<PAGE> 1
Registration Nos. 33-35788
811-06136
As filed with the Securities and Exchange Commission on
May 1, 2000
--------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 / x /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 18 / x /
-----
and/or
REGISTRATION UNDER THE
INVESTMENT COMPANY ACT OF 1940 / x /
Amendment No. 19 / x /
-----
(Check appropriate box or boxes)
--------------------------------
HOMESTEAD FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
4301 Wilson Boulevard, Arlington, VA 22203
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code:
(703) 907-6026
--------------
William P. McKeithan, Esq.
Homestead Funds ,Inc.
4301 Wilson Boulevard, Arlington, VA 22203
(Name and Address of Agent for Service)
Copies to:
Michael Berenson, Esq.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
Approximate Date of Proposed Public Offering.
It is proposed that this filing will become effective:
X immediately upon filing on October 28, 1999
- ----- 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> 2
HOMESTEAD FUNDS
[GRAPHIC]
PROSPECTUS
MAY 1, 2000
DAILY INCOME FUND
SHORT-TERM GOVERNMENT
SECURITIES FUND
SHORT-TERM BOND FUND
STOCK INDEX 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 if 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> 3
[Intentionally Left Blank]
<PAGE> 4
3
TABLE OF CONTENTS
THE HOMESTEAD FUNDS ARE A FAMILY OF SIX NO-LOAD MUTUAL FUNDS. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Objective, Strategy, Risks
Short-Term
Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Objective, Strategy, Risks
Short-Term Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Objective, Strategy, Risks
Stock Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Objective, Strategy, Risks
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Objective, Strategy, Risks
Small Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Objective, Strategy, Risks
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
YOUR ACCOUNT
How to Buy, Sell and
Exchange Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Conditions of Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
When Transactions
Are Priced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
How Fund Prices
Are Determined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Signature Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Minimum Account Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Excessive Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SERVICES
Important Addresses
and Phone Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Hours of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
24-Hour, Automated
Telephone Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Account Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Fund Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Telephone Transaction
Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Automatic Investment/
Redemption Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Checkwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Retirement Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ADDITIONAL SOURCES
OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</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> 5
4 THE FUNDS
THE DAILY INCOME FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE.
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.
The Daily Income Fund's share price is not insured by the Federal Deposit
Insurance Corporation, Federal Reserve Board or any other agency. While the
Fund has maintained a stable share price since its inception, there is no
guarantee it will be able to meet this goal in the future.
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.
<PAGE> 6
THE FUNDS 5
- - INCOME RISK--the chance a decline in interest rates will cause the Fund's
yield to decline.
- - 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 essentially a short-term
loan collateralized by securities. The buyer, in this case the Fund,
purchases securities with an agreement that the seller will buy them back at
a mutually agreed upon price and time. 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.
<PAGE> 7
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
THE FUND'S PRICE OR YIELD. 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> 8
THE FUNDS 7
Some types of securities in which the Fund invests pose specific risks. These
include...
- - REPURCHASE AGREEMENTS--A repurchase agreement is essentially a short-term
loan collateralized by securities. The buyer, in this case the Fund,
purchases securities with an agreement that the seller will buy them back at
a mutually agreed upon price and time. 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. In
addition, there is a risk that unscheduled or early repayment of principal
would negatively affect the Fund's return as the Fund could be forced to
reinvest in lower yielding securities.
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> 9
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 Depository 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 or 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> 10
THE FUNDS 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 essentially a short-term
loan collateralized by securities. The buyer, in this case the Fund,
purchases securities with an agreement that the seller will buy them back at
a mutually agreed upon price and time. 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 DEPOSITORY 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> 11
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. In
addition, there is a risk that unscheduled or early repayment of principal
would negatively affect the Fund's return as the Fund could be forced to
reinvest in lower yielding securities.
- - 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. In addition, there is a risk that
unscheduled or early repayment of principal would negatively affect the
Fund's return as the Fund could be forced to reinvest in lower yielding
securities.
<PAGE> 12
THE FUNDS 11
- - 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.
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> 13
12 THE FUNDS
THE STOCK INDEX FUND IS MANAGED TO TRACK THE PERFORMANCE OF THE STANDARD &
POOR'S 500 STOCK INDEX. INVESTING IN BOTH INDEX AND ACTIVELY MANAGED MUTUAL
FUNDS IS A WAY TO FURTHER DIVERSIFY YOUR PORTFOLIO.
STOCK INDEX FUND
ASSET ALLOCATION
stock
PORTFOLIO CHARACTERISTICS
similar to the Standard & Poor's 500 Stock Index
EXPECTED DEGREE OF SHARE PRICE VOLATILITY
high
OBJECTIVE
The Stock Index Fund seeks to match, as closely as possible, before expenses,
the performance of the Standard & Poor's 500 Stock Index (Standard & Poor's
500). Over the long term, the investment adviser seeks a correlation of 98% or
better, before expenses. (A figure of 100% would indicate perfect correlation.)
The primary component of the Fund's total return is likely to be capital
appreciation (or depreciation). Any dividend or interest income is incidental
to the pursuit of its objective.
Because the underlying investments--stocks and other securities that function
like stocks--are inherently volatile, the Fund is appropriate for long-term
investors who can tolerate fluctuations in the value of their investment.
STRATEGY
PORTFOLIO COMPOSITION--The Stock Index Fund invests all of its assets in the
Equity 500 Index Portfolio, a separate investment company managed by Bankers
Trust Company. The Equity 500 Index Portfolio's investment objective is
identical to the Stock Index Fund's. In this document, statements regarding the
Stock Index Fund's investments refer to investments made by the Equity 500
Index Portfolio. We use the term Index Fund to mean either the Stock Index Fund
or the Equity 500 Index Portfolio.
The Index Fund's securities are weighted to attempt to make the Index Fund's
total investment characteristics similar to those of the Standard & Poor's 500
as a whole. The investment adviser may exclude or may remove any stock from the
Index Fund, if the investment adviser believes that the stock is illiquid or
has impaired financial conditions due to extraordinary events.
The Index Fund cannot as a practical matter hold every one of the 500 stocks in
the Standard & Poor's 500. In an effort to run an efficient and effective
strategy, the Index Fund uses the process of "optimization," a statistical
sampling technique. First, the Index Fund buys the stocks that make up the
larger portions of the Standard & Poor's 500's value in roughly the same
proportion as the Standard & Poor's 500. Second, smaller stocks are analyzed
and selected. In choosing smaller stocks, the investment adviser tries to match
the industry and risk characteristics of all of the smaller companies in the
Standard & Poor's 500 without buying all of those stocks. This approach
attempts to maximize the Index Fund's liquidity and returns while minimizing
its costs.
Under normal conditions, the Index Fund will invest at least 80% of its total
assets in stocks of companies included in the Standard & Poor's 500 and
inderivative instruments, such as futures contracts and options, that provide
exposure to the stocks of companies in S&P 500. Up to 20% of the Index Fund's
total assets may be invested in other types of securities including ....
- - money market instruments and other short-term debt securities
- - derivative instruments, such as futures contracts and options, that provide
exposure to the stocks of companies in S&P 500.
<PAGE> 14
THE FUNDS 13
MASTER-FEEDER STRUCTURE--The Stock Index Fund is a feeder index fund that
invests all of its investable assets in a master index fund with the same
investment objective. The master index fund purchases securities for
investment. This structure works as follows:
Investor
purchases shares of . . .
Feeder index fund
which invests in . . .
Master index fund
which buys . . .
Investment securities.
This feeder index fund can withdraw its investment in the master index fund at
any time if the Board of Directors determines that it is in the best interest
of the Fund and its shareholders. If this happens, the Fund's assets will be
invested according to the investment policies and restrictions described in
this prospectus.
INDEXING--Indexing is different than an active management approach in that
portfolio securities are selected based on their ability to keep the Index
Fund's return in line with the Standard & Poor's 500's. The Index Fund's
manager does not make decisions based on his or her opinion of the securities'
investment potential.
INDEX DESCRIPTION AND CONSTRUCTION--The Index Fund's model, the Standard &
Poor's 500 Stock Index, is a representative sample of common stocks that trade
on major U.S. exchanges. The Standard & Poor's 500 is constructed by industry
group. On June 30, 1999, 11 industries were represented. Industries are
organized under four major categories: industrials, utilities, financials and
transportations. Stocks are held by the Standard & Poor's 500 in proportion to
their market capitalization (share price multiplied by number of shares
outstanding). The Standard & Poor's 500 includes both large- and small-company
stocks; however, the larger companies have a dominant position and a greater
influence over the Standard & Poor's 500's performance because of the Standard
& Poor's 500's calculation methodology.
The Standard & Poor's 500 is a trademark of McGraw Hill, Inc. The Stock Index
Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's.
Standard & Poor's makes no representation or warranty regarding the
advisability of investing in the securities included in the Standard & Poor's
500 or the ability of the Standard & Poor's 500 to track the overall
stockmarket.
RISKS
An investment in the Index 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. For example, the value of
the stock market as a whole could decline. It is also possible that returns
for large-company stocks, the primary driver of performance for the Standard
& Poor's 500 and therefore for the Index Fund, could trail returns on other
types of investments. As is true for other specific market sectors,
<PAGE> 15
14 THE FUNDS
large-company stocks tend to go through cycles of outperformance or
underperformance relative to the full stock market. These periods can last
for several years. An investment in the Index Fund is not a deposit of
Bankers Trust or any other bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. The
value of an investment in the Index Fund will fluctuate up and down. When
you sell your shares of the Index Fund, they could be worth less than what
you paid for them.
- - TRACKING ERROR RISK--The chance the Index Fund's return will not closely
track the Standard & Poor's 500's. The leading causes of tracking error
are...
- - expenses--The Standard & Poor's 500 is a hypothetical portfolio and incurs
no expenses. The Index Fund has to pay for trading, accounting,
recordkeeping and other services.
- - composition--The composition of the Standard & Poor's 500 and the stocks
held by the Index Fund may occasionally diverge.
- - cash flows--The Index Fund's ability to closely trail the Standard & Poor's
500 may be affected by the timing and magnitude of cash flows in to and out
of the Index Fund.
Some of the types of securities in which the Index Fund invests pose specific
risks. These include...
- - FUTURES AND OPTIONS--Futures and options are agreements to buy or sell
securities at a set price on a set date. With a futures contract, the Index
Fund is obligated either to buy or sell the security at the agreed upon
terms or to sell the contract to another party (at a loss or gain) before
the settlement date. With an option agreement, the Index Fund has the right
but not the obligation to buy or sell the security at the agreed upon terms.
The Index Fund uses futures and options as a way of sharing in the
performance of the Standard & Poor's 500 without owning all Standard &
Poor's 500 securities directly. This strategy enhances the Index Fund's
ability to track the Standard & Poor's 500 and improves liquidity. Options
and futures prices can be highly volatile, and the loss from an investment
in futures could be greater than the contract's original cost. To mitigate
these risks, the Index Fund will not use options or futures for speculative
purposes or as leveraged investments that would further magnify the gains or
losses of these investments. The Index Fund will invest only in futures and
options whose values are tied to the Standard & Poor's 500. The Index Fund
intends to buy futures in anticipation of buying stocks.
CHANGES TO FUND POLICIES--The Index Fund's investment objective is not
fundamental and may be changed by the Board of Directors without shareholder
approval.
<PAGE> 16
THE FUNDS 15
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
value
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 defensive strategy, the Fund may invest in money
market securities without limitation
- - U.S. dollar-denominated securities of foreign issuers, including American
Depository 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.
FOCUS ON LARGE- AND MID-CAPITALIZATION COMPANIES--The Value Fund focuses on
stocks of established companies. These are typically sizable business
franchises with market capitalizations of $2 billion or greater. On June 30,
1999, the average market capitalization for all of the companies held in the
portfolio was $19.6 billion. 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.
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
16 THE FUNDS
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 essentially a short-term
loan collateralized by securities. The buyer, in this case the Fund,
purchases securities with an agreement that the seller will buy them back at
a mutually agreed upon price and time. 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 DEPOSITORY 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.-
<PAGE> 18
THE FUNDS 17
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.
- - 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
18 THE FUNDS
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 companies. 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. Remaining
assets may be invested in other types of securities including...
- - U.S. dollar-denominated securities of foreign issuers, including American
Depository 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.
FOCUS ON SMALL-CAPITALIZATION COMPANIES--The Small Company Stock Fund focuses
on companies whose market capitalization is consistent with that of companies
included in the Russell 2000 Index. On June 30, 1999, the average market
capitalization for companies in the Russell 2000 was approximately $780
million. On June 30, 1999, the average market capitalization for companies held
in the Fund's portfolio was $550 million. 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.
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.
<PAGE> 20
THE FUNDS 19
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 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 essentially a short-term
loan collateralized by securities. The buyer, in this case the Fund,
purchases securities with an agreement that the seller will buy them back at
a mutually agreed upon price and time. 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.
<PAGE> 21
20 THE FUNDS
- - AMERICAN DEPOSITORY 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.
- - 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> 22
THE FUNDS 21
PERFORMANCE
The information below provides some indication of the risks of investing in
each Fund by showing changes in each Fund's performance from year to year and
by showing how each Fund's average annual returns for one, five and ten years
compare with those of a broad measure of market performance. Past performance
does not predict future performance.
DAILY INCOME FUND
Average Annual Total Returns for Periods Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 5 YEAR (11/90)
- -------------------------------------------------------------------
<S> <C> <C> <C>
DAILY INCOME FUND 4.6% 4.9% 4.5%
- -------------------------------------------------------------------
Best Quarter: Q1 of 1991 1.59%
Worst Quarter: Q2 of 1993 .65%
</TABLE>
For the Fund's current yield, call 1-800-258-3030.
[BAR GRAPH]
<TABLE>
<S> <C>
1991 5.67%
1992 3.39%
1993 2.68%
1994 3.63%
1995 5.38%
1996 4.81%
1997 4.92%
1998 4.91%
1999 4.56%
</TABLE>
SHORT-TERM GOVERNMENT SECURITIES FUND
Average Annual Total Returns for Periods Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR (5/95)
- -------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM GOVERNMENT 2.9% 5.1%
SECURITIES FUND
- -------------------------------------------------------------------
MERRILL LYNCH 1-4.99 YEAR 2.0% 6.2%
U.S. TREASURY INDEX
- -------------------------------------------------------------------
Best Quarter: Q4 of 1995 2.12%
Worst Quarter: Q1 of 1996 .27%
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C>
1996 4.46%
1997 5.73%
1998 5.51%
1999 2.88%
</TABLE>
For the Fund's current yield, call 1-800-258-3030.
<PAGE> 23
22 THE FUNDS
SHORT-TERM BOND FUND
Average Annual Total Returns for Periods Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 5 YEAR (11/91)
- ------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM BOND FUND 3.2% 6.4% 5.8%
- ------------------------------------------------------------------
MERRILL LYNCH 1-4.99 YEAR 2.2% 6.9% 6.2%
CORP./GOV. INDEX
- ------------------------------------------------------------------
Best Quarter: Q3 of 1992 3.71%
Worst Quarter: Q1 of 1994 -.62%
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C>
1992 6.30%
1993 6.62%
1994 0.09%
1995 10.81%
1996 5.16%
1997 6.62%
1998 6.40%
1999 3.21%
</TABLE>
For the Fund's current yield, call 1-800-258-3030.
STOCK INDEX FUND
Total Returns for Period Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
(10/99)
- ------------------------------------------------------
<S> <C>
STOCK INDEX FUND 9.7%
- ------------------------------------------------------
STANDARD & POOR'S 500 9.7%
STOCK INDEX
- ------------------------------------------------------
</TABLE>
<PAGE> 24
THE FUNDS 23
VALUE FUND
Average Annual Total Returns for Periods Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR 5 YEAR (11/90)
- -------------------------------------------------------------------
<S> <C> <C> <C>
VALUE FUND -3.2% 16.0% 14.2%
- -------------------------------------------------------------------
STANDARD & POOR'S 500 21.0% 28.5% 21.1%
STOCK INDEX
- -------------------------------------------------------------------
Best Quarter: Q2 of 1999 14.71%
Worst Quarter: Q3 of 1999 -14.66%
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C>
1991 17.16%
1992 11.68%
1993 18.83%
1994 2.50%
1995 33.78%
1996 17.94%
1997 26.70%
1998 8.31%
1999 -3.21%
</TABLE>
SMALL COMPANY STOCK FUND
Average Annual Total Returns for Periods Ended 12/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION
1 YEAR (3/98)
- -------------------------------------------------------------------
<S> <C> <C>
SMALL COMPANY STOCK FUND -.6% -6.5%
- -------------------------------------------------------------------
RUSSELL 2000 INDEX 21.4% 6.3%
- -------------------------------------------------------------------
Best Quarter: Q2 of 1999 21.90%
Worst Quarter: Q3 of 1998 -12.82%
</TABLE>
[BAR GRAPH]
<TABLE>
<S> <C>
1999 -0.55%
</TABLE>
<PAGE> 25
24 THE FUNDS
EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of a Fund. 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 STOCK VALUE COMPANY
FUND SECURITIES FUND BOND FUND INDEX FUND FUND STOCK FUND
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None None None None None None
Sales Load Imposed on
Reinvested Dividends None None None None None None
Deferred Sales Load Imposed
on Redemptions None None None None None None
Redemption Fee None None None None None None
Exchange Fee None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fees .50%* .45%* .60%* .05%** .55%* .84%*
Other Expenses .34%* .41%* .23%* .64%*** .19%* 1.18%*
Total Fund Operating Expenses .84%* .86%* .83%* .69%** .74%* 2.02%*
</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 assets
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, .75% of the average daily net assets
of the Stock Index 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, 1999, 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. As a result of these waivers and reimbursements, the actual net
operating 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.
** These expenses have been revised since December 31, 1999 to reflect a
reduction in management fees effective March 15, 2000.
*** These other expenses include a .25% fee paid to RE Advisers for Fund
administration.
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 $264 $462 $1,036
Short-Term Government Securities Fund $76 $263 $466 $1,064
Short-Term Bond Fund $76 $257 $453 $1,020
Stock Index Fund $70** $220** $322** $449**
Value Fund $75 $234 $408 $911
Small Company Stock Fund $150 $574 $1,024 $2,272
</TABLE>
** These expenses have been revised since December 31, 1999 to reflect a
reduction in management fees effective March 15, 2000.
**** There are no charges imposed upon redemption. One-year figures are based
on actual net operating expenses.
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> 26
THE FUNDS 25
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.
