<PAGE> 1
Registration Nos. 33-35788
811-6136
As filed with the Securities and Exchange Commission on
March 4, 1998
--------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 12 / x /
-----
and/or
REGISTRATION UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 13 / x /
-----
(Check appropriate box or boxes)
--------------------------------
HOMESTEAD FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
4301 Wilson Boulevard, Arlington, VA 22203
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code:
(703) 907-6026
--------------
William P. McKeithan, Esq.
Homestead Funds ,Inc.
4301 Wilson Boulevard, Arlington, VA 22203
(Name and Address of Agent for Service)
Copies to:
Michael Berenson, Esq.
Jorden Burt Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
<PAGE> 2
Approximate Date of Proposed Public Offering.
It is proposed that this filing will become effective:
X immediately upon filing on ___________
- ----- pursuant to paragraph (b) ----- pursuant to
paragraph (b)
_____ 60 days after filing _____ on ______ pursuant to
pursuant to paragraph (a)(1) paragraph (a)(1)
_____ 75 days after filing on ______ pursuant to
pursuant to paragraph (a)(2) ----- paragraph (a)(2) of
rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
The Registrant has registered an indefinite number of its shares pursuant to
Rule 24f-2 under the Investment Company Act of 1940. The Registrant's Rule
24f-2 Notice for the fiscal year ended December 31, 1997 will be filed in
March, 1998.
<PAGE> 3
HOMESTEAD FUNDS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A Item No. Caption in Prospectus
- ------------------ ---------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Cover Page; Introduction
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Introduction; Daily Income Fund;
Short-Term Bond Fund; Short-Term
Government Securities Fund; and Value
Fund; Other Investment Practices, Risk
Conditions, and Policies of the Funds
5. Management of the Fund How the Homestead Funds are
Managed
6. Capital Stock and Other Capital Stock
Securities
7. Purchase of Securities Being How to Purchase Shares;
Offered Shareholder Service; How Each
Fund's Net Asset Value is
Determined
8. Redemption or Repurchase Shareholder Services; How to
Redeem Shares
9. Pending Legal Proceedings Not applicable
<CAPTION>
Caption in Statement of
Form N-1A Item No. Additional Information
- ------------------ ----------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information and History
13. Investment Objectives and Investment Restrictions; Descrip-
Policies tion of Certain Investments
14. Management of the Fund Management of the Homestead Funds
15. Control Persons and Principal Principal Holders of Securities
Holders of Securities
16. Investment Advisory and Other Investment Management and Other
Services Services
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Caption in Statement of
Form N-1A Item No. Additional Information
- ------------------ ----------------------
<S> <C>
17. Brokerage Allocation and Other Brokerage Allocation and Other
Practices Practices
18. Capital Stock and Other Capital Stock and Corporate
Securities Matters
19. Purchase, Redemption and Pricing Purchase and Redemption of Sec-
of Securities Being Offered urities Being Offered; Determin-
ation of Net Asset Value
20. Tax Status Tax Status
21. Underwriters Distribution of Shares
22. Calculation of Performance Data Performance Information About the
Funds
23. Financial Statements Independent Auditors
</TABLE>
<PAGE> 5
------------------------------------
ABOUT THIS PROSPECTUS
This Prospectus sets forth concisely
the information about each Fund that
you should know before investing. It
should be retained for future
reference. A Statement of Additional
Information, dated March 4, 1998,
about each Fund has been filed with
the Securities and Exchange
Commission and is incorporated
herein by reference. You may obtain
a copy of the Statement of
Additional Information at no charge
by calling Homestead Funds, Inc. at
1-800-258-3030.
HOMESTEAD FUNDS, INC.
4301 Wilson Boulevard
Arlington, VA 22203
<PAGE> 6
- ------------------------------------------------------
INVESTMENT OBJECTIVES
OF EACH FUND
The Daily Income Fund seeks maximum current income, consistent with preservation
of capital and liquidity by investing in high-quality money market securities.
Shares in the Daily Income Fund are neither insured nor guaranteed by the U.S.
Government. There is no assurance that the Daily Income Fund will maintain a
stable net asset value of $1.00 per share.
The Short-Term Bond Fund seeks a high level of income consistent with
maintaining minimum fluctuation of principal by investing in high-quality,
short-term debt securities. The share price of the Short-Term Bond Fund is
expected to fluctuate with changes in interest rates and bond market conditions.
The Short-Term Government Securities Fund seeks a high level of current income
from investments in a portfolio of securities backed by the full faith and
credit of the U.S. Government. Shares in the Short-Term Government Securities
Fund are neither insured or guaranteed by the U.S. Government. The share price
of the Short-Term Government Securities Fund is expected to fluctuate with
changes in interest rates and bond market conditions.
The Small Company Stock Fund seeks long-term growth of capital for the long-term
investor. The Fund is not designed for short-term financial needs or for
short-term investment in the stock market.
The Value Fund seeks long-term growth of capital and income for the long-term
investor. Current income is a secondary objective.
There can be no assurance that the objectives of each Fund will be realized. For
general information, please call Homestead Funds, Inc., c/o PFPC, Inc. ("PFPC")
toll-free at 1-800-258-3030.
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introduction to the Funds................... 1
Financial Highlights........................ 2
Daily Income Fund........................... 6
Short-Term Bond Fund........................ 7
Short-Term Government Securities Fund....... 8
Small Company Stock Fund.................... 8
Value Fund.................................. 9
Other Investment Practices, Risk Conditions,
and Policies of the Funds............... 10
Dividends, Distributions, and Taxes......... 13
How to Purchase Shares...................... 15
Shareholder Services........................ 16
How Each Fund's Net Asset Value is
Determined.............................. 18
How to Redeem Shares........................ 19
How the Homestead Funds are Managed......... 20
Capital Stock............................... 21
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 7
- --------------------------------------------------------------------------------
INTRODUCTION TO THE FUNDS
FEE SUMMARY. This information is included to assist your understanding of the
various costs and expenses to which an investment in each Fund would be subject.
A more complete description of all fees and expenses is included in this
Prospectus under the section "Expenses."
<TABLE>
<CAPTION>
SHORT-TERM SMALL
DAILY INCOME SHORT-TERM GOVERNMENT COMPANY VALUE
FUND BOND FUND SECURITIES FUND STOCK FUND FUND
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases None None None None None
Sales Load Imposed on Reinvested Dividends None None None None None
Deferred Sales Load Imposed on Redemptions None None None None None
Redemption Fee None None None None None
Exchange Fee None None None None None
ANNUAL FUND OPERATING EXPENSES
AFTER EXPENSE WAIVER OR ASSUMPTION
(as a percentage of average daily net assets)
Investment Management Fee .47%* .48%* 0%* 0% .59%*
12b-1 Fees None None None None None
Other Expenses .33%* .27%* .75%* 1.50%* .20%*
Total Fund Operating Expenses .80%* .75%* .75%* 1.50%* .79%*
</TABLE>
* RE Advisers has agreed to assume all annual fund operating expenses of each
Fund (other than certain expenses that are capitalized and certain other
non-recurring expenses) ("Fund Operating Expenses") which in any year exceed
.80% of the average daily net assets for the Daily Income Fund, .75% of the
average daily net assets for the Short-Term Bond Fund and Short-Term
Government Securities Fund, 1.50% of the average daily net assets of the Small
Company Stock Fund and 1.25% of the average daily net assets for the Value
Fund. See "How the Homestead Funds are Managed-Investment Manager" for further
information about the investment management fees. The Total Fund Operating
Expenses prior to any fee waivers are .83%, .87% and 1.27%, for the Daily
Income Fund, Short-Term Bond Fund and Short-Term Government Securities Fund,
respectively. There are no fees waived for the Value Fund. The Total Fund
Operating Expenses for the Small Company Stock Fund are estimated to be 2.50%.
EXAMPLES: An investor in each Fund would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and (2) redemption at the end of
each future time period**:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Daily Income Fund $8 $26 $44 $99
Short-Term Bond Fund $8 $24 $42 $93
Short-Term Government Securities Fund $8 $24 $42 $93
Value Fund $8 $25 $43 $97
Small Company Stock Fund $15 $47 NA NA
</TABLE>
**There are no charges imposed upon redemption.
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
FEES OR EXPENSES FOR EACH FUND. ACTUAL FEES AND EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN ABOVE. Similarly, the annual rate of return assumed in the
Example is not an estimate or guarantee of future investment performance, but is
included for illustrative purposes.
-----------------------------
1
<PAGE> 8
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following tables include selected data and other performance information
derived from the financial statements of each of the respective Funds. They
should be read in conjunction with the financial statements and notes thereto
appearing in the Fund's Annual Report to Shareholders for the fiscal year ended
December 31, 1997 ("Annual Report").
The unqualified report of Deloitte & Touche LLP, independent auditors, is
included in the Annual Report. It also contains additional information regarding
the performance of each Fund. The Annual Report is incorporated by reference in
the Statement of Additional Information and may be obtained without charge by
calling the Fund at the telephone number given on the cover page of this
prospectus.
DAILY INCOME FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NOVEMBER 19, 1990
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
------------------------------------------------------------------- DECEMBER 31,
1997 1996(d) 1995(d) 1994(d) 1993(d) 1992(d) 1991(d) 1990(d)
------- ------- ------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD....................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- ----- -----
Income from investment
operations
Net investment income(a)...... 0.05 0.05 0.05 0.04 0.03 0.03 0.06 0.01
----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations.................. 0.05 0.05 0.05 0.04 0.03 0.03 0.06 0.01
----- ----- ----- ----- ----- ----- ----- -----
Distributions
Net investment income......... (0.05) (0.05) (0.05) (0.04) (0.03) (0.03) (0.06) (0.01)
----- ----- ----- ----- ----- ----- ----- -----
Total distributions........... (0.05) (0.05) (0.05) (0.04) (0.03) (0.03) (0.06) (0.01)
----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR...... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN...................... 4.92% 4.81% 5.38% 3.63% 2.68% 3.39% 5.67% 0.74%(c)
===== ===== ===== ===== ===== ===== ===== =====
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands)................... $53,033 $57,871 $52,699 $36,668 $25,159 $22,330 $24,396 $15,490
Ratio of expenses to average net
assets(a)..................... 0.80% 0.76% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%(b)
Ratio of net investment income
to average net assets(a)...... 4.80% 4.71% 5.25% 3.66% 2.64% 3.34% 5.44% 6.79%(b)
Ratio of gross expenses before
voluntary expense limitation
to average net assets......... 0.83% 0.81% 0.87% 0.99% 1.11% 1.21% 1.27% 1.98%(b)
</TABLE>
- -------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Annualized.
(c) Aggregate total return for the period.
(d) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
-----------------------------
2
<PAGE> 9
SHORT-TERM BOND FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NOVEMBER 5, 1991
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED DECEMBER 31, TO
----------------------------------------------------------------- DECEMBER 31,
1997 1996(d) 1995(d) 1994(d) 1993(d) 1992(d) 1991(d)
------ ------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD........................... $5.15 $5.19 $4.95 $5.19 $5.10 $5.06 $5.00
----- ------ ------ ------ ------ ------ ----------
Income from investment operations
Net investment income(a).......... 0.30 0.29 0.28 0.24 0.24 0.26 0.04
Net realized and unrealized gain
(loss) on investments........... 0.03 (0.04) 0.24 (0.24) 0.09 0.04 0.06
----- ------ ------ ------ ------ ------ ----------
Total from investment operations.... 0.33 0.25 0.52 0.00 0.33 0.30 0.10
----- ------ ------ ------ ------ ------ ----------
Distributions
Net investment income............. (0.30) (0.29) (0.28) (0.24) (0.24) (0.26) (0.04)
----- ------ ------ ------ ------ ------ ----------
Total distributions............... (0.30) (0.29) (0.28) (0.24) (0.24) (0.26) (0.04)
----- ------ ------ ------ ------ ------ ----------
NET ASSET VALUE, END OF YEAR.......... $5.18 $5.15 $5.19 $4.95 $5.19 $5.10 $5.06
------ ------ ------ ------ ------ ----------
-----
------ ------ ------ ------ ------ ----------
TOTAL RETURN.......................... 6.62% 5.16% 10.81% 0.09% 6.62% 6.30% 1.99%(c)
===== ====== ====== ====== ====== ====== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands)....................... $108,898 $81,470 $62,125 $52,257 $37,046 $10,991 $1,268
Ratio of expenses to average net
assets(a)......................... 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%(b)
Ratio of net investment income to
average net assets(a)............. 5.75% 5.72% 5.49% 4.84% 4.58% 5.20% 5.59%(b)
Ratio of gross expenses before
voluntary expense limitation to
average net assets................ 0.87% 0.76% 0.86% 0.98% 1.16% 1.94% 5.61%(b)
Portfolio turnover rate............. 55% 49% 35% 13% 14% 19% 0%
</TABLE>
- -------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Annualized.
(c) Aggregate total return for the period.
(d) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
-----------------------------
3
<PAGE> 10
SHORT-TERM GOVERNMENT SECURITIES FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
MAY 1, 1995
YEAR ENDED (COMMENCEMENT
DECEMBER 31, OF OPERATIONS) TO
--------------------- DECEMBER 31,
1997 1996(d) 1995(d)
------ -------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................ $ 5.05 $ 5.09 $ 5.00
------ ------- ------
Income from investment operations
Net investment income(a)........................................ 0.26 0.26 0.18
Net realized and unrealized gain (loss) on investments.......... 0.02 (0.04) 0.09
------ ------- ------
Total from investment operations................................ 0.28 0.22 0.27
------ ------- ------
Distributions
Net investment income......................................... (0.26) (0.26) (0.18)
------ ------- ------
Total distributions........................................... (0.26) (0.26) (0.18)
------ ------- ------
NET ASSET VALUE, END OF YEAR........................................ $ 5.07 $ 5.05 $ 5.09
====== ======== ======
TOTAL RETURN........................................................ 5.73% 4.46% 5.44%(c)
====== ======== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)............................ $16,187 $7,692 $2,658
Ratio of expenses to average net assets(a)....................... 0.75% 0.75% 0.75%(b)
Ratio of net investment income to average net assets(a).......... 5.19% 5.16% 5.18%(b)
Ratio of gross expenses before voluntary expense limitation to
average net assets............................................. 1.27% 2.30% 6.21%(b)
Portfolio turnover rate.......................................... 12% 21% 7%
</TABLE>
- -------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Annualized.
(c) Aggregate total return for the period.
(d) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
-----------------------------
4
<PAGE> 11
VALUE FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
NOVEMBER 19, 1990
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF OPERATIONS) TO
------------------------------------------------------------------------------- DECEMBER 31,
1997 1996(E) 1995(E) 1994(E) 1993(E) 1992(E) 1991(E) 1990(E)
------- ------- ------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................ $20.99 $18.44 $14.50 $14.54 $12.49 $11.48 $10.15 $10.12
----- ------ ------ ------ ------ ------ ------ ----------
Income from investment
operations
Net investment
income(a)............ 0.37 0.39 0.41 0.29 0.22 0.25 0.39 0.07(b)
Net realized and
unrealized gain on
investments.......... 5.22 2.91 4.47 0.07 2.12 1.09 1.34 -
----- ------ ------ ------ ------ ------ ------ ----------
Total from investment
operations........... 5.59 3.30 4.88 0.36 2.34 1.34 1.73 0.07
----- ------ ------ ------ ------ ------ ------ ----------
Distributions
Net investment
income............... (0.37) (0.39) (0.41) (0.29) (0.22) (0.25) (0.39) (0.04)
Net realized gain...... (0.71) (0.36) (0.53) (0.11) (0.07) (0.08) (0.01) -
----- ------ ------ ------ ------ ------ ------ ----------
Total distributions.... (1.08) (0.75) (0.94) (0.40) (0.29) (0.33) (0.40) (0.04)
----- ------ ------ ------ ------ ------ ------ ----------
NET ASSET VALUE, END OF
YEAR..................... $25.50 $20.99 $18.44 $14.50 $14.54 $12.49 $11.48 $10.15
===== ====== ====== ====== ====== ====== ====== ==========
TOTAL RETURN.............. 26.70% 17.94% 33.78% 2.50% 18.83% 11.68% 17.16% 0.58%(D)
===== ====== ====== ====== ====== ====== ====== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands)............ $378,621 $238,550 $147,506 $91,612 $53,616 $19,730 $10,398 $6,568
Ratio of expenses to
average net
assets(a).............. 0.79% 0.73% 0.84% 1.15% 1.25% 1.25% 1.25% 1.25%(c)
Ratio of net investment
income to average net
assets(a).............. 1.59% 2.08% 2.50% 2.19% 1.92% 2.33% 3.80% 6.09%(c)
Ratio of gross expenses
before
voluntary expense
limitation to average
net assets............. n/a n/a n/a 1.15% 1.25% 1.61% 1.75% 2.34%(c)
Portfolio turnover
rate................... 6% 5 % 10% 4 % 2 % 5 % 26% 0%
Average commission rate
paid per share
transacted(f).......... $0.0480 $0.0500 - - - - - -
</TABLE>
- -------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Per share amount was calculated based on average shares outstanding during
the period.
(c) Annualized.
(d) Aggregate total return for the period.
(e) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
(f) Required disclosure for fiscal years beginning after December 1, 1995
pursuant to SEC regulations.
- ----------------------------------------------------------------
- ----------------------------------------------------
5
<PAGE> 12
OVERVIEW OF THE HOMESTEAD FUNDS
Homestead Funds is a Maryland corporation registered with the Securities and
Exchange Commission as a no-load, open-end diversified management investment
company, commonly known as a mutual fund. The Homestead Funds currently consist
of five funds: the Daily Income Fund, Short-Term Bond Fund, Short-Term
Government Securities Fund, Small Company Stock Fund and Value Fund ("Fund" or
"Funds"). Each Fund in the Homestead Funds is a separate investment portfolio
with distinct investment objectives, investment program, policies, and
restrictions. Each Fund is advised and managed by RE Advisers Corporation ("RE
Advisers"), which directs the day-to-day operations of each Fund and the
investment of each Fund's assets. RE Advisers is an indirect wholly-owned
subsidiary of National Rural Electric Cooperative Association ("NRECA"), a
non-profit membership organization whose members provide electric light and
power and other services to more than 25 million people in 46 states.
No sales charges, redemption fees or penalties, or Rule 12b-1 fees are charged
by the Homestead Funds with respect to an investment in the Funds. This means
that all of the money you invest will be credited to your account(s) in the
Fund(s) and immediately go to work for you.
- ------------------------------------------------------
DAILY INCOME FUND
INVESTMENT OBJECTIVES: The Daily Income Fund seeks maximum current income,
consistent with preservation of capital and liquidity by investing in
high-quality money market securities.
INVESTMENT PROGRAM: In seeking to achieve its objectives, the Daily Income Fund
will invest in a diversified portfolio of high-quality U.S. dollar-denominated
money market securities that present minimal credit risks and which, at the time
of acquisition, are eligible securities. Eligible securities are rated in one of
the two highest credit categories for short-term debt obligations assigned by
any two nationally recognized statistical rating organizations ("NRSROs"), or by
one NRSRO, if only one has rated the money market securities ("Requisite
NRSROs") or, if unrated, are of comparable investment quality. The Daily Income
Fund will invest at least 95% of its total assets in eligible securities that
are rated within the highest rating category for short-term debt obligations by
the Requisite NRSROs or unrated securities of comparable investment quality. The
eligible money market securities in which the Fund may invest include: (i)
Short-term obligations of the U.S. Government (such as United States Treasury
bills), its agencies (such as the Government National Mortgage Association), and
instrumentalities (such as the Federal National Mortgage Association);
(ii) Short-term obligations of banks and savings and loan associations having
total assets in excess of one billion dollars, including certificates of
deposit, banker's acceptances, and time deposits; (iii) Short-term corporate
obligations, including notes and bonds with remaining maturities of 13 months or
less; (iv) Commercial paper (unsecured promissory notes having maturities of 9
months or less) issued by corporations and finance companies; (v) Repurchase
agreements that are collateralized by securities described in (i) through (iv),
above. See "Repurchase Agreements" in this Prospectus for a fuller description
of this investment technique and its risks; (vi) U.S. dollar-denominated
obligations issued by the Government of Canada or its agencies or
instrumentalities; and (vii) U.S. dollar-denominated obligations of foreign
issuers. See "U.S. Dollar-Denominated Securities of Foreign Issuers" in this
Prospectus for a fuller description of these securities and their risks. Certain
of these money market securities may have adjustable rates of interest with
periodic demand features.
MATURITY: The Fund will invest in eligible money market securities maturing in
13 months or less and will maintain a dollar-weighted average portfolio maturity
of 90 days or less. These practices are designed to minimize any price
fluctuation in the Fund's portfolio securities.
PRICE: The Fund seeks to maintain a constant net asset value of $1.00 per share,
although in certain circumstances this may not be possible. The Fund will use
the amortized cost method of valuing its portfolio securities.
PORTFOLIO MANAGEMENT: RE Advisers actively manages the Fund, adjusting the
composition of investments and the average maturity of the Fund's portfolio
according to its outlook for short-term interest rates. During periods of rising
interest rates,
-----------------------------
6
<PAGE> 13
a shorter average maturity may be expected, while a longer maturity may be more
appropriate when interest rates are falling.
SUITABILITY: The Fund is designed to be a convenient and economical medium for
investing short-term funds, while seeking to provide maximum current income
consistent with safety of principal. In addition, the Fund is also useful as a
component of a long-term, balanced investment program for the conservative
investor. The Fund's investment performance will vary depending on changes in
short-term interest rates or in the creditworthiness of issuers of its portfolio
securities.
- ------------------------------------------------------
SHORT-TERM BOND FUND
INVESTMENT OBJECTIVES: The Short-Term Bond Fund seeks to provide a high level of
current income consistent with stability of principal and current liquidity by
investing in high-grade, short-term debt securities.
INVESTMENT PROGRAM: In seeking to achieve its objective, the Short-Term Bond
Fund will invest primarily in a diversified portfolio of short-term debt
securities rated within the three highest credit categories assigned by any
NRSRO or, if unrated, of comparable investment quality as determined by RE
Advisers.
The short-term debt securities in which the Fund may invest include: (i)
corporate debt securities; (ii) U.S. Government securities, including bonds,
notes and bills issued by the U.S. Treasury, and securities issued by agencies
and instrumentalities of the U.S. Government; (iii) mortgage pass-through
securities; (iv) collateralized mortgage obligations; (v) asset-backed
securities; (vi) zero-coupon bonds; and (vii) U.S. dollar-denominated debt
securities of foreign issuers. See "Other Investment Practices, Risk Conditions,
and Policies of the Funds" for a fuller description of these securities and
their risks.
Although the Short-Term Bond Fund will ordinarily invest at least 65% of its
total assets in high-grade, short-term debt securities, to the extent the Fund
is not so invested, it may invest in other types of securities, including: (i)
debt securities rated BBB or its equivalent by any NRSRO or unrated debt
securities of comparable investment quality, limited to no more than 5% of the
Fund's net assets; (ii) equity-related securities (i.e., preferred stocks and
securities convertible into or exchangeable for common stocks); (iii)
privately-placed securities, limited to no more than 10% of the Fund's net
assets; and (iv) high-quality money market investments of the type in which the
Daily Income may invest. For temporary or defensive purposes, the Fund may
invest in money market securities without limitation.
The Fund may purchase debt securities and certain money market securities on a
when-issued or delayed delivery basis. Certain of these securities may have
adjustable rates of interest with periodic demand features.
MATURITY: The dollar-weighted average effective maturity of the Fund's portfolio
will not exceed three years. Within this limitation, the Fund may purchase
individual securities with effective maturities greater than three years.
PORTFOLIO TURNOVER: The portfolio turnover rate for the Fund will vary and when
circumstances warrant, securities may be sold without regard to the length of
time held. Although the Fund cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 75%.
PORTFOLIO MANAGEMENT: To meet the Fund's objective, Douglas G. Kern, Senior
Fixed-Income Portfolio Manager of RE Advisers actively manages the Fund,
adjusting the composition of investments and the average maturity of the Fund's
portfolio based on general economic and financial trends, such as the level of
interest rates and inflation, and the supply and demand of debt securities. Mr.
Kern has managed the Fund since its inception in November 1991 and has been
Senior Fixed-Income Portfolio Manager of NRECA during the past twelve years.
SUITABILITY: The Fund is designed for investors who seek a greater level of
income than normally provided by money market investments and less principal
fluctuation than that experienced by long-term bond funds. THE SHORT-TERM BOND
FUND IS NOT A MONEY MARKET FUND AND ITS SHARE PRICE IS EXPECTED TO FLUCTUATE
WITH CHANGES IN INTEREST RATES AND BOND MARKET CONDITIONS, ALTHOUGH THIS
FLUCTUATION SHOULD BE MORE MODERATE THAN THAT OF A FUND WITH A LONGER AVERAGE
MATURITY.
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<PAGE> 14
- ------------------------------------------------------
SHORT-TERM GOVERNMENT
SECURITIES FUND
INVESTMENT OBJECTIVES: The Short-Term Government Securities Fund seeks to
provide a high level of current income consistent with stability of principal
and current liquidity by investing in securities backed by the full faith and
credit of the U.S. Government.
INVESTMENT PROGRAM: In seeking to achieve its objective, the Short-Term
Government Securities Fund will invest at least 65% of its portfolio in U.S.
