<PAGE>
P R O S P E C T U S
DATED NOVEMBER 1, 1999
AHA INVESTMENT FUNDS, INC.
LIMITED MATURITY FIXED INCOME PORTFOLIO
FULL MATURITY FIXED INCOME PORTFOLIO
DIVERSIFIED EQUITY PORTFOLIO
BALANCED PORTFOLIO
100 Half Day Road
Lincolnshire, Illinois 60069
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This Prospectus sets forth concisely the information about the Fund that you
should know before investing. It should be read carefully and retained for
future reference.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities and has not passed on the adequacy
or accuracy of the information in this Prospectus. It is a criminal offense to
state otherwise.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Objective and Strategy......................................................1
Main Risks..................................................................5
Past Performance............................................................7
Fees And Expenses..........................................................11
Portfolio Investments And Related Risks....................................12
Management Of The Fund.....................................................15
Expenses And Fees..........................................................16
How To Buy Shares..........................................................17
How To Redeem Shares.......................................................18
Exchange Privilege.........................................................20
Dividends, Distributions And Taxes.........................................20
Fund Performance Information...............................................21
Financial Highlights.......................................................22
General Information........................................................27
Investment Manager Profiles................................................27
</TABLE>
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<PAGE>
OBJECTIVE AND STRATEGY
BASIC FUND BACKGROUND
The Fund is a diversified fund designed for use by participants in the
American Hospital Association Investment Program. The Program is a service
offered by Hewitt Associates LLC pursuant to arrangements with the American
Hospital Association and is available to American Hospital Association member
hospitals and their affiliated organizations, including employee benefit plans
and hospital insurance funds. To become a participant in the Program an eligible
organization must enter into a Program Services Agreement with Hewitt. Other
hospital associations affiliated with AHA and their sponsored and affiliated
organizations are also eligible to become participants.
The Fund is comprised of four independently managed investment
portfolios. Subject to the approval of the Fund's Board of Directors, Hewitt
selects the Investment Managers of the portfolios. Each portfolio, with the
exception of the Limited Maturity Fixed Income Portfolio, has multiple
Investment Managers. The assets of these portfolios are divided into segments to
be invested using specific investment styles.
LIMITED MATURITY FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE: The investment objective of the Portfolio is to
provide shareholders a high level of current income, consistent with the
preservation of capital and liquidity.
PRINCIPAL INVESTMENT STRATEGIES: In pursuing its investment objective,
the Portfolio invests its assets primarily in fixed income securities (I.E.,
debt). The investments of the Portfolio are limited to debt issued or guaranteed
by the U.S. Government or by its agents or instrumentalities (including, among
others, U.S. Treasury obligations and securities issued by the Federal Home Loan
Bank and the Federal National Mortgage Association), high quality
non-convertible debt of other issuers and money market instruments. High quality
debt securities are those debt securities having one of the three highest grades
issued by Moody's Investors Service, Inc. (Aaa, Aa or A) or Standard and Poor's
(AAA, AA or A), or which if not rated are of comparable quality as determined by
the Portfolio's Investment Manager. The Portfolio is not required to sell a
security if the rating or credit quality of the security deteriorates after its
purchase. However, the Investment Managers will evaluate and monitor the quality
of all investments, and will dispose of investments which have deteriorated in
their creditworthiness or ratings as determined to be necessary to assure the
Portfolio's overall investments are constituted in a manner consistent with its
investment objective. Subject to certain limitations, the Portfolio may invest
in options on securities, interest rate futures and options on interest rate
futures. The Portfolio may invest in futures and options on futures only for
hedging and other non-speculative purposes.
The Investment Manager of the Portfolio determines which securities to
purchase or sell and adjusts the average maturity of the Portfolio based upon a
variety of factors aimed at controlling risk while capturing market
opportunities. The factors considered in determining the appropriate average
maturity of the Portfolio and when to purchase or sell securities include the
Investment Manager's assessment of interest rate trends and movements and its
analysis of yields, the quality of securities, and the comparative risks and
returns of alternative investments. The dollar-weighted average maturity of the
Portfolio is normally less than three years. In no event will the
dollar-weighted average maturity exceed five years. However, there is no limit
on the maturities of individual securities.
FULL MATURITY FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE: The investment objective of the Portfolio is to
provide shareholders over the long-term with the highest level of income
consistent with preservation of capital.
<PAGE>
PRINCIPAL INVESTMENT STRATEGIES: In pursuing its investment objective,
the Portfolio invests at least 75% of its total assets in fixed income
securities (I.E., debt) issued or guaranteed by the U.S. Government or its
agents or instrumentalities (including among others, U.S. Treasury obligations,
Inflation Index Bonds and Strips, securities issued by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the Government
National Mortgage Association and the Student Loan Marketing Association), high
quality non-convertible debt of other issuers and money market instruments.
Although the Portfolio invests primarily in high quality debt securities (as
defined above), it may invest up to 25% of its total assets in securities rated
Baa by Moody's Investors Services, Inc. or BBB by Standard and Poor's, or which
if not rated, are of comparable quality as determined by the Portfolio's
Investment Managers. The Portfolio is not required to sell a security if the
rating or credit quality of the security deteriorates after its purchase.
However, the Investment Managers will evaluate and monitor the quality of all
investments, and will dispose of investments which have deteriorated in their
creditworthiness or ratings as determined to be necessary to assure the
Portfolio's overall investments are constituted in a manner consistent with its
investment objective. Subject to certain limitations, the Portfolio may also
invest in options on securities, interest rate futures and options on interest
rate futures. The Portfolio may invest in futures and options on futures only
for hedging and other non-speculative purposes.
The Portfolio uses multiple Investment Managers with distinct
investment styles. Hewitt Associates, LLC, the Fund's Investment Consultant,
selects the Portfolio's Investment Managers (subject to approval of the Fund's
Board of Directors) based on its consideration of a variety of factors,
including the Investment Manager's investment style and performance record, as
well as the characteristics of the Investment Manager's typical investments.
The Investment Managers may vary the average maturity of the
Portfolio's assets substantially and make buy and sell decisions, based upon
their individual market analyses. Such analyses may consider, for example,
interest rate trends and movements, yields, the quality and value (e.g., whether
over- or under-valued) of particular securities, and the comparative risks and
returns of alternative investment choices. The Portfolio has no minimum or
maximum maturity with respect to the securities it may purchase. Its
dollar-weighted average maturity may at times exceed 20 years and at other times
fall below five years.
DIVERSIFIED EQUITY PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Portfolio is
long-term capital growth.
PRINCIPAL INVESTMENT STRATEGIES. In pursuing its investment objective,
the Portfolio normally invests at least 75% of its total assets in equity
securities. These securities include common and preferred stocks, and other
securities, such as convertible securities, warrants and stock options, having
equity characteristics. The Portfolio may also invest in high quality debt
obligations and, subject to certain limitations, in options on securities, stock
index options, futures contracts and options on futures contracts. The Portfolio
may invest in futures and options on futures only for hedging and other
non-speculative purposes.
The Portfolio uses multiple Investment Managers with distinct
investment styles. The Investment Consultant selects the Portfolio's Investment
Managers (subject to approval of the Fund's Board of Directors) based on its
consideration of a variety of factors, including the Investment Manager's
investment style and performance record, as well as the characteristics of the
Investment Manager's typical investments.
The investment strategies of the Investment Managers will differ, but typically
will emphasize securities which in their opinions contain one or more of the
following characteristics:
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<PAGE>
- - prices that are judged to be significantly below the intrinsic value of the
company;
- - favorable prospects for earnings growth;
- - above average return on equity and dividend yield; and
- - sound overall financial condition of the issuer.
Investment Managers may determine to sell securities if it is believed
that the characteristics above which led to the securities purchase, are no
longer applicable. Additionally, securities might be sold, for example, if a
"target price" has been achieved, anticipated positive developments fail to
materialize or a stock becomes overweighted in the Portfolio.
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Portfolio is to
provide a combination of growth of capital and income.
PRINCIPAL INVESTMENT STRATEGIES. In pursuing its investment objective, the
Portfolio invests in equity securities for growth, in equity securities that
offer both growth and income, and in fixed income securities (I.E., debt), some
of which may be convertible into common stocks. The Portfolio invests no more
than 75% of its total assets in equity securities and at least 25% of its total
assets in fixed income securities. Equity securities in which the Portfolio
invests include common and preferred stocks and other securities, such as
convertible securities, warrants and stock options, having equity
characteristics. Fixed income investments may include U.S. Government
Securities, non-convertible debt of "investment grade" quality (E.G., rated Baa
or higher by Moody's Investors Services, Inc. or BBB or higher by Standard and
Poor's, or if unrated, of comparable quality as determined by the Investment
Manager) and money market instruments. The Portfolio has no restrictions
concerning the minimum or maximum maturity of its fixed income investments. The
Portfolio may also invest in futures and options on futures only for hedging and
other non-speculative purposes.
With respect to the fixed income portion of the Portfolio, the
Investment Managers may vary the average maturity of the Portfolio's assets
substantially and make buy and sell decisions, based upon their individual
market analyses. Such analyses may consider, for example, interest rate trends
and movements, yields, the quality and value (e.g., whether over- or
under-valued) of particular securities, and the comparative risks and returns of
alternative investment choices. With respect to equities, Investment Managers
choose securities based upon a number of characteristics, based upon their
individual investment strategies. These characteristics will differ, but may
include, among others: :
- - prices that are judged to be significantly below the intrinsic value of the
company;
- - favorable prospects for earnings growth;
- - above average return on equity and dividend yield; and
- - sound overall financial condition of the issuer.
Investment Managers may determine to sell securities if it is believed
that the characteristics upon which they relied when purchasing the securities
are no longer applicable. Additionally, securities might be sold, for
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<PAGE>
example, if a "target price" has been achieved, anticipated positive
developments fail to materialize, or a stock becomes overweighted in the
Portfolio.
The Portfolio uses multiple Investment Managers to obtain expertise in
both the equity and fixed-income markets. The Fund's Investment Consultant
selects Investment Managers (subject to approval of the Fund's Board of
Directors) based on a variety of factors, including the Investment Manager's
investment style and performance record, as well as the characteristics of the
Investment Manager's typical investments. Investment policies are structured so
as to allow the Investment Managers to pursue the Portfolio's objectives in a
way that seeks to reduce the magnitude and rapidity of short term movements in
the net asset value of its shares.
SUMMARY PORTFOLIO COMPARISON
<TABLE>
<CAPTION>
Investment in Debt
Rated Baa by
Moody's or BBB by
Anticipated Equity Anticipated Debt Standard &
Portfolio Investments* Investments* Poor's* Objective
--------- ------------ ------------ ------------------ ---------
<S> <C> <C> <C> <C>
Limited Maturity
Fixed Income 0% At least 75% 0% High level of current
income consistent
with preservation of
capital and liquidity
Full Maturity Fixed
Income 0% At least 75% Up to 25% Highest level of
income consistent
with preservation of
capital
Diversified Equity At least 75% Up to 25% 0% Long-term capital
growth
Balanced Up to 75% At least 25% Up to 25% Growth of capital
and income
</TABLE>
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* As a percentage of total assets.
-4-
<PAGE>
MAIN RISKS
An investment in the Fund, like any investment, is subject to certain
risks. The value of a Portfolio's investments will increase or decrease. This
will cause the value of the Portfolios' shares to increase or decrease, and a
participant could lose money on its investment. The following describes, with
respect to each Portfolio, the principal types of risks that the Portfolio is
subject to. A Portfolio that does not list a particular risk may hold
investments that are subject to that risk, but will not do so in a way that is
expected to affect materially the Portfolio's overall performance.
LIMITED MATURITY FIXED INCOME PORTFOLIO
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RISK DESCRIPTION
Interest Rate and The value of fixed income securities generally
Credit Risk will fall if interest rates rise. The value of
these securities may also fall as a result of
other factors such as the financial condition of
the issuer, the market perception of the issuer or
general economic conditions. These investments
also involve a risk that the issuer may not be
able to meet its principal and interest payment
obligations. Fixed income securities having longer
maturities involve greater risk of fluctuations in
value.
Futures and Options on Transactions involving futures and options on
Futures futures involve certain risks, even though such
transactions may be engaged in solely for hedging
and other non-speculative purposes. A lack of
correlation between the value of the instruments
underlying an option or futures contract and the
value of assets being hedged, or unexpected
adverse price movement, could render a hedging
strategy ineffective and could result in a loss.
FULL MATURITY FIXED INCOME PORTFOLIO
------------------------------------
RISK DESCRIPTION
Use of multiple Investment The investment styles employed by a Portfolio's
Managers Investment Managers may not be complementary and
may result in the Portfolio's holdings focusing on
certain types of securities or positions which
offset each other. This focus may benefit or harm
the Portfolio's performance depending on the
performance of those securities and the overall
economic environment. The use of multiple
Investment Managers could result in a high level
of portfolio turnover, resulting in higher
brokerage expenses and increased tax liability
from the Portfolio's realization of capital gains.
Interest Rate and Credit The value of fixed income securities generally
Risk will fall if interest rates rise. The value of
these securities may also fall as a result of
other factors such as the financial condition of
the issuer, the market perception of the issuer or
general economic conditions. These investments
also involve a risk that the issuer may not be
able to meet its principal and interest payment
obligations. Fixed income securities having longer
maturities involve greater risk of fluctuations in
value.
Fixed income securities Although debt securities rated below "high
rated below high quality quality" generally offer a higher yield than high
quality-rated debt securities, they generally
involve higher risks. They tend to be more subject
to:
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<PAGE>
- Adverse changes in general economic conditions
and in the industries in which their issuers
are engaged;
- Changes in the financial conditions of their
issuers; and
- Price fluctuations in response to changes in
interest rates.
As a result, issuers of such debt securities are
more likely than issuers of high quality debt to
miss principal and interest payments or to
default.
Futures and options on Transactions involving futures and options on
Futures futures involve certain risks, even though such
transactions may be engaged in solely for hedging
and other non-speculative purposes. A lack of
correlation between the value of the instruments
underlying an option or futures contract and the
value of assets being hedged, or unexpected
adverse price movement, could render a hedging
strategy ineffective and could result in a loss.
DIVERSIFIED EQUITY PORTFOLIO
----------------------------
RISK DESCRIPTION
Use of multiple Investment The investment styles employed by a Portfolio's
Managers Investment Managers may not be complementary and
may result in the Portfolio's holdings focusing on
certain types of securities or positions which
offset each other. This focus may benefit or harm
the Portfolio's performance depending on the
performance of those securities and the overall
economic environment. The use of multiple
Investment Managers could result in a high level
of portfolio turnover, resulting in higher
brokerage expenses and increased tax liability
from the Portfolio's realization of capital gains.
Market Value Risk The value of equity securities rise and fall based
upon a variety of factors including activities of
the company that issued the stock, conditions
related to the industry of the issuer and general
market and economic conditions.
Futures and Options on Transactions involving futures and options on
Futures futures involve certain risks, even though such
transactions may be engaged in solely for hedging
and other non-speculative purposes. A lack of
correlation between the value of the instruments
underlying an option or futures contract and the
value of assets being hedged, or unexpected
adverse price movement, could render a hedging
strategy ineffective and could result in a loss.
BALANCED PORTFOLIO
------------------
RISK DESCRIPTION
Use of multiple Investment The investment styles employed by a Portfolio's
Managers Investment Managers may not be complementary and
may result in the Portfolio's holdings focusing on
certain types of securities or positions which
offset each other. This focus may benefit or harm
the Portfolio's performance depending on the
performance of those securities and the overall
economic environment. The use of multiple
Investment Managers could result in a high level
of portfolio turnover, resulting in higher
brokerage expenses and increased tax liability
from the Portfolio's realization of capital gains.
-6-
<PAGE>
Market Value Risk The value of equity securities rise and fall based
upon a variety of factors including activities of
the company that issued the stock, conditions
related to the industry of the issuer and general
market and economic conditions.
Interest Rate and The value of fixed income securities generally
Credit Risk will fall if interest rates rise. The value of
these securities may also fall as a result of
other factors such as the financial condition of
the issuer, the market perception of the issuer or
general economic conditions. These investments
also involve a risk that the issuer may not be
able to meet its principal and interest payment
obligations. Fixed income securities having longer
maturities involve greater risk of fluctuations in
value.
Fixed income securities Although debt securities rated below "high
rated below high quality quality" generally offer a higher yield than high
quality-rated debt securities, they generally
involve higher risks. They tend to be more subject
to:
- Adverse changes in general economic conditions
and in the industries in which their issuers
are engaged;
- Changes in the financial conditions of their
issuers; and
- Price fluctuations in response to changes in
interest rates.
As a result, issuers of such debt securities are
more likely than issuers of high quality debt to
miss principal and interest payments or to
default.
Futures and Options on Transactions involving futures and options on
Futures futures involve certain risks, even though such
transactions may be engaged in solely for hedging
and other non-speculative purposes. A lack of
correlation between the value of the instruments
underlying an option or futures contract and the
value of assets being hedged, or unexpected
adverse price movement, could render a hedging
strategy ineffective and could result in a loss.
PAST PERFORMANCE
The following bar charts illustrate the risks of investing in the
Portfolios by showing how Portfolio performance has varied from year-to-year
over a 10 year period(1). The table thereafter further illustrates the risks of
investing in the Portfolios by showing how the Portfolios' performance for 1, 5
and 10 years compare with certain indices that measure broad market performance.
- ----------------------------------
(1) The information assumes reinvestment of dividends and distributions.
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<PAGE>
As with all mutual funds, past performance is not a prediction of future
results.
YEAR-TO-YEAR TOTAL RETURN
AS OF 12/31 EACH YEAR
---------------------
LIMITED MATURITY FIXED INCOME PORTFOLIO(2)
------------------------------------------
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
8.09% 8.18% 12.83% 3.58% 4.97% 0.33% 10.54% 4.09% 5.92% 6.32%
</TABLE>
FULL MATURITY FIXED INCOME PORTFOLIO(3)
---------------------------------------
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
9.49% 7.08% 15.92% 5.72% 10.99% (-3.74)% 17.19% 2.24% 9.33% 7.98%
</TABLE>
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(2) As of September 30, 1999, the total year-to-date return was 2.16%.
Commencement date for the Portfolio was December 22, 1988.
(3) As of September 30, 1999, the total year-to-date return was (1.26)%.
Commencement date for the Portfolio was October 20, 1988.
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<PAGE>
BALANCED PORTFOLIO(4)
---------------------
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
17.26% (-5.07)% 27.97% 5.06% 10.76% (-1.94)% 25.04% 17.97% 24.44% 8.82%
</TABLE>
DIVERSIFIED EQUITY PORTFOLIO(5)
-------------------------------
[GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
19.12% (-7.68)% 34.68% 9.51% 10.06% (-0.37)% 33.75% 23.37% 33.64% 16.66%
</TABLE>
During the periods shown in the bar chart, the highest and lowest
quarterly returns of the Portfolios were as follows:
<TABLE>
<CAPTION>
BEST AND WORST QUARTER RESULTS
------------------------------
PORTFOLIO BEST QUARTER WORST QUARTER
<S> <C> <C>
Limited Maturity Fixed Income 4.48% (4Q/91) (.70)% (1Q/92)
Full Maturity Fixed Income 6.08% (3Q/91) (3.00)% (1Q/96)
Diversified Equity 20.92% (4Q/98) (15.57)% (3Q/90)
Balanced 12.71% (4Q/98) (8.13)% (3Q/90)
</TABLE>
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(4) As of September 30, 1999, the total year-to-date return was 2.95%.
Commencement date for the Portfolio was October 20, 1988.
(5) As of September 30, 1999, the total year-to-date return was 3.41%.