In 1999, the Funds paid RE Advisers the following fees, expressed as a percent
of fund assets:
<TABLE>
<S> <C>
Daily Income Fund .46%
Short-Term Government
Securities Fund .34%
Short-Term Bond Fund .52%
Value Fund .55%
Small Company Stock Fund .32%
</TABLE>
INVESTMENT MANAGER FOR THE STOCK INDEX FUND
Bankers Trust (BT)
130 Liberty Street
One Bankers Trust Plaza
New York, NY 10006
As of December 31, 1999, BT had total assets under management of approximately
$270 billion. BT is dedicated to serving the needs of corporations,
governments, financial institutions, and private clients and has invested
retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
On March 11, 1999, BT announced that it had reached an agreement with the
United States Attorney's Office in the Southern District of New York to resolve
an investigation concerning inappropriate transfers of unclaimed funds and
related record-keeping problems that occurred between 1994 and early 1996. BT
pleaded guilty to misstating entries in the bank's books and records and agreed
to pay a $63.5 million fine to state and federal authorities. On July 26, 1999,
the federal criminal proceedings were concluded with BT's formal sentencing.
The events leading up to the guilty pleas did not arise out of the investment
advisory or mutual fund management activities of BT or its affiliates.
As a result of the plea, absent an order from the SEC, BT would not be able to
continue to provide investment advisory services to the Equity 500 Index
Portfolio. The SEC has granted a temporary order to permit BT and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a permanent
order.
BT also serves as the administrator for the Equity 500 Index Portfolio. Under
an Administration and Services Agreement with the Portfolio, BT calculates the
<PAGE> 27
26 THE FUNDS
value of the assets of the Portfolio and generally assists the Portfolio's
Board in all aspects of the administration and operation. Under the
Administration and Services Agreement, BT may delegate one or more of its
responsibilities to others, at BT's expense.
RE Advisers serves as the administrator for the Stock Index Fund. Pursuant to
an Administrative Service Agreement, RE Advisers provides certain
administrative services to the Fund and generally assists in all aspects of its
operation.
In 1999, the Stock Index Fund paid BT .08% of net assets and paid RE Advisers
.25% of net assets.
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
<PAGE> 28
THE FUNDS 27
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
Interest Income
<TABLE>
<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
STOCK INDEX FUND Declared and paid quarterly
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> 29
28 THE FUNDS
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand a Fund's
financial performance for the past five years or, if shorter, the period of a
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate an investor would
have earned (or lost) on an investment in a Fund (assuming reinvestment of all
dividends and distributions). The figures below were audited by independent
auditors. The Funds' independent auditors are Deloitte & Touche LLP. The
figures for periods prior to 1997 were audited by other auditors. If you would
like to receive a copy of the latest annual report, which includes complete
financials and footnotes, please call 1-800-258-3030.
DAILY INCOME FUND
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<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) . . . . . . . . . 0.04 0.05 0.05 0.05 0.05
Net realized and unrealized gain on
investments . . . . . . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations . . . . . . 0.04 0.05 0.05 0.05 0.05
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . . . (0.04) (0.05) (0.05) (0.05) (0.05)
Net realized gain . . . . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . . . (0.04) (0.05) (0.05) (0.05) (0.05)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . 4.56% 4.91% 4.92% 4.81% 5.38%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . . . $63,734 $58,577 $53,033 $57,871 $52,699
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . . . 0.84% 0.87% 0.83% 0.81% 0.87%
Ratio of net investment income to
average net assets (a) . . . . . . . . . . . 4.47% 4.80% 4.80% 4.71% 5.25%
Ratio of expenses to average net assets (a) . . . 0.80% 0.80% 0.80% 0.76% 0.75%
</TABLE>
- -----------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
<PAGE> 30
THE FUNDS 29
SHORT-TERM GOVERNMENT SECURITIES FUND
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
MAY 1, 1995
YEAR ENDED DECEMBER 31, (INCEPTION DATE)
--------------------------------------------------------- TO DECEMBER 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $5.09 $5.07 $5.05 $5.09 $5.00
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) . . . . . . . . . 0.23 0.25 0.26 0.26 0.18
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . . (0.09) 0.02 0.02 (0.04) 0.09
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations . . . . . . 0.14 0.27 0.28 0.22 0.27
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . . . (0.23) (0.25) (0.26) (0.26) (0.18)
Net realized gain . . . . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . . . (0.23) (0.25) (0.26) (0.26) (0.18)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $5.00 $5.09 $5.07 $5.05 $5.09
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . 2.88% 5.51% 5.73% 4.46% 5.44%(b)
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . . . $34,459 $23,930 $16,187 $7,692 $2,658
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . . . 0.86% 1.03% 1.27% 2.30% 6.21%(c)
Ratio of net investment income to
average net assets (a) . . . . . . . . . . . 4.63% 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% 0.75%(c)
Portfolio turnover rate . . . . . . . . . . . . . 9% 57% 12% 21% 11%(c)
</TABLE>
- ---------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
(b) Aggregate total return for the year.
(c) Annualized.
<PAGE> 31
30 THE FUNDS
SHORT-TERM BOND FUND
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $5.21 $5.18 $5.15 $5.19 $4.95
- -----------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) . . . . . . . . . 0.28 0.29 0.30 0.29 0.28
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . . . (0.12) 0.03 0.03 (0.04) 0.24
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations . . . . . . 0.16 0.32 0.33 0.25 0.52
- -----------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . . . (0.28) (0.29) (0.30) (0.29) (0.28)
Net realized gain . . . . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . . . (0.28) (0.29) (0.30) (0.29) (0.28)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $5.09 $5.21 $5.18 $5.15 $5.19
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . 3.21% 6.40% 6.62% 5.16% 10.81%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . . . $171,694 $146,350 $108,898 $81,470 $62,125
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . . . 0.83% 0.84% 0.87% 0.76% 0.86%
Ratio of net investment income to
average net assets (a) . . . . . . . . . . . 5.48% 5.53% 5.75% 5.72% 5.49%
Ratio of expenses to average net assets (a) . . . 0.75% 0.75% 0.75% 0.75% 0.75%
Portfolio turnover rate . . . . . . . . . . . . . 37% 62% 55% 49% 35%
</TABLE>
- -------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
<PAGE> 32
THE FUNDS 31
STOCK INDEX FUND
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
OCTOBER 28, 1999
(INCEPTION DATE)
TO DECEMBER 31,
1999
- ------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- ------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.01
Net realized and unrealized gain
on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.96
- ------------------------------------------------------------------------------------------------------------
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . 0.97
- ------------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.01)
Net realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00
- ------------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.01)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.96
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.65%(b)
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . $8,311
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . . . . . . . . . . . . . . . . . . . . . n/a
Ratio of net investment income to
average net assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.54%(c)
Ratio of expenses to average net assets (a) . . . . . . . . . . . . . . . . . . . . . 0.72%(c)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n/a
</TABLE>
- ---------------------------
(a) Excludes excess administrative fees and other expenses in accordance with
the Expense Limitation Agreement with RE Advisers.
(b) Aggregate total return for the period.
(c) Annualized.
<PAGE> 33
32 THE FUNDS
VALUE FUND
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . $26.50 $25.50 $20.99 $18.44 $14.50
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) . . . . . . . 0.41 0.40 0.37 0.39 0.41
Net realized and unrealized gain
on investments . . . . . . . . . . . . (1.23) 1.72 5.22 2.91 4.47
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations . . . . (0.82) 2.12 5.59 3.30 4.88
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . (0.41) (0.40) (0.37) (0.39) (0.41)
Net realized gain . . . . . . . . . . . . (1.74) (0.72) (0.71) (0.36) (0.53)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . (2.15) (1.12) (1.08) (0.75) (0.94)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . $23.53 $26.50 $25.50 $20.99 $18.44
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . (3.21)% 8.31% 26.70% 17.94% 33.78%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . $406,302 $449,002 $378,621 $238,550 $147,506
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . n/a n/a n/a n/a n/a
Ratio of net investment income to
average net assets (a) . . . . . . . . . 1.47% 1.52% 1.59% 2.08% 2.50%
Ratio of expenses to average net assets (a) . 0.74% 0.72% 0.79% 0.73% 0.84%
Portfolio turnover rate . . . . . . . . . . . 17% 10% 6% 5% 10%
</TABLE>
- --------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
<PAGE> 34
THE FUNDS 33
SMALL COMPANY STOCK FUND
For a Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
MARCH 4, 1998
YEAR ENDED (INCEPTION DATE)
DECEMBER 31, TO DECEMBER 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . $8.85 $10.00
- --------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) . . . . . . . . . . . . . . 0.05 0.05
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . . . . . . . . (0.10) (1.15)
- --------------------------------------------------------------------------------------------------------
Total from investment operations . . . . . . . . . . . (0.05) (1.10)
- --------------------------------------------------------------------------------------------------------
Distributions
Net investment income . . . . . . . . . . . . . . . . (0.05) (0.05)
Net realized gain . . . . . . . . . . . . . . . . . . . (0.43) 0.00
- --------------------------------------------------------------------------------------------------------
Total distributions . . . . . . . . . . . . . . . . . (0.48) (0.05)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $8.32 $8.85
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . (0.55)% (11.02)%(b)
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) . . . . . . . . . . . . $10,637 $7,562
Ratio of gross expenses before voluntary expense
limitation to average net assets . . . . . . . . . . . 2.02% 3.11%(c)
Ratio of net investment income to
average net assets (a) . . . . . . . . . . . . . . . . 0.65% 1.04%(c)
Ratio of expenses to average net assets (a) . . . . . . . . 1.50% 1.50%(c)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . 23% 20%(c)
</TABLE>
- -----------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
(b) Aggregate total return for the year.
(c) Annualized.
<PAGE> 35
34 YOUR ACCOUNT
YOU PAY NO COMMISSIONS OR FEES WHEN YOU BUY, SELL OR EXCHANGE SHARES DIRECTLY
FROM THE DISTRIBUTOR, REINVESTMENT CORPORATION.
HOW TO BUY, SELL AND EXCHANGE SHARES
You may make transactions on any day Homestead Funds is open for business. See
page 40 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>
<S> <C>
INITIAL INVESTMENT
BY CHECK
- ------------------------------------------------------------------------------------------------------------------------------------
($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) 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 41 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> 36
YOUR ACCOUNT 35
HOW TO SELL SHARES
Daily Income Fund investors may also redeem shares by writing checks against
their account. See page 42 for more information.
<TABLE>
<S> <C>
BY MAIL PAYMENT METHOD
- ------------------------------------------------------------------------------------------------------------------------------------
Send a letter to: Check mailed within seven days
Homestead Funds
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 39 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, partner-
ship, 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
- ------------------------------------------------------------------------------------------------------------------------------------
Call 1-800-258-3030. In order to use this service, you must have Check mailed to address of record
authorized telephone privileges. within seven days
--or--
You cannot make telephone redemptions if stock certificates for Funds transferred
the shares involved have been issued and are still outstanding. electronically to bank
account of record
For Traditional and Roth IRAs only, you must meet the age (We send funds by
requirement for distributions (age 59 1/2 or older) in order to ACH transfer unless you
redeem by phone. See page 41 for additional restrictions and request a wire transfer.
guidelines. Homestead Funds and its agents will not be liable for We charge a nominal
any losses unless you properly notify them prior to 60 days from fee to send a wire.)
the date of the transaction and the loss is due to the negligence
of Homestead Funds or its agents. A properly executed application
or other authorized form of Homestead Funds must be received to
authorize this option.
If you have a trust, guardianship, custodianship, partnership,
pension or profit sharing account, you may need to complete
additional documents to authorize telephone redemptions. You
cannot make telephone redemptions from an estate account.
</TABLE>
<PAGE> 37
36 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>
<S> <C>
BY MAIL
- ------------------------------------------------------------------------------------------------------------------------------------
(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 39 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 Call 1-800-258-3030. The Funds you're exchanging from and to must be
exchanging between identically registered.
existing accounts/
$100 minimum if You cannot make telephone exchanges if stock certificates for the
exchanging to a shares involved have been issued and are still outstanding.
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> 38
YOUR ACCOUNT 37
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 from our
receipt of the purchase check. 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.
<PAGE> 39
38 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. The Exchange is closed on weekends and all major
holidays.
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 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.
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> 40
YOUR ACCOUNT 39
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 process a transfer of assets in amounts of $250,000 or more
for custodian to custodian IRA accounts
- - 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.
<PAGE> 41
40 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: Investments Division
To reach a Homestead Funds representative by phone, call...
1-800-258-3030
Our fax number is...
1-703-907-5606
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 shares of Homestead Funds on any day the New York
Stock Exchange is open. The Exchange is closed on weekends and all major
holidays.
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 34.
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> 42
SERVICES 41
TELEPHONE TRANSACTION PRIVILEGES
We can take your instructions to buy, sell or exchange fund shares over the
phone. See the transaction instructions section beginning on page 34, 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.
IRA TELEPHONE REDEMPTIONS--Telephone redemptions from IRA accounts are accepted
only for Traditional and Roth IRAs (not for SEP, SIMPLE and Education IRAs) and
only for shareholders who meet the age requirement for IRA distributions (59
1/2 or older). Telephone withdrawals are limited to $100,000 per day.
Distributions from Traditional IRAs are generally taxable as income. Our
representative will ask you if you would like a portion of your redemption
amount withheld for payment of taxes. You may accept or decline this option.
See page 33 for additional restrictions and guidelines.
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 40.
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.
<PAGE> 43
42 SERVICES
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.
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.
<PAGE> 44
ADDITIONAL INFORMATION 43
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.
The following materials provide more information about the Homestead Funds and
are available upon request.
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.)
REPORTS
Additional information about Fund investments is available in the annual and
semi-annual reports to shareholders. Here you will find a discussion of the
market conditions and investment strategies that significantly affected Fund
performance.
To order materials to be sent to you at no cost, write or call...
Homestead Funds
4301 Wilson Boulevard, RSI8-305
Arlington, VA 22203
Attention: Investments Division
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, for a fee, 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: 811-06136
<PAGE> 45
[Intentionally Left Blank]
<PAGE> 46
[Intentionally Left Blank]
<PAGE> 47
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 1, 2000, 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 1, 2000.
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
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."
1
<PAGE> 48
The Homestead Funds currently consist of six portfolios, the Daily Income Fund,
the Short-Term Government Securities Fund, the Short-Term Bond Fund, the Stock
Index Fund (the "Index Fund"), the 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, Stock Index Fund, Value Fund and Small Company Stock Fund
are sometimes referred to individually as the "Fund" and collectively as the
"Funds."
All of the Funds, except the Stock Index Fund, are 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.
The Stock Index Fund invests in a separate investment company managed by Bankers
Trust Company.
INVESTMENT RESTRICTIONS (ALL FUNDS EXCEPT THE INDEX FUND)
In addition to the restrictions set forth in the Prospectus with respect to each
Fund (except the Index 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 (except the Index 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 the Index Fund)
except as indicated to the contrary.
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
2
<PAGE> 49
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 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 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;
3
<PAGE> 50
(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 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.
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS (INDEX FUND)
The Index Fund may:
1. Purchase or sell securities on a when-issued or forward commitment
basis. The purchase or sale of when-issued securities enables an
investor to hedge against anticipated changes in interest rates and
prices by locking in an attractive price or yield. The price of
when-issued securities is fixed at the time the commitment to purchase
or sell is made, but delivery and payment for the when-issued
securities take place at a later date, normally one to two months after
the date of purchase. During the period between purchase and
settlement, no payment is made by the purchaser to the issuer and no
interest accrues to the purchaser. Such transactions therefore involve
a risk of loss if the value of the security to be purchased declines
prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date. A sale of a when-issued
security also involves the risk that the other party will be unable to
settle the transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities
with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. As with
when-issued securities, these transactions involve certain risks, but
they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed
for existing obligations, whereas in a when-issued transaction, the
obligations have not yet been issued. When purchasing securities on a
when-issued or forward commitment basis, a segregated account of liquid
assets at least equal to the value of purchase commitments for such
securities will be maintained until the settlement date.
2. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").
3. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by the Portfolio exceeds 33 1/3% of
its total assets (including the market value of collateral received).
For purposes of complying with the Portfolio's investment policies and
restrictions, collateral received in connection with securities loans
is deemed an asset of the Portfolio to the extent required by law. The
Manager receives compensation for administrative and oversight
functions with respect to securities lending. The amount of such
compensation depends on the income generated by the loan of the
securities. The Portfolio continues to receive interest on the
securities loaned and simultaneously earns either interest on the
investment of the cash collateral or fee income if the loan is
otherwise collateralized.
4
<PAGE> 51
4. Enter into repurchase agreements. A repurchase agreement is an
agreement under which securities are acquired by the Portfolio from a
securities dealer or bank subject to resale at an agreed upon price on
a later date. The acquiring Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. However, BT
attempts to minimize this risk by entering into repurchase agreements
only with financial institutions which are deemed to be of good
financial standing and which have been approved by the Equity 500 Index
Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board").
5. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities"). The Portfolio will not invest more than
15% of its respective net assets in Section 4(2) securities and
illiquid securities unless the applicable investment adviser
determines, by continuous reference to the appropriate trading markets
and pursuant to guidelines approved by the Equity 500 Index Portfolio
Board, that any Section 4(2) securities held by the Portfolio in excess
of this level are at all times liquid.
INVESTMENT RESTRICTIONS
The Index Fund has the following non-fundamental investment policy that enables
it to invest in the Portfolio:
Notwithstanding any other limitation, the Index Fund may invest all of
its investable assets in an open-end management investment company with
substantially the same investment objectives, policies and limitations
as the Index Fund. For this purpose, "all of the Index Fund's
investable assets" means that the only investment securities that will
be held by the Index Fund will be the Index Fund's interest in the
investment company.
All other non-fundamental investment policies and the fundamental policies of
the Index Fund and the Portfolio are identical. Therefore, although the
following discusses the investment policies of the Equity 500 Index Portfolio
and its Board, it applies equally to the Index Fund and its Board of Directors
("Board").
EQUITY 500 INDEX PORTFOLIO
The following investment restrictions are "fundamental policies" of the Equity
500 Index Portfolio and may be changed with respect to the Portfolio only by the
majority vote of the Portfolio's outstanding interests, as defined above.
Whenever the Index Fund is requested to vote on a change in the fundamental
policy of the Portfolio, the Index Fund will hold a meeting of its shareholders
and will cast its votes as instructed by its shareholders. The percentage of the
Index Fund's votes representing Index Fund shareholders not voting will be voted
by the Board in the same proportion as the Index Fund shareholders who do, in
fact, vote.