Treasury bills, notes and bonds and securities issued by agencies and
instrumentalities of the U.S. Government that are guaranteed by the U.S.
Government.
The short-term debt securities in which the Fund may invest include: (i) U.S.
Government securities, including bonds, notes and bills issued by the U.S.
Treasury; (ii) Securities issued by agencies and instrumentalities of the U.S.
Government that are guaranteed by the full faith and credit of the U.S.
Government; and (iii) Repurchase agreements collateralized by U.S. Government
securities or by securities issued by agencies and instrumentalities of the U.S.
Government and guaranteed by the U.S. Government. See "Other Investment
Practices, Risk Conditions, and Policies of the Funds" for a fuller description
of these securities and their risks.
MATURITY: The dollar-weighted average effective maturity of the Fund's portfolio
will not exceed three years. Within this limitation, the Fund may purchase
individual securities with effective maturities greater than three years.
PORTFOLIO TURNOVER: The portfolio turnover rate for the Fund will vary and when
circumstances warrant, securities may be sold without regard to the length of
time held. Although the Fund cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 75%.
PORTFOLIO MANAGEMENT: To meet the Fund's objective, Douglas G. Kern, Senior
Fixed-Income Portfolio Manager of RE Advisers actively manages the Fund,
adjusting the composition of investments and the average maturity of the Fund's
portfolio in an effort to minimize fluctuations in market value based on general
economic and financial trends, such as the level of interest rates and
inflation. Mr. Kern has managed the Fund since its inception in May 1995 and has
been Senior Fixed-Income Portfolio Manager of NRECA during the past twelve
years.
SUITABILITY: The Fund is designed for investors who seek an investment with less
principal fluctuation than that experienced by intermediate and long-term
government securities funds. THE SHORT-TERM GOVERNMENT SECURITIES FUND IS NOT A
MONEY MARKET FUND AND ITS SHARE PRICE IS EXPECTED TO FLUCTUATE WITH CHANGES IN
INTEREST RATES AND BOND MARKET CONDITIONS, ALTHOUGH THIS FLUCTUATION SHOULD BE
MORE MODERATE THAN THAT OF A FUND WITH A LONGER AVERAGE MATURITY. Fixed-Income
securities experience appreciation when interest rates decline and depreciation
when interest rates rise.
- ------------------------------------------------------
SMALL COMPANY
STOCK FUND
INVESTMENT OBJECTIVES: The Small Company Stock Fund seeks long-term growth of
capital by investing in stocks for the long-term investor.
INVESTMENT PROGRAM: In seeking to achieve its objective, the Small Company Stock
Fund will normally invest at least 65% of its total assets in diversified and
carefully selected common stocks of companies with small market capitalizations
at the time of investment. In selecting investments, RE Advisers will emphasize
fundamental investment value. This approach is based on the belief that the
common stocks of certain companies may sell at a discount from their fundamental
value.
Small market capitalization companies are those whose market capitalization is
similar to the market capitalization of companies in the Russell 2000 at the
time of the Fund's investment. Companies whose capitalization no longer meets
this definition after purchase continue to be considered small capitalization
companies for purposes of the 65% policy. The Russell 2000 included companies
with market capitalizations between $50 million and $2.5 billion as of December
31, 1997.
PORTFOLIO TURNOVER: The Small Company Stock Fund will not trade in securities
for short-term profits; however, when circumstances warrant, securities may be
sold without regard to the length of time held. Although the Fund cannot
accurately predict annual portfolio turnover rate, it is not expected to exceed
75%.
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<PAGE> 15
PORTFOLIO MANAGEMENT: To meet the Fund's objectives, Peter R. Morris, Director
of Investments and Stuart E. Teach, Senior Equity Portfolio Manager of RE
Advisers will actively manage the Fund, adjusting the composition of common
stock investments in the Fund's portfolio based on general economic and
financial trends. Messrs. Morris and Teach have managed the Small Company Stock
Fund since its inception in March 1998. Mr. Morris has been Director of
Investments at NRECA during the past twenty-three years and Mr. Teach has been
Senior Equity Portfolio Manager of NRECA during the past twelve years.
SUITABILITY: The Small Company Stock Fund is intended for investors seeking
long-term growth of capital. Because of the Fund's emphasis on investment in
common stocks, net asset value will fluctuate based on market conditions.
Consequently, the Small Company Stock Fund is designed for long-term investors
and should not be relied on for short-term financial needs or for short-term
investment in the stock market. The net asset value of the Fund's respective
shares will fluctuate based on market conditions.
Investments in small capitalization stocks may present a greater risk than
investments in medium and large capitalization stocks and can experience greater
price fluctuation. Some small capitalization stocks have limited product lines,
markets or economic resources.
- ------------------------------------------------------
VALUE FUND
INVESTMENT OBJECTIVES: The Value Fund seeks long-term growth of capital and
income for the long-term investor. Current income is a secondary objective.
INVESTMENT PROGRAM: In seeking to achieve its objectives, the Value Fund will
invest primarily in a diversified and carefully selected portfolio of common
stocks of established companies that may be undervalued or overlooked by the
market. In selecting investments, RE Advisers, will emphasize fundamental
investment value. This approach is based on the belief that the common stocks of
certain companies may sell at a discount from their fundamental value.
The valuation process used by RE Advisers considers the following factors in
analyzing a security's fundamental value: (i) the relationship of a company's
potential earning power to the current market price of its stock; (ii) a low
price/earnings ratio relative to either that company's historical results or to
the current ratios for other similar companies; (iii) above-average dividend
income; (iv) discount to the stated book value of assets; and (v) a company's
strong competitive advantages, including well-recognized trademarks or brand
names or significant market position. The Value Fund may invest in equity
securities of companies that are considered by RE Advisers to be financially
sound and attractive investments based on their long-term operating history, but
which may be experiencing temporary earnings declines due to adverse economic
conditions that may be company or industry specific or due to unfavorable
publicity. The Value Fund may invest in such companies when RE Advisers believes
that they will react positively to changing economic conditions or that such
companies have taken or are expected to take actions designed to return their
earnings to historical levels or otherwise increase the market price of their
securities.
The utilization of a value approach may result, in some cases, in investment
selections that may be out-of-favor or counter to those of other investors.
However, such an approach may also produce significant capital appreciation.
Although the Value Fund will ordinarily invest at least 80% of its net assets in
common stocks, to the extent not so invested, it may invest in other types of
securities including: (i) equity-related securities (i.e., preferred stocks,
securities convertible into or exchangeable for common stocks, and warrants);
(ii) high-grade debt securities rated at least A by a NRSRO or, if unrated, of
equivalent investment quality as determined by RE Advisers; and (iii)
high-quality money market investments in which the Daily Income Fund may invest.
The Value Fund may use such money market investments to reduce downside
volatility during uncertain or declining market conditions. For temporary or
defensive purposes, the Fund may invest in money market securities or short-term
bonds without limitation.
Equity securities in which the Fund invests generally will be listed on a
national securities exchange. The Fund may, on occasion, purchase unlisted
securities that have an established over-the-counter market. The Fund may also
invest up to 10% of its net assets in U.S. dollar-denominated securities of
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<PAGE> 16
foreign issuers through the purchase of American Depository Receipts ("ADRs").
See "U.S. Dollar-Denominated Securities of Foreign Issuers" in this Prospectus
for a fuller description of these securities and their risks.
PORTFOLIO TURNOVER: The Fund will not trade in securities for short-term
profits; however, when circumstances warrant, securities may be sold without
regard to the length of time held. Although the Fund cannot accurately predict
its annual portfolio turnover rate, it is not expected to exceed 75%.
PORTFOLIO MANAGEMENT: To meet the Fund's objectives, Peter R. Morris, Director
of Investments and Stuart E. Teach, Senior Equity Portfolio Manager of RE
Advisers will actively manage the Fund, adjusting the composition of common
stock investments in the Fund's portfolio based on general economic and
financial trends. Messrs. Morris and Teach have managed the Fund since its
inception in November 1990. Mr. Morris has been Director of Investments at NRECA
during the past twenty-three years, and Mr. Teach and has been Senior Equity
Portfolio Manager of NRECA during the past twelve years.
SUITABILITY: The Fund is intended for investors seeking long-term growth of
capital and income. Because of the Fund's emphasis on investment in common
stocks, its value will fluctuate based on market conditions. Consequently, the
Fund is designed for long-term investors and should not be relied on for
short-term financial needs or for short-term investment in the stock market. The
net asset value of the Fund's shares will fluctuate based on market conditions.
- ------------------------------------------------------
OTHER INVESTMENT
PRACTICES, RISK
CONDITIONS, AND
POLICIES OF THE FUNDS
REPURCHASE AGREEMENTS. Each Fund may utilize repurchase agreements through which
they may purchase a security (the "underlying security") from a well established
domestic securities dealer or bank that is a member of the Federal Reserve
System and the seller of the repurchase agreement (i.e., the securities dealers
or bank) agrees to repurchase the underlying security at a mutually agreed upon
time and price. In these repurchase transactions, the underlying security, which
must be a high-quality money market security, is held by the custodian for the
applicable Fund through the federal book entry system as collateral and marked-
to-market on a daily basis to ensure full collateralization of the repurchase
agreement. For the Daily Income Fund, the underlying security must either be a
U.S. Government security or a security rated in the highest rating category by
the Requisite NRSROs and must be determined to present minimal credit risks. For
the Short-Term Government Securities Fund, the underlying security must be a
U.S. Government security or a security issued by an agency or instrumentality of
the U.S. Government and is guaranteed by the U.S. Government. In the event of
bankruptcy or default of certain sellers of repurchase agreements, the Funds
could experience costs and delays in liquidating the underlying security held as
collateral and might incur a loss if such collateral declines in value during
this period.
U.S. DOLLAR-DENOMINATED SECURITIES OF FOREIGN ISSUERS. Subject to each Fund's
investment objectives, investment program, policies, and restrictions, the Daily
Income Fund, Short-Term Bond Fund, Small Company Stock Fund and Value Fund each
may invest in certain types of U.S. dollar-denominated securities of foreign
issuers. With respect to equity securities, the Short-Term Bond Fund, Small
Company Stock Fund and Value Fund may purchase ADRs. ADRs are U.S. dollar
denominated certificates issued by a U.S. bank or trust company and represent
the right to receive securities of a foreign issuer deposited in a domestic bank
or foreign branch of a U.S. bank. ADRs are traded on domestic exchanges or in
the U.S. over-the-counter market and, generally, are in registered form.
Investment in ADRs has certain advantages over direct investment in the
underlying non-U.S. securities because: (i) ADRs are U.S. dollar-denominated
investments which are registered domestically, easily transferable, and for
which market quotations are readily available, and (ii) issuers whose securities
are represented by ADRs are subject to the same auditing, accounting, and
financial reporting standards as domestic issuers.
The Short-Term Bond Fund, Small Company Stock Fund and Value Fund may also, in
accordance with specific investment objectives, investment program, policies,
and restrictions, purchase U.S. dollar-
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<PAGE> 17
denominated, short-term debt securities of foreign issuers and money market
securities of foreign issuers of the type in which the Daily Income Fund may
normally invest. Such securities of foreign issuers may be issued and traded
domestically (e.g., Yankee securities), or may be issued abroad and traded
exclusively in foreign markets (e.g., Eurodollar securities).
Although investment in U.S. dollar-denominated securities of foreign issuers is
intended to reduce risk by providing further diversification of each Fund's
portfolio, investment in such securities may involve the following risks: the
possibility of adverse foreign political and economic developments; the
possibility of expropriation, confiscatory taxation, or nationalization of
foreign portfolio companies; and, for foreign securities that are not registered
domestically, there is less publicly available information regarding issuers of
such securities and such issuers are not subject to the same accounting,
auditing and financial reporting standards and practices as domestic issuers.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or
delayed delivery basis. When such transactions are negotiated, the price of such
securities is fixed at the time of the commitment, but delivery and payment for
the securities may take place up to 90 days after the date of the commitment to
purchase. The securities so purchased are subject to market fluctuation, and no
interest accrues to the purchaser during this period. When-issued securities
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. RE Advisers does not believe that the net asset
value or income of any Fund will be adversely affected by the purchase of
securities on a when-issued basis.
CONVERTIBLE SECURITIES AND PREFERRED STOCK. The Short-Term Bond Fund, Small
Company Stock Fund and Value Fund may invest in investment grade debt securities
that are convertible into or exchangeable for common stock. The Short-Term Bond
Fund and the Value Fund may also invest in preferred stock, which are securities
that represent an ownership interest in a company and provide their owner with
claims on the company's earnings and assets prior to the claims of owners of
common stock, but after those of bond owners.
MORTGAGE PASS-THROUGH SECURITIES. The Short-Term Bond Fund may invest in
mortgage pass-through securities, which are securities representing interests in
pools of mortgages. Principal and interest payments made on the mortgages in the
pools are passed through to the holder of such securities. Payment of principal
and interest on some mortgage pass-through securities (but not the market value
of the securities themselves) may be guaranteed by the full faith and credit of
the U.S. Government (in the case of securities guaranteed by the Government
National Mortgage Association ("GNMAs"), or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). The
Short-Term Government Securities Fund may invest in GNMA securities.
The Short-Term Bond Fund may also invest in mortgage pass-though securities
created by non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers) which may be supported by various forms of insurance
or guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage pass-through security meets the Short-Term Bond Fund's
investment quality standards.
Unscheduled or early repayment of principal on mortgage pass-through securities
(arising from prepayments of principal due to the sale of the underlying
property, refinancing or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed-income securities.
In the view of RE Advisers, collateralized mortgage obligations and asset-backed
securities may be considered derivative investments. Discussions
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<PAGE> 18
pertaining to these securities are included below and in the Statement of
Additional Information.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Short-Term Bond Fund and Short-Term
Government Securities Fund may invest in collateralized mortgage obligations
("CMOs"). CMOs are debt securities collateralized by underlying mortgage loans
or pools of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA
and are generally issued by limited purpose finance subsidiaries of U.S.
government instrumentalities. The Short-Term Government Securities Fund may
invest in CMOs utilizing collateral guaranteed by GNMA.
CMOs are not, however, mortgage pass-through securities. Rather they are
pay-through securities, i.e., securities backed by the cash flow from the
underlying mortgages. Investors in CMOs are not owners of the underlying
mortgages, which serve as collateral for such debt securities, but are simply
owners of a debt security backed by such pledged assets. CMOs are typically
structured into multiple classes, with each class bearing a different stated
maturity and having different payment streams. Monthly payments of principal,
including prepayments, are first returned to investors holding the shortest
maturity class; investors holding longer maturity classes receive principal
payments only after the shorter class or classes have been retired.
ASSET-BACKED SECURITIES. The Short-Term Bond Fund may purchase asset-backed
securities that represent either fractional interests or participation in pools
of leases, retail installment loans or revolving credit receivables held by a
trust or limited purpose finance subsidiary. Such asset-backed securities may be
secured by the underlying assets (such as Certificates for Automobile
Receivables or "CARS") or may be unsecured (such as Credit Card Receivable
Securities ("CARDS")). Depending on the structure of the asset-backed security,
monthly or quarterly payments of principal and interest or interest only are
passed-through (like mortgage pass-through securities) or paid through (like
CMOs) to certificate holders. Asset-backed securities may be guaranteed up to
certain amounts by guarantees, insurance, or letters of credit issued by a
financial institution affiliated or unaffiliated with the originator of the
pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. Certificate holders
may also experience delays in payment if the full amounts due on underlying
loans, leases or receivables are not realized because of unanticipated legal or
administrative costs of enforcing the contracts or because of depreciation or
damage to the collateral (usually automobiles) securing certain contracts, or
other factors. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the servicing agent for
the pool, the originator of the pool or the financial institution providing
credit support enhancement for the pool. If consistent with its investment
objective and policies, the Short-Term Bond Fund may invest in other
asset-backed securities that may be developed in the future.
ZERO-COUPON BONDS. The Short-Term Bond Fund may invest in zero-coupon bonds.
Such bonds may be issued directly by agencies and instrumentalities of the U.S.
Government or by private corporations. The Short-Term Government Securities Fund
may invest in zero-coupon bonds issued directly by agencies of the U.S.
Government. Zero-coupon bonds may originate as such or may be created by
stripping an outstanding bond. Zero-coupon bonds do not make regular interest
payments. Instead, they are sold at a deep discount from their face value.
Because a zero-coupon bond does not pay current income, its price can be very
volatile when interest rates change. In calculating its dividend, the Short-Term
Bond Fund takes into account as income a portion of the difference between a
zero-coupon bond's purchase price and its face value.
OTHER INVESTMENT COMPANIES. The Daily Income Fund's investment in other
investment companies is limited in amount so that no more than 5% of the Fund's
total net assets will be invested in any one investment company or in all other
investment companies in the aggregate. The Short-Term Bond Fund, Short-Term
Government Securities Fund, Small Company Stock Fund and Value Fund may invest
in other investment companies, limited in amount so that no more than 5% of each
Fund's respective total net assets will be invested in any one investment
company and no more than 10% in all other investment companies in the aggregate.
The Short-Term Government Securities Fund may purchase shares of investment
companies which
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<PAGE> 19
invest in U.S. Government securities. Each Fund's investment in such other
investment companies will reflect the operating expenses of these companies.
CERTAIN POLICIES TO REDUCE RISK. Each Fund has adopted certain fundamental
investment policies in managing its portfolio that are designed to maintain the
portfolio's diversity and reduce risk. Each Fund will not: (i) with respect to
75% of each Fund's total assets, invest in more than 10% of the outstanding
voting securities of any one issuer; (ii) invest 25% or more of its total assets
in securities of companies in the same industry except, that with respect to the
Daily Income Fund and the Short-Term Bond Fund, this limitation will not apply
to securities issued by domestic branches of U.S. banks and savings and loan
associations and U.S. branches of foreign banks (if subject to the same
regulation as domestic banks); and (iii) borrow more than 10% of that Fund's
total assets. The Funds will not borrow in order to increase income, but only to
facilitate redemption requests that might otherwise require untimely disposition
of portfolio securities. Limitations (i) and (ii) do not apply to obligations
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities. These investment policies are fundamental and may be changed
for a Fund only by approval of that Fund's shareholders. The Short-Term Bond
Fund will, as a matter of operating policy, concentrate 25% or more of its total
assets in securities issued by domestic branches of U.S. banks and savings and
loan associations and U.S. branches of foreign banks (provided such banks are
subject to the same regulation as domestic banks) when the Short-Term Bond
Fund's position in issues maturing in one year or less equals 35% or more of the
Fund's total assets.
FURTHER INFORMATION. Each Fund's investment program is subject to further
restrictions as described in the Statement of Additional Information. Each
Fund's investment program, unless otherwise specified, is not fundamental and
may be changed without shareholder approval by the Board of Directors. Each
Fund's investment objectives are fundamental and may be changed only with
approval of that Fund's shareholders.
INVESTMENT PERFORMANCE. Each Fund may illustrate in advertisements its average
annual total return, which is the rate of growth of the Fund that would be
necessary to achieve the ending value of an investment kept in the Fund for the
period specified and is based on the following assumptions: (1) all dividends
and distributions by the Fund are reinvested in shares of the Fund at net asset
value, and (2) all recurring fees are included for applicable periods.
Each Fund may also illustrate in advertisements its cumulative total return for
several time periods throughout the Fund's life based on an assumed initial
investment of $1,000. Any such cumulative total return for each Fund will assume
the reinvestment of all income dividends and capital gains distributions for the
indicated periods and will include all recurring fees.
The Daily Income Fund may illustrate in advertisements its yield and effective
yield. The Daily Income Fund's yield refers to income generated by an investment
in the Fund over a seven (7) day period, expressed as an annual percentage rate.
The Daily Income Fund's effective yield is calculated similarly but assumes that
income earned from the investment is reinvested. The Fund's effective yield will
be slightly higher than its yield because of the compounding effect of this
assumed reinvestment.
The Short-Term Bond Fund and Short-Term Government Securities Fund may
illustrate in advertisements its yield based on a recent thirty (30) day period,
which reflects the income per share earned by the Fund's portfolio investments.
The yield is calculated by dividing the Fund's net investment income per share
during that period by the net asset value on the last day of that period and
annualizing the result. Further information on each Fund's performance
calculations is described in the Statement of Additional Information.
- ------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS
AND TAXES
Each Fund intends to elect to be treated and to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") in which case it will not be subject to federal income tax
on any income and capital gains distributed to its shareholders. As a result, it
is the policy of each Fund to declare and distribute to its shareholders as
income dividends or capital gains distributions, at least annually,
substantially all of its ordinary
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<PAGE> 20
income and capital gains realized from the sale of its portfolio securities, if
any.
Income dividends for the Daily Income Fund, Short-Term Bond Fund and Short-Term
Government Securities Fund will be declared daily and paid monthly. Income
dividends for the Value Fund will be declared and paid semi-annually and for the
Small Company Stock Fund will be declared and paid annually. All distributions
of capital gains income of each Fund, if any, realized during the fiscal year,
will be declared and distributed no less frequently than annually. Income
dividends are derived from each Fund's net investment income, including any net
short-term capital gains and dividends received by a Fund, and are taxable to
you as ordinary income. Corporate shareholders may be entitled to take a
deduction for income dividends received that are attributable to dividends
received from a domestic corporation, provided that both the corporate
shareholder retains its shares in the applicable Fund for more than 45 days and
the Fund retains its shares in the issuer from whom it received the income
dividends for more than 45 days. Distributions of capital gains by each Fund are
derived from each Fund's long-term capital gains and are taxable to you as
long-term capital gains, regardless of how long you have held your shares.
Income dividends and distributions of capital gains income declared in October,
November or December and paid in January are taxable in the year they are
declared. The Homestead Funds will mail you a Form 1099 by the end of January
indicating the federal tax status of your income dividends and capital gains
distributions.
BACKUP WITHHOLDING. Each Fund is required by federal law to withhold 31% of
reportable payments (which may include income dividends, capital gains
distributions, and share redemption proceeds) paid to shareholders (other than
participants in tax-qualified retirement plans) who have not complied with IRS
regulations. In order to avoid this back-up withholding requirement, you must
certify on your Purchase Application Form ("Application"), or on a separate W-9
Form supplied by the transfer agent, that your Social Security or Taxpayer
Identification Number is correct (or that you have applied for such a number and
are waiting for it to be issued) and that you are not currently subject to
backup withholding, or you are exempt from backup withholding.
REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS. Unless you
elect otherwise, as permitted on the Application, income dividends and
distributions of capital gains income with respect to a particular Fund will be
reinvested in additional shares of that Fund and will be credited to your
account with that Fund at the net asset value per share next determined as of
the ex-dividend date. Both income dividends and distributions of capital gains
income are paid by the Funds on a per share basis. As a result, at the time of
such payment, the net asset value per share of the Short-Term Bond Fund,
Short-Term Government Securities Fund, Small Company Stock Fund and Value Fund
will be reduced by the amount of such payment. Payment of dividends and
distributions by the Daily Income Fund will not affect the Fund's net asset
value, but will reduce the Fund's yield. Payments from each Fund to shareholders
of income dividends and capital gains distributions are taxable to shareholders
of each Fund when such dividends and distributions are declared, regardless of
whether they are taken in cash or reinvested in shares of the Funds, unless the
accounts of such shareholders are used to fund tax-qualified retirement plans,
including Individual Retirement Account Plans ("IRAs"), Simplified Employee
Pensions ("SEP-IRAs"), and other tax-deferred plans or accounts. Participants in
such plans or accounts will be taxed when they begin receiving distributions
from such plans or accounts.
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<PAGE> 21
- ------------------------------------------------------
HOW TO PURCHASE SHARES
THE INITIAL MINIMUM INVESTMENT IS $500 PER FUND, EXCEPT AS NOTED BELOW. SUCH
MINIMUM INVESTMENT AMOUNT MAY, IN CERTAIN CASES, BE WAIVED OR LOWERED BY THE
HOMESTEAD FUNDS OR RE INVESTMENT.
OPENING AN ACCOUNT. You may make an initial purchase of shares of each Fund by
mail or by wire. Shares of the Funds may be purchased on any day the Funds are
open for business.
A COMPLETED AND SIGNED APPLICATION IS REQUIRED FOR EACH NEW ACCOUNT YOU OPEN
WITH EACH FUND REGARDLESS OF HOW YOU CHOOSE TO MAKE YOUR INITIAL PURCHASE OF
SHARES.
BY MAIL. You may purchase shares of the Funds by mailing the completed
Application, with your check made payable to Homestead Funds, Inc., to:
Homestead Funds, Inc. c/o PFPC, Inc., P.O. Box 8987, Wilmington, DE 19899.
BY WIRE. You may also purchase shares of each Fund by wiring funds to the wire
bank account for each Fund. Before wiring funds, please call PFPC toll free at
1-800-258-3030 by 4:00 p.m. on the day of the wire to advise Homestead Funds of
your intention to invest in one of the Funds and to receive instructions as to
how and where to wire your investment. Please remember to return your completed
Application to PFPC, prior to the wire date as described in the prior paragraph.
Your bank may charge you a fee for the wire.
SUBSEQUENT INVESTMENTS: Subsequent purchases of shares of the Funds may be made
by mail or by wire (see instructions above), or through means of certain
services available to shareholders of the Funds, such as the Telephone
Investment Privilege, the Exchange Privilege, and the Automatic Investment Plans
described below under "Shareholder Services."
