<PAGE> 1
Registration Nos. 33-35788
811-6136
As filed with the Securities and Exchange Commission on
May 3, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 14 / x /
-----
and/or
REGISTRATION UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 15 / x /
-----
(Check appropriate box or boxes)
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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
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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 Boros Cicchetti 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.
<PAGE> 3
HOMESTEAD FUNDS, INC.
CROSS-REFERENCE SHEET
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<CAPTION>
Form N-1A Item No. Caption in Prospectus
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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; Small
Company Stock 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>
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<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>
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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 May 3, 1999,
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
HOMESTEAD
FUNDS
PROSPECTUS
MAY 3, 1999
[GRAPHIC]
DAILY INCOME FUND
SHORT-TERM GOVERNMENT
SECURITIES FUND
SHORT-TERM BOND FUND
VALUE FUND
SMALL COMPANY STOCK FUND
As with all mutual funds, neither the Securities and Exchange
Commission nor any state securities commission has approved
or disapproved of these securities. The Securities and Exchange
Commission has not determined whether this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
[HOMESTEAD FUNDS LOGO]
HOMESTEAD FUNDS, INC.
4301 Wilson Boulevard
Arlington, VA 22203
1(800) 258-3030
<PAGE> 7
3
TABLE OF CONTENTS
THE HOMESTEAD FUNDS ARE A FAMILY OF FIVE NO-LOAD MUTUAL FUNDS MANAGED BY RE
ADVISERS. EACH OF THE FUNDS HAS A DIFFERENT FINANCIAL OBJECTIVE AND INVOLVES
SPECIFIC RISKS. USE THE INFORMATION IN THIS PROSPECTUS TO DECIDE WHICH FUND IS
BEST FOR YOU.
<TABLE>
<S> <C>
THE FUNDS
Daily Income
Objective, Strategy, Risks 4
Short-Term
Government Securities
Objective, Strategy, Risks 6
Short-Term Bond
Objective, Strategy, Risks 8
Value
Objective, Strategy, Risks 12
Small Company Stock
Objective, Strategy, Risks 15
Performance 18
Expenses 20
Management 21
Distributions and Taxes 22
Financial Highlights 23
YOUR ACCOUNT
How to Buy, Sell and
Exchange Shares 28
Conditions of Purchase 31
When Transactions
Are Priced 31
How Fund Prices
Are Determined 32
Stock Certificates 32
Signature Guarantees 33
Minimum Account Size 33
Excessive Trading 33
SERVICES
Important Addresses
and Phone Numbers 34
Hours of Operation 34
Holiday Schedule 34
24-Hour, Automated
Telephone Service 34
Account Statements 34
Fund Reports 34
Telephone Transaction
Privileges 35
Automatic Investment/
Redemption Plans 35
Checkwriting 36
Retirement Accounts 36
ADDITIONAL SOURCES
OF INFORMATION 37
</TABLE>
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the Federal Deposit Insurance
Corporation, Federal Reserve Board or any other agency, and are subject to
investment risks, including the possible loss of principal amount invested.
<PAGE> 8
4 THE FUNDS
WHILE THE DAILY INCOME FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE AND HAS
DONE SO SINCE ITS INCEPTION, THERE IS NO GUARANTEE IT WILL BE ABLE TO MEET THIS
GOAL IN THE FUTURE.
DAILY INCOME FUND
ASSET ALLOCATION
money market
CREDIT RISK
low
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
very low
Objective
The Daily Income Fund is managed to earn current income and to maintain a stable
net asset value of $1.00 per share. Since the Fund seeks to provide a high level
of principal safety, it is suitable for investors with short time horizons and
may be appropriate for long-term investors looking to reduce the risk of their
overall portfolio.
Strategy
PORTFOLIO COMPOSITION--The Daily Income Fund invests in high-quality, U.S.
dollar-denominated money market securities. Investments can include...
- - short-term obligations of the U.S. Government, its agencies and
instrumentalities (for example, Treasury bills and securities issued by
the Government National Mortgage Association or the Federal National
Mortgage Association, now called Fannie Mae)
- - short-term obligations of banks or savings and loans with total assets in
excess of $1 billion (for example, certificates of deposit, banker's
acceptances and time deposits)
- - short-term corporate obligations with remaining maturities of 13 months
or less (for example, notes and bonds)
- - commercial paper issued by corporations and finance companies
- - repurchase agreements collateralized by the above-mentioned securities
- - U.S. dollar-denominated obligations of foreign issuers.
These securities may have variable-rate demand features. Some types of
securities pose specific risks. See Risks, below, for more information.
CREDIT QUALITY--The Fund invests in short-term debt securities that present
minimal credit risk, and, at the time of investment, are eligible securities.
Eligible securities are those in either of the two highest credit categories for
short-term debt obligations, as rated by any two nationally recognized
statistical rating organizations (NRSRO); or as rated by one NRSRO, if the
security is only rated by one agency; or determined by RE Advisers to be of
comparable investment quality, if the security is unrated. The Fund will invest
at least 95% of assets in eligible securities in the highest credit category.
MATURITY--The Fund will maintain a dollar-weighted average portfolio maturity of
90 days or less. The Fund will only purchase eligible money market securities
maturing in 13 months or less.
Risks
An investment in the Daily Income Fund is subject to the following general
risks:
- - CREDIT RISK--the chance a bond issuer will not make timely payments of
principal or interest.
- - INCOME RISK--the chance a decline in interest rates will cause the Fund's
yield to decline.
<PAGE> 9
5
- - MANAGER RISK--the chance the manager's decisions, particularly security
selection, will cause the Fund to underperform other similar investments.
Some types of securities in which the Fund invests pose specific risks. These
include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is an agreement between a
buyer (in this case, the Fund) and a seller, whereby the seller agrees to
buy back the security at a mutually agreed upon price. The security is
held as collateral by the Fund's custodian. If the seller were to go
bankrupt or default, the Fund could experience costs or delays in
liquidating the security and might incur a loss if the security had
declined in value.
- - OTHER MUTUAL FUNDS--The Fund may invest up to 5% of total assets in other
mutual funds. The Fund's return on its investment will reflect the
performance of and operating expenses incurred by the other investment
companies.
The Fund has adopted certain policies to reduce risk. The Fund will not...
- - invest more than 5% of its total assets in any one issuer's securities.
- - purchase more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets and
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
- - invest 25% or more of its total assets in securities of companies in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
to securities issued by domestic branches of U.S. banks and savings and
loans or U.S. branches of foreign banks that are subject to the same
regulations as domestic banks.
- - borrow more than 10% of its total assets. The Fund will only borrow in
order to facilitate redemption requests that might otherwise require the
Fund to sell securities at a time that would be disadvantageous.
CHANGES TO FUND POLICIES--The Fund's objective and its policies to reduce risk
are fundamental and any change must be approved by shareholders. All other
policies and programs are not fundamental and may be changed by the Board of
Directors without shareholder approval.
THE FUNDS
<PAGE> 10
6 THE FUNDS
THIS FUND PROVIDES AN EXTRA MEASURE OF CREDIT PROTECTION, AS IT INVESTS
EXCLUSIVELY IN FIXED-INCOME SECURITIES WHOSE PRINCIPAL AND INTEREST PAYMENTS ARE
GUARANTEED BY THE U.S. GOVERNMENT. THE U.S. GOVERNMENT DOES NOT GUARANTEE
SECURITY PRICES OR YIELDS. THESE WILL FLUCTUATE WITH MARKET CONDITIONS.
SHORT-TERM GOVERNMENT SECURITIES FUND
ASSET ALLOCATION
fixed income
CREDIT RISK
very low
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
low
Objective
The Short-Term Government Securities Fund seeks to generate current income while
maintaining a low degree of share price fluctuation. The Fund is designed for
investors who seek a higher level of income than is normally provided by money
market investments and less principal fluctuation than is experienced by longer
term bond funds.
Strategy
PORTFOLIO COMPOSITION--The Fund invests at least 65% of its total assets in
short-term fixed-income securities whose principal and interest payments are
guaranteed by the U.S. Government. Investments can include...
- - U.S. Treasury securities
- - securities issued by U.S. Government agencies and instrumentalities and
guaranteed by the U.S. Government (including mortgage pass-through
securities and collateralized mortgage obligations (CMOs))
- - repurchase agreements collateralized by the above-mentioned securities
- - zero-coupon bonds issued by U.S. Government guaranteed agencies.
Some types of securities, including repurchase agreements, pose specific risks.
See Risks, below, for more information.
CREDIT QUALITY--The Fund will invest only in securities backed by the full faith
and credit of the U.S. Government.
MATURITY--The dollar-weighted average effective maturity of the Fund's portfolio
will not exceed three years. There is no limit on the maturity of the individual
securities in the Fund's portfolio.
Risks
An investment in the Short-Term Government Securities Fund is subject to the
following general risks:
- - INCOME RISK--the chance a decline in interest rates will cause the Fund's
yield to decline.
- - INTEREST RATE RISK--the chance a rise in interest rates will cause the
Fund's price to decline. The Fund seeks to minimize share price
fluctuation by investing in short-term securities. Prices of short-term
securities decline less in response to a change in rates than those of
longer term securities.
- - MANAGER RISK--the chance the manager's decisions, particularly security
selection, will cause the Fund to underperform other similar investments.
<PAGE> 11
7
Some types of securities in which the Fund invests pose specific risks. These
include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is an agreement between a
buyer (in this case, the Fund) and a seller, whereby the seller agrees to
buy back the security at a mutually agreed upon price. The security is
held as collateral by the Fund's custodian. If the seller were to go
bankrupt or default, the Fund could experience costs or delays in
liquidating the security and might incur a loss if the security had
declined in value.
- - WHEN-ISSUED SECURITIES--The Fund may purchase securities on a when-issued
basis. In this case, the price of the security is fixed at the time of
the commitment, but delivery and payment may take place up to 90 days
later. There is a risk the value of the security will decline during this
period.
- - COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)--These are debt securities
backed by the principal and interest payments owed on pools of underlying
mortgages. CMOs are separated into multiple classes, each bearing a
different stated maturity and having a different payment stream. The
manager's CMO class selections could increase or decrease the Fund's
price sensitivity.
The Fund has adopted certain policies to reduce risk. The Fund will not...
- - invest more than 5% of its total assets in any one issuer's securities.
- - purchase more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets and
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
- - invest 25% or more of its total assets in securities of companies in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
- - borrow more than 10% of its total assets. The Fund will only borrow in
order to facilitate redemption requests that might otherwise require the
Fund to sell securities at a time that would be disadvantageous.