The Equity 500 Index Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 33 1/3% of the current value of
the Portfolio's net assets, it may borrow money as a temporary measure
for extraordinary or emergency purposes and enter into reverse
repurchase agreements or dollar roll transactions, and except that it
may pledge, mortgage or hypothecate not more than 33 1/3% of such
assets to secure such borrowings (it is intended that money would be
borrowed only from banks and only either to accommodate requests for
the withdrawal of beneficial interests (redemption of shares) while
effecting an orderly liquidation of portfolio securities or to maintain
liquidity in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations) or reverse
repurchase agreements, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit
and variation margin, are not considered a pledge of assets for
purposes of this restriction and except that assets may be pledged to
secure letters of credit solely for the purpose of participating in a
captive insurance company sponsored by the Investment Company
Institute. (As an operating policy, the Portfolio may not engage in
dollar roll transactions).
2. Underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the 1933 Act
in selling a portfolio security.
3. Make loans to other persons except: (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's net assets (taken at market value); (b)
through the use of repurchase agreements or the
5
<PAGE> 52
purchase of short-term obligations; or (c) by purchasing a portion of
an issue of debt securities of types distributed publicly or privately.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Portfolio may hold and
sell, for the Portfolio's portfolio, real estate acquired as a result
of the Portfolio's ownership of securities).
5. Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the
achievement of the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry.
6. Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
7. With respect to 75% of the Portfolio's total assets, invest more
than 5% of its total assets in the securities of any one issuer
(excluding cash and cash-equivalents, U.S. government securities and
the securities of other investment companies) or own more than 10% of
the voting securities of any issuer.
In order to comply with certain statutes and policies the Equity 500 Index
Portfolio will not as a matter of operating policy:
1. Borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's total assets (taken at
market) except that the Portfolio may borrow for temporary or emergency
purposes up to 33 1/3% of its net assets.
2. Pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, and repurchase
agreements are not considered a pledge of assets for purposes of this
restriction.
3. Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures.
4. Sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions.
5. Invest for the purpose of exercising control or management.
6. Purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's total assets (taken
at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio, unless
permitted to exceed these limitations by an exemptive order of the SEC;
and provided further that, except in the case of merger or
consolidation, the Portfolio shall not purchase any securities of any
open-end investment company unless the Portfolio (1) waives the
investment advisory fee with respect to assets invested in other
open-end investment companies and (2) incurs no sales charge in
connection with the investment.
7. Invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable not including (a) Rule 144A securities that have
been determined to be liquid by the Portfolio's Board; and (b)
commercial paper that is sold under section 4(2) of the 1933 Act which:
(i) is not traded flat or in default as to interest or principal; and
(ii) is rated in one of the two highest categories by at least two
nationally recognized statistical rating organizations and the
Portfolio's Board has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest
6
<PAGE> 53
categories by one nationally recognized statistical rating agency and
the Portfolio's Board has determined that the commercial paper is
equivalent quality and is liquid.
8. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of
such securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue and equal
in amount to, the securities sold short, and unless not more than 10%
of the Portfolio's net assets (taken at market value) is represented by
such securities, or securities convertible into or exchangeable for
such securities, at any one time (the Portfolio has no current
intention to engage in short selling).
9. Write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio and the option is
issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 5% of the Portfolio's net assets; (c) the securities
subject to the exercise of the call written by the Portfolio must be
owned by the Portfolio at the time the call is sold and must continue
to be owned by the Portfolio until the call has been exercised, has
lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio establishes a
segregated account with its custodian consisting of cash or short-term
U.S. Government securities equal in value to the amount the Portfolio
will be obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
has purchased a closing put, which is a put of the same series as the
one previously written).
10. Buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or, financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net
assets; and (c) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
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
7
<PAGE> 54
(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).
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 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 or the Equity 500 Index Portfolio Board 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.
8
<PAGE> 55
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.
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. 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.
9
<PAGE> 56
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 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
10
<PAGE> 57
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 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.
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
11
<PAGE> 58
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.
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.
COVER
Transactions using forward contracts, future contracts, options on futures
contracts and options on indices ("Financial Instruments"), other than purchased
options, expose the Equity Index 500 Portfolio to an obligation to another
party. The Portfolio will not enter into any such transactions unless it owns
either (1) an offsetting ("covered") position in securities, currencies, or
other forward contracts, options or futures contracts, or (2) cash, receivables
and liquid assets, with a value, marked-to-market daily, sufficient to cover its
potential obligations to the extent not covered as provided in (1) above. The
Portfolio will comply with SEC guidelines regarding cover for these instruments
and will, if the guidelines so require, set aside cash, receivables, or liquid
assets in a segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of the Portfolio's assets to cover or to segregated accounts could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
INDEX FUTURES CONTRACTS AND OPTIONS ON INDEX FUTURES CONTRACTS
12
<PAGE> 59
The Equity 500 Index Portfolio may invest in index futures contracts, options on
index futures contracts and options on securities indices.
INDEX FUTURES CONTRACTS
U.S. futures contracts have been designed by exchanges which have been
designated "contracts markets" by the CFTC and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and through their clearing corporations.
At the same time a futures contract on the Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500" or the "Index") is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation margin"
may be required.
OPTIONS ON INDEX FUTURES CONTRACTS
The purchase of a call option on an index futures contract is similar in some
respects to the purchase of a call option on such an index.
The writing of a call option on a futures contract with respect to the Index
constitutes a partial hedge against declining prices of the underlying
securities that are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on an index futures contract constitutes a
partial hedge against increasing prices of the underlying securities that are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities that the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss that will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract with respect to the Index is
similar in some respects to the purchase of protective put options on the Index.
For example, the Portfolio may purchase a put option on an index futures
contract to hedge against the risk of lowering securities values.
The amount of risk the Portfolio assumes when it purchases an option on a
futures contract with respect to the Index is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of such an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased.
The Equity 500 Index Portfolio Board has adopted the requirement that index
futures contracts and options on index futures contracts be used as a hedge.
Stock index futures may be used on a continual basis to equitize cash so that
the Portfolio may maintain maximum equity exposure. The Portfolio will not enter
into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures contracts owned by
the Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
FUTURES CONTRACTS ON STOCK INDICES
The Portfolio may enter into contracts providing for the making and acceptance
of a cash settlement based upon changes in the value of an index of securities
("Futures Contracts"). This investment technique is designed only to hedge
against anticipated future change in general market prices which otherwise might
either adversely affect the value of securities held by the Portfolio or
adversely affect the prices of securities which are intended to be purchased at
a later date for the Portfolio.
In general, each transaction in Futures Contracts involves the establishment of
a position which will move in a direction opposite to that of the investment
being hedged. If these hedging transactions are successful, the futures
positions taken for the Portfolio will rise in value by an amount that
approximately offsets the decline in value of the portion of the Portfolio's
investments that are being hedged. Should
13
<PAGE> 60
general market prices move in an unexpected manner, the full anticipated
benefits of Futures Contracts may not be achieved or a loss may be realized.
Although Futures Contracts would be entered into for cash management purposes
only, such transactions do involve certain risks. These risks could include a
lack of correlation between the Futures Contract and the equity market, a
potential lack of liquidity in the secondary market and incorrect assessments of
market trends which may result in worse overall performance than if a Futures
Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under
Futures Contracts written into by the Portfolio. The Portfolio may not purchase
or sell a Futures Contract (or options thereon) if immediately thereafter its
margin deposits on its outstanding Futures Contracts (and its premium paid on
outstanding options thereon) would exceed 5% of the market value of the
Portfolio's total assets.
OPTIONS ON SECURITIES INDICES
The Portfolio may write (sell) covered call and put options to a limited extent
on the Index ("covered options") in an attempt to increase income. Such options
give the holder the right to receive a cash settlement during the term of the
option based upon the difference between the exercise price and the value of the
Index. The Portfolio may forgo the benefits of appreciation on the Index or may
pay more than the market price or the Index pursuant to call and put options
written by the Portfolio.
By writing a covered call option, the Portfolio forgoes, in exchange for the
premium less the commission ("net premium"), the opportunity to profit during
the option period from an increase in the market value of the Index above the
exercise price. By writing a covered put option, the Portfolio, in exchange for
the net premium received, accepts the risk of a decline in the market value of
the Index below the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written.
When the Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated.
The Portfolio has adopted certain other nonfundamental policies concerning index
option transactions that are discussed above. The Portfolio's activities in
index options also may be restricted by the requirements of the Code, for the
Index Fund to qualify as a regulated investment company.
The hours of trading for options on the Index may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
Because options on securities indices require settlement in cash, BT may be
forced to liquidate portfolio securities to meet settlement obligations.
OPTIONS ON STOCK INDICES
The Portfolio may purchase and write put and call options on stock indices
listed on stock exchanges. A stock index fluctuates with changes in the market
values of the stocks included in the index. Options on stock indices generally
are similar to options on stock except that the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on
14
<PAGE> 61
a stock index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
The writer may offset its position in stock index options prior to expiration by
entering into a closing transaction on an exchange or the option may expire
unexercised.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock.
LOAN TRANSACTIONS
The Equity 500 Index Portfolio may engage in loan transactions which involve the
lending of securities to a broker-dealer or institutional investor for its use
in connection with short sales, arbitrages or other security transactions. The
purpose of a qualified loan transaction is to afford a lender the opportunity to
continue to earn income on the securities loaned and at the same time earn fee
income or income on the collateral held by it.
Securities loans will be made in accordance with the following conditions: (1)
the Portfolio must receive at least 100% collateral in the form of cash or cash
equivalents, securities of the U.S. Government and its agencies and
instrumentalities, and approved bank letters of credit; (2) the borrower must
increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the Equity 500 Index Portfolio Board, as appropriate, must be
able to terminate the loan and vote proxies or enter into an alternative
arrangement with the borrower to enable the Equity 500 Index Portfolio Board to
vote proxies.
While there may be delays in recovery of loaned securities or even a loss of
rights in collateral supplied should the borrower fail financially, loans will
be made only to firms deemed to be of good financial standing and will not be
made unless the consideration to be earned from such loans would justify the
risk. If the borrower of the securities fails financially, there is a risk of
delay in recovery of the securities loaned or loss of rights in the collateral.
Such loan transactions are referred to in this Statement of Additional
Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions may be
invested only in those categories of high quality liquid securities previously
authorized by the Equity 500 Index Portfolio Board.
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, Index 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
15
<PAGE> 62
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
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, Index 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, 1999 and 1998 were
9% and 57%, respectively for the Short-Term Government Securities Fund, 37% and
62%, respectively for the Short-Term Bond Fund, 17% and 10%, respectively for
the Value Fund, and 23% and 20%, respectively 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
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 72
</TABLE>
16
<PAGE> 63
<TABLE>
<S> <C>
Anthony M. Marinello* Vice President and Director; Executive
Age 53 Director of Marketing and Service
Operations of NRECA (1988-Present).
Peter R. Morris* Secretary, Treasurer and Director; Vice
Age 50 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 51
Anthony C. Williams* President, Chairman of the Board and
Age 57 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 51 President of RE Investment; Counsel,
NRECA (1983-Present).
Catherine M. Blushi* Compliance Officer and Assistant
Age 39 Secretary; Compliance Officer of RE
Advisers; Securities Compliance Officer
of RE Investment and NRECA (August
1990-Present).
</TABLE>
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, 1999.
17
<PAGE> 64
<TABLE>
<S> <C> <C>
Mr. Lucier Mr. Perna
Compensation Received from the Fund $ 13,000 $ 7,000
</TABLE>
As of December 31, 1999 there were six portfolios of Homestead Funds for which
the above individuals served as Directors.
TRUSTEES AND OFFICERS OF THE EQUITY 500 INDEX PORTFOLIO
The Equity 500 Index Portfolio Board oversees the activities of the Equity 500
Index Portfolio and reviews contractual arrangements with companies that provide
services to the Portfolio. The Trustees and officers of the Equity 500 Index
Portfolio and their principal occupations during the past five years are set
forth below. Their titles may have varied during that period.
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------------------- ----------------------------------------
<S> <C> <C>
Charles P. Biggar (69) Trustee Trustee of each of the other investment companies
12 Hitching Post Lane in the Deutsche Asset Management Fund Complex(1); Retired; former Vice
Chappaqua, NY 10514 President, International Business Machines ("IBM") and President,
National Services and the Field Engineering Divisions of IBM.
S. Leland Dill (69) Trustee Trustee of each of the other investment companies in the
5070 North Ocean Drive Deutsche Asset Management Fund Complex; Retired; former Partner, KPMG Peat
Singer Island, FL 33404 Marwick; Director, Coutts (U.S.A.) International; Trustee, Phoenix-Zweig
Trust(2) and Phoenix-Euclid Market Neutral Fund(2); Director,
Vintners International Company Inc.; Director, Coutts Trust
Holdings Ltd., Director, Coutts Group; General Partner, Pemco(2).
Martin J. Gruber (62) Trustee Trustee of each of the other investment companies in the Deutsche Asset
229 South Irving Street Management Fund Complex; Nomura Professor of Finance, Leonard N. Stern School
Ridgewood, NJ 07450 of Business, New York University (since 1964); Trustee, TIAA(2);
Director, SG Cowen Mutual Funds(2); Director, Japan Equity Fund, Inc.(2);
Trustee, Taiwan Equity Fund, Inc.(2).
Richard Hale*(54) Trustee Trustee of each of the other investment companies in the Deutsche Asset
One South Street Management Fund Complex; Managing Director, Deutsche Asset Management;
Baltimore, MD 21202 Director, Flag Investors Funds(2); Managing Director, Deutsche Banc Alex.
Brown Incorporated; Director and President, Investment Company Capital Corp.
Richard J. Herring (53) Trustee Trustee of each of the other investment companies in the Deutsche Asset
325 South Roberts Road Management Fund Complex; Jacob Safra Professor of International Banking and
Bryn Mawr, PA 19010 Professor, Finance Department, The Wharton School, University of Pennsylvania
(since 1972).
Bruce E. Langton (68) Trustee Trustee of each of the other investment companies in the Deutsche Asset
99 Jordan Lane Management Fund Complex; Retired; former, Assistant Treasurer of IBM
Stamford, CT 06903 Corporation (until 1986); Trustee and Member, Investment Operations
Committee, Allmerica Financial Mutual Funds (1992-present); Member,
Investment Committee, Unilever U.S. Pension and Thrift Plans (1989 to
present)(3); Director, TWA Pilots Directed Account Plan and 401(k) Plan (1988
to present)(2).
Philip Saunders, Jr. (64) Trustee Trustee of each of the other investment companies in the Deutsche Asset
445 Glen Road Management Fund Complex; Principal, Philip Saunders Associates (Economic and
Weston, MA 02193 Financial Consulting); former Director, Financial Industry Consulting, Wolf &
Company; President, John Hancock Home Mortgage Corporation; Senior Vice
President of Treasury and Financial Services, John Hancock Mutual Life
Insurance Company, Inc.
Harry Van Benschoten (72) Trustee Trustee of each of the other investment companies in the Deutsche Asset
6851 Ridgewood Drive Management Fund Complex; Retired; former, Corporate Vice President, Newmont
Naples, FL 34108 Mining Corporation (prior to 1987); Director, Canada Life Insurance
Corporation of New York (since 1987).
Daniel O. Hirsch (46) Secretary Director, Deutsche Banc Alex. Brown Incorporated and Investment Company
One South Street Capital Corp. since July 1998; Assistant General Counsel, Office of the
Baltimore, MD 21202 General Counsel, United States Securities and Exchange Commission from 1993
to 1998.
John A. Keffer (57) President and President, Forum Financial Group L.L.C. and its affiliates; President,
ICC Distributors, Inc. Chief Executive ICC Distributors, Inc.(4)
Two Portland Square Officer
Portland, ME 04101
Charles A. Rizzo (41) Treasurer Director and Department Head, Deutsche Asset Management since 1998;
One South Street Senior Manager, PricewaterhouseCoopers LLP from 1993 to 1998.
Baltimore, MD 21202
</TABLE>
*"Interested Person" within the meaning of Section 2 (a)(19) of the 1940 Act.
Mr. Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche Bank and its affiliates.
(1) The "Deutsche Asset Management Fund Complex" consists of BT Investment
Funds, BT Institutional Funds, BT Pyramid Mutual Funds, BT Advisor Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, Treasury Money Portfolio, International Equity
Portfolio, Equity 500 Index Portfolio, Capital Appreciation Portfolio, Asset
Management Portfolio and BT Investment Portfolios. (2) An investment company
registered under the 1940 Act. (3) A publicly held company with securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended. (4) Underwriter/distributor for the Equity 500 Index Portfolio. Mr.
Keffer owns 100% of the shares of ICC Distributors, Inc.
The Board has an Audit Committee that meets with the Equity 500 Index
Portfolio's independent accountants to review the financial statements of the
Equity 500 Index Portfolio, the adequacy of internal controls and the accounting
procedures and policies of the Equity 500 Index Portfolio. Each member of the
Board except Mr. Hale also is a member of the Audit Committee.
Messrs. Hirsch, Keffer and Rizzo also hold similar positions for other
investment companies for which ICC Distributors or an affiliate serves as the
principal underwriter.
18
<PAGE> 65
<TABLE>
<S> <C>
to 1998.
</TABLE>
No person who is an officer or director of BT is an officer or Trustee of the
Equity 500 Index Portfolio. No director, officer or employee of ICC
Distributors, Inc. ("ICC") or any of its affiliates will receive any
compensation from the Equity 500 Index Portfolio for serving as an officer or
Trustee of the Equity 500 Index Portfolio.
The following table reflects fees paid to the Trustees of the Equity 500 Index
Portfolio for their services to that Portfolio and to certain other investment
companies advised by BT (the "Deutsche Asset Management Fund Complex") for the
year ended December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM THE EQUITY BT FUNDS COMPLEX
NAME OF TRUSTEE 500 INDEX PORTFOLIO PAID TO TRUSTEES*
- --------------- ------------------------------- -----------------------
<S> <C> <C>
Charles P. Biggar $1,235 $43,750
S. Leland Dill $1,074 $43,750
Philip Saunders, Jr. $1,108 $45,000
Martin Gruber $ 212 $45,000
Richard J. Herring $ 189 $43,750
Kelvin Lancaster N/A $18,750
Bruce E. Langton $ 212 $43,750
Harry Van benschoten $ 212 $45,000
</TABLE>
* Aggregated information is furnished for the Deutsche Asset Management Funds,
which consists of the following: BT Investment Funds, BT Institutional
Funds, BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management Portfolio,
Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity
500 Index Portfolio, Capital Appreciation Portfolio, Asset Management
Portfolio and BT Investment Portfolios.