SHARE PRICE. Your shares in each Fund will be priced at the net asset value per
share of that Fund next determined after your purchase order has been received
by the Homestead Funds' transfer agent in "good order."
With respect to the Daily Income Fund, if your purchase payment is transmitted
by federal funds wire or bank wire, the purchase order will be considered in
good order upon receipt of the wire payment by the Homestead Funds' transfer
agent. If your purchase payment as transmitted to the Homestead Funds' transfer
agent is not in federal funds (i.e., monies credited to the transfer agent by a
Federal Reserve Bank), your payment must first be converted to federal funds
before your purchase order will be considered in "good order." If your purchase
payment is by a check drawn on a member bank of the Federal Reserve System,
conversion to federal funds usually occurs within one business day of receipt of
the check by the transfer agent. Checks drawn on banks which are not members of
the Federal Reserve System may take longer to convert into federal funds. During
the period prior to receipt of federal funds, your money will not be invested in
the Daily Income Fund.
With respect to the Short-Term Bond Fund, Short-Term Government Securities Fund,
Small Company Stock Fund and Value Fund, receipt of federal funds by the
transfer agent is not necessary for a purchase order to be considered in good
order.
CONDITIONS OF YOUR PURCHASE. The Homestead Funds and RE Investment Corporation
("RE Investment"), the distributor for the Homestead Funds, each reserve the
right to reject any purchase for any reason and to cancel any purchase due to
nonpayment. Purchases are not binding on the Homestead Funds or RE Investment or
considered received until such purchase orders are received by the transfer
agent, PFPC, in good order. All purchases must be made in United States dollars
and, to avoid fees and delays, all checks must be drawn only on United States
banks. No cash will be accepted. As a condition of this offering, if your
purchase is canceled due to nonpayment or because your check does not clear
(and, therefore, your account is required to be redeemed), you will be
responsible for any loss the Funds incur.
STOCK CERTIFICATES. Stock certificates will not be issued for your shares unless
you have been a shareholder for at least thirty (30) days and unless you
specifically request them. Most shareholders elect not to receive stock
certificates. Certificates for full shares only will be issued. If you lose a
stock certificate you may incur an expense to replace it.
RETIREMENT PLAN ACCOUNTS. If you are a participant in a corporate or
institutional retirement plan account (including any deferred compensation
plan), you must contact your Plan Administrator
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15
<PAGE> 22
regarding purchase and redemption procedures, including limitations thereon,
contained in your retirement plan. REQUESTS FOR REDEMPTIONS FROM RETIREMENT PLAN
ACCOUNTS (INCLUDING IRAS) MUST BE IN WRITING. REDEMPTIONS BY TELEPHONE ARE NOT
PERMITTED.
- ------------------------------------------------------
SHAREHOLDER SERVICES
SHAREHOLDER INQUIRIES AND SERVICES OFFERED. If you have any questions about the
Homestead Funds or the following services, please call PFPC at 1-800-258-3030 or
write the Homestead Funds c/o PFPC, Inc. at P.O. Box 8987, Wilmington, DE 19899.
The Homestead Funds reserve the right to amend the shareholder services
described below or to change their terms or conditions upon sixty (60) days
notice to shareholders.
SHAREHOLDER STATEMENTS AND REPORTS. Each time you buy or sell shares or reinvest
a dividend or distribution in any Fund, you will receive a statement with
respect to that Fund confirming such transaction and listing your current share
balance with that Fund. The Homestead Funds also will send you annual and
semi-annual reports. In addition, you will receive year-end tax information
about your accounts with each Fund.
TELEPHONE PRIVILEGES. For your convenience, the Homestead Funds provide
telephone privileges that allow you by telephone authorization to (i) purchase
shares in each Fund; (ii) exchange shares from your account in one Fund for
shares in another Fund; and (iii) redeem shares in each Fund. To utilize these
telephone privileges, you must select such services by checking the appropriate
boxes on the Application and must supply us with the information required.
Procedures have been established by the Homestead Funds and its transfer agent
that are considered to be reasonable and are designed to confirm personal
identification information prior to acting on telephone instructions, tape
recording telephone communication, and providing written confirmation of
instructions communicated by telephone. If the transfer agent does not employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, it may be liable for any losses arising out of any action on its part
or any failure or omission to act as a result of its own negligence, lack of
good faith, or willful misconduct. In light of the procedures established, the
Homestead Funds will not be liable for following telephone instructions that it
or its transfer agent believe to be genuine. During periods of extreme economic
conditions or market changes, requests by telephone may be difficult to make due
to heavy volume. During such times, please consider placing your order by mail.
THE TELEPHONE PRIVILEGES ARE NOT AVAILABLE WITH RESPECT TO SHARES FOR WHICH
CERTIFICATES HAVE BEEN ISSUED OR WITH RESPECT TO REDEMPTIONS FOR ACCOUNTS
REQUIRING SUPPORTING LEGAL DOCUMENTS. IN ADDITION, SHARES HELD UNDER RETIREMENT
PLANS (INCLUDING IRAS) MAY NOT BE REDEEMED BY USING THE TELEPHONE REDEMPTION
PRIVILEGE. EXCHANGES BETWEEN THE FUNDS UTILIZING THE TELEPHONE EXCHANGE
PRIVILEGE ARE AVAILABLE TO SHARES HELD UNDER RETIREMENT PLANS (INCLUDING IRAS).
(1) TELEPHONE INVESTMENT PRIVILEGE. After your account with the Homestead Funds
has been opened, you may make additional investments in your account by
telephoning the Homestead Funds at 1-800-258-3030 between 9:00 a.m. and 4:00
p.m. Eastern Time on any day the Homestead Funds are open. Telephone
investment requests made after 4:00 p.m. Eastern Time will not be accepted.
In accordance with your instructions, we will electronically transfer monies
from your bank account designated on the Application, to your account with
the Homestead Funds. Your designated bank must be a member of the Automated
Clearing House ("ACH") network and able to make electronic transfers in
order for you to use this privilege.
(2) TELEPHONE EXCHANGE PRIVILEGE. The Telephone Exchange Privilege permits you
to exchange shares from your account in one Fund for shares in another Fund
(if the accounts in each Fund are identically registered) by telephoning the
Homestead Funds at 1-800-258-3030 between 9:00 a.m. and 4:00 p.m. Eastern
Time on any day the Homestead Funds are open. In establishing a new account
by exchange, the shares being exchanged must have a value of at least $500.
Shares exchanged will be valued at their respective net asset values next
determined after a telephone exchange request is received. Telephone
exchange requests made after 4:00 p.m. Eastern Time will not be accepted;
however, such requests will be processed as of the close of business the
next
-----------------------------
16
<PAGE> 23
business day. Please notify the Homestead Funds in writing of all current
plans or shareholder service privileges you wish to continue in any new
account opened by a telephone exchange request. See "Exchange Privilege"
below for further information concerning exchanges.
(3) TELEPHONE REDEMPTION PRIVILEGE. The Telephone Redemption Privilege permits
you to authorize the redemption of some or all shares in your account with
the Homestead Funds by telephoning the Homestead Funds at 1-800-258-3030
between 9:00 a.m. and 4:00 p.m. Eastern Time on any day the Homestead Funds
are open. In accordance with your telephone instructions, we will redeem
your Fund shares at their net asset value next determined after your
telephone redemption request is received. Telephone redemption requests made
after 4:00 p.m. Eastern Time will not be accepted; however, such requests
will be processed as of the close of business the next business day.
Redemption proceeds will, in accordance with your prior election, be mailed
to you at your current address or electronically transmitted to your
designated bank account. Your designated bank must be a member of the ACH
network and able to receive electronic transfers in order for you to use
this privilege. SHARES HELD UNDER RETIREMENT PLANS (INCLUDING IRAS) MAY NOT
BE REDEEMED BY USING THE TELEPHONE REDEMPTION PRIVILEGE.
EXCHANGE PRIVILEGE. The exchange privilege is a convenient way to buy shares in
each Fund in order to respond to changes in your investment goals or in market
conditions. In addition to the Telephone Exchange Privilege described above,
shareholders in each Fund may exchange their shares for shares in the other Fund
by a written request, in proper form, sent to the transfer agent. Such shares
exchanged will be valued at their respective net asset values next determined
after the receipt of the written exchange request. When making a written
exchange request, please provide your current Fund's name, your account name(s)
and number(s), the name of the Fund into which you wish to exchange your
investment, the amount you wish to exchange, and specify all current plans or
shareholder service privileges you wish to continue in your new account (e.g.
Automatic Monthly Investment Plans). For written exchange requests, the
signatures of all registered owners are required. Signature guarantees are also
required if the accounts will not be identically registered. (See "How to Redeem
Shares" concerning requirements relating to signature guarantees.) No sales
charge, redemption fee or penalty is imposed on exchanges. The exchange
privilege is available to shareholders in all states where it is legally
permitted. Currently, all states permit such exchanges. Please note that, for
tax purposes, an exchange may involve a taxable transaction.
EXCESSIVE TRADING. To protect the Small Company Stock Fund's and the Value
Fund's shareholders and to minimize costs, the Funds may, in their discretion,
send notification to inform you that exchanges into and out of those Funds would
be limited to one exchange every calendar quarter. This policy does not prohibit
you from redeeming shares of a Fund, but may prohibit you from making future
purchases of or exchanges into a Fund.
AUTOMATIC INVESTMENT AND WITHDRAWAL PLANS. For your convenience, the Homestead
Funds provide three plans that may enable you to add to your investment or
withdraw from your account(s) with a minimum of paperwork.
(1) AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan permits you to
purchase shares in any Fund at regular intervals selected by you.* Fund
shares are purchased by transferring funds from your designated checking,
NOW, or bank account. Only an account maintained at a domestic financial
institution that is an ACH member may be so designated. The twentieth day of
each month will be selected by you as a purchase date and your automatic
monthly purchases will be made on or about that day. *For individuals
selecting the Automatic Investment Plan, no minimum initial investment is
required. The amount of subsequent monthly investments are at the discretion
of the shareholder.
(2) AUTOMATIC PAYROLL INVESTMENTS AND OTHER DIRECT DEPOSIT PRIVILEGES. If
permitted by your employer, including the federal government, you may elect
to have certain amounts automatically deducted, on a periodic basis, from
your salary, Social Security payment or certain other payments from the
federal government, and transferred to your account(s) with the Fund(s).
Individuals selecting the Automatic Payroll Investment Plan
-----------------------------
17
<PAGE> 24
can establish an account with no minimum initial investment. Subsequent
investments per pay period are at the discretion of the shareholder.
(3) AUTOMATIC CASH WITHDRAWAL PLAN. The Automatic Cash Withdrawal Plan permits
you to have payments automatically transferred from your account(s) in any
Fund to your designated bank account on a monthly or quarterly basis. Only a
bank account maintained at a domestic financial institution that is an ACH
member may be so designated. The transaction will take place on or about the
twenty-fifth of each month.
INDIVIDUAL RETIREMENT ACCOUNTS AND SIMPLIFIED EMPLOYEE PENSIONS. An IRA is a
very attractive retirement-savings vehicle for certain qualified individuals.
You may save for your retirement and shelter your investment income from current
taxes by either: (i) having Homestead Funds establish a new IRA for you that can
be used to invest in Homestead Funds, or (ii) transfer your existing IRA to
Homestead Funds. Using your IRA, you can invest up to $2,000 per year (or up to
$4,000 if your spouse does not work) on a tax-favored basis or you may either
transfer or "roll-over" monies from other existing IRA accounts or qualified
distributions from a pension plan. In addition, an employer may: (i) have
Homestead Funds establish a new SEP-IRA or SIMPLE IRA for its employees that can
be used to invest on a tax-favored basis, or (ii) use Homestead Funds for an
existing SEP-IRA or SIMPLE IRA.
CHECKWRITING SERVICE. Checkwriting is available only for shareholders of the
Daily Income Fund. You may write an unlimited number of checks. The minimum
amount of each check must be $100 or more. Checks written on amounts subject to
the ten (10) day check clearing period, described below under "How to Redeem
Shares", will be returned, marked "uncollected." This checkwriting service is
subject to PFPC's rules and regulations and is governed by the Delaware Uniform
Commercial Code. Please note that for retirement accounts (including IRAs),
checkwriting will be limited, as applicable, to account owners who are at least
age 59 1/2. Tax withholding is not available for this service. All notices with
respect to checks drawn on the Daily Income Fund must be given to PFPC. Any stop
payment instructions must be given to PFPC by calling 1-800-258-3030. Checkbook
orders are subject to a nominal cost which will be deducted from the
shareholder's account. Please call 1-800-258-3030 for the current cost.
- ------------------------------------------------------
HOW EACH FUND'S NET ASSET
VALUE IS DETERMINED
The net asset value per share of each of the Funds is normally calculated as of
the close of regular trading on the New York Stock Exchange ("Exchange"),
typically 4:00 p.m. Eastern Time, every day the Exchange is open for trading.
The per share net asset value, calculated as described below, is effective for
all orders received in good order (as previously described) prior to the close
of trading on the Exchange for that day. Orders received after the close of
trading on the Exchange or on a day when the Exchange is not open for business
will be priced at the per share net asset value next computed.
The net asset value of each Fund's shares is determined by adding the value of
all securities, cash and other assets of the Fund, subtracting liabilities
(including accrued expenses and dividends payable) and dividing the result by
the total number of outstanding shares in the Fund.
For purposes of calculating the Daily Income Fund's net asset value per share,
portfolio securities are valued on the basis of amortized cost, which method
does not take into account unrealized gains or losses on the portfolio
securities. Amortized cost valuation involves initially valuing a security at
its cost, and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. While this method provides certainty in
valuation, it may result in periods during which the value of a security, as
determined by amortized cost, may be higher or lower than the price the Daily
Income Fund would receive if it sold the security.
For purposes of calculating the net asset value per share of the Short-Term Bond
Fund, Short-Term Government Securities Fund, Small Company Stock Fund and Value
Fund, portfolio securities are valued primarily based on market quotations, or
if market quotations are not available, by a method that the Board of Directors
believes accurately reflects fair value. In accordance with procedures and
agreements approved by the Board of
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18
<PAGE> 25
Directors, the Homestead Funds will use PFPC to perform the above-described
valuation functions and RE Advisers continuously monitors PFPC's performance of
those functions.
- ------------------------------------------------------
HOW TO REDEEM SHARES
Shareholders have the right to redeem (subject to the restrictions outlined
below) all or any part of their shares in the Funds at a price equal to the net
asset value of such shares next computed following receipt and acceptance of the
redemption request by the transfer agent for the Funds. Unless you have selected
the Telephone Redemption Privilege and provided the required information, in
order to redeem shares in the Funds, a written request in "proper form" (as
explained below) must be sent directly to PFPC, Inc., P.O. Box 8987, Wilmington,
DE 19899. You cannot redeem shares by telephone or telegram unless you are
eligible to use the Telephone Redemption Privilege. In addition, we cannot
accept requests which specify a particular date for redemption or which specify
any other special conditions.
PROPER FORM FOR ALL REDEMPTION REQUESTS. Your redemption request must be in
proper form. To be in proper form, your redemption request must include: (1)
your share certificates, if any, endorsed by all registered shareholders for the
account exactly as the shares are registered and the signature(s) must be
guaranteed, as described below; (2) for written redemption requests, a "letter
of instruction," which is a letter specifying the name of the Fund, the number
of shares to be sold, the name(s) in which the account is registered, and your
account number. The letter of instruction must be signed by all registered
shareholders for the account using the exact names in which the account is
registered; (3) other supporting legal documents, as may be necessary, for
redemption requests by corporations, estates, trusts, guardianships,
custodianships, partnerships, and pension and profit sharing plans; and (4) any
signature guarantees that are required as described above in (1), or required by
the Homestead Funds where the value of the shares being redeemed is $50,000 or
greater, or where the redemption proceeds are to be sent to an address other
than the address of record or to a person other than the registered
shareholder(s) for the account. Signature guarantees are not required for
redemptions made using the Telephone Redemption Privilege, unless redemption
proceeds are to be sent to a person other than the registered shareholders for
the account or to an address or account other than that of record.
Signature guarantees, when required, can be obtained from any one of the
following institutions: (i) a bank; (ii) a securities broker or dealer,
including a government or municipal securities broker or dealer, that is a
member of a clearing corporation or has net capital of at least $100,000; (iii)
a credit union having authority to issue signature guarantees; (iv) a savings
and loan association, a building and loan association, a cooperative bank, a
federal savings bank or association; or (v) a national securities exchange, a
registered securities exchange or a clearing agency. Notary publics are not
acceptable guarantors.
Your request for redemption will not be processed and will be held until it is
in proper form, as described above.
RECEIVING YOUR REDEMPTION PAYMENT. Except under certain emergency conditions,
your redemption payment will be sent to you within seven (7) days after receipt
of your telephone or written redemption request, in proper form, by the transfer
agent. No charge of any kind is imposed on any redemption request.
If your redemption request is with respect to shares purchased by a personal,
corporate, or government check within ten (10) days of the purchase date, the
redemption payment will be held until the purchase check has cleared (which
usually takes up to ten (10) days), although the shares redeemed will be priced
for redemption upon receipt of your redemption request. You can avoid the
inconvenience of this ten (10) day check clearing period by purchasing shares
with a certified, treasurer's or cashier's check, or with a federal funds or
bank wire.
MINIMUM ACCOUNT SIZE. Due to the relatively high cost of maintaining smaller
accounts, the Funds reserve the right to redeem shares in any account if, as the
result of redemptions, the value of that account drops below $500. You will be
allowed at least sixty (60) days, after notice by the Homestead Funds, to make
an additional investment to bring your account value up to at least $500 before
the redemption is processed.
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19
<PAGE> 26
- ------------------------------------------------------
HOW THE HOMESTEAD FUNDS
ARE MANAGED
BOARD OF DIRECTORS. The management of the Homestead Funds' business and affairs
is the responsibility of its Board of Directors. Although the Board is not
involved in the day-to-day operations of each Fund, the Board has the
responsibility for establishing broad corporate policies and supervising the
overall performance of each Fund.
INVESTMENT MANAGER. RE Advisers, 4301 Wilson Boulevard, Arlington, VA 22203, is
responsible for the selection and management of each Fund's portfolio
investments in accordance with each Fund's investment objectives, investment
program, policies, and restrictions. RE Advisers, incorporated in the
Commonwealth of Virginia in 1995 (formerly incorporated in the District of
Columbia in 1990), is a direct subsidiary of RE Investment and an indirect
wholly-owned subsidiary of NRECA, a non-profit organization which serves and
represents the nation's consumer-owned rural electric cooperatives. RE Advisers
currently provides investment advice to the Homestead Funds as well as to
certain private advisory accounts. In addition, persons employed by RE Advisers
currently provide investment advice to and supervision and monitoring of a
qualified defined benefit plan, a qualified defined contribution plan, and a
welfare benefit plan provided by NRECA for its employees and employees of its
rural electric cooperative members, that together have assets of over $4
billion. RE Advisers employs staff necessary to provide investment advisory
services and certain administrative services to the Homestead Funds and also
furnishes the Homestead Funds with all office facilities, furnishings, and
office equipment necessary for the performance of its duties under its
Investment Management Agreements on behalf of each Fund. The Homestead Funds pay
RE Advisers, on a monthly basis, an investment management fee based on each
Fund's average daily net assets at the following annualized rates: With respect
to the Daily Income Fund, .50% of average daily net assets; with respect to the
Short-Term Bond Fund, .60% of the average daily net assets; with respect to the
Short-Term Government Securities Fund, .45% of the average daily net assets;
with respect to the Small Company Stock Fund, .85% of average daily net assets
up to $200 million and .75% of average daily net assets in excess of $200
million; and with respect to the Value Fund, .65% of the average daily net
assets up to $200 million; .50% of average daily net assets up to the next $200
million; .40% of average daily net assets in excess of $400 million.
DISTRIBUTOR. RE Investment Corporation, a wholly-owned subsidiary of NRECA
United, Inc., a holding company organized by NRECA to hold stock of certain
NRECA subsidiaries, located at 4301 Wilson Boulevard, Arlington, VA 22203,
serves as distributor for the Homestead Funds under a Distribution Agreement
between the Homestead Funds and RE Investment, which was approved by the Board
of Directors of the Homestead Funds, including a majority of the independent
Directors, at a meeting held on February 26, 1998.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND SHAREHOLDER SERVICING
AGENT. PFPC, Inc., P.O. Box 8987, Wilmington, DE 19899, serves as transfer
agent, dividend disbursing agent, and shareholder servicing agent for the
Homestead Funds. PFPC also provides accounting services for the Homestead Funds.
PNC Bank serves as custodian for Homestead Funds.
EXPENSES. The Homestead Funds bear all expenses of their operation, other than
those assumed by RE Advisers under the Investment Management Agreements with
respect to each Fund and the Expense Limitation Agreements, as described below.
In particular, absent such assumption of expenses, the Homestead Funds pay:
investment management fees; shareholder servicing fees and expenses; custodian
fees and expenses; accounting services fees and expenses (including expenses of
computing each Fund's net asset value per share and calculating standardized
performance information for each Fund); transfer agent and dividend disbursing
agent fees and expenses; independent legal and accounting fees and expenses;
expenses of preparing, printing, and distributing Prospectuses, Statements of
Additional Information, and shareholder communications and reports, except as
used to market the Funds' shares; charges for necessary equipment; federal and
state registration fees and expenses, other than those with respect to the
initial registration of such shares; proxy and shareholder meeting expenses;
expenses of issuing, redeeming, and transferring shares of the Funds;
independent Directors' fees and expenses; expenses of bond, liability, and other
insurance coverage; brokerage commissions, taxes, and trade association fees;
and certain nonrecurring and
- ----------------------------------------------------------------
- ----------------------------------------------------
20
<PAGE> 27
extraordinary expenses. The underlying assets of each Fund are segregated on the
books of account for the Homestead Funds and are charged with the liabilities of
the particular Fund and a proportionate share of the general liabilities of the
Homestead Funds.
RE Advisers has agreed, as part of the Expense Limitation Agreements entered
into with the Homestead Funds with respect to each Fund, to assume as its own
expense and reimburse each Fund for all Fund Operating Expenses, which in any
year exceed .80% of the average daily net assets of the Daily Income Fund, .75%
of the average daily net assets of the Short-Term Bond Fund and Short-Term
Government Securities Fund, 1.50% of the average daily net assets of the Small
Company Stock Fund and 1.25% of the average daily net assets of the Value Fund.
The expense of organizing the Homestead Funds and registering and qualifying the
initial shares of each of its Funds under federal and state securities laws was
assumed and paid by RE Advisers. For the year ended December 31, 1996, the Total
Fund Operating Expenses paid by the Daily Income Fund, Short-Term Bond Fund,
Short-Term Government Securities Fund and Value Fund were .80%, .75%, .75% and
.79%, respectively of that Fund's average daily net assets.
- ------------------------------------------------------
CAPITAL STOCK
Homestead Funds, Inc., a Maryland corporation organized in 1990, currently
consists of five portfolios, each of which represents a separate series of
capital stock in the Homestead Funds having different investment objectives,
investment programs, policies and restrictions. Each share of capital stock of
each Fund represents an equal proportionate interest in that Fund with each
other share of stock, and each share is entitled to such dividends and
distributions of income belonging to that Fund as are declared by the Board of
Directors. In the event of the liquidation of a Fund, each share of capital
stock of that Fund is entitled to a pro rata share of the net assets of that
Fund.
Shareholders having at least two-thirds of the outstanding shares of the
Homestead Funds may remove a Director from office by a vote cast in person or by
proxy at a meeting of shareholders called for that purpose at the request of
holders of 10% or more of the outstanding shares of the Homestead Funds. The
Homestead Funds have an obligation to assist in such shareholder communications.
Homestead Funds does not routinely hold annual meetings of shareholders. Each
share of capital stock is entitled to one vote on all matters submitted to a
vote of all shareholders of the Homestead Funds. Fractional shares, when issued,
have the same rights, proportionately, as full shares. Shares of a particular
Fund will be voted separately from shares of the other Fund on matters affecting
only that Fund, including approval of the Investment Management Agreement for
that Fund and changes in the fundamental objectives, policies or restrictions of
that Fund. All shares are fully paid and nonassessable when issued and have no
preemptive, conversion or cumulative voting rights. The total authorized capital
stock of the Daily Income Fund, Short-Term Bond Fund, Short-Term Government
Securities Fund, Small Company Stock Fund and Value Fund consists of 250 million
shares, respectively, each having a par value of $.01.
As of December 31, 1997, NRECA and affiliates owned 7.8% of the outstanding
voting securities of the Daily Income Fund and may be deemed to be an affiliated
person of the Fund.
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21
<PAGE> 28
HOMESTEAD FUNDS, INC.
----------
PROSPECTUS
MARCH 4, 1998
[HOMESTEAD FUNDS, INC. LOGO]
c/o PFPC, Inc.
PO Box 8987
Wilmington, DE 19899
1-800-258-3030
<PAGE> 29
HOMESTEAD FUNDS, INC.
4301 Wilson Boulevard
Arlington, VA 22203
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus about the Funds dated March 4, 1998, which
may be obtained by telephoning Homestead Funds, Inc. c/o PFPC, Inc.
at 1-800-258-3030.