CHANGES TO FUND POLICIES--The Fund's objective and its policies to reduce risk
are fundamental and any change must be approved by shareholders. All other
policies and programs are not fundamental and may be changed by the Board of
Directors without shareholder approval.
THE FUNDS
<PAGE> 12
8 THE FUNDS
THE FUND'S SHORT MATURITY IS INTENDED TO REDUCE THE EFFECT OF INTEREST RATE
CHANGES ON ITS SHARE PRICE. PRICES OF SHORT-TERM SECURITIES DECLINE LESS IN
RESPONSE TO A RISE IN INTEREST RATES THAN THOSE OF LONGER TERM SECURITIES.
SHORT-TERM BOND FUND
ASSET ALLOCATION
fixed income
CREDIT RISK
low
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
low
Objective
The Short-Term Bond Fund seeks to generate current income while maintaining a
low degree of share price fluctuation. The Fund is designed for investors who
seek a higher level of income than is normally provided by money market
investments and less principal fluctuation than is experienced by longer term
bond funds.
Strategy
PORTFOLIO COMPOSITION--The Fund will ordinarily invest at least 65% of its total
assets in short-term debt securities in the three highest credit categories
(AAA, AA and A). Investments can include...
- - corporate debt securities
- - U.S. Treasury securities
- - securities issued by U.S. Government agencies and instrumentalities
- - mortgage pass-through securities issued by Government and non-Government
agencies
- - collateralized mortgage obligations (CMOs)
- - asset-backed securities
- - zero-coupon bonds
- - U.S. dollar-denominated debt securities of foreign issuers.
A portion of the Fund's net assets can be invested in other types of securities.
These can include...
- - debt securities rated BBB by any one nationally recognized statistical
rating organizations (NRSRO) or, if unrated, of comparable credit quality
as determined by RE Advisers, limited to no more than 5% of the Fund's
net assets
- - preferred stocks, American Depositary Receipts (ADRs) and investment
grade debt securities (those rated AAA to BBB) convertible into or
exchangeable for common stocks
- - privately-placed securities, limited to no more than 10% of the Fund's
net assets
- - money market securities that meet the Daily Income Fund's high standards
for credit quality. As a defensive temporary strategy, the Fund may
invest in money market securities without limitation.
These securities may have variable-rate demand features. Some types of
securities pose specific risks. See Risks, below, for more information.
CREDIT QUALITY--The Fund will ordinarily invest at least 65% of its assets in
securities rated within the three highest credit categories (AAA, AA and A), as
determined by a nationally recognized statistical rating organization (NRSRO),
or, if unrated, of comparable credit quality as determined by RE Advisers.
<PAGE> 13
9
MATURITY--The dollar-weighted average effective maturity of the Fund's portfolio
will not exceed three years. There is no limit on the maturity of the individual
securities in the Fund's portfolio.
Risks
An investment in the Short-Term Bond Fund is subject to the following general
risks:
- - CREDIT RISK--the chance a bond issuer will not make timely payments of
principal or interest.
- - INCOME RISK--the chance a decline in interest rates will cause the Fund's
yield to decline.
- - INTEREST RATE RISK--the chance a rise in interest rates will cause the
Fund's price to decline. The Fund seeks to minimize share price
fluctuation by investing in short-term securities.
- - MANAGER RISK--the chance the manager's decisions, particularly security
selection, will cause the Fund to underperform other similar investments.
Some types of securities in which the Fund invests pose specific risks. These
include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is an agreement between a
buyer (in this case, the Fund) and a seller, whereby the seller agrees to
buy back the security at a mutually agreed upon price. The security is
held as collateral by the Fund's custodian. If the seller were to go
bankrupt or default, the Fund could experience costs or delays in
liquidating the security and might incur a loss if the security had
declined in value.
- - U.S. DOLLAR-DENOMINATED SECURITIES OF FOREIGN ISSUERS--These securities
may respond negatively to adverse foreign political or economic
developments. In the case of foreign companies not registered in the
U.S., there is generally less publicly available information regarding
the issuer, and foreign companies are subject to different accounting,
auditing and financial reporting standards. These conditions may have an
impact on rating organizations' and RE Advisers' ability to accurately
assess and monitor an issuer's credit quality.
- - AMERICAN DEPOSITARY RECEIPTS (ADRS)--ADRs are U.S. dollar-denominated
certificates representing shares of stock in a foreign company. ADRs are
traded on domestic stock exchanges or in the U.S. over-the-counter
market. ADRs offer certain advantages over direct ownership in foreign
companies. First, ADRs are easily transferable and quotes are readily
available. Second, issuers are subject to the same auditing, accounting
and financial reporting standards as a U.S.-based company. However, as
with other U.S. dollar-denominated securities of foreign issuers, ADRs
may respond negatively to adverse foreign political or economic
developments.
THE FUNDS
<PAGE> 14
10 THE FUNDS
- - WHEN-ISSUED SECURITIES--The Fund may purchase securities on a when-issued
basis. In this case, the price of the security is fixed at the time of
the commitment, but delivery and payment may take place up to 90 days
later. There is a risk the value of the security will decline during this
period.
- - MORTGAGE PASS-THROUGH SECURITIES--These represent a share in the
principal and interest payments made on a pool of underlying mortgages.
There is a risk that 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)
would negatively affect the Fund's return, as the Fund could be forced to
reinvest the proceeds in lower yielding securities. As with other
fixed-income securities, when interest rates rise, the value of mortgage
pass-through securities generally declines. However, when interest rates
decline, the value of mortgage pass-through securities may not increase
as much as other fixed-income securities of comparable maturity because a
decline in interest rates increases the likelihood that borrowers will
prepay.
- - COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)--These are debt securities
backed by the principal and interest payments owed on pools of underlying
mortgages. CMOs are separated into multiple classes, each bearing a
different stated maturity and having a different payment stream. The
manager's CMO class selections could increase or decrease the Fund's
price sensitivity.
- - ASSET-BACKED SECURITIES--These securities represent either fractional
interests or participation in pools of leases, retail installment loans
or revolving credit receivables. Underlying automobile sales contracts
and credit card receivables are subject to prepayment, which may shorten
the securities' weighted average life and reduce the overall return.
Investors 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 the contract or other factors. The value of these securities may
fluctuate with 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.
- - ZERO-COUPON BONDS--Zero-coupon bonds do not make regular interest
payments. Instead, they are sold at a deep discount from their face
value. The investor (in this case, the Fund) is paid back at face value
when the security matures. Prices of zero-coupon bonds fluctuate more in
response to changes in interest rates than those of other types of
comparable maturity fixed-income securities.
- - OTHER MUTUAL FUNDS--The Fund may invest up to 5% of total assets in
any one other mutual fund and up to 10% of assets in all other mutual
funds. The Fund's return on its investment will reflect the performance
of and operating expenses incurred by the other investment companies.
<PAGE> 15
11
The Fund has adopted certain policies to reduce risk. The Fund will not...
- - invest more than 5% of its total assets in any one issuer's securities.
- - purchase more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets and
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
- - invest 25% or more of its total assets in securities of companies in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
- - borrow more than 10% of its total assets. The Fund will only borrow in
order to facilitate redemption requests that might otherwise require the
Fund to sell securities at a time that would be disadvantageous.
CHANGES TO FUND POLICIES--The Fund's objective and its policies to reduce risk
are fundamental and any change must be approved by shareholders. All other
policies and programs are not fundamental and may be changed by the Board of
Directors without shareholder approval.
THE FUNDS
<PAGE> 16
12 THE FUNDS
THE VALUE FUND INVESTS PRIMARILY IN STOCKS, WHOSE PRICES FLUCTUATE WITH
BUSINESS, MARKET AND ECONOMIC CONDITIONS. ITS SHARE PRICE CAN RISE AND FALL
SIGNIFICANTLY OVER THE SHORT TERM, REFLECTING CHANGES IN THE VALUE OF THE
UNDERLYING INVESTMENTS.
VALUE FUND
ASSET ALLOCATION
stock
PORTFOLIO CHARACTERISTICS
large- and medium sized, U.S.-based companies
INVESTMENT STYLE
high
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
high
Objective
The Value Fund seeks capital growth over the long term and, secondarily, income.
The Fund invests in stocks of established companies RE Advisers believes are
selling at a discount to their true worth. Because of the volatility inherent in
equity investing, the Value Fund is best-suited for long-term investors.
Strategy
PORTFOLIO COMPOSITION--Under ordinary conditions, the Value Fund will invest at
least 80% of its total assets in common stocks of established companies.
Remaining assets may be invested in other types of securities including...
- - preferred stocks, investment-grade debt securities convertible into or
exchangeable for common stocks and warrants
- - debt securities with a credit rating of at least A, as determined by any
one nationally recognized statistical rating organization (NRSRO) or, if
unrated, of comparable credit quality as determined by RE Advisers
- - money market securities that meet the Daily Income Fund's high standards
for credit quality. The Fund invests in money market securities in order
to reduce risk during periods of extreme volatility or uncertainty. When
used as part of a temporary or defensive strategy, the Fund may invest in
money market securities without limitation
- - U.S dollar-denominated securities of foreign issuers, including American
Depositary Receipts (ADRs), limited to 10% of net assets.
The Fund will generally invest in stocks listed on a national securities
exchange. The Fund may, on occasion, purchase unlisted securities that have an
established over-the-counter market. See Risks, below, for more information on
specific types of securities.
VALUE STYLE--The Value Fund invests in stocks of established companies selling
below what RE Advisers believes to be fundamental value and poised for a
turnaround. RE Advisers considers the following factors in determining a stock's
fundamental value:
- - the relationship of a company's potential earning power to the current
market price of its stock
- - the price/earnings ratio relative to either the company's historical
results or to the current ratios for other similar companies
- - the level of dividend income
- - stock price relative to the stated book value of assets
- - any competitive advantages, including well-recognized trademarks or brand
names.
<PAGE> 17
13
There are a number of reasons a stock may be trading at a discount. The company
may be experiencing a temporary earnings decline, its industry may be out of
favor due to short-term market or economic conditions or it may have drawn
unfavorable publicity. Investing before conditions improve and others realize
the stock's true worth can result in significant capital appreciation. In order
for this approach to be effective, the selected stocks must eventually return to
investors' favor and be bid higher. There is no guarantee this anticipated
turnaround will materialize.
Risks
An investment in the Value Fund is subject to the following general risks:
- - INVESTMENT RISK--the chance the value of an investment will decline in
response to a company, industry or market setback. The Fund's approach
could potentially limit volatility, since a stock already selling at a
low price may not fall as far in response to a setback as one that was
selling at a high price.