PRINCIPAL HOLDERS OF SECURITIES
Directors and officers of the Homestead Funds, as a group, owned 1% of the
outstanding voting securities of the Small Company Stock Fund and less than 1%
of the outstanding voting securities of the Daily Income Fund, Short-Term
Government Securities Fund, Short-Term Bond Fund, Stock Index Fund, and Value
Fund, as of December 31, 1999.
NRECA and its affiliates, 4301 Wilson Boulevard, Arlington, VA 22203, as of
December 31, 1999, owned 4.6% of the outstanding voting securities of the Daily
Income Fund, 8.0% of the Stock Index Fund, and 3.6% 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.
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
19
<PAGE> 66
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 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 (other than the Stock Index Fund) including:
maintenance of these 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 these 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 these Funds such information, reports, evaluations,
analyses, and opinions as these Funds may, from time to time, reasonably request
or which RE Advisers believes would be helpful to these Funds.
RE Advisers has also agreed to provide a number of administrative services to
the Stock Index Fund including: maintenance of the Stock Index Fund's corporate
existence and corporate records; maintenance of the registration and
qualification of the Fund's shares under federal and state law; coordination and
supervision of the financial, accounting, and administrative functions for the
Fund; selection, coordination of the activities of, supervision, and service as
liaison with various agents and other parties employed by the Fund (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 Fund such
information, reports, evaluations, analyses, and opinions as the Fund may, from
time to time, reasonably request or which RE Advisers believes would be helpful
to the Fund. As compensation for these services and for the expenses which it
assumes, RE Advisers receives from the Stock Index Fund, on a monthly basis, an
administration fee based on the Stock Index Fund's average daily net assets at
an annualized rate equal to .25% of average daily net assets.
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
20
<PAGE> 67
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, 1999, 1998, and 1997, investment management
fees paid to RE Advisers by the Daily Income Fund were $293,458, $238,712 and
$265,580, respectively, the Short-Term Bond Fund paid $865,548, $658,465 and
458,287, respectively, and the Value Fund paid $2,518,296, $2,423,588 and
$1,902,966 respectively. For the years ended December 31, 1999 and 1998, the
Short-Term Government Securities Fund paid $106,827 and $33,741, respectively.
For the year ended December 31, 1999, the Small Company Stock Fund paid $31,928
and none for the period ended December 31, 1998. For the period ended December
31, 1999, the Stock Index Fund paid $1,871 for administration fees to RE
Advisers Corporation. The investment management fees for each Fund were paid
pursuant to the provisions contained in the Expense Limitation Agreement between
the Homestead Funds and RE Advisers, with respect to each Fund and are described
directly below. The administration fee paid to RE Advisers in connection with
the Stock Index Fund is also subject to an Expense Limitation Agreement as
described directly below.
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 or administration 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 or
administration fee for such month, RE Advisers, in addition to waiving its
entire investment management or administration 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 or administration 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 or Stock Index 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 or administration 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 or administration fee up to the amount of the
State Expense Limit; provided, however, that an adjustment, if necessary, will
be made on or before the last day of the first month of the next succeeding
fiscal year, if the aggregate Fund Operating Expenses for the fiscal year do not
exceed the Operating Expense Limit.
For the years ended December 31, 1999, 1998, and 1997, RE Advisers waived or
reduced its investment management fees by $28,196, $38,513, and $17,263,
respectively, for the Daily Income Fund, $33,139, $56,429, and $56,654,
respectively, for the Short-Term Government Securities Fund, and $125,597,
$113,610, and $120,074, respectively, for the Short-Term Bond Fund. For the
year ended December 31, 1999 and the period ended December 31, 1998, RE
Advisers waived or reduced its investment management fees by $51,178 and
$31,553, respectively, for the Small Company Stock Fund. 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 $28,910.
21
<PAGE> 68
BANKERS TRUST COMPANY
Bankers Trust Company ("BT") is the Equity 500 Index Portfolio's investment
adviser. BT is the principal banking subsidiary of Bankers Trust Corporation.
Bankers Trust Corporation is a wholly owned subsidiary of Deutsche Bank.
Deutsche Bank is a banking company with limited liability organized under the
laws of the Federal Republic of Germany. Deutsche Bank is the parent company of
a group consisting of banks, capital markets companies, fund management
companies, mortgage banks, a property finance company, installment financing
and leasing companies, insurance companies, research and consultancy companies
and other domestic and foreign companies.
BT may have deposit, loan and other commercial banking relationships with the
issuers of obligations that may be purchased on behalf of the Equity 500 Index
Portfolio, including outstanding loans to such issuers that could be repaid in
whole or in part with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. BT has informed the
Equity 500 Index Portfolio that, in making its investment decisions, it does not
obtain or use material inside information in its possession or in the possession
of any of its affiliates. In making investment recommendations for the Equity
500 Index Portfolio, BT will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by the Equity 500 Index
Portfolio is a customer of BT, its parent or its subsidiaries or affiliates and,
in dealing with its customers, BT, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such customers are
held by any fund managed by BT or any such affiliate.
Under the Agreement, BT receives a fee from the Portfolio, computed daily and
paid monthly, at the annual rate of 0.05% of the average daily net assets of the
Portfolio. For the period January 1, 1999 to March 15, 2000, the fee was 0.075%
of the average daily net assets of the Portfolio. For the fiscal years ended
December 31, 1999, 1998 and 1997, BT earned $5,134,906, $3,186,503 and
$2,430,147, respectively, as compensation for investment advisory services
provided to the Portfolio. During the same periods, BT reimbursed $0, $799,296
and $1,739,490, respectively, to the Portfolio to cover expenses.
Under the Administration Agreement, RE Advisers presently monitors the services
provided by BT to the Equity 500 Index Portfolio. In the event that the Board
determines that it is in the best interest of the Index Fund's shareholders to
withdraw its investment from the Equity 500 Index Portfolio, the Manager would
become responsible for directly managing the assets of the Index Fund. In such
event, the Fund would pay the Manager an annual fee of up to 0.10% of the Fund's
average net assets, accrued daily and paid monthly.
BT provides administrative services to the Equity 500 Index Portfolio. Under the
administration and services agreement between the Equity 500 Index Portfolio and
BT, BT is obligated on a continuous basis to provide such administrative
services as the Equity 500 Index Portfolio Board reasonably deems necessary for
the proper administration of the Portfolio. BT generally will assist in all
aspects of the Portfolio's operations; supply and maintain office facilities
(which may be in BT's own offices), statistical and research data, data
processing services, clerical, accounting, bookkeeping and recordkeeping
services (including without limitation the maintenance of such books and records
as are required under the 1940 Act and the rules thereunder, except as
maintained by other agents), internal auditing,
22
<PAGE> 69
executive and administrative services, and stationery and office supplies;
prepare reports to investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filing with the SEC and
various state Blue Sky authorities; supply supporting documentation for
meetings of the Equity 500 Index Portfolio Board; provide monitoring reports
and assistance regarding compliance with its Declaration of Trust, By-Laws,
investment objectives and policies and with Federal and state securities laws;
arrange for appropriate insurance coverage; calculate net asset values, net
income and realized capital gains or losses; and negotiate arrangements with,
and supervise and coordinate the activities of, agents and others to supply
services.
Under the Administration and Services Agreement, the Portfolio pays no
compensation to BT. From the period January 1, 1999 to March 15, 2000, the
Administration and Services Agreement provided for the Portfolio to pay BT a
fee, accrued daily and paid monthly, computed as a percentage of the average
daily net assets of the Portfolio which on an annual basis was equal to the
lesser of (1) 0.005%, or (2) the amount that brings the total annual operating
expenses as a percentage of the Portfolio's average daily net assets up to
0.08%. Under the Administration and Services Agreement, BT may delegate one or
more of its responsibilities to others at BT's expense.
For the years ended December 31, 1997, 1998 and 1999, BT earned, $1,215,073,
$676,625 and $344,960, respectively, as compensation for administrative and
other services provided to the Equity 500 Index Portfolio.
CUSTODIANS
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.
Bankers Trust Company, New York, NY, serves as custodian and transfer agent for
the assets of the Equity 500 Index Portfolio.
BROKERAGE ALLOCATION AND OTHER PRACTICES
RE ADVISERS
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
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
23
<PAGE> 70
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, 1999, 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, 1999, 1998, and 1997 the Value
Fund paid $206,397, $221,868, and $158,740, respectively, and for the year
ended December 31, 1999 and the period ended December 31, 1998, the Small
Company Stock Fund paid $12,810 and $13,763, respectively, in brokerage
commissions, all of which were paid to brokers that provided research and other
brokerage services to RE Advisers.
RE Advisers currently provides investment advice to the Homestead Funds as well
as certain private advisory accounts. In addition, persons employed by RE
Advisers currently provide investment advice to and supervision and monitoring
of a qualified defined benefit plan, a qualified defined contribution plan, and
a welfare benefit plan provided by NRECA for its employees and employees of its
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.
BANKERS TRUST COMPANY
BT may utilize the expertise of any of its worldwide subsidiaries and affiliates
to assist in its role as investment adviser. All orders for investment
transactions on behalf of the Equity 500 Index Portfolio are placed by BT with
broker-dealers and other financial intermediaries that it selects, including
those affiliated with BT. A BT affiliate will be used in connection with a
purchase or sale of an investment for the Equity 500 Index Portfolio only if BT
believes that the affiliate's charge for the transaction does not exceed usual
and customary levels. The Equity 500 Index Portfolio will not invest in
obligations for which BT or any of its affiliates is the ultimate obligor or
accepting bank. The Portfolio may, however, invest in the obligations of
correspondents and customers of BT.
In selecting brokers or dealers to execute particular transactions for the
Equity Index 500 Portfolio, BT is authorized to consider "brokerage and research
services" (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934), provision of statistical quotations (including the
quotations necessary to determine a Portfolio's net asset value), and other
information provided to the applicable
24
<PAGE> 71
Portfolio, and to BT or its affiliates, provided, however, that BT determines
that it has received the best net price and execution available. BT is also
authorized to cause a Portfolio to pay a commission to a broker or dealer who
provides such brokerage and research services for executing a portfolio
transaction which is in excess of the amount of the commission another broker or
dealer would have charged for effecting that transaction. The Trustees or BT, as
appropriate, must determine in good faith, however, that such commission was
reasonable in relation to the value of the brokerage and research services
provided viewed in terms of that particular transaction or in terms of all the
accounts over which BT exercises investment discretion.
For the fiscal years ended December 31, 1997, 1998 and 1999 the Equity 500 Index
Portfolio paid the following brokerage commissions: $341,058, $534,801 and
$678,820. For the year ended December 31, 1998, the Portfolio paid $333 in
brokerage commissions to BT, an affiliate of the Portfolio. This represents
0.06% of the Portfolio's aggregate brokerage commissions and 0% of the
Portfolio's aggregate dollar amount of transactions involving the payment of
commissions during the fiscal year. For the years ended December 31, 1997 and
1999, the Portfolio did not pay brokerage commissions to an affiliate. The S&P
500 Index Fund was not operational during these years. Shareholders of the S&P
500 Index Fund bear only their pro-rata portion of the brokerage commissions
paid.
The fees of the investment advisers are not reduced by reason of receipt of such
brokerage and research services. However, with disclosure to and pursuant to
written guidelines approved by the Equity 500 Index Portfolio Board, BT or its
affiliated broker-dealer may execute portfolio transactions and receive usual
and customary brokerage commissions (within the meaning of Rule 17e-1 under the
1940 Act) for doing so.
In certain instances there may be securities that are suitable for the Equity
500 Index Portfolio as well as for one or more of BT's other clients. Investment
decisions for the Equity 500 Index Portfolio and for BT's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Equity 500 Index Portfolio is concerned. However, it is believed that the
ability of the Equity 500 Index Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
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 or, in the case of the Index Fund,
of the Equity 500 Index Portfolio (i.e., by redemption-in-kind), at the value of
such securities used in determining the redemption price. Nevertheless, pursuant
to Rule 18f-1 under the 1940 Act, 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 and the Trustees
of the Equity 500 Index Portfolio deem 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 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
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.
25
<PAGE> 72
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, the Index 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.
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
26
<PAGE> 73
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
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
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.
TAXATION OF THE PORTFOLIO
The Equity 500 Index Portfolio should be classified as a partnership for federal
income tax purposes and is not a "publicly traded partnership." As a result, the
Portfolio is or should not be subject to federal income tax; instead, each
investor in a Portfolio, such as the Index Fund, is required to take into
account in determining its federal income tax liability its share of the
Portfolio's income, gains, losses, deductions, credits and tax preference items,
without regard to whether it has received any cash distributions from the
Portfolio.
Because, as noted above, the Index Fund is deemed to own a proportionate share
of the Portfolio's assets and to earn a proportionate share of the Portfolio's
income for purposes of determining whether the Index Fund satisfies the
requirements to qualify as a RIC, the Portfolio intends to conduct its
operations so that the Index Fund will be able to satisfy all those
requirements.
Distributions to the Index Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) will not result in the Index Fund's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any
27
<PAGE> 74
cash that is distributed exceeds the Index Fund's basis for its interest in the
Portfolio before the distribution, (2) income or gain will be recognized if the
distribution is in liquidation of the Index Fund's entire interest in the
Portfolio and includes a disproportionate share of any unrealized receivables
held by the Portfolio and (3) loss will be recognized if a liquidation
distribution consists solely of cash and/or unrealized receivables. A Index
Fund's basis for its interest in the Portfolio generally will equal the amount
of cash and the basis of any property the Index Fund invests in the Portfolio,
increased by the Index Fund's share of the Portfolio's net income and gains and
decreased by (a) the amount of cash and the basis of any property the Portfolio
distributes to the Index Fund and (b) the Index Fund's share of the Portfolio's
losses.
Hedging strategies, such as entering into forward contracts and selling and
purchasing options and futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses. The Index Fund's share of the Equity 500 Index
Portfolio's income from options and futures derived with respect to its business
of investing securities will so qualify for the Index Fund.
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.
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, 1999 were 5.23% and 5.37%, respectively.
TOTAL RETURN CALCULATIONS
28
<PAGE> 75
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, 1999, five
years ended December 31, 1999 and since inception (on November 19, 1990) for the
Daily Income Fund were 4.56%, 4.91% and 4.46%, respectively, and for the Value
Fund were (3.21)%, 15.95% and 14.21%, respectively. The average annual total
returns for the Short-Term Government Securities Fund for the 12 months ended
December 31, 1999 and since inception (on May 1, 1995) were 2.88% and 5.14%,
respectively. The average annual total returns for the Short-Term Bond Fund for
the 12 months ended December 31, 1999, five years ended December 31, 1999, and
since inception (on November 5, 1991) were 3.21%, 6.41%, and 5.75%,
respectively. The average annual total returns for the Small Company Stock Fund
for the 12 months ended December 31, 1999 and since inception (on March 4, 1998)
were (0.55)% and (6.46)%, respectively. The average annual total returns for the
Stock Index Fund are not available since inception date was October 28, 1999.
If RE Advisers had not assumed certain Fund Operating Expenses for the Daily
Income Fund, Short-Term Government Securities Fund, Short-Term Bond Fund, and
Small Company Stock 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, 1999 would have been 4.52%, 2.77%, 3.13%
and (1.07)%, respectively.
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, 1999 was 48.85%; for the Short-Term
Government Securities Fund from its inception date (May 1, 1995) to December 31,
1999 was 26.38%; for the Short-Term Bond Fund from its inception
29
<PAGE> 76
date (November 5, 1991) to December 31, 1999 was 57.85%; for the Stock Index
Fund from its inception date (October 28, 1999) to December 31, 1999 was 9.65%;
for the Value Fund from its inception date (November 19, 1990) to December 31,
1999 was 235.95% and for the Small Company Stock Fund from its inception date
(March 4, 1998) to December 31, 1999 was (11.51)%.
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.
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, 1999 was 5.75% and 6.01%, 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. 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.
30
<PAGE> 77
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
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.
31
<PAGE> 78
The audited financial statements for the fiscal year ended December 31, 1999
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,
1999 ("Annual Report"). The Annual Report as of December 31, 1999, 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 Cicchetti Berenson & Johnson LLP, 1025 Thomas
Jefferson Street, N.W., Washington, DC 20007 which serves as Special Counsel to
the Homestead Funds.
32
<PAGE> 79
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
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.
33
<PAGE> 80
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
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.
34
<PAGE> 81
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.