Commencement date for the Portfolio was October 20, 1988.
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<PAGE>
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31 EACH YEAR
---------------------
<TABLE>
<CAPTION>
PORTFOLIO COMPARATIVE INDEX 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Limited Maturity Fixed 6.32% 5.39% 6.43%
Income
Lehman Brothers 5.05% 6.30% 6.83%
Government 1-3 Year Bond
Index
Full Maturity Fixed Income 7.98% 6.37% 8.06%
Lehman Brothers 8.67% 7.27% 9.25%
Aggregate Bond Index
Diversified Equity 16.66% 20.71% 16.43%
S&P 500 Stock Index 28.70% 24.09% 19.22%
Balanced 8.82% 14.39% 12.50%
S&P 500 Stock Index(6) 28.70% 24.09% 19.22%
Lehman Brothers 8.67% 7.27% 9.25%
Aggregate Bond Index
</TABLE>
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(6) The Balanced Portfolio may invest more or less than 50% of its assets in
equity securities. During the 10 year period ended December 31, 1998, the
Portfolio generally invested more than 50% of its assets in equity
securities.
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<PAGE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Portfolios.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
FULL MATURITY LIMITED MATURITY DIVERSIFIED BALANCED
FIXED INCOME FIXED INCOME EQUITY PORTFOLIO
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) None None None None
imposed on purchases (as a percentage
of offering price)
Maximum Deferred Sales Charge None None None None
(Load)
Maximum Sales Charge (Load) None None None None
imposed on reinvestment of dividends
Redemption Fees None None None None
Exchange Fees None None None None
</TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM PORTFOLIO ASSETS)
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
LIMITED
FULL MATURITY MATURITY FIXED DIVERSIFIED
FIXED INCOME INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Management Fees None None None None
Distribution and Service (12b-1) Fees None None None None
Other Expenses
1. Custody fees 0.03% 0.02% 0.02% 0.05%
2. Audit, legal, administration and
miscellaneous 0.13% 0.10% 0.08% 0.13%
3. Fee to Hewitt Associates LLC(7) 0.50% 0.50% 0.75% 0.75%
----- ----- ----- -----
Total Other Expenses 0.66% 0.62% 0.85% 0.93%
----- ----- ----- -----
Total Annual Portfolio Operating Expenses 0.66% 0.62% 0.85% 0.93%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
EXAMPLE: The following examples are intended to help you compare the cost of
investing in each Portfolio with the cost of investing in other mutual funds.
The examples assume that you invest $10,000 in a Portfolio for the time
periods indicated. The examples also assume that your investment has a 5% return
each year and that the Portfolio's operating expenses remain the same. Although
actual costs or investment return may be higher or lower, based on these
assumptions, the costs would be:
- ------------------------
(7) As discussed below, shareholders will incur this fee individually as
participants in the American Hospital Association Investment Program. The
table assumes the standard fee applicable for the standard level of Program
Services.
-11-
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Full Maturity Fixed Income $ 70 $220 $380 $ 850
Limited Maturity Fixed Income $ 60 $200 $350 $ 780
Diversified Equity $ 90 $280 $480 $1,070
Balanced Portfolio $100 $300 $520 $1,160
</TABLE>
PORTFOLIO
INVESTMENTS AND RELATED RISKS
The Portfolios may use various investment instruments and practices in
pursuing their investment programs. Descriptions of the primary instruments and
practices used by the Portfolios and the principal risks associated with them
are set forth above in the Sections "Objective and Strategy" and "Main Risks".
Information regarding the Portfolios' non-primary investment practices and their
associated risks, as well as additional information concerning risks associated
with the Portfolio's primary investment practices, are discussed below.
Participants should consider each Portfolio as a supplement to an
overall investment program and should invest in a Portfolio only if willing to
undertake the risks involved. Changes in the value of a Portfolio's investments
will result in changes in the value of the Portfolio's shares, and thus the
Portfolio's total return to participants.
FOREIGN SECURITIES
Each Portfolio is permitted to invest up to 10% of the value of its
total assets in securities of foreign issuers. In addition, each Portfolio may
invest up to 20% of its total assets in American Depositary Receipts ("ADRs")
and securities of Canadian issuers registered under the Securities Exchange Act
of 1934. These investments involve risks not associated with investments in U.S.
securities, including the risk of fluctuations in foreign currency exchange
rates, unreliable and untimely information about the issuers and political and
economic instability. These risks are more severe in emerging markets and could
result in an Investment Manager misjudging the value of certain securities or
result in a significant loss in the value of those securities.
ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of the value of its net assets in
illiquid securities. These securities lack a ready market in which they can be
sold. Illiquid securities involve the risk that a Portfolio will not be able to
sell them when desired or at a favorable price.
OPTIONS AND WARRANTS
Options and warrants are forms of derivative instruments. They can have
equity-like characteristics and typically derive their value, at least in part,
from the value of an underlying asset or index. Each Portfolio may, but is not
obligated to, engage in options transactions. The Diversified Equity Portfolio
and the Balanced
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<PAGE>
Portfolio may trade in options on securities and options on stock indices as
well as invest in warrants and rights. The Limited Maturity Fixed Income
Portfolio and the Full Maturity Fixed Income Portfolio may trade in options on
securities. Any options on securities on stock indices that are written by the
Portfolios must be "covered". This means that the Portfolio must hold the
underlying security or segregate assets in the amount of its option position.
A put option gives the purchaser of the option the right to sell, and
obligates the writer to buy, an underlying asset or index at a stated exercise
price at any time prior to the expiration of the option. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, an
underlying asset or index at a stated exercise price at any time prior to the
expiration of the option.
Warrants are instruments that permit, but do not obligate, the holder
to subscribe for other securities. Rights are similar to warrants, but normally
have a short duration and are distributed directly by the issuer to its
shareholders. Warrants and rights are not dividend-paying investments and do not
have voting rights like common stock. They also do not represent any rights in
the assets of the issuer. As a result, warrants and rights may be considered
more speculative than direct equity investments. In addition, the value of
warrants and rights do not necessarily change with the value of the underlying
securities and may cease to have value if they are not exercised prior to their
expiration dates.
Use of derivative instruments like options, rights and warrants can
increase the volatility of a Portfolio. They may entail investment exposures
that are greater than their costs would suggest. This means that a small
investment in these instruments could have a large potential positive or
negative impact on a Portfolio's performance. If a Portfolio invests in these
instruments at inappropriate times or judges market conditions incorrectly, they
may lower the Portfolio's return or result in substantial losses. Changes in the
liquidity of the secondary markets in which these instruments trade can result
in significant, rapid and unpredictable changes in prices, which could also
cause losses to the Portfolios. No Portfolio will purchase a call or put option
on a security or a stock index if as a result the premium paid for the option,
together with premiums paid for all other options on securities and options on
stock indices then held by that Portfolio, exceed 10% of the value of the
Portfolio's total assets. In addition, a Portfolio may not write options on
securities or stock indices with aggregate exercise prices in excess of 30% of
the value of the Portfolio's total assets measured at the time an option is
written.
FUTURES CONTRACTS AND OPTIONS ON FUTURES
Each Portfolio may, but is not obligated to, engage in transactions
involving the purchase of futures contracts and options on futures contracts for
hedging purposes and for other non-speculative purposes. The Diversified Equity
Portfolio and the Balanced Portfolio may purchase and sell stock index futures
contracts. The Limited Maturity Fixed Income Portfolio, the Full Maturity Fixed
Income Portfolio and the Balanced Portfolio may purchase and sell interest rate
futures contracts. All Portfolios may purchase and write call and put options on
the futures contracts in which they may effect transactions and may enter into
closing transactions with respect to such options to terminate existing
positions. The Portfolios may hedge up to the full value of their portfolios
through the use of futures and options on futures. However, a Portfolio will not
purchase or sell a stock index or interest rate future or an option on such
future if immediately thereafter the sum of the amount of initial margin
deposits on the Portfolio's existing futures positions and premiums paid for
options on such futures which are still outstanding would exceed 5% of the value
of the Portfolio's total assets.
Stock index futures contracts are agreements by which two parties agree
to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the stock index value at the
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close of the last trading day of the contract and the futures contract price. No
physical delivery of the stocks comprising the index is made. Interest rate
futures contracts are agreements by which two parties agree to take or make
delivery of the specific type of debt security called for in the contract at a
specified future time and at a specified price.
Options on futures are similar to options on securities, except than an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put). Purchases of
options on futures may present less risk than the purchase and sale of the
underlying futures contracts because the potential loss to a Portfolio is
limited to the premium paid, plus related transaction costs. The writing of
options on futures, however, does not present less risk than the purchase and
sale of the underlying futures contracts and only constitutes a partial hedge up
to the amount of premium income received. If an option on a futures contract
written by a Portfolio is exercised, the Portfolio may suffer a loss.
Futures contracts and options on futures contracts, like options on
securities, are forms of derivative instruments and entail many of the same
risks. A small investment in a futures contract or related option, like an
investment in an option on a security, could have a large potential positive or
negative impact on a Portfolio's performance relative to the investment.
It is expected that there will generally be a close, but not perfect,
correlation between the futures contracts and related options used and the
securities subject to a hedge. In addition, there can be no assurance that
liquid secondary markets will exist for all futures contracts purchased and sold
by the Portfolios. Under these conditions, a Portfolio may be required to
maintain a position until exercise or expiration, which could result in a loss.
Certain other risks related to trades in futures and options on futures are
discussed above under the section heading "Main Risks".
TEMPORARY DEFENSIVE INVESTMENTS
During periods of adverse market or economic conditions, the
Diversified Equity and Balanced Portfolios may temporarily invest all or a
substantial portion of their assets in high quality, fixed income securities,
money market instruments, or they may hold cash. These Portfolios will not be
pursuing their investment objectives in these circumstances. The Portfolios may
also hold these investments for liquidity purposes.
OTHER INVESTMENTS
The Portfolios may make other types of investments, including
investments in other derivative instruments, and may engage in various
investment practices, including securities lending and the purchase of
securities on a when-issued basis. These investments and practices, and their
risks, are described in the Statement of Additional Information.
YEAR 2000 ISSUES
Many computer software systems in use today recognize dates using a two
digit year code. These systems cannot distinguish between the years preceding
the year 2000 and years beginning after 1999. This is known as the "Year 2000"
problem. Most of the services provided to the Portfolios depend on the smooth
functioning of computer systems. Any failure to adapt these systems prior to the
year 2000 could interfere with the proper operations of the Portfolios. In
addition, because the Year 2000 problem affects virtually all organizations,
companies in which the Portfolios invest could be adversely impacted by this
issue. Although
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<PAGE>
this Year 2000 problem could have a negative impact on the Portfolios and their
operations, the Portfolios are working to avoid the problem and to obtain
assurances from their service providers that they are taking similar steps. The
Investment Managers consider the Year 2000 problem in making investment
decisions for the Portfolios.
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover. Although
the Portfolios generally do not trade for short-term profits, securities may be
sold without regard to the time they have been held when investment
considerations warrant such action. As a result, under certain market
conditions, the turnover rate for a particular Portfolio may be higher than that
of other investment companies and portfolios with similar investment objectives.
It is estimated that the portfolio turnover rates of the Limited Maturity Fixed
Income Portfolio and the Full Maturity Fixed Income Portfolio will not exceed
350%. The turnover rates of these Portfolios reflect the effect of their
policies to alter their maturity structures in response to market conditions. It
is estimated that the turnover rate for the fixed income segment of the Balanced
Portfolio will not exceed 200%, and that the portfolio turnover rate of the
Diversified Equity Portfolio and the equity segment of the Balanced Portfolio
will not exceed 150%. The Balanced Portfolio's assets may be shifted between
fixed income and equity securities, but it is estimated that overall portfolio
turnover rate of this Portfolio will not exceed 200%. Decisions to buy and sell
securities are made by the Portfolios' Investment Managers for the assets
assigned to them. A high portfolio turnover rate will result in greater
brokerage commissions and transaction costs. It may also result in greater
realization of gains, which may include short-term gains taxable at ordinary
income tax rates.
MANAGEMENT OF THE FUND
The Fund's Board of Directors is responsible for overseeing the general
operations of the Fund and the Portfolios and is responsible for reviewing and
approving the Fund's contracts with Hewitt and the Investment Managers. The
Fund's officers are all principals or employees of Hewitt or employees of the
American Hospital Association. The officers are responsible for the daily
management and administration of the Fund's operations. Investment Managers of
the Portfolios are responsible for the investment of the assets or segments of
the Portfolios assigned to them.
HEWITT ASSOCIATES LLC
Participants in the AHA Investment Program receive individualized asset
management consulting services to assist in determining an appropriate
investment program for their specific needs. Hewitt Associates LLC, 100 Half Day
Road, Lincolnshire, Illinois serves as the Fund's Investment Consultant. Hewitt
consults with each participant to define its investment objectives, desired
returns and tolerance for risk, and develops a plan for the allocation of the
participant's assets among different asset classes.
Hewitt is also responsible for evaluating, nominating and monitoring
the Fund's Investment Managers, and providing certain additional services to the
Fund. Hewitt provides the following services and facilities to the Fund, among
others: the supervision, monitoring and evaluation of services provided by the
Investment Managers and of administrative, accounting and other services
provided by the custodian and its affiliate; development of investment programs;
recommendation of Investment Managers for approval by the Board of Directors;
allocation of assets among Investment Managers for the Portfolios with more than
one Investment Manager; and furnishing such office space, equipment and
personnel as are required to perform such services. Hewitt is a limited
liability
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<PAGE>
company having 430 principals and is engaged in providing a variety of
consulting services, principally in the areas of employee benefits, compensation
and asset management. Since the 1960s, Hewitt has provided asset management,
allocation and manager selection consulting services to institutional investors,
including employee benefit plans.
The following officers and employees of Hewitt are primarily
responsible for overseeing the Investment Managers:
- Ronald A. Jones, who has been President of the Fund since 1990 and
an Investment Consultant of Hewitt since January, 1978.
- Timothy G. Solberg, who has been the Marketing Director of the AHA
Investment Program since September, 1989.
INVESTMENT MANAGERS
The assets of the Portfolios are allocated among the Investment
Managers listed under "Investment Manager Profiles" at the end of this
Prospectus. Investment Managers are selected based upon their expertise in a
particular investment technique. Hewitt may change the allocation of assets
among these Investment Managers. Hewitt may also hire new Investment Managers or
terminate the services of existing Investment Managers at any time subject to
the approval of the Board of Directors.
The Fund has obtained an exemptive order from the Securities and
Exchange Commission, based upon the structure of the Fund under which Hewitt
selects and pays the fees of the Investment Managers, such that the Fund's
agreements with the Investment Managers need not be approved by shareholders.
Among other things, the order also exempts the Fund from the need to disclose in
various documents, including this Prospectus, the fees of the Investment
Managers. Participants holding shares of a Portfolio will be notified promptly
when a new Investment Manager is assigned to that Portfolio. Subject to
supervision by the Fund's Board of Directors, each Investment Manager has
complete discretion as to the purchase and sale of investments for its segment
of a Portfolio consistent with the Portfolio's investment objective, policies
and restrictions. Although the activities of the Investment Managers are subject
to general supervision by the Fund's Board of Directors and officers, none of
the Board, the officers nor Hewitt evaluates the merits of individual investment
selections or investment decisions made by the Investment Managers.
The fees of each Investment Manager are paid by Hewitt. These fees
presently are each computed as a percentage of assets under management and do
not involve any performance or incentive fees. Brokerage transactions in
securities purchased and sold by the Portfolios may be effected through
brokerage affiliates of the Investment Managers (or an Investment Manager if it
is a registered broker-dealer) which will receive commissions for their
services.
EXPENSES AND FEES
The Portfolios pay all of their expenses other than those expressly
assumed by Hewitt. Portfolio expenses are deducted from the Portfolio's total
income before dividends are paid. Expenses of the Portfolios include but are not
limited to: fees of the Fund's independent public accountants, transfer agent,
registrar, custodian, dividend disbursing agent fees and expenses; shareholder
and administrative servicing, accounting and recordkeeping fees and expenses;
taxes; brokerage fees and commissions; interest; costs incident to corporate
meetings, printing and mailing prospectuses and reports to shareholders, and the
filing of reports with regulatory bodies and the
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<PAGE>
maintenance of the Fund's corporate existence; legal fees; fees to federal and
state authorities for the registration of shares; directors' fees and expenses
to directors who are not principals, employees or officers of Hewitt or the
American Hospital Association; and any extraordinary expenses of a non-recurring
nature.
The Fund and the Portfolios do not pay any fees to Hewitt. Hewitt is
compensated for its services by fees it is paid by participants (sometimes
referred to as the "program services fee"). Hewitt is responsible for paying the
fees of the Investment Managers.
Fees paid by participants to Hewitt may vary based upon a number of
factors, including the level of services provided to a participant and the
amount of assets committed by the participant. In certain cases, minimum fees
may be applicable to compensate Hewitt for its consulting services. Hewitt's
fees also vary based upon the particular Portfolios in which a participant's
assets are invested. For Hewitt's standard level of service, a participant's fee
is presently determined and payable quarterly by applying one-fourth of the
following annual percentage rates to the participant's average daily assets
invested in the Portfolios: .75% of assets invested in the Diversified Equity
Portfolio and the Balanced Portfolio; and .50% of assets invested in the Limited
Maturity Fixed Income Portfolio and the Full Maturity Fixed Income Portfolio.
Reduced fees may be negotiated by Hewitt with participants committing in excess
of $50 million, and in other special circumstances.
HOW TO BUY SHARES
Shares of each Portfolio are available only to participants in the
American Hospital Association Investment Program and to the American Hospital
Association (and its affiliated companies) which have entered into program
agreements with Hewitt. Shares may be purchased on a continuous basis directly
from the Fund at the net asset value per share of the Portfolio next calculated
after receipt of a purchase order and federal funds. Shares are not available
for purchase by individuals. Shares may be redeemed (see "How to Redeem
Shares"), but are non-transferable.
Orders to purchase shares and federal funds in the amount of the
purchase order must be received by the Fund's custodian prior to 4:00 p.m.
Eastern time to be effected on that day. The minimum initial investment in the
Fund is $1 million. The initial minimum investment and subsequent investments in
any Portfolio is $100,000. These minimum investment requirements may be waived
for participants that do not have available for investment assets sufficient to
satisfy the minimums.
PURCHASE BY MAIL: Participants may purchase shares of one or more Portfolios by
sending a check drawn on a U.S. bank and made payable to AHA Investment Funds,
Inc., together with a completed application form, to: AHA Investment Funds,
Inc., c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI
53201-0701. Purchase orders will be effected at the net asset value per share
next computed after the check has been converted into federal funds. Checks
drawn on a member bank of the Federal Reserve System will normally be converted
into federal funds within two business days of receipt; however, checks drawn on
other banks may take considerably longer. Prior to conversion into federal
funds, an investor's money will not be invested in the Fund. Shares purchased by
check will not be entitled to dividends until the day following receipt of
federal funds. Checks are accepted subject to collection. Payment for
redemptions of shares purchased by check may be delayed to assure that the
purchase check clears, which may take up to 15 days from the date of purchase.
PURCHASE BY WIRE: The purchase of shares can be expedited by wiring federal
funds to the custodian. This procedure avoids the delays and restrictions that
apply in the case of shares purchased by check. To wire federal funds to the
custodian, funds should be transmitted to:
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Firstar Bank Milwaukee, N.A.