- - MANAGER RISK--the chance the manager's decisions, particularly security
selection, will cause the Fund to underperform other similar investments.
- - STYLE RISK--the chance that returns on stocks within the specific sectors
in which the Fund invests (medium-and large-sized companies, value
investments) will trail returns from other groups or the market overall.
Periods of relative over- or underperformance tend to be cyclical and may
last for several years.
Some types of securities in which the Fund invests pose specific risks. These
include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is an agreement between a
buyer (in this case, the Fund) and a seller, whereby the seller agrees to
buy back the security at a mutually agreed upon price. The security is
held as collateral by the Fund's custodian. If the seller were to go
bankrupt or default, the Fund could experience costs or delays in
liquidating the security and might incur a loss if the security had
declined in value.
- - U.S. DOLLAR-DENOMINATED DEBT SECURITIES OF FOREIGN ISSUERS--These
securities may respond negatively to adverse foreign political or
economic developments. In the case of foreign companies not registered in
the U.S., there is generally less publicly available information
regarding the issuer, and foreign companies are subject to different
accounting, auditing and financial reporting standards. These conditions
may have an impact on rating organizations' and RE Adviser's ability to
accurately assess and monitor an issuer's financial condition.
- - AMERICAN DEPOSITARY RECEIPTS (ADRS)--ADRs are U.S. dollar-denominated
certificates representing shares of stock in a foreign company. ADRs are
traded on domestic stock exchanges or in the U.S. over-the-counter
market. ADRs offer certain advantages over direct ownership in foreign
companies. First, ADRs are easily transferable and quotes are readily
available. Second, issuers are subject to the same auditing, accounting
and financial reporting standards as a U.S.-based company.
THE FUNDS
<PAGE> 18
14 THE FUNDS
However, as with other U.S. dollar-denominated securities of foreign
issuers, ADRs may respond negatively to adverse foreign political or
economic developments.
- - WHEN-ISSUED SECURITIES--The Fund may purchase securities on a when-issued
basis. In this case, the price of the security is fixed at the time of
the commitment, but delivery and payment may take place up to 90 days
later. There is a risk the value of the security will decline during this
period.
- - OTHER MUTUAL FUNDS--The Fund may invest up to 5% of total assets in
any one other mutual fund and up to 10% of assets in all other mutual
funds. The Fund's return on its investment will reflect the performance
of and operating expenses incurred by the other investment companies.
The Fund has adopted certain policies to reduce risk. The Fund will not...
- - invest more than 5% of its total assets in any one issuer's securities.
- - purchase more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets and
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
- - invest 25% or more of its total assets in securities of companies in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
- - borrow more than 10% of its total assets. The Fund will only borrow in
order to facilitate redemption requests that might otherwise require the
Fund to sell securities at a time that would be disadvantageous.
CHANGES TO FUND POLICIES--The Fund's objective and its policies to reduce risk
are fundamental and any change must be approved by shareholders. All other
policies and programs are not fundamental and may be changed by the Board of
Directors without shareholder approval.
<PAGE> 19
15
SMALL-COMPANY STOCKS HAVE STRONG GROWTH POTENTIAL, BUT THIS AGGRESSIVE
INVESTMENT APPROACH ENTAILS GREATER RISK.
SMALL COMPANY STOCK FUND
ASSET ALLOCATION
stock
PORTFOLIO CHARACTERISTICS
small, U.S.-based companies
INVESTMENT STYLE
value
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
very high
Objective
The Small Company Stock Fund seeks capital growth over the long term by
investing in undervalued stocks of promising small companies. Small companies
may be able to respond more quickly to business opportunities than larger
companies. However, their stock prices tend to fluctuate more widely than those
of larger-company stocks. The Fund is best-suited for long-term investors who
are comfortable taking an aggressive investment approach.
Strategy
PORTFOLIO COMPOSITION--Under ordinary conditions, the Small Company Stock Fund
will invest at least 65% of its total assets in common stocks of companies
whose market capitalization at the time of investment is similar to the market
capitalization of companies represented in the Russell 2000 Index. Market
capitalization is a measure of the company's total stock market value. It is
calculated by multiplying the share price by the number of shares outstanding.
As of the latest rebalancing, the average market capitalization for companies
in the Russell 2000 was approximately $802 million. The largest company in the
Index had a market capitalization of $6,580 million. Remaining assets may be
invested in other types of securities including...
- - U.S. dollar-denominated securities of foreign issuers, including American
Depositary Receipts (ADRs), short-term debt securities and high-quality
money market securities
- - investment-grade debt securities convertible into or exchangeable for
common stocks.
See Risks, below, for more information on specific types of securities.
VALUE STYLE--The Small Company Stock Fund invests in stocks of established
companies selling below what RE Advisers believes to be fundamental value and
poised for a turnaround. RE Advisers considers the following factors in
determining a stock's fundamental value:
- - the relationship of a company's potential earning power to the current
market price of its stock
- - the price/earnings ratio relative to either the company's historical
results or to the current ratios for other similar companies
- - the level of dividend income
- - stock price relative to the stated book value of assets
- - any competitive advantages, including well-recognized trademarks or brand
names.
There are a number of reasons a stock may be trading at a discount. The company
may be experiencing a temporary earnings decline, its industry may be out of
favor due to short-term market or economic conditions or it may have drawn
unfavorable publicity. Investing before conditions improve and others realize
the stock's true worth can result in significant capital appreciation. In order
for this approach to be effective, the selected stocks must eventually return to
investors' favor and be bid higher. There is no guarantee this anticipated
turnaround will materialize.
THE FUNDS
<PAGE> 20
16 THE FUNDS
Risks
An investment in the Small Company Stock Fund is subject to the following
general risks:
- - INVESTMENT RISK--the chance the value of an investment will decline in
response to a company, industry or market setback. The Fund's value
orientation could potentially limit volatility, since a stock already
selling at a low price may not fall as far in response to a setback as
one that was selling at a high price.
- - MANAGER RISK--the chance the manager's decisions, particularly security
selection, will cause the Fund to underperform other similar investments.
- - STYLE RISK--the chance that returns on stocks within the specific sectors
in which the Fund invests (small-sized companies, value investments) will
trail returns from other groups or the market overall. Periods of
relative over- or underperformance tend to be cyclical and may last for
several years.
Some of the types of securities in which the Fund invests pose specific risks.
These include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is an agreement between a
buyer (in this case, the Fund) and a seller, whereby the seller agrees to
buy back the security at a mutually agreed upon price. The security is
held as collateral by the Fund's custodian. If the seller were to go
bankrupt or default, the Fund could experience costs or delays in
liquidating the security and might incur a loss if the security had
declined in value.
- - U.S. DOLLAR-DENOMINATED DEBT SECURITIES OF FOREIGN ISSUERS--These
securities may respond negatively to adverse foreign political or
economic developments. In the case of foreign companies not registered in
the U.S., there is generally less publicly available information
regarding the issuer, and foreign companies are subject to different
accounting, auditing and financial reporting standards. These conditions
may have an impact on rating organizations' and RE Adviser's ability to
accurately assess and monitor an issuer's financial condition.
- - AMERICAN DEPOSITARY RECEIPTS (ADRS)--ADRs are U.S. dollar-denominated
certificates representing shares of stock in a foreign company. ADRs are
traded on domestic stock exchanges or in the U.S. over-the-counter
market. ADRs offer certain advantages over direct ownership in foreign
companies. First, ADRs are easily transferable and quotes are readily
available. Second, issuers are subject to the same auditing, accounting
and financial reporting standards as a U.S.-based company. However, as
with other U.S. dollar-denominated securities of foreign issuers, ADRs
may respond negatively to adverse foreign political or economic
developments.
<PAGE> 21
17
- - WHEN-ISSUED SECURITIES--The Fund may purchase securities on a when-issued
basis. In this case, the price of the security is fixed at the time of
the commitment, but delivery and payment may take place up to 90 days
later. There is a risk the value of the security will decline during this
period.
- - OTHER MUTUAL FUNDS--The Fund may invest up to 5% of total assets in
any one other mutual fund and up to 10% of assets in all other mutual
funds. The Fund's return on its investment will reflect the performance
of and operating expenses incurred by the other investment companies.
The Fund has adopted certain policies to reduce risk. The Fund will not...
- - invest more than 5% of its total assets in any one issuer's securities.
- - purchase more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets and
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
- - invest 25% or more of its total assets in securities of companies in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
- - borrow more than 10% of its total assets. The Fund will only borrow in
order to facilitate redemption requests that might otherwise require the
Fund to sell securities at a time that would be disadvantageous.
CHANGES TO FUND POLICIES--The Fund's objective and its policies to reduce risk
are fundamental and any change must be approved by shareholders. All other
policies and programs are not fundamental and may be changed by the Board of
Directors without shareholder approval.
THE FUNDS
<PAGE> 22
18 THE FUNDS
Performance
The charts below show Fund returns, how returns compared to a benchmark index
and the best and worst quarterly return. Past performance does not predict
future performance.
Daily Income Fund
Average Annual Total Returns for Periods Ended 12/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 3 YEAR 5 YEAR (11/90)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
DAILY INCOME FUND 4.9% 4.9% 4.7% 4.4%
=================================================================
</TABLE>
Best Quarter: Q1 of 1991 1.59%
Worst Quarter: Q2 of 1993 .65%
[GRAPH]
<TABLE>
<CAPTION>
YEARS
1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN 5.67% 3.39% 2.68% 3.63% 5.38% 4.81% 4.92% 4.91%
</TABLE>
Short-Term Government Securities Fund
Average Annual Total Returns for Periods Ended 12/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR (5/95)
- ------------------------------------------------------
<S> <C> <C>
SHORT-TERM GOVERNMENT 5.5% 5.8%
SECURITIES FUND
- ------------------------------------------------------
MERRILL LYNCH 1-4.99 YEAR 7.8% 7.3%
U.S. TREASURY INDEX
======================================================
</TABLE>
Best Quarter: Q4 of 1995 2.12%
Worst Quarter: Q1 of 1996 .27%
[GRAPH]
<TABLE>
<CAPTION>
YEARS
1996 1997 1998
<S> <C> <C> <C>
TOTAL RETURN 4.46% 5.73% 5.51%
</TABLE>
<PAGE> 23
19
Short-Term Bond Fund
Average Annual Total Returns for Periods Ended 12/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 3 YEAR 5 YEAR (11/91)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM BOND FUND 6.4% 6.1% 5.8% 6.1%
- -----------------------------------------------------------------
MERRILL LYNCH 1-4.99 YEAR 7.7% 6.5% 6.3% 6.8%
CORP./GOV. INDEX
=================================================================
</TABLE>
Best Quarter: Q3 of 1992 3.71%
Worst Quarter: Q1 of 1994 -.62%
[GRAPH]
<TABLE>
<CAPTION>
YEARS
1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN 6.30% 6.62% 0.09% 10.81% 5.16% 6.62% 6.40%
</TABLE>
Value Fund
Average Annual Total Returns for Periods Ended 12/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 3 YEAR 5 YEAR (11/90)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
VALUE FUND 8.3% 17.4% 17.3% 16.6%
- -----------------------------------------------------------------
STANDARD & POOR'S 500 28.7% 28.3% 24.1% 21.0%
STOCK INDEX
=================================================================
</TABLE>
Best Quarter: Q2 of 1997 13.45%
Worst Quarter: Q3 of 1998 -11.58%
[GRAPH]
<TABLE>
<CAPTION>
YEARS
1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN 17.16% 11.68% 18.83% 2.5% 33.78% 17.94% 26.7% 8.31%
</TABLE>
Small Company Stock Fund
Total Returns for Periods Ended 12/31/98
<TABLE>
<CAPTION>
SINCE INCEPTION (3/98)
- ---------------------------------------------------------------
<S> <C>
SMALL COMPANY STOCK FUND -11.0%
- ---------------------------------------------------------------
RUSSELL 2000 INDEX -9.2%
===============================================================
</TABLE>
Best Quarter: Q4 of 1998 7.20%
Worst Quarter: Q3 of 1998 -12.82%
THE FUNDS
<PAGE> 24
20 THE FUNDS
Expenses
Investors share the cost of operating the Funds. Expenses are deducted from
total assets and therefore reflected in the Funds' share prices. There are no
transaction fees and you pay no sales commission ("load") when you buy shares
directly from the distributor.