35
<PAGE> 82
FINANCIALS
[PHOTO]
<PAGE> 83
DAILY INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (56.3% of portfolio)
A.I. Credit Corp. .................................... 5.82 % 01/19/00 $ 500,000 $ 498,545
A.I. Credit Corp. .................................... 5.83 01/20/00 1,000,000 996,923
A.I. Credit Corp. .................................... 5.82 01/28/00 600,000 597,381
American General Finance Corp. ....................... 6.28 02/08/00 600,000 596,023
Baltimore Gas & Electric Co. ......................... 6.45 01/10/00 600,000 599,033
Baltimore Gas & Electric Co. ......................... 5.88 01/14/00 500,000 498,938
Baltimore Gas & Electric Co. ......................... 6.13 01/21/00 1,000,000 996,594
Chevron USA. Inc. .................................... 5.75 01/11/00 1,000,000 998,403
Chevron USA. Inc. .................................... 5.80 01/12/00 1,000,000 998,228
Chevron USA. Inc. .................................... 5.85 01/31/00 1,000,000 995,125
CIT Group, Inc. ...................................... 5.92 01/07/00 180,000 179,822
CIT Group, Inc. ...................................... 6.20 01/31/00 830,000 825,712
CITICORP, Inc. ....................................... 5.95 01/26/00 1,000,000 995,868
Coca-Cola Co. ........................................ 5.78 01/13/00 805,000 803,449
Coca-Cola Co. ........................................ 5.78 01/14/00 500,000 498,956
Coca-Cola Co. ........................................ 5.85 01/19/00 200,000 199,415
Coca-Cola Co. ........................................ 5.82 01/24/00 520,000 518,067
Consolidated Natural Gas Co. ......................... 6.00 01/26/00 500,000 497,917
Consolidated Natural Gas Co. ......................... 6.07 01/31/00 400,000 397,977
Consolidated Natural Gas Co. ......................... 6.07 02/09/00 500,000 496,712
Consolidated Natural Gas Co. ......................... 6.03 02/23/00 570,000 564,940
Consolidated Natural Gas Co. ......................... 6.00 02/25/00 580,000 574,683
Consolidated Natural Gas Co. ......................... 6.00 02/29/00 480,000 475,280
E.I. Dupont de Nemours & Co. ......................... 5.82 01/18/00 300,000 299,176
E.I. Dupont de Nemours & Co. ......................... 5.78 01/25/00 1,000,000 996,147
Exxon Asset Management Co. ........................... 6.00 01/04/00 1,000,000 999,500
Ford Motor Credit Co. ................................ 5.70 01/03/00 340,000 339,892
Ford Motor Credit Co. ................................ 5.71 01/03/00 650,000 649,794
Ford Motor Credit Co. ................................ 6.02 01/04/00 450,000 449,774
General Electric Capital Corp. ....................... 6.25 01/13/00 106,000 105,779
General Electric Capital Corp. ....................... 5.92 01/28/00 285,000 283,735
General Electric Capital Corp. ....................... 6.15 02/11/00 113,000 112,208
General Electric Capital Corp. ....................... 6.00 02/15/00 208,000 206,440
General Electric Capital Corp. ....................... 6.10 02/16/00 150,000 148,831
General Electric Capital Corp. ....................... 6.28 02/17/00 549,000 544,499
General Electric Capital Corp. ....................... 6.00 03/22/00 550,000 542,575
General Motors Acceptance Corp. ...................... 6.60 01/07/00 172,000 171,811
General Motors Acceptance Corp. ...................... 6.00 01/18/00 135,000 134,617
IBM Credit Corp. ..................................... 5.82 01/18/00 1,040,000 1,037,142
John Deere Capital Corp. ............................. 5.72 01/05/00 1,000,000 999,364
John Deere Capital Corp. ............................. 5.75 01/06/00 480,000 479,617
John Deere Capital Corp. ............................. 5.75 01/07/00 600,000 599,425
</TABLE>
18
<PAGE> 84
DAILY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - CONTINUED
Merrill Lynch & Co., Inc. ............................ 5.90 % 02/29/00 $ 875,000 $ 866,539
Northern Illinois Gas Co. ............................ 5.85 01/19/00 1,000,000 997,075
Northern Illinois Gas Co. ............................ 5.95 01/20/00 1,000,000 996,860
Northern Illinois Gas Co. ............................ 5.85 01/24/00 1,000,000 996,262
Norwest Financial, Inc. .............................. 5.85 01/18/00 200,000 199,447
Norwest Financial, Inc. .............................. 6.35 02/04/00 650,000 646,102
Norwest Financial, Inc. .............................. 5.87 02/23/00 330,000 327,148
Pacific Gas & Electric Co. ........................... 6.40 01/27/00 500,000 497,689
Pacific Gas & Electric Co. ........................... 5.89 02/09/00 1,000,000 993,619
Pacific Gas & Electric Co. ........................... 5.89 02/10/00 1,000,000 993,456
Prudential Funding Corp. ............................. 5.95 01/12/00 700,000 698,727
Prudential Funding Corp. ............................. 5.99 01/27/00 800,000 796,539
Schering Corp. ....................................... 6.30 01/11/00 400,000 399,300
Texaco Capital, Inc. ................................. 6.30 01/06/00 600,000 599,475
Texaco Capital, Inc. ................................. 5.82 01/10/00 340,000 339,505
Transamerica Finance Corp. ........................... 5.92 01/26/00 300,000 298,767
Transamerica Finance Corp. ........................... 6.18 01/26/00 1,000,000 995,708
- ---------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $35,546,535)............................................................. 35,546,535
- ---------------------------------------------------------------------------------------------------------------------------------
CORPORATE NOTES (34.4% of portfolio)
American Express Credit Corp. ........................ 6.13 06/15/00 575,000 575,133
American Express Credit Corp. ........................ 6.50 08/01/00 105,000 105,124
American General Finance Corp. ....................... 8.00 02/15/00 795,000 796,558
American General Finance Corp. ....................... 7.76 03/14/00 150,000 150,451
American General Finance Corp. ....................... 6.52 06/23/00 50,000 50,014
American General Finance Corp. ....................... 6.13 09/15/00 360,000 359,569
Associates Corp. of North America. ................... 6.00 03/15/00 70,000 69,988
Associates Corp. of North America. ................... 5.25 03/30/00 35,000 34,927
Associates Corp. of North America. ................... 6.00 06/15/00 75,000 74,912
Beneficial Corp. ..................................... 6.45 06/19/00 305,000 305,665
CIT Group, Inc. ...................................... 6.80 04/17/00 1,000,000 1,001,298
CITICORP, Inc. ....................................... 6.65 05/15/00 500,000 500,893
CITICORP, Inc. ....................................... 6.60 08/01/00 300,000 300,807
Commercial Credit Co. ................................ 6.13 03/01/00 25,000 24,992
Eli Lilly & Co. ...................................... 8.13 02/07/00 785,000 786,488
Ford Motor Credit Co. ................................ 8.75 01/10/00 40,000 40,029
Ford Motor Credit Co. ................................ 7.45 04/13/00 100,000 100,396
Ford Motor Credit Co. ................................ 6.38 04/15/00 125,000 124,945
General Motors Acceptance Corp. ...................... 8.63 01/10/00 20,000 20,012
General Motors Acceptance Corp. ...................... 5.70 02/23/00 450,000 449,568
General Motors Acceptance Corp. ...................... 7.00 03/01/00 570,000 570,642
General Motors Acceptance Corp. ...................... 5.85 04/20/00 405,000 404,771
</TABLE>
19
<PAGE> 85
DAILY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE NOTES - CONTINUED
General Motors Acceptance Corp. ...................... 9.63 % 05/15/00 $ 210,000 $ 212,510
General Motors Acceptance Corp. ...................... 6.65 05/24/00 7,000 7,010
General Motors Acceptance Corp. ...................... 6.38 06/06/00 177,000 176,892
General Motors Acceptance Corp. ...................... 6.90 06/06/00 200,000 200,427
General Motors Acceptance Corp. ...................... 6.38 06/27/00 150,000 150,242
General Motors Acceptance Corp. ...................... 7.50 07/24/00 250,000 251,486
Household Finance Corp. .............................. 5.92 03/13/00 5,000 4,995
Household Finance Corp. .............................. 6.75 06/01/00 100,000 100,266
Household Finance Corp. .............................. 6.38 06/30/00 600,000 600,704
IBM Credit Corp. ..................................... 5.70 03/10/00 950,000 949,278
John Deere Capital Corp. ............................. 6.15 08/01/00 500,000 499,692
John Deere Capital Corp. ............................. 5.73 07/13/00 100,000 99,725
Merrill Lynch & Co., Inc. ............................ 6.62 06/06/00 20,000 20,026
Merrill Lynch & Co., Inc. ............................ 8.38 02/09/00 106,000 106,189
Merrill Lynch & Co., Inc. ............................ 6.60 05/30/00 25,000 25,034
Merrill Lynch & Co., Inc. ............................ 6.38 07/18/00 200,000 200,098
Morgan Stanley Dean Witter & Co. ..................... 5.94 02/28/00 1,710,000 1,709,659
Morgan Stanley Dean Witter & Co. ..................... 5.89 03/20/00 1,300,000 1,299,754
Norwest Financial Inc. ............................... 6.88 06/15/00 675,000 677,119
Norwest Financial Inc. ............................... 7.25 03/15/00 1,125,000 1,127,219
Pacific Gas & Electric Co. ........................... 6.63 06/01/00 62,000 62,000
PepsiCo, Inc. ........................................ 6.80 05/15/00 400,000 401,010
PepsiCo, Inc. ........................................ 5.88 06/01/00 48,000 47,843
Phillip Morris Cos., Inc. ............................ 9.25 02/15/00 2,645,000 2,653,138
Sara Lee Corp. ....................................... 5.70 07/14/00 1,135,000 1,132,120
Texaco Capital Inc. .................................. 9.45 03/01/00 100,000 100,531
Texaco Capital Inc. .................................. 5.11 05/03/00 1,000,000 997,009
Wal-Mart Stores, Inc. ................................ 5.65 02/01/00 1,075,000 1,074,780
- ---------------------------------------------------------------------------------------------------------------------------------
Total Corporate Notes (Cost $21,733,938)............................................................... 21,733,938
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS (5.4% of portfolio)
Federal Farm Credit Bank.............................. 5.20 01/14/00 50,000 49,986
Federal Farm Credit Bank.............................. 5.25 01/18/00 52,000 51,984
Federal Farm Credit Bank.............................. 6.23 03/13/00 20,000 20,013
Federal Home Loan Bank................................ 5.00 01/05/00 130,000 129,982
Federal Home Loan Bank................................ 4.81 01/11/00 50,000 49,985
Federal Home Loan Bank................................ 4.92 01/13/00 100,000 99,963
Federal Home Loan Bank................................ 4.93 01/13/00 250,000 249,916
Federal Home Loan Bank................................ 4.93 01/20/00 35,000 34,979
Federal Home Loan Bank................................ 8.60 01/25/00 135,000 135,216
Federal Home Loan Bank................................ 4.85 01/27/00 50,000 49,963
Federal Home Loan Bank................................ 5.45 02/25/00 100,000 99,875
</TABLE>
20
<PAGE> 86
DAILY INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Federal Home Loan Bank......................................... 5.10 % 03/03/00 $ 10,000 $ 9,982
Federal Home Loan Bank......................................... 7.20 03/03/00 10,000 10,021
Federal Home Loan Bank......................................... 5.15 03/08/00 20,000 19,961
Federal Home Loan Bank......................................... 5.08 03/15/00 20,000 19,957
Federal Home Loan Bank......................................... 5.23 03/17/00 20,000 19,956
Federal Home Loan Bank......................................... 5.61 03/23/00 20,000 19,988
Federal Home Loan Bank......................................... 5.59 03/27/00 20,000 19,974
Federal Home Loan Bank......................................... 5.66 03/30/00 25,000 24,971
Federal Home Loan Bank......................................... 5.00 04/05/00 60,000 59,801
Federal Home Loan Bank......................................... 4.97 04/20/00 30,000 29,885
Federal Home Loan Bank......................................... 7.01 04/20/00 25,000 25,053
Federal Home Loan Mortgage Corp................................ 7.90 01/27/00 60,000 60,080
Federal Home Loan Mortgage Corp................................ 6.44 01/28/00 210,000 210,101
Federal Home Loan Mortgage Corp................................ 5.88 03/22/00 70,000 69,947
Federal National Mortgage Association.......................... 4.83 01/11/00 74,000 73,973
Federal National Mortgage Association.......................... 5.60 01/12/00 45,000 44,993
Federal National Mortgage Association.......................... 5.44 01/14/00 75,000 74,983
Federal National Mortgage Association.......................... 8.01 01/18/00 40,000 40,038
Federal National Mortgage Association.......................... 5.34 01/24/00 500,000 499,818
Federal National Mortgage Association.......................... 6.10 02/10/00 270,000 269,917
Federal National Mortgage Association.......................... 6.25 03/20/00 19,000 19,004
Federal National Mortgage Association.......................... 4.98 03/24/00 30,000 29,917
Federal National Mortgage Association.......................... 7.06 03/28/00 100,000 100,196
Federal National Mortgage Association.......................... 9.05 04/10/00 191,000 192,421
Federal National Mortgage Association.......................... 4.97 04/12/00 291,000 289,954
Federal National Mortgage Association.......................... 5.64 04/20/00 10,000 9,981
Federal National Mortgage Association 5.65 04/28/00 219,000 218,575
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Obligations (Cost $3,435,309) ......................................... 3,435,309
- ------------------------------------------------------------------------------------------------------------------------------
CORPORATE MASTER NOTE (3.9% of portfolio)
Associates Corp. of North America 5.07 (a) 2,470,000 2,470,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Master Note (Cost $2,470,000)....................................................... 2,470,000
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNT
State Street Bank and Trust SSgA Fund 5.35 (b) 1,276
- ------------------------------------------------------------------------------------------------------------------------------
Total Money Market Account (Cost $1,276)............................................................ 1,276
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $63,187,058) - 100%................................................. $63,187,058
==============================================================================================================================
</TABLE>
(a) Variable coupon rate as of December 31, 1999.
(b) One day yield at December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE> 87
SHORT-TERM GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES (11.0% of portfolio)
Government Export Trust 93-1......................................... 6.00 % 03/15/05 $ 437,500 $ 430,553
Guaranteed Export Certificates 93-C.................................. 5.20 10/15/04 1,090,222 1,053,967
Guaranteed Export Certificates 93-D.................................. 5.23 05/15/05 421,277 404,544
Guaranteed Export Certificates 95-B.................................. 6.13 06/15/04 158,823 152,572
Guaranteed Trade Trust 92-A.......................................... 7.02 09/01/04 270,833 271,402
Small Business Administration 92-10 A................................ 6.70 01/01/02 45,712 45,496
Small Business Administration 92-10 C................................ 7.15 09/01/02 13,380 13,378
Small Business Investment Companies 95-10............................ 6.88 09/10/05 436,280 429,326
Small Business Investment Companies 99-10............................ 6.24 03/01/09 1,000,000 947,380
- ----------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed Securities (Cost $3,835,589).............................................................. 3,748,618
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BACKED SECURITIES (16.0% of portfolio)
GNMA #1928 ......................................................... 7.00 11/20/09 86,461 84,894
GNMA #780336......................................................... 6.50 02/15/11 153,656 149,094
GNMA #8215 ......................................................... 6.38 (c) 04/20/17 88,825 89,436
GNMA #8423 ......................................................... 6.38 (c) 05/20/24 165,346 166,276
GNMA #8877 ......................................................... 6.38 (c) 05/20/26 124,847 126,174
GNMA 94-1 ......................................................... 7.63 08/16/23 99,000 96,910
GNMA 96-6 ......................................................... 6.50 10/16/08 185,765 185,455
GNMA 97-18 ......................................................... 6.90 02/20/23 241,065 236,974
GNMA 97-4 B ......................................................... 7.00 08/20/26 131,279 122,781
GNMA 97-4 N ......................................................... 7.50 02/16/27 8,102 8,095
GNMA 97-8 ......................................................... 7.00 05/16/23 500,000 495,994
GNMA 98-1 ......................................................... 7.00 05/20/25 172,585 168,529
GNMA 99-27 ......................................................... 7.50 08/16/27 1,148,343 1,142,073
Vendee Mortgage Trust 92-2........................................... 7.00 05/15/08 1,000,000 990,540
Vendee Mortgage Trust 93-3........................................... 5.75 06/15/13 537,046 533,518
Vendee Mortgage Trust 96-2........................................... 6.75 09/15/09 54,316 54,181
Vendee Mortgage Trust 97-1........................................... 7.50 09/15/17 500,000 502,645
Vendee Mortgage Trust 97-2........................................... 7.50 01/15/13 86,915 87,004
Vendee Mortgage Trust 99-2........................................... 6.50 04/15/14 225,281 222,556
- ----------------------------------------------------------------------------------------------------------------------------------
Total Mortgage Backed Securities (Cost $5,534,968)........................................................... 5,463,129
- ----------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT AND AGENCY OBLIGATIONS (67.2% of portfolio)
Banco Centroamericano Promissory Note................................ 5.78 05/30/01 172,566 170,945
Interlake Steamship Co............................................... 5.45 07/15/01 298,000 298,015
Nafinsa Export/Import Trust (a)...................................... 6.79 08/01/04 250,000 249,153
PEFCO Finance Corp. (a).............................................. 5.31 11/15/03 1,000,000 944,680
Private Export Funding Corp.......................................... 7.30 01/31/02 325,000 328,809
Private Export Funding Corp.......................................... 5.48 09/15/03 400,000 384,000
Private Export Funding Corp.......................................... 8.35 01/31/01 50,000 50,937
U.S. Department of Housing and Urban Development..................... 6.36 08/01/04 30,000 29,356
</TABLE>
22
<PAGE> 88
SHORT-TERM GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. GOVERNMENT AND AGENCY OBLIGATIONS - CONTINUED
U.S. Treasury Note................................................... 6.38 % 05/15/00 $5,300,000 $ 5,313,603
U.S. Treasury Note................................................... 5.50 05/31/00 500,000 499,484
U.S. Treasury Note................................................... 5.75 10/31/00 2,350,000 2,343,440
U.S. Treasury Note................................................... 5.75 11/15/00 3,750,000 3,739,402
U.S. Treasury Note................................................... 4.88 03/31/01 1,250,000 1,230,662
U.S. Treasury Note................................................... 6.38 03/31/01 50,000 50,114
U.S. Treasury Note................................................... 5.88 11/30/01 2,600,000 2,582,547
U.S. Treasury Note................................................... 6.13 12/31/01 1,000,000 997,501
U.S. Treasury Note................................................... 6.63 04/30/02 3,000,000 3,021,712
U.S. Treasury Note................................................... 6.00 07/31/02 100,000 99,406
U.S. Treasury Note................................................... 5.50 01/31/03 500,000 488,400
Victoria Steamship Corp.............................................. 6.85 11/15/03 167,464 166,561
- ----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations (Cost $23,237,936).............................................. 22,988,727
- ----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (0.9% of portfolio)
Albany NY Industrial Development Authority........................... 7.29 08/01/04 160,000 160,688
Fairfax County VA Redevelopment & Housing Authority.................. 7.29 08/01/04 155,000 155,667
- ----------------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost $318,187)........................................................................ 316,355
- ----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNT (4.9% of portfolio)
Vanguard Money Market Reserves U.S. Treasury......................... 4.96 (b) 1,660,851
- ----------------------------------------------------------------------------------------------------------------------------------
Total Money Market Account (Cost $1,660,851)................................................................. 1,660,851
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $34,587,531) - 100%.......................................................... $34,177,680
==================================================================================================================================
</TABLE>
(a) 144A security
(b) One day yield at December 31, 1999.