The date of this Statement of Additional Information is March 4, 1998.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
General Information and History 2
Investment Restrictions 2
Description of Certain Investments 6
Management of the Homestead Funds 15
Committees of the Board of Directors 17
Principal Holders of Securities 17
Investment Management and Other Services 17
Custodian 21
Brokerage Allocation and Other Practices 21
Purchase and Redemption of Securities Being Offered 23
Determination of Net Asset Value 24
Distribution of Shares 25
Taxes 25
Capital Stock and Corporate Matters 27
Performance Information About the Funds 27
Independent Auditors 32
</TABLE>
1
<PAGE> 30
<TABLE>
<S> <C>
Legal Matters 32
Appendix 33
</TABLE>
GENERAL INFORMATION AND HISTORY
Homestead Funds, Inc. ("Homestead Funds") is a Maryland corporation registered
with the Securities and Exchange Commission ("SEC") under the Investment Company
Act of 1940 ("1940 Act") as a diversified, open-end management investment
company, commonly known as a "mutual fund."
The Homestead Funds currently consist of five portfolios, the Daily Income Fund,
the Short-Term Bond Fund, the Short-Term Government Securities Fund, Small
Company Stock Fund and the Value Fund, each of which represents a separate
series of capital stock in the Homestead Funds having different investment
objectives, investment programs, policies, and restrictions. The Daily Income
Fund, Short-Term Bond Fund, Short-Term Government Securities Fund, Small Company
Stock Fund and Value Fund are sometimes referred to individually as the "Fund"
and collectively as the "Funds."
Each Fund is advised and managed by RE Advisers Corporation ("RE Advisers"),
which directs the day-to-day operations of each Fund and the investment of each
Fund's assets. RE Advisers is an indirect, wholly-owned subsidiary of National
Rural Electric Cooperative Association ("NRECA"), a non-profit membership
organization whose members provide electric light and power and other services
to more than 25 million people in 46 states.
INVESTMENT RESTRICTIONS
In addition to the restrictions set forth in the Prospectus with respect to each
Fund, which are described as fundamental investment policies, investment
restrictions (1), (2), (3), (5), (7) (11), (14), and (16) described below, have
been adopted as fundamental investment policies of each Fund. Such fundamental
investment policies may be changed only with the consent of a "majority of the
outstanding voting securities" of the particular Fund. As used in the Prospectus
and in this Statement of Additional Information, the term "majority of the
outstanding voting shares" means the lesser of (1) 67% of the shares of a Fund
present at a meeting where the holders of more than 50% of the outstanding
shares of a Fund are present in person or by proxy, or (2) more than 50% of the
outstanding shares of a Fund. Shares of each Fund will be voted separately on
matters affecting only that Fund, including approval of changes in the
fundamental objectives, policies, or restrictions of that Fund.
The following investment restrictions apply to each Fund except as indicated to
the contrary.
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A Fund will not:
(1) Margin and Short Sales: Purchase securities on margin or sell securities
short, except the Short-Term Bond Fund and the Value Fund may make margin
deposits in connection with permissible options and futures transactions subject
to (5) and (8) below and may make short sales against the box. As a matter of
operating policy, the Short-Term Bond Fund and the Value Fund have no current
intention, in the foreseeable future (i.e., the next year), of making short
sales against the box;
(2) Senior Securities and Borrowing: Issue any class of securities senior to any
other class of securities, although each Fund may borrow for temporary or
emergency purposes. Each Fund may borrow up to 10% of its total assets. No
additional securities will be purchased for a Fund when borrowed money exceeds
5% of the Fund's total assets. The Short-Term Bond Fund and Value Fund may each
enter into futures contracts subject to (5) below;
(3) Real Estate: Purchase or sell real estate, or invest in real estate limited
partnerships, except each Fund may, as appropriate and consistent with its
respective investment objectives, investment program, policies and other
investment restrictions, buy securities of issuers that engage in real estate
operations and securities that are secured by interests in real estate
(including shares of real estate investment trusts, mortgage pass-through
securities, mortgage-backed securities, and collateralized mortgage
obligations) and may hold and sell real estate acquired as a result of
ownership of such securities;
(4) Control of Portfolio Companies: Invest in portfolio companies for the
purpose of acquiring or exercising control of such companies;
(5) Commodities: Purchase or sell commodities and invest in commodities futures
contracts, except that the Short-Term Bond Fund and the Value Fund may each
enter into only futures contracts and options thereon that are listed on a
national securities or commodities exchange where, as a result thereof, no more
than 5% of the total assets for that Fund (taken at market value at the time of
entering into the futures contracts) would be committed to margin deposits on
such future contracts and premiums paid for unexpired options on such futures
contracts; provided that, in the case of an option that is "in-the-money" at the
time of purchase, the "in-the-money" amount, as defined under Commodity Futures
Trading Commission regulations, may be excluded in computing such 5% limit. The
Short-Term Bond Fund and the Value Fund will each utilize only listed futures
contract and options thereon. As a matter of operating policy, Short-Term Bond
Fund and the Value Fund have no current intention, in the foreseeable future
(i.e., the next year), of entering into futures contracts or options thereon;
(6) Investment Companies: Invest in the securities of other open-end investment
companies, except that each Fund may purchase securities of other open-end
investment companies provided that each such Fund (i) owns no more than 3% of
the total outstanding voting securities of any one investment company and (ii)
invests no more than 5% of its total assets in the securities of any one
investment company or 10% in all other investment companies in the
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aggregate. Further, as a matter of operating policy, the Daily Income Fund will
limit its investments in other investment companies in accordance with the
diversification requirements for money market funds specified in (16) below. The
Short-Term Government Securities Fund may purchase shares of other investment
companies which invest in U.S. Government securities.
(7) Underwriting: Underwrite securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter, within the meaning of the
Securities Act of 1933, in connection with the purchase of securities directly
from an issuer in accordance with that Fund's investment objectives, investment
program, policies, and restrictions;
(8) Options, Straddles and Spreads: Invest in puts, calls, straddles, spreads or
any combination thereof, except that the Short-Term Bond Fund and the Value Fund
each may invest in and commit its assets to writing and purchasing only put and
call options that are listed on a national securities exchange and issued by the
Options Clearing Corporation to the extent permitted by the Prospectus and this
Statement of Additional Information. In order to comply with the securities laws
of several states, neither the Short-Term Bond Fund nor the Value Fund (as a
matter of operating policy) will write a covered call option if, as a result,
the aggregate market value of all portfolio securities covering call options or
subject to put options for that Fund exceeds 25% of the market value of that
Fund's net assets. In addition, the Short-Term Bond Fund and the Value Fund will
utilize only listed options issued by the Options Clearing Corporation. The
Short-Term Bond Fund and the Value Fund have no current intention, in the
foreseeable future (i.e., the next year), of investing in options, straddles and
spreads;
(9) Oil and Gas Programs: Invest in interests in oil, gas, or other
mineral exploration or development programs or oil, gas and mineral leases,
although investments may be made in the securities of issuers engaged in any
such businesses;
(10) Ownership of Portfolio Securities by Officers and Directors: Purchase or
retain the securities of any issuer if to the knowledge of the Homestead Funds,
those officers and directors of the Homestead Funds or RE Advisers who
individually own more than 1/2 of 1% of the securities of such issuer
collectively own more than 5% of the securities of such issuer;
(11) Loans: Make loans, except that each Fund in accordance with that Fund's
investment objectives, investment program, policies, and restrictions may: (i)
invest in a portion of an issue of publicly issued or privately placed bonds,
debentures, notes, and other debt securities for investment purposes, and (ii)
purchase money market securities and enter into repurchase agreements, provided
such instruments are fully collateralized and marked to market daily;
(12) Unseasoned Issuers: Invest more than 5% of its total assets in securities
of issuers, including their predecessors and unconditional guarantors, which, at
the time of purchase, have been in operation for less
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than three years, other than obligations issued or guaranteed by the United
States Government, its agencies, and instrumentalities;
(13) Restricted Securities, Securities Not Readily Marketable, and Illiquid
Securities: Knowingly purchase or otherwise acquire any security or invest in a
repurchase agreement if, as a result, more than 15% of the net assets of the
Short-Term Bond Fund, Short-Term Government Securities Fund, Small Company
Stock Fund and Value Fund (10% of the net assets of the Daily Income Fund)
would be invested in securities that are restricted, illiquid, or not readily
marketable, including repurchase agreements maturing in more than seven days
and foreign issuers whose securities are not listed on a recognized domestic or
foreign exchange. The Short-Term Government Securities Fund will only invest in
repurchase agreements collateralized by U.S. Government securities or by
securities issued by agencies and instrumentalities of the U.S. Government and
guaranteed by the U.S. Government. As a matter of operating policy, in
compliance with certain state regulations, no more than 5% of any Fund's total
assets will be invested in restricted securities;
(14) Mortgaging: Mortgage, pledge, or hypothecate in any other manner, or
transfer as security for indebtedness any security owned by a Fund, except (i)
as may be necessary in connection with permissible borrowings (in which event
such mortgaging, pledging, and hypothecating may not exceed 10% of each Fund's
total assets) and (ii) with respect to the Short-Term Bond Fund, Small Company
Stock Fund and Value Fund, as may be necessary, in connection with the use of
options and futures contracts;
(15) Warrants: The Daily Income Fund, Short-Term Bond Fund and Short-Term
Government Securities Fund will not invest in warrants. The Small Company Stock
Fund and Value Fund will limit its investment in warrants to no more than 5% of
its net assets, valued at the lower of cost or market value, and will further
limit its investment in unlisted warrants to no more than 2% of its net assets.
(16) Diversification: Make an investment unless 75% of the value of that Fund's
total assets is represented by cash, cash items, U.S. Government securities,
securities of other investment companies and other securities. For purposes of
this restriction, the purchase of "other securities" is limited so that no more
than 5% of the value of the Fund's total assets would be invested in any one
issuer. As a matter of operating policy, each Fund will not consider repurchase
agreements to be subject to the above-stated 5% limitation if all the collateral
underlying the repurchase agreements are U.S. Government securities and such
repurchase agreements are fully collateralized. Further, as a matter of
operating policy, the Daily Income Fund will invest no more than 5% of the value
of that Fund's total assets in securities of any one issuer, other than U.S.
Government securities, except that the Daily Income Fund may invest up to 25% of
its total assets in First Tier Securities (as defined in Rule 2a-7 under the
1940 Act) of a single issuer for a period of up to three business days after the
purchase of such security. Further, as a matter of operating policy, the Daily
Income Fund will not invest more than (i) the greater of 1% of its total assets
or $1,000,000 in Second Tier Securities (as
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defined in Rule 2a-7 under the 1940 Act) of a single issuer and (ii) 5% of the
Daily Income Fund's total assets, when acquired, in Second Tier Securities.
DESCRIPTION OF CERTAIN INVESTMENTS
The following is a description of certain types of investments which may be made
by the Funds.
Money Market Instruments
As stated in the Prospectus, the Daily Income Fund will invest in a diversified
portfolio of U.S. dollar-denominated money market instruments, which are
considered eligible securities for purposes of Rule 2a-7 under the 1940 Act and
present minimal credit risks. The Short-Term Bond Fund, Short-Term Government
Securities Fund, Small Company Stock Fund and Value Fund may invest in
high-quality money market instruments of the same type as the Daily Income Fund
in order to enable it to; (1) take advantage of buying opportunities; (2) meet
redemption requests or ongoing expenses; or (3) take defensive action as
necessary, or for other temporary purposes. The Short-Term Government Securities
Fund will invest in securities backed by the full faith and credit of the U.S.
Government. The money market instruments that may be used for investment (except
as noted above) include:
United States Government Obligations: These consist of various types of
marketable securities issued by the United States Treasury, i.e., bills, notes
and bonds. Such securities are direct obligations of the United States
Government and differ mainly in the length of their maturity. Treasury bills,
the most frequently issued marketable government security, have a maturity of up
to one year and are issued on a discount basis.
United States Government Agency Securities: These consist of debt securities
issued by agencies and instrumentalities of the United States Government,
including the various types of instruments currently outstanding or which may be
offered in the future. Agencies include, among others, the Federal Housing
Administration, Government National Mortgage Association, Farmer's Home
Administration, Export-Import Bank of the United States, Maritime
Administration, and General Services Administration. Instrumentalities include,
for example, each of the Federal Home Loan Banks, the National Bank for
Cooperatives, the Federal Home Loan Mortgage Corporation, the Farm Credit Banks,
the Federal National Mortgage Association, and the United States Postal Service.
These securities are either; (i) backed by the full faith and credit of the
United States Government (e.g., United States Treasury Bills); (ii) guaranteed
by the United States Treasury (e.g., Government National Mortgage Association
mortgage-backed securities); (iii) supported by the issuing agency's or
instrumentality's right to borrow from the United States Treasury (e.g., Federal
National Mortgage Association Discount Notes); or (iv) supported only by the
issuing agency's or instrumentality's own credit (e.g., each of the Federal Home
Loan Banks).
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Bank and Savings and Loan Obligations: These include certificates of
deposit, bankers' acceptances, and time deposits. Certificates of deposit
generally are short-term, interest-bearing negotiable certificates issued by
commercial banks or savings and loan associations against funds deposited in the
issuing institution. Bankers' acceptances are time drafts drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction (e.g., to finance the import, export, transfer, or storage of
goods). With a bankers' acceptance, the borrower is liable for payment as is the
bank, which unconditionally guarantees to pay the draft at its face amount on
the maturity date. Most bankers' acceptances have maturities of six months or
less and are traded in secondary markets prior to maturity. Time deposits are
generally short-term, interest-bearing negotiable obligations issued by
commercial banks against funds deposited in the issuing institutions. The Funds
will not invest in any security issued by a commercial bank or a savings and
loan association unless the bank or savings and loan association is organized
and operating in the United States, has total assets of at least one billion
dollars, and is a member of the Federal Deposit Insurance Corporation ("FDIC"),
in the case of banks, or insured by the FDIC in the case of savings and loan
associations; provided, however, that such limitation will not prohibit
investments in foreign branches of domestic banks which meet the foregoing
requirements. The Funds will not invest in time-deposits maturing in more than
seven days.
Commercial Paper and Other Short-Term Corporate Debt Instruments: These include
commercial paper, (i.e., short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs). Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Also included are non-convertible corporate debt
securities (e.g., bonds and debentures). Corporate debt securities with a
remaining maturity of less than 13 months are liquid (and tend to become more
liquid as their maturities lessen) and are traded as money market securities.
The Daily Income Fund, Short-Term Bond Fund and Value Fund may purchase
corporate debt securities having no more than 13 months remaining to maturity at
the date of settlement; however, the Short-Term Bond Fund, Small Company Stock
Fund and Value Fund may also purchase corporate debt securities having greater
maturities.
Repurchase Agreements: The Funds may invest in repurchase agreements. A
repurchase agreement is an instrument under which the investor (such as the
Fund) acquires ownership of a security (known as the "underlying security") and
the seller (i.e., a bank or primary dealer) agrees, at the time of the sale, to
repurchase the underlying security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period,
unless the seller defaults on its repurchase obligations. The underlying
securities will consist only of high grade money market instruments. With
respect to the Daily Income Fund, the underlying security must be either a U.S.
Government security or a security rated in the highest rating category for
short-term debt securities by the Requisite NRSROs (as defined in Rule 2a-7
under the 1940 Act) and must be determined to present minimal credit risks. With
respect to the Short-Term Government Securities Fund, the underlying
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security must be a U.S. Government security or a security issued by an agency or
instrumentality of the U.S. Government and guaranteed by the U.S. Government.
Repurchase agreements are, in effect, collateralized by such underlying
securities, and, during the term of a repurchase agreement, the seller will be
required to mark-to-market such securities every business day and to provide
such additional collateral as is necessary to maintain the value of all
collateral at a level at least equal to the repurchase price. Repurchase
agreements usually are for short periods, often under one week, and will not be
entered into by a Fund for a duration of more than seven days if, as a result,
more than 15% of the net value of that Fund (10% of the net assets of the Daily
Income Fund) would be invested in such agreements or other securities which are
not readily marketable.
The Funds will seek to assure that the amount of collateral with respect to any
repurchase agreement is adequate. As with a true extension of credit, however,
there is risk of delay in recovery or the possibility of inadequacy of the
collateral should the seller of the repurchase agreement fail financially. In
addition, a Fund could incur costs in connection with disposition of the
collateral if the seller were to default. The Funds will enter into repurchase
agreements only with sellers deemed to be creditworthy by the Homestead Funds'
Board of Directors and only when the economic benefit to the Funds is believed
to justify the attendant risks. The Funds have adopted standards for the sellers
with whom they will enter into repurchase agreements. The Board of Directors
believe these standards are designed to reasonably assure that such sellers
present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase agreement. The Funds may enter
into repurchase agreements only with member banks of the Federal Reserve System
or primary dealers in United States Government securities.
Adjustable Rate Securities: Adjustable rate securities (i.e., variable rate and
floating rate instruments) are securities that have interest rates that are
adjusted periodically, according to a set formula. The maturity of some
adjustable rate securities may be shortened under certain special conditions
described more fully below.
Variable rate instruments are obligations (usually certificates of deposit) that
provide for the adjustment of their interest rates on predetermined dates or
whenever a specific interest rate changes. A variable rate instrument whose
principal amount is scheduled to be paid in 13 months or less is considered to
have a maturity equal to the period remaining until the next readjustment of the
interest rate. Many variable rate instruments are subject to demand features
which entitle the purchaser to resell such securities to the issuer or another
designated party, either (1) at any time upon notice of usually 13 months or
less, or (2) at specified intervals, not exceeding 13 months, and upon 30 days
notice. A variable rate instrument subject to a demand feature is considered to
have a maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
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Floating rate instruments (generally corporate notes, bank notes, or Eurodollar
certificates of deposit) have interest rate reset provisions similar to those
for variable rate instruments and may be subject to demand features like those
for variable rate instruments. The interest rate is adjusted, periodically
(e.g., daily, monthly, semi-annually), to the prevailing interest rate in the
marketplace. The interest rate on floating rate securities is ordinarily
determined by reference to, or is a percentage of, a bank's prime rate, the
90-day U.S. Treasury bill rate, the rate of return on commercial paper or bank
certificates of deposit, an index of short-term interest rates, or some other
objective measure. The maturity of a floating rate instrument is considered to
be the period remaining until the principal amount can be recovered through
demand.
Debt Securities
As noted in the Prospectus, the Short-Term Bond Fund invests at least 65% of its
net assets in a managed portfolio of high-quality debt securities which includes
short-term corporate debt securities, U.S. Government and agency notes and
bonds, mortgage pass-through securities, collateralized mortgage obligations,
other mortgage-related securities and asset-backed securities described below.
The Short-Term Government Securities Fund invests at least 65% of its net assets
in a managed portfolio which includes U.S. Government bills, notes and bonds and
securities issued by agencies and instrumentalities of the U.S. Government that
are guaranteed by the U.S. Government.
The Small Company Stock Fund and the Value Fund may invest up to 20% of their
assets in high-grade debt securities. Debt securities are considered to be
high-grade if they are rated at least A, or its equivalent by one of the NRSROs,
or if not rated, are of equivalent investment quality as determined by RE
Advisers. See the Appendix for a description of each rating category.
Mortgage Pass-Through Securities. Interests in pools of mortgage pass-through
securities differ from other forms of debt securities (which normally provide
periodic payments of interest in fixed amounts and the payment of principal in a
lump sum at maturity or on specified call dates). Instead, mortgage pass-through
securities provide monthly payments consisting of both interest and principal
payments. In effect, these payments are a "pass-through" of the monthly payments
made by the individual borrowers on the underlying residential mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Unscheduled
payments of principal may be made if the underlying mortgage loans are repaid,
refinanced or the underlying properties are foreclosed, thereby shortening the
securities' weighted average life. Some mortgage pass-through securities (such
as securities guaranteed by the Government National Mortgage Association) are
described as "modified pass-through securities." These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, on the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
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The principal governmental guarantor of mortgage pass-through securities is the
Government National Mortgage Association ("GNMA"). GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Treasury, the timely
payment of principal and interest on securities issued by lending institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgage loans. These mortgage loans
are either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. A "pool" or group of such mortgage loans is assembled
and after being approved by GNMA, is offered to investors through securities
dealers.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Treasury) include the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/services which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers. Mortgage
pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Treasury.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Treasury.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage pass-through securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. Timely payment of interest and principal of these pools may be supported
by various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance and letters of credit. The insurance and guarantees
are issued by governmental entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers thereof
will be considered in determining whether a mortgage pass-through security meets
the Short-Term Bond Fund's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The
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Short-Term Bond Fund may buy mortgage pass-through securities without insurance
or guarantees if RE Advisers determines that the securities meet the Fund's
quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The Short-Term Bond Fund will limit investment in
mortgage pass-through securities or other securities which may be considered
illiquid to no more than 15% of the Fund's total assets.
Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are debt securities collateralized by underlying whole mortgage loans
or, more typically, by pools of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA and their income streams. CMOs are generally structured
into multiple classes or tranches, each bearing a different stated maturity. The
actual maturity and average life of a CMO will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series of CMO bonds
(e.g., Series A, B, C, and Z bonds). Proceeds of the CMO bond offering are used
to purchase mortgages or mortgage pass-through certificates which are used as
collateral for the loan ("Collateral"). The Collateral is generally pledged to a
third party trustee as security for the CMO bonds. Principal and interest
payments from the Collateral are used to pay principal on the CMO bonds. The
Series A, B, and C bonds all bear current interest. Interest on the Series Z
bond is accrued and added to principal and a like amount is paid as principal on
the Series A, B, or C bond currently being paid off. When the Series A, B, and C
bonds are paid in full, interest and principal on the Series Z bond begins to be
paid currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
In reliance on an SEC interpretation, the Short-Term Bond Fund's investment in
certain qualifying CMOs, including CMOs that have elected to be treated as Real
Estate Mortgage Investment Conduits ("REMICs"), are not subject to the 1940
Act's limitation on acquiring interests in other investment companies. In order
to be able to rely on the SEC's interpretation, the CMOs and REMICs must be
unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed
securities, (ii) do not issue redeemable securities, (iii) operate under general
exemptive orders exempting them from all provisions of the 1940 Act, and (iv)
are not registered or regulated under the 1940 Act as investment companies. To
the extent that the Short-Term Bond Fund selects CMOs or REMICs that do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities in the aggregate and may not acquire more
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than 3% of the outstanding voting securities of any single such entity. The
Short-Term Government Securities Fund may invest in CMOs guaranteed by GNMA.
Other Mortgage-Related Securities. Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
Asset-Backed Securities. The Short-Term Bond Fund may invest in asset- backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations (such as Certificates for Automobile
Receivables or "CARs") and credit card receivables (such as Credit Card
Receivable Securities or "CARDS"). Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. However, such securities may also
be issued on a pay-through basis (like CMOs) and, in such case, are generally
issued as the debt of a special purpose entity organized solely for the purpose
of owning such asset and issuing such pay- through security. Asset-backed
securities are not issued or guaranteed by the U.S. Government or its agencies
or instrumentalities. The payment of principal and interest on such obligations
may be guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution (such as a bank or insurance
company) affiliated or unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises considerations concerning the
credit support for such securities due to the financing of the instruments
underlying such securities. For example, most organizations that issue
asset-backed securities relating to motor vehicle installment purchase
obligations perfect their interests in their respective obligations only by
filing a financing statement and by having the servicer of the obligations,
which is usually the originator, take custody thereof. In such circumstances, if
the servicer were to sell the same obligations to another party, in violation of
its duty not to do so, there is a risk that such party could acquire an interest
in the obligations superior to that of the holders of the asset-backed
securities. Also, although most such obligations grant a security interest in
the motor vehicle being financed, in most states the security interest in a
motor vehicle must be noted on the certificate of title to perfect such security
interest against competing claims of other parties. Due to the large number of
vehicles involved, however, the certificate of title to each vehicle financed,
pursuant to the obligations underlying the asset-backed securities, usually is
not amended to reflect the assignment of the seller's security interest for the
benefit of the holders of the asset-backed securities. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities.
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In addition, various state and federal laws give the motor vehicle owner the
right to assert against the holder of the owner's obligation certain defenses
such owner would have against the seller of the motor vehicle. The assertion of
such defenses could reduce payments on the related asset-backed securities.
Insofar as credit card receivables are concerned, credit card holders are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such holders the right to set off certain amounts
against balances owed on the credit card, thereby reducing the amounts paid on
such receivables. In addition, unlike most other asset-backed securities, credit
card receivables are unsecured obligations of the cardholder.
The development of asset-backed securities is at an early stage compared to
mortgage pass-through or mortgage-backed securities. While the market for
asset-backed securities is becoming increasingly liquid, the market for such
securities is not as well developed as that for mortgage pass-through securities
guaranteed by government agencies or instrumentalities. RE Advisers intends to
limit its purchases of asset-backed securities to securities that are readily
marketable at the time of purchase.
Maturity of Debt Securities
The maturity of debt securities may be considered long (10 or more years),
intermediate (3 to 10 years), or short-term (1 to 3 years). In general, the
principal values of longer-term securities fluctuate more widely in response to
changes in interest rates than those of shorter-term securities, providing
greater opportunity for capital gain or risk of capital loss. A decline in
interest rates usually produces an increase in the value of debt securities,
while an increase in interest rates generally reduces their value.
