<PAGE>
P R O S P E C T U S
DATED NOVEMBER 1, 2000
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
Page
----
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
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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 Manager 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
Managers) 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>
----------------------------------
* As a percentage of total assets.
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<PAGE>
MAIN RISKS
An investment in the Fund, like any investment, is subject to certain
risks. The value of a Portfolio's investment 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.
<TABLE>
<CAPTION>
LIMITED MATURITY FIXED INCOME PORTFOLIO
RISK DESCRIPTION
<S> <C>
Interest Rate and Credit Risk The value of fixed income securities generally 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 Futures Transactions involving futures and options on 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.
<CAPTION>
FULL MATURITY FIXED INCOME PORTFOLIO
RISK DESCRIPTION
<S> <C>
Use of multiple Investment The investment styles employed by a Portfolio's Investment
Managers 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 Risk The value of fixed income securities generally 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 rated Although debt securities rated below "high quality"
below high 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
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<PAGE>
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 Futures Transactions involving futures and options on 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.
<CAPTION>
DIVERSIFIED EQUITY PORTFOLIO
RISK DESCRIPTION
<S> <C>
Use of multiple Investment The investment styles employed by a Portfolio's Investment
Managers 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 Futures Transactions involving futures and options on 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.
<CAPTION>
BALANCED PORTFOLIO
RISK DESCRIPTION
<S> <C>
Use of multiple Investment The investment styles employed by a Portfolio's Investment
Managers 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
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<PAGE>
issuer and general market and economic conditions.
Interest Rate and Credit Risk The value of fixed income securities generally 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 rated Although debt securities rated below "high quality"
below high 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 Futures Transactions involving futures and options on 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.
</TABLE>
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.
<TABLE>
<CAPTION>
YEAR-TO-YEAR TOTAL RETURN
AS OF 12/31 EACH YEAR
LIMITED MATURITY FIXED INCOME PORTFOLIO(2)
<S> <C> <C>
1990 8.18%
1991 12.83%
1992 3.58%
1993 4.97%
1994 0.33%
1995 10.54%
1996 4.09%
1997 5.92%
1998 6.32%
1999 2.74%
<CAPTION>
FULL MATURITY FIXED INCOME PORTFOLIO(3)
<S> <C> <C>
1990 7.08%
1991 15.92%
1992 5.72%
1993 10.99%
1994 -3.74%
1995 17.19%
1996 2.24%
1997 9.33%
1998 7.98%
1999 1.48%
</TABLE>
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(2) As of June 30, 2000, the total year-to-date return was 2.66%. Commencement
date for the Portfolio was December 22, 1988.
(3) As of June 30, 2000, the total year-to-date return was 3.96%. Commencement
date for the Portfolio was October 20, 1988.
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<PAGE>
<TABLE>
<CAPTION>
BALANCED PORTFOLIO(4)
<S> <C>
1990 -5.07%
1991 27.97%
1992 5.06%
1993 10.76%
1994 -1.94%
1995 25.04%
1996 17.97%
1997 24.44%
1998 8.82%
1999 15.42%
<CAPTION>
DIVERSIFIED EQUITY PORTFOLIO(5)
<S> <C>
1990 -7.68%
1991 34.68%
1992 9.51%
1993 10.06%
1994 -0.37%
1995 33.75%
1996 23.37%
1997 33.64%
1998 16.66%
1999 20.97%
</TABLE>
During the periods shown in the bar chart, the highest and lowest quarterly
returns of the Portfolios were as follows:
BEST AND WORST QUARTER RESULTS
<TABLE>
<CAPTION>
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 June 30, 2000, the total year-to-date return was 1.31%. Commencement
date for the Portfolio was October 20, 1988.
(5) As of June 30, 2000, the total year-to-date return was 2.08%. Commencement
date for the Portfolio was October 20, 1988.
