doesn't have to be complicated. In addition to a wide
variety of mutual funds, First Investors offers personalized service. Your
registered representative is available to answer your questions and help you
process your transactions. In the event you wish to process a transaction
directly, the material provided in this easy-to-follow guide tells you how to
contact us and explains our policies and procedures. Please note that there are
special rules for money market funds. Please read this manual completely to gain
a better understanding of how shares are bought, sold, exchanged, and
transferred. In addition, the manual provides you with a description of the
services we offer to simplify investing. The services, privileges and fees
referenced in this manual are subject to change. You should call our Shareholder
Services Department at 1 (800) 423-4026 before initiating any transaction. This
manual must be preceded or accompanied by a First Investors mutual fund
prospectus. For more complete information on any First Investors Fund, including
charges and expenses, refer to the prospectus. Read the prospectus carefully
before you invest or send money.
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
TABLE OF CONTENTS
HOW TO BUY SHARES
To Open An Account ......................................................... 5
To Open a Retirement Account ............................................... 6
Minimum Initial Investment ................................................. 6
Additional Investments ..................................................... 6
Acceptable Forms of Payment ................................................ 6
Share Classes .............................................................. 6
Share Class Specification .................................................. 7
Class A Shares ............................................................. 7
Sales Charge Waivers & REductions on Class A Shares ........................ 7
Class B Shares ............................................................. 9
How To Pay ................................................................. 10
Wire Transfers ............................................................. 11
Distribution Cross-Investment .............................................. 12
HOW TO SELL SHARES
REDEMPTION OPTIONS ......................................................... 13
Written Redemptions ........................................................ 13
Telephone Redemptions ...................................................... 13
Electronic Funds Transfer .................................................. 13
Systematic Withdrawal Plans ................................................ 14
Expedited Wire Redemptions ................................................. 14
HOW TO EXCHANGE SHARES
Exchange Methods ........................................................... 15
Exchange Conditions ........................................................ 16
Exchanging Funds With.
Automatic Investments or
Systematic Withdrawals ..................................................... 16
WHEN AND HOW ARE FUND SHARES PRICED? ....................................... 17
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED? .... 17
Purchases .................................................................. 17
Redemptions ................................................................ 18
Exchanges .................................................................. 18
Orders Placed Via First Investors Registered Representatives ............... 18
Special Rules for Money Market Funds ....................................... 19
SPECIAL RULES FOR MONEY MARKET ACCOUNTS .................................... 18
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS ................................ 19
SIGNATURE GUARANTEE ARE REQUIRED............................................ 19
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS ..................... 20
Security MEasures .......................................................... 20
Eligibility ................................................................ 20
NON-RETIREMENT ACCOUNTS .................................................... 20
RETIREMENT ACCOUNTS ........................................................ 20
Shareholder Services ....................................................... 21
OTHER SERVICES ............................................................. 22
Reinvestment Privilege ..................................................... 22
Certificate Shares ......................................................... 22
Money Market Fund Draft Checks ............................................. 22
Return Mail ................................................................ 23
Transferring Shares ........................................................ 23
ACCOUNT STATEMENTS
Transaction Confirmation Statements ........................................ 24
Master Account Statements .................................................. 24
Annual and Semi-Annual Reports ............................................. 24
DIVIDENDS AND DISTRIBUTIONS
Dividends and Distributions ................................................ 25
Buying a Dividend .......................................................... 25
TAX FORMS .................................................................. 26
4
HOW TO BUY SHARES
First Investors offers a wide variety of mutual funds to meet your financial
needs ("FI Funds"). Your First Investors registered representative will review
your financial objectives and risk tolerance, explain our product line and
services, and help you select the right investments. Call our Shareholder
Services Department at 1 (800) 423-4026 for the number of the First Investors
office near you or visit us on-line at www.firstinvestors.com
o TO OPEN AN ACCOUNT
Before investing, you must establish an account with your broker/dealer. At
First Investors Corporation ("FI") you do this by completing and signing a
Master Account Agreement ("MAA"). After you determine the fund(s) you want to
purchase, deliver your completed MAA and your check, made payable to First
Investors Corporation, to your registered representative. New client accounts
must be established through your registered representative. You need to tell us
how you want your shares registered when you open a new Fund account. Please
keep the following information in mind:
- -JOINT ACCOUNTS. For any account with two or more owners, all owners must sign
requests to process transactions. Telephone privileges allow any one of the
owners to process transactions independently.
- -GIFTS AND TRANSFERS TO MINORS. Custodial accounts for a minor may be
established under your state's Uniform Gifts/Transfers to Minors Act. Custodial
accounts are registered under the minor's social security number.
TRUSTS. A trust account may be opened only if you have a valid written trust
document.
- -TRANSFER ON DEATH (TOD). TOD registrations, available on all FI Funds in all
states, allow individual and joint account owners to name one or more
beneficiaries. The ownership of the account automatically passes to the named
beneficiaries in the event of the death of all account owners.
- -DIVIDENDS AND CAPITAL GAINS. Fund distributions will be automatically
reinvested in your account unless you request otherwise.
_______________________________________________________________________________
SOME REGISTRATIONS REQUIRE ADDITIONAL PAPERWORK.
_______________________________________________________________________________
TYPE OF ACCOUNT ADDITIONAL DOCUMENTS REQUIRED
Corporations
Partnership
& Trusts First Investors Certificate of Authority
Transfer On Death First Investors TOD Registration Request Form
(TOD)
Estates Original or Certified Copy of Death Certificate
Certified Copy of Letters Testamentary/Administration
First Investors Executor's Certification &
Indemnification Form
Conservatorships Copy of court document appointing Conservator/Guardian
& Guardianships
_______________________________________________________________________________
5
oTO OPEN A RETIREMENT ACCOUNT
Fund shares may be purchased for your retirement account by completing the MAA
and the appropriate retirement plan application. First Investors offers
retirement plans for both individuals and employers as follows:
INDIVIDUAL RETIREMENT ACCOUNTS
including Roth, Traditional, and Rollover IRAs.
SIMPLE IRAS offered by employers.
SEP-IRAS (SIMPLIFIED EMPLOYEE PENSION PLANS) for small business owners or people
with income from self-employment, including SARSEP IRAs.
403(B)(7) accounts for employees of eligible tax-exempt organizations such as
schools, hospitals and charitable organizations.
401(K) plans for employers.
MONEY PURCHASE PENSION & PROFIT SHARING plans for sole proprietors.
For more information about these plans call your registered representative or
our Shareholder Services Department at 1 (800) 423-4026.
oMINIMUM INITIAL INVESTMENT
You can open a non-retirement account with a check made payable to First
Investors Corporation for as little as $1,000. The minimum is waived if you open
an account through one of our Automatic Investment Programs (see "How to Pay")
or through a full exchange from another FI Fund. You can open a First Investors
Traditional IRA or Roth IRA with as little as $500 (except for the Cash
Management Fund which requires a $1,000 investment). Other retirement accounts
may have lower initial investment requirements at the Fund's discretion.
oADDITIONAL INVESTMENTS
Once you have established an account, you can add to it through your registered
representative or by sending us a check directly. There is no minimum
requirement on additional purchases into existing fund accounts. Remember to
include your FI Fund account number on your check made payable to First
Investors Corporation. Mail checks to: First Investors Corporation Attn: Dept.
Cp 581 Main Street Woodbridge, NJ 07095-1198
oACCEPTABLE FORMS OF PAYMENT
The following forms of payment are acceptable:
- -checks made payable to First Investors Corporation
- -Money Line electronic funds transfers
- -federal funds wire transfers
For your protection, never give your registered representative cash or a check
made payable to your registered representative.
We do not accept:
- -Third party checks
- -Traveler's checks
- -Checks drawn on non-US banks
- -Money orders
- -Cash
oSHARE CLASSES
All FI Funds are available in Class A and Class B shares. Direct purchases into
Class B share money market accounts are not accepted. Class B money market fund
shares may only be acquired through an exchange from another Class B share
account or through Class B share dividend cross-reinvestment.
Each class of shares has its own cost structure. As a result, different classes
6
of shares in the same fund generally have different prices. Class A shares have
a front-end sales charge. Class B shares have a contingent deferred sales charge
("CDSC"). While both classes have a Rule 12b-1 fee, the fee on Class B shares is
generally higher. The principal advantages of Class A shares are that they have
lower overall expenses, the availability of quantity discounts on sales charges,
and certain account privileges that are not offered on Class B shares. The
principal advantage of Class B shares is that all your money is put to work from
the outset. Your registered representative can help you decide which class of
shares is best for you.
oSHARE CLASS SPECIFICATION
It's very important to specify which class of shares you wish to purchase when
you open a new account. All First Investors account applications have a place to
designate your preference. If you do not specify which class of shares you want
to purchase, Class A shares will automatically be purchased.
oCLASS A SHARES
When you buy Class A shares, you pay the offering price - the net asset value of
the fund plus a front-end sales charge. The front-end sales charge declines with
larger investments.
_______________________________________________________________________________
CLASS A SALES CHARGES
_______________________________________________________________________________
AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT
up to $24,999 6.25% 6.67%
$25,000 - $49,999 5.75% 6.10%
$50,000 - $99,999 5.50% 5.82%
$100,000 - $249,999 4.50% 4.71%
$250,000 - $499,999 3.50% 3.63%
$500,000 - $999,999 2.50% 2.56%
Investments of $1 million or more will only be made in Class A shares at the
Fund's net asset value.
Generally, you should consider purchasing Class A shares if you plan to invest
$250,000 or more either initially or over time.
_______________________________________________________________________________
_______________________________________________________________________________
oSALES CHARGE WAIVERS & REDUCTIONS ON CLASS A SHARES
If you qualify for one of the sales charge reductions or waivers, it is very
important to let us know at the time you place your order. Include a written
statement with your check explaining which privilege applies. If you do not
include this statement we cannot guarantee that you will receive the reduction
or waiver.
CLASS A SHARES MAY BE PURCHASED WITHOUT A SALES CHARGE:
1: By an officer, trustee, director, or employee of the Fund, the Fund's adviser
or subadviser, First Investors Corporation, or any affiliates of First Investors
Corporation.
2: By a former officer, trustee, director, or employee of the Fund,
First Investors Corporation, or their affiliates provided the person worked for
the company for at least 5 years and retired or terminated employment in good
standing.
7
3: By a FI registered representative or an authorized dealer, or by his/her
spouse, child (under age 21) or grandchild (under age 21).
4: When fund distributions are reinvested in Class A shares.
5: When Systematic Withdrawal Plan payments are reinvested in Class A shares.
6: When qualified retirement plan loan repayments are reinvested in Class A
shares.
7: With the liquidation proceeds from a First Investors Life Variable Annuity
Fund A, C, or D contract within one year of the contract's maturity date.
8:When dividends (at least $50 a year) from a First Investors Life Insurance
Company policy are invested into an EXISTING account.
9: When a group qualified plan (401(k) plans, money purchase pension plans,
profit sharing plans and 403(b) plans that are subject to Title I of ERISA) is
reinvesting redemption proceeds from another fund on which a sales charge or
CDSC was paid.
10: With distribution proceeds from a First Investors group qualified plan
account into an IRA.
11: By participant directed group qualified plans with 100 or more eligible
employees or $1,000,000 or more in assets.
12: In amounts of $1 million or more.
13: By individuals under a Letter of Intent or Cumulative Purchase Privilege of
$1 million or more.
FOR ITEMS 9 THROUGH 13 ABOVE: A CDSC OF 1.00% WILL BE
DEDUCTED IF SHARES ARE REDEEMED WITHIN 2 YEARS OF PURCHASE.
SALES CHARGES ON CLASS A SHARES MAY BE REDUCED FOR:
1: Participant directed group qualified retirement plans with 99 or fewer
eligible employees. The initial sales charge is reduced to 3.00% of the offering
price.
2: Certain unit trust holders ("unitholders") who elect to invest the entire
amount of principal, interest, and/or capital gains distributions from their
unit investment trusts in Class A shares. Unitholders of various series of New
York Insured Municipals-Income Trust sponsored by Van Kampen Merrit, Inc.,
unitholders of various series of the Multistate Tax Exempt trust sponsored by
Advest Inc., and unitholders of various series of the Insured Municipal Insured
National Trust, J.C. Bradford & Co. as agent, may buy Class A shares of a FI
Fund with unit trust distributions at the net asset value plus a sales charge of
1.5%. Unitholders of various tax-exempt trusts, other than the New York Trust,
sponsored by Van Kampen Merritt Inc. may buy Class A shares of a FI Fund at the
net asset value plus a sales charge of 1.0%.
Unitholders may make additional purchases, other than those made by unit trust
distributions, at the Fund's regular offering price.
CUMULATIVE PURCHASE PRIVILEGE The Cumulative Purchase Privilege lets you add the
value of all your existing FI Fund accounts (Class A and Class B shares) to the
amount of your next Class A share investment to reach sales charge discount
breakpoints. For example, if the combined value of your existing FI Fund
accounts is $25,000, your next purchase will be eligible for a sales charge
discount at the $25,000 level. Cumulative Purchase discounts are applied to
purchases as indicated in the first column of the Class A Sales Charge table.
All your accounts registered with the same social security number will be linked
together under the Cumulative Purchase Privilege. In addition, your spouse's
accounts and custodial accounts held for minor children residing at your home
can also be linked to your accounts upon request.
8
- -Conservator accounts are linked to the social security number of the ward, not
the conservator.
- -Sole proprietorship accounts are linked to personal/family accounts only if the
account is registered with a social security number, not an employer
identification number ("EIN").
- -Testamentary trusts and living trusts may be linked to other accounts
registered under the same trust EIN, but not to the personal accounts of the
trustee(s).
- -Estate accounts may only be linked to other accounts registered under the same
EIN of the estate or social security number of the decedent.
- -Church and religious organizations may link accounts to others registered with
the same EIN but not to the personal accounts of any member.
LETTER OF INTENT
A Letter of Intent ("LOI") lets you purchase at a discounted sales charge level
even though you do not yet have sufficient investments to qualify for that
discount level. An LOI is a commitment by you to invest a specified dollar
amount during a 13-month period. The amount you agree to invest determines the
sales charge you pay. Under an LOI, you can reduce the initial sales charge on
Class A share purchases based on the total amount you agree to invest in both
Class A and Class B shares during the 13 month period. Purchases made up to 90
days before the date of the LOI may be included.
Your LOI can be amended in two ways. First, you may file an amended LOI to raise
or lower the LOI amount during the 13 month period. Second, your LOI will be
automatically amended if you invest more than your LOI amount during the
13-month period and qualify for an additional sales charge reduction.
By purchasing under an LOI, you acknowledge and agree to the following:
- -You authorize First Investors to reserve 5% of your total intended investment
in shares held in escrow in your name until the LOI is completed.
- -First Investors is authorized to sell any or all of the escrow shares to
satisfy any additional sales charges owed in the event you do not fulfill the
LOI.
- -Although you may exchange all your shares, you may not sell the reserve shares
held in escrow until you fulfill the LOI or pay the higher sales charge.
oCLASS B SHARES
Class B shares are sold without an initial sales charge, putting all your money
to work for you immediately. If you redeem Class B shares within 6 years of
purchase, a CDSC will be imposed. The CDSC declines from 4% to 0% over a 6-year
period, as shown in the chart below. Class B share money market fund shares are
not sold directly. They can only be acquired through an exchange from another
Class B fund account. Class B shares, and the dividend and distribution shares
they earn, automatically convert to Class A shares after 8 years, reducing
future annual expenses.
Generally, you should consider purchasing Class B shares if you intend to invest
less than $250,000 and you would rather pay higher ongoing expenses than an
initial sales charge.
CLASS B SALES CHARGES
THE CDSC DECLINES OVER TIME AS SHOWN IN THE TABLE BELOW:
________________________________________________________________
Year 1 2 3 4 5 6 7+
________________________________________________________________
CDSC 4% 4% 3% 3% 2% 1% 0%
________________________________________________________________
9
If shares redeemed are subject to a CDSC, the CDSC will be based on the lesser
of the original purchase price or redemption price. There is no CDSC on shares
acquired through dividend and capital gains reinvestment. We call these "free
shares."
Anytime you sell shares, your shares will be redeemed in the following manner to
ensure that you pay the lowest possible CDSC:
FIRST-Class B shares representing dividends and capital gains that are not
subject to a CDSC.
SECOND-Class B shares held more than six years which are not subject to a CDSC.
THIRD-Class B shares held longest which will result in the lowest CDSC.
For purposes of calculating the CDSC, all purchases made during the calendar
month are deemed to have been made on the first business day of the month at the
average cost of the shares purchased during that period.
SALES CHARGE WAIVERS ON CLASS B SHARES
The CDSC on Class B shares does not apply to:
1: Appreciation on redeemed shares above their original purchase price.
2: Redemptions due to death or disability (as defined in section 72(m)(7) of the
Internal Revenue Code) requested within one year of death. Additional
documentation is required.
3: Distributions from employee benefit plans due to termination or plan
transfer.
4: Redemptions to remove an excess contribution from an IRA or qualified
retirement plan.
5: Distributions upon reaching required minimum age 70 1/2 provided you have
held the shares for at least three years.
6: Annual redemptions of up to 8% of your account's value redeemed by a
Systematic Withdrawal Plan. Free shares not subject to a CDSC will be redeemed
first and will count towards the 8% limit.
7: Shares redeemed from advisory accounts managed by or held by the Fund's
investment advisor or any of its affiliates.
8: Tax-free returns of excess contributions from employee benefit plans.
9: Redemptions of non-retirement shares purchased with proceeds from the sale of
shares of another fund group between April 29, 1996 and June 30, 1996 that did
not pay a sales charge (other than money market fund accounts or retirement plan
accounts).
10: Redemptions by the Fund when the account falls below the minimum.
11: Redemptions to pay account fees.
Include a written statement with your redemption request explaining which
exemption applies. If you do not include this statement we cannot guarantee that
you will receive the waiver.
oHOW TO PAY
You can invest using one or more of the
following options:
- -CHECK:
You can buy shares by writing a check payable to
First Investors Corporation. If you are opening a new fund account, your check
must meet the fund minimum. When making purchases to an existing account,
remember to include your fund account number on your check.
- -AUTOMATIC INVESTMENT PROGRAMS:
We offer several automatic investment programs to simplify
investing.
- -MONEY LINE:
With our Money Line program, you can open an account with as little as $50 a
month or $600 each year in a FI Fund account by transferring funds
electronically from your bank account. You can invest up to $10,000 a month
through Money Line.
10
Money Line allows you to select the payment amount and frequency that is best
for you. You can make automatic investments bi-weekly, semi-monthly, monthly,
quarterly, semi-annually, or annually. The date you select as your Money Line
investment date is the date on which shares will be purchased. THE PROCEEDS MUST
BE AVAILABLE IN YOUR BANK ACCOUNT TWO BUSINESS DAYS PRIOR TO THE INVESTMENT
DATE.
HOW TO APPLY:
1: Complete the Electronic Funds Transfer ("EFT") section of the application to
provide complete bank information and authorize EFT fund share purchases. Attach
a voided check. A signature guarantee of all shareholders and bank account
owners is required.
PLEASE ALLOW AT LEAST 10 BUSINESS DAYS FOR INITIAL PROCESSING.
2: Complete the Money Line section of the application to specify the amount,
frequency and date of the investment.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
HOW TO CHANGE:
Provided you have telephone privileges, you may call Shareholder Services at 1
(800) 423-4026 to:
- -Increase the payment up to $999.99.
- -Decrease the payment.
- -Discontinue the service.
To change investment amounts, reallocate or cancel Money Line, you must notify
us at least 3 business days prior to the investment date.
You must send a signature guaranteed written request to Administrative Data
Management Corp. to:
- -Increase the payment to $1,000 or more.
- -Change bank information.
A medallion signature guarantee (see Signature Guarantee Policy) is required to
increase a Money Line payment to $2,500 or more. Changing banks or bank account
numbers requires 10 days notice. Money Line service will be suspended upon
notification that all account owners are deceased.
AUTOMATIC PAYROLL INVESTMENT: With our Automatic Payroll Investment service
("API") you can systematically purchase shares by salary reduction. To
participate, your employer must offer direct deposit and permit you to
electronically transfer a portion of your salary. Contact your company payroll
department to authorize the salary reductions. If not available, you may
consider our Money Line program.
Shares purchased through API are bought at the offering price on the day the
electronic transfer is received by the Fund.
HOW TO APPLY:
1: Complete an API Application.
2: Complete an API Authorization Form.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
oWire Transfers:
You may purchase shares via a federal funds wire transfer from your bank account
into your EXISTING First Investors account. Federal fund wire transfer proceeds
are not subject to a holding period and are available to you immediately upon
receipt, as long as we have been notified properly.
YOU MUST CALL US AT 1 (800) 423-4026 TO ADVISE US OF AN INCOMING FEDERAL FUNDS
WIRE and provide us with the federal funds wire transfer confirmation number,
the amount of the wire, and the fund account number to receive same day credit.
11
There are special rules for money market fund accounts. To wire federal funds to
an existing First Investors account (other than money markets), instruct your
bank to wire your investment to: FIRST FINANCIAL SAVINGS BANK, S.L.A. ABA #
221272604 ACCOUNT # 0306142 YOUR NAME YOUR FIRST INVESTORS FUND ACCOUNT#
oDISTRIBUTION CROSS-INVESTMENT:
You can invest the dividends and capital gains from one fund account, excluding
the money market funds, into another fund account in the same class of shares.
The shares will be purchased at the net asset value on the day after the record
date of the distribution.
- -You must invest at least $50 a month or $600 a year into a NEW account.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
You may establish a Distribution Cross-Investment service by contacting your
registered representative or calling Shareholder Services at 1 (800) 423-4026.
oSYSTEMATIC WITHDRAWAL PLAN PAYMENT INVESTMENTS:
You can invest Systematic Withdrawal Plan payments (see How to Sell Shares) from
one fund account in shares of another fund account.
- -Payments are invested without a sales charge.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
- -Both accounts must be in the same class of shares.
- -You must invest at least $600 a year if into a new account.
- -You can invest on a monthly, quarterly, semi-annual, or annual basis.
Redemptions are suspended upon notification that all account owners are
deceased. Service will recommence upon receipt of written alternative payment
instructions and other required documents from the decedent's legal
representative.
HOW TO SELL SHARES
You can sell your shares on any day the New York Stock Exchange is open for
regular trading. In the mutual fund industry, a sale is referred to as a
"redemption." Redemption proceeds are generally mailed within three days. If the
shares being redeemed were purchased by check, payment may be delayed to verify
that the check has been honored, which may take up to 15 days from the date of
purchase. Shareholders may not redeem shares by telephone or electronic funds
transfer unless the shares have been owned for at least 15 days.
Redemptions of shares are not subject to the 15 day verification period if the
shares were purchased via:
- -Automatic Payroll Investment
- -FIC registered representative payroll checks -First Investors Life Insurance
Company checks
- -Federal funds wire payments
12
oREDEMPTION OPTIONS
For trusts, estates, attorneys-in-fact, corporations, partnerships, and other
entities, additional documents are required to redeem shares. Call Shareholder
Services at 1 (800) 423-4026 for more information.
WRITTEN REDEMPTIONS
You can write a letter of instruction or contact your First Investors registered
representative for a liquidation request form. A written liquidation request in
good order must include:
1: The name of the fund;
2: Your account number;
3: The dollar amount, number of shares or percentage of the account you want to
redeem;
4: Share certificates (if they were issued to you);
5: Original signatures of all owners exactly as your account is registered;
6: Signature guarantees, if required (see Signature Guarantee Policy).
Written redemption requests should be mailed to:
ADMINISTRATIVE DATA MANAGEMENT CORP.
581 MAIN STREET
WOODBRIDGE, NJ 07095-1198
TELEPHONE REDEMPTIONS
You, or any person we believe is authorized to act on your behalf, may redeem
shares which have been owned for at least 15 days by calling our Special
Services Department at 1 (800) 342-6221 from 9:00 a.m. to 5:00 p.m., EST,
provided:
- -Telephone privileges are available for your account registration (see Telephone
Privileges);
- -You have telephone privileges (see Telephone Privileges);
- -You do not hold share certificates (issued shares);
- -The redemption check is made payable to the registered owner(s) or
pre-designated bank;
- -The redemption check is mailed to your address of record;
- -Your address of record has not changed within the past 60 days;
- -The redemption amount is $50,000 or less; AND
- -The redemption amount, combined with the amount of all telephone redemptions
made within the previous 30 days does not exceed $100,000.
ELECTRONIC FUNDS TRANSFER
The Electronic Funds Transfer ("EFT") service allows you to redeem shares and
electronically transfer proceeds to your bank account.
YOU MUST ENROLL IN THE ELECTRONIC FUNDS TRANSFER SERVICE AND PROVIDE COMPLETE
BANK ACCOUNT INFORMATION BEFORE USING THE PRIVILEGE. Signature guarantees of all
shareholders and all bank account owners are required. Please allow at least 10
business days for initial processing. We will send any proceeds during the
processing period to your address of record. Call your registered representative
or Shareholder Services at 1 (800) 423-4026 for an application.
You may call Shareholder Services or send written instructions to Administrative
Data Management Corp. to request an EFT redemption of shares which are held at
least 15 days. Each EFT redemption:
1: Must be electronically transferred to your pre-designated bank account;
2: Must be at least $500;
3: Cannot exceed $50,000;
4: Cannot exceed $100,000 when added to the total amount of all EFT
redemptions made within the previous 30 days.
13
If your redemption does not qualify for an EFT redemption, you may request to
have the redemption proceeds mailed to you.
The Electronic Funds Transfer service may also be used to purchase shares (see
Money Line) and transfer systematic withdrawal payments (see Systematic
Withdrawal Plans) and dividend distributions (see Other Services) to your bank
account.
SYSTEMATIC WITHDRAWAL PLANS
Our Systematic Withdrawal Plan allows you to redeem a specific dollar amount or
percentage from your account on a regular basis. Your payments can be mailed to
you or a pre-authorized payee by check, transferred to your bank account
electronically (if you have enrolled in the EFT service) or invested in shares
of another FI fund in the same class of shares through our Systematic Withdrawal
Plan Payment investment service (see How to Buy Shares).
You can receive payments on a monthly, quarterly, semi-annual, or annual basis.
Your account must have a value of at least $5,000 in non-certificated shares
("unissued shares"). The $5,000 minimum account balance is waived for required
minimum distributions from retirement plan accounts. The minimum Systematic
Withdrawal Plan payment is $25 (waived for Required Minimum Distributions on
retirement accounts or FIL premium payments).
Once you establish the Systematic Withdrawal Plan, you should not make
additional investments into this account (except money market funds). Buying
shares during the same period as you are selling shares is not advantageous to
you because of sales charges.
If you own Class B shares, you may establish a Systematic Withdrawal Plan and
redeem up to 8% of the value of your account annually without a CDSC.
If you own Class B shares of a retirement account and you are receiving your
Required Minimum Distribution through a Systematic Withdrawal Plan, up to 8% of
the value of your account may be redeemed annually without a CDSC. However, if
your Required Minimum Distribution exceeds the 8% limit, the applicable CDSC
will be charged if the additional shares were held less than 3 years and you
have not reached age 70-1/2.
To establish a Systematic Withdrawal Plan, complete the appropriate section of
the account application or contact your registered representative or call
Shareholder Services at 1 (800) 423-4026.
oEXPEDITED WIRE REDEMPTIONS (MONEY MARKET FUNDS ONLY)
Enroll in our Expedited Redemption service to wire proceeds from your FI money
market account to your bank account. Call Shareholder Services at 1 (800)
423-4026 for an application or to discuss specific requirements.
- -Each wire under $5,000 is subject to a $10 fee.
- -Six wires of $5,000 or more are permitted without charge each month. Each
additional wire is $10.00.
- -Wires must be directed to your pre-authorized bank account.
14
HOW TO EXCHANGE SHARES
The exchange privilege gives you the flexibility to change investments as your
goals change without incurring a sales charge. Since an exchange is a redemption
and a purchase, it creates a gain or loss which is reportable for tax purposes.
You should consult your tax advisor before requesting an exchange. Read the
prospectus of the FI Fund you are purchasing carefully. Review the differences
in objectives, policies, risk, privileges and restrictions.
______________________________________________________________________________
EXCHANGE METHODS
_______________________________________________________________________________
METHOD STEPS TO FOLLOW
Through Your FI
Registered Representative Call your registered representative.
___________________________________________________________________________________
By Phone Call Special Services from 9:00 a.m. to 5:00 p.m., EST
(800) 342-6221 Orders received after the close of the New York Stock
Exchange, usually 4:00 p.m., est, are processed the following business day.
1.You must have telephone privileges
(see Telephone Transactions)
2.Certificate shares cannot be exchanged by phone.
3.For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required.
____________________________________________________________________________________
By Mail to: 1.Send us written instructions signed by all account
ADM exactly as the account is registered.
owners 2. Include your fund account number.
ATTN: EXCHANGE DEPT. 3. Indicate either the dollar amount, number of shares
581 MAIN STREET or percent of the account you want to exchange.
WOODBRIDGE, NJ 07095-119 4. Specify the existing account number or the name of
the new Fund you are exchanging into.
5. Include any outstanding share certificates for the
shares you want to exchange.
6. For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required. Call Shareholder Services at 1 (800)
423-4026.
____________________________________________________________________________________
15
oEXCHANGE CONDITIONS
1: You may only exchange shares within the same Class.
2: Exchanges can only be made into identically owned accounts.
3: Partial exchanges into a new fund account must meet the new fund's minimum
initial investment.
4: The fund you are exchanging into must be eligible for sale in your state.
5: If your request does not clearly indicate the amount to be exchanged or the
accounts involved, no shares will be exchanged.