<TABLE>
<CAPTION>
SHORT-TERM SMALL
DAILY INCOME GOVERNMENT SHORT-TERM VALUE COMPANY
FUND SECURITIES FUND BOND FUND FUND STOCK 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
(as a percentage of average daily net assets)
12b-1 Fees None None None None None
Management Fees .50%* .45%* .60%* .56%* .84%*
Other Expenses .37%* .58%* .24%* .16%* 2.27%*
Total Fund Operating Expenses .87%* 1.03%* .84%* .72%* 3.11%*
</TABLE>
* RE Advisers has agreed to assume all annual fund operating expenses for each
Fund which in any year exceed .80% of the average daily net asets for the
Daily Income Fund, .75% of the average daily net assets for the Short-Term
Government Securities Fund, .75% of the average daily net assets for the
Short-Term Bond Fund, 1.25% of the average daily net assets of the Value Fund
and 1.50% of the average daily net assets for the Small Company Stock Fund.
For the year ended December 31, 1998, RE Advisers waived a portion of its
management fees for the Daily Income Fund, Short-Term Government Securities
Fund, Short-Term Bond Fund, and Small Company Stock Fund. In addition, RE
Advisers reimbursed the Small Company Stock Fund for a portion of its
expenses. As a result of these waivers and reimbursements, the actual total
expense ratios were .80% for the Daily Income Fund, .75% for the Short-Term
Government Fund, .75% for the Short-Term Bond Fund, and 1.50% for the Small
Company Stock Fund. The Expense Limitation Agreement with RE Advisers can be
terminated by the adviser or the Funds with 90 days notice and Board approval.
EXAMPLES
An investor in each Fund would pay the following expenses on a $10,000
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 $82 $255 $444 $992
Short-Term Government Securities Fund $76 $240 $417 $933
Short-Term Bond Fund $76 $240 $417 $933
Value Fund $73 $228 $397 $887
Small Company Stock Fund $150 $466 N/A N/A
</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.
<PAGE> 25
21
Investment Manager
RE Advisers
4301 Wilson Boulevard
Arlington, VA 22203
The investment manager is responsible for selecting investments, managing
the portfolios and setting investment strategies and policies. RE Advisers was
launched in 1990 and now manages over $800 million for mutual fund and private
account investors.
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 Corporation and an indirect, wholly-owned subsidiary
of NRECA, a non-profit organization which serves and represents the nation's
consumer-owned rural electric cooperatives.
Portfolio Managers
Portfolio managers oversee the Funds' day-to-day operations.
DAILY INCOME FUND
Patricia Murphy
Ms. Murphy has managed the Fund since 1998 and is a senior investment analyst
for RE Advisers and NRECA. She has been with NRECA since 1997.
SHORT-TERM GOVERNMENT SECURITIES FUND AND SHORT-TERM BOND FUND
Douglas Kern
Mr. Kern has managed the Funds since their inception and has been a senior
fixed-income portfolio manager for NRECA since 1985.
VALUE FUND AND
SMALL COMPANY STOCK FUND
Peter Morris
Mr. Morris is the director of investments for RE Advisers and NRECA. He has been
with NRECA since 1974.
Stuart Teach
Mr. Teach is a senior equity portfolio manager for RE Advisers and NRECA. He and
Mr. Morris have co-managed the Funds since their inception. Mr. Teach has been
with NRECA since 1985.
Board of Directors
The Board of Directors establishes Homestead Funds' corporate policies and
monitors Fund performance.
Distributor
RE Investment Corporation
4301 Wilson Boulevard
Arlington, VA 22203
Transfer Agent
PFPC, Inc.
P.O. Box 8987
Wilmington, DE 19899
The transfer agent processes transactions, disburses distributions and provides
accounting services for the Homestead Funds.
Custodian
PFPC Trust Company
THE FUNDS
<PAGE> 26
22 THE FUNDS
Distributions and Taxes
Each Fund intends to distribute substantially all of its ordinary income and
capital gains. You may elect to have distributions automatically reinvested in
your Fund account. Whether reinvested or received, distributions are generally
taxable to non-retirement account investors. We'll mail you IRS Form 1099 at the
end of January indicating the federal tax status of your income and capital
gains distributions for the prior year.
Distribution Schedule
<TABLE>
<CAPTION>
Interest Income
<S> <C>
DAILY INCOME FUND Declared daily and paid monthly
SHORT-TERM GOVERNMENT SECURITIES FUND Declared daily and paid monthly
SHORT-TERM BOND FUND Declared daily and paid monthly
VALUE FUND Declared and paid semi-annually
SMALL COMPANY STOCK FUND Declared and paid annually
Capital Gains
ALL FUNDS If any, declared and paid no less frequently than annually
</TABLE>
<PAGE> 27
23
Financial Highlights
This information was taken from the financial statements included in the
Homestead Funds, latest annual report. These figures have been audited by
independent auditors. In 1998 and 1997 the Funds independent auditors were
Deloitte & Touche LLP. If you would like to receive a copy of the latest annual
report, which includes complete financials, footnotes and the auditor's opinion,
please call 1-800-258-3030.
Daily Income Fund
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (b) 1995 (b) 1994 (b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.05 0.05 0.05 0.05 0.04
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.04
- ---------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.05) (0.05) (0.05) (0.05) (0.04)
Net realized gain (0.00) (0.00) (0.00) (0.00) (0.00)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.04)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
===========================================================================================================================
TOTAL RETURN 4.91% 4.92% 4.81% 5.38% 3.63%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $58,577 $53,033 $57,871 $52,699 $36,668
Ratio of gross expenses before voluntary
expense limitation to average net assets 0.87% 0.83% 0.81% 0.87% 0.99%
Ratio of net investment income to
average net assets (a) 4.80% 4.80% 4.71% 5.25% 3.66%
Ratio of expenses to average net assets (a) 0.80% 0.80% 0.76% 0.75% 0.75%
</TABLE>
- ----------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) The Financial Highlights for periods prior to 1997 were auditied by other
auditors.
THE FUNDS
<PAGE> 28
24 THE FUNDS
Short-Term Government Securities Fund
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION DATE)
YEAR ENDED DECEMBER 31, TO DECEMBER 31
- --------------------------------------------------------------------------------------------
1998 1997 1996 (d) 1995 (d)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $5.07 $5.05 $5.09 $5.00
- ------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.25 0.26 0.26 0.18
Net realized and unrealized gain (loss)
on investments 0.02 0.02 (0.04) 0.09
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 0.27 0.28 0.22 0.27
- ------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.25) (0.26) (0.26) (0.18)
Net realized gain (0.00) (0.00) (0.00) (0.00)
- ------------------------------------------------------------------------------------------------------------
Total distributions (0.25) (0.26) (0.26) (0.18)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $5.09 $5.07 $5.05 $5.09
============================================================================================================
TOTAL RETURN 5.51% 5.73% 4.46% 5.44% (b)
============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $23,930 $16,187 $7,692 $2,658
Ratio of gross expenses before voluntary
expense limitation to average net assets 1.03% 1.27% 2.30% 6.21% (c)
Ratio of net investment income to
average net assets (a) 5.00% 5.19% 5.16% 5.18% (c)
Ratio of expenses to average net assets (a) 0.75% 0.75% 0.75% 0.75% (c)
Portfolio turnover rate 57% 12% 21% 7%
</TABLE>
- ----------------
(a) Excludes excess investment mangement fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Aggregate total return for the period.
(c) Annualized.
(d) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
<PAGE> 29
25
Short-Term Bond Fund
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (b) 1995 (b) 1994 (b)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $5.18 $5.15 $5.19 $4.95 $5.19
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.29 0.30 0.29 0.28 0.24
Net realized and unrealized gain (loss)
on investments 0.03 0.03 (0.04) 0.24 (0.24)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.32 0.33 0.25 0.52 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.29) (0.30) (0.29) (0.28) (0.24)
Net realized gain (0.00) (0.00) (0.00) (0.00) (0.00)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.29) (0.30) (0.29) (0.28) (0.24)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $5.21 $5.18 $5.15 $5.19 $4.95
===============================================================================================================================
TOTAL RETURN 6.40% 6.62% 5.16% 10.81% 0.09%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $146,350 $108,898 $81,470 $62,125 $52,257
Ratio of gross expenses before voluntary
expense limitation to average net assets 0.84% 0.87% 0.76% 0.86% 0.98%
Ratio of net investment income to
average net assets (a) 5.53% 5.75% 5.72% 5.49% 4.84%
Ratio of expenses to average net assets (a) 0.75% 0.75% 0.75% 0.75% 0.75%
Portfolio turnover rate 62% 55% 49% 35% 13%
</TABLE>
- --------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) The Financial Highlights for periods prior to 1997 were auditied by other
auditors.