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<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
AS OF 12/31 EACH YEAR
---------------------
PORTFOLIO COMPARATIVE INDEX 1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Limited Maturity 2.74% 5.89% 5.89%
Fixed Income
Lehman Brothers 2.96% 6.47% 6.55%
Government 1-3 Year
Bond Index
Full Maturity Fixed 1.48% 6.86% 6.93%
Income
Lehman Brothers 0.83% 7.73% 7.69%
Aggregate Bond Index
Diversified Equity 20.97% 25.49% 16.61%
S&P 500 Stock Index 21.03% 28.53% 18.19%
Balanced S&P 500 Stock Index (6) 15.42% 18.18% 12.32%
21.03% 28.53% 18.19%
Lehman Brothers 0.83% 7.73% 7.69%
Aggregate Bond Index
</TABLE>
---------------------
(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, 2000, 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> <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 0.02% 0.02% 0.02% 0.05%
2. Audit, legal, administration and miscellaneous 0.14% 0.12% 0.09% 0.19%
3. Fee to Hewitt Associates LLC(7) 0.50% 0.50% 0.75% 0.75%
----- ----- ----- -----
Total Other Expenses 0.67% 0.64% 0.86% 0.99%
----- ----- ----- -----
Total Annual Portfolio Operating Expenses 0.67% 0.64% 0.86% 0.99%
===== ===== ===== =====
</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>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
Full Maturity Fixed Income $ 68 $214 $373 $ 835
Limited Maturity Fixed Income $ 65 $205 $357 $ 798
Diversified Equity $ 88 $274 $477 $1,061
Balanced Portfolio $101 $315 $547 $1,213
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 Portfolios' 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
- 13 -
<PAGE>
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.
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
- 14 -
<PAGE>
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 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.
- 15 -
<PAGE>
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 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.
- 16 -
<PAGE>
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:
- 17 -
<PAGE>
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
- 19 -
<PAGE>
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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<PAGE>
It is expected that dividends from net investment income will be declared
and paid on the following schedule:
DECLARED PAYABLE PORTFOLIOS
-------- ------- ----------
Daily Last Day of each month. Limited Maturity Fixed Income
Portflio
Full Maturity Fixed Income
Portflio
Quarterly Mid: March, June, September, Diversified Equity Portfolio
and December Balanced Portfolio
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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<PAGE>
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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<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
-------- -------- -------- -------- --------
1996 1997 1998 1999 2000
---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year .................... $9.88 $9.63 $9.79 $10.18 $9.85
Income From Investment Operations:
Net investment income ............................... 0.65 0.65 0.64 0.60 0.64
Net realized and unrealized gain (loss) on
investments and futures ........................... (0.25) 0.16 0.39 (0.33) (0.17)
Total Income from Investment Operations ........... 0.40 0.81 1.02 0.27 0.47
Less Distributions:
Net investment income ............................... (0.65) (0.65) (0.64) (0.60) (0.64)
Net realized capital gain (loss) .................... 0 0 0 0 0
Total Distributions ............................... (0.65) (0.65) (0.64) (0.60) (0.64)
Net Asset Value, End of Year .......................... $9.63 $9.79 $10.18 $9.85 $9.68
Total Return on Net Asset Value(A) .................... 3.58% 8.09% 10.20% 2.11% 4.41%
Ratios/Supplemental Data:
Net Assets, End of Year (in thousands) ..............$53,292 $50,796 $71,829 $73,420 $78,188
Ratio of Expenses to Average Net Assets(B) .......... 0.21% 0.21% 0.17% 0.16% 0.17%
Ratio of Net Investment Income to
Average Net Assets(B) ............................. 6.52% 6.63% 6.19% 5.90% 6.55%
Portfolio Turnover Rate ............................... 283.13% 304.93% 178.52% 273.61% 211.40%
</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,
-------- -------- -------- -------- --------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...................... $10.22 $10.12 $10.16 $10.22 $10.20
Income From Investment Operations
Net investment income ................................. 0.62 0.61 0.60 0.53 0.58
Net realized and unrealized gain (loss) on