When-Issued Securities
Each Fund may, from time to time, purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase, but may take up to three months. During
the period between purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues to a Fund. While when-issued securities may be
sold prior to the settlement date, each Fund intends to purchase such securities
with the purpose of actually acquiring them, unless a sale appears to be
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a security on a when issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. Each Fund
will maintain, in a segregated account with the custodian, cash and liquid
high-quality debt securities equal in value to commitments for when-issued
securities.
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<PAGE> 42
Warrants
Warrants are securities that give the holder the right to purchase equity
securities from the issuer at a specific price (the "strike price") for a
limited period of time. The strike price of warrants typically is higher than
the prevailing market price of the underlying security at the time the warrant
is issued, while the market value of the warrant is typically much lower than
the current market price of the underlying securities. Warrants are generally
considered to be more risky investments than the underlying securities, but may
offer greater potential for capital appreciation than the underlying securities.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities, and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments. The Daily Income Fund,
Short-Term Bond Fund and Short-Term Government Securities Fund will not invest
in warrants. The Small Company Stock Fund and the Value Fund will limit
investment in warrants to no more than 5% of net assets, valued at the lower of
cost or market value, and will further limit its investment in unlisted warrants
to no more than 2% of net assets.
U.S. Dollar-Denominated Securities of Foreign Issuers
Subject to each Fund's investment objectives, investment program, policies, and
restrictions, the Daily Income Fund, Short-Term Bond Fund, Small Company Stock
Fund and Value Fund may invest in certain types of U.S. dollar-denominated
securities of foreign issuers. As described in the Prospectus, with respect to
equity securities, the Short-Term Bond Fund, Small Company Stock Fund and Value
Fund may purchase American Depository Receipts ("ADRs"). The Daily Income Fund,
Short-Term Bond Fund, Small Company Stock Fund and the Value Fund also may
purchase U.S. dollar-denominated money market instruments, and the Short-Term
Bond Fund, Small Company Stock Fund and the Value Fund may purchase longer-term
debt securities of foreign issuers. Such money market instruments and debt
securities of foreign issuers may be issued and traded domestically (e.g.,
Yankee securities), or traded exclusively in foreign markets (e.g., Eurodollar
securities).
Yankee securities include money market instruments and bonds of foreign issuers
who customarily register such securities with the SEC and borrow U.S. dollars by
underwritings of securities intended for delivery in the United States. Although
the principal trading market for Yankee securities is the United States, foreign
buyers can and do participate in the Yankee securities market. Interest on such
Yankee bonds is customarily paid on a semi-annual basis. The marketability of
these "foreign bonds" in the United States is in many cases better than that for
foreign bonds in foreign markets, but is, of course, dependent upon the quality
of the issuer.
Eurodollar securities include money market instruments and bonds underwritten by
an international syndicate and sold "at issue" to non-U.S. investors. Such
securities are not registered with the SEC or issued domestically and generally
14
<PAGE> 43
may only be sold to U.S. investors after the initial offering and cooling-off
periods. The market for Eurodollar securities is dominated by foreign-based
investors and the primary trading market for these securities is London.
The Daily Income Fund, Short-Term Bond Fund, Small Company Stock Fund and Value
Fund may invest in U.S. dollar denominated securities issued by foreign
broker-dealers, commercial banks or registered investment advisers. In general,
however, mutual funds are prohibited under Section 12(d)(3) of the 1940 Act and
current rules thereunder from purchasing the securities of any foreign
broker-dealer, commercial bank or registered investment adviser that, in its
most recent fiscal year, derived more than 15% of such entity's gross revenues
from securities-related activities. The SEC adopted certain amendments to Rule
12d3-1 under the 1940 Act that would permit mutual funds to acquire the equity
securities of certain foreign securities-related businesses.
Although investments in securities of foreign issuers are intended to reduce
risk by providing further diversification, such investments involve risks not
ordinarily associated with investments in securities of domestic issuers. These
risks include: the possibility of foreign political and economic instability;
difficulties of predicting international trade patterns and the possibility of
the imposition of exchange controls; and the possibility of expropriation,
confiscatory taxation, or nationalization of foreign portfolio companies.
Securities of foreign issuers that are traded primarily abroad (e.g., Eurodollar
securities) also may be less liquid and subject to greater price fluctuations
than securities of domestic issuers. Moreover, there may be less publicly
available information about foreign issuers whose securities are not registered
with the SEC and such foreign issuers may not be subject to the accounting,
auditing and financial reporting standards applicable to issuers registered
domestically. In addition, foreign issuers, stock exchanges, and brokers
generally are subject to less government regulation. Moreover, there may be
difficulties in obtaining and enforcing court judgment abroad and there may be
difficulties in effecting the repatriation of capital invested abroad. Finally,
there may be difficulties and delays in the settlement of transactions in
certain foreign markets.
The portfolio turnover rates for the years ended December 31, 1997 and 1996 were
55% and 49%, respectively for the Short-Term Bond Fund, 12% and 21%,
respectively for the Short-Term Government Securities Fund and 6% and 5%,
respectively for the Value Fund.
MANAGEMENT OF THE HOMESTEAD FUNDS
Directors and Officers
Directors and officers of the Homestead Funds, together with information as to
their principal business occupations during the last five years, are shown
below. Each Director who is considered an "interested person" of the Homestead
Funds (as defined in Section 2(a)(19) of the 1940 Act) is indicated by an
15
<PAGE> 44
asterisk next to his name. The address for all interested persons is 4301 Wilson
Boulevard, Arlington, VA 22203.
Compensation: Messrs. Lucier and Perna are paid $2,000 each per meeting for
attendance at Board of Directors' meetings and $1,000 each per meeting for
attendance at Audit Committee meetings.
<TABLE>
<CAPTION>
Position with the Homestead Funds
and Principal Occupation within
Business Address Past Five Years
- ---------------- -----------------------------------
<S> <C>
Francis P. Lucier Director; Corporate Consultant; Director,
2001 N.W. Royal Fern Court PHH Corporation.
Palm City, FL 34990
Age 70
Anthony M. Marinello* Vice President and Director; Executive
Age 52 Director of Marketing and Service
Operations of NRECA (1988-Present).
Peter R. Morris* Secretary, Treasurer and Director; Vice
Age 49 President and Director of RE Advisers;
Secretary, Treasurer and Director of
RE Investment; Executive Director of
Investments of NRECA (1988-Present).
James F. Perna Director; Partner, Krooth & Altman
1850 M Street, N.W., Suite 400 (law firm).
Washington, D.C. 20036
Age 50
Anthony C. Williams* President, Chairman of the Board and
Age 56 Director; President and Director of RE
Advisers; President and Director of
RE Investment; Director of
Retirement, Safety and Insurance
Department of NRECA (1985-Present);
Director, Cooperative Benefit
Administrators, Inc., Electric Life
Cooperative Insurance Company and
Cooperative Insurance Services, Inc.
(1985-Present).
William P. McKeithan* Vice President and Counsel; Vice
Age 50 President of RE Investment; Counsel,
NRECA (1983-Present).
Catherine M. Blushi* Compliance Officer and Assistant
Age 37 Secretary; Compliance Officer of RE
Advisers; Securities Compliance Officer
of RE Investment and NRECA (August
1990-Present).
</TABLE>
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<PAGE> 45
COMMITTEES OF THE BOARD OF DIRECTORS
The Homestead Funds have an Audit Committee and an Executive Committee. The
duties of these two committees and their present membership are as follows:
Audit Committee: The members of the Audit Committee will consult with the
Homestead Funds' independent auditors if the auditors or Audit Committee deem it
desirable, and will meet with the Homestead Funds' independent auditors at least
once annually to discuss the scope and results of the annual audit of the Funds
and such other matters as the Audit Committee members may deem appropriate or
desirable. Messrs. Lucier and Perna are members of the Audit Committee.
Executive Committee: During intervals between Board Meetings, the Executive
Committee possesses and may exercise all of the powers of the Board of Directors
in the management of the Homestead Funds except as to matters where action of
the full Board of Directors is specifically required. Included within the scope
of such powers are matters relating to valuation of securities held in each
Fund's portfolio and the pricing of each Fund's shares for purchase and
redemption. Messrs. Williams, Marinello, and Morris are members of the Executive
Committee.
PRINCIPAL HOLDERS OF SECURITIES
Directors and officers of the Homestead Funds, as a group, owned less than 1% of
the outstanding voting securities of the Daily Income Fund, Short-Term Bond
Fund, Short-Term Government Securities Fund and Value Fund as of December 31,
1997.
NRECA and its affiliates, 4301 Wilson Boulevard, Arlington, VA 22203, as of
December 31, 1997, owned 7.8% of the outstanding voting securities of the Daily
Income Fund and may be considered an interested person of the Fund.
INVESTMENT MANAGEMENT AND OTHER SERVICES
RE Advisers, 4301 Wilson Boulevard, Arlington, VA 22203, serves as investment
manager of the Daily Income Fund, Short-Term Bond Fund, Short-Term Government
Securities Fund, Small Company Stock Fund and Value Fund pursuant to separate
Investment Management Agreements that have been annually approved by the Board
of Directors of the Homestead Funds, including a majority of independent
Directors. The Investment Management Agreements with respect to the Daily Income
Fund and the Value Fund were approved by the majority vote of the respective
shareholders of the Daily Income Fund and the Value Fund at the Meetings of
Shareholders held on November 25 and 26, 1996. The Investment Management
Agreement between the Homestead Funds, with respect to the Short-Term Bond Fund
and Short-Term Government Securities Fund, and RE Advisers was approved by the
majority vote of the shareholders of the Short-Term Bond Fund and Short-Term
Government Securities Fund at the Meeting of Shareholders held on December
12, 1996.
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<PAGE> 46
The initial term of each Investment Management Agreement is one year. However,
once the Investment Management Agreements for each Fund are approved by the
respective shareholders of each Fund, each such Agreement may continue in effect
from year to year thereafter if approved at least annually by a vote of a
majority of the Board of Directors (including a majority of the Directors who
are not parties to the Investment Management Agreement or interested persons of
any such parties) cast in person at a meeting called for the purpose of voting
on such renewal, or by the vote of a majority of the outstanding shares of the
particular Fund.
RE Advisers
The directors and the principal executive officers of RE Advisers are Anthony C.
Williams, Peter R. Morris, and Stuart E. Teach. RE Advisers is a direct
subsidiary of RE Investment, which is a wholly-owned subsidiary of NRECA United,
Inc., a holding company organized by NRECA to hold stock of certain NRECA
subsidiaries.
In addition to the duties set forth in the Prospectus, RE Advisers, in
furtherance of such duties and responsibilities, is authorized and has agreed to
provide or perform the following functions: (1) formulate and implement a
continuing investment program for use in managing the assets and resources of
each Fund in a manner consistent with each Fund's investment objectives,
investment program, policies, and restrictions, which program may be amended and
updated from time to time to reflect changes in financial and economic
conditions; (2) make all determinations with respect to the investment of each
Fund's assets in accordance with (a) applicable law, (b) each Fund's investment
objectives, investment program, policies, and restrictions as provided in the
Homestead Funds' Prospectus and Statement of Additional Information, as amended
from time to time, (c) provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), relating to regulated investment companies, and (d) such
other limitations as the Board of Directors of the Homestead Funds may impose by
written notice; (3) make all determinations as to the purchase or sale of
portfolio securities, including advising the Board of Directors as to certain
matters involving each Fund's portfolio securities that are not in the nature of
investment decisions; (4) buy, sell, exchange, convert for each Fund's use, and
otherwise trade in portfolio securities and other assets; (5) furnish to the
Board of Directors periodic reports concerning RE Adviser's economic outlook
and investment strategy, as well as information concerning each Fund's portfolio
activity and investment performance; (6) select the broker-dealers,
underwriters, or issuers to be used, place orders for the execution of portfolio
transactions with such broker-dealers, underwriters or issuers, and negotiate
the commissions (if any) for the execution of transactions in securities with or
through such broker-dealers, underwriters or issuers selected by RE Advisers;
(7) obtain and evaluate business and financial information in connection with
the exercise of its duties; (8) determine the quality of the Daily Income Fund's
portfolio; (9) determine the creditworthiness of the issuers, obligors, or
guarantors of portfolio securities; and (10) evaluate the creditworthiness of
any entities with which
18
<PAGE> 47
the Funds propose to engage in repurchase transactions. In addition, RE Advisers
has agreed to provide a number of administrative services to the Homestead Funds
including: maintenance of the Homestead Funds' corporate existence and corporate
records; maintenance of the registration and qualification of each Fund's shares
under federal and state law; coordination and supervision of the financial,
accounting, and administrative functions for each Fund; selection, coordination
of the activities of, supervision, and service as liaison with various agents
and other parties employed by the Homestead Funds (e.g., custodian, transfer
agent, auditors, and attorneys); and assistance in the preparation and
development of all shareholder communications and reports. RE Advisers also will
furnish to or place at the disposal of the Funds such information, reports,
evaluations, analyses, and opinions as the Homestead Funds may, from time to
time, reasonably request or which RE Advisers believes would be helpful to the
Funds.
Under a Joint Services Agreement by and between NRECA, RE Advisers and RE
Investment Corporation ("RE Investment"), NRECA has agreed to provide personnel,
property, and services to RE Investment and RE Advisers in carrying out their
responsibilities and services under agreements with the Homestead Funds. In
turn, RE Advisers has agreed to provide, without cost to the Homestead Funds,
persons (who are directors, officers, or employees of RE Advisers) to serve as
directors, officers, or members of any committees of the Board of Directors of
the Homestead Funds. As between the Homestead Funds and RE Advisers, RE Advisers
has agreed to pay all necessary salaries, expenses and fees, if any, of the
directors, officers and employees of the Homestead Funds who are affiliated with
RE Advisers.
As compensation for its services and for the expenses which it assumes, the
Homestead Funds pay RE Advisers, on a monthly basis, an investment management
fee based on each Fund's average daily net assets at the following annualized
rates: with respect to the Daily Income Fund, .50% of average daily net assets;
with respect to the Short-Term Bond Fund, .60% of average daily net assets; with
respect to the Short-Term Government Securities Fund, .45% of average daily net
assets; with respect to the Small Company Stock Fund, .85% of average daily net
assets up to $200 million and .75% of average daily net assets in excess of $200
million; and with respect to the Value Fund, .65% of average daily net assets up
to $200 million; .50% of average daily net assets up to the next $200 million;
and .40% of average daily net assets in excess of $400 million.
For the years ended December 31, 1997 and 1996, investment management fees paid
to RE Advisers by the Daily Income Fund were $265,580 and $239,975,
respectively, the Short-Term Bond Fund were $458,287 and $327,392, respectively,
and the Value Fund were $1,902,966 and $978,928, respectively. There were no
management fees paid by the Short-Term Government Securities Fund for either of
the above stated periods. The investment management fees for each Fund were paid
pursuant to provisions contained in the Expense Limitation Agreement between the
Homestead Funds and RE Advisers, with respect to each Fund and are described
directly below.
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<PAGE> 48
Each Expense Limitation Agreement provides that to the extent that the aggregate
expenses incurred by each Fund in any fiscal year, including but not limited to
fees of RE Advisers, computed as hereinabove set forth (but excluding interest,
taxes, brokerage commissions, and other expenditures which are capitalized in
accordance with generally accepted accounting principles, and other
extraordinary expenses not incurred in the ordinary course of each Fund's
business) (hereinafter referred to as "Fund Operating Expenses"), exceed the
lowest applicable limit actually enforced by any state in which a Fund's shares
are qualified for sale ("State Expense Limit"), such excess amount ("Excess
Amount") will be the liability of RE Advisers. To determine RE Advisers'
liability for the Excess Amount, the Fund Operating Expenses will be annualized
monthly as of the last day of the month. If the annualized Fund Operating
Expenses for any month exceed the State Expense Limit, RE Advisers will first
waive or reduce its investment management fee for such month, as appropriate, to
the extent necessary to pay such Excess Amount. In the event the Excess Amount
exceeds the amount of the investment management fee for such month, RE Advisers,
in addition to waiving its entire investment management fee for such month, will
also remit to the applicable Fund the difference between the Excess Amount and
the amount due as the investment management fee, provided, however, that an
adjustment will be made on or before the last day of the first month of the next
succeeding fiscal year if the aggregate Fund Operating Expenses for that Fund
for the fiscal year do not exceed the State Expense Limit.
In addition, the Expense Limitation Agreements provide that RE Advisers is also
liable for any other Fund Operating Expenses which in any year exceed .80% of
the Daily Income Fund's average daily net assets; .75% of the Short- Term Bond
Fund's or Short-Term Government Securities Fund's average daily net assets;
1.50% of the Small Company Stock Fund's average daily net assets; and 1.25% of
the Value Fund's average daily net assets (the "Operating Expense Limit"). To
determine RE Advisers' liability for each Fund's expenses, the expenses of each
Fund will be annualized monthly as of the last day of the month. If the
annualized expenses for any month exceed the Operating Expense Limit, for each
Fund, such excess amount ("Excess Operating Amount") will be the liability of RE
Advisers. To pay such liability, RE Advisers will first waive or reduce its
investment management fee for such month, as appropriate, and, if necessary,
will also assume as its own expense and reimburse each Fund for the difference
between the Excess Operating Amount and the investment management fee up to the
amount of the State Expense Limit; provided, however, that an adjustment, if
necessary, will be made on or before the last day of the first month of the next
succeeding fiscal year, if the aggregate Fund Operating Expenses for the fiscal
year do not exceed the Operating Expense Limit.
For the years ended December 31, 1997 and 1996, RE Advisers assumed and
reimbursed Fund Operating Expenses for the Short-Term Government Securities
Fund in the amount of $8,787 and $52,282, respectively, and waived investment
managements fees in the amount of $17,263 and $28,659, respectively, for the
Daily Income Fund, $120,074 and $10,694, respectively for the Short-Term Bond
Fund and $56,654 and $24,988, respectively for the Short-Term Government
Securities Fund.
The Adviser is taking appropriate steps to assess the impact of the
Year 2000 on all computer systems used by the Funds. The primary computer
systems used by the Funds are provided by PNC Bank ("PNC"), in its capacity as
custodian, and PFPC, Inc. ("PFPC"), in its capacity as accounting services
agent, as well as the transfer, dividend disbursing and shareholder servicing
agent. The Adviser is monitoring PNC's and PFPC's assessment of the impact of
the Year 2000 on their computer systems. PNC and PFPC have completed their
assessments and plan to complete corrective actions prior to December 31, 1998.
At this time, the projected costs for system modifications or other corrective
actions to address the Year 2000 is not expected to have a significant impact
on the Funds.
20
<PAGE> 49
CUSTODIAN
PNC Bank ("PNC"), 400 Bellevue Parkway, Wilmington, DE 19809, is custodian of
the securities and cash owned by the Funds. PNC is responsible for holding all
securities and cash of each Fund, receiving and paying for securities
purchased, delivering against payment securities sold, receiving and collecting
income from investments, making all payments covering expenses of the Homestead
Funds, computing the net asset value of each Fund, calculating each Fund's
standardized performance information, and performing other administrative
duties, all as directed by persons authorized by the Homestead Funds. PNC does
not exercise any supervisory function in such matters as the purchase and sale
of portfolio securities, payment of dividends, or payment of expenses of the
Funds or the Homestead Funds. Portfolio securities of the Funds purchased in
the United States are maintained in the custody of PNC and may be entered into
the Federal Reserve Book Entry System, or the security depository system of the
Depository Trust Company. Pursuant to the Custodian Agreement, portfolio
securities purchased outside the United States are maintained in the custody of
various foreign custodians, including foreign banks and foreign securities
depositories, as are approved by the Board of Directors, in accordance with
regulations under the 1940 Act. The Funds may invest in obligations of PNC and
may purchase or sell securities from or to PNC.
PFPC, Inc. is the transfer agent and dividend disbursing agent for the
Funds and provides the Funds with various shareholder services, including
shareholder communications and responses to shareholder inquiries.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Neither the Homestead Funds nor any of its Directors or officers nor those of RE
Advisers have any interest in any brokerage firm through which or with which
each Fund effects purchases or sales of its portfolio securities that would
cause such brokerage firm to be considered an affiliated person of such entity
or person.
Subject to the general supervision of the Board of Directors, RE Advisers is
responsible for making decisions with respect to the purchase and sale of
portfolio securities on behalf of each Fund. RE Advisers is also responsible for
the implementation of those decisions, including the selection of broker-dealers
to effect portfolio transactions, the negotiation of commissions, and the
allocation of principal business and portfolio brokerage.
Purchases and sales of common stock and other equity securities are usually
effected on an exchange through brokers who charge a commission. The purchase of
money market instruments and other debt securities traded in the
over-the-counter market usually will be on a principal basis directly from
issuers or dealers serving as primary market makers. Occasionally, equity
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<PAGE> 50
securities may be traded in the over-the-counter market as well. The price of
such money market instruments and debt securities, as well as equity securities
traded in the over-the counter market, is usually negotiated, on a net basis,
and no brokerage commissions are paid. Although no stated commissions are paid
for securities traded in the over-the-counter market, transactions in such
securities with dealers usually include the dealer's "mark-up" or "mark-down."
Money market instruments and other debt securities as well as certain equity
securities may also be purchased in underwritten offerings, which include a
fixed amount of compensation to the underwriter, generally referred to as the
underwriting discount or concession.
In selecting brokers and dealers to execute transactions for each Fund, RE
Advisers' primary consideration is to seek to obtain the best execution of the
transactions, at the most favorable overall price, and in the most effective
manner possible, considering all the circumstances. Such circumstances include:
the price of the security; the rate of the commission or broker-dealer's
"spread"; the size and difficulty of the order; the reliability, integrity,
financial condition, general execution and operational capabilities of competing
broker-dealers; and the value of research and other services provided by the
broker-dealer. RE Advisers may also rank broker-dealers based on the value of
their research services and may use this ranking as one factor in its selection
of broker-dealers.
In placing orders for each Fund, RE Advisers, subject to seeking best execution,
is authorized pursuant to the Investment Management Agreements to cause each
Fund to pay broker-dealers that furnish brokerage and research services (as such
services are defined under Section 28(e) of the Securities Exchange Act of 1934,
as amended (the "1934 Act")) a higher commission than that which might be
charged by another broker-dealer that does not furnish such brokerage and
research services or who furnishes services of lesser value. However, such
higher commissions must be deemed by RE Advisers as reasonable in relation to
the brokerage and research services provided by the broker-dealer, viewed in
terms of either that particular transaction or the overall decision-making
responsibilities of RE Advisers with respect to the Homestead Funds or other
accounts, as to which it exercises investment discretion (as such term is
defined under Section 3(a)(35) of the 1934 Act).
For the years ended December 31, 1997 and 1996, the Daily Income Fund,
Short-Term Government Securities Fund and Short-Term Bond Fund paid no brokerage
commissions. For the years ended December 31, 1997 and 1996, the Value Fund paid
$158,740 and $116,507, respectively in brokerage commissions, all of which were
paid to brokers that provided research and other brokerage services to RE
Advisers.
RE Advisers currently provides investment advice to the Homestead Funds as well
as certain private advisory accounts. In addition, persons employed by RE
Advisers currently provide investment advice to and supervision and monitoring
of a qualified defined benefit plan, a qualified defined contribution plan, and
a welfare benefit plan provided by NRECA for its employees and employees of its
22
<PAGE> 51
rural electric cooperative members ("NRECA Plans"). Some of the NRECA Plans and
other accounts have investment objectives and programs similar to the Homestead
Funds. Accordingly, occasions may arise when RE Advisers and the NRECA
investment personnel may engage in simultaneous purchase and sale transactions
of securities that are consistent with the investment objectives and programs of
the Homestead Funds, the NRECA Plans, and other accounts.
On those occasions when such simultaneous investment decisions are made, RE
Advisers and the NRECA investment personnel will allocate purchase and sale
transactions in an equitable manner according to written procedures approved by
the Homestead Funds' Board of Directors. Specifically, such written procedures
provide that, in allocating purchase and sale transactions made on a combined
basis, RE Advisers and the NRECA investment personnel will seek to achieve the
same average unit price of securities for each entity and will seek to allocate,
as nearly as practicable, such transactions on a pro-rata basis substantially in
proportion to the amounts ordered to be purchased or sold by each entity. Such
procedures may, in certain instances, be either advantageous or disadvantageous
to the Homestead Funds.
PURCHASE AND REDEMPTION OF SECURITIES BEING OFFERED
The shares of each Fund are offered to the public for purchase directly through
RE Investment, which serves as the principal underwriter and distributor for the
Homestead Funds.
The offering and redemption price of the shares of each Fund is based upon that
Fund's net asset value per share next determined after a purchase order or
redemption request has been received in good order by the Homestead Funds'
transfer agent. See "Determination of Net Asset Value" below. Each Fund intends
to pay all redemptions of its shares in cash. However, each Fund may make full
or partial payment of any redemption request by the payment to shareholders of
portfolio securities of the applicable Fund (i.e., by redemption-in-kind), at
the value of such securities used in determining the redemption price. The
Funds, nevertheless, pursuant to Rule 18f-1 under the 1940 Act, have filed a
notification of election under which each Fund is committed to pay in cash to
any shareholder of record, all such shareholder's requests for redemption made
during any 90-day period, up to the lesser of $250,000 or 1% of the applicable
Fund's net asset value at the beginning of such period. The securities to be
paid in-kind to any shareholders will be readily marketable securities selected
in such manner as the Board of Directors of the Homestead Funds deems fair and
equitable. If shareholders were to receive redemptions-in-kind, they would incur
brokerage costs should they wish to liquidate the portfolio securities received
in such payment of their redemption request. The Homestead Funds do not
anticipate making redemptions-in-kind.