6: Amounts exchanged from a non-money market fund to a money market fund may be
exchanged back at net asset value. Dividends earned from money market fund
shares will be subject to a sales charge.
7: If you are exchanging from a money market fund to a fund with a sales charge,
there will be a sales charge on any shares that were not previously subject to a
sales charge. Your request must be in writing and include a statement
acknowledging that a sales charge will be paid. If you exchange Class B shares
of a fund for shares of a Class B money market fund, the CDSC will not be
imposed and the holding period used to calculate the CDSC will carry over to the
acquired shares.
8: FI Funds reserve the right to reject any exchange order which in the opinion
of the Fund is part of a market timing strategy. In the event that an exchange
is rejected, neither the redemption nor the purchase side of the exchange will
be processed.
oEXCHANGING FUNDS WITH AUTOMATIC INVESTMENTS OR SYSTEMATIC WITHDRAWALS
Let us know if you want to continue automatic investments into the original fund
or the fund you are exchanging into ("receiving fund") or if you want to change
the amount or allocation into both. Also inform us if you wish to continue,
terminate, or change a preauthorized systematic withdrawal. Without specific
instructions, we will amend account privileges as outlined below:
________________________________________________________________________________
EXCHANGE EXCHANGE EXCHANGE A
ALL SHARES TO ALL SHARES TO PORTION OF
ONE FUND MULTIPLE SHARES TO ONE OR
FUNDS MULTIPLE FUNDS
________________________________________________________________________________
MONEY LINE ML moves to ML stays with ML stays with
(ML) Receiving Fund Original Fund Original Fund
AUTOMATIC PAYROLL API moves to API Stays with API stays with
INVESTMENT (API) Receiving Fund Original Fund Original Fund
SYSTEMATIC SWP moves to SWP SWP stays
WITHDRAWALS Receiving Fund Canceled with Original Fund (SWP)
________________________________________________________________________________
16
WHEN AND HOW ARE FUND SHARES PRICED?
Each FI Fund prices its shares each day that the New York Stock Exchange
("NYSE") is open for trading. The share price is calculated as of the close of
trading on the NYSE (generally 4:00 p.m., EST) except for shares of the money
market funds which are priced as of 12:00 noon. These days are referred to as
"Trading Days" in this Manual.
Each Fund calculates the net asset value of each class of its shares separately
by taking the total value of class assets, subtracting class expenses, and
dividing the difference by the total number of shares in the class. The price
that you will pay for a share is the NAV plus any applicable front-end sales
charge. You receive the NAV price if you redeem or exchange your shares, less
any applicable CDSC.
Fund prices are on our website (www.firstinvestors.com) the next day. The prices
for our larger funds are also reported in many newspapers, including The Wall
Street Journal and The New York Times. Special pricing procedures are employed
during emergencies. For a description of these procedures you can request, free
of charge, a copy of a Statement of Additional Information.
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED?
The processing and price for a purchase, redemption or exchange depends upon how
your order is placed. As indicated below, special rules apply to money market
transactions.
oPURCHASES
Purchases that are made by written application or order are processed when they
are received in "good order" by our Woodbridge, NJ office. To be in good order,
all required paperwork must be completed and payment received. If your order is
received prior to the close of trading on the NYSE, it will receive that day's
price (except in the case of the money market funds which are discussed below).
This procedure applies whether your purchase order is given to your registered
representative or mailed directly by you to our Woodbridge, NJ office.
As described previously in "How to Buy Shares," certain types of purchases can
only be placed by written application. For example, purchases in connection with
the opening of retirement accounts may only be made by written application.
Furthermore, rollovers of retirement accounts will be processed only when we
have received both written application and the proceeds of the rollover. Thus,
for example, if it takes 30 days for another fund group to send us the proceeds
of a retirement account, your purchase of First Investors funds will not occur
until we receive the proceeds.
Some types of purchases may be phoned or electronically transmitted to us by
your broker/dealer. If you give your order to a First Investors registered
17
representative before the close of trading on the NYSE and the order is phoned
to our Woodbridge, NJ office prior to 5:00 p.m., EST, your shares will be
purchased at that day's price (except money market funds which are discussed
below). If you are buying a First Investors Fund through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements. Payment is due within three business days
of placing an order by phone or electronic means or the trade may be cancelled.
(In such event, you will be liable for any loss resulting from the
cancellation.) To avoid cancellation of your orders, you may arrange to open a
money market account and use it to pay for subsequent purchases.
Purchases made pursuant to our Automatic Investment Programs are processed as
follows:
- -Money Line purchases are processed on the dates you select on your application.
- -Automatic Payroll Investment Service purchases are processed on the dates that
we receive funds from your employer.
oREDEMPTIONS
As described previously in "How To Sell Shares", certain redemption orders may
only be made by written instructions or application. Unless you have declined
Telephone Privileges, most redemptions can be made by phone by you or your
registered representative.
Written redemption orders will be processed when received in good order in our
Woodbridge, NJ office. Phone redemption orders will be processed when received
in our Woodbridge, NJ office.
If your redemption order is received prior to the close of trading on the NYSE,
you will receive that day's price (except in the case of money market funds
which are discussed below). If you are redeeming through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements.
oEXCHANGES
Exchanges can generally be made by written instructions or, unless you have
declined Telephone Privileges, by phone by you or your registered
representative. Exchange orders are processed when we receive them in good order
in our Woodbridge, NJ office.
Exchange orders received prior to the close of trading on the NYSE will be
processed at that day's prices (except in the case of exchanges into or out of
money market funds which are discussed below).
oORDERS PLACED VIA FIRST INVESTORS REGISTERED REPRESENTATIVES
All orders placed through a First Investors registered representative must be
reviewed and approved by a principal officer of the branch office before being
mailed or transmitted to the Woodbridge, NJ office.
oORDERS PLACED VIA DEALERS
It is the responsibility of the Dealer to forward or transmit orders to the Fund
promptly and accurately. A fund will not be liable for any change in the price
per share due to the failure of the Dealer to place the order in a timely
fashion. Any such disputes must be settled between you and the Dealer.
18
oSPECIAL RULES FOR MONEY MARKET FUNDS
A money market fund share purchase will not be made until we receive the funds
for the purchase. The funds for the purchase will not be deemed to have been
received until the morning of the next Trading Day following the Trading Day on
which your purchase check is received in our Woodbridge, NJ office. If a check
is received in our Woodbridge, NJ office after the close of regular trading on
the NYSE, the funds for the purchase will not be deemed to have been received
until the morning of the second following Trading Day.
If you make your purchase by wire transfer prior to 12:00 p.m., EST, and you
have previously advised us that the wire is on the way, the funds for the
purchase will be deemed to have been received on that same day. You must call
beforehand and give us your name, account number, the amount of the wire, and a
federal reference number documenting the transfer. If we fail to receive such
advance notification, the funds for your purchase will not be deemed to have
been received until the morning of the next Trading Day following receipt of the
federal wire and your account information. To wire funds to an existing First
Investors money market account, instruct your bank to wire your investment, as
applicable, to: CASH MANAGEMENT FUND BANK OF NEW YORK ABA #021000018 ACCOUNT
8900005696 YOUR NAME YOUR FIRST INVESTORS ACCOUNT # TAX-EXEMPT MONEY MARKET FUND
BANK OF NEW YORK ABA #021000018 ACCOUNT 8900023198 YOUR NAME YOUR FIRST
INVESTORS ACCOUNT #
Purchases by Money Line and Automatic Payroll Investment are processed in the
same manner as those in other Funds.
Requests for redemptions or exchanges out of or into our money market funds must
be received in writing or by phone prior to 12:00 p.m., EST, on a Trading Day,
to be processed the same day. Redemption or exchange orders received after 12:00
p.m., EST, but before the close of regular trading on the NYSE, will be
processed on the morning of the following Trading Day.
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS
A fund reserves the right to reject or restrict any specific purchase request if
the fund determines that doing so is in the best interest of the fund and its
shareholders. Investments in a fund are designed for long-term purposes and are
not intended to provide a vehicle for short-term market timing. The funds also
reserve the right to reject any exchange that in the funds' opinion is part of a
market timing strategy. In the event that a fund rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.
SIGNATURE GUARANTEE POLICY
A signature guarantee protects you from the risk of a
fraudulent signature and is generally required for non-standard and large dollar
transactions. A signature guarantee may be obtained from your First Investors
registered representative or eligible guarantor institutions including banks,
savings associations, credit unions and brokerage firms which are members of the
Securities Transfer Agents Medallion Program ("STAMP"), the New York Stock
Exchange Medallion Signature Program ("MSP"), or the Stock Exchanges Medallion
Program ("SEMP"). Please note that a notary public stamp or seal is not
acceptable. The words "Signature Guaranteed" must appear beside the signature of
the guarantor.
- -SIGNATURE GUARANTEES ARE REQUIRED:
1: For redemptions over $50,000.
2: For redemption checks made payable to any person(s) other than the registered
shareholder(s) or a major financial institution for the benefit of the
registered shareholder(s).
3: For redemption checks mailed to an address other than the address of record
(unless the check is mailed to a financial institution on your behalf).
4: For redemptions when the address of record has changed within 60 days of the
request.
5: When a stock certificate is mailed to an address other than the address of
record or to the dealer on the account.
6: When shares are transferred to a new registration.
7: When issued shares are redeemed.
8: To establish any EFT service.
19
9: For requests to change the address of record to a P.O. box or a "c/o" street
address.
10: If multiple account owners of one account give inconsistent instructions.
11: When a transaction requires additional legal documentation.
12: When the authority of a representative of a corporation, partnership, trust,
or other entity has not been satisfactorily established.
13: When an address on an account which was coded "Do Not Mail" to suppress
check and dividend mailings due to a previously unknown address is updated.
14: Any other instance whereby a fund or its transfer agent deems it necessary
as a matter of prudence.
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS 1 (800) 342-6221
You automatically receive telephone privileges when you open a First Investors
individual, joint, or custodial account unless you decline the option on your
account application or send the Fund written instructions. For trusts, estates,
attorneys-in-fact, corporations, partnerships, and other entities, additional
documents are required. Call Shareholder Services at 1 (800) 423-4026 for
assistance.
Telephone privileges allow you to exchange or redeem shares and authorize other
transactions by calling Special Services at 1 (800) 342-6221 from 9:00 a.m. to
5:00 p.m., EST, on any day the NYSE is open. Your First Investors registered
representative may also use telephone privileges to execute your transactions.
oSECURITY MEASURES
For your protection, the following security measures are taken:
1: Telephone requests are recorded to verify accuracy.
2: Some or all of the following information is obtained:
- -Account number
- -Address
- -Social security number
- -Other information as deemed necessary
3: A written confirmation of each transaction is mailed to you.
We will not be liable for following instructions
if we reasonably believe the instructions are genuine based on our verification
procedures.
oELIGIBILITY
NON-RETIREMENT ACCOUNTS:
You can exchange or redeem shares of any non-retirement account by phone. Shares
must be owned for 15 days for telephone redemption. Telephone exchanges and
redemptions are not available on guardianship and conservatorship accounts.
RETIREMENT ACCOUNTS:
You can exchange between shares of any participant directed IRA, 403(b) or
401(k) Simplifier plan where First Financial Savings Bank, S.L.A. is Custodian.
You may also exchange shares from an individually registered non-retirement
account to an IRA account registered to the same owner (provided an IRA
application is on file). Telephone exchanges are permitted on 401(k) Flexible
plans, money purchase pension plans and profit sharing plans if a First
Investors Qualified Retirement Plan Application is on file with the fund.
Contact your First Investors registered representative or call Shareholder
Services at 1 (800) 423-4026 to obtain a Qualified Retirement Plan Application.
Telephone redemptions are not permitted on First Investors retirement accounts.
20
SHAREHOLDER SERVICES:
1 (800) 423-4026
PROVIDED YOU HAVE NOT DECLINED TELEPHONE PRIVILEGES, CALL US TO UPDATE OR
CORRECT:
- -Your address or phone number.
- -Your birth date (important for retirement distributions).
- -Your distribution option to reinvest or pay in cash (non-retirement accounts
only) or initiate cross reinvestment of dividends.
- -The amount of your Money Line or Automatic Payroll Investment payment.
- -The allocation of your Money Line or Automatic Payroll Investment payment.
- -The amount of your Systematic Withdrawal payment.
TO REQUEST:
- -A duplicate copy of a statement or tax form.
- -A history of your account (the fee can be debited from your non-retirement
account).
- -A share certificate to be mailed to your address of record.
- -A stop payment on a dividend, redemption or money market check.
- -Suspension (up to six months) or cancellation of Money Line.
- -Cancellation of your Systematic Withdrawal Plan.
- -Cancellation of cross-reinvestment of dividends.
- -Money market fund draft checks.
21
OTHER SERVICES
oREINVESTMENT PRIVILEGE
If you sell some or all of your Class A or Class B shares, you may be entitled
to reinvest all or a portion of the proceeds in the same class of shares of a FI
fund within six months of the redemption without a sales charge.
If you reinvest proceeds into a new fund account, you must meet the fund's
minimum initial investment requirement.
If you reinvest all the proceeds from a Class B share redemption, you will be
credited, in additional shares, for the full amount of the CDSC. If you reinvest
a portion of a Class B share redemption, you will be credited with a pro-rated
percentage of the CDSC.
The reinstatement privilege does not apply to automated purchases, automated
redemptions, or reinvestments in Class B shares of less than $1,000. Please
notify us if you qualify for this privilege. For more information, call
Shareholder Services at 1 (800) 423-4026.
oCERTIFICATE SHARES
Every time you make a purchase of Class A shares, we will credit shares to your
fund account. We do not issue shares certificates unless you specifically
request them. Certificates are not issued on any Class B shares or on Class A
money market funds.
Having us credit shares on your behalf eliminates the expense of replacing lost,
stolen, or destroyed certificates. If a certificate is lost, stolen, or damaged,
you will be charged a replacement fee of the greater of 2% of the current value
of the certificated shares or $25.
In addition, certificated shares cannot be redeemed or exchanged until they are
returned with your transaction request. The share certificate must be properly
endorsed and signature guaranteed.
oMoney Market Fund Draft Checks
Free draft check writing privileges are available when you open a First
Investors Cash Management Fund or a First Investors Tax Exempt Money Market Fund
account. Checks may be written for a minimum of $500. Draft checks are not
available for Class B share accounts, retirement accounts, guardianships and
conservatorships. Complete the Money Market Fund Check Redemption section of the
account application to apply for draft checks. To order additional checks, call
Shareholder Services at 1 (800) 423-4026.
Additional documentation is required to establish check writing privileges for
trusts, corporations, partnerships and other entities. Call Shareholder Services
at 1 (800) 423-4026 for further information.
_______________________________________________________________________________
FEE TABLE
Call Shareholder Services at 1 (800) 423-4026 or send your request to FIC, Attn:
Correspondence Dept., 581 Main Street, Woodbridge N.J. 07095-1198 to request a
copy of the following records:
ACCOUNT HISTORY STATEMENTS CANCELLED CHECKS
1974 - 1982* $10 per year fee There is a $10 fee for a copy of a
1983 - present $5 total fee for all years cancelled dividend, liquidation, or
Current & investment check requested. There
Two Prior Years Free cancelled money market draft check.
DUPLICATE TAX FORMS
Current Year Free
Prior Year(s) $7.50 per tax form
per year
* ACCOUNT HISTORIES ARE NOT AVAILABLE
PRIOR TO 1974.
22
oRETURN MAIL
If mail is returned to the fund marked undeliverable by the U.S. Postal Service
after two consecutive mailings, and the fund is unable to obtain a current
shareholder address, the account status will be changed to "Do Not Mail" to
discontinue future mailings and prevent unauthorized persons from obtaining
account information.
You can remove the "Do Not Mail" status on your account by submitting written
instructions including your current address signed by all shareholders with a
signature guarantee (see Signature Guarantee Policy). Additional requirements
may apply for certain accounts. Call Shareholder Services at 1 (800) 423-4026
for more information.
Returned dividend checks and other distributions will be reinvested in the fund
when an account's status has been changed to "Do Not Mail". No interest will be
paid on outstanding checks prior to reinvestment. All future dividends and other
distributions will be reinvested in additional shares until new instructions are
provided. If you cannot be located within a period of time mandated by your
state of residence your fund shares may be turned over to your state (in other
words forfeited).
Prior to turning over assets to your state, the fund will seek to obtain a
current shareholder address in accordance with Securities and Exchange
Commission rules. A search company may be employed to locate a current address.
The fund may deduct the costs associated with the search from your account.
oTRANSFERRING SHARES
A transfer is a change of share ownership from one customer to another. Unlike
an exchange, transfers occur within the same fund. You can transfer your shares
at any time.
To transfer shares, submit a letter of instruction including:
- -Your account number.
- -Dollar amount, percentage, or number of shares to be transferred.
- -Existing account number receiving the shares (IF ANY).
- -The name(s), registration, and taxpayer identification number of the customer
receiving the shares.
- -The signature of each account owner requesting the transfer with signature
guarantee(s).
In addition, we will request that the transferee complete a Master Account
Agreement to establish a brokerage account with First Investors Corporation and
validate his or her social security number to avoid back-up withholding. If the
transferee declines to complete an MAA, all transactions in the account must be
on an unsolicited basis and the account will be so coded.
Depending upon your account registration, additional documentation may be
required to transfer shares. Transfers due to the death or disability of a
shareholder also require additional documentation. Please call our Shareholder
Services Department at 1 (800) 423-4026 for specific transfer requirements
before initiating a request.
A transfer is a change of ownership and may trigger a taxable event. You should
consult your tax advisor before initiating a transfer.
23
ACCOUNT STATEMENTS
oTRANSACTION CONFIRMATION STATEMENTS
You will receive a confirmation statement immediately after most transactions.
These include:
- -shareorder purchases
- -check investments
- -redemptions
- -exchanges
- -transfers
- -systematic withdrawals
Money Line and Automatic Payroll Investment purchases are not confirmed for each
transaction. They will appear on your next regularly scheduled monthly or
quarterly statement (see Dividend Schedule under "Dividends and Distributions").
A separate confirmation statement is generated for each fund account you own. It
provides:
- -Your fund account number
- -The date of the transaction
- -A description of the transaction (PURCHASE, REDEMPTION, ETC.)
- -The number of shares bought or sold for the transaction
- -The dollar amount of the transaction
- -The dollar amount of the dividend payment (IF APPLICABLE)
- -The total share balance in the account
- -The dollar amount of any dividends or capital gains paid
- -The number of shares held by you, held for you (INCLUDING ESCROW SHARES), and
the total number of shares you own.
The confirmation statement also provides a perforated Investment Stub with your
preprinted name, registration, and fund account number for future investments.
oMASTER ACCOUNT STATEMENTS
If First Investors Corporation is your broker, you will receive a Master Account
Statement for all your identically owned First Investors fund accounts on at
least a quarterly basis. The Master Account Statement will also include a recap
of any First Investors Life Insurance and Executive Investors Trust accounts you
may own. Joint accounts registered under your taxpayer identification number
will appear on a separate Master Account Statement but may be mailed in the same
envelope upon request.
The Master Account Statement provides the following information for each First
Investors fund you own:
- -fund name
- -fund's current market value
- -total distributions paid year-to-date
- -total number of shares owned
oANNUAL AND SEMI-ANNUAL REPORTS
You will also receive an Annual and a Semi-Annual Report. These financial
reports show the assets, liabilities, revenues, expenses, and earnings of the
fund as well as a detailed accounting of all portfolio holdings. You will
receive one report per household.
24
DIVIDENDS AND DISTRIBUTIONS
oDIVIDENDS AND DISTRIBUTIONS
For funds that declare daily dividends, you start earning dividends on the day
your purchase is made. For FI money market funds, you start earning dividends on
the day federal funds are credited to your fund account. The funds declare
dividends from net investment income and distribute the accrued earnings to
shareholders as noted below:
________________________________________________________________________________
DIVIDEND PAYMENT SCHEDULE
________________________________________________________________________________
MONTHLY: QUARTERLY: ANNUALLY (IF ANY):
Cash Management Fund Blue Chip Fund Global Fund
Fund for Income Growth & Income Fund Special Situations Fund
Government Fund Total Return Fund Mid-Cap Opportunity Fund
Insured Intermediate Tax-Exempt Utilities Income Fund
Insured Tax Exempt Fund
Investment Grade Fund
High Yield Fund
Multi-State Insured Tax Free Fund
New York Insured Tax Free Fund
Tax-Exempt Money Market Fund
________________________________________________________________________________
Capital gains distributions, if any, are paid annually, usually near the end of
the fund's fiscal year. On occasion, more than one capital gains distribution
may be paid during one year. Dividend and capital gains distributions are
automatically reinvested to purchase additional fund shares unless otherwise
instructed. Dividend payments of less than $5.00 are automatically reinvested to
purchase additional fund shares.
oBUYING A DIVIDEND
If you buy shares shortly before the record date of the dividend, the entire
dividend you receive may be taxable even though a part of the distribution is
actually a return of your purchase price. This is called "buying a dividend."
There is no advantage to buying a dividend because a fund's net asset value per
share is reduced by the amount of the dividend.
25
TAX FORMS
TAX FORM DESCRIPTION MAILED BY
_________________________________________________________________________________________________
1099-DIV Consolidated report lists all taxable dividend and capital gains January 31
distributions for all of the shareholder's accounts. Also includes
foreign taxes paid and any federal income tax withheld due to backup
withholding.
_________________________________________________________________________________________________
1099-B Lists proceeds from all redemptions including systematic January
31 withdrawals and exchanges. A separate form is issued for each
fund account. Includes amount of federal income tax withheld due
to backup withholding.
_________________________________________________________________________________________________
1099-R Lists taxable distributions from a retirement account. A separate January 31
form is issued for each fund account. Includes federal
income tax withheld due to IRS withholding requirements.
_________________________________________________________________________________________________
5498 Provided to shareholders who made an annual IRA May 31
contribution or rollover purchase. Also provides the account's
fair market value as of the last business day of the previous year.
A separate form is issued for each fund account.
_________________________________________________________________________________________________
1042-S Provided to non-resident alien shareholders to report the amount March 15
of fund dividends paid and the amount of federal taxes
withheld. A separate form is issued for each fund account.
_________________________________________________________________________________________________
Cost Basis Uses the "average cost-single category" method to show the cost January 31
Statement basis of any shares sold or exchanged. Information is provided
to assist shareholders in calculating capital gains or losses. A
separate statement, included with Form 1099-B, is issued for each
fund account. This statement is not reported to the IRS and does
not include money market funds or retirement accounts.
_________________________________________________________________________________________________
Tax Savings Consolidated report lists all amounts not subject to federal, January 31
Report for state and local income tax for all the shareholder's accounts.
Non-Taxable Also includes any amounts subject to alternative minimum tax.
Income
_________________________________________________________________________________________________
Tax Savings Provides the percentage of income paid by each fund that may January 31
Summary be exempt from state income tax.
_________________________________________________________________________________________________
THE OUTLOOK
Today's strategies for tomorrow's goals are brought into focus in the OUTLOOK,
the quarterly newsletter for clients of First Investors Corporation. This
informative tool discusses the products and services we offer to help you take
advantage of current market conditions and tax law changes. The OUTLOOK'S
straight forward approach and timely articles make it a valuable resource. As
always, your registered representative is available to provide you with
additional information and assistance. Material contained in this publication
should not be considered legal, financial, or other professional advice.
26
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
62
EXECUTIVE INVESTORS TRUST
BLUE CHIP FUND
HIGH YIELD FUND
INSURED TAX EXEMPT FUND
95 Wall Street
New York, New York 10005 1-800-423-4026
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY __, 2000
This is a Statement of Additional Information ("SAI") for Executive
Investors Trust ("Trust"), an open-end diversified management investment
company. The Trust offers three separate series, each of which has different
investment objectives and policies: BLUE CHIP FUND, HIGH YIELD FUND and INSURED
TAX EXEMPT FUND (each a "Fund").
This SAI is not a prospectus. It should be read in conjunction with the
Funds' Prospectus/Proxy Statement dated January __, 2000 which may be obtained
free of cost from the Trust at the address or telephone number noted above.
Information regarding the purchase, redemption, sale and exchange of your Fund
shares is contained in the Shareholder Manual, a separate section of the SAI
that is a distinct document and may also be obtained free of charge by
contacting your Fund at the address or telephone number noted above.
TABLE OF CONTENTS
PAGE
Investment Strategies and Risks..............................................2
Investment Policies..........................................................5
Futures and Options Strategies..............................................16
Portfolio Turnover..........................................................22
Investment Restrictions.....................................................22
Trustees And Officers.......................................................27
Management..................................................................29
Underwriter.................................................................30
Distribution Plans..........................................................31
Determination of Net Asset Value............................................32
Allocation of Portfolio Brokerage...........................................33
Purchase, Redemption and Exchange of Shares.................................35
Taxes.......................................................................35
Performance Information.....................................................38
General Information.........................................................43
Pro Forma Financial Statements and Schedules................................45
Shareholder Manual: A Guide to your First Investors Mutual Fund Account.....46
Appendix A .................................................................47
Appendix B .................................................................48
Appendix C .................................................................49
Financial Statements........................................................53
INVESTMENT STRATEGIES AND RISKS
BLUE CHIP FUND
The Fund seeks its objective by investing, under normal market conditions,
at least 65% of its total assets in common stocks of "Blue Chip" companies that
the Fund's investment adviser, Executive Investors Management Company, Inc.
("EIMCO" or "Adviser"), believes have potential earnings growth that is greater
than the average company included in the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"). The Fund also may invest up to 35% of its total assets
in the equity securities of non-Blue Chip companies that the Adviser believes
have significant potential for growth of capital or future income consistent
with the preservation of capital. When market conditions warrant, or when the
Adviser believes it is necessary to achieve the Fund's objective, the Fund may
invest up to 25% of its total assets in fixed-income securities. It is the
Fund's policy to remain relatively fully invested in equity securities under all
market conditions rather than to attempt to time the market by maintaining large
cash or fixed-income securities positions when market declines are anticipated.
The Fund is appropriate for investors who are comfortable with a fully invested
stock portfolio.
The Fund defines Blue Chip companies as those companies that are included
in the S&P 500. Blue Chip companies are considered to be of relatively high
quality and generally exhibit superior fundamental characteristics, which may
include: potential for consistent earnings growth, a history of profitability
and payment of dividends, leadership position in their industries and markets,
proprietary products or services, experienced management, high return on equity
and a strong balance sheet. Blue Chip companies usually exhibit less investment
risk and share price volatility than smaller, less established companies.
Examples of Blue Chip companies are Microsoft Corp., General Electric Co.,
Pepsico Inc. and Bristol-Myers Squibb Co.
The Fund primarily invests in stocks of growth companies. These are
companies which are expected to increase their earnings faster than the overall
market. If earnings expectations are not met, the prices of these stocks may
decline substantially even if earnings do increase. Investments in growth
companies may lack the dividend yield that can cushion stock prices in market
downturns.
The fixed-income securities in which the Fund may invest include money
market instruments (including prime commercial paper, certificates of deposit of
domestic branches of U.S. banks and bankers' acceptances), U.S. Government
Obligations (including mortgage-backed securities) and corporate debt
securities. However, no more than 5% of the Fund's net assets may be invested in
corporate debt securities rated below Baa by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P") (commonly referred
to as "high yield bonds" or "junk bonds"). The Fund may borrow money for
temporary or emergency purposes in amounts not exceeding 5% of its total assets.
The Fund may also invest up to 10% of its total assets in ADRs, enter into
repurchase agreements and make loans of portfolio securities.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
HIGH YIELD FUND
The Fund primarily seeks high current income and secondarily seeks capital
appreciation by investing, under normal market conditions, at least 65% of its
total assets in high risk, high yield securities, commonly referred to as "junk
bonds" ("High Yield Securities"). High Yield Securities include the following
instruments: fixed, variable or floating rate debt obligations (including bonds,
debentures and notes) which are rated below Baa by Moody's or below BBB by S&P,
or are unrated and deemed to be of comparable quality by the Fund's Adviser;
2
preferred stocks and dividend-paying common stocks that have yields comparable
to those of high yielding debt securities; any of the foregoing securities of
companies that are financially troubled, in default or undergoing bankruptcy or
reorganization ("Deep Discount Securities"); and any securities convertible into
any of the foregoing. See "High Yield Securities" and "Deep Discount
Securities," below.
The Fund may invest in debt securities issued by foreign governments and
companies and in foreign currencies for the purpose of purchasing such
securities. However, the Fund may not invest more than 5% of its total assets in
debt securities issued by foreign governments and companies that are denominated
in foreign currencies. The Fund may invest up to 5% of its total assets in debt
securities of issuers located in emerging market countries. The Fund also may
borrow money for temporary or emergency purposes in amounts not exceeding 5% of
its total assets, invest up to 10% of its net assets in securities issued on a
when-issued or delayed delivery basis, invest up to 15% of its net assets in
restricted securities (which may not be publicly marketable), and invest in zero
coupon and pay-in-kind securities. In addition, the Fund may make loans of
portfolio securities.
The Fund may invest up to 35% of its total assets in the following
instruments: common and preferred stocks, other than those considered to be High
Yield Securities; debt obligations of all types (including bonds, debentures and
notes) rated BBB or better by Moody's or S&P; securities issued by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Obligations");
warrants and money market instruments consisting of prime commercial paper,
certificates of deposit of domestic branches of U.S.
banks, bankers' acceptances and repurchase agreements.
In any period of market weakness or of uncertain market or economic
conditions, the Fund may establish a temporary defensive position to preserve
capital by having all or part of its assets invested in short-term fixed income
securities or retained in cash or cash equivalents, including bank certificates
of deposit, bankers' acceptances, U.S. Government Obligations and commercial
paper issued by domestic corporations.