Account of Firstar Mutual Fund Services, LLC
777 East Wisconsin Ave.
Milwaukee, WI
ABA Number 075000022
For Credit to AC #112-952-137
Account Name: Name of Investor
Portfolio Name:
Limited Maturity Fixed Income Portfolio (051)
Full Maturity Fixed Income Portfolio (052)
Diversified Equity Portfolio (053)
Balanced Portfolio (054)
ALL PURCHASE ORDERS MUST SPECIFY THE PORTFOLIO OR PORTFOLIOS IN WHICH
INVESTMENTS ARE TO BE MADE.
For further information regarding the procedures to be used when
purchasing shares, please call: 1 (800) 445-1341.
The Fund reserves the right in its sole discretion to reject any order
for purchase of shares (including purchase by exchange) when in the judgment of
management such rejection is in the best interest of the Fund.
SHARE PRICE
Net asset value per share is computed separately for each Portfolio
once daily as of the close of trading on the New York Stock Exchange (presently
4:00 p.m., New York time). A Portfolio's net asset value per share may also be
computed on other days when there is a sufficient degree of trading in the
securities held by that Portfolio if a purchase or redemption request is
received on that day. The net asset value per share will not be determined on
holidays observed by the New York Stock Exchange.
Net asset value per share for each Portfolio is calculated by dividing
the market value of all of the Portfolio's investments plus the value of its
other assets (including dividends and interest accrued but not collected), less
all liabilities (including accrued expenses, but excluding capital and surplus),
by the number of shares of that Portfolio outstanding. Prices of shares of each
Portfolio fluctuate daily based on changes in the values of securities held by
that Portfolio. If market quotations are not readily available, a security is
valued at fair value as determined under procedures adopted by the Board of
Directors of the Fund. Debt securities held by the Portfolios with remaining
maturities of 60 days or less, are valued at amortized cost, absent unusual
circumstances.
HOW TO REDEEM SHARES
WRITTEN REDEMPTION REQUESTS
Participants may redeem all or any portion of the shares they own of a
Portfolio on any business day. Shares are redeemed at their current net asset
value next determined after a request in proper form is received as described
below. The business days on which net asset values are determined are described
under "How to Buy Shares -- Share Price." If stock certificates have been
issued, they must be forwarded to the Transfer Agent together with a written
request for redemption and a stock power, each signed on behalf of the
registered
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<PAGE>
shareholder by an authorized signatory. If no certificates have been issued,
only a properly signed written redemption request need be submitted.
All requests to redeem shares should be sent to:
AHA Investment Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
For further information regarding the procedures to be used for
redemptions, please call: 1 (800) 445-1341.
Payment of redemption proceeds will ordinarily be made within seven
days by wire transfer of federal funds to the participant's account at a
commercial bank which is a member of the Federal Reserve System. The bank
account must be designated by the participant on the application form used in
opening an account with the Fund. Upon request, redemption proceeds will be paid
by check mailed to the participant's address of record. The Fund does not
currently impose a fee for wire redemptions, but reserves the right to impose
such a fee in the future.
The Fund reserves the right to suspend the right of redemption or
postpone the date of payment (including redemption through an exchange of
shares) if unlikely emergency conditions, which are specified in the Investment
Company Act of 1940 or determined by the Securities and Exchange Commission,
should exist.
EXPEDITED REDEMPTION PROCEDURES. Participants may redeem shares by
telephone, avoiding the need to submit a written redemption request, provided
that certificates for shares have not been issued. Arrangements for telephone
redemptions must be established prior to the time of redemption. Please call the
Transfer Agent at 1 (800) 445-1341 for further information.
In the event a shareholder cannot reach the Transfer Agent to place a
telephone redemption order as a result of telephone system problems or during
periods of unusual economic or market change, a redemption request may be
expedited by sending a written request by overnight service to:
AHA Investment Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202
The Fund's transfer agent employs reasonable procedures to confirm that
telephone redemption instructions are genuine such as recording telephone calls,
providing written confirmation of transactions, or requiring a form of personal
identification or other information prior to effecting a telephone redemption.
To the extent these procedures are used, none of the Fund, Hewitt or the
Transfer Agent, will be liable for any loss due to fraudulent or unauthorized
telephone instructions.
INVOLUNTARY AND AUTOMATIC REDEMPTION. The Board of Directors has the
authority to redeem the accounts of a participant having an aggregate value, as
a result of redemptions, of less than $1 million in all Portfolios or such
lesser amount as may be established by the Board. In these situations, the
participant will be notified that the account will be redeemed, and the proceeds
paid to the participant, unless additional investments are made to increase the
account value to $1 million or such other determined amount within 60 days. The
Fund does not presently intend to utilize this procedure, but reserves the right
to do so. In addition, under the Program
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Agreements with Hewitt, shares may be automatically redeemed if the Program
Agreement is terminated or if the participant fails to pay applicable fees.
EXCHANGE PRIVILEGE
Shares of any Portfolio may be exchanged for shares of any other
Portfolio of the Fund on the basis of the respective net asset values of the
Portfolios at the time of exchange. Exchanges must be in the amount of $100,000
or more.
An exchange involves the redemption of shares of one Portfolio and
investment of the redemption proceeds in shares of another Portfolio. Redemption
will, except as noted below, be made at the net asset value per share next
determined after receipt of an exchange request in proper order. Shares of the
Portfolio to be acquired will be purchased when the proceeds from redemption
become available (normally on the day the request is received, but under certain
circumstances up to seven days thereafter if a Portfolio determines to delay the
payment of redemption proceeds) at the net asset value of those shares next
determined after satisfaction of the purchase order requirements of the
Portfolio whose shares are being acquired. Any gain or loss realized on an
exchange is recognized for federal income tax purposes.
Before making an exchange, participants should review the investment
objectives and policies of the Portfolios and should consider their differences.
Instructions to effect an exchange may be given in writing or by telephone. The
exchange privilege is not available by telephone if certificates for the shares
to be exchanged have been issued. To effect an exchange, or for further
information, please contact the Transfer Agent at: 1 (800) 445-1341. In the
event the Transfer Agent cannot be reached by telephone as a result of telephone
system problems or during periods of unusual economic or market changes, an
order to exchange shares may be expedited by sending a written request by
overnight service to:
AHA Investment Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202
The Fund reserves the right to modify or terminate the exchange
privilege and to impose fees for and limitations on its use upon not less than
sixty days written notice to participants.
As in the case of telephone redemption requests, the transfer agent
employs reasonable procedures to confirm that telephone exchange instructions
are genuine. To the extent these procedures are used, none of the Fund, Hewitt,
or the Transfer Agent, will be liable for any loss due to fraudulent or
unauthorized telephone exchange instructions.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund pays dividends from its net investment income and distributes
any net capital gains that it realizes.
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It is expected that dividends from net investment income will be
declared and paid on the following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE PORTFOLIOS
-------- ------- ----------
<S> <C> <C>
Daily Last day of each month. Limited Maturity Fixed Income Portfolio
Full Maturity Fixed Income Portfolio
Quarterly Mid: March, June, September, and Diversified Equity Portfolio
December Balanced Portfolio
</TABLE>
Distributions of capital gains, if any, generally will be paid once a
year. An additional distribution will be paid if required for a Portfolio to
avoid imposition of a federal income or excise tax on undistributed capital
gains. Dividends and other distributions will be reinvested unless the
participant instructs the Fund otherwise.
TAXES
Because the Portfolios intend to distribute all of their net investment
income and capital gains to shareholders, it is not expected that the Portfolios
will be required to pay any federal income taxes. The Portfolios may be subject
to nominal, if any, state taxes. Should a Portfolio fail to distribute the
amount required by the Internal Revenue Code to be distributed during any
calendar year, the Portfolio would be required to pay a four percent,
nondeductible excise tax on the amount of the under-distribution.
Shareholders that are subject to federal income taxation normally will
have to pay any applicable federal income taxes, and any state and local income
taxes, on the dividends and distributions they receive from the Portfolios,
whether paid in cash or in additional shares. Redemptions of shares (including
redemptions to pay fees to Hewitt if a shareholder has elected to pay fees in
such manner) and exchanges of shares among the Portfolios will result in the
recognition of any gain or loss for federal income tax purposes for those
shareholders subject to federal income taxation.
The tax status of the dividends and distributions for each calendar
year will be detailed in each participant's annual tax statement from the Fund.
FUND PERFORMANCE INFORMATION
From time to time the Fund may provide reports of a Portfolio's total
return performance or yield to shareholders and prospective investors in
advertisements and other materials. Certain sales materials, but not
advertisements, may quote distribution rates for the Portfolios. These reports
are based upon investment results during specified periods and in the case of
total return, assume reinvestment of all dividends and capital gains, if any,
paid during that period. Quotations of total return, yield and distribution rate
are adjusted to include the effect of the standard fees that participants pay to
Hewitt. These adjustments are made by using the applicable fees for Hewitt's
standard level of service for the average size shareholder account in the
Portfolio. Because dividends, net asset value and expenses of the Portfolios
will fluctuate, any given report of total return, yield or distribution rate
should not be considered as representative or a prediction of a Portfolio's
performance for any specified period in the future. Rankings, ratings and
comparisons appearing in publications such as Money, Forbes, and similar
sources, or based upon data disseminated by Lipper Analytical Services Inc.,
Morningstar, Inc. or other similar services, and comparisons to recognized
market indices, may also be used in advertisements and other materials. Certain
additional comparisons may also be made. See "Performance Information" in the
Statement of Additional Information.
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YIELD QUOTATIONS
Yield quotations may be disseminated by the Limited Maturity Fixed
Income Portfolio and the Full Maturity Fixed Income Portfolio and used in
advertising and sales materials. They are based on historical earnings and will
reflect net investment income generated over a 30 day period based on the
average number of shares of the Portfolio outstanding entitled to receive
dividends over the period. This income is then "annualized" and shown as a
percentage of the shareholder's investment at net asset value per share on the
last day of the period.
Yield quotations do not generally reflect the impact of changes in net
asset value on an investor's return.
TOTAL RETURN
The total returns of the Portfolios may also be disseminated. Total
return is calculated by determining the difference between the net asset value
of all shares held at the end of the period for each share held at the beginning
of the period (assuming reinvestment of dividends and other distributions), and
then dividing that difference by the net asset value per share at the beginning
of the period. These calculations implicitly reflect the compounding of
dividends and distributions by assuming reinvestment. The average annual
compounded rate of return is the yearly rate that, when applied evenly to each
annual period and compounded, would produce the total return for the period
quoted. Unlike yield and distribution rate quotations, total return reflects all
changes in a Portfolio's net asset value.
FINANCIAL HIGHLIGHTS
The following financial highlights tables summarize the financial
performance of the Portfolios for the past 5 years. Certain information reflects
financial results for a single Portfolio share throughout each year or period
ended June 30. The total returns in the table represent how much a participant's
investment in the Portfolio would have increased (or decreased) during each
period, assuming reinvestment of all dividends and distributions. This
information has been audited by Arthur Andersen LLP, whose report, along with
the Portfolios' financial statements, are included in the Fund's annual report,
which is available without charge upon request.
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FULL MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- -------- --------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.............. $9.48 $9.88 $9.63 $9.79 $10.18
Income From Investment Operations:
Net investment income............................. 0.65 0.65 0.65 0.64 0.60
Net realized and unrealized gain (loss) on
investments and futures........................... 0.40 (0.25) 0.16 0.39 (0.33)
Total Income from Investment Operations........... 1.05 0.40 0.81 1.02 0.27
Less Distributions:
Net investment income............................. (0.65) (0.65) (0.65) (0.64) (0.60)
Net realized capital gain (loss).................. 0 0 0 0 0
Total Distributions............................... (0.65) (0.65) (0.65) (0.64) (0.60)
Net Asset Value, End of Period.................... $9.88 $9.63 $9.79 $10.18 $9.85
Total Return on Net Asset Value(A)................ 10.99% 3.58% 8.09% 10.20% 2.11%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).......... $39,874 $53,292 $50,796 $71,829 $73,420
Ratio of Expenses to Average Net Assets(B)........ 0.21% 0.21% 0.21% 0.17% 0.16%
Ratio of Net Investment Income to
Average Net Assets(B)............................. 6.88% 6.52% 6.63% 6.19% 5.90%
Portfolio Turnover Rate........................... 279.42% 283.13% 304.93% 178.52% 273.61%
</TABLE>
- -----------
(A) Total Return on Net Asset Value is net of the standard management fee of
0.50%.
(B) Ratios include all standard management fees and expenses except for the
program services fee.
-23-
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- -------- --------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $10.09 $10.22 $10.12 $10.16 $10.22
Income From Investment Operations:
Net investment income............................ 0.62 0.62 0.61 0.60 0.53
Net realized and unrealized gain (loss) on
investments and futures........................ 0.13 (0.10) 0.04 0.06 (0.02)
Total Income from Investment Operations........ 0.75 0.52 0.65 0.66 0.51
Less Distributions:
Net investment income............................ (0.62) (0.62) (0.61) (0.60) (0.53)
Net realized capital gain (loss)................. 0 0 0 0 0
Total Distributions............................ (0.62) (0.62) (0.61) (0.60) (0.53)
Net Asset Value, End of Period..................... $10.22 $10.12 $10.16 $10.22 $10.20
Total Return on Net Asset Value(A)................. 7.19% 4.66% 6.03% 6.11% 4.59%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)......... $186,856 $201,196 $141,023 $129,717 $104,675
Ratio of Expenses to Average Net Assets(B)....... 0.12% 0.10% 0.12% 0.12% 0.12%
Ratio of Net Investment Income to Average Net
Assets(B)...................................... 6.17% 6.03% 6.04% 5.92% 5.30%
Portfolio Turnover Rate.......................... 155.12% 132.75% 121.70% 144.97% 176.78%
</TABLE>
- -----------
(A) Total Return on Net Asset Value is net of the standard management fee of
0.50%.
(B) Ratios include all standard management fees and expenses except for the
program services fee.
-24-
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- -------- --------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $13.90 $14.76 $17.59 $20.72 $20.37
Income From Investment Operations:
Net investment income............................ 0.29 0.35 0.34 0.32 0.29
Net realized and unrealized gain on investments
and futures..................................... 2.34 3.57 5.18 4.14 3.42
Total Income from Investment Operations......... 2.63 3.92 5.52 4.46 3.71
Less Distributions:
Net investment income............................ (0.29) (0.35) (0.34) (0.32) (0.29)
Net realized capital gain (loss)................. (1.48) (0.74) (2.05) (4.49) (1.64)
Total Distributions............................. (1.77) (1.09) (2.39) (4.81) (1.93)
Net Asset Value, End of Period..................... $14.76 $17.59 $20.72 $20.37 $22.15
Total Return on Net Asset Value(A)................. 20.11% 26.42% 32.97% 24.05% 18.90%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)......... $39,634 $54,435 $70,590 $85,736 $126,892
Ratio of Expenses to Average Net Assets(B)....... 0.31% 0.18% 0.17% 0.14% 0.10%
Ratio of Net Investment Income to Average Net
Assets(B)....................................... 2.30% 2.09% 1.83% 1.51% 1.43%
Portfolio Turnover Rate.......................... 68.12% 57.76% 67.31% 65.82% 74.35%
</TABLE>
- -----------
(A) Total Return on Net Asset Value is net of the standard management fee of
0.75%.
(B) Ratios include all standard management fees and expenses except for the
program services fee.
-25-
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- -------- --------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............... $11.66 $12.63 $13.38 $14.86 $14.61
Income From Investment Operations:
Net investment income............................ 0.32 0.41 0.37 0.41 0.36
Net realized and unrealized gain on investments
and futures..................................... 1.44 1.98 2.65 2.01 1.45
Total Income from Investment Operations......... 1.76 2.39 3.02 2.42 1.81
Less Distributions:
Net investment income............................ (0.32) (0.41) (0.39) (0.44) (0.35)
Net realized capital gain (loss)................. (0.47) (1.23) (1.15) (2.23) (1.37)
Total Distributions............................. (0.79) (1.64) (1.54) (2.67) (1.73)
Net Asset Value, End of Period..................... $12.63 $13.38 $14.86 $14.61 $14.69
Total Return on Net Asset Value(A)................. 14.97% 19.20% 23.23% 16.79% 13.10%
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)......... $46,646 $43,130 $52,137 $59,360 $63,301
Ratio of Expenses to Average Net Assets(B)....... 0.21% 0.23% 0.23% 0.18% 0.18%
Ratio of Net Investment Income to Average Net
Assets(B)....................................... 4.12% 3.08% 2.81% 2.86% 2.55%
Portfolio Turnover Rate.......................... 160.41% 146.69% 173.60% 169.04% 206.43%
</TABLE>
- -----------
(A) Total Return on Net Asset Value is net of the standard management fee of
0.75%.
(B) Ratios include all standard management fees and expenses except for the
program services fee.
-26-
<PAGE>
GENERAL INFORMATION
AMA COALITION OF TOBACCO-FREE INVESTMENTS
The Fund is a member of the American Medical Association
("AMA") Coalition of Tobacco-Free Investments and has adopted a non-fundamental
policy under which the Portfolios will not purchase the stocks or bonds of
companies that are identified by the AMA as engaged in growing, processing or
otherwise handling tobacco. If a Portfolio holds any such securities of an
issuer which is subsequently identified by the AMA as engaged in such
activities, the securities will be sold within a reasonable time period,
consistent with prudent investment practice. (The AMA does not endorse any
investment vehicle and does not guarantee any rate of return.)
ARRANGEMENTS WITH AHA AND OTHER ORGANIZATIONS
The American Hospital Association has granted Hewitt a non-exclusive
right to use the name "American Hospital Association" and derivations thereof in
connection with the AHA Investment Program and the Fund. Hewitt pays a royalty
for these rights. Any termination of the licensing arrangement would require the
Fund promptly to take steps to change its name. For its assistance to Hewitt in
making the Program available to members of AHA and their affiliated
organizations, and in communicating to members, Hewitt also pays from its own
resources a fee to American Hospital Association. Similar fees may be paid by
Hewitt to other organizations which provide similar services. The Fund may
contract directly with American Hospital Association for certain
non-distribution related services such as printing.
CONTROL PERSONS
As of July 31, 1999, American Hospital Association may be deemed to
control the Fund through its direct and indirect beneficial ownership of more
than 25 percent of the Fund's outstanding shares. In addition, as of such date,
American Hospital Association and American Hospital Association Retirement Trust
may be deemed to control the Limited Maturity Fixed Income, Full Maturity Fixed
Income, Balanced and Diversified Equity Portfolios through their direct and
indirect beneficial ownership of more than 25 percent of the outstanding shares
of such Portfolios.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Firstar Bank Milwaukee acts as custodian for the Fund. As custodian,
Firstar holds all securities and cash of the Portfolios. The custodian is
authorized to deposit securities in securities depositories and to use
sub-custodians approved by the Fund. Firstar Mutual Fund Services, LLC serves as
the Fund's transfer agent, dividend disbursing agent and registrar and acts as
shareholder servicing agent. It also provides the Fund with accounting services.
INVESTMENT MANAGER PROFILES
The Investment Managers have no affiliation with Hewitt or the Fund's
officers and directors. Each Investment Manager is principally engaged in
managing institutional investment accounts. They may also serve as managers or
advisers to other investment companies and other clients, including clients of
Hewitt.
-27-
<PAGE>
The present Investment Managers of the Fund, and the year in which they
commenced providing services to the Portfolios are as follows:
LIMITED MATURITY FIXED INCOME PORTFOLIO DIVERSIFIED EQUITY PORTFOLIO
The Patterson Capital Corporation (1988) Cambiar Investors, Inc. (1988)
Investment Research Company (1993)
FULL MATURITY FIXED INCOME PORTFOLIO BALANCED PORTFOLIO
Firstar Investment Research & Western Asset Management
Management Company, LLC (1996) Company (1995)
Western Asset Management Cambiar Investors, Inc. (1993)
Company (1995) Investment Research Company (1999)
The following profiles set forth information regarding the Investment
Managers and the persons (or groups) within such organizations responsible for
making investment decisions for the Portfolios:
CAMBIAR INVESTORS, INC., 8400 E. Prentice Avenue, Englewood, Colorado
80111, is a wholly owned subsidiary of United Asset Management Corporation, a
publicly held company. Cambiar was organized in 1973 and has approximately $2.1
billion of assets under management.