investments and futures ............................. (0.10) 0.04 0.06 (0.02) (0.09)
Total Income from Investment Operations ............. 0.52 0.65 0.66 0.51 0.49
Less Distributions:
Net investment income ................................. (0.62) (0.61) (0.60) (0.53) (0.58)
Net realized capital gain (loss) ...................... 0 0 0 0 0
Total Distributions ................................. (0.62) (0.61) (0.60) (0.53) (0.58)
Net Asset Value, End of Year ............................ $10.12 $10.16 $10.22 $10.20 $10.11
Total Return on Net Asset Value(A) ...................... 4.66% 6.03% 6.11% 4.59% 4.37%
Ratios/Supplemental Data:
Net Assets, End of Year (in thousands) ................ $201,196 $141,023 $129,717 $104,675 $85,813
Ratio of Expenses to Average Net Assets(B) ............ 0.10% 0.12% 0.12% 0.12% 0.14%
Ratio of Net Investment Income to Average Net
Assets(B) ........................................... 6.03% 6.04% 5.92% 5.30% 5.70%
Portfolio Turnover Rate ............................... 132.75% 121.70% 144.97% 176.78% 161.89%
</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,
-------- -------- -------- -------- --------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...................... $14.76 $17.59 $20.72 $20.37 $22.15
Income From Investment Operations:
Net investment income ................................. 0.35 0.34 0.32 0.29 0.24
Net realized and unrealized gain on investments and
futures ............................................. 3.57 5.18 4.14 3.42 1.05
Total Income from Investment Operations ............. 3.92 5.52 4.46 3.71 1.29
Less Distributions:
Net investment income ................................. (0.35) (0.34) (0.32) (0.29) (0.24)
Net realized capital gain (loss) ...................... (0.74) (2.05) (4.49) (1.64) (2.16)
Total Distributions ................................. (1.09) (2.39) (4.81) (1.93) (2.40)
Net Asset Value, End of Year ............................ $17.59 $20.72 $20.37 $22.15 $21.04
Total Return on Net Asset Value(A) ...................... 26.42% 32.97% 24.05% 18.90% 5.28%
Ratios/Supplemental Data:
Net Assets, End of Year (in thousands) ................ $54,435 $70,590 $85,736 $126,892 $131,786
Ratio of Expenses to Average Net Assets(B) ............ 0.18% 0.17% 0.14% 0.10% 0.11%
Ratio of Net Investment Income to Average Net
Assets(B) ........................................... 2.09% 1.83% 1.51% 1.43% 1.11%
Portfolio Turnover Rate ............................... 57.76% 67.31% 65.82% 74.35% 66.84%
</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,
-------- -------- -------- -------- --------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...................... $12.63 $13.38 $14.86 $14.61 $14.69
Income From Investment Operations:
Net investment income ................................. 0.41 0.37 0.41 0.36 0.37
Net realized and unrealized gain on investments and
futures ............................................. 1.98 2.65 2.01 1.45 0.26
Total Income from Investment Operations ............... 2.39 3.02 2.42 1.81 0.63
Less Distributions:
Net investment income ................................. (0.41) (0.39) (0.44) (0.36) (0.37)
Net realized capital gain (loss) ...................... (1.23) (1.15) (2.23) (1.37) (2.51)
Total Distributions ................................. (1.64) (1.54) (2.67) (1.73) (2.88)
Net Asset Value, End of Year ............................ $13.38 $14.86 $14.61 $14.69 $12.44
Total Return on Net Asset Value(A) ...................... 19.20% 23.23% 16.79% 13.10% 3.99%
Ratios/Supplemental Data:
Net Assets, End of Year (in thousands) ................ $43,130 $52,137 $59,360 $63,301 $48,936
Ratio of Expenses to Average Net Assets(B) ............ 0.23% 0.23% 0.18% 0.18% 0.24%
Ratio of Net Investment Income to Average Net
Assets(B) ........................................... 3.08% 2.81% 2.86% 2.55% 2.58%
Portfolio Turnover Rate ............................... 146.69% 173.60% 169.04% 206.43% 169.10%
</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, 2000 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:
<TABLE>
<CAPTION>
<S> <C>
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
Baird Advisors (2000) Western Asset Management Company (1995)
Western Asset Management Cambiar Investors, Inc. (1993)
Company (1995) Investment Research Company (1999)
</TABLE>
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., 2401 East Second Avenue, Suite 400, Denver
Colorado 80206, is a wholly owned subsidiary of United Asset Management
Corporation, a publicly held company. Cambiar was organized in 1973 and has
approximately $2.2 billion of assets under management.