The medium- to lower-rated, and certain of the unrated, securities in
which the Fund invests tend to offer higher yields than higher-rated securities
with the same maturities because the historical financial condition of the
issuers of such securities may not be as strong as that of other issuers. Debt
obligations rated lower than A by Moody's or S&P have speculative
characteristics or are speculative, and generally involve more risk of loss of
principal and income than higher-rated securities. Also, their yields and market
values tend to fluctuate more than those of higher quality securities. The
greater risks and fluctuations in yield and value occur because investors
generally perceive issuers of lower-rated and unrated securities to be less
creditworthy. These risks cannot be eliminated, but may be reduced by
diversifying holdings to minimize the portfolio impact of any single investment.
In addition, fluctuations in market value do not affect the cash income from the
securities, but are reflected in the computation of the Fund's net asset value.
When interest rates rise, the net asset value of the Fund tends to decrease.
When interest rates decline, the net asset value of the Fund tends to increase.
Variable or floating rate debt obligations in which the Fund may invest
periodically adjust their interest rates to reflect changing economic
conditions. Thus, changing economic conditions specified by the terms of the
security would serve to change the interest rate and the return offered to the
investor. This reduces the effect of changing market conditions on the
security's underlying market value.
A High Yield Security may itself be convertible into or exchangeable for
equity securities, or may carry with it the right to acquire equity securities
evidenced by warrants attached to the security or acquired as part of a unit
with the security. Although the Fund invests primarily in High Yield Securities,
securities received upon conversion or exercise of warrants and securities
remaining upon the break-up of units or detachment of warrants may be retained
to permit orderly disposition, to establish a long-term holding period for
Federal income tax purposes, or to seek capital appreciation.
3
Because of the greater number of investment considerations involved in
investing in High Yield Securities, the achievement of the Fund's investment
objectives depends more on the Adviser's research abilities than would be the
case if the Fund were investing primarily in securities in the higher rated
categories. Because medium- to lower-rated securities generally involve greater
risks of loss of income and principal than higher-rated securities, investors
should consider carefully the relative risks associated with investments in
securities that carry medium to lower ratings or are unrated. See "Types of
Securities and Their Risks-High Yield Securities" and Appendix A for a
description of corporate bond ratings.
The Fund seeks to achieve its secondary objective to the extent consistent
with its primary objective. There can be no assurance that the Fund will be able
to achieve its investment objectives. The Fund's net asset value fluctuates
based mainly upon changes in the value of its portfolio securities.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INSURED TAX EXEMPT FUND
The Fund seeks to achieve its objective by investing at least 80% of its
total assets in municipal bonds issued by or on behalf of various states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is exempt from Federal income tax and is not a Tax Preference Item.
While the Fund does not intend to buy any instruments whose interest income is
subject to Federal income tax or is a Tax Preference Item, up to 20% of the
Fund's net assets may be invested in securities, the interest of which is
subject to Federal income tax, including the AMT. The Fund also may invest up to
20% of its total assets in certificates of participation, municipal notes,
municipal commercial paper and variable rate demand instruments (collectively
with municipal bonds, "Municipal Instruments"). The Fund generally invests in
bonds with maturities of over fifteen years.
See "Municipal Instruments," below.
While the Fund diversifies its assets among municipal issuers in different
states, municipalities and territories, from time to time it may invest more
than 25% of its total assets in a particular segment of the municipal bond
market, such as hospital revenue bonds, housing agency bonds, airport bonds or
electric utility bonds. Such a possible concentration of the assets of the Fund
could result in the Fund being invested in securities which are related in such
a way that economic, business, political or other developments which would
affect one security would probably likewise affect the other securities within
that particular segment of the bond market.
The Fund may make loans of portfolio securities and invest in zero coupon
municipal securities. The Fund may invest up to 25% of its net assets in
securities on a "when issued" basis, which involves an arrangement whereby
delivery of, and payment for, the instruments occur up to 45 days after the
agreement to purchase the instruments is made by a Fund. The Fund also may
invest up to 20% of its assets, on a temporary basis, in high quality fixed
income obligations, the interest on which is subject to Federal and state or
local income taxes. In addition, the Fund may invest up to 10% of its total
assets in municipal obligations on which the rate of interest varies inversely
with interest rates on other municipal obligations or an index (commonly
referred to as inverse floaters). The Fund may borrow money for temporary or
emergency purposes in amounts not exceeding 5% of its total assets. See
"Investment Policies," below.
Although the Fund generally invests in municipal bonds rated Baa or higher
by Moody's or BBB or higher by S&P, the Fund may invest up to 5% of its net
assets in lower rated municipal bonds or in unrated municipal bonds deemed to be
of comparable quality by the Adviser. See "Debt Securities," below. However, in
4
each instance such municipal bonds will be covered by the insurance feature and
thus are considered to be of higher quality than lower rated municipal bonds
without an insurance feature. See "Insurance" for a discussion of the insurance
feature. The Adviser will carefully evaluate on a case-by-case basis whether to
dispose of or retain a municipal bond which has been downgraded in rating
subsequent to its purchase by a Fund. A description of municipal bond ratings is
contained in Appendix A.
There can be no assurances that future national, regional or state-wide
economic developments will not adversely affect the market value of Municipal
Securities held by the Fund or the ability of particular obligors to make timely
payments of debt service on (or lease payments relating to) those obligations.
There is also the risk that some or all of the interest income that the Fund
receives might become taxable or be determined to be taxable by the Internal
Revenue Service, applicable state tax authorities, or a judicial body. See the
discussion on "Taxes." In addition, there can be no assurances that future court
decisions or legislative actions will not affect the ability of the issuer of a
Municipal Security to repay its obligations.
Additional restrictions are set forth in the "Investment Restrictions"
section of this SAI.
INVESTMENT POLICIES
AMERICAN DEPOSITORY RECEIPTS. American Depository Receipts ("ADRs") may be
purchased through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the underlying security and a
depository, whereas a depository may establish an unsponsored facility without
participation by the issuer of the depository security. Holders of unsponsored
depository receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts of the
deposited securities. ADRs are not necessarily denominated in the same currency
as the underlying securities to which they may be connected. Generally, ADRs in
registered form are designed for use in the U.S. securities market and ADRs in
bearer form are designed for use outside the United States.
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.
BOND MARKET CONCENTRATION. INSURED TAX EXEMPT FUND may invest more than 25%
of its total assets in a particular segment of the bond market, such as hospital
revenue bonds, housing agency bonds, industrial development bonds, airport bonds
and university dormitory bonds. Such concentration may occur in periods when one
or more of these segments offer higher yields and/or profit potential. The Fund
has no fixed policy as to concentrating its investments in a particular segment
of the bond market, because bonds are selected for investment based on appraisal
of their individual value and income. This possible concentration of the assets
of the Fund may result in the Fund being invested in securities which are
related in such a way that economic, business, political developments or other
changes which would affect one security would probably likewise affect the other
securities within that particular segment of the bond market. Such concentration
of the Fund's investments could increase market risks, but risk of non-payment
of interest when due, or default of principal, are covered by the insurance
obtained by the Fund.
5
CERTIFICATES OF DEPOSIT. Each Fund may invest in bank certificates of
deposit ("CDs"). The Federal Deposit Insurance Corporation is an agency of the
U.S. Government which insures the deposits of certain banks and savings and loan
associations up to $100,000 per deposit. The interest on such deposits may not
be insured if this limit is exceeded. Current Federal regulations also permit
such institutions to issue insured negotiable CDs in amounts of $100,000 or
more, without regard to the interest rate ceilings on other deposits. To remain
fully insured, these investments currently must be limited to $100,000 per
insured bank or savings and loan association.
CONVERTIBLE SECURITIES. BLUE CHIP FUND and HIGH YIELD FUND may invest in
convertible securities. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security. The Adviser 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.
DETACHABLE CALL OPTIONS. INSURED TAX EXEMPT FUND may invest in detachable
call options. Detachable call options are sold by issuers of municipal bonds
separately from the municipal bonds to which the call options relate and permit
the purchasers of the call options to acquire the municipal bonds at the call
prices and call dates. In the event that interest rates drop, the purchaser
could exercise the call option to acquire municipal bonds that yield
above-market rates. During the coming year, the Fund expects to acquire
detachable call options relating to municipal bonds that it already owns or will
acquire in the immediate future and thereby, in effect, make such municipal
bonds non-callable so long as the Fund continues to hold the detachable call
option. The Fund will consider detachable call options to be illiquid securities
and they will be treated as such for purposes of certain investment limitation
calculations.
FOREIGN GOVERNMENT OBLIGATIONS. HIGH YIELD FUND may invest in foreign
government obligations, which generally consist of obligations supported by
national, state or provincial governments or similar political subdivisions.
Investments in foreign government debt obligations involve special risks. The
issuer of the debt may be unable or unwilling to pay interest or repay principal
when due in accordance with the terms of such debt, and the Fund may have
limited legal resources in the event of default. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance.
FOREIGN SECURITIES--RISK FACTORS. HIGH YIELD FUNd may sell a security
denominated in a foreign currency and retain the proceeds in that foreign
currency to use at a future date (to purchase other securities denominated in
that currency) or the Fund may buy foreign currency outright to purchase
securities denominated in that foreign currency at a future date. Investing in
foreign securities involves more risk than investing in securities of U.S.
companies. Because HIGH YIELD FUND currently does not intend to hedge its
foreign investments against the risk of foreign currency fluctuations, changes
in the value of these currencies can significantly affect the Fund's share
price. In addition, the Fund will be affected by changes in exchange control
regulations and fluctuations in the relative rates of exchange between the
currencies of different nations, as well as by economic and political
developments. Other risks involved in foreign securities include the following:
there may be less publicly available information about foreign companies
comparable to the reports and ratings that are published about companies in the
United States; foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies; some foreign stock markets
have substantially less volume than U.S. markets, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies; there may be less government supervision and regulation of foreign
stock exchanges, brokers and listed companies than exist in the United States;
and there may be the possibility of expropriation or confiscatory taxation,
6
political or social instability or diplomatic developments which could affect
assets of the HIGH YIELD FUND held in foreign countries.
HIGH YIELD SECURITIES. High Yield Securities are subject to certain
risks that may not be present with investments in higher grade debt securities.
EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. Debt obligations rated
lower than Baa by Moody's or BBB by S&P, commonly referred to as "junk bonds,"
are speculative and generally involved a higher risk or loss of principal and
income than higher-rated debt securities. The prices of High Yield Securities
tend to be less sensitive to interest rate changes than higher-rated
investments, but may be more sensitive to adverse economic changes 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 the Fund's net asset value. A significant 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 higher incidence of default. This would affect the value of
such securities and thus the Fund's net asset value. Further, if the issuer of a
security owned by the Fund defaults, it 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
exercised either provision in a declining interest rate market, the fund would
have to replace the security, which could result in a decreased return for
shareholders. Conversely, if the Fund experience unexpected net redemptions in a
rising interest rate market, it might be forced to sell certain securities,
regardless of investment merit. This could result in decreasing the assets to
which Fund expenses could be allocated and in a reduced rate of return for the
Fund. While it is impossible to protect entirely against this risk,
diversification of the Fund's portfolio and the Adviser's careful analysis of
prospective portfolio securities helps to minimize the impact of a decrease in
value of a particular security or group of securities in the 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 the 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.
CREDIT RATINGS. The credit ratings issued by credit rating services
may not fully reflect the true risks of an investment. For example, credit
ratings typically evaluate the safety of principal and interest payments, not
market value risk, of High Yield Securities. Also, credit rating agencies may
fail to change on a timely basis a credit rating to reflect changes in economic
or company conditions that affect a security's market value. The Fund may invest
in securities rated as low as D by S&P or C by Moody's or, if unrated, deemed to
be of comparable quality by the Adviser. Debt obligations with these ratings
either have defaulted or are in great danger of defaulting and are considered to
be highly speculative. The Adviser continually monitors the investments in the
7
Fund's portfolio and carefully evaluates whether to dispose of or retain High
Yield Securities whose credit ratings have changed. See Appendix A for a
description of corporate bond ratings.
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 second market. To the
extent that no established retail secondary market exists, many High Yield
Securities may not be as liquid as higher-grade bonds. A less active and thinner
market for High Yield Securities than that available for higher quality
securities may result in more volatile valuations of a Fund's holdings and more
difficulty in executing trades at favorable prices during unsettled market
conditions.
The ability of the 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 Trust's Board of Trustees ("Board")
to value High Yield Securities become 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.
INSURANCE. The municipal bonds in INSURED TAX EXEMPT FUND'S portfolio will
be insured as to their scheduled payments of principal and interest at the time
of purchase either (1) under a Mutual Fund Insurance Policy written by an
independent insurance company; (2) under an insurance policy obtained subsequent
to a municipal bond's original issue (a "Secondary Market Insurance Policy"); or
(3) under an insurance policy obtained by the issuer or underwriter of such
municipal bond at the time of original issuance (a "New Issue Insurance
Policy"). An insured municipal bond in the Fund's portfolio typically will be
covered by only one of the three policies. For instance, if a municipal bond is
already covered by a New Issue Insurance Policy or a Secondary Market Insurance
Policy, then that security will not be additionally insured under the Mutual
Fund Insurance Policy.
The Trust has purchased a Mutual Fund Insurance Policy ("Policy") from AMBAC
Assurance Corporation ("AMBAC"), a Wisconsin stock insurance company, with its
principal executive offices in New York City. The Policy guarantees the payment
of principal and interest on municipal bonds purchased by the Fund which are
eligible for insurance under the Policy. Municipal bonds are eligible for
insurance if they are approved by AMBAC prior to their purchase by the Fund.
AMBAC furnished the Fund with an approved list of municipal bonds at the time
the Policy was issued and subsequently provides amended and modified lists of
this type at periodic intervals. AMBAC may withdraw particular securities from
the approved list and may limit the aggregate amount of each issue or category
of municipal bonds therein, in each case by notice to the Fund prior to the
entry by the Fund of an order to purchase a specific amount of a particular
security otherwise eligible for insurance under the Policy. The approved list
merely identifies issuers whose issues may be eligible for insurance and does
not constitute approval of, or a commitment by, AMBAC to insure such securities.
In determining eligibility for insurance, AMBAC has applied its own standards
which correspond generally to the standard it normally uses in establishing the
insurability of new issues of municipal bonds and which are not necessarily the
criteria which would be used in regard to the purchase of municipal bonds by the
Fund. The Policy does not insure: (1) obligations of, or securities guaranteed
by, the United States of America or any agency or instrumentality thereof; (2)
municipal bonds which were insured as to payment of principal and interest at
the time of their issuance; (3) municipal bonds purchased by the Fund at a time
when they were ineligible for insurance; (4) municipal bonds which are insured
by insurers other than AMBAC; and (5) municipal bonds which are no longer owned
by the Fund. AMBAC has reserved the right at any time, upon 90 days' prior
written notice to the Fund, to refuse to insure any additional municipal bonds
purchased by the Fund, on or after the effective date of such notice. If AMBAC
so notifies the Fund, the Fund will attempt to replace AMBAC with another
8
insurer. If another insurer cannot be found to replace AMBAC, the Fund may ask
its shareholders to approve continuation of its business without insurance.
In the event of nonpayment of interest or principal when due, in respect of
an insured municipal bond, AMBAC is obligated under the Policy to make such
payment not later than 30 days after it has been notified by the Fund that such
nonpayment has occurred (but not earlier than the date such payment is due).
AMBAC, as regards insurance payments it may make, will succeed to the rights of
the Fund. Under the Policy, a payment of principal on an insured municipal bond
is due for payment when the stated maturity date has been reached, which does
not include any earlier due date by reason of redemption, acceleration or other
advancement of maturity or extension or delay in payment by reason of
governmental action.
The Policy does not guarantee the market value or yield of the insured
municipal bonds or the net asset value or yield of the Fund's shares. The Policy
will be effective only as to insured municipal bonds owned by the Fund. In the
event of a sale by the Fund of a municipal bond insured under the Policy, the
insurance terminates as to such municipal bond on the date of sale. If an
insured municipal bond in default is sold by the Fund, AMBAC is liable only for
those payments of interest and principal which are then due and owing and, after
making such payments, AMBAC will have no further obligations to the Fund in
respect of such municipal bond. It is the intention of the Fund, however, to
retain any insured securities which are in default or in significant risk of
default and to place a value on the defaulted securities equal to the value of
similar insured securities which are not in default. While a defaulted bond is
held by the Fund, the Fund continues to pay the insurance premium thereon but
also collects interest payments from the insurer and retains the right to
collect the full amount of principal from the insurer when the municipal bond
comes due. See "Determination of Net Asset Value" for a more complete
description of the Fund's method of valuing securities in default and securities
which have a significant risk of default.
The Trust may purchase a Secondary Market Insurance Policy from an
independent insurance company rated in the top rating category by Standard &
Poor's Ratings Group ("S&P"), Moody's Investors Service ("Moody's"), Fitch IBCA,
Inc. ("Fitch") or any other nationally recognized rating organization which
insures a particular bond for the remainder of its term at a premium rate fixed
at the time such bond is purchased by the Fund. It is expected that these
premiums will range from 1% to 5% of par value. Such insurance coverage will be
noncancellable and will continue in force so long as such bond so insured is
outstanding. The Fund may also purchase municipal bonds which are already
insured under a Secondary Market Insurance Policy. A Secondary Market Insurance
Policy could enable the Fund to sell a municipal bond to a third party as an
AAA/Aaa rated insured municipal bond at a market price higher than what
otherwise might be obtainable if the security were sold without the insurance
coverage. (Such rating is not automatic, however, and must specifically be
requested for each bond.) Any difference between the excess of a bond's market
value as an AAA/Aaa rated bond over its market value without such rating and the
single premium payment would inure to the Fund in determining the net capital
gain or loss realized by the Fund upon the sale of the bond.
In addition to the contract of insurance relating to the Fund, there is a
contract of insurance between AMBAC and First Investors Multi-State Insured Tax
Free Fund, between AMBAC and First Investors Series Fund, between AMBAC and
First Investors New York Insured Tax Free Fund, Inc. and between AMBAC and First
Investors Insured Tax Exempt Fund, Inc. Otherwise, neither AMBAC or any
affiliate thereof, has any material business relationship, direct or indirect,
with the Funds.
AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia, the Territory of Guam and
the Commonwealth of Puerto Rico, with admitted assets of $3,289,594,353
(unaudited) and statutory capital of $1,920,300,000 (unaudited) as of December
9
31, 1998. Statutory capital consists of AMBAC's policyholders' surplus and
statutory contingency reserve. S&P, Moody's and Fitch have each assigned a
triple-A claims-paying ability rating to AMBAC.
AMBAC has obtained a private letter ruling from the Internal Revenue Service
("IRS") to the effect that the insuring of an obligation by AMBAC will not
affect the treatment for Federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
AMBAC under policy provisions substantially identical to those contained in its
municipal bond insurance policy shall be treated for Federal income tax purposes
in the same manner as if such payments were made by the issuer of the municipal
bonds. Investors should understand that a private letter ruling may not be cited
as precedent by persons other than the taxpayer to whom it is addressed;
nevertheless, those rulings may be viewed as generally indicative of the
Internal Revenue Service's views on the proper interpretation of the Code and
the regulations thereunder.
AMBAC makes no representation regarding the municipal bonds included in the
investment portfolio of the Fund or the advisability of investing in such
municipal bonds and makes no representation regarding, nor has it participated
in the preparation of, the Prospectus and this SAI.
The information relating to AMBAC contained above has been furnished by
AMBAC. No representation is made herein as to the accuracy or adequacy of such
information, or as to the existence of any adverse changes in such information,
subsequent to the date hereof.
INVERSE FLOATERS. INSURED TAX EXEMPT FUND may invest in derivative
securities on which the rate of interest varies inversely with interest rates on
similar securities or the value of an index. For example, an inverse floating
rate security may pay interest at a rate that increases as a specified interest
rate index decreases but decreases as that index increases. The secondary market
for inverse floaters may be limited. The market value of such securities
generally is more volatile than that of a fixed rate obligation and, like most
debt obligations, will vary inversely with changes in interest rates. The
interest rates on inverse floaters may be significantly reduced, even to zero,
if interest rates rise. The Fund may invest up to 10% of its net assets in
inverse floaters.
LOANS OF PORTFOLIO SECURITIES. Each Fund may loan securities to qualified
broker-dealers or other institutional investors provided: the borrower pledges
to the Fund and agrees to maintain at all times with the Fund collateral equal
to not less than 100% of the value of the securities loaned (plus accrued
interest or dividend, if any); the loan is terminable at will by the Fund; the
Fund pays only reasonable custodian fees in connection with the loan; and the
Adviser monitors the creditworthiness of the borrower throughout the life of the
loan. Such loans may be terminated by the Fund at any time and the Fund may vote
the proxies if a material event affecting the investment is to occur. The market
risk applicable to any security loaned remains a risk of the Fund. The borrower
must add to the collateral whenever the market value of the securities rises
above the level of such collateral. The Fund could incur a loss if the borrower
should fail financially at a time when the value of the loaned securities is
greater than the collateral. BLUE CHIP Fund and INSURED TAX EXEMPT FUND may make
loans not in excess of 10% of each Fund's total assets. HIGH YIELD FUND may make
loans, together with illiquid securities, not in excess of 15% of its net
assets.
MONEY MARKET INSTRUMENTS. Investments by each Fund in commercial paper are
limited to obligations rated Prime-1 by Moody's or A-1 by S&P. Commercial paper
includes notes, drafts, or similar instruments payable on demand or having a
maturity at the time of issuance not exceeding nine months, exclusive of days of
grace or any renewal thereof. Investments in certificates of deposit will be
made only with domestic institutions with assets in excess of $500 million. See
Appendix A for a description of commercial paper ratings.
10
MORTGAGE-BACKED SECURITIES. BLUE CHIP 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 the Fund), like the payments on the underlying
loans, represent both principal and interest. Although the underlying mortgage
loans are for specified periods of time, such as twenty to thirty years, the
borrowers can, and typically do, repay them sooner. Thus, the security holders
frequently receive prepayments of principal, in addition to the principal which
is part of the regular monthly payments. A borrower is more likely to prepay a
mortgage which bears a relatively high rate of interest. Thus, in times of
declining interest rates, some higher yielding mortgages might be repaid
resulting in larger cash payments to the Fund, and the Fund will be forced to
accept lower interest rates when that cash is used to purchase additional
securities.
RISKS OF MORTGAGE-BACKED SECURITIES. Investments in mortgage-backed
securities entail market, prepayment and extension risk. Fixed-rate
mortgage-backed securities are priced to reflect, among other things, current
and perceived interest rate conditions. As conditions change, market values will
fluctuate. In addition, the mortgages underlying mortgage-backed securities
generally may be prepaid in whole or in part at the option of the individual
buyer. Prepayment generally increases when interest rates decline. Prepayments
of the underlying mortgages can affect the yield to maturity on mortgage-backed
securities and, if interest rates decline, the prepayment may only be invested
at the then prevailing lower interest rate. As a result, mortgage-backed
securities may have less potential for capital appreciation during periods of
declining interest rates as compared with other U.S. Government securities with
comparable stated maturities. Conversely, rising interest rates may cause
prepayment rates to occur at a slower than expected rate. This may effectively
lengthen the life of a security, which is known as extension risk. Longer term
securities generally fluctuate more widely in response to changes in interest
rates than shorter term securities. Changes in market conditions, particularly
during periods of rapid or unanticipated changes in market interest rates, may
result in volatility and reduced liquidity of the market value of certain
mortgage-backed securities.
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 purchases are the "modified pass-through" type.
"Modified pass-through" GNMA Certificates entitle the holder to receive a share
of all interest and principal payments paid and owed on the mortgage pool net of
fees paid to the "issuer" and GNMA, regardless of whether or not the mortgagor
actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers'
Home Administration ("FMHA"), or guaranteed by the Department of Veteran Affairs
("VA"). The GNMA guarantee is backed by the full faith and credit of the U.S.
Government. GNMA also is empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before maturity of the mortgages in the pool. The Fund normally
will not distribute principal payments (whether regular or prepaid) to its
shareholders. Rather, it will invest such payments in additional
mortgage-related securities of the types described above. Interest received by
11
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.
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.
MUNICIPAL INSTRUMENTS-INSURED TAX EXEMPT FUND. As used in this SAI,
"Municipal Instruments" include the following: (1) municipal bonds; (2) private
activity bonds or industrial development bonds, (3) certificates of
participation ("COPS"), (4) municipal commercial paper; (5) municipal notes; and
(6) variable rate demand instruments (`VRDIs"). Generally, the value of
Municipal Instruments varies inversely with changes in interest rates.
MUNICIPAL BONDS. Municipal bonds are debt obligations that generally are
issued to obtain funds for various public purposes and have a time to maturity,
at issuance, of more than one year. The two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith and credit for the
payment of principal and interest. Revenue bonds generally are payable only from
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special tax or other specific revenue source.
There are variations in the security of municipal bonds, both within a
particular classification and between classifications, depending on numerous
factors. The yields on municipal bonds depend on, among other things, general
money market conditions, condition of the municipal bond market, size of a
particular offering, the maturity of the obligation and rating of the issuer.
Generally, the value of municipal bonds varies inversely to changes in interest
rates. See Appendix B for a description of municipal bond ratings.
PRIVATE ACTIVITY BONDS OR INDUSTRIAL DEVELOPMENT BONDS. Certain types of
revenue bonds, referred to as private activity bonds ("PABs") or industrial
development bonds ("IDBs"), are issued by or on behalf of public authorities to
obtain funds to provide for various privately operated facilities, such as
airports or mass transportation facilities. Most PABs and IDBs are pure revenue
12
bonds and are not backed by the taxing power of the issuing agency or authority.
See "Taxes" for a discussion of special tax consequences to "substantial users,"
or persons related thereto, of facilities financed by PABs or IDBs.
CERTIFICATES OF PARTICIPATION. COPs provide participation interests in
lease revenues and each certificate represents a proportionate interest in or
right to the lease-purchase payment made under municipal lease obligations or
installment sales contracts. In certain states, COPs constitute a majority of
new municipal financing issues. The possibility that a municipality will not
appropriate funds for lease payments is a risk of investing in COPS, although
this risk is mitigated by the fact that each COP will be covered by the
insurance feature.
The Board has established guidelines for determining the liquidity of
COPs in the Fund's portfolio and, subject to its review, has delegated that
responsibility to the Adviser. Under these guidelines, the Adviser will consider
(1) the frequency of trades and quotes for the security, (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers, (3) the willingness of dealers to undertake to make a market
in the security, (4) the nature of the marketplace, namely, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer, (5) the coverage of the obligation by new issue insurance, (6) the
likelihood that the marketability of the obligation will be maintained through
the time the security is held by the Fund, and (7) for unrated COPs, the COPs'
credit status analyzed by the Adviser according to the factors reviewed by
rating agencies.
MUNICIPAL COMMERCIAL PAPER. Issues of municipal commercial paper which the
Fund may purchase are rated P-1 by Moody's or A-1 by S&P or have insurance
through the issuer or an independent insurance company and include unsecured,
short-term, negotiable promissory notes. Municipal commercial paper is issued
usually to meet temporary capital needs of the issuer or to serve as a source of
temporary construction financing. These obligations are paid from general
revenues of the issuer or are refinanced with long-term debt. A description of
commercial paper ratings is contained in Appendix A.
MUNICIPAL NOTES. Municipal notes which the Fund may purchase will be
principally tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes. The obligations are sold by an issuer
prior to the occurrence of another revenue producing event to bridge a financial
gap for such issuer. Municipal notes are usually general obligations of the
issuing municipality. Project notes are issued by housing agencies, but are
guaranteed by the U.S. Department of Housing and Urban Development and are
secured by the full faith and credit of the United States. Such municipal notes
must be rated MIG-1 by Moody's or SP-1 by S&P or have insurance through the
issuer or an independent insurance company. A description of municipal note
ratings is contained in Appendix B.
VARIABLE RATE DEMAND INSTRUMENTS. VRDIs are Municipal Instruments, the
interest on which is adjusted periodically, which allow the holder to demand
payment of all unpaid principal plus accrued interest from the issuer. A VRDI
that the Fund may purchase will be selected if it meets criteria established and
designed by the Board to minimize risk to the Fund. In addition, a VRDI must be
rated MIG-1 by Moody's or SP-1 by S&P or insured by the issuer or an independent
insurance company. There is a recognized after-market for VRDIs.
PREFERRED STOCK. Each Fund may invest in preferred stock. A preferred stock
is a blend of the characteristics of a bond and common stock. It can offer the
higher yield of a bond and has priority over common stock in equity ownership,
but does not have the seniority of a bond and, unlike common stock, its
participation in the issuer's growth may be limited. Preferred stock has
preference over common stock in the receipt of dividends and in any residual
assets after payment to creditors should the issuer be dissolved. Although the
dividend is set at a fixed annual rate, in some circumstances it can be changed
or omitted by the issuer.