Michael S. Barish Michael J. Gardner
President Vice President
Cambiar Investors, Inc. (1973-present) Cambiar Investors, Inc. (1995-present)
AHA Investment Funds, Inc. Simmons & Company (1991-1995)
Portfolio Manager (1988-present) AHA Investment Funds, Inc.
Portfolio Manager (1999-present)
Darrel D. Hershey Brian M. Barish
Senior Vice President Vice President
Cambiar Investors, Inc. (1985-present) Cambiar Investors, Inc. (1997-present)
AHA Investment Funds, Inc. Lazzard Freres & Co. LLC (1993-1997)
Portfolio Manager (1988-present) AHA Investment Funds, Inc.
Portfolio Manager (1997-present)
FIRSTAR INVESTMENT RESEARCH & MANAGEMENT COMPANY, LLC, 777 East
Wisconsin Avenue, Suite 800, Milwaukee, Wisconsin 53202, is a wholly owned
subsidiary of Firstar Corporation, a publicly owned company. The firm has
approximately $25.0 billion in assets under management.
Gary A. Elfe Daniel A. Tranchita
Senior Vice President Senior Vice President
Firstar Investment Research & Firstar Investment Research &
Management Company, LLC Management Company, LLC
(1978-present) (1989-present)
AHA Investment Funds, Inc. AHA Investment Funds, Inc.
Portfolio Manager Portfolio Manager
(1996-present) (1999-present)
-28-
<PAGE>
INVESTMENT RESEARCH COMPANY, 16236 San Dieguito Road #2-20, P.O. Box
9210, Rancho Santa Fe, California 92067, is a wholly owned subsidiary of United
Asset Management Corporation, a publicly held company. The firm was organized in
1985 and has approximately $1.3 billion of assets under management.
John D. Freeman C.B. (Tom) Garcia
President Senior Research Consultant
Investment Research Company (1996-present) Investment Research
AHA Investment Funds, Inc. Company (1985-present)
Portfolio Manager (1996-present) AHA Investment Funds, Inc.
Martingale Asset Management Portfolio Manager (1993-present)
Portfolio Manager (1992-1996)
Ming Wang
Sr. Vice President
Investment Research Company (1996-present)
AHA Investment Funds, Inc.
Portfolio Manager (1996-present)
TIAA CREFF Investment Management
Portfolio Manager (1991-1996)
THE PATTERSON CAPITAL CORPORATION, 2029 Century Park East #2950, Los
Angeles, California 90067, is a privately held advisory organization headed by
Joseph B. Patterson. Patterson Capital provides investment management services
to a variety of institutions, including investment companies and employee
benefit plans, and has approximately $1.9 billion under management.
Jean M. Clark Joseph B. Patterson
Sr. Vice President/Portfolio Manager Chief Investment Strategist
The Patterson Capital Corporation The Patterson Capital Corporation
(1983-1988) (1991-present) (1977-present)
AHA Investment Funds, Inc. AHA Investment Funds, Inc.
Portfolio Manager (1991-present) Portfolio Manager (1988-present)
WESTERN ASSET MANAGEMENT COMPANY, 117 East Colorado Boulevard,
Pasadena, California 91105, is a wholly owned subsidiary of Legg Mason, Inc., a
publicly held financial services organization that engages through its
subsidiaries in the businesses of securities brokerage, investment management,
corporate and public finance and real estate services. The firm manages more
than $27.4 billion for its institutional clients, plus $4.2 billion of assets
for mutual funds. Western Asset Management's Fixed-Income team has
responsibility for the management of the Portfolios.
-29-
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS OR IN APPROVED SALES LITERATURE IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER.
INVESTMENT CONSULTANT
HEWITT ASSOCIATES LLC
100 Half Day Road
Lincolnshire, Illinois 60069
CUSTODIAN
FIRSTAR BANK MILWAUKEE
615 East Michigan Street
Milwaukee, WI 53202
TRANSFER AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
LEGAL COUNSEL
SCHULTE ROTH & ZABEL LLP
900 Third Avenue
New York, New York 10022
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
33 West Monroe Street
Chicago, Illinois 60603
<PAGE>
FOR MORE INFORMATION
For more information about the Fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS - Additional information is available in the
Fund's annual and semi-annual reports to shareholders. The annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) - The SAI provides more
details about the Fund and its policies. A current SAI is on file with the SEC
and is incorporated by reference into (and is legally a part of) this
Prospectus.
TO OBTAIN INFORMATION
To obtain free copies of the annual or semi-annual report or the SAI or
to discuss questions about the Fund:
BY TELEPHONE - 1-800-445-1341
BY MAIL - AHA Investment Funds, Inc., c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, Wisconsin 53201-0701
Information about the Fund (including the SAI) can be reviewed and
copied at the SEC's Public Reference Room in Washington D.C. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Free text only versions of the annual report, semi-annual report
and the SAI are available on the EDGAR Database on the SEC's Internet web- site,
http://www.sec.gov. You can also obtain copies of this information, after paying
a duplication fee, by electronic request at the following Email address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
Investment Company Act File Number 811-05534.
<PAGE>
Statement of Additional Information
Dated November 1, 1999
AHA INVESTMENT FUNDS, INC.
AHA Investment Funds, Inc. (the "Fund") is an open-end, diversified
management investment company. Shares of the Fund's four investment portfolios
(the "Portfolios") are available only to participants in the American Hospital
Association Investment Program (the "Program") and to the American Hospital
Association (and its affiliated companies). Hewitt Associates LLC is the Fund's
Investment Consultant and, subject to approval of the Fund's Board of Directors,
selects the investment managers of the Portfolios. Shares of the following
Portfolios are currently offered directly by the Fund, without any sales charge
("no-load"), and are sold and redeemable at their current net asset values per
share:
LIMITED MATURITY FIXED INCOME PORTFOLIO: Seeks a high level of current income,
consistent with preservation of capital and liquidity. Invests primarily in high
quality fixed income securities and maintains an average dollar weighted
portfolio maturity of five years or less.
FULL MATURITY FIXED INCOME PORTFOLIO: Seeks over the long term the highest level
of income consistent with preservation of capital. Invests primarily in high
quality fixed income securities. There is no restriction on the maximum maturity
of the securities purchased. The average dollar weighted portfolio maturity will
vary and may exceed 20 years.
DIVERSIFIED EQUITY PORTFOLIO: Seeks long-term capital growth. Invests primarily
in equity securities and securities having equity characteristics.
BALANCED PORTFOLIO: Seeks a combination of growth of capital and income. Invests
varying proportions of its assets in equity and fixed income securities, with
not less than 25 percent of total assets invested in fixed income securities.
A Prospectus for the Fund dated November 1, 1999, which provides the
basic information you should know before investing, may be obtained without
charge by calling the Fund's transfer agent at: 1-(800) 445-1341. This Statement
of Additional Information is not a Prospectus. It contains information in
addition to and more detailed than that set forth in the Prospectus and is
intended to provide you additional information regarding the activities and
operations of the Fund. The Statement of Additional Information should be read
in conjunction with the Prospectus.
B-1
<PAGE>
INVESTMENT CONSULTANT:
HEWITT ASSOCIATES LLC
100 Half Day Road
Lincolnshire, Illinois 60069
TABLE OF CONTENTS
PAGE
THE FUND AND ITS MANAGEMENT..................................................3
INVESTMENT POLICIES AND PRACTICES...........................................10
INVESTMENT RESTRICTIONS.....................................................19
PORTFOLIO TURNOVER..........................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................21
DETERMINATION OF NET ASSET VALUE............................................24
TAXES.......................................................................26
PURCHASES AND REDEMPTIONS OF SHARES.........................................27
SPECIAL INVESTMENT TECHNIQUES...............................................28
PERFORMANCE INFORMATION.....................................................35
ADDITIONAL INFORMATION......................................................38
APPENDIX - CORPORATE SECURITIES RATINGS......................................1
B-2
<PAGE>
THE FUND AND ITS MANAGEMENT
THE FUND
The Fund is registered with the Securities and Exchange Commission
as an open-end, diversified management investment company. It was incorporated
on March 14, 1988 under the laws of Maryland and is designed for use by
participants in the American Hospital Association Investment Program (the
"Program"). The Program is a service offered by Hewitt Associates llc ("Hewitt")
pursuant to arrangements with American Hospital Association Services, Inc. and
is available to American Hospital Association ("AHA") member hospitals and their
affiliated organizations, including employee benefit plans and hospital
insurance funds ("Member Organizations"). To become a participant, a Member
Organization must enter into a Program Services Agreement ("Program Agreement")
with Hewitt. Other hospital associations affiliated with AHA and their sponsored
and affiliated organizations are also eligible to become participants by
entering into Program Agreements. Shares of the Fund may also be purchased by
AHA and its affiliated companies.
Participants receive individualized asset management consulting
services to assist in determining an appropriate investment program for their
specific needs. Hewitt consults with each participant to help it define its
investment objectives, desired returns and tolerance for risk, and develop a
plan for the allocation of the participant's assets among different asset
classes. Participants can implement their investment programs by investing in
shares of the Fund and may change the allocation of assets among the Portfolios
or withdraw assets from the Portfolios at any time by redeeming shares. Fees
paid to Hewitt by participants cover the costs of both Hewitt's consulting
services and the fees of the Fund's investment managers. The Fund itself pays no
fees to Hewitt or the investment managers, but bears certain direct costs and
expenses. For a more complete description of fees and expenses, see "Expenses
and Fees" in the Prospectus.
The Fund is comprised of four independently managed investment
portfolios, and is designed to provide Participants with a cost-effective method
of pursuing a professionally managed, diversified investment program. The Fund
provides flexibility, liquidity and a range of investment vehicles. There can,
however, be no assurance that any Portfolio of the Fund will achieve its
investment objective.
THE INVESTMENT CONSULTANT
Hewitt serves as the Fund's Investment Consultant, pursuant to a
Corporate Management Agreement dated as of July 15, 1988 (the "Management
Agreement"). Under the Management Agreement, Hewitt is responsible to provide
various services to the Fund. Among other things, Hewitt evaluates, selects
(subject to Board of Director approval) and monitors the performance of the
investment managers of the Fund's investment portfolios (the "Portfolios"), and
is required to pay the fees of the investment managers for the services they
render to the Portfolios. Hewitt is also responsible for allocating the assets
of the Portfolios with more than one manager among such Portfolios' investment
managers, and supervising the services provided by the Fund's custodian,
transfer agent, and other organizations which provide accounting, recordkeeping
and administrative services. Hewitt is required to provide such office space,
B-3
<PAGE>
equipment and personnel as may reasonably be necessary to render the services
under the Management Agreement, and bears the costs of telephone service, heat,
light, power and other utilities in connection therewith.
Expenses not expressly assumed by Hewitt under the Management
Agreement are paid by the Fund. Expenses borne by the Fund include, but are not
limited to: charges and expenses of the Fund's registrar, custodian, transfer
agent, dividend disbursing agent and shareholder servicing agent; brokerage fees
and commissions; taxes; engraving and printing of share certificates;
registration costs of the Fund and its shares under federal and state securities
laws and expenses associated with the preparation and filing of required reports
and the maintenance of the Fund's corporate existence; the costs and expense of
printing prospectuses, proxy statements and reports, including typesetting, and
of distributing these materials to shareholders; expenses of shareholders' and
directors' meetings; fees and expenses of directors who are not principals or
employees of Hewitt or the AHA; expenses incident to any dividend, withdrawal or
redemption options; charges and expenses of outside services used in preparing
and maintaining the books and records (including accounting records) of the
Fund; pricing shares of the Portfolios and rendering administrative services;
membership dues in industry organizations; interest on borrowings; postage;
insurance premiums on property and personnel (including directors and officers);
the fees and expenses of the Fund's independent accountants and its legal
counsel; extraordinary expenses including, but not limited to, legal claims and
liabilities, litigation costs and indemnification; and all other costs of the
Fund's operations. The Fund has entered into arrangements with Firstar Mutual
Fund Services, LLC to obtain accounting services necessary for its operations.
Pursuant to the Management Agreement, total operating expenses of
the Portfolios are subject to applicable limitations under the regulations of
states in which shares of the Portfolios are registered for sale. Operating
expenses are thus effectively subject to the most restrictive of such
limitations as they may be amended from time to time, or as they may be waived
or modified. No such limitations are presently applicable to the Portfolios. The
Management Agreement also provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations thereunder,
Hewitt is not liable to the Fund or any of its investors for any act or omission
or for any losses.
The Management Agreement was initially approved on June 22, 1988 by
the Fund's Board of Directors, including a majority of the directors who are not
"interested persons," as defined in the Investment Company Act of 1940 (the
"Act"), of the Fund or Hewitt (the "Independent Directors"), by vote cast in
person at a meeting called for such purpose. It was also approved on July 25,
1988 by American Hospital Association Services, Inc., as the sole shareholder of
the Fund at that time, for an initial term expiring June 30, 1990. The
shareholders of each Portfolio voted to approve the Management Agreement at a
special meeting of shareholders held on February 9, 1990. The Management
Agreement may continue in effect from year to year after its initial term
provided that each continuance is approved at least annually by shareholders of
each Portfolio by a majority shareholder vote as defined by the Act or by the
Board of Directors. Each such continuance must also be approved by the vote of a
majority of the Independent Directors. Pursuant to such approvals by the Board
of Directors, the
B-4
<PAGE>
Management Agreement has continued in effect from year to year. At a meeting of
the Fund's Board of Directors held in person on May 6, 1999, the Management
Agreement was renewed for an additional one year period expiring June 30, 2000.
The Management Agreement may be terminated at any time, without penalty, on
sixty days' notice by the Fund's Board of Directors, by the holders of a
majority of the shares of a Portfolio, or by Hewitt. In addition, the Management
Agreement provides for its automatic termination in the event of its
"assignment" (as defined by the Act and the rules thereunder). Shareholders of
each Portfolio are required to vote separately on all proposals to approve,
renew or terminate the Management Agreement, which would remain in effect for
those Portfolios which vote to approve or renew that agreement.
The Fund has acknowledged that the name "AHA" is a property right of
AHA and that its right to use that name is non-exclusive. The Fund also has
acknowledged that both AHA and Hewitt have the right to withdraw the right to
use the name "AHA" from the Fund.
THE INVESTMENT MANAGERS
Each of the investment managers has entered into a Portfolio
Advisory Agreement with the Fund (the "Advisory Agreements"). These agreements
provide that the investment managers are responsible for the investments of the
assets of the Portfolios allocated to them by Hewitt on behalf of the Fund.
Under the Advisory Agreements, the investment managers are required to invest
the assets of the Portfolio or Portfolios allocated to them in a manner
consistent with the investment objectives, policies, and restrictions of the
Portfolios, and in accordance with all procedures adopted by the Fund and its
Board of Directors. Hewitt has assumed responsibility for the payment of all
fees payable to the investment managers, which fees are each computed as a
percentage of the assets of the Fund under the management of the investment
manager. The investment managers assume all of the costs associated with
providing the services they render to the Portfolios. In addition, under the
Advisory Agreements, the investment managers are not liable to the Fund for any
act or omission in the absence of willful misfeasance, bad faith, negligence or
reckless disregard of their obligations.
The following organizations presently serve as investment managers
of the Fund pursuant to Advisory Agreements, and manage the Portfolios
indicated:
LIMITED MATURITY FIXED INCOME PORTFOLIO The Patterson Capital
Corporation ("Patterson")
FULL MATURITY FIXED INCOME PORTFOLIO Firstar Investment Research &
Management Company, LLC ("FIRMCO") Western Asset Management Company
("WAMCO")
DIVERSIFIED EQUITY PORTFOLIO Investment Research Company ("IRC")
Cambiar Investors, Inc. ("Cambiar")
B-5
<PAGE>
BALANCED PORTFOLIO
Cambiar
WAMCO
IRC
Cambiar and IRC are investment firms that are wholly owned
subsidiaries of United Asset Management. Patterson is a privately held company
that is controlled by Joseph B. Patterson. WAMCO is a wholly owned subsidiary of
Legg Mason, Inc., a publicly held company. FIRMCO is a wholly owned subsidiary
of Firstar Corporation, a publicly held company.
The Advisory Agreements with the investment managers were each
initially approved by the Board of Directors of the Fund, including a majority
of the Independent Directors. The continuation of each such agreement was last
approved by the Fund's Board of Directors at a meeting held in person on May 6,
1999. Each Advisory Agreement will remain in effect until June 30, 2000, unless
terminated prior thereto, and may continue in effect from year to year, provided
that such continuance is approved annually by the Board of Directors of the
Fund, including a majority of the Independent Directors. The Advisory Agreements
may be terminated at any time, without penalty, on thirty days' notice by the
Fund's Board of Directors or by the investment managers. In accordance with an
exemptive order issued by the Securities and Exchange Commission, the Advisory
Agreements need not be approved by shareholders of the Fund and shareholders
need not be given the right to terminate the agreements. As a result, the Board
of Directors may select, retain and remove the investment managers without the
approval of shareholders. The Advisory Agreements provide for their automatic
termination in the event of an "assignment" (as defined by the Act and the rules
thereunder).
Hewitt has certain responsibilities regarding the supervision of the
investment managers (see "The Investment Consultant," above); however, neither
Hewitt nor the Fund's officers or directors evaluate the investment merits of
investment selections or decisions made by the investment managers. The
investment managers and their affiliated brokers may be authorized to execute
brokerage transactions for the Portfolios and receive commissions for their
services. See "Portfolio Transactions and Brokerage."
Additional information concerning each of the Fund's investment
managers is contained in the Fund's Prospectus under "Investment Manager
Profiles." This information is incorporated herein by reference.
DIRECTORS AND OFFICERS
The Fund's Board of Directors has the overall responsibility for
supervising the operations of the Fund and the services provided to the Fund and
its Portfolios by Hewitt, the investment managers and other organizations. The
directors and executive officers of the Fund, their principal business
occupations during the last five years and their affiliations with Hewitt and
AHA, if any, are shown below. None of the Independent Directors is an affiliated
person of Hewitt or AHA. None of the directors or officers is an affiliated
person of any investment manager of the Fund.
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<TABLE>
<CAPTION>
OCCUPATIONS AND AFFILIATION
NAME, AGE, POSITION WITH FUND AND ADDRESS WITH AHA AND HEWITT
- ----------------------------------------- -------------------
<S> <C>
Dallas L. Carroll, 45 Chief Financial Officer, American Hospital Association;
Director Formerly, Vice President Senior Executive Weiss Memorial
One North Franklin Hospital
Chicago, Illinois 60606
Frank A. Ehmann, 65 Formerly, President and Director, United Stationers,
Director Executive Vice-President and Director, Baxter Corp. and
864 Bryant Avenue President and Director, American Hospital Supply Corp.
Winnetka, Illinois 60093 Director of various companies in health products field.
Richard John Evans, 47 Vice President, American Hospital Association Director,
Director American Hospital Association
One North Franklin
Chicago, Illinois 60606
James A. Henderson, 57 Vice President, Associate General Counsel, Assistant
Vice President Secretary, American Hospital Association; Assistant
One North Franklin Secretary, American Hospital Association Services, Inc.;
Chicago, Illinois 60606 Trustee, AHA Multiple Employer Group Insurance Trust;
Formerly, Assistant Secretary, Health Providers Service
Company.