The right to redeem shares or to receive payment with respect to any redemption
of shares of the Funds may only be suspended (1) for any period during which
trading on the New York Stock Exchange ("Exchange") is restricted or such
Exchange is closed, other than customary weekend and holiday closings, (2) for
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<PAGE> 52
any period during which an emergency exists as a result of which disposal of
securities or determination of the net asset value of the Fund is not reasonably
practicable, or (3) for such other periods as the SEC may by order permit for
protection of shareholders of the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value of shares of each Fund is normally calculated as of the
close of trading on the Exchange on every day the Exchange is open for trading,
except (1) on days where the degree of trading in the Fund's portfolio
securities would not materially affect the net asset value of the Fund's shares
and (2) on days during which no shares of the Fund were tendered for redemption
and no purchase orders were received. The Exchange is open Monday through Friday
except on the following national holidays: New Year's Day, Martin Luther King
Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
The net asset value of each Fund's shares is determined by adding the value of
all securities, cash and other assets of the Fund, subtracting liabilities
(including accrued expenses and dividends payable) and dividing the result by
the total number of outstanding shares in the Fund.
For purposes of calculating the Daily Income Fund's net asset value per share,
portfolio securities are valued on the basis of amortized cost, which method
does not take into account unrealized gains or losses on the portfolio
securities. Amortized cost valuation involves initially valuing a security at
its cost, and thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the security. While this method provides certainty in
valuation, it may result in periods during which the value of a security, as
determined by amortized cost, may be higher or lower than the price the Daily
Income Fund would receive if it sold the security.
For purposes of calculating the net asset value per share of the Short-Term
Bond Fund, Short-Term Government Securities Fund, Small Company Stock Fund and
Value Fund, portfolio securities are valued primarily based on market
quotations, or if market quotations are not available, by a method that the
Board of Directors believes accurately reflects fair value. In accordance with
procedures and agreements approved by the Board of Directors, the Homestead
Funds will use PFPC to perform the above-described valuation functions and RE
Advisers continuously monitors PFPC's performance of those functions.
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<PAGE> 53
DISTRIBUTION OF SHARES
Pursuant to a Distribution Agreement between the Homestead Funds and RE
Investment, a wholly-owned subsidiary of NRECA United, Inc., a holding company
organized by NRECA, RE Investment serves as the exclusive principal underwriter
and distributor of the shares of each Fund in a continuous offering.
Under the terms of the Distribution Agreement, RE Investment is not obligated to
sell any specific number of shares of the Funds. Pursuant to the Distribution
Agreement, RE Investment has agreed to bear the costs and expenses incurred by
it in performing its obligations thereunder, including the following costs and
expenses: (1) the printing and distribution of the Homestead Funds' Prospectus,
Statement of Additional Information, and periodic reports to potential investors
in the Funds; (2) the preparation, printing, and distribution of any
advertisement or other sales literature; and, (3) all other expenses which are
primarily for the purpose of promoting the sale of each Fund's shares.
As previously discussed in this Statement of Additional Information, NRECA has
agreed to provide personnel, property, and services to RE Investment in carrying
out its responsibilities and services under its agreement with the Homestead
Funds. In turn, RE Investment has agreed to provide, without cost to the
Homestead Funds, persons to serve as directors, officers, or employees of the
Homestead Funds.
RE Investment will not receive commissions or other compensation for acting as
principal underwriter and distributor of the Homestead Funds, and no commission
or other fee will be paid by the Homestead Funds or RE Investment to any person
or entity in connection with the sale of shares of the Funds.
TAXES
Each Fund intends to continue to qualify as a "regulated investment company"
("RIC") under Subchapter M of the Code. As such, each Fund must meet the
requirements of Subchapter M of the Code, including the requirements regarding
25
<PAGE> 54
the character of investments in each Fund, investment diversification, and
distribution.
In general, to qualify as a RIC, at least 90% of the gross income of each Fund
for the taxable year must be derived from dividends, interest, and gains from
the sale or other disposition of securities.
A RIC must distribute to its shareholders 90% of its ordinary income and net
short-term capital gains. Moreover, undistributed net income may be subject to
tax at the RIC level.
In addition, each Fund must declare and distribute dividends equal to at least
98% of its ordinary income (as of the twelve months ended December 31) and
distributions of at least 98% of its capital gains net income (as of the twelve
months ended December 31), in order to avoid a federal excise tax. Each Fund
intends to make the required distributions, but they cannot guarantee that they
will do so. Dividends attributable to a Fund's ordinary income are taxable as
such to shareholders.
A corporate shareholder may be entitled to take a deduction for income dividends
received by it that are attributable to dividends received from a domestic
corporation, provided that both the corporate shareholder retains its shares in
the applicable Fund for more than 45 days and the Fund retains its shares in the
issuer from whom it received the income dividends for more than 45 days. A
distribution of capital gains net income reflects a Fund's excess of net
long-term gains over its net short-term losses. Each Fund must designate income
dividends and distributions of capital gains net income and must notify
shareholders of these designations within sixty days after the close of the
Homestead Funds' taxable year. A corporate shareholder of a Fund cannot use a
dividends-received deduction for distributions of capital gains net income.
If, in any taxable year, a Fund should not qualify as a RIC under the Code: (1)
that Fund would be taxed at normal corporate rates on the entire amount of its
taxable income without deduction for dividends or other distributions to its
shareholders, and (2) that Fund's distributions to the extent made out of that
Fund's current or accumulated earnings and profits would be taxable to its
shareholders (other than shareholders in tax deferred accounts) as ordinary
dividends (regardless of whether they would otherwise have been considered
capital gains dividends), and may qualify for the deduction for dividends
received by corporations.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFIC"), that Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
26
<PAGE> 55
interest may be imposed on the Fund with respect to deferred taxes arising from
the distributions or gains. If a Fund were to purchase shares in a PFIC and (if
the PFIC made the necessary information available) elected to treat the PFIC as
a "qualified electing fund" under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90 percent and
calendar year distribution requirements described above.
CAPITAL STOCK AND CORPORATE MATTERS
As a Maryland corporate entity, the Homestead Funds need not hold regular annual
shareholder meetings and, in the normal course, do not expect to hold such
meetings. The Homestead Funds, however, must hold shareholder meetings for such
purposes as, for example: (1) electing the initial Board of Directors; (2)
approving certain agreements as required by the 1940 Act; (3) changing
fundamental investment objectives, policies, and restrictions of the Funds; and
(4) filling vacancies on the Board of Directors in the event that less than a
majority of the Directors were elected by shareholders. The Homestead Funds
expect that there will be no meetings of shareholders for the purpose of
electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by shareholders. At such time, the
Directors then in office will call a shareholders meeting for the election of
Directors. In addition, holders of record of not less than two-thirds of the
outstanding shares of the Homestead Funds may remove a Director from office by a
vote cast in person or by proxy at a shareholder meeting called for that purpose
at the request of holders of 10% or more of the outstanding shares of the
Homestead Funds. The Funds have the obligation to assist in such shareholder
communications. Except as set forth above, Directors will continue in office and
may appoint successor Directors.
PERFORMANCE INFORMATION ABOUT THE FUNDS
Daily Income Fund Yield Calculation
The Daily Income Fund calculates a seven-day "current yield" based on a
hypothetical account containing one share at the beginning of the seven-day
period. Current yield is calculated for the seven-day period by determining the
net change in the hypothetical account's value for the period (excluding
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation, and including all dividends accrued and dividends
reinvested in additional shares), and dividing the net change in the account
value by the value of the account at the beginning of the period in order to
obtain the base period return. This base period return is then multiplied by
365/7 to annualize the yield figure, which is carried to the nearest
one-hundredth of one percent. Realized capital gains or losses and unrealized
appreciation or depreciation of the assets of the Daily Income Fund are included
in the hypothetical account for only the beginning of the period. Account values
also reflect all accrued expenses.
27
<PAGE> 56
The Daily Income Fund's compound effective yield for the period is computed by
compounding the unannualized base period return by adding one to the base period
return, raising the sum to a power equal to 365/7, and subtracting one from the
result. Current and compound yields will fluctuate daily. Accordingly, yields
for any given seven-day period do not necessarily represent future results.
The seven-day current yield and compound effective yield of the Daily Income
Fund at December 31, 1997 were 5.10% and 5.23%, respectively.
Total Return Calculations
Each Fund may provide average annual total return information calculated
according to a formula prescribed by the SEC. According to that formula, average
annual total return figures represent the average annual compounded rate of
return for the stated period. Average annual total return quotations reflect the
percentage change between the beginning value of a static account in the Fund
and the ending value of that account measured by the then current net asset
value of that Fund assuming that all dividends and capital gains distributions
during the stated period were reinvested in shares of the Fund when paid. Total
return is calculated by finding the average annual compounded rates of return of
a hypothetical investment that would equate the initial amount invested to the
ending redeemable value of such investment, according to the following formula:
T=(ERV/P)1/n - 1
where T equals average annual total return; where ERV, the ending redeemable
value, is the value at the end of the applicable period of a hypothetical $1,000
payment made at the beginning of the applicable period; where P equals a
hypothetical initial payment of $1,000; and where n equals the number of years.
The average annual total returns for the 12 months ended December 31, 1997, five
years ended December 31, 1997 and since inception (on November 19, 1990) for the
Daily Income Fund were 4.92%, 4.28% and 4.38%, respectively, and for the Value
Fund were 26.70%, 19.48% and 17.76%, respectively. The average annual total
returns for the Short-Term Bond Fund for the 12 months ended December 31, 1997,
five years ended December 31, 1997 and since inception (on November 5, 1991)
were 6.62%, 5.80% and 6.06%, respectively. The average annual total returns for
the Short-Term Government Securities Fund for the 12 months ended December 31,
1997 and since inception (on May 1, 1995) were 5.73% and 5.87%, respectively.
If RE Advisers had not assumed certain Fund Operating Expenses for the Daily
Income Fund, Short-Term Bond Fund and Short-Term Government Securities Fund as
noted above, in accordance with the Expense Limitation Agreement with respect to
each Fund, the average annual total return for the 12 months ended December 31,
1997 would have been 4.89% 6.50% and 5.21%, respectively.
28
<PAGE> 57
Each Fund, from time to time, also may advertise its cumulative total return
figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in shares of that Fund. Cumulative total return is calculated by
finding the compound rates of a hypothetical investment over such period,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
The cumulative total return for the Daily Income Fund from its inception date
(November 19, 1990) to December 31, 1997 was 35.69%; for the Short-Term Bond
Fund from its inception date (November 5, 1991) to December 31, 1997 was 43.74%;
for the Short-Term Government Securities Fund from its inception date (May 1,
1996) to December 31, 1997 was 16.45%; and for the Value Fund from its inception
date (November 19, 1990) to December 31, 1997 was 220.44%.
Short-Term Bond Fund and Short-Term Government Securities Fund Yield
Calculations. In addition to providing cumulative total return information, the
Short-Term Bond Fund and Short-Term Government Securities Fund may also
illustrate performance by providing yield information.
Each Fund's yield is based on a specified 30-day (or one month) period and is
computed by dividing the net investment income per share earned during the
specified period by the maximum offering price (i.e., net asset value) per share
on the last day of the specified period, and annualizing the net results
according to the following formula:
a-b 6
YIELD = 2[(____+ 1) -1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
29
<PAGE> 58
Yield fluctuations may reflect changes in net income, and portfolio changes
resulting from net purchases or net redemptions of the Fund's shares may affect
its yield. Accordingly, yield may vary from day to day, and the yield stated for
a particular past period is not necessarily representative of the Fund's future
yield. The yields of the Short-Term Bond Fund and Short-Term Government
Securities Fund are not guaranteed, and the principal is not insured.
The 30-day yield of the Short-Term Bond Fund and Short-Term Government
Securities Fund as of December 31, 1997 was 5.85% and 5.15%, respectively.
From time to time, in reports and promotional literature, each Fund's
performance may be compared to: (1) other groups of mutual funds tracked by: (A)
Lipper Analytical Services, a widely-used independent research firm which ranks
mutual funds by overall performance, investment objectives, and asset size; (B)
Forbes Magazine's Annual Mutual Funds Survey and Mutual Fund Honor Roll; or (C)
other financial or business publications, such as Business Week, Money Magazine,
and Barron's, which provide similar information; (2) the Consumer Price Index
(measure for inflation), which may be used to assess the real rate of return
from an investment in each Fund; (3) other government statistics such as GNP,
and net import and export figures derived from governmental publications, e.g.,
The Survey of Current Business, which may be used to illustrate investment
attributes of each Fund or the general economic, business, investment, or
financial environment in which each Fund operates; (4) Alexander Steele's Mutual
Fund Expert, a tracking service which ranks various mutual funds according to
their performance; and (5) Morningstar, Inc. which ranks mutual funds on the
basis of historical risk and total return. Morningstar rankings are calculated
using the mutual fund's average annual returns for a certain period and a risk
factor that reflects the mutual fund's performance relative to three-month
Treasury bill monthly returns. Morningstar's rankings range from five star
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a mutual fund as a weighted average
for 3, 5, and 10-year periods. In each category, Morningstar limits its five
star rankings to 10% of the funds it follows and its four star rankings to 22.5%
of the funds it follows. Rankings are not absolute or necessarily predictive of
future performance.
In addition, the performance of the Daily Income Fund may be compared to indices
of broad groups of similar but unmanaged securities or other benchmarks
considered to be representative of the Daily Income Fund's holdings such as: (1)
Advertising News Service, Inc.'s "Bank Rate Monitor The Weekly Financial Rate
Reporter," a weekly publication which lists the yield on various money market
instruments offered to the public by 100 leading banks and thrift institutions
in the United States, including loan rates offered by these banks; (2) Donoghue
Organization, Inc., "Donoghue's Money Fund Reports," a weekly publication which
tracks net assets, yield, maturity and portfolio holdings of approximately 380
money market mutual funds offered in the United States; and (3) indices prepared
by the research departments of such financial organizations as Lehman Brothers,
Merrill Lynch, Pierce, Fenner and Smith, Inc., and Lipper Analytical Services,
Inc.
30
<PAGE> 59
The performance of the Short-Term Bond Fund may be compared to indices of broad
groups of similar but unmanaged securities or other benchmarks considered to be
representative of the Short-Term Bond Fund's holdings, including those listed
above for the Daily Income Fund. Such benchmarks may also include: (1) bank
certificates of deposit ("CDs") which differ from an investment in a mutual fund
in several ways: (a) the interest rate established by the sponsoring bank is
fixed for the term of the CD, (b) there are penalties for early withdrawal from
CDs, and (c) the principal on a CD is insured by the FDIC; (2) Merrill Lynch,
Pierce, Fenner & Smith, Inc., "Taxable Bond Indices," including in particular
the 1-2.99 Years Treasury Note Index; (3) Salomon Brothers, Inc., "Bond Market
Round-Up," a weekly publication that tracks yields and yield prices in a large
group of money market instruments, public corporate debt obligations and U.S.
Government securities; and (4) other indices prepared by the research department
of such financial institutions as Lehman Brothers and Merrill Lynch, Pierce,
Fenner & Smith, Inc.
The performance of the Short-Term Government Securities Fund may be compared to
indices of broad groups of similar but unmanaged securities or other benchmarks
considered to be representative of the Short-Term Government Securities Fund's
holdings, including those listed above for the Short-Term Bond Fund.
The performance of the Value Fund also may be compared to indices of broad
groups of similar but unmanaged securities or other benchmarks considered to be
representative of the Value Fund's holdings such as: (1) the Standard and Poor's
500 Composite Stock Index ("S&P 500 Index"), a well known measure of the price
performance of 500 leading large domestic stocks, which together represent
approximately 80% of the capitalization of the United States equity market. The
S&P 500 Index is widely regarded as representative of the equity market in
general and may include companies in which the Value Fund may invest. The S&P
500 Index is unmanaged and capitalization weighted. Performance of the S&P 500
Index assumes reinvestment of all capital gains distributions and dividends paid
by the stocks in that data base; (2) Lipper Analytical Services, Inc.'s "Lipper
Growth and Income Fund Performance Analysis," a monthly publication that tracks
net assets and total return of approximately 143 growth and income mutual funds
offered in the United States; and (3) indices prepared by the research
departments of such financial institutions as Lehman Brothers and Merrill Lynch,
Pierce, Fenner and Smith, Inc.
The performance of the indices that may be used as benchmarks for each Fund's
performance, unlike the returns of the Funds, do not include the effect of
paying brokerage costs (for equity securities) and other transaction costs that
investors normally incur when investing directly in the securities in those
indices.
The Homestead Funds may also illustrate a particular Fund's investment returns
or returns in general by graphs and charts, that compare, at various points in
time, the return from an investment in the particular Fund (or returns in
general) on a tax-deferred basis (assuming reinvestment of capital gains and
dividends and assuming one or more tax rates) with the same return on a taxable
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<PAGE> 60
basis. In this regard, information derived from the following chart may be used:
Tax-Deferred Versus Taxable Returns
Assuming 9% annual rate of return, $2,000 annual contribution and 28% tax
bracket, the following is a comparison of tax-deferred and taxable returns:
<TABLE>
<CAPTION>
Year Taxable Tax Deferred
---- ------- ------------
<S> <C> <C>
10 $ 28,700 $ 33,100
15 $ 51,400 $ 64,000
20 $ 82,500 $111,500
25 $125,100 $184,600
30 $183,300 $297,200
</TABLE>
INDEPENDENT AUDITORS
Deloitte & Touche LLP, whose address is 117 Campus Drive, Princeton, NJ 08540,
have been selected as the independent auditors for the Homestead Funds.
The audited financial statements for the fiscal year ended December 31, 1997 and
the report of the independent auditors for the year then ended, are included in
the Homestead Funds' Annual Report to Shareholders for December 31, 1997
("Annual Report"). The Annual Report is incorporated by reference in this
Statement of Additional Information.
LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities laws
applicable to the offer and sale of the shares described in the Prospectus has
been provided by Jorden Burt Berenson & Johnson LLP, 1025 Thomas Jefferson
Street, N.W., Washington, DC 20007 which serves as Special Counsel to the
Homestead Funds.
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<PAGE> 61
APPENDIX
DESCRIPTION OF RATINGS OF CERTAIN MONEY MARKET SECURITIES
AND OTHER DEBT SECURITIES
Description of Moody's Investors Service, Inc.'s commercial paper ratings:
Prime-1 (or related institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following characteristics:
1. Leading market positions in well established industries.
High rates of return on funds employed.
2. Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
3. Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
4. Well established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Description of Moody's Investors Service, Inc.'s corporate bond ratings:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 a high-quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities 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 medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
33
<PAGE> 62
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and may
have speculative characteristics as well.
Description of Standard & Poor's Corporation's commercial paper ratings:
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Standard & Poor's Corporation's corporate bond ratings:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A--Bonds rated A have strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are medium-grade category bonds, which are regarded as
having adequate capacity to pay principal and interest. Although these bonds
have adequate asset coverage and normally are protected by satisfactory
earnings, adverse economic conditions or changing circumstances are more likely
to lead to weakened capacity to pay interest and principal.
Description of Fitch Investor's Service, Inc.'s commercial paper ratings:
Fitch-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
Fitch-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
Description of Fitch Investor's Service, Inc.'s corporate bond ratings:
AAA--Bonds of this rating are regarded as strictly high grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions, and
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<PAGE> 63
liable to but slight market fluctuation other than through changes in the money
rate. The factor last named is of importance, varying with the length of
maturity. Such bonds are mainly senior issues of strong companies, and are most
numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA bond is a showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may enter, such as a wide margin of
protection through collateral security or direct lien on specific property as in
the case of high-class equipment certificates or bonds that are first mortgages
on valuable real estate. Sinking funds or voluntary reduction of the debt, by
call or purchase are often factors, while guarantee or assumption by parties
other than the original debtor may influence the rating.
AA--Bonds in this group are of safety virtually beyond question, and as a class
are readily saleable while many are highly active. Their merits are not greatly
unlike those of the "AAA" class, but a bond so rated may be of junior though
strong lien--in many cases directly following an AAA bond--or the margin of
safety is strikingly broad. The issue may be the obligation of a small company,
strongly secured but influenced as to rating by the lesser financial power of
the enterprise and more local type of market.
Description of Duff & Phelps Inc.'s commercial paper ratings:
Duff 1--High certainty of timely payment. Liquidity factors are excellent and
supported by strong fundamental protection factors. Risk factors are minor.
Duff 2--Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Description of Duff & Phelps Inc.'s corporate bond ratings:
Duff 1--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
Duff 2,3,4--High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
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<PAGE> 64
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements incorporated by reference into the
Prospectus:
Financial Highlights for the period November 19, 1990
(commencement of operations) to December 31, 1990,
the years ended December 31, 1991, 1992, 1993, 1994,
1995, 1996 and 1997 for the Daily Income Fund and Value
Fund, and for the period November 5, 1991
(commencement of operations) to December 31, 1991,
the years ended December 31, 1992, 1993, 1994, 1995
1996 and 1997 for the Short-Term Bond Fund, and for the
period May 1, 1995 (commencement of operations) to
December 31, 1995 and the years ended December 31,
1996 and 1997 for the Short-Term Government Securities
Fund.(11)
Financial Statements incorporated by reference into the
Statement of Additional Information:
Statement of Assets and Liabilities as of December
31, 1997.
Statement of Operations for the year ended December
31, 1997.
Statements of Changes in Net Assets for the years
ended December 31, 1997 and December 31, 1996.
Portfolios of Investments as of December 31, 1997.
Report of Independent Auditors.
Notes to Financial Statements for the year ended
December 31, 1997.
(b) Exhibits:
1. Articles of Incorporation of Homestead
Funds, Inc.(1)
1(a). Articles Supplementary to the Articles of
Incorporation.
2. By-Laws of Homestead Funds, Inc.(1)
3. Not applicable.
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<PAGE> 65
4(a). Specimen Certificate of Stock of the Daily
Income Fund.(3)
4(b). Specimen Certificate of Stock of the Value
Fund.(3)
4(c). Specimen Certificate of Stock of the
Short-Term Bond Fund.(4)
4(d). Specimen Certificate of Stock of the
Short-Term Government Securities Fund.(9)
4(e). Specimen Certificate of Stock of the Small Company
Stock Fund.
5(a). Investment Management Agreement by and
between Homestead Funds, Inc., on behalf of
the Daily Income Fund, and RE Advisers
Corporation.(11)
5(b). Investment Management Agreement by and
between Homestead Funds, Inc., on behalf of
the Value Fund, and RE Advisers Corporation.(11)
5(c). Investment Management Agreement by and
between Homestead Funds, Inc., on behalf of
the Short-Term Bond Fund, and RE Advisers
Corporation.(11)
5(d). Investment Management Agreement by and
between Homestead Funds, Inc., on behalf of
the Short-Term Government Securities Fund,
and RE Advisers Corporation.(11)
5(e) Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Small
Company Stock Fund, and RE Advisers Corporation.
6. Distribution Agreement between Homestead
Funds, Inc. and RE Investment Corporation.(3)
7. Not applicable.
8. Custodian Agreement by and between Homestead
Funds, Inc. and Wilmington Trust Company assigned
to PNC Bank.(9)
9(a). Transfer Agency Agreement by and between
Homestead Funds, Inc. and Rodney Square
Management Corporation assigned to PFPC, Inc.(9)
9(b). Joint Services Agreement among National Rural
Electric Cooperative Association, RE
Investment Corporation, and RE Advisers
Corporation.(2)
9(c). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the Daily
Income Fund, and RE Advisers Corporation.(11)
2
<PAGE> 66
9(d). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the Value
Fund, and RE Advisers Corporation.(11)
9(e). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the
Short-Term Bond Fund, and RE Advisers
Corporation.(11)
9(f). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the
Short-Term Government Securities Fund, and RE
Advisers Corporation.(11)
9(g). Expense Limitation Agreement by and between
Homestead Funds, Inc., on behalf of the Small
Company Stock Fund, and RE Advisers
Corporation.
10. Opinion and Consent of Counsel regarding the
legality of the securities being
registered.(1)
10(a). Opinion and Consent of Counsel regarding the
legality of the securities being
registered. (4)
11(a). Consent of Ernst & Young LLP, independent
auditors.
(b) Consent of Deloitte & Touche LLP, independent
auditors.
12. Not applicable.
13(a). Stock Subscription Agreement by and between
National Rural Electric Cooperative
Association and Homestead Funds, Inc. on
behalf of the Daily Income Fund and Value
Fund.(2)
13(b). Stock Subscription Agreement by and between
National Rural Electric Cooperative
Association and Homestead Funds, Inc. on
behalf of the Short-Term Bond Fund.(4)
13(c). Stock Subscription Agreement by and between
National Rural Electric Cooperative
Association and Homestead Funds, Inc. on
behalf of the Short-Term Government
Securities Fund.(9)
13(d) Stock Subscription Agreement by and between
RE Advisers Corporation and Homestead Funds,
Inc. on behalf of the Small Company Stock
Fund.