13
REPURCHASE AGREEMENTS. A repurchase agreement essentially is a short-term
collateralized loan. The lender (a Fund) agrees to purchase a security from a
borrower (typically a broker-dealer) at a specified price. The borrower
simultaneously agrees to repurchase that same security at a higher price on a
future date (which typically is the next business day). The difference between
the purchase price and the repurchase price effectively constitutes the payment
of interest. In a standard repurchase agreement, the securities which serve as
collateral are transferred to a Fund's custodian bank. In a "tri-party"
repurchase agreement, these securities would be held by a different bank for the
benefit of the Fund as buyer and the broker-dealer as seller. In a "quad-party"
repurchase agreement, the Fund's custodian bank also is made a party to the
agreement. Each Fund may enter into repurchase agreements with banks which are
members of the Federal Reserve System or securities dealers who are members of a
national securities exchange or are market makers in government securities. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will a Fund invest in repurchase agreements with more
than one year in time to maturity. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of one year
from the effective date of the repurchase agreement. Each Fund will always
receive, as collateral, securities whose market value, including accrued
interest, which will at all times be at least equal to 100% of the dollar amount
invested by the Fund in each agreement, and the Fund will make payment for such
securities only upon physical delivery or evidence of book entry transfer to the
account of the custodian. If the seller defaults, a Fund might incur a loss if
the value of the collateral securing the repurchase agreement declines, and
might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the
seller of the security, realization upon the collateral by a Fund may be delayed
or limited. No Fund may enter into a repurchase agreement with more than seven
days to maturity if, as a result, more than 15% of such Fund's net assets would
be invested in such repurchase agreements and other illiquid investments.
RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS. No Fund will purchase or
otherwise acquire any security if, as a result, more than 15% of its net assets
(taken at current value) would be invested in securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale. This policy includes foreign issuers' unlisted
securities with a limited trading market and repurchase agreements maturing in
more than seven days. This policy does not include restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended ("1933 Act"), which the Board or the Adviser has determined under
Board-approved guidelines are liquid.
Restricted securities which are illiquid may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Such securities include
those that are subject to restrictions contained in the securities laws of other
countries. Securities that are freely marketable in the country where they are
principally traded, but would not be freely marketable in the United States,
will not be subject to this 15% limit. Where registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when it
decided to sell.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
14
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such portfolio securities and a Fund might be unable to dispose of such
securities promptly or at reasonable prices.
Over-the-counter ("OTC") options and their underlying collateral are also
considered illiquid investments. INSURED TAX EXEMPT FUND may not invest in
options. While BLUE CHIP FUND and HIGH YIELD FUND have no intention of investing
in options in the coming year, if any such Fund did, the assets used as cover
for OTC options written by the Fund would not be considered illiquid unless the
OTC options are sold to qualified dealers who agree that the Fund may repurchase
any OTC option it writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option written subject to
this procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option
WARRANTS. HIGH YIELD FUND AND BLUE CHIP FUND may each purchase warrants,
which are instruments that permit the Fund to acquire, by subscription, the
capital stock of a corporation at a set price, regardless of the market price
for such stock. Warrants may be either perpetual or of limited duration. There
is greater risk that warrants might drop in value at a faster rate than the
underlying stock. HIGH YIELD FUND'S investments in warrants is limited to 5% of
its total assets, of which no more than 2% may not be listed on the New York or
American Stock Exchange.
WHEN-ISSUED SECURITIES. HIGH YIELD FUND and INSURED TAX EXEMPT FUND may each
invest up to 10% and 25%, respectively, 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 a Fund on a
when-issued basis may result in that 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 on its books and records or with its custodian consisting of
cash or liquid high-grade debt securities equal to the amount of that Fund's
commitment, which are valued at their fair market value. If on any day the
market value of this segregated account falls below the value of a Fund's
commitment, that Fund will be required to deposit additional cash or qualified
securities into the account until equal to the value of that Fund's commitment.
When the securities to be purchased are issued, the Fund will pay for the
securities from available cash, the sale of securities in the segregated
account, sales of other securities and, if necessary, from sale of the
when-issued securities themselves although this is not ordinarily expected.
Securities purchased on a when-issued basis are subject to the risk that yields
available in the market, when delivery takes place, may be higher than the rate
to be received on the securities a Fund is committed to purchase. Sale of
securities in the segregated account or sale of the when-issued securities may
cause the realization of a capital gain or loss.
ZERO COUPON 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
15
value, which discount varies depending on the time remaining until cash payments
begin, prevailing interest rates, liquidity of the security and the perceived
credit quality of the issuer. Pay-in-kind securities are those that pay interest
through the issuance of additional securities. The market prices of zero coupon
and pay-in-kind securities generally are more volatile than the prices of
securities that pay interest periodically and in cash and are likely to respond
to changes in interest rates to a greater degree than do other types of debt
securities having similar maturities and credit quality. Original issue discount
earned each year on zero coupon securities (including zero coupon Municipal
Securities) and the "interest" on pay-in-kind securities must be accounted for
by a Fund that holds the securities for purposes of determining the amount it
must distribute that year to continue to qualify for tax treatment as a
regulated investment company and, for HIGH YIELD FUND, to avoid certain excise
tax on undistributed income. Thus, a Fund may be required to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. See "Taxes". These distributions must be made from a Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities.
HIGH YIELD FUND and INSURED TAX EXEMPT FUND will not be able to purchase
additional income-producing securities with cash used to make such
distributions, and their current income ultimately could be reduced as a result.
FUTURES AND OPTIONS STRATEGIES
Although they do not intend to engage in such strategies in the coming year,
BLUE CHIP FUND has the legal authority to engage in certain options strategies,
and HIGH YIELD FUND AND INSURED TAX EXEMPT FUND have the legal authority to
engage in certain futures strategies, to hedge their portfolios and in other
circumstances permitted by the Commodities Futures Trading Commission ("CFTC").
In addition, INSURED TAX EXEMPT FUND may engage in certain options strategies to
enhance income. To hedge their portfolios, BLUE CHIP FUND may buy
exchange-traded put and call options on stock indices and enter into closing
transactions with respect to such options, and HIGH YIELD FUND may buy and sell
interest rate futures contracts traded on a board of trade. INSURED TAX EXEMPT
FUND may sell covered listed put and call options and buy call and put on its
portfolio securities and may enter into closing transactions with respect to
such options. The Fund also may buy and sell financial futures contracts and buy
and sell call and put options thereon traded on a U.S. exchange or board of
trade and enter into closing transactions with respect to such options.
Certain special characteristics of, and risks associated with, using these
instruments and strategies are discussed below. Use of these instruments is
subject to the applicable regulations of the Securities and Exchange Commission
("SEC"), the several options and futures exchanges upon which options and
futures contracts are traded and the CFTC. The discussion of these strategies
does not imply that the Funds will use them to hedge against risks or for any
other purpose.
Participation in the options or futures markets involves investment risks
and transaction costs to which a Fund would not be subject absent the use of
these strategies. If the Adviser's prediction of movements in the direction of
the securities and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. The Fund might not employ any of the strategies
described below, and there can be no assurance that any strategy will succeed.
The use of these strategies involve certain special risks, including (1)
dependence on the Adviser's ability to predict correctly movements in the
direction of interest rates and securities prices, (2) imperfect correlation
between the price of options, futures contracts and options thereon and
movements in the prices of the securities being hedged, (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities and, (4) the possible absence of a liquid secondary market
for any particular instrument at any time.
COVER FOR HEDGING AND OPTION INCOME STRATEGIES. No Fund will use leverage in
its hedging and option income strategies. Each Fund will not enter into a
16
hedging or option income strategy that exposes the Fund to an obligation to
another party unless it owns either (1) an offsetting ("covered") position in
securities or other options or futures contracts or (2) cash and/or liquid
assets with a value sufficient at all times to cover its potential obligations.
Each Fund will comply with guidelines established by the SEC with respect to
coverage of hedging and option income strategies by mutual funds and, if
required, will set aside cash and/or liquid assets in a segregated account with
its custodian in the prescribed amount. Securities or other options or futures
positions used for cover and assets held in a segregated account cannot be sold
or closed out while the hedging or option income strategy is outstanding unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of a Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
OPTIONS STRATEGIES. INSURED TAX EXEMPT FUND may purchase call options on
securities that the Adviser intends to include in its portfolio in order to fix
the cost of a future purchase. Call options also may be used as a means of
participating in an anticipated price increase of a security. In the event of a
decline in the price of the underlying security, use of this strategy would
serve to limit the Fund's potential loss to the option premium paid; conversely,
if the market price of the underlying security increases above the exercise
price and the Fund either sells or exercises the option, any profit eventually
realized will be reduced by the premium. INSURED TAX EXEMPT FUND may purchase
put options in order to hedge against a decline in the market value of
securities held in its portfolio. The put option enables the Fund to sell the
underlying security at the predetermined exercise price; thus the potential for
loss to the Fund below the exercise price is limited to the option premium paid.
If the market price of the underlying security is higher than the exercise price
of the put option, any profit the Fund realizes on the sale of the security will
be reduced by the premium paid for the put option less any amount for which the
put option may be sold.
INSURED TAX EXEMPT FUND may write covered call options on securities to
increase income in the form of premiums received from the purchasers of the
options. Because it can be expected that a call option will be exercised if the
market value of the underlying security increases to a level greater than the
exercise price, the Fund will write covered call options on securities generally
when the Adviser believes that the premium received by the Fund, plus
anticipated appreciation in the market price of the underlying security up to
the exercise price of the option, will be greater than the total appreciation in
the price of the security. The strategy may be used to provide limited
protection against a decrease in the market price of the security in an amount
equal to the premium received for writing the call option less any transaction
costs. Thus, if the market price of the underlying security held by the Fund
declines, the amount of such decline will be offset wholly or in part by the
amount of the premium received by the Fund. If, however, there is an increase in
the market price of the underlying security and the option is exercised, the
Fund will be obligated to sell the security at less than its market value. The
Fund gives up the ability to sell the portfolio securities used to cover the
call option while the call option is outstanding. Such securities may also be
considered illiquid in the case of OTC options written by the Fund, to the
extent described under "Investment Policies--Restricted Securities and Illiquid
Investments" and therefore subject to the Fund's limitation on investments in
illiquid securities. In addition, the Fund could lose the ability to participate
in an 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).
INSURED TAX EXEMPT FUND may write put options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) the
obligation to buy, the underlying security at the exercise price during the
option period. So long as the obligation of the writer continues, the writer may
be assigned an exercise notice by the broker-dealer through which such option
was sold, requiring it to make payment of the exercise price against delivery of
17
the underlying security. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options. The Fund may write covered put options in circumstances when the
Adviser believes that the market price of the securities will not decline below
the exercise price less the premiums received. If the put option is not
exercised, the Fund will realize income in the amount of the premium received.
This technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security would decline below the exercise price less the premiums
received, in which case the Fund would expect to suffer a loss.
BLUE CHIP FUND may purchase U.S. exchange-traded put and call options on
stock indices in much the same manner as the more traditional equity and debt
options discussed above, except that stock index options may serve as a hedge
against overall fluctuations in the securities markets (or a market sector)
rather than anticipated increases or decreases in the value of a particular
security. A stock index assigns relative values to the stock included in the
index and fluctuates with changes in such values. Stock index options operate in
the same way as the more traditional equity options, except that settlements of
stock index options are effected with cash payments and do not involve delivery
of securities. Thus, upon settlement of a stock index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the stock index. The effectiveness of
hedging techniques using stock index options will depend on the extent to which
price movements in the stock index selected correlate with price movements of
the securities in which a Fund invests.
Currently, many options on equity securities are exchange-traded, whereas
options on debt securities are primarily traded on the OTC market.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
guarantees completion of every exchange-traded option transaction. In contrast,
OTC options are contracts between a Fund and the opposite party with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the dealer from which it has purchased the OTC option to make or take delivery
of the securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as the loss of the
expected benefit of the transaction.
SPECIAL CHARACTERISTICS AND RISKS OF OPTIONS TRADING. BLUE CHIP FUND and
INSURED TAX EXEMPT FUND may effectively terminate their right or obligation
under an option by entering into a closing transaction. If either Fund wishes to
terminate its obligation to sell securities under a put or call option it has
written, the Fund may purchase a put or call option of the same series (that is,
an option identical in its terms to the call option previously written); this is
known as a closing purchase transaction. Conversely, in order to terminate its
right to purchase or sell specified securities under a call or put option it has
purchased, a Fund may write an option of the same series as the option held;
this is known as a closing sale transaction. Closing transactions essentially
permit a Fund to realize profits or limit losses on its options positions prior
to the exercise or expiration of the option. Whether a profit or loss is
realized from a closing transaction depends on the price movement of the
underlying index or security and the market value of the option.
The value of an option position will reflect, among other things, the
current market price of the underlying security or stock index, the time
remaining until expiration, the relationship of the exercise price to the market
price, the historical price volatility of the underlying security or stock index
and general market conditions. For this reason, the successful use of options
depends upon the Adviser's ability to forecast the direction of price
18
fluctuations in the underlying securities market or, in the case of stock index
options, fluctuations in the market sector represented by the index selected.
Options normally have expiration dates of up to nine months. Unless an
option purchased by a Fund is exercised or unless a closing transaction is
effected with respect to that position, a loss will be realized in the amount of
the premium paid and any transaction costs.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. The ability to
establish and close out positions on the exchanges is subject to the maintenance
of a liquid secondary market. Although BLUE CHIP FUND and INSURED TAX EXEMPT
FUND intend to purchase or write only those exchange-traded options for which
there appears to be a liquid secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at any particular
time. Closing transactions may be effected with respect to options traded in the
OTC markets (currently the primary markets for options on debt securities) only
by negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although a Fund will
enter into OTC options only with dealers that agree to enter into, and that are
expected to be capable of entering into, closing transactions with a Fund, there
is no assurance that the Fund will be able to liquidate an OTC option at a
favorable price at any time prior to expiration. In the event of insolvency of
the opposite party, a Fund may be unable to liquidate an OTC option.
Accordingly, it may not be possible to effect closing transactions with respect
to certain options, with the result that a Fund would have to exercise those
options that it has purchased in order to realize any profit. With respect to
options written by a Fund, the inability to enter into a closing transaction may
result in material losses to the Fund. For example, because a Fund must maintain
a covered position with respect to any call option it writes, that Fund may not
sell the underlying assets used to cover an option during the period it is
obligated under the option. This requirement may impair the Fund's ability to
sell a portfolio security or make an investment at a time when such a sale or
investment might be advantageous.
Stock index options are settled exclusively in cash. If BLUE CHIP 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.
A Fund's activities in the options markets may result in a higher portfolio
turnover rate and additional brokerage costs; however, a Fund also may save on
commissions by using options as a hedge rather than buying or selling individual
securities in anticipation or as a result of market movements.
FUTURES STRATEGIES. HIGH YIELD FUND and INSURED TAX EXEMPT 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 they invest.
HIGH YIELD FUND and INSURED TAX EXEMPT FUND may use interest rate futures
contracts and, for INSURED TAX EXEMPT FUND, options thereon, to hedge the debt
portion of their portfolios against changes in the general level of interest
rates. A Fund may purchase an interest rate futures contract when it intends to
purchase debt securities but has not yet done so. This strategy may minimize the
effect of all or part of an increase in the market price of those securities
because a rise in the price of the securities prior to their purchase may either
be offset by an increase in the value of the futures contract purchased by a
Fund or avoided by taking delivery of the debt securities under the futures
contract. Conversely, a fall in the market price of the underlying debt
securities may result in a corresponding decrease in the value of the futures
19
position. A Fund may sell an interest rate futures contract in order to continue
to receive the income from a debt security, while endeavoring to avoid part or
all of the decline in the market value of that security that would accompany an
increase in interest rates.
INSURED TAX EXEMPT FUND may purchase a call option on a financial futures
contract to hedge against a market advance in debt securities that the Fund
plans to acquire at a future date. The Fund also may write covered call options
on financial futures contracts as a partial hedge against a decline in the price
of debt securities held in the Fund's portfolio or purchase put options on
financial futures contracts in order to hedge against a decline in the value of
debt securities held in the Fund's portfolio.
HIGH YIELD FUND and INSURED TAX EXEMPT FUND will use futures contracts and,
for INSURED TAX EXEMPT FUND, options thereon solely in bona fide hedging
transactions or under other circumstances permitted by the CFTC and INSURED TAX
EXEMPT FUND will not enter into such investments for which the aggregate initial
margin and premiums exceed 5% of that Fund's total assets. This does not limit
that Fund's assets at risk to 5%. The Fund has represented the foregoing to the
CFTC.
FUTURES GUIDELINES. To the extent that a Fund enters into futures contracts
or options thereon other than for bona fide hedging purposes (as defined by the
CFTC), (1) the aggregate initial margin and premiums required to establish these
positions (excluding the in-the-money amount for options that are in-the-money
at the time of purchase) will not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on any
contracts into which the Fund has entered. This policy does not limit a Fund's
assets at risk to 5%. The value of all futures sold will not exceed the total
market value of a Fund's portfolio. In addition, each Fund may not purchase
interest rate futures contracts if immediately thereafter more than 30% of its
total assets would be so invested.
SPECIAL CHARACTERISTICS AND RISKS OF FUTURES TRADING. No price is paid upon
entering into futures contracts. Instead, upon entering into a futures contract,
HIGH YIELD FUND and INSURED TAX EXEMPT FUND are required to deposit with their
custodian in a segregated account in the name of the futures broker through
which the transaction is effected an amount of cash, U.S. Government securities
or other liquid, high-grade debt instruments generally equal to 3%-5% of the
contract value. This amount is known as "initial margin." When writing a put or
call option on a futures contract, margin also must be deposited in accordance
with applicable exchange rules. Initial margin on futures contracts is in the
nature of a performance bond or good-faith deposit that is returned to a Fund
upon termination of the transaction, assuming all obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Fund may be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased generally in
the future by regulatory action. Subsequent payments, called "variation margin,"
to and from the broker, are made on a daily basis as the value of the futures
position varies, a process known as "marking to market." Variation margin does
not involve borrowing to finance the futures transactions, but rather represents
a daily settlement of a Fund's obligation to or from a clearing organization.
INSURED TAX EXEMPT FUND is also obligated to make initial and variation margin
payments when it writes options on futures contracts.
Holders and writers of futures positions and options thereon can enter into
offsetting closing transactions, similar to closing transactions on options on
securities, by selling or purchasing, respectively, a futures position or
options position with the same terms as the position or option held or written.
Positions in futures contracts and options thereon may be closed only on an
exchange or board of trade providing a secondary market for such futures or
options.
20
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a futures contract or related option may vary
either up or down from the previous day's settlement price. Once the daily limit
has been reached in a particular contract, no trades may be made that day at a
price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
prices could move to the daily limit for several consecutive trading days with
little or no trading and thereby prevent prompt liquidation of unfavorable
positions. In such event, it may not be possible for a Fund to close a position
and, in the event of adverse price movements such Fund would have to make daily
cash payments of variation margin (except in the case of purchased options).
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the contracts can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, there is no guarantee that the price of the securities will, in fact,
correlate with the price movements in the contracts and thus provide an offset
to losses on the contracts.
Successful use by HIGH YIELD FUND and INSURED TAX EXEMPT FUND of futures
contracts and, for INSURED TAX EXEMPT FUND, related options, will depend upon
the Adviser's ability to predict movements in the direction of the overall
securities and interest rate markets, which requires different skills and
techniques than predicting changes in the prices of individual securities.
Moreover, futures contracts relate not to the current price level of the
underlying instrument but to the anticipated levels at some point in the future.
There is, in addition, the risk that the movements in the price of the futures
contract or related option will not correlate with the movements in prices of
the securities being hedged. In addition, if a Fund has insufficient cash, it
may have to sell assets from its portfolio to meet daily variation margin
requirements. Any such sale of assets may or may not be made at prices that
reflect the rising market. Consequently, a Fund may need to sell assets at a
time when such sales are disadvantageous to that Fund. If the price of the
futures contract or related option moves more than the price of the underlying
securities, a Fund will experience either a loss or a gain on the futures
contract or related option, that may or may not be completely offset by
movements in the price of the securities that are the subject of the hedge.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between price movements in the futures or related
option position and the securities being hedged, movements in the prices of
futures contracts and related options may not correlate perfectly with movements
in the prices of the hedged securities because of price distortions in the
futures market. As a result, a correct forecast of general market trends may not
result in successful hedging through the use of futures contracts and related
options over the short term.
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures contracts or
related options. Although HIGH YIELD FUND and INSURED TAX EXEMPT FUND intend to
purchase or sell futures and, for INSURED TAX EXEMPT FUND, related options, only
on exchanges or boards of trade where there appears to be a liquid secondary
market, there is no assurance that such a market will exist for any particular
contract or option at any particular time. In such event, it may not be possible
to close a futures or option position and, in the event of adverse price
movements, a Fund would continue to be required to make variation margin
payments.
Like options on securities, options on futures contracts have a limited
life. The ability to establish and close out options on futures will be subject
to the development and maintenance of liquid secondary markets on the relevant
exchanges or boards of trade. There can be no certainty that liquid secondary
markets for all options on futures contracts will develop.
Purchasers of options on futures contracts pay a premium in cash at the time
of purchase. This amount and the transaction costs are all that is at risk.
Sellers of options on a futures contract, however, must post initial margin and
21
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
INSURED TAX EXEMPT 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.
HIGH YIELD FUND and INSURED TAX EXEMPT FUND'S activities in the futures and,
for INSURED TAX EXEMPT FUND, related options, markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions; however, a Fund also may save on commissions by using
futures and related options as a hedge rather than buying or selling individual
securities in anticipation or as a result of market movements.
PORTFOLIO TURNOVER
Although each Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Adviser, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in a Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Allocation of Portfolio Brokerage."
For the fiscal year ended December 31, 1998, the portfolio turnover rate for
BLUE CHIP FUND, HIGH YIELD FUND and INSURED TAX EXEMPT FUND was 96%, 41% and
172%, respectively. For the fiscal year ended December 31, 1999, the portfolio
turnover rate for BLUE CHIP FUND, HIGH YIELD FUND and INSURED TAX EXEMPT FUND
was __%, __% and __%, respectively.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
respective Fund and, unless identified as non-fundamental policies, may not be
changed without the affirmative vote of a majority of the outstanding voting
securities of that Fund, voting separately from any other Fund of the Trust. As
provided in the Investment Company Act of 1940, as amended ("1940 Act"), a "vote
of a majority of the outstanding voting securities of the Fund" means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund or (2) 67% or more of the shares of the Fund present at a meeting, if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. Except with respect to borrowing, changes in values of a particular
Fund's assets will not cause a violation of the following investment
restrictions so long as percentage restrictions are observed by that Fund at the
time it purchases any security.
BLUE CHIP FUND. BLUE CHIP FUND will not:
(1) Make short sales of securities to maintain a short position.
(2) Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow from a bank for temporary or emergency purposes in amounts
not exceeding 5% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed) and pledge its assets to secure such
borrowings.
22
(3) Make loans, except loans of portfolio securities (limited to 10% of the
Fund's total assets).
(4) Invest more than 25% of the Fund's total assets (taken at current value)
in the obligations of one or more issuers having their principal business
activities in the same industry.
(5) With respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
(6) Pledge, mortgage or hypothecate any of its assets except that the Fund
may pledge its assets to secure borrowings made in accordance with paragraph (2)
above, provided the Fund maintains asset coverage of at least 300% for pledged
assets.
(7) Buy or sell commodities or commodity contracts or real estate or
interests in real estate limited partnerships, although it may purchase and sell
securities which are secured by real estate and securities of companies which
invest or deal in real estate.
(8) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain Federal securities laws.
(9) Make investments for the purpose of exercising control or management.
(10) Purchase any securities on margin.
(11) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of the Trust, as principals.
(12) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer, director or Trustee of the Trust or of the Adviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers,
directors or Trustees who own more than 1/2 of 1% own in the aggregate more than
5% of the outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be changed
without prior shareholder approval. These investment restrictions provide that
the Fund will not:
(1) Write, purchase or sell options (puts, calls or combinations thereof),
except that the Fund may purchase put and call options on U.S. exchange-traded
options on stock indices (and may enter into closing sale transactions with
respect to such options) provided that the premiums paid for such options do not
exceed 5% of the Fund's total assets.
(2) Purchase any security if, as a result, more than 15% of its net assets
would be invested in illiquid securities, including repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
any securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees, or the
Fund's investment adviser acting pursuant to authority delegated by the
Trustees, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended, or any other applicable rule, and therefore that such securities are
not subject to the foregoing limitation.
23
HIGH YIELD FUND. HIGH YIELD FUND will not:
(1) Borrow money, except from banks and only for temporary or emergency
purposes and then in amounts not in excess of 5% of its total assets.
(2) Engage in "short sales" in excess of 10% of the Fund's total assets.
(3) Pledge, mortgage or hypothecate any of its assets, except that the Fund
may pledge its assets to secure borrowings made in accordance with paragraphs
(1) and (2) above and for margin to secure its obligations under interest rate
futures contracts, provided the Fund maintains asset coverage of at least 300%
for pledged assets.
(4) Make loans, except by purchase of debt obligations and through
repurchase agreements. However, the Trust's Board may, on the request of
broker-dealers or other institutional investors which they deem qualified,
authorize the Fund to loan securities to cover the borrower's short position;
provided, however, the borrower pledges to the Fund and agrees to maintain at
all times with the Fund cash collateral equal to not less than 100% of the value
of the securities loaned, the loan is terminable at will by the Fund, the Fund
receives interest on the loan as well as any distributions upon the securities
loaned, the Fund retains voting rights associated with the securities, the Fund
pays only reasonable custodian fees in connection with the loan, and the Adviser
monitors the creditworthiness of the borrower throughout the life of the loan;
provided further, that such loans will not be made if the value of all
repurchase agreements with more than seven days to maturity, and other illiquid
assets is greater than an amount equal to 15% of the Fund's net assets.
(5) With respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
(6) Purchase the securities of an issuer if such purchase, at the time
thereof, would cause more than 5% of the value of the Fund's total assets to be
invested in securities of issuers which, including predecessors, have a record
of less than three years' continuous operation.
(7) Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(8) Purchase or sell real estate or commodities or commodity contracts.
However, the Fund may purchase interests in real estate investment trusts whose
securities are registered under the 1940 Act and are readily marketable and may
invest in interest rate futures contracts and options thereon (provided the
margin required does not violate the investment restrictions pertaining to
pledged assets).
(9) Invest in companies for the purpose of exercising control or management.
(10) Invest in securities of other investment companies, except in
connection with a merger of another investment company.
(11) Purchase any securities on margin (however, the Fund's engaging in
"hedging transactions" and the margins required thereon shall not be considered
a violation of this provision).
24
(12) Purchase or retain securities of any issuer if any officer and director
or trustee of the Trust or the Adviser owns beneficially more than 1/2 of 1% of
the securities of such issuer or if all such officers and directors or trustees
together own more than 5% of the securities of such issuer.
(13) Invest more than 25% of the Fund's total assets (taken at current
value) in the obligations of one or more issuers having their principal business
activities in the same industry.
(14) Invest more than 5% of the value of its net assets in warrants, with no
more than 2% in warrants not listed on either the New York or American Stock
Exchanges.
(15) Purchase or sell portfolio securities from or to the Adviser or any
trustee or officer thereof or of the Trust, as principals.
(16) Invest more than 15% of the value of its total assets, at the time of
purchase, in deep discount securities of companies that are financially
troubled, in default or in bankruptcy or reorganization.
(17) Issue senior securities.
(18) Invest any of its assets in interests in oil, gas or other mineral
exploration or development programs, or in puts, calls, straddles or any
combination thereof.
(19) Invest more than 10% of its net assets in when-issued securities at the
time such purchase is made.
The following investment restriction is not fundamental and may be changed
without shareholder approval:
(1) The Fund will not purchase any security if, as a result, more than 15%
of its net assets would be invested in illiquid securities, including repurchase
agreements not entitling the holder to payment of principal and interest within
seven days and any securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a readily available market.
The Trustees, or the Fund's investment adviser acting pursuant to authority
delegated by the Trustees, may determine that a readily available market exists
for securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended, or any other applicable rule, and therefore that such
securities are not subject to the foregoing limitation.
INSURED TAX EXEMPT FUND. INSURED TAX EXEMPT FUND will not:
(1) Borrow money except for temporary or emergency purposes (not for
leveraging or investment) in an amount not exceeding 5% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed 5% of the value of the Fund's total
assets by reason of a decline in net assets will be reduced within three
business days to the extent necessary to comply with the 5% limitation. This
policy shall not prohibit deposits of assets to provide margin or guarantee
positions in connection with transactions in options, futures contracts, swaps,
forward contracts, and other derivative instruments or the segregation of assets
in connection with such transactions.
(2) Issue senior securities.
(3) Make loans, except loans of portfolio securities (limited to 10% of the
Fund's total assets), provided such loans are at all times secured by cash or
equivalent collateral of no less than 100% by marking to market daily.
25
(4) With respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer. With respect to pre-refunded bonds, the Adviser considers an escrow
account to be the issuer of such bonds when the escrow account consists solely
of U.S. Government obligations fully substituted for the obligation of the
issuing municipality.
(5) Invest in any municipal bonds unless they will be insured municipal
bonds or unless they are already insured under an insurance policy obtained by
the issuer or underwriter thereof.
(6) Invest more than 25% of the Fund's total assets (taken at current value)
in the obligations of one or more issuers having their principal business
activities in the same industry.
(7) Buy or sell real estate or interests in real estate limited
partnerships, although it may purchase and sell securities which are secured by
real estate or interests therein.
(8) Underwrite any issue of securities, although the Fund may purchase
municipal bonds directly from the issuer thereof for investment in accordance
with the Fund's investment objective, policy and limitations.
(9) Make investments for the purpose of exercising control or management.
(10) Purchase or sell portfolio securities from or to the Adviser or any
director, officer or Trustee thereof or of the Trust, as principals.
(11) Invest in any securities of any issuer if, to the knowledge of the
Fund, any officer, director or Trustee of the Trust or of the Adviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers,
directors or Trustees who own more than 1/2 of 1% own in the aggregate more than
5% of the outstanding securities of such issuer.