Ronald A. Jones,(**) 50 Investment Consultant, Hewitt Associates LLC.
Director and President
100 Half Day Road
Lincolnshire, Illinois 60069
James B. Lee, 37 Independent Consultant to Hewitt Associates LLC.
Treasurer
914 Sherwood Road
La Grange Park, Illinois 60526
John D. Oliverio, 46 Executive Vice President and Director, Wheaton Franciscan
Director Services Inc.; Director, Oak Park Hospital; Director,
26 West 171 Roosevelt Road Synergon Health System.
Wheaton, Illinois 60189
</TABLE>
________________________________
(**) Director who is an "interested person" of the Fund as defined by the Act.
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<TABLE>
<CAPTION>
OCCUPATIONS AND AFFILIATION
NAME, AGE, POSITION WITH FUND AND ADDRESS WITH AHA AND HEWITT
- ----------------------------------------- -------------------
<S> <C>
John M. Ryan, 52 Attorney, Hewitt Associates LLC; Formerly, Partner, Wilson
Secretary & McIlvaine (a Chicago law firm).
100 Half Day Road
Lincolnshire, Illinois 60069
Timothy G. Solberg, 46 Director of Marketing and Client Services, Hewitt Associates
Director LLC, Investment Services Division.
100 Half Day Road
Lincolnshire, Illinois 60069
Thomas J. Tucker, 67 Former Vice President, Incarnate Word Health Services.
Director Formerly, Vice President and Chief Financial Officer,
8 Rock Creek Spohn Hospital. Fellow of the Healthcare Financial
Corpus Christi, Texas 78412 Management Association.
John L. Yoder, 67 Vice President, The Princeton Agency, Princeton Insurance
Director Co., Formerly President, Rahway Hospital, Rahway Hospital
19 Tankard Foundation and Recovery Health System (parent of Rahway
Washington Crossing, Pennsylvania 18977 Hospital), BICO Corporation (health ventures); Vice
Chairman and Director, Health Care Insurance Exchange -
Princeton Insurance Co. Formerly, Trustee, American
Hospital Association.
</TABLE>
The Fund pays an attendance fee to each director who is not a
principal, director, officer or employee of Hewitt or AHA of $1,000 for each
quarterly meeting and $500 for each special meeting of the Board of Directors
and for any committee meeting (not held on the date of a quarterly Board
meeting), and reimburses such directors for travel and other out-of-pocket
expenses incurred in attending such meetings. Directors and officers of the Fund
who are principals, directors or officers of or employed by Hewitt or AHA (or
any affiliated company of either) receive no compensation or expense
reimbursement from the Fund. During the fiscal year ended June 30, 1999, the
Fund paid directors' fees (including expenses) of $20,523.75 as follows:
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED REGISTRANT
COMPENSATION AS PART ANNUAL AND FUND
NAME OF PERSON, FROM OF FUND BENEFITS UPON COMPLEX PAID
POSITION REGISTRANT EXPENSES RETIREMENT TO DIRECTORS
- ------------------------ ----------------------- -------------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Dallas L. Carroll 0 0 0 0
Director
Frank A. Ehmann, $4,623.14 0 0 $4,623.14
Director
Richard John Evans, 0 0 0 0
Director
Ronald A. Jones, 0 0 0 0
Director and President
John D. Oliverio, $4,064.90 0 0 $4,064.90
Director
Timothy G. Solberg, 0 0 0 0
Director
Thomas J. Tucker, $5,592.35 0 0 $5,592.35
Director
John L. Yoder, $6,243.36 0 0 $6,243.36
Director
</TABLE>
By virtue of certain positions held by officers and directors of the
Fund with organizations that are shareholders of the Fund, including AHA and
American Hospital Association Retirement Trust, the officers and directors of
the Fund, as a group, may be deemed to have shared, indirect beneficial
ownership of 37% of the Fund's outstanding shares as of July 31, 1999.
INVESTMENT POLICIES AND PRACTICES
The sections below describe, in greater detail than in the Fund's
Prospectus, some of the different types of investments which may be made by the
Portfolios and the different
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investment practices in which the Portfolios may engage. The use of options and
futures contracts by the Portfolios are discussed under "Special Investment
Techniques." The general investment objectives of the Portfolios are set forth
in the Prospectus. Although the Portfolios' investment objectives are
fundamental, and may not be changed without the approval of shareholders, their
investment policies may be changed by the Fund's Board of Directors (except as
otherwise noted in the Prospectus or herein).
SHORT-TERM INVESTMENTS
Each of the Portfolios may invest in a variety of short-term debt
securities ("money market instruments"), including instruments issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities
("Government Securities") and repurchase agreements for such securities. Money
market instruments are generally considered to be debt securities having
remaining maturities of approximately one year or less. Other types of money
market instruments include: certificates of deposit, bankers' acceptances,
commercial paper, letters of credit, short-term corporate obligations, and the
other obligations discussed below.
The short-term investments of the Portfolios in bank obligations
(including certificates of deposit, bankers' acceptances, time deposits and
letters of credit) are limited to: (1) obligations of U.S. commercial banks and
savings institutions having total assets of $1 billion or more, and instruments
secured by such obligations, including obligations of foreign branches of U.S.
banks and (2) similar obligations of foreign commercial banks having total
assets of $1 billion or more or their U.S. branches which are denominated in
U.S. dollars. Obligations of foreign banks and their U.S. branches are subject
to the additional risks of the types generally associated with investment in
foreign securities. See "Foreign Securities." Similar risks may apply to
obligations of foreign branches of U.S. banks. There currently are no reserve
requirements applicable for obligations issued by foreign banks or foreign
branches of U.S. banks. Also, not all of the federal and state banking laws and
regulations applicable to domestic banks relating to maintenance of reserves,
loan limits and promotion of financial soundness apply to foreign branches of
domestic banks, and none of them apply to foreign banks.
Commercial paper constituting the short-term investments of the
Portfolios must be rated within the two highest grades by Standard & Poor's
("S&P") or the highest grade by Moody's Investors Service, Inc. ("Moody's") or,
if not rated, must be issued by a company having an outstanding debt issue rated
at least AA by S&P or Aa by Moody's. Other types of short-term corporate
obligations (including loan participations and master demand notes) must be
rated at least A by S&P or Moody's to qualify as a short-term investment of the
Portfolios, or, if not rated, must be issued by a company having an outstanding
debt issue rated at least A by Moody's or S&P. The quality standards described
above may be modified by the Fund upon the approval of its Board of Directors.
Information concerning corporate securities ratings is found in the Appendix.
Bank time deposits may be non-negotiable until expiration and may
impose penalties for early withdrawal. Master demand notes are corporate
obligations which permit the investment of fluctuating amounts at varying rates
of interest pursuant to direct arrangements
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<PAGE>
with the borrower. They permit daily changes in the amounts borrowed. The amount
under the note may be increased at any time by the Portfolio making the
investment up to the full amount provided by the note agreement, or may be
decreased by the Portfolio. The borrower may prepay up to the full amount of the
note without penalty. These notes may in some cases be backed by bank letters of
credit. Because these notes are direct lending arrangements between the lender
and borrower, it is not generally contemplated that they will be traded, and
there is no secondary market for them, although they are redeemable (and thus
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. Investments in bank time deposits and master demand notes
are subject to limitations on the purchase of securities that are restricted or
illiquid. See "Restricted and Illiquid Securities." No Portfolio intends to
purchase any non-negotiable bank time deposits or master demand notes during the
coming year.
REPURCHASE AGREEMENTS. The Portfolios may enter into repurchase
agreements involving the types of securities which are eligible for purchase by
that Portfolio. However, there is no limitation upon the maturity of the
securities underlying the repurchase agreements.
Repurchase agreements, which may be viewed as a type of secured
lending by the Portfolios, typically involve the acquisition by a Portfolio of
Government Securities or other securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Portfolio will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral") at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The Portfolio will receive interest from the
institution until the time when the repurchase is to occur. Although such date
is deemed to be the maturity date of a repurchase agreement, the maturities of
securities subject to repurchase agreements are not subject to any limits and
may exceed one year.
While repurchase agreements involve certain risks not associated
with direct investments in debt securities, the Fund follows procedures designed
to minimize such risks. These procedures include a requirement that the
investment managers effect repurchase transactions only with large, well
capitalized United States financial institutions approved by them as
creditworthy based upon periodic review under guidelines established and
monitored by the directors of the Fund. In addition, the value of the collateral
underlying the repurchase agreement, which will be held by the Fund's custodian
in a segregated account on behalf of the Portfolio, will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Portfolio will seek to liquidate such collateral.
However, the exercise of a Portfolio's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Portfolio could suffer a loss. It is the current policy of each
Portfolio not to invest in repurchase agreements that do not mature within seven
days if any such investment, together with any other illiquid assets held by the
Portfolio, amount to more than 10% of its total assets. Investments in
repurchase agreements may at times be substantial when, in the view of the
investment managers, liquidity or other considerations warrant.
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<PAGE>
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements. These agreements, in which the Portfolio would be the
seller of the security underlying the repurchase agreement for cash and be
obligated to repurchase the security, involve a form of leverage to the extent
the Portfolio may invest the cash received and involve risks similar to
repurchase agreements. Although this practice, if successful, may help a
Portfolio increase its income or net assets through the investment of the cash
received in a reverse repurchase agreement, if the return on those investments
is inadequate or they decline in value during the term of the agreement, the
income or the net assets of the Portfolio would be adversely affected as
compared to its income and net assets absent the transaction. No Portfolio
intends to enter into reverse repurchase agreements during the coming year.
TYPES OF DEBT SECURITIES
The debt obligations in which the Portfolios may invest are subject
to certain quality limitations and other restrictions. Permissible investments
include money market instruments and other types of obligations. See "Short-Term
Investments" and "Convertible Securities." Debt obligations are subject to
various risks as described in the Prospectus. In addition, investors should
recognize that, although securities ratings issued by a securities rating
service provide a generally useful guide as to credit risks, they do not offer
any criteria to evaluate interest rate risk. As noted in the Prospectus, changes
in interest rate levels cause fluctuations in the prices of debt obligations and
will, therefore, cause fluctuations in net asset values per share of the
Portfolios.
Applicable quality limitations of the Portfolios, as described in
the Prospectus, require that debt securities purchased by the Limited Maturity
Fixed Income Portfolio and the Diversified Equity Portfolio be rated at the time
of purchase A or higher by S&P or Moody's (or, if unrated, be of comparable
quality as determined by the investment manager) and that such securities
purchased by the Full Maturity Fixed Income Portfolio and the Balanced Portfolio
be rated at the time of purchase BBB or higher by S&P or Baa or higher by
Moody's (or, if unrated, be of comparable quality as determined by the
investment manager). Although unrated securities eligible for purchase by the
Portfolios must be determined to be comparable in quality to securities having
certain specified ratings, the market for unrated securities may not be as broad
as for rated securities since many investors rely on rating organizations for
credit appraisal.
Subsequent to the purchase of a debt security by a Portfolio, the
ratings or credit quality of a debt security may deteriorate. Any such
subsequent adverse changes in the rating or quality of a security held by a
Portfolio would not require the Portfolio to sell the security. However, the
investment managers of the Portfolios will evaluate and monitor the quality of
all investments, including bonds rated lower than BBB or Baa, and will dispose
of investments which have deteriorated in their creditworthiness or ratings as
determined to be necessary to assure that the Portfolios' overall investments
are constituted in a manner consistent with their investment objectives.
The economy and interest rates affect lower rated obligations
differently from other securities. For example, the prices of these obligations
have been found to be less sensitive
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<PAGE>
to interest rate changes than higher rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. To the extent
that there is no established retail secondary market, there may be thin trading
of lower rated obligations which may adversely impact the ability of the
Portfolios' investment managers to accurately value such obligations and the
Portfolios' assets, and may also adversely impact the Portfolios' ability to
dispose of the obligations. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
lower rated obligations, especially in a thinly traded market.
GOVERNMENT SECURITIES. Government Securities include obligations
issued by the U.S. Government, such as U.S. Treasury bills, notes and bonds,
which differ as to their maturities at the time of issuance. Government
Securities also include obligations guaranteed by the U.S. Government or issued
by its agencies or instrumentalities, such as obligations of the Export-Import
Bank of the United States, the General Services Administration, Federal Land
Banks, Farmers Home Administration and Federal Home Loan Banks. Some Government
Securities, such as U.S. Treasury obligations and obligations issued by the
Export-Import Bank and the Federal Housing Administration, are backed by the
full faith and credit of the U.S. Treasury. Others, such as those issued by
Federal Home Loan Banks, are backed by the issuer's right to borrow from the
U.S. Treasury. Some, such as those issued by the Federal National Mortgage
Association and Federal Farm Credit Banks, are backed only by the issuer's own
credit, with no guarantee or U.S. Treasury backing.
ZERO COUPON SECURITIES. Debt securities purchased by the Portfolios
may include zero coupon securities. These securities do not pay any interest
until maturity and, for this reason, zero coupon securities of longer maturities
may trade at a deep discount from their face or par values and may be subject to
greater fluctuations in market value than ordinary debt obligations of
comparable maturity. Current federal tax law requires the holder of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment that year. It is not anticipated that any Portfolio will invest more
than 5% of its assets in zero coupon securities in the coming year.
VARIABLE RATE SECURITIES. Debt obligations purchased by the
Portfolios may also include variable and floating rate securities. The interest
rates payable on these securities are adjusted either at predesignated periodic
intervals or whenever there is a change in an established market rate of
interest. Other features may include a right whereby the Portfolio which holds
the security may demand prepayment of the principal amount prior to the stated
maturity (a "demand feature") and the right of an issuer to prepay the principal
amount prior to maturity. One benefit of variable and floating rate securities
is that, because of interest rate adjustments on the obligation, changes in
market value that would normally result from fluctuations in prevailing interest
rates are reduced. The benefit of a demand feature is enhanced liquidity.
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<PAGE>
MORTGAGE-BACKED SECURITIES. The Portfolios may invest in
mortgage-backed securities issued or guaranteed by the U.S. Government, or one
of its agencies or instrumentalities, or issued by private issuers. The
mortgage-backed securities in which these Portfolios may invest include
collateralized mortgage obligations ("CMOs") and REMIC interests. CMOs are debt
instruments issued by special purpose entities and secured by mortgages or other
mortgage-backed securities, which provide by their terms for aggregate payments
of principal and interest based on the payments made on the underlying mortgages
or securities. CMOs are typically issued in separate classes with varying
coupons and stated maturities. REMIC interests are mortgage-backed securities as
to which the issuers have qualified to be treated as real estate mortgage
investment conduits under the Internal Revenue Code of 1986 and have the same
characteristics as CMOs. The amount of privately issued mortgage-backed
securities that may be purchased by a Portfolio may not exceed 10% of the value
of the Portfolio's total assets, and the securities of any one such issuer
purchased by a Portfolio may not exceed 5% of the value of the Portfolio's total
assets.
The Portfolios may from time to time also invest in "stripped"
mortgage-backed securities. These are securities which operate like CMOs but
entitle the holder to disproportionate interests with respect to the allocation
of interest or principal on the underlying mortgages or securities. A stripped
mortgage-backed security is created by the issuer separating the interest and
principal on a mortgage pool to form two or more independently tradeable
securities. The result is the creation of classes of discount securities which
can be structured to produce faster or slower prepayment expectations based upon
the particular underlying mortgage interest rate payments assigned to each
class. These obligations exhibit risk characteristics similar to mortgage-backed
securities generally and zero coupon securities. Due to existing market
characteristics, "interest only" and "principal only" mortgage-backed securities
are considered to be illiquid.
Because the mortgages underlying mortgage-backed securities are
subject to prepayment at any time, most mortgage-backed securities are subject
to the risk of prepayment in an amount differing from that anticipated at the
time of issuance. Prepayments generally are passed through to the holders of the
securities. Any such prepayments received by a Portfolio must be reinvested in
other securities. As a result, prepayments in excess of those anticipated could
adversely affect yield to the extent reinvested in instruments with a lower
interest rate than that of the original security. Prepayments on a pool of
mortgages are influenced by a variety of economic, geographic, social and other
factors. Generally, however, prepayments will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Accordingly, amounts required to be reinvested are likely to be greater (and the
potential for capital appreciation less) during a period of declining interest
rates than during a period of rising interests rates. Mortgage-backed securities
may be purchased at a premium over the principal or face value in order to
obtain higher income. The recovery of any premium that may have been paid for a
given security is solely a function of the ability to liquidate such security at
or above the purchase price.
ASSET-BACKED SECURITIES. Each of the Portfolios may invest in
asset-backed securities issued by private issuers. Asset-backed securities
represent interests in pools of consumer loans (generally unrelated to mortgage
loans) and most often are structured as pass-through securities. Interest and
principal payments ultimately depend on payment of the underlying loans by
individuals, although the securities may be supported by letters of credit or
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<PAGE>
other credit enhancements. The value of asset-backed securities may also depend
on the creditworthiness of the servicing agent for the loan pool, the originator
of the loans, or the financial institution providing the credit enhancement.
Asset-backed securities may be "stripped" into classes in a manner similar to
that described under "Mortgage-Backed Securities," above, and are subject to the
prepayment risks described therein.
TYPES OF EQUITY SECURITIES
Equity securities may be purchased by the Diversified Equity
Portfolio and Balanced Portfolio and may include common and preferred and
convertible preferred stocks, and securities having equity characteristics such
as rights, warrants and convertible debt securities. See "Convertible
Securities." Common stocks and preferred stocks represent equity ownership
interests in a corporation and participate in the corporation's earnings through
dividends which may be declared by the corporation. Unlike common stocks,
preferred stocks are entitled to stated dividends payable from the corporation's
earnings, which in some cases may be "cumulative" if prior stated dividends have
not been paid. Dividends payable on preferred stock have priority over
distributions to holders of common stock, and preferred stocks generally have
preferences on the distribution of assets in the event of the corporation's
liquidation. Preferred stocks may be "participating" which means that they may
be entitled to dividends in excess of the stated dividend in certain cases. The
rights of common and preferred stocks are generally subordinate to rights
associated with a corporation's debt securities. Rights and warrants are
securities which entitle the holder to purchase the securities of a company
(generally, its common stock) at a specified price during a specified time
period. Because of this feature, the values of rights and warrants are affected
by factors similar to those which determine the prices of common stocks and
exhibit similar behavior. Rights and warrants may be purchased directly or
acquired in connection with a corporate reorganization or exchange offer. The
purchase of rights and warrants are subject to certain limitations. See
"Investment Restrictions."
CONVERTIBLE SECURITIES
Securities of this type may be purchased by the Diversified Equity
Portfolio and the Balanced Portfolio. They include convertible debt obligations
and convertible preferred stock. A convertible security entitles the holder to
exchange it for a fixed number of shares of common stock (or other equity
security), usually at a fixed price within a specified period of time. Until
conversion, the holder receives the interest paid on a convertible bond or the
dividend preference of a preferred stock.
Convertible securities have an "investment value" which is the
theoretical value determined by the yield it provides in comparison with similar
securities without the conversion feature. The investment value changes based
upon prevailing interest rates and other factors. They also have a "conversion
value" which is the worth in market value if the security were exchanged for the
underlying equity security. Conversion value fluctuates directly with the price
of the underlying security. If conversion value is substantially below
investment value, the price of the convertible security is governed principally
by its investment value. If the conversion value is near or above investment
value, the price of the convertible security generally will rise
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<PAGE>
above investment value and may represent a premium over conversion value due to
the combination of the convertible security's right to interest (or dividend
preference) and the possibility of capital appreciation from the conversion
feature. A convertible security's price, when price is influenced primarily by
its conversion value, will generally yield less than a senior nonconvertible
security of comparable investment value. Convertible securities may be purchased
at varying price levels above their investment values or conversion values.