14. Specimen Individual Retirement Account Plan
Document.(3)
15. Not applicable.
16(a). Computation of a $1,000 Hypothetical
Investment in the Daily Income Fund,
Short-Term Bond Fund, Short-Term Government
Securities Fund and Value Fund, set forth in
the Prospectus Fee Table.
3
<PAGE> 67
16(b). Computations of the Current Yield and
Compound Effective Yield Quotations for the
Daily Income Fund for the period ended
December 31, 1997, set forth in the Statement
of Additional Information.
16(c). Computation of the 30-Day Yield Quotation for
the Short-Term Bond Fund and Short-Term
Government Securities Fund for the period
ended December 31, 1997, set forth in the
Statement of Additional Information.
16(d). Set forth in the Statement of Additional
Information: Computation of the Cumulative
Total Returns for the Daily Income Fund,
Short-Term Bond Fund, Short-Term Government
Securities Fund and Value Fund for the period
ended December 31, 1997. SEC's Standardized
Average Annual Total Returns for the Daily
Income Fund, Short-Term Bond Fund and Value
Fund for the year ended December 31, 1997,
five years ended December 31, 1997 and since
the inception of each Fund. SEC's
Standardized Average Annual Total Returns for
the Short-Term Government Securities Fund for
the year ended December 31, 1997 and since
inception.
16(e). Calculation of total return before expense
waivers, as of December 31, 1997.
17. Organizational Chart.(5)
18. Specimen Price Make-Up Sheet.
19(a). Power of Attorney.(1)
19(b). Power of Attorney.(2)
19(c). Power of Attorney.(12)
(1) Incorporated herein by reference to initial filing, on July 9, 1990.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 on October
1, 1990 of Registrant's Registration Statement on Form N-aA, File No. 33-35788.
(3) Incorporated herein by reference to Post-Effective Amendment No. 2 on May 1,
1991 of Registrant's Registration Statement on Form N-1A, File No. 33-35788.
(4) Incorporated herein by reference to Post-Effective Amendment No. 3 on
September 5, 1991 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(5) Incorporated herein by reference to Post-Effective Amendment No. 4 on May 1,
1992 of Registrant's Registration Statement on Form N-1A, File No. 33-35788.
(6) Incorporated herein by reference to Post-Effective Amendment No. 5 on May 1,
1993 of Registrant's Registration Statement on Form N-1A, File No. 33-35788.
4
<PAGE> 68
35788.
(7) Incorporated herein by reference to Post-Effective Amendment No. 6 on April
29, 1994 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(8) Incorporated herein by reference to Post-Effective Amendment No. 7 on
January 20, 1995 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(9) Incorporated herein by reference to Post-Effective Amendment No. 8 on April
26, 1995 of Registrant's Registration Statement on Form N-1A, File No.
33-35788.
(10) Incorporated herein by reference to Post-Effective Amendment No. 9 on May
1, 1996 of Registrant's Registration Statement on Form N-1A, File No. 33-35788.
(11) Incorporated herein by reference to Post-Effective Amendment No. 10 on
May 1, 1997 of Registrant's Registration Statement on Form N-1A, File
No. 33-35788
(12) Incorporated herein by reference to Post-Effective Amendment No. 11 on
December 18, 1997 of Registrant's Registration Statement on Form N-1A,
File No. 33-35788.
Item 25. Persons Controlled by or under Common Control with Registrant.
No person is directly or indirectly controlled by Registrant.
The information in the Statement of Additional Information
dated March 4, 1998 relating to "control persons" is
incorporated herein by reference.
Item 26. Number of Holders of Securities, as of December 31, 1997.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Daily Income Fund 1,509
Short-Term Bond Fund 2,174
Short-Term Government Securities Fund 496
Value Fund 10,999
</TABLE>
Item 27. Indemnification
Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Form N-1A registration statement filed on October
1, 1990.
Item 28. Business and Other Connections of Investment Manager
Certain information pertaining to business and other
connections of the Registrant's investment manager, RE
Advisers is hereby incorporated herein by reference to the
section of the Prospectus captioned "How the Homestead Funds
are Managed" and to the section of the Statement of Additional
Information captioned "Investment Management and Other
Services." Set forth below is
5
<PAGE> 69
a list of each director and officer of RE Advisers indicating
each business, profession, vocation, or employment of a
substantial nature in which each such person has been, at any
time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, partner, or
trustee. The principal business address of each organization
listed in the table below is 4301 Wilson Boulevard, Arlington,
VA 22203.
<TABLE>
<CAPTION>
Name Position and Organization
- ---- -------------------------
<S> <C>
Anthony C. Williams President and Director of Homestead Funds; President and Director of
President and Director RE Investment; Director of Retirement, Safety and Insurance Department of NRECA
1985-present); Director, Cooperative Benefit Administrators, Inc., Electric Life
Cooperative Insurance Company and, Cooperative Insurance Services, Inc.
(1985-present).
Peter R. Morris Secretary, Treasurer and Director of Homestead Funds and RE Investment.
Vice President and Director Executive Director of Investments of NRECA (1988-present).
Stuart E. Teach Vice President of RE Investment; Senior Equity Portfolio Manager of NRECA
Secretary, Treasurer and Director (1985-present).
Catherine M. Blushi Compliance Officer and Assistant Compliance Officer Secretary of Homestead
Funds; Securities Compliance Officer of NRECA and RE Investment (1990-present).
</TABLE>
Item 29. Principal Underwriters.
(a) RE Investment acts as principal underwriter of the
Registrant's shares on a best-efforts basis and receives no
fee or commission for its underwriting and distribution
services. RE Investment does not serve as principal
underwriter or distributor for any other investment company.
(b) Set forth below is information concerning each director,
officer, or partner of RE Investment.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Offices with
Business Address* with Underwriter Registrant
---------------- ---------------- ----------
<S> <C> <C>
</TABLE>
6
<PAGE> 70
<TABLE>
<S> <C> <C>
Stuart E. Teach President None
Peter R. Morris Secretary, Treasurer Secretary,
and Director
Treasurer and
Director
William P. McKeithan Vice President, Vice President
Counsel and and Counsel
Director
Anthony C. Williams Vice President and President and
Director Director
Catherine M. Blushi Securities Compliance Compliance
Officer Officer and
Secretary
</TABLE>
*The principal business address of each person listed in the table is 4301
Wilson Boulevard, Arlington, VA 22203.
Item 30. Location of Accounts and Records.
The following entities prepare, maintain and preserve the
records required by Section 31(a) of the Investment Company Act
of 1940 (the "1940 Act") for the Registrant. These services
are provided to the Registrant through written agreements
between the parties to the effect that such services will be
provided to the Registrant for such periods prescribed by the
rules and regulations of the Securities and Exchange Commission
under the 1940 Act and such records are the property of the
entity required to maintain and preserve such records and will
be surrendered promptly on request.
PNC Bank ("PNC"), 400 Bellevue Parkway, Wilmington, DE
19809, serves as custodian and accounting services agent for
the Registrant and in such capacity keeps records regarding
securities and other assets in custody and in transfer, bank
statements, canceled checks, financial books and records, and
other records relating to PNC's duties in its capacity as
custodian and accounting services agent.
PFPC, Inc. serves as the transfer agent, dividend
disbursing agent, and shareholder servicing agent for the
Registrant and in such capacity keeps records regarding each
shareholder's account and all disbursements made to
shareholders. In addition, RE Advisers, pursuant to its
Investment Management Agreements with respect to each Fund,
7
<PAGE> 71
maintains all records required pursuant to such agreements. RE
Investment, as principal underwriter for the Homestead Funds,
maintains all records required pursuant to the Distribution
Agreement with the Homestead Funds.
Item 31. Management Services.
RE Advisers, pursuant to the Investment Management Agreements,
performs certain administrative services for the Homestead
Funds.
Item 32. Undertakings.
The Registrant hereby undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's
latest Annual Report to Shareholders, upon request without
charge.
The Registrant undertakes to provide updated Financial
Information with regard to the Small Company Stock Fund within
four to six months from the date of this Post-effective
amendment filing.
8
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485 (b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in Washington, D.C., on the 4th day of March 1998.
Homestead Funds, Inc.
---------------------------------
(Registrant)
/s/ Anthony C. Williams
---------------------------------
Anthony C. Williams
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 11 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Anthony C. Williams President March 4, 1998
- -----------------------
Anthony C. Williams
Francis P. Lucier* Director March 4, 1998
- -----------------------
Francis P. Lucier
</TABLE>
<PAGE> 73
<TABLE>
<S> <C> <C>
Anthony M. Marinello* Vice President and March 4, 1998
- ----------------------- Director
Anthony M. Marinello
Peter R. Morris* Secretary, Treasurer March 4, 1998
- ----------------------- and Director
Peter R. Morris
James F. Perna* Director March 4, 1998
- -----------------------
James F. Perna
*By:/s/William P. McKeithan
-----------------------
William P. McKeithan, Esq.
(Attorney-in-Fact)
</TABLE>
<PAGE> 1
EXHIBIT 1(A)
ARTICLES SUPPLEMENTARY
TO THE
ARTICLES OF INCORPORATION
OF
HOMESTEAD FUNDS, INC.
Pursuant to Section 2-208 et seq. of the Maryland General
Corporation Act and as authorized by resolution of its Board of Directors,
Homestead Funds, Inc. (the "Corporation") hereby files these Articles
Supplementary to its Articles of Incorporation.
1. Pursuant to the authority contained in Paragraphs A and B of
Article FIFTH of the Articles of Incorporation of the Corporation, authorized
and unissued shares of stock of the Corporation are hereby reclassified into
the following classes, par value $0.01 per share, as follows:
<TABLE>
<CAPTION>
Class Authorized Number of Shares
----- ---------------------------
<S> <C>
Value Fund 200,000,000
Daily Income Fund 300,000,000
Short-Term Bond Fund 200,000,000
Short-Term Government Securities Fund 100,000,000
Small Company Stock Fund 200,000,000.
</TABLE>
2. Each share of stock in each class shall have the same
preferences, rights, voting powers, restrictions, limitation as to dividends,
qualifications, and terms and conditions of redemption specified in Paragraph E
of Article FIFTH of the Corporation's Articles of Incorporation, as may be
amended from time to time.
IN WITNESS WHEREOF, these Articles Supplmentary have been signed
and acknowledged below by the President and attested to by the Secretary of the
Corporation on this 18th day of November, 1997.
------------------------------
Anthony C. Williams, President
<PAGE> 2
Page 2
ATTEST:
- --------------------------------
Peter R. Morris, Secretary
I, Catherine M. Blushi, Assistant Secretary to the Corporation,
being duly sworn, do hereby verify that the above Articles Supplementary were
approved by unanimous action of the Board of Directors of the Corporation at a
meeting held November 18, 1997 and do hereby certify the matter and facts set
forth in the Articles Supplementary with respect to authorization and approval.
-----------------------------
Catherine M. Blushi
Assistant Secretary
<PAGE> 1
[HOMESTEAD FUNDS LOGO]
NUMBER SHARES
HOMESTEAD FUNDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SMALL COMPANY STOCK FUND
THIS CERTIFIES THAT IS THE OWNER OF
VOID
* SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
FULL-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.01 EACH OF THE
CAPITAL STOCK OF HOMESTEAD FUNDS, INC. - Small Company Stock Fund
HEREAFTER CALLED THE "CORPORATION", TRANSFERABLE ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON
SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ISSUED AND HELD SUBJECT TO
ALL OF THE RESTRICTIONS, CONDITIONS AND PROVISIONS SET FORTH IN THE CHARTER OF
THE CORPORATION TO ALL OF WHICH THE HOLDER HEREOF AGREES BY THE ACCEPTANCE OF
THIS CERTIFICATE.
THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT.
WITNESS THE FACSIMILE SEAL FOR THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
HOMESTEAD FUNDS, INC. -- Small Company Stock Fund.
DATED:
[SIG] [SIG]
TREASURER PRESIDENT
[HOMESTEAD FUNDS, INC. CORPORATE SEAL]
COUNTERSIGNED:
TRANSFER AGENT
BY
- --------------------------------
AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 5(E)
INVESTMENT MANAGEMENT AGREEMENT
Investment Management Agreement, made as of the first day of March,
1998, by and between Homestead Funds, Inc., a Maryland corporation (the
"Company"), on behalf of the Small Company Stock Fund (the "Fund"), and RE
Advisers Corporation, a Virginia corporation (the "Investment Manager").
WHEREAS, the Company engages in business as an open-end
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Company is a series type investment company currently
consisting of four series, the Daily Income Fund, the Value Fund, the
Short-Term Bond Fund and the Short-Term Government Securities Fund, each with
its own investment program, policies, and investment objectives, and
restrictions; and
WHEREAS, the Investment Manager is engaged principally in the
business of rendering investment management services and registered as an
investment manager under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Company desires to retain the Investment Manager to
render investment management services (i.e., investment advisory and
administrative services) to it on behalf of the Fund in the manner and on the
terms and conditions hereinafter set forth;
NOW THEREFORE, the parties hereto agree as follows:
1. Duties and Responsibilities of the Investment Manager.
1.1 Investment Advisory Services. The Investment Manager
shall act as the investment manager to the Fund and shall, subject to the
supervision of the Company's Board of Directors, provide the following
investment advisory services: (i) formulate and implement a continuing program
for the management of the assets and resources of the Fund in a manner
consistent with the Fund's investment objectives, investment program, policies
and restrictions, that may be amended and updated, from time to time, to
reflect changes in financial and economic conditions; (ii) make all
determinations with respect to the investment of the Fund's assets in
accordance with applicable law and the Fund's investment objectives, investment
program, policies, and restrictions as provided in the Company's Prospectus and
Statement of Additional Information, as amended from time to time, provisions
of the Internal Revenue Code of 1986, as amended, relating to regulated
investment companies, and such other limitations as the Board of
<PAGE> 2
Page 2
Directors of the Company may impose by notice in writing to the Investment
Manager; (iii) make all determinations as to the purchase and sale of portfolio
securities, including advising the Board of Directors as to certain matters
involving the Fund's portfolio securities that are not in the nature of
investment decisions; (iv) obtain and evaluate such business and financial
information relating to the economy, industries, businesses, securities
markets, and securities as it may deem necessary or useful in discharging its
responsibilities under this Agreement; (v) furnish the Board of Directors with
periodic reports concerning the Investment Manager's economic outlook and
investment strategy, as well as information concerning the Fund's portfolio
activity and investment performance; (vi) determine the creditworthiness of the
issuers, obligers, or guarantors of money market and debt securities utilized
by the Fund; and (vii) evaluate the creditworthiness of any entities with
which the Fund proposes to engage in repurchase transactions. In furtherance of
this duty, the Investment Manager, as agent and attorney-in-fact with respect
to the Fund, is authorized, in its discretion and without prior consultation
with the Fund and the Board of Directors of the Company to buy, sell, exchange,
convert for the Fund's use, and otherwise trade in any money market
instruments' bonds, and other securities or assets, and to select the
broker-dealers, underwriters or issuers to be used and to place orders and
negotiate commissions (if any) for the execution of transactions in securities
with or through such broker-dealers, underwriting, or issuers.
1.2 Administrative services. In addition to investment
advisory services set forth above in 1.1, the Investment Manager shall oversee
the administration of all aspects of the Company's business and affairs with
respect to the Fund and shall provide certain services required for effective
administration of the Company with respect to the Fund, in connection
therewith, the Investment Manager shall:
1.2.1 Office and Other Facilities. Furnish, without cost to
the company, or provide and pay the cost of, such office facilities,
furnishings, and office equipment as are adequate for the Company's needs.
1.2.2 Personnel. Provide, without additional remuneration
from or other cost to the Company, the services of individuals competent to
perform all of the Company's executive, administrative, compliance, and
clerical functions that are not performed by or through employees or other
persons or agents engaged by the Company (including, e.g., the custodian,
accounting services agent, transfer agent, dividend disbursing agent and
shareholder servicing agent).
1.2.3 Agents. Assist the Company in selecting, coordinating
the activities of, supervising, and acting as liaison with any other persons
and
<PAGE> 3
Page 3
agents engaged by the Company, including the Company's custodian, accounting
services agent, transfer agent, dividend disbursing agent, shareholder
servicing agent, independent accountants, and independent legal counsel. The
Investment Manager shall also monitor the functions of such persons and agents,
including, in particular, the accounting services agent in its evaluation of
the Fund's portfolio securities.
1.2.4 Directors and Officers. Authorize and permit the
Investment Manager's directors, officers and employees who may be elected or
appointed as directors or officers of the Company to serve in such capacities,
without remuneration from or additional cost to the Company.
1.2.5 Books and Records. Ensure that all financial,
accounting, corporate, and other records required to be maintained and
preserved by the Company or on its behalf will be maintained in accordance with
applicable laws and regulations and that the Company's corporate existence will
be maintained.
1.2.6 Reports to the Company. Furnish to or place at the
disposal of the Company such information, reports, evaluations, analyses, and
opinions relating to its administrative functions as the Company may, at any
time or from time to time, reasonably request or as the Investment Manager may
deem helpful to the Company.
1.2.7 Reports and Filings. Assist in the development and
preparation of all reports and communications by the Company to the Fund's
shareholders and all reports and filings necessary to maintain the
registrations and qualifications of the Company's shares under federal and
state law.
2. Allocation of Expenses
2.1 Expenses Paid by Investment Manager.
2.1.1 Salaries and Fees of Directors and Officers. As between
the Fund and the Investment Manager, the Investment Manager shall pay all
salaries, expenses and fees, if any of the directors, officers or employees of
the Investment Manager who are directors, officers or employees of the Company.
The Investment Manager has obtained such personnel through an agreement with
National Rural Electric Cooperative Association, which has primary
responsibility for the salaries, expenses and fees of persons provided to serve
as directors, officers and employees of the Investment Manager.
2.1.2 Waiver or Assumption and Reimbursement of the
<PAGE> 4
Page 4
Company's Expenses by Investment Manager. The Waiver of assumption and
reimbursement by the Investment Manager of any expense of the Company that the
Investment Manager is not required by this Agreement to waive, or assume and
reimburse, shall not obligate the Investment Manager to waive, or assume or
reimburse, the same or any similar expense of the Company on any subsequent
occasion, unless so required pursuant to a separate agreement between the
Company and the Investment Manager.
2.1.3 Organizational Expenses. The Investment Manager shall
pay or assume all organizational expenses of the Company.
2.2 Expenses paid by the Company. The Company, with respect
to the Fund, shall bear all expenses of its operations and business not
specifically waived, assumed or agreed to be paid by the Investment Manager as
provided in this Agreement or any other agreement between the Company and the
Investment Manager. In particular, the expenses hereby allocated to the
Company, with respect to the Fund, include, but are not limited to:
2.2.1 Custody and Accounting services. All fees and expenses
of depositories, custodians, accounting service agents, and other agents for
the transfer, receipt, safekeeping, servicing of and accounting for the Fund's
cash, securities, and other property, including, among other things, fees and
expenses for the calculation of standardized effective and compound yield
quotations for the Fund, maintenance of ledgers, position and income reports,
and settlement of fund purchases and sales.
2.2.2 Transfer Agency, shareholder servicing, and Dividend
Disbursement. All costs of establishing maintaining, and servicing accounts of
shareholders of the Fund, including the Fund's proportionate share of all fees
and expenses of the Company's transfer agent, shareholder services agent,
dividend disbursing agent and any other agents engaged by the Company to
service such Fund accounts. In addition, the company shall reimburse the
Investment Manager and charge to the Fund the Fund's proportionate share of all
expenses incurred by the Investment Manager in responding to telephonic and
written inquiries from, and in mailing information to Fund shareholders and
others who may request information on behalf of Fund shareholders, regarding
matters such as shareholder account or transaction status, net asset value of
Fund shares, Fund performance, and general information about the Fund.
2.2.3 Shareholder Reports. All costs of preparing, setting
in type, printing, and distributing reports and other communications to
shareholders of the Fund.
<PAGE> 5
Page 5
2.2.4 Prospectuses. All cost of preparing, setting in type,
printing and mailing to shareholders of the Fund annual or more frequent
revisions of the Company's Prospectus and Statement of Additional Information
and any supplements thereto.
2.2.5 Shareholder Meetings. All costs incidental to holding
meetings of shareholders of the Fund, including the printing of notices and
proxy materials, and proxy solicitations therefor.
2.2.6 Pricing and Portfolio Valuation. All costs of daily
valuation of the individual portfolio securities of the Fund and daily
computation of the net asset value per share of the Fund, including (i) a
proportionate share of the cost of any equipment obtained by the Company, the
Investment Manager or agents of the Company or a proportionate share of the
cost of any equipment currently owned by the Investment Manager that will be
used to price the Fund's shares or value the Fund's assets, or (ii) the cost
of the services of any agents engaged by the Company for the purpose of
pricing Fund shares or valuing the assets of the Fund.
2.2.7 Communications. All charges for equipment or services
used for communications between the Investment Manager or the Company and the
custodian, accounting services agent, transfer agent, shareholder servicing
agent, dividend disbursing agent, or any other agent engaged by the Company to
provide services to the Fund.
2.2.8 Independent Legal and Accounting Fees. The Fund's
proportionate share of all charges for services and expenses of the Company's
independent legal counsel and independent accountants.
2.2.9 Directors' Fees and Expenses. The Fund's proportionate
share of all compensation of directors (other than those directors affiliated
with the Investment Manager), all expenses incurred in connection with their
services as directors, and all expenses of meetings of the Board of Directors
and committees of the Board of Directors.
2.2.10 Federal Registration Fees. The Fund's proportionate
share of all fees and expenses of maintaining the registration of the Company
under the 1940 Act and maintaining the registration of the Fund's shares or
registering additional shares of the Fund under the Securities Act of 1933, as
amended (the "1933 Act"), including all fees and expenses incurred in
connection with the preparation, setting in type, printing, and filing of any
post-effective amendments or supplements to the Registration Statement,
Prospectus, and Statement of Additional Information for the Company under the
1933 Act or the 1940 Act that may be prepared from time to time.
<PAGE> 6
Page 6
2.2.11 State Registration Fees. The Funds proportionate share
of all fees and expenses of maintaining the registration and qualification of
the Company and of the Fund's shares for sale under the securities laws of
various states and jurisdictions and registering and qualifying additional
shares of the Fund, and of maintaining the registration and qualification of
the Company under all other laws applicable to the Company or its business
activities.
2.2.12 Issue, Redemption and Transfer of the Fund's Shares.
All expenses incurred in connection with the issue, redemption, and transfer of
the Fund's shares, including the expenses of confirming all share transactions
and of transmitting share certificates for the Fund.
2.2.13 Bonding and Insurance. All expenses of bond, liability,
and other insurance coverage required by law or regulation or deemed advisable
by the Board of Directors of the Company, including, without limitation, such
bond, liability and other insurance expense that may from time to time be
allocated to the Fund in a manner approved by its Board of Directors.
2.2.14 Brokerage Commissions. All brokers' commissions, if
any, and other charges incident to the purchase or sale of the Fund's portfolio
securities.
2.2.15 Taxes. The fund's proportionate share of all taxes or
governmental fees payable to federal, state or other governmental agencies,
domestic or foreign, including issue, stamp, or transfer taxes.
2.2.16 Trade Association Fees. The Fund's proportionate share
of all fees, dues and other expenses incurred in connection with the Company's
trade association or other membership in any investment organization.
2.2.17 Nonrecurring and Extraordinary Expenses. The Fund's
proportionate share of such nonrecurring and extraordinary expenses as may
arise, including the costs of actions, suits, or proceedings to which the
Company is a party and the expenses the Company may incur as a result of its
legal obligation to provide indemnification to its officers, directors,
employees, and agents.
3. Management Fees.
3.1 Compensation. The Company, with respect to the Fund,
shall pay the Investment Manager as compensation for all services rendered,
facilities provided and expenses waived or assumed and reimbursed by the
<PAGE> 7
Page 7
Investment Manager, investment management fees computed as follows, based on
the value of the average daily net assets of the Fund:
3.1.1 Rate. The fees with respect to the Fund shall be at the
following annualized rates: 0.85% of average daily net assets up to $200
million; 0.75% of average daily net assets in excess of $200 million.
3.1.2 Method of Computation. The fee shall accrue each
calendar day and the sum of the daily fee accruals for the Fund shall be paid
monthly to the Investment Manager on the first business day of the next
calendar month. The daily fee accruals shall be computed by multiplying the
fraction of one over the number of calendar days in the year by the applicable
annual rates for the Fund, described in subparagraph 3.1.1, above, and
multiplying the product by the net assets of the Fund as determined in
accordance with the Company's Prospectus as of the close of business on the
previous business day on which the Company was open for business.
3.1.3 Proration of Fee. If this Agreement becomes effective
or terminates before the end of any month, the fee for the period from the
effective date to the end of such month or from the beginning of such month to
the date of termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full month in which such
effectiveness or termination occurs.
4. Brokerage. Subject to seeking best execution, and subject to any
policies or procedures as then approved by the Company's Board of Directors,
the Investment Manager, in carrying out its duties under Paragraph 1.1, may
cause the Fund to pay a broker-dealer which furnishes brokerage and research
services (as such services are defined under Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Acted")) a higher commission than
that which might be charged by another broker-dealer which does not furnish
brokerage and research services or which furnished brokerage and research
services deemed to be of lesser value, if the Investment Manager determines in
good faith that the amount of such commission is reasonable in relation to the
value of the brokerage and research services provided by the broker-clearer
viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Manager with respect to the other accounts,
if any, as to which it exercises investment discretion (as such term is defined
under Section 3(a)(35) of the 1934 Act).