THE FUNDS
<PAGE> 30
26 THE FUNDS
Value Fund
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (b) 1995 (b) 1994 (b)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $25.50 $20.99 $18.44 $14.50 $14.54
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.40 0.37 0.39 0.41 0.29
Net realized and unrealized gain (loss)
on investments 1.72 5.22 2.91 4.47 0.07
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.12 5.59 3.30 4.88 0.36
- --------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.40) (0.37) (0.39) (0.41) (0.29)
Net realized gain (0.72) (0.71) (0.36) (0.53) (0.11)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (1.08) (0.75) (0.94) (0.40)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $26.50 $25.50 $20.99 $18.44 $14.50
================================================================================================================================
TOTAL RETURN 8.31% 26.70% 17.94% 33.78% 2.50%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $449,002 $378,621 $238,550 $147,506 $91,612
Ratio of gross expenses before voluntary
expense limitation to average net assets 0.72% 0.79% 0.73% 0.84% 1.15%
Ratio of net investment income to
average net assets (a) 1.52% 1.59% 2.08% 2.50% 2.19%
Ratio of expenses to average net assets (a) 0.72% 0.79% 0.73% 0.84% 1.15%
Portfolio turnover rate 10% 6% 5% 10% 4%
</TABLE>
- ------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) The Financial Highlights for periods prior to 1997 were audited by other
auditors.
<PAGE> 31
27
Small Company Stock Fund
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
MARCH 4, 1998
(INCEPTION DATE)
TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.05
Net realized and unrealized gain (loss)
on investments (1.15)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations (1.10)
- -------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.05)
Net realized gain (0.00)
- -------------------------------------------------------------------------------------------------------------
Total distributions (0.05)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.85
=============================================================================================================
TOTAL RETURN (11.02)% (b)
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $7,562
Ratio of gross expenses before voluntary
expense limitation to average net assets 3.11%(c)
Ratio of net investment income to
average net assets (a) 1.04%(c)
Ratio of expenses to average net assets (a) 1.50%(c)
Portfolio turnover rate 17%
</TABLE>
- ----------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Aggregate total return for the period.
(c) Annualized.
THE FUNDS
<PAGE> 32
28 YOUR ACCOUNT
YOU PAY NO COMMISSIONS OR FEES WHEN YOU BUY, SELL OR EXCHANGE SHARES DIRECTLY
FROM THE DISTRIBUTOR, RE INVESTMENT CORPORATION.
How to Buy, Sell and Exchange Shares
You may make transactions on any day Homestead Funds is open for business. See
page 34 for our hours of operation. The following instructions apply to
non-retirement and individual retirement accounts (IRAs). If you are a
participant in an employer-sponsored 401(k), 403(b) or 457 deferred
compensation plan, ask your plan administrator for transaction instructions.
How to Buy Shares
<TABLE>
INITIAL INVESTMENT
BY CHECK
- -----------------------------------------------------------------------------------------------------------
<S> <C>
($500 minimum Complete an account application and mail it to:
per Fund, non-retirement Homestead Funds
account/$200 minimum c/o PFPC
per Fund, IRA) P.O. Box 8987
Wilmington, DE 19899
Include a check payable to Homestead Funds.
BY WIRE
- -----------------------------------------------------------------------------------------------------------
($500 minimum Complete an account application and mail it to:
per Fund, non-retirement Homestead Funds
account/$200 minimum, c/o PFPC
per Fund, IRA) Wilmington, DE 19899
P.O. Box 8987
Wilmington, DE 19899
Call 1-800-258-3030 before 4:00 p.m. ET on the day you expect to wire
funds to confirm receipt of your account application and to get wire
instructions. Homestead Funds does not charge a fee to receive a wire
transfer, but your bank may charge a fee to send one.
THROUGH AN
AUTOMATIC
INVESTMENT PLAN
- -----------------------------------------------------------------------------------------------------------
(no minimum) Complete an account application and mail it to:
Homestead Funds
c/o PFPC
P.O. Box 8987
Wilmington, DE 19899
See page 35 for information on this service.
SUBSEQUENT INVESTMENT
BY CHECK
- -----------------------------------------------------------------------------------------------------------
(no minimum) Send a check, payable to Homestead Funds, to:
Homestead Funds
c/o PFPC
P.O. Box 8987
Wilmington, DE 19899
Write your account number on the check.
BY WIRE
- -----------------------------------------------------------------------------------------------------------
(no minimum) Call 1-800-258-3030 before 4:00 p.m. ET on the day you expect to wire
funds to get wire instructions. Homestead Funds does not charge a fee
to receive a wire transfer, but your bank may charge a fee to send
one.
BY ACH TRANSFER
- -----------------------------------------------------------------------------------------------------------
(no minimum) Call 1-800-258-3030 before 4:00 p.m. ET. We will take your
instructions over the phone and transfer money from the bank account
listed on your account application to your fund account. In order to
use this service, you must have authorized telephone privileges and
your bank must be a member of the ACH network.
</TABLE>
<PAGE> 33
29
How to Sell Shares
Daily Income Fund investors may also redeem shares by writing checks against
their account. See page 36 for more information.
<TABLE>
BY MAIL PAYMENT METHOD
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Send a letter to: Check mailed within
Homestead Funds seven days
c/o PFPC
P.O. Box 8987
Wilmington, DE 19899
Include the name of the Fund, the dollar amount or the number of shares to be
sold, the name of the account owners and your account number. Your letter must
be signed by all registered account owners. Sign your name exactly as shown in
the account registration. Check the Signature Guarantee section on page 33 to
see if your signature needs to be guaranteed.
If you elected to receive stock certificates for your shares, you must endorse
and include these with your letter of instructions. Certificates must be signed
by all registered account owners. Sign your name exactly as shown in the account
registration. Signatures must be guaranteed.
If you have an estate, trust, guardianship, custodianship, partnership, pension
or profit sharing account, you may be required to send other documents to
authorize a redemption. Call Homestead Funds at 1-800-258-3030.
BY PHONE PAYMENT METHOD
- -----------------------------------------------------------------------------------------------------------------------------
(non-retirement accounts only) Check mailed to address of
Call 1-800-258-3030. In order to use this service, you must have authorized record within seven days
telephone privileges. --or--
You cannot make telephone redemptions if stock certificates for the shares Funds transferred
involved have been issued and are still outstanding. electronically to bank
account of record
If you have a trust, guardianship, custodianship, partnership, pension or (We send funds by
profit sharing account, you may need to complete additional documents to ACH transfer unless you
authorize telephone redemptions. You cannot make telephone redemptions request a wire transfer.
from an estate account. We charge a nominal
fee to send a wire.)
</TABLE>
YOUR ACCOUNT
<PAGE> 34
30 YOUR ACCOUNT
How to Exchange Shares
An exchange is technically a redemption and subsequent investment. Depending on
the Funds and types of accounts involved, it may be a taxable event.
<TABLE>
BY MAIL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
(no minimum if Send a letter to:
exchanging between Homestead Funds
existing accounts/ c/o PFPC
$100 minimum if P.O. Box 8987
exchanging to a Wilmington, DE 19899
new account)
Specify the Fund names, owners' names and account numbers for the
Funds you're exchanging from and to. If exchanging to a new account,
write "New" instead of an account number. Tell us the dollar amount
or number of shares you wish to exchange. Your letter must be signed
by all registered account owners. Sign your name exactly as shown in
the account registration.
Check the Signature Guarantee section on page 33 to see if your
signature needs to be guaranteed.
Specify any services (e.g. Automatic Investment, telephone privileges)
established for your current account that you want to include on the
account you're exchanging to.
BY PHONE
- -----------------------------------------------------------------------------------------------------------------------------
(no minimum if The Funds you're exchanging from and to must be identically registered.
exchanging between
existing accounts/ You cannot make telephone exchanges if stock certificates for the shares
$100 minimum if involved have been issued and are still outstanding.
exchanging to a
new account) If you have a trust, guardianship, custodianship, partnership, pension
or profit sharing account, you may need to complete additional documents
to authorize telephone exchanges. You cannot make telephone exchanges
from an estate account.
</TABLE>
<PAGE> 35
31
Conditions of Purchase
All purchases must be made in U.S. dollars and, to avoid fees and delays, all
checks must be drawn on U.S. banks. No cash will be accepted. Homestead Funds
and its distributor reserve the right to reject any purchase for any reason and
to cancel any purchase due to nonpayment. If your purchase is canceled due to
nonpayment or because your check does not clear (and, therefore, we are
required to redeem your account), you will be responsible for any loss the
Funds incur.
Broker-Dealers
You may also buy shares of the Homestead Funds from an authorized broker-dealer.
A broker-dealer may charge you a transaction fee or take a commission from your
investment for this service.
Determination of "Good Order"
Purchases are not binding on Homestead Funds or its distributor or considered
received until requests are received by the transfer agent in "good order." For
the Daily Income Fund, investments made by federal funds wire or ACH transfer
are considered to be in "good order" upon our receipt of the wire. Daily Income
Fund investments made by other methods, including personal check, must be
converted to federal funds before we consider them to be in "good order."
Checks drawn on banks which are members of the Federal Reserve system are
usually converted to federal funds within one business day. Checks drawn on
non-member financial institutions may take longer. Investments made to other
Homestead Funds are considered to be in "good order" when received.
How We Handle Incomplete Instructions
If your instructions to buy, sell or exchange shares are not complete, we will
try to contact you. If we don't receive further instructions within a reasonable
period of time, we will return your request and any checks sent with it.
Redemption Payments
If you instruct us to redeem shares you recently purchased by personal,
corporate or government check, your redemption payment will be held until your
purchase check has cleared. This usually takes no more than 10 days. Your
transaction will be priced on the day we receive your redemption request.
When Transactions Are Priced
Investments, redemptions and exchanges received in "good order" before 4:00 p.m.
ET are priced at the Fund's net asset value per share at the market's close on
that business day. Telephone redemptions and telephone exchanges made after 4:00
p.m. ET will be priced at the Fund's net asset value per share at the market's
close on the following business day. Telephone investments made after 4:00 p.m.
ET will not be accepted. We will disregard any instruction to process
transactions on a specific date.
YOUR ACCOUNT
<PAGE> 36
32 YOUR ACCOUNT
How Fund Prices Are Determined
Each Fund's net asset value per share 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.
WHEN CALCULATED--Each Fund's net asset value per share is calculated as of the
close of regular trading on the New York Stock Exchange (typically 4:00 p.m.
ET). Net asset values per share are calculated every day the New York Stock
Exchange is open for trading.
VALUATION METHODOLOGY (DAILY INCOME 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 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 provide
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.
VALUATION METHODOLOGY (ALL OTHER FUNDS)--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.