However, there is no assurance that any premium above investment value or
conversion value will be recovered because prices change and, as a result, the
ability to achieve capital appreciation through conversion may never be
realized.
FOREIGN SECURITIES
Each Portfolio may invest up to 10% of its total assets, at the time
of purchase, in foreign securities. As discussed in the Prospectus, each
Portfolio may in addition invest in securities of certain Canadian issuers and
securities purchased by means of American Depository Receipts ("ADRs") in an
amount not to exceed 20% of a Portfolio's total assets at the time of purchase.
Investments in foreign securities will be affected by a number of factors which
ordinarily do not affect investments in domestic securities.
Foreign securities may be affected by changes in currency exchange
rates, exchange control regulations, changes in governmental administration or
economic or monetary policy (in the U.S. and abroad), political events,
expropriation or nationalization or confiscatory taxation. Dividends and
interest paid on foreign securities may be subject to foreign withholding and
other foreign taxes. In addition, there may be less publicly available
information concerning foreign issuers than domestic issuers, and foreign
issuers may not be subject to uniform accounting, auditing and financial
reporting standards comparable to those of domestic issuers. Securities of
certain foreign issuers and in certain foreign markets are less liquid and more
volatile than domestic issues and markets, and foreign brokerage commissions are
generally higher than in the U.S. There is also generally less regulation and
supervision of exchanges, brokers and issuers in foreign countries.
Securities denominated in foreign currencies may be affected
favorably or unfavorably by changes in foreign currency exchange rates and costs
will be incurred in converting one currency to another. Exchange rates are
determined by forces of supply and demand which forces are affected by a variety
of factors including international balances of payments, economic and financial
conditions, government intervention and speculation. Foreign currency exchange
transactions of the Portfolios may be effected on a "spot" basis (cash basis) at
the prevailing spot rate for purchasing or selling currency. The Portfolios may
also utilize forward foreign currency contracts as described below.
FORWARD FOREIGN CURRENCY CONTRACTS
The Portfolios authorized to invest in foreign securities may enter
into forward currency contracts to purchase or sell foreign currencies as a
hedge against possible variations in foreign exchange rates. A forward foreign
currency exchange contract is an agreement between the contracting parties to
exchange an amount of currency at some future time at an agreed upon
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<PAGE>
rate. The rate can be higher or lower than the spot rate between the currencies
that are the subject of the contract. A forward contract generally has no
deposit requirement, and such transactions do not involve commissions. By
entering into a forward contract for the purchase or sale of the amount of
foreign currency invested in a foreign security, a Portfolio can hedge against
possible variations in the value of the dollar versus the subject currency
either between the date the foreign security is purchased or sold and the date
on which payment is made or received ("transaction hedging"), or during the time
the Portfolio holds the foreign security ("position hedging"). Hedging against a
decline in the value of a currency through the use of forward contracts does not
eliminate fluctuations in the prices of securities or prevent losses if the
prices of securities decline. Hedging transactions preclude the opportunity for
gain if the value of the hedged currency should rise. The Portfolios will not
speculate in forward currency contracts. If a Portfolio enters into a "position
hedging transaction," which is the sale of forward non-U.S. currency with
respect to a security held by it and denominated in such foreign currency, the
Fund's custodian will place cash or liquid securities in a separate account in
an amount equal to the value of the Portfolio's total assets committed to the
consummation of such forward contract. If the value of the securities placed in
the account declines, additional cash or securities will be placed in the
account so that the value of cash or securities in the account will equal the
amount of the Portfolio's commitments with respect to such contracts. A
Portfolio will not attempt to hedge all of its non-U.S. portfolio positions and
will enter into such transactions only to the extent, if any, deemed appropriate
by its investment managers. The Portfolios will not enter into forward contracts
for terms of more than one year.
Each Portfolio also has the authority to engage in transactions in
foreign currency options and futures, but the Portfolios have no intention to do
so during the coming year. These options and futures are similar to options and
futures on securities, except they represent an option to purchase or to sell an
amount of a specified currency prior to expiration of the option at a designated
price (in the case of a currency option), or a contract to purchase or deliver a
specified amount of currency at an agreed upon future time and price (in the
case of a currency future). Such transactions would be used for purposes similar
to those described above for forward foreign currency contracts.
SECURITIES LOANS
Consistent with applicable regulatory requirements, the Portfolios
may lend their United States portfolio securities (in an amount not exceeding
one-third of a Portfolio's total assets) to brokers, dealers and other financial
institutions, provided that such loans are callable at any time by the Fund
(subject to notice provisions described below), and are at all times secured by
cash or cash equivalents, which are maintained in a segregated account pursuant
to applicable regulations and that are equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Portfolio continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term investments.
A loan may be terminated by the borrower on one business day's
notice, or by the Fund on four business days' notice. If the borrower fails to
deliver the loaned securities within
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four days after receipt of notice, the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost exceeding the collateral. As with any extensions of credit, there are risks
of delay in recovery and in some cases even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans of
securities will only be made to firms deemed by the Fund's management to be
creditworthy (such creditworthiness will be monitored on an ongoing basis) and
when the income which can be earned from such loans justifies the attendant
risks. Upon termination of the loan, the borrower is required to return the
securities. Any gain or loss in the market price during the loan period would
inure to the Portfolio which made the loan.
When voting or consent rights which accompany loaned securities pass
to the borrower, the Fund will follow the policy of calling the loaned
securities, to be delivered within one day after notice, to permit the exercise
of such rights if the matters involved would have a material effect on the
investment in such loaned securities. The Portfolios will pay reasonable
finder's, administrative and custodial fees in connection with loans of
securities. A Portfolio will not lend securities if to do so would cause it to
have loaned securities in excess of one third of the value of the Portfolio's
total assets, measured at the time of such loan. The Portfolios may lend foreign
securities consistent with the foregoing requirements, but have no intention of
doing so in the foreseeable future.
RESTRICTED AND ILLIQUID SECURITIES
Each Portfolio may invest up to 10% of the value of its total
assets, measured at the time of investment, in restricted and illiquid
securities. Restricted securities are securities which are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933. Illiquid securities are securities which may be subject
to other types of resale restrictions or which have no readily available markets
for their disposition. These limitations on resale and marketability may have
the effect of preventing a Portfolio from disposing of a security at the time
desired or at a reasonable price. In addition, in order to resell a restricted
security, the Portfolio might have to bear the expense and incur the delays
associated with effecting registration. In purchasing restricted securities, the
Portfolios do not intend to engage in underwriting activities, except to the
extent a Portfolio may be deemed to be a statutory underwriter under the
Securities Act of 1933 in disposing such securities. Restricted securities will
be purchased for investment purposes only and not for the purpose of exercising
control or management of other companies. Under the Fund's present policies,
securities available for purchase and sale in accordance with Rule 144A under
the Securities Act of 1933 are treated as restricted securities for the purposes
of the limitation set forth above.
B-18
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the investment restrictions enumerated in the
Prospectus, the investment restrictions listed below have been adopted as
fundamental policies. Under the Act, a fundamental policy may not be changed
without the vote of a majority of the outstanding voting securities, as defined
in the Act. For a Portfolio to alter a fundamental policy requires the
affirmative vote of the holders of (a) 67% or more of the shares of a Portfolio
present at a meeting of shareholders, if the holders of at least 50% of the
outstanding shares of the Portfolio are present or represented by proxy or (b)
more than 50% of the outstanding shares of the Portfolio, whichever is less.
No Portfolio may:
1. Purchase a security, other than Government Securities, if as a
result of such purchase more than 5% of the value of the Portfolio's assets
would be invested in the securities of any one issuer, or the Portfolio would
own more than 10% of the voting securities, or of any class of securities, of
any one issuer. For purposes of this restriction, all outstanding indebtedness
of an issuer is deemed to be a single class.
2. Purchase a security, other than Government Securities, if as a
result of such purchase 25% or more of the value of the Portfolio's total assets
would be invested in the securities of issuers in any one industry.
3. Purchase the securities of any issuer, if as a result of such
purchase more than 10% of the value of the Portfolio's total assets would be
invested in securities that are subject to legal or contractual restrictions on
resale or that are illiquid. (As a matter of non-fundamental policy, repurchase
agreements maturing in more than seven days, certain time deposits and
over-the-counter options are considered to be illiquid.)
4. Issue senior securities as defined in the Act or borrow money,
except that a Portfolio may borrow from banks for temporary or emergency
purposes (but not for investment), in an amount up to 10% of the value of its
total assets (including the amount borrowed) less liabilities (not including the
amount borrowed) at the time the borrowing was made. While any such borrowings
exist for a Portfolio, it will not purchase securities. (However, a Portfolio
which is authorized to do so by its investment policies may lend securities,
enter into repurchase agreements without limit and reverse repurchase agreements
in an amount not exceeding 10% of its total assets, purchase securities on a
when-issued or delayed delivery basis and enter into forward foreign currency
contracts.)
5. Purchase the securities of any issuer if, to the knowledge of
the Fund, any officer or director of the Fund, or any officer, partner or
director of Hewitt or any investment manager, owns more than 1% of the
outstanding securities of such issuer and such officers, partners and directors
who own more than such 1% also own in the aggregate more than 5% of the
outstanding securities of such issuer.
B-19
<PAGE>
6. Purchase the securities (other than Government Securities) of
an issuer having a record, together with predecessors, of less than three years'
continuous operations, if as a result of such purchase more than 5% of the value
of the Portfolio's total assets would be invested in such securities.
7. Purchase the securities of another investment company, except
in connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Make short sales of securities or purchase securities on
margin, except for such short-term loans as are necessary for the clearance of
purchases of securities.
9. Engage in the underwriting of securities except insofar as a
Portfolio may be deemed an underwriter under the Securities Act of 1933 in
disposing of a security.
10. Purchase or sell real estate or interests therein, or purchase
oil, gas or other mineral leases, rights or royalty contracts or development
programs, except that a Portfolio may invest in the securities of issuers
engaged in the foregoing activities and may invest in securities secured by real
estate or interests therein.
11. Invest for the purpose of exercising control or management of
another company.
12. Make loans of money or securities, except through the purchase
of permitted investments (including repurchase and reverse repurchase
agreements) and through the loan of securities (in an amount not exceeding
one-third of total assets) by any Portfolio.
13. Purchase or sell commodities, except that the Portfolios may
purchase and sell financial futures contracts and options on such contracts and
may enter into forward foreign currency contracts and engage in the purchase and
sale of foreign currency options and futures.
14. Invest more than 5% of the value of a Portfolio's total assets
in warrants, including not more than 2% of such assets in warrants not listed on
a U.S. stock exchange. (Rights and warrants attached to, received in exchange
for, or as a distribution on, other securities are not subject to this
restriction.)
15. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except as necessary to secure permitted borrowings. (Collateral arrangements and
initial margin with respect to permitted options on securities, financial
futures contracts and related options, and arrangements incident to other
permitted practices, are not deemed to be subject to this restriction.)
For purposes of these investment restrictions and other limitations,
all percentage limitations apply at the time of a purchase or other transaction.
Any subsequent change in a percentage resulting from market fluctuations or
other changes in the amount of total assets does not require the sale or
disposition of an investment or any other action.
B-20
<PAGE>
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover.
Although the Portfolios generally do not trade for short-term profits,
securities may be sold without regard to the time they have been held when
investment considerations warrant such action. As a result, under certain market
conditions, the turnover rate for a particular Portfolio will be higher than
that of other investment companies and portfolios with similar investment
objectives. It is estimated that the portfolio turnover rates of the Limited
Maturity Fixed Income Portfolio and the Full Maturity Fixed Income Portfolio
will not exceed 350%. The turnover rates of these Portfolios reflect the effect
of their policies to alter their maturity structures in response to market
conditions. It is estimated that the turnover rate for the fixed income segment
of the Balanced Portfolio will not exceed 200%, and that the portfolio turnover
rate of the Diversified Equity Portfolio and the equity segment of the Balanced
Portfolio will not exceed 150%. The Balanced Portfolio's assets may be shifted
between fixed income and equity securities, but it is estimated that overall
portfolio turnover rate of this Portfolio will not exceed 200%. Decisions to buy
and sell securities are made by the Portfolios' investment managers for the
assets assigned to them. Investment managers make decisions to buy or sell
securities independently from other investment managers. Thus, one investment
manager may sell a security while another investment manager for the same
Portfolio is purchasing the same security. In addition, when an investment
manager's services are terminated, the new investment manager may restructure
the Portfolio. These practices will result in higher portfolio turnover rates.
Brokerage costs are commensurate with the rate of portfolio activity so that a
Portfolio with higher turnover will incur higher brokerage costs.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision of the Fund's Board of Directors,
the investment managers are responsible for decisions to buy and sell securities
for the Portfolios, the selection of brokers and dealers to effect the
transactions, and the negotiation of brokerage commissions, if any. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission for their services. In the over-the-counter market,
securities are generally traded on a "net" basis with non-affiliated dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. Certain money market instruments may be
purchased directly from an issuer, in which case no commission or discounts are
paid. The Fund anticipates that its transactions involving foreign securities
will be effected primarily on principal stock exchanges for such securities.
Fixed commissions on such transactions are generally higher than negotiated
commissions on domestic transactions. There is also generally less government
supervision and regulation of foreign stock exchanges and brokers than in the
United States.
The investment managers currently serve as investment advisers to a
number of clients, including other investment companies, and may in the future
act as investment advisers to others. It is the practice of each of the
investment managers to cause purchase and sale transactions to be allocated
among the Portfolios and others whose assets it manages in such
B-21
<PAGE>
manner as it deems equitable. In making such allocations, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the Portfolios and the other
client accounts. This procedure may, under certain circumstances, have an
adverse effect on the Portfolios.
The policy of the Fund regarding purchases and sales of securities
for its Portfolios is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Board of Directors of the Fund believes that a
requirement always to seek the lowest commission cost could impede effective
management and preclude the Portfolios and the investment managers from
obtaining high quality brokerage and research services. In seeking to determine
the reasonableness of brokerage commissions paid in any transaction, the
investment managers rely on their experience and knowledge regarding commissions
generally charged by various brokers and on their judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as in
most cases an exact dollar value for those services is not ascertainable.
In seeking to implement the Fund's policies, the investment managers
effect transactions with those brokers and dealers who they believe provide the
most favorable prices and which are capable of providing efficient executions.
If the investment managers believe such price and execution are obtainable from
more than one broker or dealer, they may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Fund or the investment managers. Such services may include, but
are not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investments; wire services; and appraisals
or evaluations of portfolio securities. The information and services received by
the investment managers from brokers and dealers may be of benefit in the
management of accounts of other clients and may not in all cases benefit the
Fund directly. While such services are useful and important in supplementing
their own research and facilities, the investment managers believe the value of
such services is not determinable and does not significantly reduce their
expenses.
Consistent with the policies described above, brokerage transactions
in securities listed on exchanges or admitted to unlisted trading privileges may
be effected through investment managers or their affiliates which are registered
brokers. In order for such transactions to be effected, the commissions, fees or
other remuneration received by the broker must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. This
standard would allow an investment manager or its affiliate to receive no more
than the remuneration which would be expected to be
B-22
<PAGE>
received by an unaffiliated broker in a commensurate arm's-length transaction.
In approving the use of an affiliated broker, the Board of Directors of the
Fund, including a majority of the Independent Directors, has adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid are consistent with the foregoing standard.
The directors have considered the possibilities of seeking to
recapture, for the benefit of the Portfolios, brokerage commissions and other
expenses of portfolio transactions. For example, brokerage commissions received
by affiliated brokers could be offset against the advisory fees paid by the
Portfolios. After considering all factors deemed relevant, the directors made a
determination not to seek such recapture. The directors will reconsider this
matter from time to time.
Brokerage commissions paid by the Diversified Equity Portfolio and
Balanced Portfolio for the last three fiscal years ending June 30, were:
<TABLE>
<CAPTION>
Diversified Equity Balanced
<S> <C> <C>
1999 $156,945 $85,615
1998 $66,694 $58,186
1997 $66,076 $69,738
</TABLE>
Brokerage commissions allocated for research services during the
fiscal year ended June 30, 1999 were $3,100 by the Diversified Equity Portfolio
(in transactions having an aggregate value of $4,510,000) and $2750 by the
Balanced Portfolio (in transactions having an aggregate value of $3,750,000).
During the period, no brokerage commissions were paid by the other two
Portfolios.
During the fiscal year ended June 30, 1999, the Portfolios held
securities of Bankers Trust Company ("Bankers"); Bear Stearns Incorporated
("Bear Stearns"); J.P. Morgan; Lehman Brothers Incorporated ("Lehman Brothers");
Merrill Lynch & Company ("Merrill Lynch"); Morgan Stanley Group Incorporated
("Morgan Stanley"); and PaineWebber Incorporated ("PaineWebber") which are
companies which may be deemed to be the Fund's "regular brokers or dealers," as
defined by Rule 10b-1 under the Act, or the parents of such brokers or dealers.
Securities of such companies were held by the Full Maturity Fixed
Income Portfolio (Bankers, J.P. Morgan; Lehman Brothers, Merrill Lynch and
PaineWebber), Limited Maturity Fixed Income Portfolio (Merrill Lynch),
Diversified Equity Portfolio (J.P. Morgan, Merrill Lynch, Morgan Stanley) and
Balanced Portfolio (Bear Stearns, J.P. Morgan, Merrill Lynch.)
B-23
<PAGE>
Aggregate holdings, as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
FULL MATURITY FIXED INCOME
- --------------------------
<S> <C>
Lehman Bankers 8.12% $1,000,000 principal amount
Due 04/01/02
J.P. Morgan 6.00% $ 800,000 principal amount
Due 01/15/09
Lehman Brothers 11.63% $375,000 principal amount
Due 05/15/05
Merrill Lynch
6.875% Due 11/15/18 $375,000 principal amount
6.310% Due 11/15/26 $172,781 principal amount
Paine Weber 6.73% $150,000 principal amount
Due 01/20/04
<CAPTION>
LIMITED MATURITY FIXED INCOME
- -----------------------------
<S> <C>
Merrill Lynch 6.05% $1,250,000 principal amount
Due 03/06/01
<CAPTION>
DIVERSIFIED EQUITY
- ------------------
<S> <C>
J.P. Morgan 1,000 Common stock shares
Merrill Lynch 5,000 Common stock shares
Morgan Stanley 4,070 Common stock shares
BALANCED
- --------
<S> <C>
Bear Stearns 1,000 Common stock shares
J.P. Morgan 200 Common stock shares
Merrill Lynch 2,000 Common stock shares
</TABLE>
DETERMINATION OF NET ASSET VALUE
The Prospectus describes the days on which the net asset values per
share of the Portfolios are computed for purposes of purchases and redemptions
of shares by investors, and also sets forth the times as of which such
computations are made and the requirements applicable to the processing of
purchase and redemption orders. Net asset value is computed once daily each day
the New York Stock Exchange ("NYSE") is open and on each other day on which
there is a sufficient degree of trading in a Portfolio's investments to affect
net asset value, except that no computation need be made on a day on which no
orders to purchase or redeem shares have been received. The NYSE currently
observes the following holidays: New Year's Day; Martin
B-24
<PAGE>
Luther King's Birthday (third Monday in January); Presidents' Day (third Monday
in February); Good Friday (Friday before Easter); Memorial Day (last Monday in
May); Independence Day; Labor Day (first Monday in September); Thanksgiving Day
(last Thursday in November); and Christmas Day.