5. Investment Manager's Use of the Services of Others. The Investment
Manager may at its own cost (except as contemplated by Paragraph 4 of this
Agreement) employ, retain or otherwise avail itself of the services or
facilities of other persons or organizations for the purpose of providing the
Investment
<PAGE> 8
Page 8
Manager of the Company with (i) such statistical and other factual information;
(ii) such advice regarding economic factors and trends; (iii) such advice as to
occasional transactions in specific securities; (iv) or such other information,
advice or assistance as the Investment Manager may deem necessary, appropriate
or convenient for the discharge of its obligations hereunder or otherwise
helpful to the Company or the Fund, or in the discharge of the Investment
Manager's overall responsibilities with respect to the other accounts which it
serves as an investment manager.
6. Ownership of Records. All records required to be maintained and
preserved by the Company, with respect to the Fund, pursuant to the provisions
of rules or regulations of the Securities and Exchange Commission under Section
31(a) of the 1940 Act and maintained and preserved by the Investment Manager on
behalf of the Company, with respect to the Fund, are the property of the
Company and shall be surrendered by the Investment Manager promptly on request
by the Company.
7. Reports to Investment Manager. The Company shall furnish or
otherwise make available to the Investment Manager such Prospectuses,
Statements of Additional Information, financial statements, proxy statements,
reports, and other information relating to the business and affairs of the
Company, with respect to the Fund, as the Investment Manager may, at any time
or from time to time, reasonably require in order to discharge its obligations
under this Agreement.
8. Services to Other Clients. Nothing herein contained shall limit the
freedom of the Investment Manager or any affiliated person of the Investment
Manager to render investment supervisory and corporate administrative services
to other investment companies, to act as investment counselor to other persons,
firms or corporations, or to engage in other business activities; however, so
long as this Agreement or any extension, renewal or amendment hereof shall
remain in effect or until the Investment Manager shall otherwise consent, the
Investment Manager shall be the only investment manager to the Company.
9. Limitation of Liability of Investment Manager. Neither the
Investment Manager nor any of its officers, directors, or employees, nor any
persons performing executive, administrative, trading, or other functions for
the Company, with respect to the Fund or the Investment Manager (at the
direction or request of the Investment Manager) in connection with the
Investment Manager's discharge of its obligations undertaken or reasonably
assumed with respect to this Agreement, shall be liable for any error of
judgment or mistake of law or for any loss suffered by the Company, with
respect to the Fund, in connection with the matters to which this Agreement
<PAGE> 9
Page 9
relates, except for loss resulting from willful misfeasance, bad faith, or
gross negligence in the performance of its or their duties on behalf of the
Company or from reckless disregard by the Investment Manager or any such
persons of the duties of the Investment Manager under this Agreement.
10. Term of Agreement. This Agreement shall have a term of 12 months
beginning on the first day of the month following the affirmative vote of a
majority of the outstanding voting securities of the Fund approving this
Agreement. This Agreement shall thereafter continue from year to year, but only
so long as such continuance is specifically approved at least annually by the
Board of Directors of the Company or by vote of a majority of the outstanding
voting securities of the Fund in accordance with the requirements of the 1940
Act, and in either event by the vote of a majority of the Board of Directors of
the Company who are not "interested persons" (as defined in the 1940 Act and
rules thereunder) of any such party, cast, in person, at a meeting called for
the purpose of voting on such approval.
Any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act and rules thereunder) of the
Fund shall be effective to approve or continue this Agreement with respect to
the Fund, notwithstanding (i) that a comparable agreement has not been approved
by the holders of a majority of the outstanding shares of any other series of
the Company and (ii) that this Agreement has not been approved by the vote of a
majority of the outstanding shares of the Company, unless such approval shall
be required by any other applicable law or otherwise. The Investment Manager
shall furnish to the Company, promptly upon its request, such information as
may be reasonably necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment thereof.
11. Amendment and Assignment of Agreement. This Agreement may not be
amended without the affirmative vote of a majority of the outstanding voting
securities of the Fund, and this Agreement shall automatically and immediately
terminate in the event of its assignment.
12. Termination of Agreement. This Agreement may be terminated by either
party hereto, without the payment of any penalty, upon 60 days prior notice in
writing to the other party; provided, that in the case of termination by the
Company such action shall have been authorized by resolution of a majority of
the Board of Directors of the Company who are not parties to this Agreement or
interested persons of any such party, or by vote of a majority of the
outstanding voting securities of the Fund.
13. Miscellaneous.
<PAGE> 10
Page 10
13.1 Captions. The captions in this Agreement are included
for convenience of reference only and in no other way define or delineate any
of the provisions hereof or otherwise affect their construction or effect.
13.2 Interpretation. Nothing herein contained shall be
deemed to required the Company to take any action contrary to its Articles of
Incorporation or By-Laws, or any applicable statutory or regulatory requirement
to which it is subject or by which it is bound, or to relieve or deprive the
Board of Directors of its responsibility for and control of the conduct of the
affairs of the Company.
13.3 Definitions. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the 1940 Act and to interpretations
thereof, if any, by the United States courts or, in the absence of any
controlling decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission validly issued pursuant to the 1940 Act.
Specifically, the terms "vote of a majority of the outstanding voting
securities", "interested person", "assignment," and "affiliated person" shall
have the meanings assigned to them by Section 2(a) of the 1940 Act. In
addition, where the effect of a requirement of the 1940 Act reflected in any
provision of this Agreement is relaxed by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and year first above
written.
ATTEST: HOMESTEAD FUNDS, INC.
on behalf of the Small Company
Stock Fund
By:
- -------------------------------- --------------------------------
Peter R. Morris, Secretary William P. McKeithan, Vice-
President
<PAGE> 11
Page 11
ATTEST: RE ADVISERS CORPORATION
By:
- -------------------------------- --------------------------------
Peter R. Morris, Secretary Anthony C. Williams, President
<PAGE> 1
EXHIBIT 9(G)
EXPENSE LIMITATION AGREEMENT
Expense Limitation Agreement, made as of the first day of March,
1998, by and between Homestead Funds, Inc., a Maryland corporation (the
"Homestead Funds"), on behalf of the Small Company Stock Fund (the "Fund"), and
RE Advisers Corporation, a Virginia corporation (the "Investment Manager").
WHEREAS, the Homestead Funds, on behalf of the Fund, and the
Investment Manager have entered into an Investment Management Agreement, dated
as of the first day of March, 1998, (the "Investment Management Agreement")
pursuant to which the Investment Manager will render investment management
services to the Fund for compensation based on the value of the net assets of
the Fund; and
WHEREAS, the Homestead Funds and the Investment Manager have
determined that it is appropriate and in the best interests of the Fund and its
shareholders to set a limit of the level of expenses to which the Fund will be
subject;
NOW THEREFORE, the parties hereto agree as follows:
1. State Expense Limit
1.1 Limitation. To the extent that the
aggregate expenses of every character incurred by the Fund in any fiscal year,
including but not limited to investment management fees of the Investment
Manager (but excluding interest, taxes, brokerage commissions and other
expenditures which are capitalized in accordance with generally accepted
accounting principles, and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) (the "Fund Operating Expenses"), exceed
the lowest applicable limit actually enforced by any state in which the Fund's
shares are qualified for sale (the "State Expense Limits") such excess amount
(the "Excess Amounts") shall be the liability of the Investment Manager.
1.2 Method of Computation. To determine the
Investment Manager's liability for the Excess Amount, the Fund Operating
Expenses shall be annualized monthly as of the last day of the month. If the
annualized Fund operating Expenses for any month exceed the State Expense
Limit, the Investment Manager shall first waive or reduce its investment
management fee for such month, as appropriate, to the extent necessary to pay
such Excess Amount. In the event the Excess Amount exceeds the amount of the
investment management fee for such month, the Investment Manager, in addition
to waiving its entire investment management fee for such month, shall also
remit
<PAGE> 2
Page 2
to the Fund the difference between the Excess Amount and the amount due as the
investment management fee; provided, however, that an adjustment shall be made
on or before the last day of the first month of the next succeeding fiscal year
if the aggregate Fund Operating Expenses for the fiscal year do not exceed the
State Expense Limit.
2. Operating Expense Limit.
2.1 Limitation. To the extent that Fund
Operating Expenses in any year exceed 1.50% of the Fund's average daily net
assets (the "Operating Expense Limit"), such excess amount (the "Excess
Operating amount") shall be the liability of the Investment Manager.
2.2 Method of Computation. To determine the
Investment Manager's liability for the Excess Operating Amount, the Fund
Operating Expenses shall be annualized monthly as of the last day of the month.
If the annualized Fund Operating Expenses for any month exceed the Operating
Expense Limit, the Investment Manager shall first waive or reduce its
investment management fee for such month, as appropriate, to the extent
necessary to pay such Excess Operating Amount. In the event the Excess
Operating Amount exceeds the amount of the investment management fee for the
month, the Investment Manager, in addition to waiving its entire investment
management fee for such month, shall also assume as its own expense and
reimburse the Fund for the difference between the Excess Operating Amount and
the investment management fee up to the amount of the State Expense Limit;
provided, however, that an adjustment shall be made on or before the last day
of the first month of the next succeeding fiscal year if the aggregate Fund
Operating Expenses for the fiscal year do not exceed the Operating Expense
Limit.
3. Termination of Agreement. This Agreement shall continue
in effect for a period of one year from the date of execution. This Agreement
shall continue thereafter from month to month and may then be terminated by
either party without payment of any penalty, upon 90 days prior notice in
writing to the other party at its principal place of business; provided that,
in the case of termination by the Homestead Funds, be authorized by resolution
of the Board of Homestead Funds.
<PAGE> 3
Page 3
4. Miscellaneous.
4.1 Captions. The captions in this Agreement
are included for convenience or reference only and in no other way define or
delineate any of the provisions hereof or otherwise affect their construction
or effect.
4.2 Interpretation. Nothing herein contained
shall be deemed to require the Homestead Funds to take any action contrary to
its Articles of Incorporation or By-Laws, or any applicable statutory or
regulatory requirement to which it is subject or by which it is bound, or to
relieve or deprive the Board of Directors of its responsibility for and control
of the conduct of the affairs of the Homestead Funds.
<PAGE> 4
Page 4
4.3 Definitions. Any questions of
interpretation of any term or provision of this Agreement, including but not
limited to the investment management fee, the computations of net asset values
and the allocation of expenses, having a counterpart in or otherwise derived
from the terms and provisions of the Investment Management Agreement, shall
have the same meaning as and be resolved by reference to such agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
signed by their respective officers thereunto duly authorized and their
respective corporate seals to be hereunto affixed, as of the day and year first
above written.
ATTEST: HOMESTEAD FUNDS, INC.
on behalf of the Small Company
Stock Fund
By:
- -------------------------------- --------------------------------------
Peter R. Morris, Secretary William P. McKeithan, Vice
President
ATTEST: RE ADVISERS CORPORATION
By:
- -------------------------------- --------------------------------------
Peter R. Morris, Secretary Anthony C. Williams, President
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Post-Effective Amendment
Number 12 to Registration Statement Number 33-35788 (Form N-1A) of our report
dated January 29, 1997, on the financial statements and financial highlights of
Homestead Funds, Inc. for the year ended December 31, 1996, included in the
1996 Annual Report to Shareholders.
Washington, D.C.
March 2, 1998
<PAGE> 1
EXHIBIT 11(b)
INDEPENDENT AUDITORS' CONSENT
Homestead Funds, Inc:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 12 to Registration Statement No. 33-35788 of Homestead Funds, Inc. of
our report dated February 13, 1998 appearing in the Annual Report to
Shareholders for the year ended December 31, 1997 and to the references to us
under the headings "Financial Highlights" in the Prospectus and "Independent
Auditors" in the Statement of Additional Information, both of which are part of
such Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
March 4, 1998
<PAGE> 1
EXHIBIT 13(D)
STOCK SUBSCRIPTION AGREEMENT
THIS AGREEMENT between RE Advisers Corporation ("RE Advisers") and
Homestead Funds, Inc. (hereinafter the "Homestead Funds"), a corporation
organized and existing under and by virtue of the laws of the State of
Maryland.
In consideration of the mutual promises set forth herein, the
parties agree as follows:
1. The Homestead Funds agrees to sell to RE Advisers and RE
Advisers hereby subscribes to purchase shares of a class of the Homestead
Funds' Common Stock (hereinafter the "Stock"), such class with a Par Value of
$.01 per share, at a price of ten dollars ($10.00) per share for the Small
Company Stock Fund, in the following amounts:
<TABLE>
<CAPTION>
Number of Shares
Class of Common Stock of Common Stock
--------------------- ----------------
<S> <C>
Small Company Stock Fund 5,000
</TABLE>
2. RE Advisers agrees to pay $50,000 for such Stock at the time of
its issuance, which shall occur upon call of the President of the Homestead
Funds at any time on or before the effective date of the registration statement
filed by the Homestead Funds on Form N-1A.
3. RE Advisers acknowledges that the Stock has not been, and will
not be, registered under any state or federal securities laws and that,
therefore, the Homestead Funds is relying on certain exemptions therein from
such registration requirements, including exemptions dependent on
<PAGE> 2
2
the intent of the undersigned in acquiring the Stock. RE Advisers also
understands that any resale of the Stock, or any part thereof, may be subject
to restrictions under state and federal securities laws, and that RE Advisers
may be required to bear the economic risk of any investment in the Stock for an
indefinite period of time.
4. RE Advisers represent and warrants that it is acquiring the
Stock solely for its own account and solely for investment purposes and not
with a view to the resale or disposition of all or any part thereof, and that
it has no present plan or intention to sell or otherwise dispose of the Stock
or any part thereof.
5. RE Advisers agrees that it will not sell or dispose of the stock
or any part thereof unless registration statements with respect to such Stock
are then in effect under the Securities Act of 1933 and under any applicable
state securities laws or unless the undersigned shall have delivered to the
Homestead Funds an opinion of counsel acceptable to the Homestead Funds, in
form and substance acceptable to the Homestead Funds, that no such registration
is necessary.
6. RE Advisers further agrees to withdraw any request to redeem any
of the Stock to the extent the Homestead Funds informs the undersigned that the
effect of such redemption could be to reduce the Homestead Fund's net worth
below $100,000.
<PAGE> 3
3
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
by their duly authorized representatives this 18th day of November, 1997.
RE ADVISERS CORPORATION
By:
--------------------------------------
TITLE:
--------------------------------
HOMESTEAD FUNDS, INC.
By:
--------------------------------------
TITLE:
--------------------------------
<PAGE> 1
EXHIBIT 16(A)
HOMESTEAD FUNDS - DAILY INCOME FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.80%) RETURN (.80%) EXPENSE
---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.200% 43 8 8
2 1,043 4.200% 44 9 17
3 1,087 4.200% 47 9 26
4 1,134 4.200% 49 9 35
5 1,183 4.200% 50 10 44
6 1,233 4.200% 53 10 54
7 1,286 4.200% 55 10 65
8 1,341 4.200% 58 11 76
9 1,399 4.200% 59 11 87
10 1,458 4.200% 63 12 99
</TABLE>
<PAGE> 2
HOMESTEAD FUNDS - VALUE FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.79%) RETURN (.79%) EXPENSE
---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.210% 43 8 8
2 1,043 4.210% 44 8 16
3 1,087 4.210% 46 9 25
4 1,133 4.210% 48 9 34
5 1,181 4.210% 51 9 43
6 1,232 4.210% 52 10 53
7 1,284 4.210% 55 10 64
8 1,339 4.210% 57 11 74
9 1,396 4.210% 59 11 85
10 1,455 4.210% 61 11 97
</TABLE>
<PAGE> 3
HOMESTEAD FUNDS - SHORT TERM BOND FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.75%) RETURN (.75%) EXPENSE
---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.250% 43 8 8
2 1,043 4.250% 46 8 16
3 1,089 4.250% 47 8 24
4 1,136 4.250% 49 9 33
5 1,185 4.250% 51 9 42
6 1,236 4.250% 54 9 51
7 1,290 4.250% 56 10 61
8 1,346 4.250% 58 10 71
9 1,404 4.250% 61 11 82
10 1,465 4.250% 63 11 93
</TABLE>
<PAGE> 4
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.75%) RETURN (.75%) EXPENSE
---- ---------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 4.250% 43 8 8
2 1,043 4.250% 46 8 16
3 1,089 4.250% 47 8 24
4 1,136 4.250% 49 9 33
5 1,185 4.250% 51 9 42
6 1,236 4.250% 54 9 51
7 1,290 4.250% 56 10 61
8 1,346 4.250% 58 10 71
9 1,404 4.250% 61 11 82
10 1,465 4.250% 63 11 93
</TABLE>
<PAGE> 5
HOMESTEAD FUNDS - SMALL COMPANY STOCK FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-1.50%) RETURN (1.50%) EXPENSE
---- ---------- ---------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
1 1,000 3.500% 35 15 15
2 1,035 3.500% 36 16 31
3 1,071 3.500% 38 16 47
4 1,109 3.500% 39 17 63
5 1,148 3.500% 40 17 80
6 1,188 3.500% 41 18 98
7 1,229 3.500% 43 18 117
8 1,272 3.500% 45 19 136
9 1,317 3.500% 46 20 156
10 1,363 3.500% 61 20 176
</TABLE>
<PAGE> 1
EXHIBIT 16(B)
HOMESTEAD FUNDS - DAILY INCOME FUND
SEVEN DAY CURRENT YIELD
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Date Daily Rate
---------------------- -------------------------
<S> <C>
12/25/96 0.0001366360
12/26/96 0.0001420540
12/27/96 0.0001420540
12/28/96 0.0001420540
12/29/96 0.0001384270
12/30/96 0.0001384420
12/31/96 0.0001385150
-------------------------
Total 0.0009781820
=========================
</TABLE>
Formula: (Sum of 7 days daily rate) X (365/7) X 100
(.0009781820) X 365/7 X 100 = 5.10%
<PAGE> 2
HOMESTEAD FUNDS - DAILY INCOME FUND
EFFECTIVE YIELD
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Date Daily Rate
---------------------- -------------------------
<S> <C>
12/25/96 0.0001366360
12/26/96 0.0001420540
12/27/96 0.0001420540
12/28/96 0.0001420540
12/29/96 0.0001384270
12/30/96 0.0001384420
12/31/96 0.0001385150
-------------------------
Total 0.0009781820
=========================
</TABLE>
Formula: [(Sum of 7 days daily rate +1)/\(365/7)] - 1 X 100
[(.0009781820 + 1)/\365/7] - 1 X 100 = 5.23%
<PAGE> 1
EXHIBIT 16(C)
HOMESTEAD FUNDS - SHORT-TERM BOND FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Formula: 2{[(a-b)/(c*d)=1]/\6-1}
Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = The maximum offering price per share on the last day of the period.
{[(585,369.25 - 66,385.16)/20,794,323.262 * 5.18) + 1]/\6 - 1} = 5.85%
</TABLE>
<PAGE> 2
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Formula: 2{[(a-b)/(c*d)=1]/\6-1}
Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = The maximum offering price per share on the last day of the period.
2{[(77,655.41 - 9,818.85)/ 3,148,082.193 * 5.07) + 1]/\6 - 1} = 5.15%
</TABLE>
<PAGE> 1
EXHIBIT 16(D)
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - DAILY INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, 1997
- ------------------------
<S> <C>
Average Total Return
Since Inception 4.38%
For the Five Years Ended 4.28%
For the Year Ended 4.92%
Cumulative Total Return
Since Inception 35.69%
<CAPTION>
Formulas:
- ------------------------
<S> <C>
Average Total Return:
{(Ending Share Value - Beginning Share Value) +1}/\(1/(# of days/365))-1 X 100
-----------------------------------------------------------------
Beginning Share Value
Since Inception: {(1,356.90 - 1,000.00) +1}/\(1/(2,600/365))-1 X 100 = 4.38%
--------------------------------------
1,000.00
For the Five Years Ended: {(1,356.90 - 1,100.56) +1}/\(1/5)-1 X 100 = 4.28%
--------------------------------------
1,101
For the Year Ended: (1,356.90 - 1,293.30) X 100 = 4.92%
--------------------------------------
1,293
Cumulative Total Return Since
Inception:
(Ending Share Value - Beginning Share Value) X 100
-----------------------------------------------------------------------
Beginning Share Value
(1,356.90 - 1,000.00) X 100 = 35.69%
--------------------------------------
1,000.00
</TABLE>
<PAGE> 2
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT-TERM BOND FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------
<S> <C>
Average Total Return
Since Inception 6.06%
For the Five Years Ended 5.80%
For the Year Ended 6.62%
Cumulative Total Return
Since Inception 43.74%
<CAPTION>
Formulas:
- ----------------------------------
<S> <C>
Average Total Return:
{(Ending Share Value - Beginning Share Value) +1}/\(1/(# of days/365))-1 X 100
----------------------------------------------------------------
Beginning Share Value
Since Inception: {(1,437.43 - 1,000.00) +1}/\(1/(2,250/365))-1 X 100 = 6.06%
--------------------------------------
1,000.00
For the Five Years Ended: {(1,437.43 - 1,084.20) +1}/\(1/5)-1 X 100 = 5.80%
--------------------------------------
1,084
For the Year Ended: (1,437.43 - 1,348.21) X 100 = 6.62%
--------------------------------------
1,348
Cumulative Total Return Since
Inception:
(Ending Share Value - Beginning Share Value) X 100
-----------------------------------------------------------------------
Beginning Share Value
(1,437.43 - 1,000.00) X 100 = 43.74%
--------------------------------------
1,000.00
</TABLE>
<PAGE> 3
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------
<S> <C>
Average Total Return
Since Inception 5.87%
For the Year Ended 5.73%
Cumulative Total Return
Since Inception 16.45%
<CAPTION>
Formulas:
- ----------------------------------
<S> <C>
Average Total Return:
{(Ending Share Value - Beginning Share Value) +1}/\(1/(# of days/365))-1 X 100
-----------------------------------------------------------------
Beginning Share Value
Since Inception: {(1,201.22 - 1,000.00) +1}/\(1/(976/365))-1 X 100 = 5.87%
--------------------------------------
1,000.00
For the Year Ended: (1,201.22 - 1.101.39) X 100 = 5.73%
--------------------------------------
1,101
Cumulative Total Return Since
Inception:
(Ending Share Value - Beginning Share Value) X 100
----------------------------------------------------------------
Beginning Share Value
(1,201.22 - 1,000.00) X 100 = 16.45%
--------------------------------------
1,000.00
</TABLE>
<PAGE> 4
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - VALUE FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------
<S> <C>
Average Total Return
Since Inception 17.76%
For the Five Years Ended 19.48%
For the Year Ended 26.70%
Cumulative Total Return
Since Inception 220.44%
<CAPTION>
Formulas:
- ----------------------------------
<S> <C>
Average Total Return:
{(Ending Share Value - Beginning Share Value) +1}/\(1/(# of days/365))-1 X 100
-----------------------------------------------------------------
Beginning Share Value
Since Inception: {(3,204.43 - 1,000.00) +1}/\(1/(2,600/365))-1 X 100 = 17.76%
--------------------------------------
1,000.00
For the Five Years Ended: {(3,204.43 - 1,316.07) +1}/\(1/5)-1 X 100 = 19.48%
--------------------------------------
1,316
For the Year Ended: (3,204.43 - 2,529.19) X 100 = 26.70%
--------------------------------------
2,529
Cumulative Total Return Since
Inception:
(Ending Share Value - Beginning Share Value) X 100
----------------------------------------------------------------
Beginning Share Value
(3,204.43 - 1,000.00) X 100 = 220.44%
--------------------------------------
1,000.00
</TABLE>
<PAGE> 1
EXHIBIT 16(E)
CALCULATION OF 1 YEAR RETURN BEFORE EXPENSE WAIVERS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DAILY ST ST GOVERNMENT
INCOME BOND BOND
------------------ ----------------- -------------------------
<S> <C> <C> <C>
1 Year TR, 12/31/97 4.92% 6.62% 5.73%
------------------ ----------------- -------------------------
Expense Adjustment:
Ratio of gross expenses before
voluntary expense limitation
to average net assets -0.83% -0.87% -1.27%
Ratio of expenses to average
net assets -0.80% -0.75% -0.75%
------------------ ----------------- -------------------------
Total Return Adjustment -0.03% -0.12% -0.52%
------------------ ----------------- -------------------------
1 Year TR before expense
Waivers, 12/31/97 4.89% 6.50% 5.21%
================== ================= =========================
</TABLE>
<PAGE> 1
EXHIBIT 18
Homestead Funds
Specimen Price Make-up Sheet
As of December 31, 1997
<TABLE>
<CAPTION>
Shares
Net Assets Outstanding Share Price
---------- ---------- -----------
<S> <C> <C> <C>
Daily Income Fund $ 53,033,394 53,033,394 $1.00
Short-Term Bond Fund $108,897,773 21,021,094 $5.18
Short-Term Government Securities Fund $ 16,186,727 3,193,981 $5.07
Value Fund $378,621,160 14,846,925 $25.50
</TABLE>