<TABLE>
<CAPTION>
<S> <C>
Michael S. Barish Brian M. Barish
Chairman President
Cambiar Investors, Inc. (1973-present) Cambiar Investors, Inc. (1997-present)
AHA Investment Funds, Inc. Lazard Freres & Co. LLC (1993-1997)
Portfolio Manager (1988-present) AHA Investment Funds, Inc.
Portfolio Manager (1997-present)
Michael J. Gardner Maria L Azari
Vice President Vice President
Cambiar Investors, Inc. (1995-present) Cambiar Investor, Inc. (1997-present)
Simmons & Company (1991-1995) Eaton Vance (1991-1996)
AHA Investment Funds, Inc. AHA Investment Funds, Inc.
Portfolio Manager (1999-present) Portfolio Manager (1998- present)
Anita A. Aldrich
Vice President
Cambiar Investor, Inc. (1999-present)
Bankers Trust Company (1992-1999)
AHA Investment Funds, Inc.
Portfolio Manager (1999- present)
BAIRD ADVISORS, 777 East Wisconsin Avenue, Suite 2100, Milwaukee,
Wisconsin 53202 is an institutional fixed income department within Robert W.
Baird & Company, Inc. and has approximately $6.6 billion in assets under
management.
<CAPTION>
<S> <C>
Gary A. Elfe Daniel A. Tranchita, CFA
Managing Director Senior Vice President
Baird Advisors (2000-present) Baird Advisors (2000-present)
Firstar Investment Research & Firstar Investment Research &
Management Company, LLC Management Company, LLC
(1978-2000) (1989-2000)
AHA Investment Funds, Inc. AHA Investment Funds, Inc.
Senior Portfolio Manager (1996-present) Senior Portfolio Manager (1999-present)
</TABLE>
- 28 -
<PAGE>
INVESTMENT RESEARCH COMPANY, 16236 San Dieguito Road Suite 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 $1.2 billion of assets under management.
<TABLE>
<CAPTION>
<S> <C>
John D. Freeman Jeffrey Norman
President Senior Vice President
Investment Research Company (1996-present) Investment Research Company (1999-present)
AHA Investment Funds, Inc. AHA Investment Funds, Inc.
Portfolio Manager (1996-present) Portfolio Manager (1999-present)
Martingale Asset Management
Portfolio Manager (1992-1996)
Ming Wang
Sr. Research Consultant
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 and
controlled 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 $1.5 billion under management.
<CAPTION>
<S> <C>
Jean M. Clark Joseph B. Patterson
Sr. Vice President/Portfolio Manager Chief Investment Strategist
The Patterson Capital Corporation (1983-1988) The Patterson Capital Corporation (1977-present)
(1991-present) AHA Investment Funds, Inc.
AHA Investment Funds, Inc. Portfolio Manager (1988-present)
Portfolio Manager (1991-present)
</TABLE>
WESTERN ASSET MANAGEMENT COMPANY, 117 East Colorado Boulevard, Pasadena,
California 91105, is an independent affiliate 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 $65.3
billion for its institutional clients, plus $11.0 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, 2000
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, 2000, 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..............................................25
TAXES.........................................................................26
PURCHASES AND REDEMPTIONS OF SHARES...........................................27
SPECIAL INVESTMENT TECHNIQUES.................................................28
PERFORMANCE INFORMATION.......................................................36
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
(the "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 Portfolios (the "Investment Managers"), 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
B-4
<PAGE>
of Directors, the 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 18,
2000, the Management Agreement was renewed for an additional one year period
expiring June 30, 2001. 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
Baird Advisors ("Baird")
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. Baird Advisors is a division of Robert W.
Baird & Co. Incorporated that offers professional portfolio management.
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 18, 2000.
Each Advisory Agreement will remain in effect until June 30, 2001, 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.