In valuing the assets of the Portfolios for purposes of computing
net asset value, securities are appraised at market value as of the close of
trading on each business day when the NYSE is open. Securities, other than stock
options, listed on the NYSE or other exchanges are valued on the basis of the
last sale price on the exchange on which they are primarily traded. However, if
the last sale price on the NYSE is different than the last sale price on any
other exchange, the NYSE price will be used. If there are no sales on that day,
then the securities are valued at the bid price on the NYSE or other primary
exchange for that day. Securities traded in the over-the-counter market are
valued on the basis of the last sales price as reported by NASDAQ. If there are
no sales on that day, then the securities are valued at the mean between the
closing bid and asked prices as reported by NASDAQ. Stock options traded on
national securities exchanges are valued at the last sales price prior to the
time of computation of net asset value per share. Futures contracts and options
thereon, which are traded on commodities exchanges, are valued at their daily
settlement value as of the close of such commodities exchanges. Securities for
which quotations are not readily available and other assets are appraised at
fair value as determined pursuant to procedures adopted in good faith by the
Board of Directors of the Fund. Short-term debt securities will be valued at
their current market value when available or fair value, which for securities
with remaining maturities of 60 days or less has been determined in good faith
by the Board of Directors to be represented by amortized cost value, absent
unusual circumstances. A pricing service may be utilized to determine the fair
value of securities held by the Portfolios. Any such service might value the
investments based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. The service may also employ
electronic data processing techniques, a matrix system or both to determine
valuation. The Board of Directors will review and monitor the methods used by
such services to assure itself that securities are valued at their fair values.
The values of securities held by the Portfolios and other assets
used in computing net asset value are determined as of the time trading in such
securities is completed each day, which, in the case of foreign securities,
generally occurs at various times prior to the close of the NYSE. Foreign
currency exchange rates are also generally determined prior to the close of the
NYSE. On occasion, the values of such securities and exchange rates may be
affected by events occurring between the time as of which determinations of such
values or exchange rates are made and the close of the NYSE. When such events
materially affect the value of securities held by the Portfolios or their
liabilities, such securities and liabilities will be valued at fair value in
accordance with procedures adopted in good faith by the Fund's Board of
Directors. The values of any assets and liabilities initially expressed in
foreign currencies will be converted to U.S. dollars at the mean between the bid
and offer prices of the currencies against U.S. dollars last quoted by any major
bank.
B-25
<PAGE>
TAXES
It is the policy of the Fund each fiscal year to distribute
substantially all of each Portfolio's net investment income and net realized
capital gains, if any, to its shareholders. The Fund intends that each Portfolio
will qualify as a regulated investment company under the provisions of the
Internal Revenue Code. If so qualified, a Portfolio will not be subject to
federal income tax on that part of its net investment income and net realized
capital gains which it distributed to its shareholders. To qualify for such tax
treatment, a Portfolio must generally, among other things, (a) derive at least
90% of its annual gross income from dividends, interest (including payments
received with respect to loans of stock and securities) and gains from the sale
or other disposition of stock or securities and certain related income; and (b)
diversify its holdings so that at the end of each fiscal quarter (i) 50% of the
market value of the Portfolio's assets is represented by cash, Government
Securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Portfolio's assets or 10% of the voting
securities of the issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than Government
Securities). These requirements may limit the ability of the Portfolios to
engage in transactions involving options and futures.
Under present Maryland law, the Fund is not subject to any state
income taxation during any fiscal year in which the Portfolios each qualify as a
regulated investment company. However, the Fund might be subject to Maryland
income taxes for any taxable year in which the Portfolios did not so qualify.
Further, the Fund may be subject to tax in certain states where it does
business. In those states which have income tax laws, the tax treatment of the
Fund and its shareholders in respect to distributions may differ from federal
tax treatment.
Shareholders will be notified annually by the Fund as to the federal
tax status of dividends and distributions paid to or reinvested by the
shareholder for the preceding taxable year. In addition, dividend and long-term
capital gains distributions may also be subject to state and local taxes. Each
shareholder is advised to consult its own tax adviser concerning the tax effects
of share ownership.
It should be noted that both dividends and capital gains
distributions received by an investor have the effect of reducing the net asset
value of the shares by the exact amount of the dividend or capital gains
distribution. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the distribution of realized long-term capital
gains, such distribution would be at least a partial return of capital but
nonetheless taxable at capital gains rates. Therefore, an investor should
consider the tax consequences of purchasing shares immediately prior to a
distribution record date.
Dividends and interest received by the Portfolios on foreign
investments may give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes.
Distributions by a Portfolio of net investment income and the excess
of net short-term capital gains over net long-term capital loss are taxable to
shareholders of that Portfolio as ordinary income regardless of whether such
distributions are reinvested in additional shares or
B-26
<PAGE>
paid in cash. Distributions of net long-term gains, if any, are taxable as
long-term capital gains regardless of how long the investor has held the shares
and regardless of whether the distribution is received in additional shares or
in cash.
The Taxpayer Relief Act of 1997 (the "Act"), enacted in August 1997,
dramatically changes the taxation of net capital gains by applying different
rates thereto depending on the taxpayer's holding period and marginal rate of
federal income tax. The Act, however, does not address the application of these
rules to distributions by regulated investment companies and instead authorizes
the issuance of regulations to do so. Accordingly, shareholders should consult
their tax advisers as to the effect of the Act on distributions by the Fund to
them of net capital gain.
FUTURES CONTRACTS AND RELATED OPTIONS. Accounting for futures
contracts and options on futures contracts will be in accordance with generally
accepted accounting principles. Initial margin deposits made by a Portfolio upon
entering into futures contracts will be recognized as assets. During the period
the futures contract is open, changes in the value of the contract will be
recognized as unrealized gains or losses by "marking to market" on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Maintenance margin payments will be made or received, depending upon whether
gains or losses are incurred.
Futures contracts, options on futures contracts and options on debt
securities held by a Portfolio at the end of each fiscal year of each Fund may
be required to be "marked to market" for federal income tax purposes; that is,
treated as having been sold at market value. The straddle rules of Section 1092
of the Code may require a Portfolio to defer losses incurred in certain
transactions involving securities and options or futures on securities, and may
affect a Portfolio's holding period in the asset offsetting the option or
future. A Portfolio's ability to engage in the options and futures transactions
may be limited by these rules.
PURCHASES AND REDEMPTIONS OF SHARES
Shares of the Portfolios are offered for sale in a continuous
offering directly by the Fund, without the use of any underwriter. They may be
purchased and redeemed at their current net asset values per share, without any
sales or redemption charges or fees, at the times and days, and in the manner
described in the Prospectus. Shares are offered to member hospitals of the
American Hospital Association and their affiliated organizations and to other
eligible organizations and their members which have entered into Program
Services Agreements with Hewitt and to the American Hospital Association (and
its affiliated companies). Other hospital associations affiliated with AHA and
their sponsored and affiliated organizations are also eligible to become
Participants. The Board of Directors of the Fund in its sole discretion may at
some future time permit additional types of organizations and their members
which have entered into Program Service Agreements with Hewitt to purchase
shares, but has no present plans to offer shares of the Fund to organizations
other than those described under "The Fund and its Management - The Investment
Consultant." Shares are not available for purchase by individual investors and
are non-transferable.
B-27
<PAGE>
Payments for shares presented for redemption or repurchase will be
made within seven days following receipt of the required documents as discussed
in the Prospectus. Such payment may be postponed or the right of redemption
suspended at a time when: (a) the NYSE is closed for other than customary
weekends and holidays; (b) trading on that exchange is restricted; (c) an
emergency exists as a result of which disposal by a Portfolio of securities
owned by it is not reasonably practical or it is not reasonably practicable for
the Fund fairly to determine the value of a Portfolio's net assets; or (d) the
SEC, by order, so permits for the protection of shareholders.
The following table shows the calculation of the net asset value per
share (offering price) of each Portfolio as of June 30, 1999:
<TABLE>
<CAPTION>
(a) (b) (c)
OFFERING
PRICE
NET ASSETS SHARES OUTSTANDING (a)-(b)
---------- ------------------ -------
<S> <C> <C> <C>
Full Maturity Fixed $ 73,420,223 7,452,459 $9.85
Income Portfolio
Limited Maturity $104,674,712 10,266,996 $10.20
Fixed Income
Portfolio
Diversified Equity $126,892,152 5,729,370 $22.15
Portfolio
Balanced Portfolio $ 63,300,904 4,309,240 $14.69
</TABLE>
SPECIAL INVESTMENT TECHNIQUES
Each Portfolio may engage in certain transactions in securities
options, futures contracts and options on futures contracts. The specific
transactions in which each Portfolio may engage are noted and described in the
Prospectus. The discussion below provides additional information regarding the
use of options and futures, including options on stock indices and stock index
futures.
REGULATORY MATTERS
The Portfolios will comply with and adhere to all limitations on the
manner and extent to which they effect transactions in futures and options on
such futures currently imposed by the rules and policy guidelines of the
Commodity Futures Trading Commission as conditions for the exclusion of a
registered investment company from the definition of the term "commodity pool
operator". Under those restrictions, the Portfolios will use commodity futures
or commodity options contracts solely for "bona fide hedging" purposes as
defined in Rule 1.3(z)
B-28
<PAGE>
under the Commodity Exchange Act of 1974, as amended; provided, however, that a
Portfolio may use commodity futures or commodity options contracts for other
purposes to the extent that initial margin and premiums required to establish
such positions do not exceed 5% of the liquidation value of the Portfolio, after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. In the case of an option that is "in-the-money"
at the time of purchase, the in-the-money amount may be excluded in computing
such 5%. (In general, a call option on a future is "in-the-money" if the value
of the future exceeds the exercise ("strike") price of the call; a put option on
a future is "in-the-money" if the value of the future which is the subject of
the put is exceeded by the strike price of the put.)
OPTIONS ON SECURITIES
An option on a security provides the purchaser, or "holder," with
the right, but not the obligation, to purchase, in the case of a "call" option,
or sell, in the case of a "put" option, the security or securities underlying
the option, for a fixed exercise price up to a stated expiration date. The
holder pays a non-refundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchaser of the option assumes is
equal to the premium plus related transaction costs, although the entire amount
may be lost. The risk of the seller, or "writer," however, is potentially
unlimited, unless the option is "covered," which is generally accomplished
through the writer's ownership of the underlying security, in the case of a call
option, or the writer's segregation of an amount of cash or securities equal to
the exercise price, in the case of a put option. If the writer's obligation is
not covered, it is subject to the risk of the full change in value of the
underlying security from the time the option is written until exercise. Upon
exercise of the option, the holder is required to pay the purchase price of the
underlying security, in the case of a call option, or to deliver the security in
return for the purchase price, in the case of a put option. Conversely, the
writer is required to deliver the security, in the case of a call option, or to
purchase the security, in the case of a put option. Options on securities which
have been purchased or written may be closed out prior to exercise or expiration
by entering into an offsetting transaction on the exchange on which the initial
position was established, subject to the availability of a liquid secondary
market.
Options on securities and options on indices of securities,
discussed below, are traded on national securities exchanges, such as the
Chicago Board Options Exchange and the New York Stock Exchange, which are
regulated by the Securities and Exchange Commission. The Options Clearing
Corporation guarantees the performance of each party to an exchange-traded
option, by in effect taking the opposite side of each such option. Options on
securities and indices purchased and written by the Portfolios may be traded on
NASDAQ rather than on an exchange. Any options not traded on an exchange must be
effected with primary government securities dealers recognized by the Board of
Governors of the Federal Reserve System.
An option position in an exchange traded option may be closed out
only on an exchange which provides a secondary market for an option of the same
series. Although a Portfolio will generally purchase or write only those options
for which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option at any particular time. In such event it might not be possible
B-29
<PAGE>
to effect closing transactions in a particular option with the result that a
Portfolio would have to exercise the option in order to realize any profit. This
would result in the Portfolio incurring brokerage commissions upon the
disposition of underlying securities acquired through the exercise of a call
option or upon the purchase of underlying securities upon the exercise of a put
option. If a Portfolio as a covered call option writer is unable to effect a
closing purchase transaction in a secondary market, unless the Portfolio is
required to deliver the stock pursuant to the assignment of an exercise notice,
it will not be able to sell the underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume or (vi) one or more exchanges could, for economic
or other reasons decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options) in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on that exchange which had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at a particular time, render certain of the facilities of any
of the clearing corporations inadequate and thereby result in the institution by
an exchange of special procedures which may interfere with the timely execution
of customers' orders. However, the Options Clearing Corporation, based on
forecasts provided by the U.S. exchanges, believes that its facilities are
adequate to handle the volume of reasonably anticipated options transactions,
and such exchanges have advised such clearing corporation that they believe
their facilities will also be adequate to handle reasonably anticipated volume.
Transactions in options on securities also may be effected
over-the-counter through financial institutions dealing in such options as well
as the underlying instruments. OTC options are purchased from or sold (written)
to dealers or financial institutions which have entered into direct agreements
with the Fund. With OTC options, such variables as expiration date, exercise
price and premium will be agreed upon between the Fund and the transacting
dealer, without the intermediation of a third party. If the transacting dealer
fails to make or take delivery of the securities underlying an option it has
written, in accordance with the terms of that option as written, the Portfolio
would lose the premium paid for the option as well as any anticipated benefit of
the transaction.
OPTIONS ON STOCK INDICES
In contrast to an option on a security, an option on a stock index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option, rather than the right to purchase or sell a security.
The amount of this settlement is equal to (i) the amount,
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<PAGE>
if any, by which the fixed exercise price of the option exceeds (in the case of
a call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
The purchaser of the option receives this cash settlement amount if the closing
level of the stock index on the day of exercise is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount if the option is exercised. As in the case of
options on securities, the writer or holder may liquidate positions in stock
index options prior to exercise or expiration by entering into closing
transactions on the exchange on which such positions were established, subject
to the availability of a liquid secondary market.
The index underlying a stock index option may be a "broad-based"
index, such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect movements
in the stock market in general. In contrast, certain options may be based on
narrower market indices, such as the Standard & Poor's 100 Index, or on indices
of securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stock
included in the index and the index fluctuates with changes in the market values
of the stocks so included.
The Diversified Equity Portfolio and the Balanced Portfolio may
purchase and write put and call options on stock indices. Transactions in stock
index options will be effected to increase income, in the case of the Balanced
Portfolio, or by either Portfolio, for purposes of hedging against adverse price
movements in the stock market generally or in particular market segments (i.e.,
decreases in the values of securities owned or increases in the values of
securities to be acquired). A put option on an index may be purchased to hedge
against a decline in a market or industry segment. A call option on an index may
be purchased to attempt to reduce the risk of missing a market or industry
segment advance. In such cases, the possible loss to the Portfolio will be
limited to the premium paid to purchase the option, plus related transaction
costs.
Put and call options on stock indices written by the Portfolios must
be "covered." This means that when a Portfolio writes a call option on an index,
it will segregate in a separate account, either cash or liquid securities having
a vale equal to its obligations under the option, should the option be
exercised, or securities qualified to serve as "cover" under applicable rules of
the national securities exchanges with a value at least equal to the value of
the index times the multiplier. A put option on an index written by a Portfolio
will be covered if the Portfolio maintains cash or liquid securities having a
value equal to the exercise price in a segregated account with its custodian, or
if it has bought and holds a put on the same index (and in the same amount)
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
B-31
<PAGE>
RISKS OF OPTIONS ON STOCK INDICES
The purchase and sale of options on stock indices will be subject to
risks applicable to options transactions generally. In addition, the distinctive
characteristics of options on indices create certain risks that are not present
with stock options. Index prices may be distorted if trading of certain stocks
included in the index is interrupted. Trading in index options also may be
interrupted in certain circumstances such as if trading were halted in a
substantial number of stocks included in the index or if dissemination of the
current level of an underlying index is interrupted. If this occurred, a
Portfolio would not be able to close out options which it had purchased and, if
restrictions on exercise were imposed, may be unable to exercise an option it
holds, which could result in losses if the underlying index moves adversely
before trading resumes. However, it is a policy to purchase options only on
indices which include a sufficient number of stocks so that the likelihood of a
trading halt in the index is minimized.
The purchaser of an index option may also be subject to a timing
risk. If an option is exercised by a Portfolio before final determination of the
closing index value for that day, the risk exists that the level of the
underlying index may subsequently change. If such a change caused the exercised
option to fall out-of-the-money (that is, the exercising of the option would
result in a loss, not a gain), the Portfolio would be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer. Although the Portfolio
may be able to minimize this risk by withholding exercise instructions until
just before the daily cutoff time, it may not be possible to eliminate this risk
entirely because the exercise cutoff times for index options may be earlier than
those fixed for other types of options and may occur before definitive closing
index values are announced. Alternatively, when the index level is close to the
exercise price, a Portfolio may sell rather than exercise the option. Although
the markets for certain index option contracts have developed rapidly, the
markets for other index options are not as liquid. The ability to establish and
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop in all index option contracts. A Portfolio will not purchase or
sell any index option contract unless and until in the opinion of the investment
manager the market for such options has developed sufficiently that such risk in
connection with such transactions is no greater than such risk in connection
with options on stocks.
FUTURES CONTRACTS
A futures contract is a bilateral agreement providing for the
purchase and sale of a specified type and amount of a financial instrument, or
for the making and acceptance of a cash settlement, at a stated time in the
future, for a fixed price. By its terms, a futures contract provides for a
specified settlement date on which, in the case of the majority of interest rate
futures contracts, the fixed income securities underlying the contract are
delivered by the seller and paid for by the purchaser, or on which, in the case
of stock index futures contracts and certain interest rate futures contracts,
the difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
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<PAGE>
Futures contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. In addition, futures contracts call for settlement only on the
expiration date, and cannot be "exercised" at any other time during their term.
A futures contract may be purchased or sold only on an exchange,
known as a "contract market," designated by the Commodity Futures Trading
Commission ("CFTC") for the trading of such contract, and only through a
registered futures commission merchant which is a member of such contract
market. A commission is paid on each completed purchase and sale transaction.
The contract market clearinghouse guarantees the performance of each party to a
futures contract by in effect taking the opposite side of such contract.
The Diversified Equity Portfolio and the Balanced Portfolio, may for
hedging purposes, and other non-speculative purposes consistent with applicable
rules of the CFTC, purchase and sell stock index futures contracts. The Limited
Maturity Fixed Income Portfolio, the Full Maturity Fixed Income Portfolio, and
the Balanced Portfolio may purchase and sell interest rate futures contracts for
similar purposes. Purchase and sales of stock index futures are used to protect
a Portfolio's current or intended equity investments from broad fluctuations in
the prices of equity securities. Interest rate futures are purchased and sold to
attempt to hedge against the effects of interest rate changes on a Portfolio's
current or intended investments in fixed income securities. In the event that an
anticipated decrease in the value of a Portfolio's securities occurs, as a
result of a general decline in the stock market or a general increase in
interest rates, these adverse effects may be offset, in whole or part, by gains
on the sale of a futures contract by the Portfolio. Similarly, increases in
costs of securities proposed to be acquired by a Portfolio, as a result of a
general increase in the stock market or a general decline in interest rates, may
be offset, in whole or part, by gains on futures contracts purchased by the
Portfolio.
Interest rate futures contracts currently are traded on a variety of
fixed income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Stock index futures contracts currently can be purchased
or sold with respect to several different stock indices, each based on a
different measure of market performance. The index assigns weighted values to
the securities included in the index and its composition is changed
periodically. A determination as to which of the index contracts would be
appropriate for purchase or sale by a Portfolio will be based upon, among other
things, the liquidity offered by such contracts and the volatility of the
underlying index.
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by a Portfolio upon the purchase or sale of a futures contract.