Stock Certificates
If you have been a shareholder for at least 30 days and want to receive
certificates for your shares, send a letter of instruction to:
Homestead Funds c/o PFPC
P.O. Box 8987
Wilmington, DE 19899
Stock certificates are not issued for the Daily Income Fund. If you wish to
redeem or exchange shares for which you have been issued certificates, you need
to endorse and return the certificates before we can process your transaction.
For this reason, most shareholders elect not to receive certificates. If you
lose certificates, there may be a charge to replace them.
<PAGE> 37
33
Signature Guarantees
A signature guarantee is proof that your signature is authentic. We require a
specific type of signature guarantee, known as a medallion stamp.
WHEN NEEDED--A medallion stamp is required when you...
- - endorse stock certificates
- - instruct us to redeem amounts of $50,000 or more (unless you are
redeeming shares by phone)
- - instruct us to mail or wire redemption proceeds to an address other than
the address of record
- - instruct us to make a redemption check payable to someone other than the
registered account owner(s)
- - instruct us to exchange shares between accounts that have different
registrations.
For estate, trust and other non-individual accounts, there are other instances
when you may need a medallion stamp. Please check with a Homestead Funds'
representative.
WHERE TO OBTAIN--You can get a medallion stamp from any of the following
financial institutions authorized to issue them...
- - bonded banks
- - securities brokers or dealers
- - credit unions
- - savings and loan associations, building and loan associations,
cooperative banks, federal savings banks and associations
- - national securities exchanges, registered securities exchanges and
securities clearing houses.
We will not accept a guarantee from a notary in lieu of a medallion stamp
because notaries do not compensate you or Homestead Funds in case of fraud.
Minimum Account Size
Due to the relatively high cost of maintaining small accounts, Homestead Funds
reserves the right to close your account if the value of the account falls below
$500 as the result of redemptions or if you elect to participate in the
automatic investment plan and stop making investments before the account reaches
$500. Before closing your account, we will notify you in writing and give you 60
days to bring your account balance to at least $500.
Excessive Trading
To protect all shareholders against costs associated with excessive trading, the
Value Fund and Small Company Stock Fund may at their discretion limit
shareholders to one exchange per calendar quarter. Shareholders would be
notified in writing if such a policy were to be implemented. This policy would
not prevent you from making redemptions.
YOUR ACCOUNT
<PAGE> 38
34 SERVICES
TO ASK A QUESTION ABOUT YOUR HOMESTEAD FUNDS ACCOUNT OR MAKE TRANSACTIONS BY
PHONE, CALL 1-800-258-3030.
Important Addresses and Phone Numbers
Send transaction instructions and account inquiries to...
REGULAR MAIL
Homestead Funds
c/o PFPC
P.O. Box 8987
Wilmington, DE 19899
OVERNIGHT MAIL
Homestead Funds
c/o PFPC
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809
Attention: Shareholder Services
Send requests for general fund information and sales literature to...
Homestead Funds
4301 Wilson Boulevard, RSI8-305
Arlington, VA 22203
Attention: Matthew Lynch
To reach a Homestead Funds representative by phone, call...
1-800-258-3030
Our fax number is...
1-703-907-5526
Shareholders are responsible for confirming receipt. We will not accept a
signature guarantee sent by fax
Hours of Operation
You may buy, sell or exchange share of Homestead Funds on any day the New York
Stock Exchange is open.
Representatives are available on business days from 8:30 a.m. to 5:00 p.m., ET.
If you've established telephone privileges, representatives can take your
instructions to buy, sell (non-retirement accounts only) or exchange shares over
the phone. Telephone transactions must be made by 4:00 p.m. ET to be priced at
the Fund's closing price on that business day. For transaction instructions, see
page 28.
24-Hour, Automated Telephone Service
To hear a recording of the Funds' most recent net asset values, call
1-800-258-3030, prompter one. This hotline is available 24 hours a day, seven
days a week.
Account Statements
CONFIRMATION STATEMENT--Whenever you buy or sell shares or have distributions
reinvested in your account, we send a confirmation statement. This statement
shows the date of the transaction, number of shares involved and share price.
MONTHLY AND YEAR-END STATEMENT--We send statements at the beginning of every
month showing all activity in your account during the previous month. Your
December monthly statement, mailed in early January, lists all activity in your
account during the previous year.
Fund Reports
Shareholders receive reports twice a year. Reports include a summary of the
financial markets, an explanation of fund strategy, performance, portfolio
holdings and financial statements. The semi-annual report covers the six-month
period ending June 30; the annual report covers the 12-month period ending
December 31.
<PAGE> 39
35
Telephone Transaction Privileges
We can take your instructions to buy, sell (non-retirement accounts only) or
exchange fund shares over the phone. See the transaction instructions section
beginning on page 28, for procedures.
HOW TO AUTHORIZE--Use the account application to authorize us to act on your
instructions to buy or sell shares. You are automatically authorized to make
telephone exchanges. Use the account application to decline this service. To
modify your telephone transaction privileges for an existing account, send us a
letter.
BUSY PERIODS--We strive to answer calls promptly at all times. However, during
periods of exceptionally high market volatility, you may have trouble reaching a
representative by phone. If this occurs, please consider sending your
transaction instructions by overnight mail. Address on page 34.
SAFEGUARDS AND LIMITS TO LIABILITY--Homestead Funds and PFPC, our transfer
agent, have established procedures designed to protect you and the Funds from
loss. We will take reasonable steps to confirm your identity before accepting
your instructions, we will tape record your instructions and we will send a
statement confirming your transaction. In light of these procedures, Homestead
Funds will not be liable for following instructions we or our transfer agent
believe to be genuine.
Automatic Investment/Redemption Plans
AUTOMATIC INVESTMENT (BY ACH TRANSFER)--You can invest automatically by having a
set amount of money moved from your bank account to your Homestead Funds
account. The transfer takes place on or about the 20th of each month. You
determine the amount to transfer. Your bank must be located in the U.S. and must
participate in the ACH network. Homestead Funds does not charge a fee for this
service, but your bank might. Check with your bank before establishing this
service.
AUTOMATIC INVESTMENT (BY PAYROLL DEDUCTION)--You can invest automatically by
having money deducted from your paycheck, Social Security or other federal
government check and directed to your Homestead Funds account. Money is invested
as soon as we receive it from the sender, typically on or about the date your
check is issued. You determine the amount to invest. Check with your employer to
be sure they can accommodate payroll deduction plans before you establish this
service.
AUTOMATIC WITHDRAWAL--You can redeem shares of your Homestead Funds accounts
automatically and have the proceeds transferred to your bank account. The
transfer takes place on or about the 25th of each month. You determine the
amount to transfer. Your bank must be located in the U.S. and must participate
in the ACH network. Homestead Funds does not charge a fee for this service, but
your bank might. Check with your bank before establishing this service.
SERVICES
<PAGE> 40
36 SERVICES
FOR IRAS--If making automatic investments to an IRA, be sure your investments do
not exceed your total annual IRA contribution limit. In order to make automatic
withdrawals from an IRA, you must be 59 1/2 or older.
Checkwriting
ELIGIBILITY--Daily Income Fund shareholders can write checks against their Fund
account. If your Daily Income Fund account is a retirement account, you can
write checks only if you meet the IRA age requirement for distributions (59 1/2
or older).
MINIMUM AMOUNT--Checks must be written for $100 or more. No taxes will be
withheld from check amounts.
ORDERING CHECKS--If you elect checkwriting on your account application and fund
your account by check or wire, you receive your first book of checks
automatically. To add checkwriting privileges to an existing account or request
additional checks, call 1-800-258-3030. There is a nominal charge for check
orders. This charge is automatically deducted from your Daily Income Fund
account.
CHECK PROCESSING AND STOP PAYMENTS--Checks are processed by our transfer agent,
PFPC. This service is subject to their rules and governed by the Delaware
Uniform Commercial Code. To stop payment on a check, call 1-800-258-3030. PFPC
does not charge a fee to process checks or stop payment on a check.
CHECKS WRITTEN AGAINST NEWLY OPENED ACCOUNTS--If you opened your account with a
personal, corporate or government check, there is a clearing period of typically
no more than 10 days. If you attempt to write a redemption check before your
investment check has cleared, your redemption check will be returned for
insufficient funds.
INSUFFICIENT FUNDS--If you write a check for an amount that exceeds your Daily
Income Fund account balance your check will be returned for insufficient funds.
We will not automatically transfer money from other Homestead Fund accounts to
cover your check.
Retirement Accounts
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)--You can open a Traditional IRA,
Roth IRA, SEP-IRA, SIMPLE IRA or Education IRA in any of the Homestead Funds. To
request an IRA application, call 1-800-258-3030.
EMPLOYER-SPONSORED PLANS--Your employer may offer the Homestead Funds as
investment options available to participants in a 401(k), 403(b) or 457
(deferred compensation) plan. If your employer's plan does not offer the
Homestead Funds, ask your plan administrator to call us at 1-800-285-3030.
Service Changes Policy
Homestead Funds may change the terms of these programs or discontinue a service.
If we do so, we'll provide 60 days notice to shareholders.
<PAGE> 41
37
ADDITIONAL INFORMATION
The following materials provide more information about the Homestead Funds and
are available free upon request.
Annual and semi-annual reports
Reports discuss market conditions, Fund strategies and results for the most
recent six- and 12-month periods.
Statement of Additional Information
The Statement of Additional Information lists other Fund management and
investment policies. The Statement of Additional Information is incorporated by
reference into this prospectus (is legally considered to be a part of this
document.)
To order materials, write or call...
Homestead Funds
4301 Wilson Boulevard, RSI8-305
Arlington, VA 22203
Attention: Matthew Lynch
1-800-258-3030
These documents are also on file with the Securities & Exchange Commission. You
can view text-only versions online at www.sec.gov or request copies from the
Commission's public reference room.
450 Fifth Street, NW
Washington, DC 20549
Call 1-800-SEC-3030 for
reference room information.
Homestead Funds Investment Company Act file number: 811-6136
ADDITIONAL INFO
<PAGE> 42
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 May 3, 1999, 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 May 3, 1999.
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> 43
<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 Government Securities Fund, the Short-Term Bond Fund,
Value Fund and the Small Company Stock 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 Government Securities Fund, Short-Term Bond Fund,
Value Fund and Small Company Stock 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.