(c) Variable coupon rate as of December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
23
<PAGE> 89
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (42.7% of portfolio)
BASIC INDUSTRIES - 9.2%
Archer Daniels Midland Co. .............................. 0.00 % (a) 05/01/02 $ 225,000 $ 191,531
Armstrong World Industries, Inc.......................... 6.35 08/15/03 500,000 480,625
Caterpillar, Inc......................................... 7.98 01/14/02 800,000 811,000
Corning Glassworks, Inc. ................................ 7.10 08/14/00 100,000 100,375
Corning, Inc............................................. 8.25 03/15/02 250,000 255,450
Corning, Inc............................................. 6.00 08/15/03 500,000 481,875
Dow Chemical Co.......................................... 9.35 03/15/02 1,138,000 1,141,364
Dow Chemical Co.......................................... 8.63 04/01/06 150,000 159,308
Eastman Kodak Co......................................... 9.38 03/15/03 250,000 263,620
General Foods Corp....................................... 6.00 06/15/01 374,000 366,987
General Motors Corp...................................... 9.13 07/15/01 200,000 206,250
Honeywell International, Inc............................. 0.00 (a) 08/15/00 1,528,000 1,464,130
Honeywell International, Inc............................. 0.00 (a) 08/01/01 490,000 440,387
Honeywell International, Inc............................. 9.88 06/01/02 150,000 159,375
McKesson Corp............................................ 4.50 03/01/04 345,000 293,250
Monsanto Co. (b)......................................... 5.38 12/01/01 500,000 486,250
Nabisco, Inc............................................. 8.00 01/15/00 338,000 338,000
Occidental Petroleum Corp................................ 6.50 04/01/05 500,000 477,245
Occidental Petroleum Corp................................ 6.75 11/15/02 1,000,000 981,960
PHH Corp. ............................................... 7.02 11/09/01 1,250,000 1,250,440
Phillip Morris, Inc. .................................... 6.00 07/15/01 2,375,000 2,327,500
Rohm & Haas Co. ......................................... 9.88 09/01/00 195,000 198,656
Ryder System, Inc........................................ 7.56 08/15/00 85,000 85,319
TRW Inc. ............................................... 6.50 06/01/02 1,000,000 981,184
United Technologies Corp. ............................... 6.40 09/15/01 500,000 497,277
Xerox Corp............................................... 6.60 (c) 10/23/01 1,250,000 1,253,565
- ------------------------------------------------------------------------------------------------------------------------------
Total Basic Industries................................................................................. 15,692,923
- ------------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLE GOODS - 2.9%
Auto Parts
Cooper Tire & Rubber Co.................................. 7.25 12/16/02 1,000,000 988,750
Beverages
Anheuser-Busch Cos., Inc................................. 6.90 10/01/02 1,717,000 1,706,818
Recreation
Walt Disney Co. (b)...................................... 4.20 03/15/01 1,250,000 1,216,736
Retail
Sears Roebuck Acceptance Corp............................ 8.17 01/14/02 100,000 101,625
Sears Roebuck Acceptance Corp............................ 6.80 10/09/02 900,000 880,875
- ------------------------------------------------------------------------------------------------------------------------------
Total Consumer Non-Durable Goods....................................................................... 4,894,804
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 90
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER SERVICES - 0.6%
Healthcare
American Hospital Supply Finance Corp. ................... 0.00% (a) 08/15/00 $1,030,000 $ 985,607
- ------------------------------------------------------------------------------------------------------------------------------
Total Consumer Services .................................................................................. 985,607
- ------------------------------------------------------------------------------------------------------------------------------
FINANCE - 16.0%
Banks
BankAmerica Corp. ........................................ 8.13 08/15/04 537,000 537,671
Barclays N.A. Capital Corp................................ 9.75 05/15/21 306,000 328,185
Chemical New York Corp.................................... 0.00 (a) 02/16/00 100,000 99,159
CITICORP ................................................ 6.50 09/16/01 75,000 74,573
Deutsche Bank Financial................................... 0.00 (a) 02/01/00 449,000 446,755
First Chicago Corp. ...................................... 6.33 (c) 07/28/03 175,000 174,537
Irving Bank Corp. ........................................ 8.50 06/01/02 60,000 60,054
National City Bank of Cleveland........................... 7.10 09/25/12 800,000 754,393
Financial Services
American Express Credit Corp. ............................ 0.00 (a) 12/12/00 465,000 436,699
American Express Credit Corp. ............................ 6.25 08/10/05 1,100,000 1,094,721
Associates Corp. of North America......................... 6.00 06/15/01 1,995,000 1,972,556
AT&T Capital Corp. ....................................... 7.50 11/15/00 1,000,000 1,006,962
Bell Atlantic Financial Services, Inc. ................... 6.53 02/22/00 1,250,000 1,249,828
Beneficial Corp. ......................................... 9.50 03/08/01 450,000 461,812
CIT Group, Inc. .......................................... 5.50 10/15/01 1,250,000 1,216,858
CM International.......................................... 0.00 (a) 09/11/00 1,925,000 1,844,496
Capital One Bank.......................................... 7.00 04/30/01 200,000 199,000
First Interstate Bancorp. ................................ 10.83 03/19/01 725,000 756,417
GATX Capital Corp. ....................................... 6.36 12/16/02 450,000 433,125
General Electric Capital Corp. ........................... 5.50 11/01/01 153,000 149,557
General Motors Acceptance Corp. .......................... 6.50 (c) 12/03/01 1,250,000 1,254,855
General Motors Acceptance Corp. .......................... 5.50 01/14/02 500,000 485,000
Goldman Sachs Group....................................... 5.90 01/15/03 1,000,000 960,000
Heller Financial, Inc. ................................... 6.51 (c) 09/25/00 1,000,000 1,001,675
Household Finance Corp. .................................. 6.36 (c) 08/01/01 1,000,000 1,000,068
Household Finance Corp. .................................. 6.13 07/15/12 315,000 306,583
Household Finance Corp. .................................... 6.08 03/08/06 422,500 405,904
Merrill Lynch & Co. ...................................... 5.71 01/15/02 1,250,000 1,218,750
NationsBank Corp. ........................................ 7.23 08/15/12 200,000 189,741
NationsBank Corp. ........................................ 6.83 11/10/05 1,000,000 972,500
Norwest Financial Inc. ................................... 5.50 03/19/01 1,000,000 983,321
Salomon, Inc. ............................................ 7.30 05/15/02 400,000 402,000
Transamerica Financial Corp. ............................. 7.68 03/16/00 500,000 501,594
Transamerica Financial Corp. ............................. 6.60 03/20/01 250,000 248,477
</TABLE>
25
<PAGE> 91
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services - continued
Transamerica Financial Corp. ............................. 6.13 % 11/01/01 $ 750,000 $ 737,475
Xtra, Inc. ............................................... 7.80 02/03/03 500,000 497,500
Insurance
Liberty Mutual Capital Corp. (b).......................... 7.98 12/01/02 500,000 508,595
Liberty Mutual Capital Corp. (b).......................... 8.10 01/14/05 1,250,000 1,265,625
St. Paul Co., Inc. ....................................... 6.40 08/18/03 500,000 485,000
Security & Commodity Brokers
Lehman Brothers, Inc. .................................... 6.00 02/26/01 500,000 494,375
- ------------------------------------------------------------------------------------------------------------------------------
Total Finance...................................................................................... 27,216,396
- ------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 5.0%
Airlines
Delta Airlines, Inc. ..................................... 9.60 05/26/00 50,000 50,491
Railroad
Burlington Northern & Santa Fe Railway.................... 5.51 05/01/01 1,000,000 979,061
Consolidated Rail Corp. .................................. 6.89 07/01/00 100,000 100,250
CSX Corp. ................................................ 9.50 08/01/00 500,000 507,500
CSX Corp. ................................................ 5.45 04/15/01 1,250,000 1,227,354
Norfolk & Western Railway................................. 8.13 11/15/00 100,000 100,852
Norfolk Southern Corp. ................................... 6.40 06/15/01 500,000 495,184
Norfolk Southern Corp. ................................... 5.37 07/15/04 900,000 825,750
Union Pacific Co. ........................................ 9.95 11/01/00 291,000 297,547
Union Pacific Co. ........................................ 6.12 02/01/04 125,000 117,721
Union Pacific Railroad Co. ............................... 7.06 05/15/03 1,400,000 1,387,750
Union Tank Car Co. ....................................... 6.00 03/15/02 1,500,000 1,465,995
Union Tank Car Co. ....................................... 6.63 10/03/04 1,000,000 967,636
- ------------------------------------------------------------------------------------------------------------------------------
Total Transportation................................................................................ 8,523,091
- ------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 9.0%
Electric & Gas
Cleveland Electric Illuminating Co. ...................... 7.63 08/01/02 100,000 100,140
DTE Capital Corp. (b)..................................... 6.17 06/15/38 915,000 879,776
Duke Capital Corp. ....................................... 7.25 10/01/04 1,000,000 993,750
Duquesne Light Co. ....................................... 6.63 06/15/04 32,000 31,960
Duquesne Light Co. ....................................... 6.63 06/15/04 150,000 149,438
Energy Acquisition Corp. ................................. 6.15 03/01/02 1,000,000 981,250
Florida Power and Light Co. .............................. 6.63 02/01/03 200,000 196,986
Idaho Power Co. .......................................... 8.65 01/01/00 300,000 300,000
Michigan Consolidated Gas Co. ............................ 5.75 05/01/01 1,301,000 1,284,372
New Orleans Public Service Co. ........................... 7.00 03/01/03 500,000 509,375
</TABLE>
26
<PAGE> 92
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electric & Gas - continued
Northern Indiana Public Service Co..............................7.50 % 04/01/02 $ 858,000 $ 864,015
Northern Indiana Public Service Co..............................7.53 07/08/15 500,000 474,695
Niagara Mohawk Power Corp.......................................5.88 09/01/02 1,000,000 971,460
Pacific Gas & Electric Co.......................................6.63 06/01/00 310,000 309,612
Pacific Gas & Electric Co.......................................6.75 12/01/00 626,000 629,130
Potomac Electric Power Co.......................................6.00 04/01/04 1,500,000 1,426,371
Public Service Electric & Gas Co................................6.00 05/01/00 682,000 680,295
Telephone
AT&T Corp.......................................................8.25 01/11/00 100,000 100,026
AT&T Corp.......................................................8.20 02/15/05 1,037,000 1,039,593
NYNEX Corp......................................................9.55 05/01/10 159,372 170,942
Pacific Telephone & Telegraph Co................................4.63 05/01/00 228,000 226,575
Pacific Telephone & Telegraph Co................................6.00 11/01/02 676,000 656,565
Pacific Telephone & Telegraph Co................................6.50 07/01/03 1,414,000 1,378,650
Southwestern Bell Telephone Co..................................5.88 06/01/03 500,000 481,875
Southwestern Bell Telephone Co. ................................5.75 09/01/04 500,000 473,045
- -----------------------------------------------------------------------------------------------------------------------------
Total Utilities ............................................................................................15,309,896
- -----------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $73,709,057) ...................................................................72,622,717
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN BONDS (0.2% of portfolio)
Hydro-Quebec......................................................6.50 07/16/03 100,000 97,679
Hydro-Quebec......................................................6.27 01/03/26 80,000 77,900
Trans-Canada Pipelines ...........................................6.77 04/30/01 150,000 149,063
- -----------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds (Cost $325,637) ...........................................................................324,642
- -----------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES (19.5% of portfolio)
American Express Master Trust 93-1................................5.38 07/15/01 570,000 566,345
Americredit Automobile Receivables Trust 98-B.....................6.06 12/12/02 500,000 490,270
Americredit Automobile Receivables Trust 99-A.....................5.88 12/05/05 1,850,000 1,807,357
Arcadia Automobile Receivables Trust 97-C.........................6.55 06/15/05 440,000 430,596
Arcadia Automobile Receivables Trust 98-B A3......................5.95 11/15/02 200,000 199,032
Arcadia Automobile Receivables Trust 98-B A4......................6.00 11/15/03 1,250,000 1,231,575
Arcadia Automobile Receivables Trust 99-A A5......................6.12 12/15/06 1,500,000 1,455,090
Auto Leasing Investors 97-A5 (b)..................................6.08 02/13/04 725,000 693,281
Banc One Auto Grantor Trust 97-A..................................6.27 11/20/03 136,855 136,520
Capital Auto Receivables Asset Trust 99-1.........................5.58 06/15/02 625,000 618,002
Centerior Energy Receivables Master Trust 96-1....................7.20 04/15/02 90,000 90,503
Champion Auto Trust 98-A..........................................6.11 10/15/02 649,638 649,638
Chase Manhattan Auto Owner Trust 97-B.............................6.35 02/15/01 14,943 14,906
Chase Manhattan Grantor Trust 92-4 A1 ............................5.80 02/17/03 100,000 97,650
</TABLE>
27
<PAGE> 93
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES - CONTINUED
CIT RV Trust 94-A.................................................4.90 % 07/15/09 $ 72,102 $ 69,874
Citibank Credit Card Master Trust 96-1............................0.00 (a) 02/07/03 340,000 315,776
Citibank Credit Card Master Trust 97-3............................6.84 02/10/04 800,000 799,024
Citibank Credit Card Master Trust 97-7............................6.35 08/15/02 110,000 109,934
Copelco Capital Funding Corp. 96-A................................6.34 07/20/04 71,068 70,996
Copelco Capital Funding Corp. 97-A................................6.47 04/20/05 300,000 298,379
CPS Auto Trust 97-2...............................................6.65 10/15/02 100,365 100,314
CPS Auto Trust 98-1...............................................6.00 08/15/03 1,772,852 1,754,872
CPS Auto Trust 96-1...............................................6.40 08/15/01 788,773 787,321
CTB Auto Grantor Trust 97-A (b)...................................6.50 09/15/03 68,328 68,285
Discover Card Trust 97-2..........................................6.79 04/16/10 1,250,000 1,230,700
Discover Card Trust 99-2..........................................5.90 10/15/04 1,500,000 1,468,050
First Bank Corporate Card Master Trust 97-1.......................6.40 02/15/03 70,000 69,315
Felco Funding II LLC 98-1 A1 (b)..................................5.97 10/15/00 89,341 89,344
Felco Funding II LLC 98-1 A2 (b)..................................5.98 09/15/01 300,000 299,073
First Chicago Master Trust 97-T...................................6.53 (c) 10/15/02 260,000 260,263
First Merchants Auto Trust 96-C...................................6.15 07/15/01 76,466 76,430
First Security Auto Grantor Trust 97-B............................6.10 04/15/03 193,002 192,562
First Security Auto Grantor Trust 98-A............................5.97 04/15/04 647,284 646,126
First Security Auto Grantor Trust 99-1............................5.58 06/15/03 440,000 430,157
Ford Credit Auto Owner Trust 98-A.................................5.65 10/15/01 49,654 49,573
Franklin Auto Trust 98-1..........................................5.65 01/17/06 1,000,000 984,400
Green Tree Lease Finance 97-1.....................................6.17 09/20/05 394,501 394,079
Green Tree Lease Finance 98-1.....................................5.60 07/20/02 370,000 366,529
Heller Equipment Asset Recievables Trust 97-1.....................6.39 05/25/05 228,094 227,658
Honda Auto Receivables Grantor Trust 97-A.........................5.85 02/15/03 284,164 281,590
Honda Auto Receivables Grantor Trust 97-B.........................5.95 05/15/03 379,328 378,632
Household Affinity Credit Card Master Trust 93-2..................5.60 05/15/02 91,667 91,406
Hyundai Auto Receivables Trust 98-A A2............................6.05 07/15/04 200,000 195,661
J.C. Penney Master Credit Card Trust C............................9.63 06/15/00 750,000 758,052
John Deere Owner Trust 99-A.......................................5.94 10/15/02 2,500,000 2,465,525
Key Auto Finance Trust 97-2.......................................6.15 10/15/01 491,471 491,535
Metlife Capital Equipment Loan Trust 97-A.........................6.85 05/20/08 2,800,000 2,780,428
Metris Master Trust 97-1..........................................6.87 10/20/05 1,505,000 1,506,881
Navistar Financial Corp. Owner Trust 96-A.........................6.35 11/15/02 87,400 87,354
New Court Equipment Trust Securities 98-1.........................5.24 12/20/02 465,000 459,904
Nissan Auto Receivables Grantor Trust 97-A........................6.15 02/15/03 106,592 107,597
Olympic Automobile Receivables Trust 95-C.........................6.20 01/15/02 46,396 46,315
Olympic Automobile Receivables Trust 95-D.........................6.15 07/15/01 100,378 100,380
Olympic Automobile Receivables Trust 96-A.........................5.85 07/15/01 151,828 151,769
Olympic Automobile Receivables Trust 96-C.........................6.80 03/15/02 472,600 473,583
Onyx Acceptance Grantor Trust 96-1 ...............................5.40 05/15/01 29,704 29,658
</TABLE>
28
<PAGE> 94