The Fund, Hewitt and each of the Investment Managers have adopted a code
of ethics pursuant to Rule 17j-1 under the Investment Company Act of 1940
(each a "Code of Ethics") which govern personal securities trading by
directors and officers of the Fund and the personnel of Hewitt and the
Investment Managers who provide services to the Fund or obtain current
information regarding the Fund's investment activities, as well as certain
other personnel. The Codes of Ethics generally permit such personnel to
purchase and sell securities, including securities which are purchased, sold
or held by the Fund, but only subject to certain conditions designed to
ensure that purchase and sale for such persons' accounts do not adversely
affect the Fund's investment activities.
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.
B-6
<PAGE>
<TABLE>
<CAPTION>
Occupations and Affiliation
Name, Age, Position with Fund and Address with AHA and Hewitt
----------------------------------------- ---------------------------
<S> <C>
Anthony J. Burke, 35 Chief Executive Officer, American Hospital
Director Association Financial Solutions, Inc.; Formerly,
One North Franklin Senior Vice President, AHA Insurance
Chicago, Illinois 60606 Resources Inc. ("IRI") (3 years). Formerly,
Managing Director of IRI
Frank A. Ehmann, 66 Formerly, President and Director, United
Director Stationers, Executive Vice-President and Director,
864 Bryant Avenue Baxter Corp. and President and Director,
Winnetka, Illinois 60093 American Hospital Supply Corp. Director of
various companies in health products field.
Richard John Evans, 48 Chief Financial Officer/Vice President, American
Director Hospital Association. Director of Financial
One North Franklin Planning, American Hospital Association
Chicago, Illinois 60606
James A. Henderson, 58 Vice President, Associate General Counsel,
Vice President Assistant Secretary, American Hospital
One North Franklin Association; Assistant Secretary, American
Chicago, Illinois 60606 Hospital Association Services, Inc.; Trustee,
AHA Multiple Employer Group Insurance Trust;
Formerly, Assistant Secretary, Health Providers
Service Company.
Ronald A. Jones,** 51 Investment Consultant, Hewitt Investment Group,
Director and President a Division of Hewitt Associates LLC.
100 Half Day Road
Lincolnshire, Illinois 60069
James B. Lee, 38 Independent Consultant to Hewitt Associates
Treasurer LLC; Director of Operations, Christian Brothers
914 Sherwood Road Investment Services; Inc.; Formerly, Program
La Grange Park, Illinois 60526 Administrator-AHA Investment Program, Hewitt
Associates LLC.; Treasurer and Chief Financial
Officer of Hewitt Series Trust
John D. Oliverio, 47 Chief Executive Officer, President and Director, Wheaton
Director Franciscan Services Inc.; Director, Oak Park
26 West 171 Roosevelt Road Hospital; Director, Synergon Health System;
</TABLE>
-------------------------
**Director who is an "interested person" of the Fund as defined by the Act.
B-7
<PAGE>
<TABLE>
<CAPTION>
Occupations and Affiliation
Name, Age, Position with Fund and Address with AHA and Hewitt
----------------------------------------- ---------------------------
<S> <C>
Wheaton, Illinois 60189 Trustee, Hewitt Series Trust.
Peter E. Ross, 40 Attorney, Hewitt Associates LLC, Chief Compliance Officer,
Secretary Hewitt Services, LLC; Secretary of Hewitt Series Trust.
100 Half Day Road
Lincolnshire, Illinois 60069
Timothy G. Solberg, **47 Director of Marketing and Client Services,
Director Hewitt Investment Group, a Division of
100 Half Day Road Hewitt Associates LLC.
Lincolnshire, Illinois 60069
Thomas J. Tucker, 68 Former Vice President, Incarnate Word Health
Director Services. Formerly, Vice President and Chief
8 Rock Creek Financial Officer, Spohn Hospital. Fellow of the
Corpus Christi, Texas 78412 Healthcare Financial Management Association.