2
<PAGE> 44
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
3
<PAGE> 45
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 Government Securities Fund, Short-Term Bond Fund, Value Fund and
Small Company Stock 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, Value Fund and
Small Company Stock Fund, as may be necessary, in connection with the use of
options and futures contracts;
(15) Warrants: The Daily Income Fund, Short-Term Government Securities Fund and
Short-Term Bond Fund will not invest in warrants. The Value Fund and Small
Company Stock 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 Government Securities Fund,
Short-Term Bond Fund, Value Fund and Small Company Stock 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, Value Fund and Small
Company Stock 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 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 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 Value Fund and the Small Company Stock 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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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 Government Securities Fund and Short-Term Bond Fund will not invest
in warrants. The Value Fund and the Small Company Stock 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, Value Fund and Small
Company Stock 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, Value Fund and Small Company Stock
Fund may purchase American Depository Receipts ("ADRs"). The Daily Income Fund,
Short-Term Bond Fund, Value Fund and the Small Company Stock Fund also may
purchase U.S. dollar-denominated money market instruments, and the Short-Term
Bond Fund, Value Fund and the Small Company Stock 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
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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, Value Fund and Small Company Stock
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, 1998 and 1997 were
57% and 12%, respectively for the Short-Term Government Securities Fund, 62% and
55% for the Short-Term Bond Fund and 10% and 6%, respectively for the Value
Fund. The portfolio turnover rates for the period March 4, 1998 to December 31,
1998 was 17% for the Small Company Stock 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
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<PAGE> 57
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 71
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 38 Secretary; Compliance Officer of RE
Advisers; Securities Compliance Officer
of RE Investment and NRECA (August
1990-Present).
</TABLE>
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<PAGE> 58
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.
Compensation
The Fund pays no salaries or compensation to any of its officers or Directors
affiliated with Homestead Funds. The chart below sets forth the annual fees
paid to the non-interested Directors as of December 31, 1998.
Mr. Lucier Mr. Perna
Compensation Received from the Fund $ 7,000 $ 10,000
As of December 31, 1998 there were five portfolios of Homestead Funds for which
the above individuals served as Directors.
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
Government Securities Fund Fund, Short-Term Bond Fund, Value Fund, and Small
Company Stock Fund as of December 31, 1998.
NRECA and its affiliates, 4301 Wilson Boulevard, Arlington, VA 22203, as of
December 31, 1998, owned 4.3% of the outstanding voting securities of the Daily
Income Fund and 4.5% of the Small Company Stock Fund and may be considered an
interested person of the Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
RE Advisers, 4301 Wilson Boulevard, Arlington, VA 22203, serves as investment
manager of the Daily Income Fund, Short-Term Government Securities Fund,
Short-Term Bond Fund, Value Fund and Small Company Stock 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
Government Securities Fund and Short-Term Bond Fund, and RE Advisers was
approved by the majority vote of the shareholders of the Short-Term Government
Securities Fund and Short-Term Bond Fund at the Meeting of Shareholders held on
December 12, 1996.
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<PAGE> 59
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
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<PAGE> 60
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 Government Securities Fund, .45% of average daily
net assets; with respect to the Short-Term Bond Fund, .60% of average daily net
assets; 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; and 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.
For the years ended December 31, 1998 and 1997, investment management fees paid
to RE Advisers by the Daily Income Fund were $238,712 and $265,580, the
Short-Term Government Securities Fund paid $33,741 and $0, respectively,
respectively, the Short-Term Bond Fund paid $658,465 and $458,287, and
respectively the Value Fund paid $2,423,588 and $1,902,966, respectively. For
the period ended December 31, 1998, the Small Company Stock Fund paid no
investment management fees, pursuant to the provisions contained in the Expense
Limitation Agreement with respect to that Fund described below. 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> 61
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
Government Securities Fund's or Short-Term Bond Fund's average daily net
assets; and 1.25% of the Value Fund's average daily net assets 1.50% of the
Small Company Stock 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 period ended December 31, 1998, RE Advisers assumed and reimbursed Fund
Operating Expenses for the Small Company Stock Fund in the amount of $28,911
and waived investment management fees in the amount of $31,552, respectively.
For the years ended December 31, 1998 and 1997, RE Advisers waived or reduced
its investment management fee by $38,513 and $17,263, respectively for the
Daily Income Fund $56,429 and $56,654, respectively for the Short-Term
Government Securities Fund and $113,610 and $120,074, respectively for the
Short-Term Bond 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.
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<PAGE> 62
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> 63
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, 1998 and 1997, the Daily Income Fund,
Short-Term Government Securities Fund and Short-Term Bond Fund paid no
brokerage commissions. For the years ended December 31, 1998 and 1997, the
Value Fund paid $221,868 and $158,740 respectively and for the period ended
December 31, 1998, the Small Company Stock Fund paid $13,763 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> 64
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> 65
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,
Jr.'s Birthday, 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
Government Securities Fund, Short-Term Bond Fund, Value Fund and Small Company
Stock 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> 66
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
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<PAGE> 67
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> 68
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> 69
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, 1998 were 4.76% and 4.87%, 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, 1998,
five years ended December 31, 1998 and since inception (on November 19, 1990)
for the Daily Income Fund were 4.91%, 4.73% and 4.44%, respectively, and for
the Value Fund were 8.31%, 17.29% and 16.55% respectively. The average annual
total returns for the Short-Term Government Securities Fund for the 12 months
ended December 31, 1998 and since inception (on May 1, 1995) were 5.51% and
5.76%, respectively. The average annual total returns for the Short-Term Bond
Fund for the 12 months ended December 31, 1998, five years ended December 31,
1998 and since inception (on November 5, 1991) were 6.40%, 5.76% and 6.11%,
respectively. The average annual total returns as of December 31, 1998 for the
Small Company Stock Fund are not available since inception date was March 4,
1998.
If RE Advisers had not assumed certain Fund Operating Expenses for the Daily
Income Fund, Short-Term Government Securities Fund and Short-Term Bond 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,
1998 would have been 4.84%, 5.23% and 6.31%, respectively.
28
<PAGE> 70
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, 1998 was 42.35%; for the Short-Term
Government Securities Fund from its inception date (May 1, 1995) to December
31, 1998 was 22.86%; for the Short-Term Bond Fund from its inception date
(November 5, 1991) to December 31, 1998 was 52.94%; for the Value Fund from its
inception date (November 19, 1990) to December 31, 1998 was 247.08% and for the
Small Company Stock Fund from its inception date (March 4, 1998) to December 31,
1998 was (11.02)%.
Short-Term Government Securities Fund and Short-Term Bond Fund Yield
Calculations. In addition to providing cumulative total return information, the
Short-Term Government Securities Fund and Short-Term Bond 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> 71
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 Government Securities Fund and Short-Term
Bond Fund as of December 31, 1998 was 4.41% and 5.38%, 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> 72
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 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 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 Small Company Stock Fund may be compared to indices of
broad groups of similar but unmanaged securities, such as the Russell 2000.
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
31
<PAGE> 73
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, 1998 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, 1998
("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 Boros Berenson Cicchetti & Johnson LLP, 1025 Thomas
Jefferson Street, N.W., Washington, DC 20007 which serves as Special Counsel to
the Homestead Funds.
32
<PAGE> 74
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> 75
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> 76
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> 77
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, 1997 and 1998 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,
1997 and 1998 for the Short-Term Bond Fund, and for the
period May 1, 1995 (commencement of operations) to
December 31, 1995 and the year ended December 31, 1996
for the Short-Term Government Securities Fund,(11) and
for the period March 4, 1998 (commencement of
operations) to December 31, 1998 for the Small Company
Stock Fund.
Financial Statements incorporated by reference into the
Statement of Additional Information:
Statement of Assets and Liabilities as of December
31, 1998.
Statement of Operations for the year ended December
31, 1998.
Statements of Changes in Net Assets for the years
ended December 31, 1998 and December 31, 1997.
Portfolios of Investments as of December 31, 1998.
Report of Independent Auditors.
Notes to Financial Statements for the year ended
December 31, 1998.
(b) Exhibits:
1. Articles of Incorporation of Homestead
Funds, Inc.(1)
1(a). Articles Supplementary to the Articles of
Incorporation.(11)
2. By-Laws of Homestead Funds, Inc.(1)
3. Not applicable.
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<PAGE> 78
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.(13)
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(d). Investment Management Agreement by and between
Homestead Funds, Inc. on behalf of the Small
Company Stock Fund and RE Advisers Corporation.(13)
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> 79
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.(13)
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 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.(13)
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, Small Company Stock Fund Fee
Table.
3
<PAGE> 80
16(b). Computations of the Current Yield and
Compound Effective Yield Quotations for the
Daily Income Fund for the period ended
December 31, 1998, 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, 1998, 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 period ended December
31, 1998. 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, 1998, five years ended
December 31, 1998 and since the inception of
each Fund. SEC's Standardized Average Annual
Total Returns for the Short-Term Government
Securities Fund for the period ended December
31, 1998 and since inception.
16(e). Calculation of total return before expense
waivers, as of December 31, 1998.
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> 81
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.
(13) Incorporated herein by reference to Post-Effective Amendment No. 12 on
March 4, 1998
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 May 3, 1999 relating to "control persons" is
incorporated herein by reference.
Item 26. Number of Holders of Securities, as of December 31, 1998.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Daily Income Fund 2,407
Short-Term Bond Fund 3,221
Short-Term Government Securities Fund 850
Small Company Stock Fund 961
Value Fund 15,513
</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
Prospectus.
5
<PAGE> 82
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 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> 83
<TABLE>
<S> <C> <C>
Anthony C. Williams President and President and
Director Director
Stuart E. Teach Vice President None
Peter R. Morris Secretary and Treasurer Secretary,
Treasurer and
Director
William P. McKeithan Vice President Vice President
and Counsel
Director
Catherine M. Blushi Securities Compliance Compliance
Officer Officer and
Assistant 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> 84
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.
8
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in Washington, D.C., on the 3rd day of May 1999.
Homestead Funds, Inc.
---------------------------------
(Registrant)
/s/ Anthony C. Williams
---------------------------------
Anthony C. Williams
President
Pursuant to the requirements of the Securities Act of 1933, this
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 May 3, 1999
- -----------------------
Anthony C. Williams
Francis P. Lucier* Director May 3, 1999
- -----------------------
Francis P. Lucier
</TABLE>
<PAGE> 86
<TABLE>
<S> <C> <C>
Anthony M. Marinello* Vice President and May 3, 1999
- ----------------------- Director
Anthony M. Marinello
Peter R. Morris* Secretary, Treasurer May 3, 1999
- ----------------------- and Director
Peter R. Morris
James F. Perna* Director May 3, 1999
- -----------------------
James F. Perna
*By:/s/William P. McKeithan
-----------------------
William P. McKeithan, Esq.