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES - CONTINUED
Onyx Acceptance Grantor Trust 98-A................................5.85 % 08/15/02 $ 595,605 $ 593,652
Onyx Acceptance Auto Trust Ser. 97-4..............................6.30 05/15/04 94,033 93,573
PNC Student Loan Trust I 97-2.....................................6.45 01/25/02 290,000 288,605
PNC Student Loan Trust I 97-C.....................................6.57 01/25/04 125,000 121,022
Pemex Finance LTD (b).............................................6.13 11/15/03 500,000 487,710
Premier Auto Trust 96-2...........................................6.58 10/06/00 11,219 11,220
Railcar Trust 92-1................................................7.75 06/01/04 65,382 66,477
Sears Credit Account Master Trust 98-1............................5.80 08/15/05 450,000 444,685
Spiegel Master Trust 94-B.........................................8.15 06/15/04 100,000 100,530
Union Acceptance Corp. 95-C.......................................6.40 10/10/02 115,606 115,280
Union Acceptance Corp. 95-D.......................................5.97 01/07/03 97,148 96,631
Union Acceptance Corp. 98-D A3....................................5.75 06/09/03 100,000 97,549
Union Acceptance Corp. 98-D A4....................................5.81 03/08/04 450,000 439,470
Western Financial Grantor Trust 95-4..............................6.20 02/01/02 131,432 131,425
WFS Financial Owner Trust 97-D ...................................6.25 03/20/02 75,775 75,784
- -----------------------------------------------------------------------------------------------------------------------------
Total Asset Backed Securities (Cost $33,600,126) ...........................................................33,209,682
- -----------------------------------------------------------------------------------------------------------------------------
MORTGAGE BACKED SECURITIES (24.9% of portfolio)
Aames Mortgage Trust 98-A.........................................6.65 (c) 03/15/28 527,776 528,462
Advanta Home Equity Loan Trust 92-3...............................6.05 09/25/08 97,039 94,396
Advanta Home Equity Loan Trust 92-4...............................7.20 11/25/08 56,328 55,906
Advanta Home Equity Loan Trust 93-2...............................6.15 10/25/09 56,250 55,312
Advanta Mortgage Loan Trust 93-3 A1..............................4.90 01/25/10 48,842 47,707
Advanta Mortgage Loan Trust 93-3 A3...............................4.75 02/25/10 116,839 115,562
Advanta Mortgage Loan Trust 93-4..................................5.70 03/25/25 189,959 181,992
Advanta Mortgage Loan Trust 94-1 A1...............................6.30 07/25/25 324,586 317,302
Advanta Mortgage Loan Trust 94-1 A2...............................6.30 07/25/25 499,341 490,173
AFC Home Equity Loan Trust 92-4...................................6.20 10/11/07 34,969 34,570
American Business Financial Services 96-2.........................7.53 02/15/28 316,412 315,975
Amresco Residential Securities Mortgage Loan Trust 96-3...........7.55 02/25/23 92,003 92,347
Bear Stearns Secured Investors Trust 87-2.........................9.95 10/20/18 80,940 85,487
Chase Mortgage Finance Corp. 93-G.................................7.00 04/25/01 20,198 20,123
Chase Mortgage Finance Corp. 93-N.................................6.75 11/25/24 260,453 256,588
Chase Mortgage Finance Corp. 94-B.................................6.75 02/25/25 255,235 253,671
Chase Mortgage Finance Corp. 94-L.................................7.50 11/25/10 250,000 249,558
Chase Mortgage Finance Corp. 98-S4................................6.90 08/25/28 691,099 609,991
Chemical Mortgage Acceptance Corp. 88-2...........................6.66 (c) 05/25/18 205,666 204,576
Citibank N.A. 86-4...............................................10.00 11/25/16 81,390 81,688
CITICORP Mortgage Securities, Inc. 88-11..........................6.44 (c) 08/25/18 526,652 517,261
CITICORP Mortgage Securities, Inc. 88-17..........................6.73 (c) 11/25/18 564,771 560,766
CITICORP Mortgage Securities, Inc. 92-16..........................7.50 09/25/22 28,874 28,422
CITICORP Mortgage Securities, Inc. 98-6 ..........................6.80 07/25/28 173,944 163,489
</TABLE>
29
<PAGE> 95
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES - CONTINUED
CITICORP Mortgage Securities, Inc. 97-3...........................7.00 % 08/25/27 $ 933,631 $ 931,026
CITICORP Mortgage Trust 3.........................................9.00 01/25/20 100,000 99,587
CMC Securities Corp. 92-D.........................................7.80 (c) 12/25/23 17,433 17,597
CMC Securities Corp. 93-E.........................................6.50 11/25/08 903,683 874,503
CMO Trust 15......................................................5.00 03/20/18 40,891 38,902
CMO Trust 17......................................................7.25 04/20/18 32,891 32,801
CMO Trust 27......................................................7.25 04/23/17 163,624 160,272
Corestates Home Equity Trust 94-1.................................6.65 05/15/09 220,766 218,364
Countrywide Asset-Backed Certificates 96-1........................6.53 02/25/14 19,189 19,105
Countrywide Funding Corp. 87-2....................................7.14 (c) 02/25/18 196,645 196,445
Countrywide Home Loans 97-1.......................................7.50 03/25/27 2,860,667 2,857,068
CS First Boston Mortgage Securities Corp. 96-2....................6.62 02/25/18 139,497 135,399
DLJ Mortgage Acceptance Corp. 91-3................................6.59 (c) 02/20/21 678,793 671,990
DLJ Mortgage Acceptance Corp. 95-8................................7.25 11/25/25 101,508 101,110
Equivantage Home Equity Loan Trust 95-2...........................6.85 05/25/22 256,573 255,264
Federal Deposit Insurance Credit Corp. 96-C1......................6.75 05/25/26 382,881 376,794
FHLMC 135 .......................................................8.75 05/15/00 3,210 3,194
FHLMC 144 .......................................................8.75 06/15/00 2,205 2,194
FHLMC 1574 .......................................................6.50 09/15/22 25,225 24,865
FHLMC 1662 .......................................................6.25 01/15/09 46,396 46,102
FHLMC 1663 .......................................................7.00 07/15/23 27,256 26,650
FHLMC 1714 .......................................................7.00 10/15/22 77,429 75,725
FHLMC 2035 .......................................................6.85 12/25/27 55,216 50,575
FHLMC 218209......................................................8.50 06/01/02 33,071 33,784
FNMA G92-44 D.....................................................8.00 12/25/20 58,014 57,797
FNMA REMIC 92-203.................................................6.50 11/25/07 40,987 40,595
FNMA REMIC 93-140.................................................7.00 07/25/12 53,854 52,998
FNMA REMIC 93-68..................................................6.00 05/25/08 50,721 46,885
FNMA REMIC 94-4...................................................6.50 12/25/06 69,227 68,991
Federal National Mortgage Association 99-8........................6.50 11/25/19 686,123 634,980
First Alliance Mortgage Loan Trust 94-1...........................5.85 04/25/25 340,608 322,180
First Alliance Mortgage Loan Trust 94-3...........................7.83 10/25/25 54,241 54,308
First Greensboro Home Equity Loan Trust 98-1......................6.55 12/25/29 1,000,401 977,622
First Plus Home Loan Trust 97-1...................................6.60 07/10/10 51,377 51,399
First Plus Home Loan Trust 97-2...................................6.82 04/10/23 89,997 89,861
First Plus Home Loan Trust 97-3...................................7.22 11/10/20 1,000,000 993,930
First Plus Home Loan Trust 98-1...................................6.04 10/10/13 395,252 394,097
First Plus Home Loan Trust 98-2...................................6.32 11/10/13 531,238 529,448
First Plus Home Loan Trust 98-4...................................6.51 (c) 01/10/11 19,592 19,604
First Plus Home Loan Trust 97-3...................................6.86 10/10/13 800,000 797,967
First Plus Home Loan Trust 97-4...................................6.82 10/10/18 200,000 192,624
Fleetwood Credit Corp. Grantor Trust 93-A ........................6.00 01/15/08 146,314 143,754
</TABLE>
30
<PAGE> 96
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES - CONTINUED
Fremont Home Loan Owners Trust 99-2...............................7.28 % 06/25/29 $1,382,090 $1,378,234
Fund America Investors Corp. 91-1.................................7.95 10/20/21 393,200 392,726
GE Capital Mortgage Services, Inc. 94-1...........................6.50 03/25/24 125,000 122,920
GE Capital Mortgage Services, Inc. 94-13..........................6.50 04/25/24 599,028 592,580
GE Capital Mortgage Services, Inc. 97-4...........................7.50 05/25/27 500,000 500,100
GE Capital Mortgage Services, Inc. 98-8...........................6.20 04/25/28 1,000,000 943,400
GMBS Certificates 89-1............................................9.50 12/25/19 82,844 82,504
GNMA 99-27 .......................................................7.50 08/16/27 2,296,686 2,284,146
GNMA 97-18 .......................................................6.90 02/20/23 662,928 651,678
Green Tree Financial Corp. 97-6...................................6.47 01/15/29 1,835,732 1,822,674
Green Tree Financial Corp. 95-7...................................6.70 11/15/26 85,273 85,309
Green Tree Home Equity Loan Trust 98-C............................6.03 07/15/29 152,111 151,873
Housing Securities Inc. 94-1......................................7.50 03/25/09 137,449 138,188
Housing Securities Inc. 92-EA.....................................7.50 10/25/07 451,000 451,848
Housing Securities Inc. 94-2......................................6.50 07/25/09 136,511 132,899
ICI Funding Secured Assets Corp. 97-2.............................7.85 07/25/28 72,977 72,634
Independent National Mortgage Corp. 96-E..........................6.93 05/25/26 216,750 215,552
Master Financial Asset Securitization Trust 98-2..................6.34 10/20/12 1,000,000 990,300
Mego Mortgage Home Loan Trust 97-4................................6.77 09/25/23 833,246 827,777
Merrill Lynch Mortgage Investors, Inc. 94-A.......................6.36 (c) 02/15/09 94,159 92,059
Mid State Trust 3 A...............................................7.63 04/01/22 61,865 61,932
Morgan Stanley Capital I 97-ALIC A1B..............................6.44 11/15/02 423,393 418,325
Morgan Stanley Capital I 97-ALIC A2...............................5.99 03/15/05 306,952 295,742
Mortgage Obligation Structured Trust 93-1.........................6.85 10/25/18 182,160 181,564
New Century Home Equity Loan Trust 97-NC6.........................7.01 05/25/26 165,000 162,230
Nomura Asset Securities Corp. 94-4B...............................8.30 09/25/24 19,583 19,759
Norwest Asset Securities Corp. 97-10..............................7.00 08/25/27 489,130 465,165
Norwest Asset Securities Corp. 98-2...............................6.50 02/25/28 335,710 318,833
Oakwood Mortgage Investors, Inc. 96-B.............................7.10 10/15/26 798,393 799,117
Prudential Home Mortgage Securities 91-9..........................7.23 (c) 08/25/21 1,380 1,373
Prudential Home Mortgage Securities 93-9..........................7.05 03/25/08 156,495 156,062
Prudential Home Mortgage Securities 93-29.........................6.75 08/25/08 13,071 13,023
Prudential Home Mortgage Securities 93-41.........................6.00 10/25/00 14,034 13,938
Residential Asset Securities Corp. 98-KS2.........................6.24 02/25/17 325,000 319,673
Residential Funding Mortgage Securities I 93-S25..................6.50 07/25/08 14,628 14,567
Residential Funding Mortgage Securities I 97-S13..................7.25 09/25/27 115,463 115,232
Resolution Trust Corp. 92-2.......................................7.89 (c) 08/25/21 133,953 133,415
Ryland Mortgage Securities Corp. 93-4.............................7.50 08/25/24 70,173 69,558
Salomon Brothers Mortgage Securities 96-LB2.......................7.25 10/25/26 60,518 60,327
Salomon Brothers Mortgage Securities 97-LB2.......................6.82 12/25/27 165,000 162,159
Saxon Asset Securities Trust 98-3.................................6.37 07/25/13 784,381 781,195
Saxon Asset Securities Trust 98-2 ................................6.22 03/25/18 168,881 167,704
</TABLE>
31
<PAGE> 97
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES - CONTINUED
Securitized Asset Sales, Inc. 93-8................................7.29 % (c) 12/26/23 $ 112,857 $ 110,659
Southern Pacific Secured Assets Corp. 98-1........................6.27 02/25/18 450,000 444,861
Southern Pacific Secured Assets Corp. 98-H1.......................6.41 01/25/29 1,250,000 1,237,463
Structured Mortgage Asset Residential Trust 93-5..................6.57 (c) 06/25/24 44,516 42,125
TMS Home Equity Trust 93-C........................................5.75 10/15/22 60,031 58,915
TMS Home Equity Trust 93-D........................................5.68 02/15/09 53,209 51,368
TMS Home Equity Trust 94-D........................................8.93 06/15/22 393,000 401,995
TMS Home Equity Trust 96-B A7.....................................7.55 02/15/20 360,000 362,951
TMS Home Equity Trust 96-B A10....................................6.78 (c) 10/15/27 180,722 180,152
TMS Home Equity Trust 96-C........................................7.69 05/15/24 394,000 390,687
TMS Home Equity Trust 97-A........................................7.24 05/15/28 263,000 259,218
TMS Home Equity Trust 97-C........................................6.59 02/15/15 541,000 538,740
UCFC Home Equity Loan 95-A1.......................................8.55 01/10/20 550,000 554,147
UCFC Home Equity Loan 96-C1.......................................7.15 12/15/13 90,195 89,965
UCFC Home Equity Loan 96-C1.......................................7.83 01/15/28 405,000 396,288
UCFC Home Equity Loan 98-C1.......................................5.96 05/15/20 400,000 382,672
UCFC Home Equity Loan 98-A........................................6.49 04/15/24 484,000 474,291
UCFC Home Equity Loan 98-B........................................6.27 11/15/24 500,000 480,590
UCFC Manufactured Housing Contract 98-2...........................6.16 08/15/19 1,000,000 950,720
UCFC Manufactured Housing Contract 97-3...........................6.36 02/15/11 110,356 109,974
Vanderbilt Mortgage Finance 95-B..................................6.68 05/07/06 88,335 87,140
Zions Home Refinance Loan Trust 93-1 .............................5.15 09/25/03 20,976 20,329
- -----------------------------------------------------------------------------------------------------------------------------
Total Mortgage Backed Securities (Cost $42,926,775) ........................................................42,365,224
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (10.8% of portfolio)
Banco Centroamericano Promissory Note.............................5.78 05/30/01 588,900 583,367
Chattanooga Valley Corp...........................................0.00 (a) 01/01/01 256,000 240,000
Chattanooga Valley Corp...........................................0.00 (a) 07/01/01 204,000 184,224
Federal Farm Credit Bank..........................................5.90 08/06/01 1,000,000 990,105
Federal Home Loan Bank............................................6.81 09/27/04 1,000,000 987,128
Federal Home Loan Mortgage Corp...................................5.87 07/16/01 2,000,000 1,979,935
Federal Home Loan Mortgage Corp...................................6.00 01/12/04 1,250,000 1,208,891
Federal Home Loan Mortgage Corp...................................6.82 07/06/04 1,000,000 982,314
Federal National Mortgage Assn....................................5.95 03/13/02 1,500,000 1,477,875
Federal National Mortgage Assn....................................6.20 07/07/03 1,250,000 1,214,838
Federal National Mortgage Assn....................................6.00 03/01/04 500,000 482,335
Federal National Mortgage Assn....................................6.07 05/05/04 1,750,000 1,689,621
Government Export Trust 93-1......................................6.00 03/15/05 306,250 301,387
Small Business Administration 92-10...............................7.15 09/01/02 22,300 22,297
U.S. Treasury Note................................................7.13 02/29/00 250,000 250,814
U.S. Treasury Note................................................6.38 05/15/00 800,000 802,053
U.S. Treasury Note ...............................................5.75 10/31/00 2,250,000 2,243,719
</TABLE>
32
<PAGE> 98
SHORT-TERM BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTEREST MATURITY FACE
RATE DATE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - CONTINUED
U.S. Treasury Note................................................6.38 % 03/31/01 $ 500,000 $ 501,146
U.S. Treasury Note................................................5.88 11/30/01 1,750,000 1,738,253
U.S. Treasury Note ...............................................6.00 07/31/02 500,000 497,031
- -----------------------------------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations (Cost $18,610,535) ............................................18,377,333
- -----------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (0.7% of portfolio)
Rhode Island Housing & Mortgage Finance Corp......................6.62 04/01/02 55,000 54,381
Westmoreland County, PA ..........................................0.00 (a) 08/15/00 1,200,000 1,151,820
- -----------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds (Cost $1,207,476) .....................................................................1,206,201
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE MASTER NOTE (1.2% of portfolio)
Associates Corp. of North America ................................5.07 (c) 2,060,000 2,060,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Corporate Master Note (Cost $2,060,000) ...............................................................2,060,000
- -----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNT
State Street Bank & Trust SSgA Fund ..............................5.35 (d) 4,530
- -----------------------------------------------------------------------------------------------------------------------------
Total Money Market Account (Cost $4,530) ........................................................................4,530
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $172,444,136) - 100% ...............................................$170,170,329
=============================================================================================================================
</TABLE>
(a) Zero coupon security, purchased at a discount.
(b) 144A security.
(c) Variable coupon rate as of December 31, 1999.