The following investment restrictions are not fundamental and may be changed
without shareholder approval. These investment restrictions provide that the
Fund will not:
(1) Purchase any security if, as a result, more than 15% of its net assets
would be invested in illiquid securities, including repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
any securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees, or the
Fund's investment adviser acting pursuant to authority delegated by the
Trustees, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended, or any other applicable rule, and therefore that such securities are
not subject to the foregoing limitation.
(2) Purchase or sell physical commodities unless acquired as a result of
ownership of securities (but this restriction shall not prevent the Fund from
purchasing or selling options, futures contracts, caps, floors and other
derivative instruments, engaging in swap transactions or investing in securities
or other instruments backed by physical commodities).
(3) Enter into futures contracts or options on futures contracts other than
for bona fide hedging purposes (as defined by the CFTC) if the aggregate initial
margin and premiums required to establish these positions (excluding the amount
by which options are "in-the-money" at the time of purchase) may not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into.
26
(4) Pledge assets, except that the Fund may pledge its assets to secure
borrowings made in accordance with fundamental investment restriction (1) above,
provided the Fund maintains asset coverage of at least 300% for pledged assets;
provided, however, this limitation will not prohibit escrow, collateral or
margin arrangements in connection with the Fund's use of options, futures
contracts or options on futures contracts.
(5) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments and other deposits made in connection with
transactions in options, futures contracts, swaps, forward contracts, and other
derivative instruments shall not be deemed to constitute purchasing securities
on margin.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Trust,
their age, business address and principal occupations during the past five
years. Unless otherwise noted, an individual's business address is 95 Wall
Street, New York, New York 10005.
JAMES J. COY (85). Emeritus Trustee, 90 Buell Lane, East Hampton, NY 11937.
Retired; formerly Senior Vice President, James Talcott, Inc. (financial
institution).
GLENN O. HEAD*+ (74), President and Trustee. Chairman of the Board and Director,
Administrative Data Management Corp. ("ADM"), FIMCO, Executive Investors
Management Company, Inc. ("EIMCO"), First Investors Asset Management Company,
Inc. ("FIAMCO"), First Investors Corporation ("FIC"), Executive Investors
Corporation ("EIC") and First Investors Consolidated Corporation ("FICC").
KATHRYN S. HEAD*+ (44), Trustee, 581 Main Street, Woodbridge, NJ 07095.
President and Director, FICC, ADM and FIMCO; Vice President and Director, FIC
and EIC; President EIMCO; Chairman, President and Director, First Financial
Savings Bank, S.L.A.
LARRY R. LAVOIE* (52), Trustee. Assistant Secretary, ADM, EIC, EIMCO, FIAMCO,
FICC and FIMCO; President, FIAMCO; Secretary and General Counsel, FIC.
REX R. REED** (77), Trustee, 259 Governors Drive, Kiawah Island, SC 29455.
Retired; formerly Senior Vice President, American Telephone & Telegraph Company.
HERBERT RUBINSTEIN** (78), Trustee, 695 Charolais Circle, Edwards, CO
81632-1136. Retired; formerly President, Belvac International Industries, Ltd.
and President, Central Dental Supply.
NANCY SCHAENEN** (68), Trustee, 56 Midwood Terrace, Madison, NJ 07940. Trustee,
Drew University and DePauw University.
JAMES M. SRYGLEY** (67), Trustee, 39 Hampton Road, Chatham, NJ 07982. Principal,
Hampton Properties, Inc. (property investment company).
JOHN T. SULLIVAN* (67), Trustee and Chairman of the Board; Director, FIMCO, FIC,
FICC and ADM; Of Counsel, Hawkins, Delafield & Wood, Attorneys.
ROBERT F. WENTWORTH** (70), Trustee, 217 Upland Downs Road, Manchester Center,
VT 05255. Retired; formerly financial and planning executive with American
Telephone & Telegraph Company.
27
JOSEPH I. BENEDEK (42), Treasurer and Principal Accounting Officer, 581 Main
Street, Woodbridge, NJ 07095. Treasurer, FIMCO and EIMCO.
CONCETTA DURSO (64), Vice President and Secretary. Vice President, FIMCO, EIMCO
and ADM; Assistant Vice President and Assistant Secretary, FIC and EIC.
CLARK D. WAGNER (40), Vice President. Vice President, First Investors Series
Fund, First Investors Insured Tax Exempt Fund, Inc., First Investors Multi-State
Insured Tax Free Fund, First Investors New York Insured Tax Free Fund, Inc.,
Executive Investors Trust and First Investors Government Fund, Inc.; Chief
Investment Officer, FIMCO.
GEORGE V. GANTER (46), Vice President. Vice President, First Investors Asset
Management Company, Inc., First Investors High Yield, Inc., and First Investors
Special Bond Fund; Portfolio Manager, FIMCO.
PATRICIA D. POITRA (43), Vice President. Vice President, First Investors U.S.
Government Plus Fund, First Investors Series Fund II, Inc. and First Investors
Series Fund; Director of Equities, FIMCO.
* These Trustees may be deemed to be "interested persons," as defined in the
1940 Act.
** These Trustees are members of the Board's Audit Committee.
+ Mr. Glenn O. Head and Ms. Kathryn S. Head are father and daughter.
The Trustees and officers, as a group, owned less than 1% of shares of any
Fund.
All of the officers and Trustees, except for Ms. Poitra and Messrs. Ganter
and Wagner, hold identical or similar positions with 14 other registered
investment companies in the First Investors Family of Funds. Mr. Head is also an
officer and/or Director of First Investors Asset Management Company, Inc., First
Investors Credit Funding Corporation, First Investors Leverage Corporation,
First Investors Realty Company, Inc., First Investors Resources, Inc., N.A.K.
Realty Corporation, Real Property Development Corporation, Route 33 Realty
Corporation, First Investors Life Insurance Company, First Financial Savings
Bank, S.L.A., First Investors Credit Corporation 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.
28
The following table lists compensation paid to the Trustees of the Trust for
the fiscal year ended December 31, 1999.
TOTAL
COMPENSATION
FROM FIRST
AGGREGATE INVESTORS FAMILY
COMPENSATION OF FUNDS PAID TO
TRUSTEE FROM TRUST* TRUSTEE++
------- ------------ ----------------
James J. Coy** $-0- $-0-
Roger L. Grayson*** $-0- $-0-
Glenn O. Head $-0- $-0-
Kathryn S. Head $-0- $-0-
Larry R. Lavoie+ $-0- $-0-
Rex R. Reed $ $
Herbert Rubinstein $ $
James M. Srygley $ $
John T. Sullivan $-0- $-0-
Robert F. Wentworth $ $
Nancy Schaenen $ $
- ----------------------
* Compensation to officers and interested Trustees of the Trust is paid by the
Adviser.
** On March 27, 1997, Mr. Coy resigned as a Trustee of the Trust. Mr. Coy
currently serves as an Emeritus Trustee. Mr. Coy is paid by the Adviser.
*** On August 20, 1998, Mr. Grayson resigned as a Trustee of the Trust.
+ On September 17, 1998, Mr. Lavoie was elected by the Board to serve as
Trustee.
++ The First Investors Family of Funds consists of 15 separate registered
investment companies.
MANAGEMENT
Investment advisory services to each Fund are provided by Executive
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 the Trust, including a majority of the Trustees who are not
parties to the Funds' Advisory Agreement or "interested persons" (as defined in
the 1940 Act) of any such party ("Independent Trustees"), in person at a meeting
called for such purpose and by a majority of the public shareholders of each
Fund. The Board of Trustees is responsible for overseeing the management of the
Funds.
Pursuant to the Advisory Agreement, EIMCO 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 Trust's
Trustees. The Advisory Agreement also provides that EIMCO shall provide the Fund
with certain executive, administrative and clerical personnel, office facilities
and supplies, conduct the business and details of the operation of the Trust and
each Fund and assume certain expenses thereof, other than obligations or
liabilities of the Fund. The Advisory Agreement may be terminated at any time,
with respect to a Fund, without penalty by the Trust's Trustees or by a majority
of the outstanding voting securities of such Fund, or by EIMCO, 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 Trust's Trustees or by a majority of the outstanding voting securities of
29
such Fund, and, in either case, by a vote of a majority of the Trust's
Independent Trustees voting in person at a meeting called for the purpose of
voting on such approval.
Under the Advisory Agreement, each Fund pays the Adviser an annual fee, paid
monthly, according to the following schedules:
Annual
Average Daily Net Assets Rate
- ------------------------ ------
Up to $200 million................................................... 1.00%
In excess of $200 million up to $500 million......................... 0.75
In excess of $500 million up to $750 million......................... 0.72
In excess of $750 million up to $1.0 billion......................... 0.69
Over $1.0 billion.................................................... 0.66
For the fiscal years ended December 31, 1997, 1998 and 1999, BLUE CHIP
FUND'S advisory fees were $29,330, $43,487 and $_______, respectively. Of such
amounts, the Adviser voluntarily waived $21,997, $25,229 and $______,
respectively. For the fiscal years ended December 31, 1997, 1998 and 1999,
INSURED TAX EXEMPT FUND'S advisory fees were $156,479, $167,864 and $_______,
respectively. Of such amounts, the Adviser voluntarily waived $117,359, $120,222
and $_______, respectively. For the fiscal years ended December 31, 1997, 1998
and 1999, HIGH YIELD FUND'S advisory fees were $180,560, $195,205 and $_______,
respectively. Of such amounts, the Adviser voluntarily waived $90,280, $97,603
and $______, respectively. For the fiscal year ended December 31, 1998, the
Adviser voluntarily assumed expenses for BLUE CHIP FUND and INSURED TAX EXEMPT
FUND in the amounts of $10,161 and $21,698, respectively. For the fiscal year
ended December 31, 1999, the Adviser voluntarily assumed expenses for BLUE CHIP
FUND and INSURED TAX EXEMPT FUND in the amounts of $______ and $______,
respectively.
The Adviser has an Investment Committee composed of Dennis T. Fitzpatrick,
George V. Ganter, Michael Deneka, David Hanover, Glenn O. Head, Kathryn S. Head,
Nancy W. Jones, Michael O'Keefe, Patricia D. Poitra, Clark D. Wagner and Matthew
Wright. The Committee usually meets weekly to discuss the composition of the
portfolio of each Fund and to review additions to and deletions from the
portfolios.
Each Fund bears all expenses of its operations other than those incurred by
the Adviser or Underwriter under the terms of its advisory or underwriting
agreements. Fund expenses include, but are not limited to: the advisory fee;
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of communicating to existing shareholders, including
preparing, printing and mailing prospectuses and shareholder reports to such
shareholders; and proxy and shareholder meeting expenses.
First Investors Consolidated Corporation ("FICC") owns all of the
outstanding stock of the Adviser, Executive Investors Corporation, and the
Funds' transfer agent. Mr. Glenn O. Head controls FICC and, therefore, controls
the Adviser.
UNDERWRITER
The Trust has entered into an Underwriting Agreement ("Underwriting
Agreement") with Executive Investors Corporation ("Underwriter" or "EIC") which
requires the Underwriter to use its best efforts to sell shares of the Funds.
The Underwriting Agreement was approved by the Trust's Board, including a
majority of the Independent Trustees. The Underwriting Agreement provides that
30
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
Trust's Board or by a vote of a majority of the outstanding voting securities of
such Fund, and in either case by the vote of a majority of the Trust's
Independent Trustees, voting in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement will terminate automatically
in the event of its assignment.
For the fiscal year ended December 31, 1997, BLUE CHIP FUND paid EIC
underwriting commissions of $3,324. For the same period, EIC reallowed an
additional $10,933 to unaffiliated dealers and $2,518 to FIC. For the fiscal
year ended December 31, 1998, BLUE CHIP FUND paid EIC underwriting commissions
of $4,954. For the same period, EIC reallowed an additional $27,753 to
unaffiliated dealers and $4,526 to FIC. For the fiscal year ended December 31,
1999, BLUE CHIP FUND paid EIC underwriting commissions of $______. For the same
period, EIC reallowed an additional $______ to unaffiliated dealers and $_____
to FIC.
For the fiscal year ended December 31, 1997, HIGH YIELD FUND paid EIC
underwriting commissions of $17,493. For the same period, EIC reallowed an
additional $122,540 to unaffiliated dealers and $5,239 to FIC. For the fiscal
year ended December 31, 1998, HIGH YIELD FUND paid EIC underwriting commissions
of $14,639. For the same period, EIC reallowed an additional $108,983 to
unaffiliated dealers and $5,172 to FIC. For the fiscal year ended December 31,
1999, HIGH YIELD FUND paid EIC underwriting commissions of $______. For the same
period, EIC reallowed an additional $_______ to unaffiliated dealers and $_____
to FIC.
For the fiscal year ended December 31, 1997, INSURED TAX EXEMPT FUND paid
EIC underwriting commissions of $6,680. For the same period, EIC reallowed an
additional $28,463 to unaffiliated dealers and $5,596 to FIC. For the fiscal
year ended December 31, 1998, INSURED TAX EXEMPT FUND paid EIC underwriting
commissions of $9,625. For the same period, EIC reallowed an additional $76,513
to unaffiliated dealers and $1,494 to FIC. For the fiscal year ended December
31, 1999, INSURED TAX EXEMPT FUND paid EIC underwriting commissions of $_____.
For the same period, EIC reallowed an additional $______ to unaffiliated dealers
and $_____ to FIC.
DISTRIBUTION PLANS
As stated in the Prospectus/Proxy Statement, pursuant to an Amended and
Restated Class A Distribution Plan adopted by the Trust pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), 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 Class A Plan is a compensation plan.
In adopting the Plan for the Funds, the Trust's Board considered all
relevant information and determined that there is a reasonable likelihood that
the Plan will benefit each Fund and its shareholders. The Trust's Board believes
that the amounts spent pursuant to the 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
that Fund.
31
The Plan was approved by the Trust's Board, including a majority of the
Independent Trustees, and by a majority of the outstanding voting securities of
each Fund. The Plan will continue in effect, with respect to a Fund, from year
to year as long as its continuance is approved annually by either the Board or
by a vote of a majority of the outstanding voting securities of that Fund. In
either case, to continue, the Plan must be approved by the vote of a majority of
the Independent Trustees of the Trust. The Board reviews quarterly and annually
a written report provided by the Treasurer of the amounts expended under the
Plan and the purposes for which such expenditures were made. While the Plan is
in effect, the selection and nomination of the Trust's Independent Trustees will
be committed to the discretion of such Independent Trustees then in office. The
Plan can be terminated, with respect to a Fund, at any time by a vote of a
majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of that Fund.
For the fiscal year ended December 31, 1999, BLUE CHIP FUND paid $______ in
fees pursuant to the Plan. For the same period, the Underwriter waived an
additional $_____ in fees pursuant to the Plan. For the fiscal year ended
December 31, 1999, HIGH YIELD FUND paid $______ in fees pursuant to the Plan.
For the same period, the Underwriter waived an additional $______ in fees
pursuant to the Plan. For the fiscal year ended December 31, 1999, INSURED TAX
EXEMPT FUND paid $______ in fees pursuant to the Plan. For the same period, the
Underwriter waived an additional $______ in fees pursuant to the Plan. For the
fiscal year ended December 31, 1999, the Underwriter incurred the following
Plan-related expenses with respect to each Fund:
Compensation to Compensation to Compensation to
Fund Underwriter Dealers Sales Personnel
- ---- --------------- --------------- ---------------
BLUE CHIP FUND $ $0 $
HIGH YIELD FUND $ $0 $
INSURED TAX EXEMPT FUND $ $0 $
DEALER CONCESSIONS. With respect to shares of each Fund, the Fund will reallow a
portion of the sales load to the dealers selling the shares as shown in the
following table:
SALES CHARGES AS % OF CONCESSION TO
OFFERING NET AMOUNT DEALERS AS % OF
AMOUNT OF INVESTMENT PRICE INVESTED OFFERING PRICE
- -------------------- ----- -------- --------------
Less than $100,000.................. 4.75% 4.99 4.27%
$100,000 but under $250,000......... 3.90 4.06 3.51
$250,000 but under $500,000......... 2.90 2.99 2.61
$500,000 but under $1,000,000....... 2.40 2.46 2.16
DETERMINATION OF NET ASSET VALUE
Except as provided herein, a security listed or traded on an exchange or the
Nasdaq Stock Market is valued at its last sale price on the exchange or market
where the security is principally traded, and lacking any sales on a particular
day, the security is valued at the mean between the closing bid and asked
prices. Securities traded in the OTC market (including securities listed on
exchanges whose primary market is believed to be OTC) are valued at the mean
between the last bid and asked prices prior to the time when assets are valued
based upon quotes furnished by market makers for such securities. However, a
Fund may determine the value of debt securities based upon prices furnished by
an outside pricing service. The pricing services are provided to the BLUE CHIP
FUND and HIGH YIELD FUND by Interactive Data Corporation and to the INSURED TAX
EXEMPT FUND by Muller Data Corporation. The pricing services use quotations
obtained from investment dealers or brokers for the particular securities being
evaluated, information with respect to market transactions in comparable
securities and consider security type, rating, market condition, yield data and
other available information in determining value. Short-term debt securities
that mature in 60 days or less are valued at amortized cost. Securities for
which market quotations are not readily available are valued on at fair value as
determined in good faith by or under the supervision of the Trust's officers in
a manner specifically authorized by the Board of the Trust.
With respect to the HIGH YIELD FUND and INSURED TAX EXEMPT 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 or by the pricing services. With respect to HIGH YIELD FUND,
quotations of foreign securities in foreign currencies are converted into U.S.
dollar equivalents using the foreign exchange equivalents in effect.
32
INSURED TAX EXEMPT FUND may retain any insured municipal bond which is in
default in the payment of principal or interest until the default has been
cured, or the principal and interest outstanding are paid by an insurer or the
issuer of any letter of credit or other guarantee supporting such municipal
bond. In such case, it is the Fund's policy to value the defaulted bond daily
based upon the value of a comparable bond which is insured and not in default.
In selecting a comparable bond, the Fund will consider security type, rating,
market condition and yield.
The Board may suspend the determination of a Fund's net asset value for the
whole or any part of any period (1) during which trading on the New York Stock
Exchange ("NYSE") is restricted as determined by the SEC or the NYSE is closed
for other than weekend and holiday closings, (2) during which an emergency, as
defined by rules of the SEC in respect to the United States market, exists as a
result of which disposal by a Fund of securities owned by it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (3)
for such other period as the SEC has by order permitted.
EMERGENCY PRICING PROCEDURES. In the event that the Funds must halt
operations during any day that they would normally be required to price under
Rule 22c-1 under the 1940 Act due to an emergency ("Emergency Closed Day"), the
Funds will apply the following procedures:
1. The Funds will make every reasonable effort to segregate orders
received on the Emergency Closed Day and give them the price that they would
have received but for the closing. The Emergency Closed Day price will be
calculated as soon as practicable after operations have resumed and will be
applied equally to sales, redemptions and repurchases that were in fact received
in the mail or otherwise on the Emergency Closed Day.
2. For purposes of paragraph 1, an order will be deemed to have been
received by the Funds on an Emergency Closed Day, even if neither the Funds nor
the Transfer Agent is able to perform the mechanical processing of pricing on
that day, under the following circumstances:
(a) In the case of a mail order the order will be considered
received by a Fund when the postal service has delivered it to FIC's Woodbridge
offices prior to the close of regular trading on the NYSE; and
(b) In the case of a wire order, including a Fund/SERV order, the
order will be considered received when it is received in good form by a FIC
branch office or an authorized dealer prior to the close of regular trading on
the NYSE.
3. If the Funds are unable to segregate orders received on the Emergency
Closed Day from those received on the next day the Funds are open for business,
the Funds may give all orders the next price calculated after operations resume.
4. Notwithstanding the foregoing, on business days in which the NYSE is
not open for regular trading, the Funds may determine not to price their
portfolio securities if such prices would lead to a distortion of the NAV, for
the Funds and their shareholders.
ALLOCATION OF PORTFOLIO BROKERAGE
The Adviser may purchase or sell portfolio securities on behalf of the Fund
in agency or principal transactions. In agency transactions, the Fund generally
pays brokerage commissions. In principal transactions, the Fund generally does
not pay commissions, however the price paid for the security may include an
undisclosed dealer commission or "mark-up" or selling concessions. The Adviser
normally purchases fixed-income securities on a net basis from primary market
makers acting as principals for the securities. The Adviser may purchase certain
33
money market instruments directly from an issuer without paying commissions or
discounts. The Adviser may also purchase securities traded in the OTC market. As
a general practice, OTC securities are usually purchased from market makers
without paying commissions, although the price of the security usually will
include undisclosed compensation. However, when it is advantageous to the Fund
the Adviser may utilize a broker to purchase OTC securities and pay a
commission.
In purchasing and selling portfolio securities on behalf of the Fund, the
Adviser will seek to obtain best execution. The Fund may pay more than the
lowest available commission in return for brokerage and research services.
Additionally, upon instruction by the Board, the Adviser may use dealer
concessions available in fixed-priced underwritings to pay for research and
other services. Research and other services may include information as to the
availability of securities for purchase or sale, statistical or factual
information or opinions pertaining to securities, reports and analysis
concerning issuers and their creditworthiness, and Lipper's Directors'
Analytical Data concerning Fund performance and fees. The Adviser generally uses
the research and other services to service all the funds in the First Investors
Family of Funds, rather than the particular Funds whose commissions may pay for
research or other services. In other words, a Fund's brokerage may be used to
pay for a research service that is used in managing another Fund within the
First Investor Fund Family. The Lipper's Directors' Analytical Data is used by
the Adviser and the Fund Board to analyze a fund's performance relative to other
comparable funds.
In selecting the broker-dealers to execute the Fund's portfolio
transactions, the Adviser may consider such factors as the price of the
security, the rate of the commission, the size and difficulty of the order, the
trading characteristics of the security involved, the difficulty in executing
the order, the research and other services provided, the expertise, reputation
and reliability of the broker-dealer, access to new offerings, and other factors
bearing upon the quality of the execution. The Adviser does not place portfolio
orders with an affiliated broker, or allocate brokerage commission business to
any broker-dealer for distributing fund shares. Moreover, no broker-dealer
affiliated with the Adviser participates in commissions generated by portfolio
orders placed on behalf of the Fund.
The Adviser may combine transaction orders placed on behalf of a Fund, other
funds in the First Investors Group of Funds and First Investors Life Insurance
Company, affiliates of the Funds, for the purpose of negotiating brokerage
commissions or obtaining a more favorable transaction price; and where
appropriate, securities purchased or sold may be allocated in accordance with
written procedures approved by the Board. The Trust's Board has authorized and
directed the Adviser to use dealer concessions available in fixed-price
underwritings of municipal bonds to pay for research services which are
beneficial in the management of INSURED TAX EXEMPT FUND'S portfolio.
For the fiscal year ended December 31, 1997, BLUE CHIP FUND paid $4,661 in
brokerage commissions. Of that amount $2,648 was paid to brokers who furnished
research services on portfolio transactions in the amount of $1,981,834. For the
fiscal year ended December 31, 1997, HIGH YIELD FUND paid $72 in brokerage
commissions., all of which was paid to brokers who furnished research services
on portfolio transactions in the amount of $18,214. For the fiscal year ended
December 31, 1997, INSURED TAX EXEMPT FUND did not pay brokerage commissions.
For the fiscal year ended December 31, 1998, BLUE CHIP FUND paid $9,840 in
brokerage commissions. Of that amount $594 was paid to brokers who furnished
research services on portfolio transactions in the amount of $598,897. For the
fiscal year ended December 31, 1998, HIGH YIELD FUND and INSURED TAX EXEMPT FUND
did not pay brokerage commissions.
For the fiscal year ended December 31, 1999, BLUE CHIP FUND paid $_____ in
brokerage commissions. Of that amount $____ was paid to brokers who furnished
34
research services on portfolio transactions in the amount of $_______. For the
fiscal year ended December 31, 1999, HIGH YIELD FUND and INSURED TAX EXEMPT FUND
did not pay brokerage commissions [PLEASE CONFIRM].
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Information regarding the purchase, redemption and exchange of Fund shares
is contained in the Shareholder Manual, a separate section of the SAI that is a
distinct document and may be obtained free of charge by contacting your Fund.
REDEMPTIONS-IN KIND. If the Board should determine that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution in kind of securities from the portfolio of
the Fund. If shares are redeemed in kind, the redeeming shareholder will likely
incur brokerage costs in converting the assets into cash. The method of valuing
portfolio securities for this purpose is described under "Determination of Net
Asset Value."
TAXES
GENERAL
In order to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"), a Fund - each Fund being treated as a separate corporation for these
purposes - must distribute to its shareholders for each taxable year at least
90% of the sum of its investment company taxable income (consisting generally of
net investment income, net short-term capital gain and, for HIGH YIELD FUND, net
gains from certain foreign currency transactions) plus, in the case of INSURED
TAX EXEMPT FUND, its net interest income excludable from gross income under
section 103(a) of the Code ("Distribution Requirement"), and must meet several
additional requirements. For each Fund these requirements include the following:
(1) the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or, for HIGH YIELD FUND, foreign
currencies, or other income (including gains from options or futures contracts)
derived with respect to its business of investing in securities or, for HIGH
YIELD FUND, those currencies ("Income Requirement"); (2) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with those other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in October, November or
December of any year and payable to shareholders of record on a date in any of
those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
reported, or in the case of exempt-interest dividends (see below) paid to
shareholders of INSURED TAX EXEMPT FUND, will be taxed to shareholders for the
year in which that December 31 falls.
A portion of the dividends from BLUE CHIP 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
35
deduction are subject indirectly to the Federal alternative minimum tax. No
dividends paid by INSURED TAX EXEMPT FUND or HIGH YIELD FUND are expected to be
eligible for this deduction.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary (taxable) income for that year and capital gain net income
for the one-year period ending on October 31 of that year, plus certain other
amounts.
Interest and dividends received by HIGH YIELD FUND, and gains realized
thereby, may be subject to income, withholding or other taxes imposed by foreign
countries that would reduce the yield and/or total return 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. Gains
from the disposition of foreign currencies (except certain gains that may be
excluded by future regulations) will qualify as permissible income under the
Income Requirement.
HIGH YIELD FUND and INSURED TAX EXEMPT FUND may acquire zero coupon or other
securities issued with original issue discount. As a holder of those securities,
each such Fund must account for the portion of the original issue discount that
accrues on the securities during the taxable year, even if the Fund receives no
corresponding payment on them during the year. Similarly, HIGH YIELD 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 and net tax-exempt interest, including any
original issue discount and other non-cash income, to satisfy the Distribution
Requirement and HIGH YIELD FUND must do so to avoid imposition of the Excise
Tax, a Fund may be required in a particular year to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. Those
distributions will be made from a Fund's cash assets or from the proceeds of
sales of portfolio securities, if necessary. Each Fund may realize capital gains
or losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character and timing of recognition of the gains
and losses a Fund will realize in connection therewith. Gains from options and
futures derived by a Fund with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or short sale) with respect to
any stock, debt instrument (other than "straight debt") or partnership interest
the fair market value of which exceeds its adjusted basis-and enters into a
"constructive sale" of the same or substantially similar property, the Fund will
be treated as having made an actual sale thereof, with the result that gain will
be recognized at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract or futures contract entered into
by a Fund or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale.
36
INSURED TAX EXEMPT FUND
Dividends paid by INSURED TAX EXEMPT FUND will qualify as exempt-interest
dividends as defined in the Prospectus, and thus will be excludable from gross
income for Federal income tax purposes by its shareholders, if the Fund
satisfies the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of securities the
interest on which is excludable from gross income under section 103(a); the Fund
intends to continue to satisfy this requirement. The aggregate dividends
excludable from the Fund's shareholders' gross income may not exceed its net
tax-exempt income. Shareholders' treatment of dividends from the Fund under
state and local income tax laws may differ from the treatment thereof under the
Code. Investors should consult their tax advisers concerning this matter.
If shares of INSURED TAX EXEMPT FUND are sold at a loss after being held for
six months or less, the loss will be disallowed to the extent of any
exempt-interest dividends received on those shares, and any portion of the loss
not disallowed will be treated as described above.
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, to the extent INSURED TAX EXEMPT FUND receives interest on those
bonds, a proportionate part of the exempt-interest dividends it pays) is a Tax
Preference Item. Exempt-interest dividends received by a corporate shareholder
also may be indirectly subject to the Federal alternative minimum tax without
regard to whether the Fund's tax-exempt interest was attributable to those
bonds. Entities or other persons who are "substantial users" (or persons related
to "substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisers before purchasing shares of the
Fund because, for users of certain of these facilities, the interest on those
bonds is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
Up to 85% of social security and certain railroad retirement benefits may be
included in taxable income for recipients whose modified adjusted gross income
(which includes income from tax-exempt sources such as INSURED TAX EXEMPT FUND)
plus 50% of their benefits exceeds certain base amounts. Exempt-interest
dividends from the Fund still are tax-exempt to the extent described in the
Prospectus; they are only included in the calculation of whether a recipient's
income exceeds the established amounts.
INSURED TAX EXEMPT FUND may invest in municipal bonds that are purchased,
generally not on their original issue, with market discount (that is, at a price
less than the principal amount of the bond or, in the case of a bond that was
issued with original issue discount, a price less than the amount of the issue
price plus accrued original issue discount) ("municipal market discount bonds").
Gain on the disposition of a municipal market discount bond (other than a bond
with a fixed maturity date within one year from its issuance), generally is
treated as ordinary (taxable) income, rather than capital gain, to the extent of
the bond's accrued market discount at the time of disposition. Market discount
on such a bond generally is accrued ratably, on a daily basis, over the period
from the acquisition date to the date of maturity. In lieu of treating the
disposition gain as above, the Fund may elect to include market discount in its
gross income currently, for each taxable year to which it is attributable.