Instead, the Portfolio will be required to deposit with its broker an amount of
cash or qualifying securities, which varies in amount, but may be as low as 5%
or less of the value of the contract. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. If the market price of the underlying index or instrument moves
causing a "paper" loss to the buyer or seller of the futures contract, that loss
is deemed to erode the deposit. If the
B-33
<PAGE>
deposit is "eroded" below a level specified by the futures exchange on which the
futures contract is traded, the purchaser or seller will be required to make a
"maintenance margin" payment to its broker to bring its deposit back up to a
specified level. Similar payments, known as "variation margin" payments, are
made on a daily basis between the broker and the clearinghouse. The process of
valuing futures contracts on a daily basis as the value of the index or
instrument underlying the futures contract fluctuates is known as "marking to
the market." In all instances involving the purchase of stock index futures
contracts by a Portfolio, an amount of cash together with such other securities
as permitted by applicable regulatory authorities to be utilized for such
purpose, at least equal to the market value of the futures contracts, will be
deposited in a segregated account with the Fund's custodian to collateralize the
position. At any time prior to the expiration of a futures contract, the
Portfolio may elect to close its position by taking an opposite position which
will operate to terminate its position in the futures contract.
Where futures are purchased to hedge against a possible increase in
the price of a security before a Portfolio is able to fashion its program to
invest in the security or in options on the security, it is possible that the
market may decline instead. If the Portfolio, as a result, concluded not to make
the planned investment at that time because of concern as to the possible
further market decline or for other reasons, the Portfolio would realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In addition to the possibility that there may be an imperfect
correlation or no correlation at all between movements in the stock index future
and the portion of the portfolio being hedged, the price of stock index futures
may not correlate perfectly with movements in the stock index due to certain
market distortions. As noted above, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the index itself and the value of a future. Moreover, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market and may therefore cause increased participation by
speculators in the futures market. Such increased participation may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and because of the imperfect correlation between movements in
stock indices and movements in the prices of stock index futures, the value of
stock index futures contracts as a hedging device may be reduced. In addition,
if a Portfolio has insufficient available cash, it may at times have to sell
securities to meet maintenance margin requirements. Such sales may have to be
effected at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract provides the holder with the right
to enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract in
the case of a put option, at a fixed exercise price to a stated expiration date.
Upon exercise of the option by the holder, the contract market clearinghouse
establishes a corresponding short position for the writer of the option, in the
case of a call option, or a corresponding long position, in the case of a put
option. In the event that an
B-34
<PAGE>
option is exercised, the parties will be subject to all the risks associated
with the trading of futures contracts, such as payment of maintenance margin
deposits. In addition, the writer of an option on a futures contract, unlike the
holder, is subject to initial and maintenance margin requirements on the option
position.
A position in an option on a futures contract may be terminated by
the purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearinghouse assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The Portfolios may purchase and write call and put options on the
futures contracts in which they may effect transactions and may enter into
closing transactions with respect to such options to terminate existing
position. The Portfolios will not engage in transactions in options on futures
for speculation, but only as a hedge against changes in the value of securities
held by them or which they intend to purchase and where the transactions are
economically appropriate to the reduction of risks inherent in the ongoing
management of the Portfolios.
Generally, a Portfolio may hedge its investments against a period of
market decline by purchasing puts on futures contracts. A Portfolio may purchase
call options on futures contracts as a means of protecting against an increase
in the prices of securities which the Portfolio intends to purchase. The
Portfolios may write options on futures contracts for similar purposes.
Purchases of options on futures may present less risk than the purchase and sale
of the underlying futures contracts because the potential loss to a Portfolio is
limited to the premium paid, plus related transaction costs. The writing of
options on futures, however, does not present less risk than the purchase and
sale of the underlying futures contracts and only constitutes a partial hedge up
to the amount of premium income received. If an option on a futures contract
written by a Portfolio is exercised, the Portfolio may suffer a loss.
PERFORMANCE INFORMATION
As discussed in the Prospectus, from time to time the Fund may
disseminate quotations of yield, total return and distribution rates. The
Portfolios may provide quotations of total return. In addition, the Limited
Maturity Fixed Income Portfolio and the Full Maturity Fixed Income Portfolio may
also quote yield. Because the investment managers of the Portfolios may be
appointed or terminated from time to time, as determined by Hewitt (subject to
the
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<PAGE>
approval of the Board of Directors of the Fund), it should be recognized that
performance quotations may reflect investment results attributable in part to
the performance of investment managers which no longer serve as such. Similarly,
such quotations may not reflect, or may only reflect in part, investment results
attributable to new investment managers which may be appointed from time to
time.
From time to time, the performance of a Portfolio or of individual
accounts or mutual funds managed by an investment manager may be compared to the
performance of other mutual funds following similar objectives, to a database
including the performance of individually managed portfolios maintained by
Hewitt or to recognized market indices. A Portfolio's return may also be
compared to the cost of living (measured by the Consumer Price Index) or the
return of various categories of investments (as measured by Ibbotson Associates
or others) over the same period. In addition to performance rankings, each
Portfolio may compare its total expense ratio to the average total expense ratio
of similar funds tracked by Lipper.
In advertising materials, the Fund may quote or reprint financial or
business publications and periodicals, including model portfolios or
allocations, as they relate to current economic and political conditions, fund
management, portfolio composition, investment philosophy, investment techniques,
the desirability of owning a particular mutual fund, and Hewitt's services and
products. Hewitt may provide information designed to clarify investment goals
and explore various financial strategies. Such information may include
information about current economic, market, and political conditions; materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting. Materials may also include
discussions of other products and services offered by Hewitt.
The Fund may quote various measures of the volatility and benchmark
correlation of the Portfolios in advertising. In addition, the Fund may compare
these measures to those of other funds. Measures of volatility seek to compare a
Portfolio's historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a comparative
benchmark may be. All measures of volatility and correlation are calculated
using averages of historical data. In advertising, the Fund may also discuss or
illustrate examples of interest rate sensitivity.
TOTAL RETURN. The Portfolios' quotations of total return will
reflect the average annual compounded rate of return on an assumed investment of
$1,000 that equates the initial amount invested to the ending redeemable value
according to the following formula:
P (1 + T)n = ERV
"P" represents a hypothetical initial investment of $1,000; "T"
represents average annual total return; "n" represents the number of years; and
"ERV" represents the ending redeemable value of the initial investment.
Dividends and other distributions are assumed to be reinvested in shares at the
prices in effect on the reinvestment dates. ERV will be adjusted to reflect the
effect of fees paid by Participants to Hewitt for its standard level of service
for the average size shareholder account and reflect the effect of Hewitt's
agreement to absorb certain expenses. Quotations of total return will be for a
one year and five year periods ended on the
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<PAGE>
date of the most recent balance sheet included in the Fund's registration
statement and also for the 10 year period so ended at such time as the
registration statement has been in effect for such period. Until such time as
the registration has been effective for the ten year period, the Portfolios'
quotations of total return will also include a quotation of total return for the
time period during which the registration statement has been in effect or
commencement of operations, whichever is later. The Portfolios may also provide
quotations of total return for other periods and quotations of cumulative total
returns, which reflect the actual performance of the Portfolios over the entire
period for which the quotation is given.
The average annualized total returns for the Portfolios of the Fund
for the period July 1, 1998 through June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Total Return Days in Period
------------ --------------
<S> <C> <C>
Full Maturity Fixed Income 2.11% (365 days in period)
Portfolio
Limited Maturity Fixed 4.59% (365 days in period)
Income Portfolio
Diversified Equity Portfolio 18.90% (365 days in period)
Balanced Portfolio 13.10% (365 days in period)
</TABLE>
YIELD. Quotations of yield by the Limited Maturity Fixed Income
Portfolio and the Full Maturity Fixed Income Portfolio are computed by dividing
net investment income per share earned during the period of the quotation by net
asset value per share on the last day of the period, according to the following
formula:
YIELD = 2 [(a-b + 1)6 - 1]
---
cd
"a" represents dividends and interest earned during the period; "b"
represents expenses accrued for the period (net of any reimbursements); "c"
represents the average daily number of shares outstanding during the period that
were entitled to receive dividends; and "d" represents net asset value per share
on the last day of the period. Expenses will be adjusted to reflect the effect
of fees paid by Participants to Hewitt, as described above with respect to yield
quotations. Yields will be quoted for one month periods, but may also be quoted
for other periods. In calculating yield, interest earned on debt securities held
is based on a computation of yield to maturity, which is then divided by 360 and
multiplied by market value to determine the daily amount of interest earned.
Dividends accrued on equity securities during the applicable period are also
included, by accruing 1/360 of the stated dividend rate each day.
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<PAGE>
The annualized yields of the Portfolios for the one month period
ended June 30, 1999 were:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
Full Maturity Fixed 6.30%
Income Portfolio
Limited Maturity Fixed 5.58%
Income Portfolio
</TABLE>
NET ASSET VALUE. Charts and graphs using the Fund's net asset
values, adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by the Fund and
reflects all elements of its return.
ADDITIONAL INFORMATION
CAPITALIZATION AND VOTING
Interests in the Fund are represented by shares of common stock,
$.01 par value, with interests in each of the four Portfolios represented by a
separate series of such stock. The Fund's presently authorized capital is
200,000,000 shares. Under the Fund's Articles of Incorporation, the Board of
Directors may increase the Fund's authorized shares, establish additional series
representing new Portfolios and classes within series and redesignate unissued
shares among the series. Additional classes within any series would be used to
distinguish among the rights of different categories of shareholders, as might
be required by future regulations or other unforeseen circumstances.
Each share of each series represents an equal proportionate interest
with each other share of such series in the Portfolio represented by such
shares, without any priority or preference over other shares of the same series.
All consideration received for the sales of shares of a particular series, all
assets in which such consideration is invested, and all income, earnings and
profits derived therefrom is allocated and belongs to that series. As such, the
interest of shareholders in a particular Portfolio is separate and distinct from
the interest of shareholders of the other Portfolios, and shares of a Portfolio
are entitled to dividends and distributions only out of the net income and
gains, if any, of that Portfolio as declared by the Board of Directors.
The assets of each Portfolio are segregated on the Fund's books and
are charged with the expenses and liabilities of that Portfolio and with a share
of the general expenses and liabilities of the Fund not attributable to any one
Portfolio. The Board of Directors determines those expenses and liabilities
deemed to be general, and these items are allocated among the Portfolios in
proportion to the relative total net assets of each or as deemed equitable by
the Board of Directors in its sole discretion.
VOTING RIGHTS. Each shareholder is entitled to a full vote for each
full share held (and fractional votes for fractional shares). After they have
been appointed or elected, the directors serve for terms of indefinite duration
and may appoint their own successors, provided
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that always at least a majority of the directors have been elected by
shareholders. Voting rights are not cumulative, so that the holders of more than
50% of the shares voting can, if they choose, elect all directors being elected,
while the holders of the remaining shares would be unable to elect any
directors. Under Maryland law, the Fund is not required and therefore does not
intend to hold annual meetings of shareholders. The directors may call annual or
special meetings of shareholders as may be required by the Act, Maryland law, or
the Articles of Incorporation, or as they otherwise deem necessary or
appropriate. In addition, the By-Laws of the Fund contain procedures under which
a director may be removed by the written declaration or vote of the holders of
two-thirds of the Fund's outstanding shares. A meeting of shareholders for such
purpose is required to be called upon the request of the holders of 10% of the
Fund's outstanding shares.
CONTROL PERSONS AND HOLDERS OF SECURITIES
As of July 31, 1999, AHA may be deemed to control the Fund through
its beneficial ownership, directly and through AHA affiliated companies and
trusts, of 37% of the total outstanding shares of the Fund. Such AHA affiliated
companies are separately operated and administered by separate boards, a
majority of the members of which are persons who are not directors, officers or
employees of AHA. AHA is a not-for-profit corporation organized under the laws
of the State of Illinois and is located at One North Franklin, Chicago, Illinois
60606. AHA may also be deemed to control the Full Maturity Fixed Income
Portfolio, the Limited Maturity Fixed Income Portfolio, Balanced Portfolio and
the Diversified Equity Portfolio through direct and indirect beneficial
ownership of shares of those Portfolios, as follows:
25% direct and indirect beneficial ownership of the Limited Maturity
Fixed Income Portfolio
51% direct and indirect beneficial ownership of the Full Maturity Fixed
Income Portfolio
41% direct and indirect beneficial ownership of the Balanced Portfolio
37% direct and indirect beneficial ownership of the Diversified Equity
Portfolio
By exercising voting rights with respect to shares of the Fund (or a Portfolio),
AHA and its affiliated entities may be able to determine the outcome of
shareholder voting on matters as to which the approval of shareholders of the
Fund (or that Portfolio) is required, depending upon the number of shares voting
on such matters.
As of July 31, 1999, AHA; American Hospital Association Retirement
Trust, One North Franklin, Chicago, Illinois 60606; Baptist Health Care
Corporation, 1000 West Monreo Street, Pennsacola, Florida 32522; Lee Hospital,
320 Main Street, Johnstown, Pennsylvania 15901 and Vail Valley Medical Center,
181 W. Meadow Drive, Vail, Colorado 81657; owned of record and beneficially
owned directly, 33%, 18%, 9, 8% and 8%, respectively, of the outstanding shares
of the Full Maturity Fixed Income Portfolio. By aggregating its direct ownership
of shares with shares owned by affiliated entities, AHA, as of such date, may be
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<PAGE>
deemed to beneficially own, directly and indirectly, 51% of the outstanding
shares of the Full Maturity Fixed Income Portfolio.
As of July 31, 1999, AHA; Hospital Research & Educational Trust, One
North Franklin, Chicago, Illinois 60606; Lewistown Hospital, 400 Highland
Avenue, Lewistown, Pennsylvania 17044; Sherman Hospital, 934 Center Street,
Elgin, Illinois 60120; and Vail Valley; owned of record and beneficially owned
directly 19%, 6%, 11%, 15% and 6%, respectively, of the outstanding shares of
the Limited Maturity Fixed Income Portfolio. By aggregating its direct ownership
of shares with shares owned by affiliated entities, AHA, as of such date, may be
deemed to beneficially own, directly and indirectly, 25% of the outstanding
shares of the Limited Maturity Fixed Income Portfolio.
As of July 31, 1999, AHA; American Hospital Association Retirement
Trust; Baptist Health Care Corporation; Flathead Healthcare, 325 Claremont
Street, Kalispell, Montana 59901; Lee Hospital; The Lutheran Health Foundation,
3024 Fairfield Avenue, Fort Wayne, Indiana 46807 owned of record and
beneficially owned directly 27%, 14%, 18%, 6%, 9% and 18%, respectively, of the
outstanding shares of the Balanced Portfolio. By aggregating its direct
ownership of shares with shares owned by affiliated entities, AHA, as of such
date, may be deemed to beneficially own, directly and indirectly, 41% of the
outstanding shares of the Balanced Portfolio.
As of July 31, 1999, AHA; American Hospital Association Retirement
Trust; Baptist Health Care Corporation; Laughlin Memorial Hospital, 1420
Tuscumlum Blvd., Greeneville, Tennessee 37745, Lee Hospital, Lewistown Hospital
owned of record and beneficially owned directly 25%, 12%, 10%, 13%, 8%, and 5%,
respectively, of the outstanding shares of the Diversified Equity Portfolio. By
aggregating its direct ownership of shares with shares owned by affiliated
entities, AHA, as of such date, may be deemed to beneficially own, directly and
indirectly, 37% of the outstanding shares of the Diversified Equity Portfolio.
DIRECTOR AND OFFICER LIABILITY
Under the Fund's Articles of Incorporation and the Maryland General
Corporation Law, the directors, officers, employees and agents of the Fund are
entitled to indemnification under certain circumstances against liabilities,
claims and expenses arising from any threatened, pending or completed action,
suit or proceeding to which they are made parties by reason of the fact that
they are or were such directors, officers, employees or agents of the Fund,
subject to the limitations of the Act which prohibit indemnification which would
protect such persons against liabilities to the Fund or its shareholders to
which they would otherwise be subject by reason of their own bad faith, willful
misfeasance, gross negligence or reckless disregard of duties.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois, are
the independent public accountants of the Fund. The independent accountants are
responsible for auditing the financial statements of the Fund. The selection of
the independent accountants is approved annually by the Fund's Board of
Directors.
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CUSTODIAN AND TRANSFER AGENT
Firstar Bank Milwaukee, N.A. (the "Custodian"), 615 East Michigan
Avenue, Milwaukee, Wisconsin, serves as custodian for the securities and cash
assets of the Fund. Cash held by the Custodian, which may at times be
substantial, is insured by the Federal Deposit Insurance Corporation up to the
amount of insurance coverage limits (presently, $100,000). Firstar Mutual Fund
Services, LLC serves as transfer agent of the Fund's shares and dividend
disbursing agent and provides additional services as the Fund's shareholder
servicing agent. For the fiscal year ending June 30, 1999, Firstar was paid
$151,938 for providing Custodian and Transfer Agent Services to the Fund.
ACCOUNTING SERVICES
Firstar Mutual Fund Services, LLC provides accounting services to
the Fund pursuant to an Accounting Servicing Agreement dated as of September 1,
1994. Under the Agreement, it provides the Portfolios with necessary accounting
services incident to their operations and securities transactions, determines
the net asset values per share of the Portfolios in accordance with policies
adopted by the Fund's Board of Directors, maintains the Fund's books of account
and such required records as may be related to these services. In consideration
of these services, the Fund pays Firstar Mutual Fund Services, LLC a monthly fee
of $7,833.33 plus a fee computed at the annual rate of 0.02% of the average net
assets of the Fund during the month, plus certain expenses.
REPORTS TO SHAREHOLDERS
Shareholders of each Portfolio will be kept fully informed through
annual and semi-annual reports showing diversification of investments,
securities owned and other information regarding the Portfolio's activities. The
financial statements of each Portfolio must be audited at least once a year by
the Fund's independent accountants.
LEGAL COUNSEL
Schulte Roth & Zabel LLP, New York, New York serves as counsel to
the Fund.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all of the information set forth in the Registration Statement the Fund
has filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
FINANCIAL STATEMENTS
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The following audited financial statements of the Fund and the notes
thereto and the report of Arthur Andersen LLP with respect to such financial
statements, are incorporated herein by reference to the Fund's Annual Report to
shareholders for the fiscal year ended June 30, 1999:
Schedule of Investments as of June 30, 1999;
Statement of Assets and Liabilities as of June 30, 1999;
Statement of Operations for the fiscal year ended June 30, 1999;
Statement of Changes in Net Assets for the fiscal year ended June 30,
1999; and
Financial Highlights.
The financial statements of the Fund incorporated by reference in
this Statement of Additional Information have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto. The financial statements are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
and giving said report.
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APPENDIX - CORPORATE SECURITIES RATINGS
Description of ratings used by Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc. ("S&P"), and Moody's Investors
Service, Inc. ("Moody's"):
S&P
LONG-TERM ISSUE CREDIT RATINGS
AAA
An obligation rated "AAA" has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA
An obligation rated "AA" differs from the highest rated obligations
only in a small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A
An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor meet its financial commitment on
the obligation.
_______________
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
_______________
BB
An obligation rated "BB" is less vulnerable to non-payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
APP-1
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B
An obligation rated "B" is more vulnerable to non-payment then
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC
An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
MOODY'S
CORPORATE BOND RATINGS
Aaa
Bonds which are rated as "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and generally are referred to
as "gilt edge." Interest payments are protected by a large or by an
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 generally are 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 or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "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 sometime in the
future.
Baa
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear
APP-2
<PAGE>
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.
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.
APP-3