(Attorney-in-Fact)
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Homestead Funds:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 14 to Registration Statement No. 33-35788 of our report dated February 12,
1999 appearing in the Homestead Funds Annual Report to Shareholders for the
year ended December 31, 1998 and to the references to us under the headings
"Financial Highlights" in the Prospectus and "Financial Statements" in the
Statement of Additional Information, both of which are part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 29, 1999
<PAGE> 1
HOMESTEAD FUNDS - DAILY INCOME FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1998
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.80%) RETURN (.80%) EXPENSE
- ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1 10000 4.200% 421 82 82
2 10421 4.200% 439 85 167
3 10860 4.200% 457 88 255
4 11317 4.200% 476 93 348
5 11793 4.200% 496 96 444
6 12289 4.200% 518 101 545
7 12807 4.200% 539 105 650
8 13346 4.200% 561 109 759
9 13907 4.200% 586 114 873
10 14493 4.200% 622 119 992
</TABLE>
<PAGE> 2
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1998
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.75%) RETURN (.75%) EXPENSE
- ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1 10000 4.250% 433 76 76
2 10433 4.250% 453 80 156
3 10886 4.250% 471 84 240
4 11357 4.250% 492 86 326
5 11849 4.250% 514 91 417
6 12363 4.250% 536 95 512
7 12899 4.250% 559 98 610
8 13458 4.250% 583 103 713
9 14041 4.250% 609 108 821
10 14650 4.250% 633 112 933
</TABLE>
<PAGE> 3
HOMESTEAD FUNDS - SHORT TERM BOND FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1998
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.75%) RETURN (.75%) EXPENSE
- ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1 10000 4.250% 433 76 76
2 10433 4.250% 453 80 156
3 10886 4.250% 471 84 240
4 11357 4.250% 493 86 326
5 11849 4.250% 513 91 417
6 12363 4.250% 536 95 512
7 12899 4.250% 559 98 610
8 13458 4.250% 583 103 713
9 14041 4.250% 609 108 821
10 14650 4.250% 632 112 933
</TABLE>
<PAGE> 4
HOMESTEAD FUNDS - VALUE FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1998
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-.72%) RETURN (.72%) EXPENSE
- ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1 10000 4.280% 433 73 73
2 10433 4.280% 451 76 149
3 10884 4.280% 471 79 228
4 11355 4.280% 491 83 311
5 11846 4.280% 512 86 397
6 12358 4.280% 535 90 487
7 12893 4.280% 558 93 580
8 13451 4.280% 581 98 678
9 14032 4.280% 607 102 780
10 14639 4.280% 620 107 887
</TABLE>
<PAGE> 5
HOMESTEAD FUNDS - SMALL COMPANY STOCK FUND
SUMMARY OF EXPENSES
PROSPECTUS - DECEMBER 31, 1998
<TABLE>
<CAPTION>
ANNUAL
RETURN DOLLAR EXPENSE TOTAL
YEAR INVESTMENT (5%-1.50%) RETURN (.72%) EXPENSE
- ------ ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1 10000 3.500% 350 150 150
2 10350 3.500% 362 155 305
3 10712 3.500% 375 161 466
4 11087 3.500% 388 166 632
5 11475 3.500% 402 172 804
6 11877 3.500% 416 179 983
7 12293 3.500% 430 184 1167
8 12723 3.500% 445 191 1358
9 13168 3.500% 461 197 1555
10 13629 3.500% 477 205 1760
</TABLE>
<PAGE> 1
HOMESTEAD FUNDS - DAILY INCOME FUND
SEVEN DAY CURRENT YIELD
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Date Daily Rate
-------------- ------------------
<S> <C>
12/25/98 0.0001247910
12/26/98 0.0001247910
12/27/98 0.0001247910
12/28/98 0.0001259720
12/29/98 0.0001274130
12/30/98 0.0001544510
12/31/98 0.0001297890
------------------
Total 0.0009119980
==================
</TABLE>
Formula: (Sum of 7 days daily rate) X (365/7) X 100
(.000911998) X 365/7 X 100 = 4.76%
<PAGE> 2
HOMESTEAD FUNDS - DAILY INCOME FUND
EFFECTIVE YIELD
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Date Daily Rate
-------------- ------------------
<S> <C>
12/25/98 0.0001247910
12/26/98 0.0001247910
12/27/98 0.0001247910
12/28/98 0.0001259720
12/29/98 0.0001274130
12/30/98 0.0001544510
12/31/98 0.0001297890
------------------
Total 0.0009119980
==================
</TABLE>
Formula: [(Sum of 7 days daily rate +1) X (365/7)] -1 /\ 100
[(.0009119980 +1) X 365/7] -1 /\ 100 = 4.87%
<PAGE> 1
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1998
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{[(101,337.24 - 14,694.59)/4,674,606 * 5.09) + 1]/\6 - 1} = 4.41%
<PAGE> 2
HOMESTEAD FUNDS - SHORT-TERM BOND FUND
30 DAY SEC YIELD
AS OF DECEMBER 31, 1998
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{[(736,058.62 - 89,668.38)/27,895,699 * 5.21) + 1] /\ 6 - 1} = 5.38%
<PAGE> 1
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - DAILY INCOME FUND
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
- --------------------
<S> <C>
Average Total Return
Since Inception 4.44%
For the Five Years Ended 4.73%
For the Year Ended 4.91%
Cumulative Total Return
Since Inception 42.35%
</TABLE>
<TABLE>
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: {(1,423.48 - 1,000.00) +1}/\(1/(2,965/365))-1 X 100 = 4.44%
-----------------------
1,000.00
For the Five
Years Ended: {(1,423.48 - 1,103.01) +1} /\(1/5)-1 X 100 = 4.73%
-----------------------
1103
For the Year Ended: (1,423.48 - 1,356.90) X 100 = 4.91%
-----------------------
1356.9
Cumulative Total Return Since Inception:
(Ending Share Value - Beginning Share Value) X 100
--------------------------------------------
Beginning Share Value
(1,423.48 - 1,000.00) X 100 = 42.35%
------------------------
1,000.00
</TABLE>
<PAGE> 2
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT-TERM GOVERNMENT SECURITIES FUND
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
- --------------------
<S> <C>
Average Total Return
Since Inception 5.76%
For the Five Years Ended 5.51%
Cumulative Total Return
Since Inception 22.86%
</TABLE>
<TABLE>
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: {(1,228.63 - 1,000.00) +1} /\ (1/(1341/365))-1 X 100 = 5.76%
-----------------------
1,000.00
For the Year Ended:
(1,228.63 - 1,164.47) X 100 = 5.51%
-----------------------
1164
Cumulative Total Return Since Inception:
(Ending Share Value - Beginning Share Value) X 100
----------------------------------------------
Beginning Share Value
(1,228.63 - 1,000.00) X 100 = 22.86%
------------------------
1,000.00
</TABLE>
<PAGE> 3
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SHORT- TERM BOND FUND
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
- --------------------
<S> <C>
Average Total Return
Since Inception 6.11%
For the Five Years Ended 5.76%
For the Year Ended 6.40%
Cumulative Total Return
Since Inception 52.94%
</TABLE>
<TABLE>
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: {(1,529.41 - 1,000.00) +1} /\ (1/(2,615/365))-1 X 100 = 6.11%
-----------------------
1,000.00
For the Five
Years Ended: {(1,529.41 - 1,155.95) +1} /\ (1/5)-1 X 100 = 5.76%
-----------------------
1155.95
For the Year Ended: (1,529.41 - 1,437.43) /\ 100 = 6.40%
---------------------
1437
Cumulative Total Return Since Inception:
(Ending Share Value - Beginning Share Value) /\ 100
----------------------------------------------
Beginning Share Value
(1,529.41 - 1,000.00) X 100 = 52.94%
------------------------
1,000.00
</TABLE>
<PAGE> 4
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS-VALUE FUND
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
- --------------------
<S> <C>
Average Total Return
Since Inception 16.55%
For the Five Years Ended 17.29%
For the Year Ended 8.31%
Cumulative Total Return
Since Inception 247.08%
</TABLE>
<TABLE>
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: {(3,470.86 - 1,000.00) +1} /\ (1/(2,615/365))-1 X 100 = 16.55%
-----------------------
1,000.00
For the Five
Years Ended: {(3,470.86 - 1,563.85) +1} /\ (1/5)-1 X 100 = 17.29%
-----------------------
1563.85
For the Year Ended: (3,470.86 - 3204.43) X 100 = 8.31%
--------------------
3204.43
Cumulative Total Return Since Inception:
(Ending Share Value - Beginning Share Value) X 100
--------------------------------------------
Beginning Share Value
(3,470.86 - 1,000.00) X 100 = 247.08%
------------------------
1,000.00
</TABLE>
<PAGE> 5
COMPUTATION OF TOTAL RETURN
HOMESTEAD FUNDS - SMALL COMPANY STOCK FUND
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
- --------------------
<S> <C>
Average Total Return
Since Inception N/A
For the Year Ended N/A
Cumulative Total Return
Since Inception -11.02%
</TABLE>
<TABLE>
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: N/A
For the Year Ended: N/A
Cumulative Total Return Since Inception:
(Ending Share Value - Beginning Share Value) X 100
--------------------------------------------
Beginning Share Value
(889.80 - 1,000.00) X 100 = -11.02
------------------------
1,000.00
</TABLE>
<PAGE> 1
CALCULATION OF 1 YEAR RETURN BEFORE EXPENSE WAIVERS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DAILY ST GOVERNMENT ST
INCOME BOND BOND
------------- ------------- -----------
1 YEAR TR, 12/31/98 4.91% 5.51% 6.40%
------------- ------------- -----------
<S> <C> <C> <C>
Expense Adjustment:
Ratio of gross expenses before
voluntary expense limitations
to average net assets -0.87% -1.03% -0.84%
Ratio of expenses to average
net assets -0.80% -0.75% -0.75%
------------- ------------- -----------
Total Return Adjustment -0.07% -0.28% -0.09%
------------- ------------- -----------
1 Year TR before expense
Waivers, 12/31/98 4.84% 5.23% 6.31%
============= ============= ===========
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
=========================================================================================
HOMESTEAD FUNDS, INC.
PRICE SPECIMEN MAKE-UP SHEET
AS OF DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------
Shares Price Per
Net Assets Outstanding Share
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Daily Income Fund $58,577,148 58,577,148 $1.00
- -----------------------------------------------------------------------------------------
Short-Term Government Securities Fund $23,930,125 4,700,521 $5.09
- -----------------------------------------------------------------------------------------
Short-Term Bond Fund $146,350,370 28,105,300 $5.21
- -----------------------------------------------------------------------------------------
Value Fund $449,001,946 16,940,963 $26.50
- -----------------------------------------------------------------------------------------
Small Company Stock Fund $7,562,029 854,657 $8.85
=========================================================================================
</TABLE>