If INSURED TAX EXEMPT FUND invests in any instruments that generate taxable
income under the circumstances described in the Prospectus, distributions of the
interest earned thereon will be taxable to the Fund's shareholders as ordinary
income to the extent of its earnings and profits. Moreover, if the Fund realizes
capital gain as a result of market transactions, any distributions of that gain
will be taxable to its shareholders. There also may be collateral Federal income
tax consequences regarding the receipt of exempt-interest dividends by
shareholders such as S corporations, financial institutions and property and
casualty insurance companies. A shareholder falling into any such category
should consult its tax adviser concerning its investment in shares of the Fund.
37
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 4.75% (as a percentage of the offering price) from the initial $1,000
payment. All dividends and other distributions are assumed to have been
reinvested at net asset value on the initial investment ("P").
Return information may be useful to investors in reviewing 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.
38
Average annual return and total return computed at the public offering price
for the periods ended December 31, 1999 are set forth in the tables below:
AVERAGE ANNUAL TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
BLUE CHIP FUND % % %
HIGH YIELD FUND
INSURED TAX EXEMPT FUND
TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
BLUE CHIP FUND % % %
HIGH YIELD FUND
INSURED TAX EXEMPT FUND
- -------------------------
* All return figures reflect the current maximum sales charge of 4.75% and
dividends reinvested at net asset value. Prior to October 28, 1988, the
maximum sales charge for HIGH YIELD FUND was 4.00% and its dividends were
reinvested at the public offering price (net asset value plus applicable
sales charge). Certain expenses of the Funds have been waived or reimbursed
from commencement of operations through December 31, 1999. Accordingly,
return figures are higher than they would have been had such expenses not
been waived or reimbursed.
** The inception dates for the Funds are as follows: BLUE CHIP FUND - May 17,
1990; HIGH YIELD FUND - March 24, 1987; and INSURED TAX EXEMPT FUND - July
26, 1990.
Average annual total return and total return may also be based on investment
at reduced sales charge levels or at net asset value. Any quotation of return
not reflecting the maximum sales charge will be greater than if the maximum
sales charge were used. Average annual return and total return computed at net
asset value for the periods ended December 31, 1999 is set forth in the tables
below:
AVERAGE ANNUAL TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
BLUE CHIP FUND % % %
HIGH YIELD FUND
INSURED TAX EXEMPT FUND
TOTAL RETURN:*
One Year Five Years Ten Years Life of Fund**
-------- ---------- --------- --------------
BLUE CHIP FUND % % %
HIGH YIELD FUND
INSURED TAX EXEMPT FUND
- -----------------
* Certain expenses of the Funds have been waived or reimbursed from
commencement of operations through December 31, 1999. Accordingly, return
figures are higher than they would have been had such expenses not been
waived or reimbursed.
** The inception dates for the Funds are as follows: BLUE CHIP FUND - May 17,
1990; HIGH YIELD FUND - March 24, 1987; and INSURED TAX EXEMPT FUND - July
26, 1990.
39
Yield for HIGH YIELD FUND and INSURED TAX EXEMPT FUND is presented for a
specified thirty-day period ("base period"). Yield is based on the amount
determined by (i) calculating the aggregate amount of dividends and interest
earned by a Fund during the base period less expenses accrued for that period
(net of reimbursement), and (ii) dividing that amount by the product of (A) the
average daily number of shares of that Fund outstanding during the base period
and entitled to receive dividends and (B) the per share maximum public offering
price of that Fund on the last day of the base period. The result is annualized
by compounding on a semi-annual basis to determine a Fund's yield. For this
calculation, interest earned on debt obligations held by a Fund is generally
calculated using the yield to maturity (or first expected call date) of such
obligations based on their market values (or, in the case of receivables-backed
securities such as GNMA Certificates, based on cost). Dividends on equity
securities are accrued daily at their estimated stated dividend rates.
INSURED TAX-EXEMPT FUND's tax-equivalent yield during the base period may be
presented in one or more stated tax brackets. Tax-equivalent yield is calculated
by adjusting the Fund's tax-exempt yield by a factor designed to show the
approximate yield that a taxable investment would have to earn to produce an
after-tax yield equal to the Fund's tax-exempt yield.
To calculate a taxable bond yield which is equivalent to a tax-exempt bond
yield (for Federal tax purposes), shareholders may use the following formula:
TAX FREE YIELD
-----------------
= Taxable Equivalent Yield
1 - Your Tax Bracket
For the 30 days ended December 31, 1999, the yield and tax-equivalent yield
(assuming a Federal tax rate of 28%) for INSURED TAX EXEMPT FUND was ____% and
____%, respectively. The maximum Federal tax rate for this period was 39.6%. For
the 30 days ended December 31, 1999, the yield for HIGH YIELD FUND was ____%.
Some of the Funds' expenses were waived or reimbursed during this period.
Accordingly, yields are higher than they would have been had such expenses not
been waived or reimbursed.
The distribution rate for HIGH YIELD FUND and INSURED TAX EXEMPT FUND is
presented for a twelve-month period. It is calculated by adding the dividends
for the last twelve months and dividing the sum by a Fund's offering price per
share at the end of that period. The distribution rate is also calculated by
using a Fund's net asset value. Distribution rate calculations do not include
capital gain distributions, if any, paid. The distribution rate for the
twelve-month period ended December 31, 1999 for shares of HIGH YIELD FUND and
INSURED TAX EXEMPT FUND calculated using the offering price was ____% and ____%,
respectively. The distribution rate for the same period for shares of HIGH YIELD
FUND and INSURED TAX EXEMPT FUND calculated using the net asset value was ____%
and _____%, respectively. During this period certain expenses of the Funds were
waived or reimbursed. Accordingly, the distribution rates are higher than they
would have been had such expenses not been waived or reimbursed.
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 C.
40
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, a Fund's portfolio holdings, such as:
Lipper Analytical Services, Inc. ("Lipper") is a widely-recognized
independent service that monitors and ranks the performance of regulated
investment companies. The Lipper performance analysis includes the
reinvestment of capital gain distributions and income dividends but does not
take sales charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend dates
accumulated for the quarter and reinvested at quarter end.
Morningstar Mutual Funds ("Morningstar"), a semi-monthly publication of
Morningstar, Inc. Morningstar proprietary ratings reflect historical
risk-adjusted performance and are subject to change every month. Funds with
at least three years of performance history are assigned ratings from one
star (lowest) to five stars (highest). Morningstar ratings are calculated
from the Fund's three-, five-, and ten-year average annual returns (when
available) and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Fund's returns are adjusted for
fees and sales loads. Ten percent of the funds in an investment category
receive five stars, 22.5% receive four stars, 35% receive three stars, 22.5%
receive two stars, and the bottom 10% receive one star.
Salomon Brothers Inc., "Market Performance," a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad Investment-Grade Bond Index and the components of the Index.
Telerate Systems, Inc., a computer system to which the Adviser subscribes
which daily tracks the rates on money market instruments, public corporate
debt obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
THE WALL STREET JOURNAL, a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks, preferred stocks,
convertible preferred stocks, options and commodities; in addition to
indices prepared by the research departments of such financial organizations
as Lehman Bros., Merrill Lynch, Pierce, Fenner and Smith, Inc., First
Boston, Salomon Brothers, Morgan Stanley, Goldman, Sachs & Co., Donaldson,
Lufkin & Jenrette, Value Line, Datastream International, James Capel, S.G.
Warburg Securities, County Natwest and UBS UK Limited, including information
provided by the Federal Reserve Board, Moody's, and the Federal Reserve
Bank.
Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond Indices," a
monthly corporate government index publication which lists principal, coupon
and total return on over 100 different taxable bond indices which Merrill
Lynch tracks. They also list the par weighted characteristics of each Index.
Lehman Brothers, Inc., "The Bond Market Report," a monthly publication which
tracks principal, coupon and total return on the Lehman Govt./Corp. Index
and Lehman Aggregate Bond Index, as well as all the components of these
Indices.
Standard & Poor's 500 Composite Stock Price Index and the Dow Jones
Industrial Average of 30 stocks are unmanaged lists of common stocks
frequently used as general measures of stock market performance. Their
performance figures reflect changes of market prices and quarterly
reinvestment of all distributions but are not adjusted for commissions or
other costs.
41
The Consumer Price Index, prepared by the U.S. Bureau of Labor Statistics,
is a commonly used measure of inflation. The Index shows changes in the cost
of selected consumer goods and does not represent a return on an investment
vehicle.
Credit Suisse First Boston High Yield Index is designed to measure the
performance of the high yield bond market.
Lehman Brothers Aggregate Index is an unmanaged index which generally covers
the U.S. investment grade fixed rate bond market, including government and
corporate securities, agency mortgage pass-through securities, and
asset-backed securities.
Lehman Brothers Corporate Bond Index includes all publicly issued, fixed
rate, non-convertible investment grade dollar-denominated, corporate debt
which have at least one year to maturity and an outstanding par value of at
least $100 million.
The NYSE composite of component indices--unmanaged indices of all
industrial, utilities, transportation, and finance stocks listed on the
NYSE.
Moody's Stock Index, an unmanaged index of utility stock performance.
Morgan Stanley All Country World Free Index is designed to measure the
performance of stock markets in the United States, Europe, Canada,
Australia, New Zealand and the developed and emerging markets of Eastern
Europe, Latin America, Asia and the Far East. The index consists of
approximately 60% of the aggregate market value of the covered stock
exchanges and is calculated to exclude companies and share classes which
cannot be freely purchased by foreigners.
Morgan Stanley World Index is designed to measure the performance of stock
markets in the United States, Europe, Canada, Australia, New Zealand and the
Far East. The index consists of approximately 60% of the aggregate market
value of the covered stock exchanges.
Reuters, a wire service that frequently reports on global business.
Russell 2000 Index, prepared by the Frank Russell Company, consists of U.S.
publicly traded stocks of domestic companies that rank from 1000 to 3000 by
market capitalization. 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.
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.
Salomon Brothers Government Index is a market capitalization-weighted index
that consists of debt issued by the U.S. Treasury and U.S. Government
sponsored agencies.
Salomon Brothers Mortgage Index is a market capitalization-weighted index
that consists of all agency pass-throughs and FHA and GNMA project notes.
Standard & Poor's 400 Midcap Index is an unmanaged capitalization-weighted
index that is generally representative of the U.S. market for medium cap
stocks.
42
Standard & Poor's Smallcap 600 Index is a capitalization-weighted index that
measures the performance of selected U.S. stocks with a small market
capitalization.
Standard & Poor's Utilities Index is an unmanaged capitalization weighted
index comprising common stock in approximately 40 electric, natural gas
distributors and pipelines, and telephone companies. The Index assumes the
reinvestment of dividends.
From time to time, in reports and promotional literature, performance
rankings and ratings reported periodically in national financial publications
such as MONEY, FORBES, BUSINESS WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may
also be used. In addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE WALL STREET
JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS may be cited.
GENERAL INFORMATION
ORGANIZATION. The Trust is a Massachusetts business trust organized on
October 28, 1986. The Trust is authorized to issue an unlimited number of shares
of beneficial interest, no par value, in such separate and distinct series and
classes of shares as the Board shall from time to time establish. The shares of
beneficial interest of the Trust are presently divided into three separate and
distinct series, each having one class, designated Class A shares. The Trust
does not hold annual shareholder meetings. If requested to do so by the holders
of at least 10% of the Trust's outstanding shares, the Trust's Board will call a
special meeting of shareholders for any purpose, including the removal of
Trustees. Each share of each fund has equal voting rights. Each share of a Fund
is entitled to participate equally in dividends and other distributions and the
proceeds of any liquidation.
CUSTODIAN. The Bank of New York, 48 Wall Street, New York, NY 10286, is
custodian of the securities and cash of each Fund.
AUDITS AND REPORTS. The accounts of each Fund are audited twice a year by
Tait, Weller & Baker, independent certified public accountants, 8 Penn Center
Plaza, Philadelphia, PA, 19103. Shareholders of each Fund receive semi-annual
and annual reports, including audited financial statements, and a list of
securities owned.
LEGAL COUNSEL. Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036 serves as counsel to the Funds.
TRANSFER AGENT. Administrative Data Management Corp., 581 Main Street,
Woodbridge, NJ 07095-1198, an affiliate of EIMCO and EIC, acts as transfer agent
for the Funds and as redemption agent for regular redemptions. The fees charged
to each Fund by the Transfer Agent are $5.00 to open an account; $3.00 for each
certificate issued; $.75 per account per month; $10.00 for each legal transfer
of shares; $.45 per account per dividend declared; $5.00 for each exchange of
shares into a Fund; $5.00 for each partial withdrawal or complete liquidation;
$4.00 for each shareholder services call; $20.00 for each item of
correspondence; and $1.00 per account per report required by any governmental
authority. Additional fees charged to the Funds by the Transfer Agent are
assumed by the Underwriter. The Transfer Agent reserves the right to change the
fees on prior notice to the Funds. Upon request from shareholders, the Transfer
Agent will provide an account history. For account histories covering the most
recent three year period, there is no charge. The Transfer Agent charges a $5.00
administrative fee for each account history covering the period 1983 through
1994 and $10.00 per year for each account history covering the period 1974
through 1982. Account histories prior to 1974 will not be provided. If any
communication from the Transfer Agent to a shareholder is returned from the U.S.
Postal Service marked as "Undeliverable" two consecutive times, the Transfer
43
Agent will cease sending any further materials to the shareholder until the
Transfer Agent is provided with a correct address. Efforts to locate a
shareholder will be conducted in accordance with SEC rules and regulations prior
to escheatment of funds to the appropriate state treasury. The Transfer Agent
may deduct the costs of its efforts to locate a shareholder from the
shareholder's account. These costs may include a percentage of the account if a
search company charges such a fee in exchange for its location services. The
Transfer Agent is not responsible for any fees that states and/or their
representatives may charge for processing the return of funds to investors whose
funds have been escheated. The Transfer Agent's telephone number is
1-800-423-4026.
5% SHAREHOLDERS. As of December 31, 1999, the following owned of record or
beneficially 5% or more of the outstanding shares of each of the Funds listed
below [UPDATE]:
Fund % of Shares Shareholder
- ---- ----------- -----------
SHAREHOLDER LIABILITY. The Trust is organized as an entity known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust however, contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by the Trust or the Trustees. The
Declaration of Trust provides for indemnification out of the property of the
Trust of any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. Thus, the risk
of a shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust itself would be unable to meet
its obligations. The Adviser believes that, in view of the above, the risk of
personal liability to shareholders is immaterial and extremely remote. The
Declaration of Trust further provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office. The
Trust may have an obligation to indemnify Trustees and officers with respect to
litigation.
TRADING BY PORTFOLIO MANAGERS AND OTHER ACCESS PERSONS. Pursuant to Section
17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust and the Adviser have
adopted Codes of Ethics restricting personal securities trading by portfolio
managers and other access persons of the Funds. Among other things, such
persons, except the Trustees: (a) must have all non-exempt trades pre-cleared;
(b) are restricted from short-term trading; (c) must provide duplicate
statements and transactions confirmations to a compliance officer; and (d) are
prohibited from purchasing securities of initial public offerings.
44
FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
Registrant incorporates by reference the financial statements and report of
independent auditors contained in the Semi-Annual Report to shareholders for the
six-month period ended June 30, 1999 electronically filed with the Securities
and Exchange Commission on _________, 1999 (Accession Number:
______________________).
45
PR0 FORMA FINANCIAL STATEMENTS AND SCHEDULES
46
APPENDIX A
DESCRIPTION OF COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS GROUP
Standard & Poor's Ratings Group ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term in
the relevant market. Ratings are graded into several categories, ranging from
"A-1" for the highest quality obligations to "D" for the lowest.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
MOODY'S INVESTORS SERVICE, INC.
Moody's Investors Service, Inc. ("Moody's") short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
PRIME-1 Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
47
APPENDIX B
DESCRIPTION OF MUNICIPAL NOTE RATINGS
STANDARD & POOR'S RATINGS GROUP
S&P's note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the difference between short-term credit risk and long-term risk.
MIG-1. Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
48
APPENDIX C
[The following tables are represented as graphs in the printed document.]
The following graphs and chart illustrate hypothetical returns:
INCREASE RETURNS
This graph shows over a period of time even a small increase in returns can make
a significant difference. This assumes a hypothetical investment of $10,000.
Years 10% 8% 6% 4%
----- ------- ------ ------ ------
5 16,453 14,898 13,489 12,210
10 27,070 22,196 18,194 14,908
15 44,539 33,069 24,541 18,203
20 73,281 49,268 33,102 22,226
25 120,569 73,402 44,650 27,138
INCREASE INVESTMENT
This graph shows the more you invest on a regular basis over time, the more you
can accumulate. this assumes monthly installment with a constant hypothetical
return rate of 8%.
Years $100 $250 $500 $1,000
----- ------ ------- ------- -------
5 7,348 18,369 36,738 73,476
10 18,295 43,736 91,473 182,946
15 34,604 86,509 173,019 346,038
20 58,902 147,255 294,510 589,020
25 95,103 237,757 475,513 951,026
49
[The following table is represented as a graph in the printed document.]
This chart illustrates the time value of money based upon the following
assumptions:
If you invested $2,000 each year for 20 years, starting at 25, assuming a 9%
investment return, you would accumulate $573,443 by the time you reach age 65.
However, had you invested the same $2,000 each year for 20 years, at that rate,
but waited until age 35, you would accumulate only $242,228 - a difference of
$331,215.
25 years old .............. 573,443
35 years old .............. 242,228
45 years old .............. 103,320
For each of the above graphs and chart it should be noted that systematic
investment plans do not assume a profit or protect against loss in declining
markets. Investors should consider their financial ability to continue purchases
through periods of both high and low price levels. Figures are hypothetical and
for illustrative purposes only and do not represent any actual investment or
performance. The value of a shareholder's investment and return may vary.
50
[The following table is represented as a chart in the printed document.]
The following chart illustrates the historical performance of the Dow Jones
Industrial Average from 1928 through 1996.
1928 .................. 300.00
1929 .................. 248.48
1930 .................. 164.58
1931 .................. 77.90
1932 .................. 59.93
1933 .................. 99.90
1934 .................. 104.04
1935 .................. 144.13
1936 .................. 179.90
1937 .................. 120.85
1938 .................. 154.76
1939 .................. 150.24
1940 .................. 131.13
1941 .................. 110.96
1942 .................. 119.40
1943 .................. 136.20
1944 .................. 152.32
1945 .................. 192.91
1946 .................. 177.20
1947 .................. 181.16
1948 .................. 177.30
1949 .................. 200.10
1950 .................. 235.40
1951 .................. 269.22
1952 .................. 291.89
1953 .................. 280.89
1954 .................. 404.38
1955 .................. 488.39
1956 .................. 499.46
1957 .................. 435.68
1958 .................. 583.64
1959 .................. 679.35
1960 .................. 615.88
1961 .................. 731.13
1962 .................. 652.10
1963 .................. 762.94
1964 .................. 874.12
1965 .................. 969.25
1966 .................. 785.68
1967 .................. 905.10
1968 .................. 943.75
1969 .................. 800.35
1970 .................. 838.91
1971 .................. 890.19
1972 .................. 1,020.01
1973 .................. 850.85
1974 .................. 616.24
1975 .................. 858.71
1976 .................. 1,004.65
1977 .................. 831.17
1978 .................. 805.01
1979 .................. 838.74
1980 .................. 963.98
1981 .................. 875.00
1982 .................. 1,046.55
1983 .................. 1,258.64
1984 .................. 1,211.56
1985 .................. 1,546.67
1986 .................. 1,895.95
1987 .................. 1,938.80
1988 .................. 2,168.60
1989 .................. 2,753.20
1990 .................. 2,633.66
1991 .................. 3,168.83
1992 .................. 3,301.11
1993 .................. 3,754.09
1994 .................. 3,834.44
1995 .................. 5,000.00
1996 .................. 6,000.00
The performance of the Dow Jones Industrial Average is not indicative of
the performance of any particular investment. It does not take into account fees
and expenses associated with purchasing mutual fund shares. Individuals cannot
invest directly in any index. Please note that past performance does not
guarantee future results.
51
[The following table is represented as a chart in the printed document.]
The following chart shows that inflation is constantly eroding the value of your
money.
THE EFFECTS OF INFLATION OVER TIME
1966 ....................... 96.61836
1967 ....................... 93.80423
1968 ....................... 89.59334
1969 ....................... 84.36285
1970 ....................... 79.88906
1971 ....................... 77.33694
1972 ....................... 74.79395
1973 ....................... 68.80768
1974 ....................... 61.27131
1975 ....................... 57.31647
1976 ....................... 54.63915
1977 ....................... 51.20820
1978 ....................... 46.98000
1979 ....................... 41.46514
1980 ....................... 36.85790
1981 ....................... 33.84564
1982 ....................... 32.60659
1983 ....................... 31.41290
1984 ....................... 30.23378
1985 ....................... 29.12696
1986 ....................... 28.81005
1987 ....................... 27.59583
1988 ....................... 26.43279
1989 ....................... 25.27035
1990 ....................... 23.81748
1991 ....................... 23.10134
1992 ....................... 22.45028
1993 ....................... 21.86006
1994 ....................... 21.28536
1995 ....................... 20.76620
1996 ....................... 20.16135
1996 ....................... 100.00
1997 ....................... 103.00
1998 ....................... 106.00
1999 ....................... 109.00
2000 ....................... 113.00
2001 ....................... 116.00
2002 ....................... 119.00
2003 ....................... 123.00
2004 ....................... 127.00
2005 ....................... 130.00
2006 ....................... 134.00
2007 ....................... 138.00
2008 ....................... 143.00
2009 ....................... 147.00
2010 ....................... 151.00
2011 ....................... 156.00
2012 ....................... 160.00
2013 ....................... 165.00
2014 ....................... 170.00
2015 ....................... 175.00
2016 ....................... 181.00
2017 ....................... 186.00
2018 ....................... 192.00
2019 ....................... 197.00
2020 ....................... 203.00
2021 ....................... 209.00
2022 ....................... 216.00
2023 ....................... 222.00
2024 ....................... 229.00
2025 ....................... 236.00
2026 ....................... 243.00
Inflation erodes your buying power. $100 in 1966, could purchase five times the
goods and service as in 1996 ($100 vs. $20).* Projecting inflation at 3%, goods
and services costing $100 today will cost $243 in the year 2026.
* Source: Consumer Price Index, U.S. Bureau of Labor Statistics.
52
[The following tables are represented as graphs in the printed document.]
This chart illustrates that historically, the longer you hold onto stocks, the
greater chance that you will have a positive return.
1926 through 1996*
Total Number of Percentage of
Number of Positive Positive
Rolling Period Periods Periods Periods
-------------- ------- ------- -------
1-Year 71 51 72%
5-Year 67 60 90%
10-Year 62 60 97%
15-Year 57 57 100%
20-Year 52 52 100%
The following chart shows the compounded annual return of large company stocks
compared to U.S. Treasury Bills and inflation over the most recent 15 year
period. **
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Large Company Stocks .......... 16.79
The following chart illustrates for the period shown that long-term corporate
bonds have outpaced U.S. Treasury Bills and inflation.
Compound Annual Return from 1982 -- 1996*
Inflation ..................... 3.55
U.S. Treasury Bills ........... 6.50
Long-Term Corp. bonds ......... 13.66
* Source: Used with permission. (c)1997 Ibbotson Associates, Inc. All rights
reserved. [Certain provisions of this work were derived from copyrighted
works of Roger G. Ibbotson and Rex Sinquefield.]
** Please note that U.S. Treasury bills are guaranteed as to principal and
interest payments (although the funds that invest in them are not), while
stocks will fluctuate in share price. Although past performance cannot
guarantee future results, returns of U.S. Treasury bills historically have
not outpaced inflation by as great a margin as stocks.
53
The accompanying table illustrates that if you are in the 36% tax bracket, a
tax-free yield of 3% is actually equivalent to a taxable investment earning
4.69%.
Your Taxable Equivalent Yield
Your Federal Tax Bracket
---------------------------------------------
28.0% 31.0% 36.0% 39.6%
your tax-free yield
3.00% 4.17% 4.35% 4.69% 4.97%
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.25%
5.50% 7.64% 7.97% 8.59% 9.11%
This information is general in nature and should not be construed as tax advice.
Please consult a tax or financial adviser as to how this information affects
your particular circumstances.
54
[The following table is represented as a graph in the printed document.]
The following graph illustrates how income has affected the gains from stock
investments since 1965.
S&P 500 Dividends Reinvested S&P 500 Principal Only
12/31/64 10,000 10,000
12/31/65 11,269 10,906
12/31/66 10,115 9,478
12/31/67 12,550 11,383
12/31/68 13,948 12,255
12/31/69 12,795 10,863
12/31/70 13,299 10,873
12/31/71 15,200 12,046
12/31/72 18,088 13,929
12/31/73 15,431 11,510
12/31/74 11,346 8,090
12/31/75 15,570 10,642
12/31/76 19,296 12,680
12/31/77 17,915 11,221
12/31/78 19,092 11,340
12/31/79 22,645 12,736
12/31/80 30,004 16,019
12/31/81 28,528 14,460
12/31/82 34,674 16,595
12/31/83 42,496 19,461
12/31/84 45,161 19,733
12/31/85 59,489 24,930
12/31/86 70,594 28,575
12/31/87 74,301 29,154
12/31/88 86,641 32,769
12/31/89 114,093 41,699
12/31/90 110,549 38,964
12/31/91 144,230 49,214
12/31/92 155,218 51,411
12/31/93 170,863 55,039
12/31/94 173,120 54,191
12/31/95 238,175 72,676
12/31/96 292,863 87,403
11/30/97 383,977 112,732
Source: First Investors Management Company, Inc. Standard & Poor's is a
registered trademark. The S&P 500 is an unmanaged index comprising 500 common
stocks spread across a variety of industries. The total returns represented
above compare the impact of reinvestment of dividends and illustrates past
performance of the index. The performance of any index is not indicative of the
performance of a particular investment and does not take into account the
effects of inflation or the fees and expenses associated with purchasing mutual
fund shares. Individuals cannot invest directly in any index. Mutual fund shares
will fluctuate in value, therefore, the value of your original investment and
your return may vary. Moreover, past performance is no guarantee of future
results.
55
FIRST INVESTORS LOGO
Shareholder Manual
A Guide to Your
First Investors
Mutual Fund Account
as of March 8, 1999
INTRODUCTION
Investing in mutual funds doesn't have to be complicated. In addition to a wide
variety of mutual funds, First Investors offers personalized service. Your
registered representative is available to answer your questions and help you
process your transactions. In the event you wish to process a transaction
directly, the material provided in this easy-to-follow guide tells you how to
contact us and explains our policies and procedures. Please note that there are
special rules for money market funds. Please read this manual completely to gain
a better understanding of how shares are bought, sold, exchanged, and
transferred. In addition, the manual provides you with a description of the
services we offer to simplify investing. The services, privileges and fees
referenced in this manual are subject to change. You should call our Shareholder
Services Department at 1 (800) 423-4026 before initiating any transaction. This
manual must be preceded or accompanied by a First Investors mutual fund
prospectus. For more complete information on any First Investors Fund, including
charges and expenses, refer to the prospectus. Read the prospectus carefully
before you invest or send money.
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
TABLE OF CONTENTS
HOW TO BUY SHARES
To Open An Account ......................................................... 5
To Open a Retirement Account ............................................... 6
Minimum Initial Investment ................................................. 6
Additional Investments ..................................................... 6
Acceptable Forms of Payment ................................................ 6
Share Classes .............................................................. 6
Share Class Specification .................................................. 7
Class A Shares ............................................................. 7
Sales Charge Waivers & REductions on Class A Shares ........................ 7
Class B Shares ............................................................. 9
How To Pay ................................................................. 10
Wire Transfers ............................................................. 11
Distribution Cross-Investment .............................................. 12
HOW TO SELL SHARES
REDEMPTION OPTIONS ......................................................... 13
Written Redemptions ........................................................ 13
Telephone Redemptions ...................................................... 13
Electronic Funds Transfer .................................................. 13
Systematic Withdrawal Plans ................................................ 14
Expedited Wire Redemptions ................................................. 14
HOW TO EXCHANGE SHARES
Exchange Methods ........................................................... 15
Exchange Conditions ........................................................ 16
Exchanging Funds With.
Automatic Investments or
Systematic Withdrawals ..................................................... 16
WHEN AND HOW ARE FUND SHARES PRICED? ....................................... 17
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED? .... 17
Purchases .................................................................. 17
Redemptions ................................................................ 18
Exchanges .................................................................. 18
Orders Placed Via First Investors Registered Representatives ............... 18
Special Rules for Money Market Funds ....................................... 19
SPECIAL RULES FOR MONEY MARKET ACCOUNTS .................................... 18
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS ................................ 19
SIGNATURE GUARANTEE ARE REQUIRED............................................ 19
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS ..................... 20
Security MEasures .......................................................... 20
Eligibility ................................................................ 20
NON-RETIREMENT ACCOUNTS .................................................... 20
RETIREMENT ACCOUNTS ........................................................ 20
Shareholder Services ....................................................... 21
OTHER SERVICES ............................................................. 22
Reinvestment Privilege ..................................................... 22
Certificate Shares ......................................................... 22
Money Market Fund Draft Checks ............................................. 22
Return Mail ................................................................ 23
Transferring Shares ........................................................ 23
ACCOUNT STATEMENTS
Transaction Confirmation Statements ........................................ 24
Master Account Statements .................................................. 24
Annual and Semi-Annual Reports ............................................. 24
DIVIDENDS AND DISTRIBUTIONS
Dividends and Distributions ................................................ 25
Buying a Dividend .......................................................... 25
TAX FORMS .................................................................. 26
4
HOW TO BUY SHARES
First Investors offers a wide variety of mutual funds to meet your financial
needs ("FI Funds"). Your First Investors registered representative will review
your financial objectives and risk tolerance, explain our product line and
services, and help you select the right investments. Call our Shareholder
Services Department at 1 (800) 423-4026 for the number of the First Investors
office near you or visit us on-line at www.firstinvestors.com
o TO OPEN AN ACCOUNT
Before investing, you must establish an account with your broker/dealer. At
First Investors Corporation ("FI") you do this by completing and signing a
Master Account Agreement ("MAA"). After you determine the fund(s) you want to
purchase, deliver your completed MAA and your check, made payable to First
Investors Corporation, to your registered representative. New client accounts
must be established through your registered representative. You need to tell us
how you want your shares registered when you open a new Fund account. Please
keep the following information in mind:
- -JOINT ACCOUNTS. For any account with two or more owners, all owners must sign
requests to process transactions. Telephone privileges allow any one of the
owners to process transactions independently.