John L. Yoder, 68 Vice President, The Princeton Agency, Princeton
Director Insurance Co., Formerly President, Rahway
19 Tankard Hospital, Rahway Hospital Foundation and
Washington Crossing, Pennsylvania 18977 Recovery Health System (parent of Rahway
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, 2000, the Fund paid
directors' fees (including expenses) of $18,240.87 as follows:
-------------------------
**Director who is an "interested person" of the Fund as defined by the Act.
B-8
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
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>
Anthony J. Burke 0 0 0 0
Director
Frank A. Ehmann, $4,000.00 0 0 $4,000.00
Director
Richard John Evans, 0 0 0 0
Director
Ronald A. Jones, 0 0 0 0
Director and President
John D. Oliverio, $4,000.00 0 0 $4,000.00
Director
Timothy G. Solberg, 0 0 0 0
Director
Thomas J. Tucker, $5,124.11* 0 0 $5,124.11
Director
John L. Yoder, $5,116.76* 0 0 $5,116.76
Director
</TABLE>
*$4,000.00 in fees, the balance are expenses for attending meetings.
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 39%
of the Fund's outstanding shares as of July 31, 2000.
B-9
<PAGE>
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 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
B-10
<PAGE>
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 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
B-11
<PAGE>
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.
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.
B-12
<PAGE>
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 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.
B-13
<PAGE>
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.
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 asto 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
B-14
<PAGE>
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 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
B-15
<PAGE>
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 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
B-16
<PAGE>
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 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
B-17
<PAGE>
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 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
B-18
<PAGE>
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.
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
B-19
<PAGE>
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.
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.)
B-20
<PAGE>
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.
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.
B-21
<PAGE>
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 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
B-22
<PAGE>
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 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:
Diversified Equity Balanced
2000 $122,214 $63,031
1999 $156,945 $85,615
1998 $66,694 $58,186
Brokerage commissions allocated for research services during the fiscal
year ended June 30, 2000 were $4,200 by the Diversified Equity Portfolio (in
transactions having an aggregate value of $5,300,000) and $3,500 by the Balanced
Portfolio (in transactions having an aggregate value of $4,100,000). During the
period, no brokerage commissions were paid by the other two Portfolios.
During the fiscal year ended June 30, 2000, the Portfolios held
securities of Bankers Trust Company ("Bankers Trust"); J.P. Morgan; Lehman
Brothers Incorporated ("Lehman Brothers"); Merrill Lynch & Company ("Merrill
Lynch"); Morgan Stanley Dean Witter & Co. ("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 Trust, Lehman Brothers, J.P. Morgan, Merrill Lynch and
PaineWebber), Limited Maturity Fixed Income Portfolio (Merrill Lynch and Morgan
Stanley), Diversified Equity Portfolio ( J.P. Morgan, Morgan Stanley and Lehman
Brothers) and Balanced Portfolio (Morgan Stanley, J.P. Morgan and Lehman
Brothers).
B-23
<PAGE>
Aggregate holdings, as of June 30, 2000 were as follows:
FULL MATURITY FIXED INCOME
Bankers Trust
8.12% Due 04/01/02 $1,000,000 principal amount
Lehman Brothers
6.482% Due 07/08/02 $ 300,000 principal amount
7.750% Due 01/15/05 $ 550,000 principal amount
11.625% Due 05/15/05 $ 375,000 principal amount
J.P. Morgan
6.000% Due 01/15/09 $ 80,000 principal amount
6.920% Due 04/15/10 $ 139,995 principal amount
Merrill Lynch
6.875% Due 11/15/18 $ 375,000 principal amount
6.310% Due 11/15/26 $ 154,684 principal amount
6.220% Due 02/15/30 $ 205,291 principal amount
PaineWebber
6.000% Due 01/15/09 $ 150,000 principal amount
LIMITED MATURITY FIXED INCOME
Merrill Lynch
6.00% Due 02/12/03 $ 860,000 principal amount
Morgan Stanley
8.100% Due 06/24/02 $ 730,000 principal amount
7.120% Due 01/15/03 $1,000,000 principal amount
DIVERSIFIED EQUITY
J.P. Morgan 3,700 Common stock shares
Morgan Stanley 10,400 Common stock shares
Lehman Brothers 3,100 Common stock shares
BALANCED
Morgan Stanley 1,500 Common stock shares
J.P. Morgan 600 Common stock shares
Lehman Brothers 500 Common stock shares
6.682% Due 07/08/02 $100,000 principal amount
B-24
<PAGE>
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 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
B-25
<PAGE>
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.
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
B-26
<PAGE>
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 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
B-27
<PAGE>
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.
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, 2000:
(a) (b) (c)
Offering
Price
Net Assets Shares Outstanding (a)-(b)
----------- ------------------- --------
Full Maturity Fixed Income $ 78,188,268 8,080,309 $ 9.68
Portfolio
Limited Maturity Fixed Income $ 85,813,179 8,484,336 $10.11
Portfolio
Diversified Equity Portfolio $131,785,886 6,264,210 $21.04
Balanced Portfolio $ 48,935,956 3,933,074 $12.44
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
B-28
<PAGE>
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) 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.
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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 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
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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, 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 value equal to its obligations under the option, should the option
be exercised, or securities qualified to serve as "cover" under applicable
rules
B-31
<PAGE>
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.
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.
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<PAGE>
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. 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
B-36
<PAGE>
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) TO THE POWER OF 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 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, 1999 through June 30, 2000 were as follows:
TOTAL RETURN DAYS IN PERIOD
------------ --------------
Full Maturity Fixed Income 4.41% (366 days in period)
Portfolio
Limited Maturity Fixed 4.37% (366 days in period)
Income Portfolio
Diversified Equity Portfolio 5.28% (366 days in period)
Balanced Portfolio 3.93% (366 days in period)
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:
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6
YIELD = 2 [(a-b + 1) - 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.
The annualized yields of the Portfolios for the one month period ended June
30, 2000 were:
Yield
-----
Full Maturity Fixed 6.20%
Income Portfolio
Limited Maturity Fixed 5.47%
Income Portfolio
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
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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 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, 2000, AHA may be deemed to control the Fund through its
beneficial ownership, directly and through AHA affiliated companies and trusts,
of 39% 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 (as of July 31, 2000):
52% direct and indirect beneficial ownership of the Full Maturity Fixed
Income Portfolio
29% direct and indirect beneficial ownership of the Limited Maturity Fixed
Income Portfolio
54% direct and indirect beneficial ownership of the Balanced Portfolio
33% direct and indirect beneficial ownership of the Diversified Equity
Portfolio
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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, 2000, AHA; American Hospital Association Retirement Trust,
One North Franklin, Chicago, Illinois 60606; Baptist Health Care Corporation,
1000 West Monroe 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, 31%, 20%, 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
deemed to beneficially own, directly and indirectly, 52% of the outstanding
shares of the Full Maturity Fixed Income Portfolio.
As of July 31, 2000, AHA; Galesburg Cottage Hospital, 695 N. Kellog Street,
Galesberg, Illinois 61401; 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 29%, 10%, 12%,
12% and 7%, 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, 29% of the outstanding shares of the
Limited Maturity Fixed Income Portfolio.
As of July 31, 2000, AHA; American Hospital Association Retirement Trust;
Baptist Health Care Corporation; Flathead Healthcare, 325 Claremont Street,
Kalispell, Montana 59901; and Lee Hospital owned of record and beneficially
owned directly 37%, 17%, 24%, 8% and 11%, 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, 54% of the outstanding shares of the
Balanced Portfolio.
As of July 31, 2000, AHA; American Hospital Association Retirement Trust;
Baptist Health Care Corporation; Laughlin Memorial Hospital, 1420 Tuscumlum
Blvd., Greeneville, Tennessee 37745, Lee Hospital, and Lewistown Hospital owned
of record and beneficially owned directly 23%, 10%, 10%, 14%, 8%, and 6%,
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, 43% 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
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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.
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, 2000, Firstar was paid $135,611 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.
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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
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, 2000:
Schedule of Investments as of June 30, 2000;
Statement of Assets and Liabilities as of June 30, 2000;
Statement of Operations for the fiscal year ended June 30, 2000;
Statement of Changes in Net Assets for the fiscal year ended
June 30, 2000; 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.
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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
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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.
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