- -GIFTS AND TRANSFERS TO MINORS. Custodial accounts for a minor may be
established under your state's Uniform Gifts/Transfers to Minors Act. Custodial
accounts are registered under the minor's social security number.
TRUSTS. A trust account may be opened only if you have a valid written trust
document.
- -TRANSFER ON DEATH (TOD). TOD registrations, available on all FI Funds in all
states, allow individual and joint account owners to name one or more
beneficiaries. The ownership of the account automatically passes to the named
beneficiaries in the event of the death of all account owners.
- -DIVIDENDS AND CAPITAL GAINS. Fund distributions will be automatically
reinvested in your account unless you request otherwise.
_______________________________________________________________________________
SOME REGISTRATIONS REQUIRE ADDITIONAL PAPERWORK.
_______________________________________________________________________________
TYPE OF ACCOUNT ADDITIONAL DOCUMENTS REQUIRED
Corporations
Partnership
& Trusts First Investors Certificate of Authority
Transfer On Death First Investors TOD Registration Request Form
(TOD)
Estates Original or Certified Copy of Death Certificate
Certified Copy of Letters Testamentary/Administration
First Investors Executor's Certification &
Indemnification Form
Conservatorships Copy of court document appointing Conservator/Guardian
& Guardianships
_______________________________________________________________________________
5
oTO OPEN A RETIREMENT ACCOUNT
Fund shares may be purchased for your retirement account by completing the MAA
and the appropriate retirement plan application. First Investors offers
retirement plans for both individuals and employers as follows:
INDIVIDUAL RETIREMENT ACCOUNTS
including Roth, Traditional, and Rollover IRAs.
SIMPLE IRAS offered by employers.
SEP-IRAS (SIMPLIFIED EMPLOYEE PENSION PLANS) for small business owners or people
with income from self-employment, including SARSEP IRAs.
403(B)(7) accounts for employees of eligible tax-exempt organizations such as
schools, hospitals and charitable organizations.
401(K) plans for employers.
MONEY PURCHASE PENSION & PROFIT SHARING plans for sole proprietors.
For more information about these plans call your registered representative or
our Shareholder Services Department at 1 (800) 423-4026.
oMINIMUM INITIAL INVESTMENT
You can open a non-retirement account with a check made payable to First
Investors Corporation for as little as $1,000. The minimum is waived if you open
an account through one of our Automatic Investment Programs (see "How to Pay")
or through a full exchange from another FI Fund. You can open a First Investors
Traditional IRA or Roth IRA with as little as $500 (except for the Cash
Management Fund which requires a $1,000 investment). Other retirement accounts
may have lower initial investment requirements at the Fund's discretion.
oADDITIONAL INVESTMENTS
Once you have established an account, you can add to it through your registered
representative or by sending us a check directly. There is no minimum
requirement on additional purchases into existing fund accounts. Remember to
include your FI Fund account number on your check made payable to First
Investors Corporation. Mail checks to: First Investors Corporation Attn: Dept.
Cp 581 Main Street Woodbridge, NJ 07095-1198
oACCEPTABLE FORMS OF PAYMENT
The following forms of payment are acceptable:
- -checks made payable to First Investors Corporation
- -Money Line electronic funds transfers
- -federal funds wire transfers
For your protection, never give your registered representative cash or a check
made payable to your registered representative.
We do not accept:
- -Third party checks
- -Traveler's checks
- -Checks drawn on non-US banks
- -Money orders
- -Cash
oSHARE CLASSES
All FI Funds are available in Class A and Class B shares. Direct purchases into
Class B share money market accounts are not accepted. Class B money market fund
shares may only be acquired through an exchange from another Class B share
account or through Class B share dividend cross-reinvestment.
Each class of shares has its own cost structure. As a result, different classes
6
of shares in the same fund generally have different prices. Class A shares have
a front-end sales charge. Class B shares have a contingent deferred sales charge
("CDSC"). While both classes have a Rule 12b-1 fee, the fee on Class B shares is
generally higher. The principal advantages of Class A shares are that they have
lower overall expenses, the availability of quantity discounts on sales charges,
and certain account privileges that are not offered on Class B shares. The
principal advantage of Class B shares is that all your money is put to work from
the outset. Your registered representative can help you decide which class of
shares is best for you.
oSHARE CLASS SPECIFICATION
It's very important to specify which class of shares you wish to purchase when
you open a new account. All First Investors account applications have a place to
designate your preference. If you do not specify which class of shares you want
to purchase, Class A shares will automatically be purchased.
oCLASS A SHARES
When you buy Class A shares, you pay the offering price - the net asset value of
the fund plus a front-end sales charge. The front-end sales charge declines with
larger investments.
_______________________________________________________________________________
CLASS A SALES CHARGES
_______________________________________________________________________________
AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE INVESTMENT
up to $24,999 6.25% 6.67%
$25,000 - $49,999 5.75% 6.10%
$50,000 - $99,999 5.50% 5.82%
$100,000 - $249,999 4.50% 4.71%
$250,000 - $499,999 3.50% 3.63%
$500,000 - $999,999 2.50% 2.56%
Investments of $1 million or more will only be made in Class A shares at the
Fund's net asset value.
Generally, you should consider purchasing Class A shares if you plan to invest
$250,000 or more either initially or over time.
_______________________________________________________________________________
_______________________________________________________________________________
oSALES CHARGE WAIVERS & REDUCTIONS ON CLASS A SHARES
If you qualify for one of the sales charge reductions or waivers, it is very
important to let us know at the time you place your order. Include a written
statement with your check explaining which privilege applies. If you do not
include this statement we cannot guarantee that you will receive the reduction
or waiver.
CLASS A SHARES MAY BE PURCHASED WITHOUT A SALES CHARGE:
1: By an officer, trustee, director, or employee of the Fund, the Fund's adviser
or subadviser, First Investors Corporation, or any affiliates of First Investors
Corporation.
2: By a former officer, trustee, director, or employee of the Fund,
First Investors Corporation, or their affiliates provided the person worked for
the company for at least 5 years and retired or terminated employment in good
standing.
7
3: By a FI registered representative or an authorized dealer, or by his/her
spouse, child (under age 21) or grandchild (under age 21).
4: When fund distributions are reinvested in Class A shares.
5: When Systematic Withdrawal Plan payments are reinvested in Class A shares.
6: When qualified retirement plan loan repayments are reinvested in Class A
shares.
7: With the liquidation proceeds from a First Investors Life Variable Annuity
Fund A, C, or D contract within one year of the contract's maturity date.
8:When dividends (at least $50 a year) from a First Investors Life Insurance
Company policy are invested into an EXISTING account.
9: When a group qualified plan (401(k) plans, money purchase pension plans,
profit sharing plans and 403(b) plans that are subject to Title I of ERISA) is
reinvesting redemption proceeds from another fund on which a sales charge or
CDSC was paid.
10: With distribution proceeds from a First Investors group qualified plan
account into an IRA.
11: By participant directed group qualified plans with 100 or more eligible
employees or $1,000,000 or more in assets.
12: In amounts of $1 million or more.
13: By individuals under a Letter of Intent or Cumulative Purchase Privilege of
$1 million or more.
FOR ITEMS 9 THROUGH 13 ABOVE: A CDSC OF 1.00% WILL BE
DEDUCTED IF SHARES ARE REDEEMED WITHIN 2 YEARS OF PURCHASE.
SALES CHARGES ON CLASS A SHARES MAY BE REDUCED FOR:
1: Participant directed group qualified retirement plans with 99 or fewer
eligible employees. The initial sales charge is reduced to 3.00% of the offering
price.
2: Certain unit trust holders ("unitholders") who elect to invest the entire
amount of principal, interest, and/or capital gains distributions from their
unit investment trusts in Class A shares. Unitholders of various series of New
York Insured Municipals-Income Trust sponsored by Van Kampen Merrit, Inc.,
unitholders of various series of the Multistate Tax Exempt trust sponsored by
Advest Inc., and unitholders of various series of the Insured Municipal Insured
National Trust, J.C. Bradford & Co. as agent, may buy Class A shares of a FI
Fund with unit trust distributions at the net asset value plus a sales charge of
1.5%. Unitholders of various tax-exempt trusts, other than the New York Trust,
sponsored by Van Kampen Merritt Inc. may buy Class A shares of a FI Fund at the
net asset value plus a sales charge of 1.0%.
Unitholders may make additional purchases, other than those made by unit trust
distributions, at the Fund's regular offering price.
CUMULATIVE PURCHASE PRIVILEGE The Cumulative Purchase Privilege lets you add the
value of all your existing FI Fund accounts (Class A and Class B shares) to the
amount of your next Class A share investment to reach sales charge discount
breakpoints. For example, if the combined value of your existing FI Fund
accounts is $25,000, your next purchase will be eligible for a sales charge
discount at the $25,000 level. Cumulative Purchase discounts are applied to
purchases as indicated in the first column of the Class A Sales Charge table.
All your accounts registered with the same social security number will be linked
together under the Cumulative Purchase Privilege. In addition, your spouse's
accounts and custodial accounts held for minor children residing at your home
can also be linked to your accounts upon request.
8
- -Conservator accounts are linked to the social security number of the ward, not
the conservator.
- -Sole proprietorship accounts are linked to personal/family accounts only if the
account is registered with a social security number, not an employer
identification number ("EIN").
- -Testamentary trusts and living trusts may be linked to other accounts
registered under the same trust EIN, but not to the personal accounts of the
trustee(s).
- -Estate accounts may only be linked to other accounts registered under the same
EIN of the estate or social security number of the decedent.
- -Church and religious organizations may link accounts to others registered with
the same EIN but not to the personal accounts of any member.
LETTER OF INTENT
A Letter of Intent ("LOI") lets you purchase at a discounted sales charge level
even though you do not yet have sufficient investments to qualify for that
discount level. An LOI is a commitment by you to invest a specified dollar
amount during a 13-month period. The amount you agree to invest determines the
sales charge you pay. Under an LOI, you can reduce the initial sales charge on
Class A share purchases based on the total amount you agree to invest in both
Class A and Class B shares during the 13 month period. Purchases made up to 90
days before the date of the LOI may be included.
Your LOI can be amended in two ways. First, you may file an amended LOI to raise
or lower the LOI amount during the 13 month period. Second, your LOI will be
automatically amended if you invest more than your LOI amount during the
13-month period and qualify for an additional sales charge reduction.
By purchasing under an LOI, you acknowledge and agree to the following:
- -You authorize First Investors to reserve 5% of your total intended investment
in shares held in escrow in your name until the LOI is completed.
- -First Investors is authorized to sell any or all of the escrow shares to
satisfy any additional sales charges owed in the event you do not fulfill the
LOI.
- -Although you may exchange all your shares, you may not sell the reserve shares
held in escrow until you fulfill the LOI or pay the higher sales charge.
oCLASS B SHARES
Class B shares are sold without an initial sales charge, putting all your money
to work for you immediately. If you redeem Class B shares within 6 years of
purchase, a CDSC will be imposed. The CDSC declines from 4% to 0% over a 6-year
period, as shown in the chart below. Class B share money market fund shares are
not sold directly. They can only be acquired through an exchange from another
Class B fund account. Class B shares, and the dividend and distribution shares
they earn, automatically convert to Class A shares after 8 years, reducing
future annual expenses.
Generally, you should consider purchasing Class B shares if you intend to invest
less than $250,000 and you would rather pay higher ongoing expenses than an
initial sales charge.
CLASS B SALES CHARGES
THE CDSC DECLINES OVER TIME AS SHOWN IN THE TABLE BELOW:
________________________________________________________________
Year 1 2 3 4 5 6 7+
________________________________________________________________
CDSC 4% 4% 3% 3% 2% 1% 0%
________________________________________________________________
9
If shares redeemed are subject to a CDSC, the CDSC will be based on the lesser
of the original purchase price or redemption price. There is no CDSC on shares
acquired through dividend and capital gains reinvestment. We call these "free
shares."
Anytime you sell shares, your shares will be redeemed in the following manner to
ensure that you pay the lowest possible CDSC:
FIRST-Class B shares representing dividends and capital gains that are not
subject to a CDSC.
SECOND-Class B shares held more than six years which are not subject to a CDSC.
THIRD-Class B shares held longest which will result in the lowest CDSC.
For purposes of calculating the CDSC, all purchases made during the calendar
month are deemed to have been made on the first business day of the month at the
average cost of the shares purchased during that period.
SALES CHARGE WAIVERS ON CLASS B SHARES
The CDSC on Class B shares does not apply to:
1: Appreciation on redeemed shares above their original purchase price.
2: Redemptions due to death or disability (as defined in section 72(m)(7) of the
Internal Revenue Code) requested within one year of death. Additional
documentation is required.
3: Distributions from employee benefit plans due to termination or plan
transfer.
4: Redemptions to remove an excess contribution from an IRA or qualified
retirement plan.
5: Distributions upon reaching required minimum age 70 1/2 provided you have
held the shares for at least three years.
6: Annual redemptions of up to 8% of your account's value redeemed by a
Systematic Withdrawal Plan. Free shares not subject to a CDSC will be redeemed
first and will count towards the 8% limit.
7: Shares redeemed from advisory accounts managed by or held by the Fund's
investment advisor or any of its affiliates.
8: Tax-free returns of excess contributions from employee benefit plans.
9: Redemptions of non-retirement shares purchased with proceeds from the sale of
shares of another fund group between April 29, 1996 and June 30, 1996 that did
not pay a sales charge (other than money market fund accounts or retirement plan
accounts).
10: Redemptions by the Fund when the account falls below the minimum.
11: Redemptions to pay account fees.
Include a written statement with your redemption request explaining which
exemption applies. If you do not include this statement we cannot guarantee that
you will receive the waiver.
oHOW TO PAY
You can invest using one or more of the
following options:
- -CHECK:
You can buy shares by writing a check payable to
First Investors Corporation. If you are opening a new fund account, your check
must meet the fund minimum. When making purchases to an existing account,
remember to include your fund account number on your check.
- -AUTOMATIC INVESTMENT PROGRAMS:
We offer several automatic investment programs to simplify
investing.
- -MONEY LINE:
With our Money Line program, you can open an account with as little as $50 a
month or $600 each year in a FI Fund account by transferring funds
electronically from your bank account. You can invest up to $10,000 a month
through Money Line.
10
Money Line allows you to select the payment amount and frequency that is best
for you. You can make automatic investments bi-weekly, semi-monthly, monthly,
quarterly, semi-annually, or annually. The date you select as your Money Line
investment date is the date on which shares will be purchased. THE PROCEEDS MUST
BE AVAILABLE IN YOUR BANK ACCOUNT TWO BUSINESS DAYS PRIOR TO THE INVESTMENT
DATE.
HOW TO APPLY:
1: Complete the Electronic Funds Transfer ("EFT") section of the application to
provide complete bank information and authorize EFT fund share purchases. Attach
a voided check. A signature guarantee of all shareholders and bank account
owners is required.
PLEASE ALLOW AT LEAST 10 BUSINESS DAYS FOR INITIAL PROCESSING.
2: Complete the Money Line section of the application to specify the amount,
frequency and date of the investment.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
HOW TO CHANGE:
Provided you have telephone privileges, you may call Shareholder Services at 1
(800) 423-4026 to:
- -Increase the payment up to $999.99.
- -Decrease the payment.
- -Discontinue the service.
To change investment amounts, reallocate or cancel Money Line, you must notify
us at least 3 business days prior to the investment date.
You must send a signature guaranteed written request to Administrative Data
Management Corp. to:
- -Increase the payment to $1,000 or more.
- -Change bank information.
A medallion signature guarantee (see Signature Guarantee Policy) is required to
increase a Money Line payment to $2,500 or more. Changing banks or bank account
numbers requires 10 days notice. Money Line service will be suspended upon
notification that all account owners are deceased.
AUTOMATIC PAYROLL INVESTMENT: With our Automatic Payroll Investment service
("API") you can systematically purchase shares by salary reduction. To
participate, your employer must offer direct deposit and permit you to
electronically transfer a portion of your salary. Contact your company payroll
department to authorize the salary reductions. If not available, you may
consider our Money Line program.
Shares purchased through API are bought at the offering price on the day the
electronic transfer is received by the Fund.
HOW TO APPLY:
1: Complete an API Application.
2: Complete an API Authorization Form.
3: Submit the paperwork to your registered representative or send it to:
ADMINISTRATIVE DATA MANAGEMENT CORP., ATTN: CONTROL DEPT., 581 MAIN STREET,
WOODBRIDGE, NJ 07095-1198.
oWire Transfers:
You may purchase shares via a federal funds wire transfer from your bank account
into your EXISTING First Investors account. Federal fund wire transfer proceeds
are not subject to a holding period and are available to you immediately upon
receipt, as long as we have been notified properly.
YOU MUST CALL US AT 1 (800) 423-4026 TO ADVISE US OF AN INCOMING FEDERAL FUNDS
WIRE and provide us with the federal funds wire transfer confirmation number,
the amount of the wire, and the fund account number to receive same day credit.
11
There are special rules for money market fund accounts. To wire federal funds to
an existing First Investors account (other than money markets), instruct your
bank to wire your investment to: FIRST FINANCIAL SAVINGS BANK, S.L.A. ABA #
221272604 ACCOUNT # 0306142 YOUR NAME YOUR FIRST INVESTORS FUND ACCOUNT#
oDISTRIBUTION CROSS-INVESTMENT:
You can invest the dividends and capital gains from one fund account, excluding
the money market funds, into another fund account in the same class of shares.
The shares will be purchased at the net asset value on the day after the record
date of the distribution.
- -You must invest at least $50 a month or $600 a year into a NEW account.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
You may establish a Distribution Cross-Investment service by contacting your
registered representative or calling Shareholder Services at 1 (800) 423-4026.
oSYSTEMATIC WITHDRAWAL PLAN PAYMENT INVESTMENTS:
You can invest Systematic Withdrawal Plan payments (see How to Sell Shares) from
one fund account in shares of another fund account.
- -Payments are invested without a sales charge.
- -A signature guarantee is required if the ownership on both accounts is not
identical.
- -Both accounts must be in the same class of shares.
- -You must invest at least $600 a year if into a new account.
- -You can invest on a monthly, quarterly, semi-annual, or annual basis.
Redemptions are suspended upon notification that all account owners are
deceased. Service will recommence upon receipt of written alternative payment
instructions and other required documents from the decedent's legal
representative.
HOW TO SELL SHARES
You can sell your shares on any day the New York Stock Exchange is open for
regular trading. In the mutual fund industry, a sale is referred to as a
"redemption." Redemption proceeds are generally mailed within three days. If the
shares being redeemed were purchased by check, payment may be delayed to verify
that the check has been honored, which may take up to 15 days from the date of
purchase. Shareholders may not redeem shares by telephone or electronic funds
transfer unless the shares have been owned for at least 15 days.
Redemptions of shares are not subject to the 15 day verification period if the
shares were purchased via:
- -Automatic Payroll Investment
- -FIC registered representative payroll checks -First Investors Life Insurance
Company checks
- -Federal funds wire payments
12
oREDEMPTION OPTIONS
For trusts, estates, attorneys-in-fact, corporations, partnerships, and other
entities, additional documents are required to redeem shares. Call Shareholder
Services at 1 (800) 423-4026 for more information.
WRITTEN REDEMPTIONS
You can write a letter of instruction or contact your First Investors registered
representative for a liquidation request form. A written liquidation request in
good order must include:
1: The name of the fund;
2: Your account number;
3: The dollar amount, number of shares or percentage of the account you want to
redeem;
4: Share certificates (if they were issued to you);
5: Original signatures of all owners exactly as your account is registered;
6: Signature guarantees, if required (see Signature Guarantee Policy).
Written redemption requests should be mailed to:
ADMINISTRATIVE DATA MANAGEMENT CORP.
581 MAIN STREET
WOODBRIDGE, NJ 07095-1198
TELEPHONE REDEMPTIONS
You, or any person we believe is authorized to act on your behalf, may redeem
shares which have been owned for at least 15 days by calling our Special
Services Department at 1 (800) 342-6221 from 9:00 a.m. to 5:00 p.m., EST,
provided:
- -Telephone privileges are available for your account registration (see Telephone
Privileges);
- -You have telephone privileges (see Telephone Privileges);
- -You do not hold share certificates (issued shares);
- -The redemption check is made payable to the registered owner(s) or
pre-designated bank;
- -The redemption check is mailed to your address of record;
- -Your address of record has not changed within the past 60 days;
- -The redemption amount is $50,000 or less; AND
- -The redemption amount, combined with the amount of all telephone redemptions
made within the previous 30 days does not exceed $100,000.
ELECTRONIC FUNDS TRANSFER
The Electronic Funds Transfer ("EFT") service allows you to redeem shares and
electronically transfer proceeds to your bank account.
YOU MUST ENROLL IN THE ELECTRONIC FUNDS TRANSFER SERVICE AND PROVIDE COMPLETE
BANK ACCOUNT INFORMATION BEFORE USING THE PRIVILEGE. Signature guarantees of all
shareholders and all bank account owners are required. Please allow at least 10
business days for initial processing. We will send any proceeds during the
processing period to your address of record. Call your registered representative
or Shareholder Services at 1 (800) 423-4026 for an application.
You may call Shareholder Services or send written instructions to Administrative
Data Management Corp. to request an EFT redemption of shares which are held at
least 15 days. Each EFT redemption:
1: Must be electronically transferred to your pre-designated bank account;
2: Must be at least $500;
3: Cannot exceed $50,000;
4: Cannot exceed $100,000 when added to the total amount of all EFT
redemptions made within the previous 30 days.
13
If your redemption does not qualify for an EFT redemption, you may request to
have the redemption proceeds mailed to you.
The Electronic Funds Transfer service may also be used to purchase shares (see
Money Line) and transfer systematic withdrawal payments (see Systematic
Withdrawal Plans) and dividend distributions (see Other Services) to your bank
account.
SYSTEMATIC WITHDRAWAL PLANS
Our Systematic Withdrawal Plan allows you to redeem a specific dollar amount or
percentage from your account on a regular basis. Your payments can be mailed to
you or a pre-authorized payee by check, transferred to your bank account
electronically (if you have enrolled in the EFT service) or invested in shares
of another FI fund in the same class of shares through our Systematic Withdrawal
Plan Payment investment service (see How to Buy Shares).
You can receive payments on a monthly, quarterly, semi-annual, or annual basis.
Your account must have a value of at least $5,000 in non-certificated shares
("unissued shares"). The $5,000 minimum account balance is waived for required
minimum distributions from retirement plan accounts. The minimum Systematic
Withdrawal Plan payment is $25 (waived for Required Minimum Distributions on
retirement accounts or FIL premium payments).
Once you establish the Systematic Withdrawal Plan, you should not make
additional investments into this account (except money market funds). Buying
shares during the same period as you are selling shares is not advantageous to
you because of sales charges.
If you own Class B shares, you may establish a Systematic Withdrawal Plan and
redeem up to 8% of the value of your account annually without a CDSC.
If you own Class B shares of a retirement account and you are receiving your
Required Minimum Distribution through a Systematic Withdrawal Plan, up to 8% of
the value of your account may be redeemed annually without a CDSC. However, if
your Required Minimum Distribution exceeds the 8% limit, the applicable CDSC
will be charged if the additional shares were held less than 3 years and you
have not reached age 70-1/2.
To establish a Systematic Withdrawal Plan, complete the appropriate section of
the account application or contact your registered representative or call
Shareholder Services at 1 (800) 423-4026.
oEXPEDITED WIRE REDEMPTIONS (MONEY MARKET FUNDS ONLY)
Enroll in our Expedited Redemption service to wire proceeds from your FI money
market account to your bank account. Call Shareholder Services at 1 (800)
423-4026 for an application or to discuss specific requirements.
- -Each wire under $5,000 is subject to a $10 fee.
- -Six wires of $5,000 or more are permitted without charge each month. Each
additional wire is $10.00.
- -Wires must be directed to your pre-authorized bank account.
14
HOW TO EXCHANGE SHARES
The exchange privilege gives you the flexibility to change investments as your
goals change without incurring a sales charge. Since an exchange is a redemption
and a purchase, it creates a gain or loss which is reportable for tax purposes.
You should consult your tax advisor before requesting an exchange. Read the
prospectus of the FI Fund you are purchasing carefully. Review the differences
in objectives, policies, risk, privileges and restrictions.
______________________________________________________________________________
EXCHANGE METHODS
_______________________________________________________________________________
METHOD STEPS TO FOLLOW
Through Your FI
Registered Representative Call your registered representative.
___________________________________________________________________________________
By Phone Call Special Services from 9:00 a.m. to 5:00 p.m., EST
(800) 342-6221 Orders received after the close of the New York Stock
Exchange, usually 4:00 p.m., est, are processed the following business day.
1.You must have telephone privileges
(see Telephone Transactions)
2.Certificate shares cannot be exchanged by phone.
3.For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required.
____________________________________________________________________________________
By Mail to: 1.Send us written instructions signed by all account
ADM exactly as the account is registered.
owners 2. Include your fund account number.
ATTN: EXCHANGE DEPT. 3. Indicate either the dollar amount, number of shares
581 MAIN STREET or percent of the account you want to exchange.
WOODBRIDGE, NJ 07095-119 4. Specify the existing account number or the name of
the new Fund you are exchanging into.
5. Include any outstanding share certificates for the
shares you want to exchange.
6. For trusts, estates, attorneys-in-fact, corporations,
partnerships, and other entities, additional documents
are required. Call Shareholder Services at 1 (800)
423-4026.
____________________________________________________________________________________
15
oEXCHANGE CONDITIONS
1: You may only exchange shares within the same Class.
2: Exchanges can only be made into identically owned accounts.
3: Partial exchanges into a new fund account must meet the new fund's minimum
initial investment.
4: The fund you are exchanging into must be eligible for sale in your state.
5: If your request does not clearly indicate the amount to be exchanged or the
accounts involved, no shares will be exchanged.
6: Amounts exchanged from a non-money market fund to a money market fund may be
exchanged back at net asset value. Dividends earned from money market fund
shares will be subject to a sales charge.
7: If you are exchanging from a money market fund to a fund with a sales charge,
there will be a sales charge on any shares that were not previously subject to a
sales charge. Your request must be in writing and include a statement
acknowledging that a sales charge will be paid. If you exchange Class B shares
of a fund for shares of a Class B money market fund, the CDSC will not be
imposed and the holding period used to calculate the CDSC will carry over to the
acquired shares.
8: FI Funds reserve the right to reject any exchange order which in the opinion
of the Fund is part of a market timing strategy. In the event that an exchange
is rejected, neither the redemption nor the purchase side of the exchange will
be processed.
oEXCHANGING FUNDS WITH AUTOMATIC INVESTMENTS OR SYSTEMATIC WITHDRAWALS
Let us know if you want to continue automatic investments into the original fund
or the fund you are exchanging into ("receiving fund") or if you want to change
the amount or allocation into both. Also inform us if you wish to continue,
terminate, or change a preauthorized systematic withdrawal. Without specific
instructions, we will amend account privileges as outlined below:
________________________________________________________________________________
EXCHANGE EXCHANGE EXCHANGE A
ALL SHARES TO ALL SHARES TO PORTION OF
ONE FUND MULTIPLE SHARES TO ONE OR
FUNDS MULTIPLE FUNDS
________________________________________________________________________________
MONEY LINE ML moves to ML stays with ML stays with
(ML) Receiving Fund Original Fund Original Fund
AUTOMATIC PAYROLL API moves to API Stays with API stays with
INVESTMENT (API) Receiving Fund Original Fund Original Fund
SYSTEMATIC SWP moves to SWP SWP stays
WITHDRAWALS Receiving Fund Canceled with Original Fund (SWP)
________________________________________________________________________________
16
WHEN AND HOW ARE FUND SHARES PRICED?
Each FI Fund prices its shares each day that the New York Stock Exchange
("NYSE") is open for trading. The share price is calculated as of the close of
trading on the NYSE (generally 4:00 p.m., EST) except for shares of the money
market funds which are priced as of 12:00 noon. These days are referred to as
"Trading Days" in this Manual.
Each Fund calculates the net asset value of each class of its shares separately
by taking the total value of class assets, subtracting class expenses, and
dividing the difference by the total number of shares in the class. The price
that you will pay for a share is the NAV plus any applicable front-end sales
charge. You receive the NAV price if you redeem or exchange your shares, less
any applicable CDSC.
Fund prices are on our website (www.firstinvestors.com) the next day. The prices
for our larger funds are also reported in many newspapers, including The Wall
Street Journal and The New York Times. Special pricing procedures are employed
during emergencies. For a description of these procedures you can request, free
of charge, a copy of a Statement of Additional Information.
HOW ARE PURCHASE, REDEMPTION, AND EXCHANGE ORDERS PROCESSED AND PRICED?
The processing and price for a purchase, redemption or exchange depends upon how
your order is placed. As indicated below, special rules apply to money market
transactions.
oPURCHASES
Purchases that are made by written application or order are processed when they
are received in "good order" by our Woodbridge, NJ office. To be in good order,
all required paperwork must be completed and payment received. If your order is
received prior to the close of trading on the NYSE, it will receive that day's
price (except in the case of the money market funds which are discussed below).
This procedure applies whether your purchase order is given to your registered
representative or mailed directly by you to our Woodbridge, NJ office.
As described previously in "How to Buy Shares," certain types of purchases can
only be placed by written application. For example, purchases in connection with
the opening of retirement accounts may only be made by written application.
Furthermore, rollovers of retirement accounts will be processed only when we
have received both written application and the proceeds of the rollover. Thus,
for example, if it takes 30 days for another fund group to send us the proceeds
of a retirement account, your purchase of First Investors funds will not occur
until we receive the proceeds.
Some types of purchases may be phoned or electronically transmitted to us by
your broker/dealer. If you give your order to a First Investors registered
17
representative before the close of trading on the NYSE and the order is phoned
to our Woodbridge, NJ office prior to 5:00 p.m., EST, your shares will be
purchased at that day's price (except money market funds which are discussed
below). If you are buying a First Investors Fund through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements. Payment is due within three business days
of placing an order by phone or electronic means or the trade may be cancelled.
(In such event, you will be liable for any loss resulting from the
cancellation.) To avoid cancellation of your orders, you may arrange to open a
money market account and use it to pay for subsequent purchases.
Purchases made pursuant to our Automatic Investment Programs are processed as
follows:
- -Money Line purchases are processed on the dates you select on your application.
- -Automatic Payroll Investment Service purchases are processed on the dates that
we receive funds from your employer.
oREDEMPTIONS
As described previously in "How To Sell Shares", certain redemption orders may
only be made by written instructions or application. Unless you have declined
Telephone Privileges, most redemptions can be made by phone by you or your
registered representative.
Written redemption orders will be processed when received in good order in our
Woodbridge, NJ office. Phone redemption orders will be processed when received
in our Woodbridge, NJ office.
If your redemption order is received prior to the close of trading on the NYSE,
you will receive that day's price (except in the case of money market funds
which are discussed below). If you are redeeming through a broker-dealer other
than First Investors, other requirements may apply. Consult with your
broker-dealer about its requirements.
oEXCHANGES
Exchanges can generally be made by written instructions or, unless you have
declined Telephone Privileges, by phone by you or your registered
representative. Exchange orders are processed when we receive them in good order
in our Woodbridge, NJ office.
Exchange orders received prior to the close of trading on the NYSE will be
processed at that day's prices (except in the case of exchanges into or out of
money market funds which are discussed below).
oORDERS PLACED VIA FIRST INVESTORS REGISTERED REPRESENTATIVES
All orders placed through a First Investors registered representative must be
reviewed and approved by a principal officer of the branch office before being
mailed or transmitted to the Woodbridge, NJ office.
oORDERS PLACED VIA DEALERS
It is the responsibility of the Dealer to forward or transmit orders to the Fund
promptly and accurately. A fund will not be liable for any change in the price
per share due to the failure of the Dealer to place the order in a timely
fashion. Any such disputes must be settled between you and the Dealer.
18
oSPECIAL RULES FOR MONEY MARKET FUNDS
A money market fund share purchase will not be made until we receive the funds
for the purchase. The funds for the purchase will not be deemed to have been
received until the morning of the next Trading Day following the Trading Day on
which your purchase check is received in our Woodbridge, NJ office. If a check
is received in our Woodbridge, NJ office after the close of regular trading on
the NYSE, the funds for the purchase will not be deemed to have been received
until the morning of the second following Trading Day.
If you make your purchase by wire transfer prior to 12:00 p.m., EST, and you
have previously advised us that the wire is on the way, the funds for the
purchase will be deemed to have been received on that same day. You must call
beforehand and give us your name, account number, the amount of the wire, and a
federal reference number documenting the transfer. If we fail to receive such
advance notification, the funds for your purchase will not be deemed to have
been received until the morning of the next Trading Day following receipt of the
federal wire and your account information. To wire funds to an existing First
Investors money market account, instruct your bank to wire your investment, as
applicable, to: CASH MANAGEMENT FUND BANK OF NEW YORK ABA #021000018 ACCOUNT
8900005696 YOUR NAME YOUR FIRST INVESTORS ACCOUNT # TAX-EXEMPT MONEY MARKET FUND
BANK OF NEW YORK ABA #021000018 ACCOUNT 8900023198 YOUR NAME YOUR FIRST
INVESTORS ACCOUNT #
Purchases by Money Line and Automatic Payroll Investment are processed in the
same manner as those in other Funds.
Requests for redemptions or exchanges out of or into our money market funds must
be received in writing or by phone prior to 12:00 p.m., EST, on a Trading Day,
to be processed the same day. Redemption or exchange orders received after 12:00
p.m., EST, but before the close of regular trading on the NYSE, will be
processed on the morning of the following Trading Day.
RIGHT TO REJECT PURCHASE OR EXCHANGE ORDERS
A fund reserves the right to reject or restrict any specific purchase request if
the fund determines that doing so is in the best interest of the fund and its
shareholders. Investments in a fund are designed for long-term purposes and are
not intended to provide a vehicle for short-term market timing. The funds also
reserve the right to reject any exchange that in the funds' opinion is part of a
market timing strategy. In the event that a fund rejects an exchange request,
neither the redemption nor the purchase side of the exchange will be processed.
SIGNATURE GUARANTEE POLICY
A signature guarantee protects you from the risk of a
fraudulent signature and is generally required for non-standard and large dollar
transactions. A signature guarantee may be obtained from your First Investors
registered representative or eligible guarantor institutions including banks,
savings associations, credit unions and brokerage firms which are members of the
Securities Transfer Agents Medallion Program ("STAMP"), the New York Stock
Exchange Medallion Signature Program ("MSP"), or the Stock Exchanges Medallion
Program ("SEMP"). Please note that a notary public stamp or seal is not
acceptable. The words "Signature Guaranteed" must appear beside the signature of
the guarantor.
- -SIGNATURE GUARANTEES ARE REQUIRED:
1: For redemptions over $50,000.
2: For redemption checks made payable to any person(s) other than the registered
shareholder(s) or a major financial institution for the benefit of the
registered shareholder(s).
3: For redemption checks mailed to an address other than the address of record
(unless the check is mailed to a financial institution on your behalf).
4: For redemptions when the address of record has changed within 60 days of the
request.
5: When a stock certificate is mailed to an address other than the address of
record or to the dealer on the account.
6: When shares are transferred to a new registration.
7: When issued shares are redeemed.
8: To establish any EFT service.
19
9: For requests to change the address of record to a P.O. box or a "c/o" street
address.
10: If multiple account owners of one account give inconsistent instructions.
11: When a transaction requires additional legal documentation.
12: When the authority of a representative of a corporation, partnership, trust,
or other entity has not been satisfactorily established.
13: When an address on an account which was coded "Do Not Mail" to suppress
check and dividend mailings due to a previously unknown address is updated.
14: Any other instance whereby a fund or its transfer agent deems it necessary
as a matter of prudence.
TELEPHONE SERVICES TELEPHONE EXCHANGES AND REDEMPTIONS 1 (800) 342-6221
You automatically receive telephone privileges when you open a First Investors
individual, joint, or custodial account unless you decline the option on your
account application or send the Fund written instructions. For trusts, estates,
attorneys-in-fact, corporations, partnerships, and other entities, additional
documents are required. Call Shareholder Services at 1 (800) 423-4026 for
assistance.
Telephone privileges allow you to exchange or redeem shares and authorize other
transactions by calling Special Services at 1 (800) 342-6221 from 9:00 a.m. to
5:00 p.m., EST, on any day the NYSE is open. Your First Investors registered
representative may also use telephone privileges to execute your transactions.
oSECURITY MEASURES
For your protection, the following security measures are taken:
1: Telephone requests are recorded to verify accuracy.
2: Some or all of the following information is obtained:
- -Account number
- -Address
- -Social security number
- -Other information as deemed necessary
3: A written confirmation of each transaction is mailed to you.
We will not be liable for following instructions
if we reasonably believe the instructions are genuine based on our verification
procedures.
oELIGIBILITY
NON-RETIREMENT ACCOUNTS:
You can exchange or redeem shares of any non-retirement account by phone. Shares
must be owned for 15 days for telephone redemption. Telephone exchanges and
redemptions are not available on guardianship and conservatorship accounts.
RETIREMENT ACCOUNTS:
You can exchange between shares of any participant directed IRA, 403(b) or
401(k) Simplifier plan where First Financial Savings Bank, S.L.A. is Custodian.
You may also exchange shares from an individually registered non-retirement
account to an IRA account registered to the same owner (provided an IRA
application is on file). Telephone exchanges are permitted on 401(k) Flexible
plans, money purchase pension plans and profit sharing plans if a First
Investors Qualified Retirement Plan Application is on file with the fund.
Contact your First Investors registered representative or call Shareholder
Services at 1 (800) 423-4026 to obtain a Qualified Retirement Plan Application.
Telephone redemptions are not permitted on First Investors retirement accounts.
20
SHAREHOLDER SERVICES:
1 (800) 423-4026
PROVIDED YOU HAVE NOT DECLINED TELEPHONE PRIVILEGES, CALL US TO UPDATE OR
CORRECT:
- -Your address or phone number.
- -Your birth date (important for retirement distributions).
- -Your distribution option to reinvest or pay in cash (non-retirement accounts
only) or initiate cross reinvestment of dividends.
- -The amount of your Money Line or Automatic Payroll Investment payment.
- -The allocation of your Money Line or Automatic Payroll Investment payment.
- -The amount of your Systematic Withdrawal payment.
TO REQUEST:
- -A duplicate copy of a statement or tax form.
- -A history of your account (the fee can be debited from your non-retirement
account).
- -A share certificate to be mailed to your address of record.
- -A stop payment on a dividend, redemption or money market check.
- -Suspension (up to six months) or cancellation of Money Line.
- -Cancellation of your Systematic Withdrawal Plan.
- -Cancellation of cross-reinvestment of dividends.
- -Money market fund draft checks.
21
OTHER SERVICES
oREINVESTMENT PRIVILEGE
If you sell some or all of your Class A or Class B shares, you may be entitled
to reinvest all or a portion of the proceeds in the same class of shares of a FI
fund within six months of the redemption without a sales charge.
If you reinvest proceeds into a new fund account, you must meet the fund's
minimum initial investment requirement.
If you reinvest all the proceeds from a Class B share redemption, you will be
credited, in additional shares, for the full amount of the CDSC. If you reinvest
a portion of a Class B share redemption, you will be credited with a pro-rated
percentage of the CDSC.
The reinstatement privilege does not apply to automated purchases, automated
redemptions, or reinvestments in Class B shares of less than $1,000. Please
notify us if you qualify for this privilege. For more information, call
Shareholder Services at 1 (800) 423-4026.
oCERTIFICATE SHARES
Every time you make a purchase of Class A shares, we will credit shares to your
fund account. We do not issue shares certificates unless you specifically
request them. Certificates are not issued on any Class B shares or on Class A
money market funds.
Having us credit shares on your behalf eliminates the expense of replacing lost,
stolen, or destroyed certificates. If a certificate is lost, stolen, or damaged,
you will be charged a replacement fee of the greater of 2% of the current value
of the certificated shares or $25.
In addition, certificated shares cannot be redeemed or exchanged until they are
returned with your transaction request. The share certificate must be properly
endorsed and signature guaranteed.
oMoney Market Fund Draft Checks
Free draft check writing privileges are available when you open a First
Investors Cash Management Fund or a First Investors Tax Exempt Money Market Fund
account. Checks may be written for a minimum of $500. Draft checks are not
available for Class B share accounts, retirement accounts, guardianships and
conservatorships. Complete the Money Market Fund Check Redemption section of the
account application to apply for draft checks. To order additional checks, call
Shareholder Services at 1 (800) 423-4026.
Additional documentation is required to establish check writing privileges for
trusts, corporations, partnerships and other entities. Call Shareholder Services
at 1 (800) 423-4026 for further information.
_______________________________________________________________________________
FEE TABLE
Call Shareholder Services at 1 (800) 423-4026 or send your request to FIC, Attn:
Correspondence Dept., 581 Main Street, Woodbridge N.J. 07095-1198 to request a
copy of the following records:
ACCOUNT HISTORY STATEMENTS CANCELLED CHECKS
1974 - 1982* $10 per year fee There is a $10 fee for a copy of a
1983 - present $5 total fee for all years cancelled dividend, liquidation, or
Current & investment check requested. There
Two Prior Years Free cancelled money market draft check.
DUPLICATE TAX FORMS
Current Year Free
Prior Year(s) $7.50 per tax form
per year
* ACCOUNT HISTORIES ARE NOT AVAILABLE
PRIOR TO 1974.
22
oRETURN MAIL
If mail is returned to the fund marked undeliverable by the U.S. Postal Service
after two consecutive mailings, and the fund is unable to obtain a current
shareholder address, the account status will be changed to "Do Not Mail" to
discontinue future mailings and prevent unauthorized persons from obtaining
account information.
You can remove the "Do Not Mail" status on your account by submitting written
instructions including your current address signed by all shareholders with a
signature guarantee (see Signature Guarantee Policy). Additional requirements
may apply for certain accounts. Call Shareholder Services at 1 (800) 423-4026
for more information.
Returned dividend checks and other distributions will be reinvested in the fund
when an account's status has been changed to "Do Not Mail". No interest will be
paid on outstanding checks prior to reinvestment. All future dividends and other
distributions will be reinvested in additional shares until new instructions are
provided. If you cannot be located within a period of time mandated by your
state of residence your fund shares may be turned over to your state (in other
words forfeited).
Prior to turning over assets to your state, the fund will seek to obtain a
current shareholder address in accordance with Securities and Exchange
Commission rules. A search company may be employed to locate a current address.
The fund may deduct the costs associated with the search from your account.
oTRANSFERRING SHARES
A transfer is a change of share ownership from one customer to another. Unlike
an exchange, transfers occur within the same fund. You can transfer your shares
at any time.
To transfer shares, submit a letter of instruction including:
- -Your account number.
- -Dollar amount, percentage, or number of shares to be transferred.
- -Existing account number receiving the shares (IF ANY).
- -The name(s), registration, and taxpayer identification number of the customer
receiving the shares.
- -The signature of each account owner requesting the transfer with signature
guarantee(s).
In addition, we will request that the transferee complete a Master Account
Agreement to establish a brokerage account with First Investors Corporation and
validate his or her social security number to avoid back-up withholding. If the
transferee declines to complete an MAA, all transactions in the account must be
on an unsolicited basis and the account will be so coded.
Depending upon your account registration, additional documentation may be
required to transfer shares. Transfers due to the death or disability of a
shareholder also require additional documentation. Please call our Shareholder
Services Department at 1 (800) 423-4026 for specific transfer requirements
before initiating a request.
A transfer is a change of ownership and may trigger a taxable event. You should
consult your tax advisor before initiating a transfer.
23
ACCOUNT STATEMENTS
oTRANSACTION CONFIRMATION STATEMENTS
You will receive a confirmation statement immediately after most transactions.
These include:
- -shareorder purchases
- -check investments
- -redemptions
- -exchanges
- -transfers
- -systematic withdrawals
Money Line and Automatic Payroll Investment purchases are not confirmed for each
transaction. They will appear on your next regularly scheduled monthly or
quarterly statement (see Dividend Schedule under "Dividends and Distributions").
A separate confirmation statement is generated for each fund account you own. It
provides:
- -Your fund account number
- -The date of the transaction
- -A description of the transaction (PURCHASE, REDEMPTION, ETC.)
- -The number of shares bought or sold for the transaction
- -The dollar amount of the transaction
- -The dollar amount of the dividend payment (IF APPLICABLE)
- -The total share balance in the account
- -The dollar amount of any dividends or capital gains paid
- -The number of shares held by you, held for you (INCLUDING ESCROW SHARES), and
the total number of shares you own.
The confirmation statement also provides a perforated Investment Stub with your
preprinted name, registration, and fund account number for future investments.
oMASTER ACCOUNT STATEMENTS
If First Investors Corporation is your broker, you will receive a Master Account
Statement for all your identically owned First Investors fund accounts on at
least a quarterly basis. The Master Account Statement will also include a recap
of any First Investors Life Insurance and Executive Investors Trust accounts you
may own. Joint accounts registered under your taxpayer identification number
will appear on a separate Master Account Statement but may be mailed in the same
envelope upon request.
The Master Account Statement provides the following information for each First
Investors fund you own:
- -fund name
- -fund's current market value
- -total distributions paid year-to-date
- -total number of shares owned
oANNUAL AND SEMI-ANNUAL REPORTS
You will also receive an Annual and a Semi-Annual Report. These financial
reports show the assets, liabilities, revenues, expenses, and earnings of the
fund as well as a detailed accounting of all portfolio holdings. You will
receive one report per household.
24
DIVIDENDS AND DISTRIBUTIONS
oDIVIDENDS AND DISTRIBUTIONS
For funds that declare daily dividends, you start earning dividends on the day
your purchase is made. For FI money market funds, you start earning dividends on
the day federal funds are credited to your fund account. The funds declare
dividends from net investment income and distribute the accrued earnings to
shareholders as noted below:
________________________________________________________________________________
DIVIDEND PAYMENT SCHEDULE
________________________________________________________________________________
MONTHLY: QUARTERLY: ANNUALLY (IF ANY):
Cash Management Fund Blue Chip Fund Global Fund
Fund for Income Growth & Income Fund Special Situations Fund
Government Fund Total Return Fund Mid-Cap Opportunity Fund
Insured Intermediate Tax-Exempt Utilities Income Fund
Insured Tax Exempt Fund
Investment Grade Fund
High Yield Fund
Multi-State Insured Tax Free Fund
New York Insured Tax Free Fund
Tax-Exempt Money Market Fund
________________________________________________________________________________
Capital gains distributions, if any, are paid annually, usually near the end of
the fund's fiscal year. On occasion, more than one capital gains distribution
may be paid during one year. Dividend and capital gains distributions are
automatically reinvested to purchase additional fund shares unless otherwise
instructed. Dividend payments of less than $5.00 are automatically reinvested to
purchase additional fund shares.
oBUYING A DIVIDEND
If you buy shares shortly before the record date of the dividend, the entire
dividend you receive may be taxable even though a part of the distribution is
actually a return of your purchase price. This is called "buying a dividend."
There is no advantage to buying a dividend because a fund's net asset value per
share is reduced by the amount of the dividend.
25
TAX FORMS
TAX FORM DESCRIPTION MAILED BY
_________________________________________________________________________________________________
1099-DIV Consolidated report lists all taxable dividend and capital gains January 31
distributions for all of the shareholder's accounts. Also includes
foreign taxes paid and any federal income tax withheld due to backup
withholding.
_________________________________________________________________________________________________
1099-B Lists proceeds from all redemptions including systematic January
31 withdrawals and exchanges. A separate form is issued for each
fund account. Includes amount of federal income tax withheld due
to backup withholding.
_________________________________________________________________________________________________
1099-R Lists taxable distributions from a retirement account. A separate January 31
form is issued for each fund account. Includes federal
income tax withheld due to IRS withholding requirements.
_________________________________________________________________________________________________
5498 Provided to shareholders who made an annual IRA May 31
contribution or rollover purchase. Also provides the account's
fair market value as of the last business day of the previous year.
A separate form is issued for each fund account.
_________________________________________________________________________________________________
1042-S Provided to non-resident alien shareholders to report the amount March 15
of fund dividends paid and the amount of federal taxes
withheld. A separate form is issued for each fund account.
_________________________________________________________________________________________________
Cost Basis Uses the "average cost-single category" method to show the cost January 31
Statement basis of any shares sold or exchanged. Information is provided
to assist shareholders in calculating capital gains or losses. A
separate statement, included with Form 1099-B, is issued for each
fund account. This statement is not reported to the IRS and does
not include money market funds or retirement accounts.
_________________________________________________________________________________________________
Tax Savings Consolidated report lists all amounts not subject to federal, January 31
Report for state and local income tax for all the shareholder's accounts.
Non-Taxable Also includes any amounts subject to alternative minimum tax.
Income
_________________________________________________________________________________________________
Tax Savings Provides the percentage of income paid by each fund that may January 31
Summary be exempt from state income tax.
_________________________________________________________________________________________________
THE OUTLOOK
Today's strategies for tomorrow's goals are brought into focus in the OUTLOOK,
the quarterly newsletter for clients of First Investors Corporation. This
informative tool discusses the products and services we offer to help you take
advantage of current market conditions and tax law changes. The OUTLOOK'S
straight forward approach and timely articles make it a valuable resource. As
always, your registered representative is available to provide you with
additional information and assistance. Material contained in this publication
should not be considered legal, financial, or other professional advice.
26
Principal Underwriter
First Investors Corporation
95 Wall Street
New York, NY 10005
Transfer Agent
Administrative Data
Management Corp.
581 Main Street
Woodbridge, NJ 07095
1-800-423-4026
27
PART C. OTHER INFORMATION
-------------------------
Item 15. Indemnification
---------------
Article XI, Section 1 of Registrant's Declaration of Trust
provides as follows:
Section 1.
Provided they have exercised reasonable care and have acted under
the reasonable belief that their actions are in the best interest of the
Trust, the Trustees shall not be responsible for or liable in any event for
neglect or wrongdoing of them or any officer, agent, employee or investment
adviser of the Trust, but nothing contained herein shall protect any Trustee
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Article XI, Section 2 of Registrant's Declaration of Trust
provides as follows:
Section 2.
(a) Subject to the exceptions and limitations contained in
Section (b) below:
(i) every person who is, or has been, a Trustee or officer
of the Trust (a "Covered Person") shall be indemnified
by the Trust to the fullest extent permitted by law
against liability and against expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding which he becomes involved
as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or
proceedings (civil, criminal or other, including
appeals), actual or threatened, and the words
"liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the
Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office or (B) not to
have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage
in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office,
(A) by the court or other body approving the settlement;
or
(B) by at least a majority or those Trustees who are
neither interested persons of the Trust nor are
parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type
inquiry); or
(C) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed
to a full trial-type inquiry); provided, however, that
any Shareholder may, by appropriate legal proceedings,
challenge any such determination by the Trustees, or
by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now
or hereafter be entitled, shall continue as to a person who has ceased to be
such Trustee or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person. Nothing contained herein
shall affect any rights to indemnification to which Trust personnel, other
than Trustees and officers, and other persons may be entitled by contract or
otherwise under the law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described
in paragraph (a) of this Section 2 may be paid by the Trust from time to time
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by him to
the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such advance
payments or (c) either a majority of the Trustees who are neither interested
persons of the Trust nor are parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a full trial-type inquiry), that there
is a reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
The general effect of this Indemnification will be to indemnify
the officers and Trustees of the Registrant from costs and expenses arising
from any action, suit or proceeding to which they may be made a party by
reason of their being or having been a Trustee or officer of the Registrant,
except where such action is determined to have arisen out of the willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the Trustee's or officer's office.
The Registrant's Investment Advisory Agreement provides as follows:
The Manager shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company or any Series in
connection with the matters to which this Agreement relate except a loss
resulting from the willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, partner, employee, or agent of the Manager, who may be or become an
officer, Board member, employee or agent of the Company shall be deemed, when
rendering services to the Company or acting in any business of the Company,
to be rendering such services to or acting solely for the Company and not as
an officer, partner, employee, or agent or one under the control or direction
of the Manager even though paid by it.
The Registrant's Underwriting Agreement provides as follows:
The Underwriter agrees to use its best efforts in effecting the
sale and public distribution of the shares of the Fund through dealers and to
perform its duties in redeeming and repurchasing the shares of the Fund, but
nothing contained in this Agreement shall make the Underwriter or any of its
officers and directors or shareholders liable for any loss sustained by the
Fund or any of its officers, trustees, or shareholders, or by any other
person on account of any act done or omitted to be done by the Underwriter
under this Agreement provided that nothing herein contained shall protect the
Underwriter against any liability to the Fund or to any of its shareholders
to which the Underwriter would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties
as Underwriter or by reason of its reckless disregard of its obligations or
duties as Underwriter under this Agreement. Nothing in this Agreement shall
protect the Underwriter from any liabilities which they may have under the
Securities Act of 1933 or the Investment Company Act of 1940.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable
Item 16. Exhibits
--------
(1)(i) Amended and Restated Declaration of Trust(1)
(ii) Supplemental Declaration of Trust(2)
(2) By-laws(1)
(3) Voting trust agreement - none.
(4) Agreement and Plan of Reorganization and Termination is attached
hereto as Appendix A to the Prospectus/Proxy Statement.
(5) Shareholders' rights are contained in (a) Articles III, VIII, X,
XI and XII of Registrant's Amended and Restated Declaration of Trust
dated September 19, 1988, as amended September 22, 1994, previously
filed as Exhibit 99.B1 to Registrant's Registration Statement, and (b)
Articles III and V of Registrant's By-laws, previously filed as Exhibit
99.B2 to Registrant's Registration Statement.
(6) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc.(1)
(7) Underwriting Agreement between Registrant and First Investors
Corporation.(1)
(8) Bonus, profit sharing or pension plans - none
(9)(i) Custodian Agreement between Registrant and Irving Trust
Company(1)
(ii) Supplement to Custodian Agreement between Registrant and The
Bank of New York(1)
(10)(i) Amended and Restated Class A Distribution Plan(1)
(ii) Class B Distribution Plan1
(11) Opinion and Consent of Counsel regarding the legality of
securities being registered - to be filed
(12) Opinion and Consent of Counsel regarding certain tax matters - to
be filed
(13)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.1
(ii) Schedule A to Administration Agreement(2)
(14) Consent of independent public accountants - to be filed
(15) Financial statements omitted from Part B - none
(16) Powers of Attorney(1)
(17) Additional exhibits -- none
- ---------
1 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 33-25623) filed on April
23, 1996.
2 Incorporated by reference from Post-Effective Amendment No. 22 to
Registrant's Registration Statement (File No. 33-25623) filed on May 15,
1997.
Item 17. Undertakings
------------
(1)The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the re-offering prospectus will contain the information called for by the
applicable registration form for re-offering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2)The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 23rd day of November, 1999.
FIRST INVESTORS SERIES FUND
By: /s/ Glenn O. Head
-----------------
Glenn O. Head
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
/s/ Glenn O. Head Principal Executive November 23, 1999
- ----------------------------- Officer and Trustee
Glenn O. Head
/s/ Joseph I. Benedek Principal Financial November 23, 1999
- ----------------------------- and Accounting Officer
Joseph I. Benedek
* Trustee November 23, 1999
- -----------------------------
Kathryn S. Head
/s/ Larry R. Lavoie Trustee November 23, 1999
- -----------------------------
Larry R. Lavoie
* Trustee November 23, 1999
- -----------------------------
Herbert Rubinstein
* Trustee November 23, 1999
- -----------------------------
Nancy Schaenen
* Trustee November 23, 1999
- -----------------------------
James M. Srygley
* Trustee November 23, 1999
- -----------------------------
John T. Sullivan
* Trustee November 23, 1999
- -----------------------------
Rex R. Reed
* Trustee November 23, 1999
- -----------------------------
Robert F. Wentworth
*By: /s/ Larry R. Lavoie
-------------------
Larry R. Lavoie
Attorney-in-fact
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------ ----------- ----
(1)(i) Amended and Restated Declaration of Trust(1)
(1)(ii) Supplemental Declaration of Trust(2)
(2) By-laws(1)
(3) Voting trust agreement - none.
(4) Agreement and Plan of Reorganization and Termination is
attached hereto as Appendix A to the Prospectus/Proxy Statement.
(5) Shareholders' rights are contained in (a) Articles III, VIII, X, XI
and XII of Registrant's Amended and Restated Declaration of Trust dated
September 19, 1988, as amended September 22, 1994, previously filed as
Exhibit 99.B1 to Registrant's Registration Statement, and (b) Articles III
and V of Registrant's By-laws, previously filed as Exhibit 99.B2 to
Registrant's Registration Statement.
(6) Investment Advisory Agreement between Registrant and First
Investors Management Company, Inc.(1)
(7) Underwriting Agreement between Registrant and First Investors
Corporation.(1)
(8) Bonus, profit sharing or pension plans - none
(9)(i) Custodian Agreement between Registrant and Irving Trust
Company(1)
(9)(ii) Supplement to Custodian Agreement between Registrant and The
Bank of New York(1)
(10)(i) Amended and Restated Class A Distribution Plan(1)
(10)(ii) Class B Distribution Plan(1)
(11) Opinion and Consent of Counsel regarding the legality of
securities being registered - to be filed
(12) Opinion and Consent of Counsel regarding certain tax matters - to
be filed
(13)(i) Administration Agreement between Registrant, First Investors
Management Company, Inc., First Investors Corporation and
Administrative Data Management Corp.(1)
(13(ii) Schedule A to Administration Agreement(2)
(14) Consent of independent public accountants - to be filed
(15) Financial statements omitted from Part B - none
(16) Powers of Attorney(1)
(17) Additional exhibits -- none
- --------
1 Incorporated by reference from Post-Effective Amendment No. 20 to
Registrant's Registration Statement (File No. 33-25623) filed on April
23, 1996.
2 Incorporated by reference from Post-Effective Amendment No. 22 to
Registrant's Registration Statement (File No. 33-25623) filed on May 15,
1997.