(d) One day yield at December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
<PAGE> 99
STOCK INDEX FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
EQUITY 500 INDEX PORTFOLIO
<TABLE>
<CAPTION>
COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock (97.4%)...................................................... $4,809,122,710 $7,953,572,107
Short-Term Instruments (2.5%)............................................. 200,811,727 200,810,636
- -----------------------------------------------------------------------------------------------------------------------------
Total Investments in Securities (99.9%)............................. 5,009,934,437 8,154,382,743
- -----------------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities (0.1%) ...................................................................... 10,714,139
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.0%) ................................................................................. $8,165,096,882
- -----------------------------------------------------------------------------------------------------------------------------
STOCK INDEX FUND TOTAL INVESTMENTS IN
SECURITIES (0.102% OF PORTFOLIO).......................................... $7,941,582 $8,303,439
=============================================================================================================================
</TABLE>
The Stock Index Fund's ownership interest in the Equity 500 Index Portfolio as
of December 31, 1999 was 0.102%. Complete details relating to the investments of
the Equity 500 Index Portfolio, along with the Portfolio's audited financial
statements, can be found in Appendix A and should be considered an integral part
of these financial statements.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
34
<PAGE> 100
VALUE FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.9% of portfolio)
BASIC INDUSTRIES - 15.7%
Aluminum
Alcan Aluminum Ltd. .................................................... 231,200 $ 9,522,550
Chemicals
Avery Dennison Corp. ................................................... 187,600 13,671,350
Forest Products
Pope & Talbot, Inc. .................................................... 140,500 2,248,000
Weyerhaeuser Co. ....................................................... 96,500 6,929,906
Packaging/Containers
Bemis Co., Inc. ........................................................ 374,800 13,071,150
Pactiv Corp. (a) ....................................................... 301,200 3,200,250
Paper
Champion International Corp. ........................................... 114,000 7,060,875
International Paper Co.................................................. 142,000 8,014,125
- -----------------------------------------------------------------------------------------------------------------------------
Total Basic Industries .............................................................................. 63,718,206
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS - 5.8%
Construction Supplies & Fixtures
Hughes Supply, Inc. .................................................... 356,800 7,693,500
Industrial Machinery
Applied Industrial Technologies, Inc. .................................. 541,700 9,005,762
Parker-Hannifin Corp.................................................... 132,975 6,823,280
- -----------------------------------------------------------------------------------------------------------------------------
Total Capital Goods ................................................................................. 23,522,542
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLE GOODS - 9.7%
Auto Parts
Cooper Tire & Rubber Co. ............................................... 507,000 7,890,187
Genuine Parts Co. ...................................................... 325,300 8,071,506
Tenneco Automotive, Inc. ............................................... 117,740 1,096,454
Household Appliances & Furnishings
Juno Lighting, Inc. (a) ................................................ 21,435 222,388
Maytag Corp. ........................................................... 241,400 11,587,200
Housewares
Oneida Ltd.............................................................. 491,700 10,694,475
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Durable Goods ........................................................................ 39,562,210
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLE GOODS - 17.7%
Drugs & Health Care
American Home Products Corp. ........................................... 120,000 4,732,500
Pharmacia & Upjohn, Inc. ............................................... 145,000 6,525,000
SmithKline Beecham Plc. ................................................ 86,000 5,541,625
</TABLE>
35
<PAGE> 101
VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLE GOODS - continued
Food Processing
J.M. Smucker Co. (Class B) ............................................. 472,700 $ 7,681,375
Photography
Eastman Kodak Co. ...................................................... 104,500 6,923,125
Retail
Dillards Department Stores, Inc. ....................................... 478,000 9,649,625
K Mart Corp. (a) ....................................................... 605,700 6,094,856
Longs Drug Stores Corp. ................................................ 276,700 7,142,319
May Department Stores Co. .............................................. 256,250 8,264,063
Ruddick Corp............................................................ 609,200 9,442,600
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Non-Durable Goods .................................................................... 71,997,088
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER SERVICES - 4.3%
Restaurants
Brinker International, Inc. (a) ........................................ 317,800 7,627,200
Wendy's International, Inc.............................................. 470,200 9,697,875
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Services ............................................................................. 17,325,075
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY - 8.3%
Domestic Oil
Atlantic Richfield Co. ................................................. 61,800 5,345,700
International Oil
Chevron Corp. .......................................................... 55,000 4,764,375
Texaco, Inc. ........................................................... 83,400 4,529,663
Oil Well Services & Equipment
Baker Hughes, Inc. ..................................................... 365,000 7,687,813
Halliburton Co.......................................................... 283,000 11,390,750
- -----------------------------------------------------------------------------------------------------------------------------
Total Energy ........................................................................................ 33,718,301
- -----------------------------------------------------------------------------------------------------------------------------
FINANCE - 18.2%
Banks
Bank One Corp. ......................................................... 279,180 8,951,209
Bank of America Corp. .................................................. 195,100 9,791,581
BB&T Corp. ............................................................. 124,800 3,416,400
Chase Manhattan Corp. .................................................. 128,400 9,975,075
Citigroup, Inc. ........................................................ 226,875 12,605,742
Commerce Bancshares, Inc. .............................................. 306,598 10,386,007
</TABLE>
36
<PAGE> 102
VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES/
FACE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE - continued
Insurance
Allstate Corp. ......................................................... 382,000shs. $ 9,168,000
Chubb Corp. ............................................................ 111,000 6,250,687
Ohio Casualty Corp...................................................... 230,400 3,700,800
- -----------------------------------------------------------------------------------------------------------------------------
Total Finance ................................................................................. 74,245,501
- -----------------------------------------------------------------------------------------------------------------------------
GENERAL BUSINESS - 3.9%
Business Services
Deluxe Corp. ........................................................... 196,100 5,380,494
Donnelley, R.R. & Sons Co............................................... 414,300 10,279,819
- -----------------------------------------------------------------------------------------------------------------------------
Total General Business............................................................................... 15,660,313
- -----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY - 1.3%
Computers & Business Equipment
Xerox Corp.............................................................. 231,000 5,240,813
- -----------------------------------------------------------------------------------------------------------------------------
Total Technology ................................................................................. 5,240,813
- -----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 3.2%
Air Travel
Southwest Airlines Co................................................... 807,600 13,073,025
- -----------------------------------------------------------------------------------------------------------------------------
Total Transportation................................................................................. 13,073,025
- -----------------------------------------------------------------------------------------------------------------------------
UTILITIES - 6.8%
Gas & Pipeline
Questar Corp. .......................................................... 516,600 7,749,000
El Paso Energy Corp. ................................................... 213,000 8,267,062
Telephone
BellSouth Corp.......................................................... 252,000 11,796,750
- -----------------------------------------------------------------------------------------------------------------------------
Total Utilities ..................................................................................... 27,812,812
- -----------------------------------------------------------------------------------------------------------------------------
Total Common Stock (Cost $308,238,925) .............................................................. 385,875,886
- -----------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS (0.3% of portfolio)
K Mart Corp., 7.75% Convertible Preferred................................. 25,200 1,102,500
- -----------------------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Cost $1,281,750) ............................................................ 1,102,500
- -----------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (1.2% of portfolio)
Merrill Lynch, 6.05%, due 01/20/00........................................ $5,000,000 4,984,035
- -----------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $4,984,035) ............................................................ 4,984,035
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 103
VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE MASTER NOTE (3.6% of portfolio)
Associates Corp. of North America, 5.07% (b).............................. $14,660,000 $ 14,660,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Corporate Master Note (Cost $14,660,000) ...................................................... 14,660,000
- -----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNT
State Street Bank and Trust SSgA Fund, 5.35% (c)........................................................... 5,399
- -----------------------------------------------------------------------------------------------------------------------------
Total Money Market Account (Cost $5,399) ............................................................ 5,399
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $329,170,109) - 100% ................................................ $406,627,820
=============================================================================================================================
</TABLE>
(a) Non-income producing.
(b) Variable coupon rate at December 31, 1999.
(c) One day yield at December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
38
<PAGE> 104
SMALL COMPANY STOCK FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.4% of portfolio)
BASIC INDUSTRIES - 1.3%
Forest Products
Pope & Talbot, Inc...................................................... 8,500 $ 136,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Basic Industries .............................................................................. 136,000
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS - 31.7%
Construction Supplies & Fixtures
Chicago Bridge & Iron Co. .............................................. 29,200 401,500
Hughes Supply, Inc. .................................................... 18,200 392,437
Industrial Machinery
Applied Industrial Technologies, Inc. .................................. 22,200 369,076
Flowserve Corp. ........................................................ 17,500 297,500
Manitowoc Co., Inc. .................................................... 12,000 408,000
Regal-Beloit Corp. ..................................................... 18,000 371,250
Manufacturing-Diverse
CLARCOR, Inc. .......................................................... 25,100 451,800
Lydall, Inc. (a) ....................................................... 36,900 244,463
Standex International Corp.............................................. 19,500 408,281
- -----------------------------------------------------------------------------------------------------------------------------
Total Capital Goods ................................................................................. 3,344,307
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER DURABLE GOODS - 7.2%
Auto Parts
Cooper Tire & Rubber Co................................................. 20,800 323,700
Household Appliances & Furnishings
Juno Lighting, Inc. (a) ................................................ 886 9,192
Housewares
Oneida Ltd.............................................................. 19,900 432,825
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Durable Goods ........................................................................ 765,717
- -----------------------------------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLE GOODS - 25.9%
Cosmetics & Toiletries
Alberto Culver Co. (Class A) ........................................... 20,000 435,000
Food Processing
J.M. Smucker Co. (Class B) ............................................. 23,500 381,875
Retail
Charming Shoppes, Inc. (a) ............................................. 86,000 569,750
Claire's Stores, Inc. .................................................. 22,500 503,437
Longs Drug Stores, Corp. ............................................... 15,900 410,419
Ruddick Corp............................................................ 28,400 440,200
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Non-Durable Goods .................................................................... 2,740,681
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 105
SMALL COMPANY STOCK FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES - 3.2%
Restaurants
CBRL Group, Inc......................................................... 34,500 $ 334,758
- -----------------------------------------------------------------------------------------------------------------------------
Total Consumer Services.............................................................................. 334,758
- -----------------------------------------------------------------------------------------------------------------------------
ENERGY - 3.4%
Oil Well Services & Equipment
Helmerich & Payne, Inc.................................................. 16,700 364,269
- -----------------------------------------------------------------------------------------------------------------------------
Total Energy ................................................................................. 364,269
- -----------------------------------------------------------------------------------------------------------------------------
FINANCE - 10.2%
Banks
UMB Financial Corp. .................................................... 11,330 427,707
Valley National Bancorp ................................................ 8,000 224,000
Insurance
Ohio Casualty Corp...................................................... 26,200 420,837
- -----------------------------------------------------------------------------------------------------------------------------
Total Finance ................................................................................. 1,072,544
- -----------------------------------------------------------------------------------------------------------------------------
GENERAL BUSINESS - 7.5%
Commercial Printing
Banta Corp. ............................................................ 20,500 462,531
Linen Supply
Superior Uniform Group, Inc............................................. 36,400 327,600
- -----------------------------------------------------------------------------------------------------------------------------
Total General Business............................................................................... 790,131
- -----------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 3.6%
Railroad
Wisconsin Central Transportation Corp. (a).............................. 28,500 382,969
- -----------------------------------------------------------------------------------------------------------------------------
Total Transportation................................................................................. 382,969
- -----------------------------------------------------------------------------------------------------------------------------
UTILITIES - 3.4%
Gas & Pipeline
Questar Corp............................................................ 23,700 355,500
- -----------------------------------------------------------------------------------------------------------------------------
Total Utilities ..................................................................................... 355,500
- -----------------------------------------------------------------------------------------------------------------------------
Total Common Stock (Cost $11,685,431) ............................................................... 10,286,876
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 106
SMALL COMPANY STOCK FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE MASTER NOTE (2.6% of portfolio)
Associates Corp. of North America, 5.07% (b).............................. $ 275,000 $ 275,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Corporate Master Note (Cost $275,000) ......................................................... 275,000
- -----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET ACCOUNT
State Street Bank & Trust SSgA Fund, 5.35% (c)............................................................. 3,897
- -----------------------------------------------------------------------------------------------------------------------------
Total Money Market Account (Cost $3,897) ............................................................ 3,897
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $11,964,328) - 100% ................................................. $ 10,565,773
=============================================================================================================================
</TABLE>
(a) Non-income producing.
(b) Variable coupon rate at December 31, 1999.
(c) One day yield at December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
41
<PAGE> 107
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME GOVERNMENT SHORT-TERM
FUND SECURITIES FUND BOND FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost:
$63,187,058; $34,587,531; $172,444,136) ...................... $63,187,058 $34,177,680 $170,170,329
Receivables
Investment securities sold ................................... -- -- --
Dividends and interest ....................................... 548,896 319,509 1,797,837
Capital shares sold .......................................... 77,054 304 520
Prepaid expenses ................................................ 14,430 11,462 20,759
- -------------------------------------------------------------------------------------------------------------------------------
Total assets .................................................... 63,827,438 34,508,955 171,989,445
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Investment securities purchased .............................. -- -- 28,725
Accrued expenses ............................................. 49,384 24,678 118,418
Due to RE Advisers ........................................... 32,206 18,018 81,475
Capital shares redeemed ...................................... -- -- 25,652
Dividends .................................................... 11,862 6,764 41,529
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................... 93,452 49,460 295,799
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS ...................................................... $63,733,986 $34,459,495 $171,693,646
===============================================================================================================================
NET ASSETS CONSIST OF:
Unrealized appreciation (depreciation) of investments ........... $ -- $ (409,851) $(2,273,807)
Accumulated net realized loss from investments and
futures transactions ......................................... -- -- --
Paid-in-capital applicable to outstanding shares of
63,733,986 of Daily Income Fund, 6,896,277 of
Short-Term Government Securities Fund, and
33,712,494 of Short-Term Bond Fund ........................... 63,733,986 34,869,346 173,967,453
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS ...................................................... $63,733,986 $34,459,495 $171,693,646
===============================================================================================================================
NET ASSET VALUE PER SHARE ....................................... $1.00 $5.00 $5.09
===============================================================================================================================
</TABLE>
42
<PAGE> 108
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL
STOCK INDEX VALUE COMPANY
FUND FUND STOCK FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost: $7,941,582;
$329,170,109; $11,964,328) ................................... $ 8,303,439 $406,627,820 $ 10,565,773
Receivables
Investment securities sold ................................... -- -- 89,922
Dividends and interest ....................................... -- 595,912 9,737
Capital shares sold .......................................... 12,925 127,537 229
Prepaid expenses ................................................ 396 33,533 8,577
- -------------------------------------------------------------------------------------------------------------------------------
Total assets .................................................... 8,316,760 407,384,802 10,674,238
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Investment securities purchased .............................. -- -- --
Accrued expenses ............................................. 2,917 168,051 20,661
Due to RE Advisers ........................................... 2,382 205,691 8,137
Capital shares redeemed ...................................... -- 124,260 --
Dividends .................................................... -- 584,705 8,348
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................... 5,299 1,082,707 37,146
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS ...................................................... $ 8,311,461 $406,302,095 $ 10,637,092
===============================================================================================================================
NET ASSETS CONSIST OF:
Unrealized appreciation (depreciation) of investments ........... $ 361,857 $ 77,457,711 $(1,398,555)
Accumulated net realized loss from investments and
futures transactions ......................................... (2,987) -- --
Paid-in-capital applicable to outstanding shares of
758,542 of Stock Index Fund,17,270,349 of Value
Fund, and 1,278,057 of Small Company Stock Fund .............. 7,952,591 328,844,384 12,035,647
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS ...................................................... $ 8,311,461 $406,302,095 $ 10,637,092
===============================================================================================================================
NET ASSET VALUE PER SHARE ....................................... $10.96 $23.53 $8.32
===============================================================================================================================
</TABLE>
43
<PAGE> 109
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME GOVERNMENT SHORT-TERM
FUND SECURITIES FUND BOND FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest ..................................................... $ 3,391,771 $ 1,668,992 $10,281,998
Dividends .................................................... -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total income .................................................... 3,391,771 1,668,992 10,281,998
- -------------------------------------------------------------------------------------------------------------------------------
Expenses
Management fees .............................................. 321,654 139,966 991,245
Custodian and accounting fees ................................ 101,244 50,120 172,858
Shareholder servicing ........................................ 54,364 34,850 79,704
Communication ................................................ 18,092 7,990 30,086
Registration expense ......................................... 24,416 21,611 33,006
Legal and audit fees ......................................... 7,853 4,192 20,675
Printing ..................................................... 6,033 2,908 14,403
Insurance .................................................... 3,441 1,545 9,025
Other expenses ............................................... 3,553 1,869 7,179
Directors fees ............................................... 2,193 1,034 5,487
Administration fees .......................................... -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses .................................................. 542,843 266,085 1,363,668
- -------------------------------------------------------------------------------------------------------------------------------
Less fees waived by RE Advisers ................................. (28,196) (33,139) (125,597)
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses .................................................... 514,647 232,946 1,238,071
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME ........................................... 2,877,124 1,436,046 9,043,927
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments ......................... -- 7,990 41,847
Net change in unrealized appreciation (depreciation) ............ -- (569,413) (3,686,363)
- -------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS .................................. -- (561,423) (3,644,516)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................... $ 2,877,124 $ 874,623 $ 5,399,411
===============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
44
<PAGE> 110
STATEMENTS OF ASSETS & LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL
STOCK INDEX VALUE COMPANY
FUND FUND STOCK FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest ..................................................... $ -- $ 1,473,650 $ 27,438
Dividends .................................................... 9,651 8,566,694 184,937
- -------------------------------------------------------------------------------------------------------------------------------
Total income .................................................... 9,651 10,040,344 212,375
- -------------------------------------------------------------------------------------------------------------------------------
Expenses
Management fees .............................................. 610 2,518,296 83,106
Custodian and accounting fees ................................ -- 242,650 48,772
Shareholder servicing ........................................ 1,466 296,088 36,497
Communication ................................................ 279 128,176 10,035
Registration expense ......................................... 22 39,648 15,764
Legal and audit fees ......................................... 635 50,253 1,591
Printing ..................................................... 502 38,411 1,627
Insurance .................................................... 11 25,860 416
Other expenses ............................................... 83 19,540 1,297
Directors fees ............................................... 34 14,590 339
Administration fees .......................................... 1,871 -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses .................................................. 5,513 3,373,512 199,444
- -------------------------------------------------------------------------------------------------------------------------------
Less fees waived by RE Advisers ................................. -- -- (51,178)
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses .................................................... 5,513 3,373,512 148,266
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME ........................................... 4,138 6,666,832 64,109
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments ......................... (2,987) 27,761,410 520,344
Net change in unrealized appreciation (depreciation) ............ 361,857 (48,332,822) (856,439)
- -------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS .................................. 358,870 (20,571,412) (336,095)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS ........... $ 363,008 $(13,904,580) $ (271,986)
===============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
45
<PAGE> 111
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT SHORT-TERM
DAILY INCOME FUND SECURITIES FUND BOND FUND
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net investment income ........... $ 2,877,124 $ 2,657,794 $ 1,436,046 $ 1,000,283 $ 9,043,927 $ 7,117,514
Net realized gain (loss)
on investments ............... -- -- 7,990 7,472 41,847 141,690
Net change in unrealized
appreciation (depreciation) .. -- -- (569,413) 86,126 (3,686,363) 603,728
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
assets from operations ....... 2,877,124 2,657,794 874,623 1,093,881 5,399,411 7,862,932
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ........... (2,877,124) (2,657,794) (1,436,046) (1,000,283) (9,043,927) (7,117,514)
Net realized gain
on investments ............... -- -- (7,990) (7,472) (41,847) (141,690)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions
to shareholders .............. (2,877,124) (2,657,794) (1,444,036) (1,007,755) (9,085,774) (7,259,204)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS, NET.. 5,156,838 5,543,754 11,098,783 7,657,272 29,029,639 36,848,869
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE
IN NET ASSETS ................ 5,156,838 5,543,754 10,529,370 7,743,398 25,343,276 37,452,597
NET ASSETS
Beginning of year ............... 58,577,148 53,033,394 23,930,125 16,186,727 146,350,370 108,897,773
- -------------------------------------------------------------------------------------------------------------------------------
END OF YEAR ..................... $63,733,986 $58,577,148 $34,459,495 $23,930,125 $171,693,646 $146,350,370
===============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
46
<PAGE> 112
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
STOCK INDEX SNALL COMPANY
FUND VALUE FUND STOCK FUND
- -------------------------------------------------------------------------------------------------------------------------------
1999* 1999 1998 1999 1998**
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income .................. $ 4,138 $ 6,666,832 $ 6,538,859 $ 64,109 $ 39,002
Net realized gain (loss)
on investments ...................... (2,987) 27,761,410 11,857,449 520,344 (1,709)
Net change in unrealized
appreciation (depreciation) ......... 361,857 (48,332,822) 12,942,414 (856,439) (542,116)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
assets from operations .............. 363,008 (13,904,580) 31,338,722 (271,986) (504,823)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .................. (4,138) (6,666,832) (6,538,859) (64,109) (39,002)
Net realized gain on investments ...... -- (27,761,410) (11,857,449) (518,635) --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders .... (4,138) (34,428,242) (18,396,308) (582,744) (39,002)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS, NET ........ 7,952,591 5,632,971 57,438,372 3,929,793 8,105,854
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS ....................... 8,311,461 (42,699,851) 70,380,786 3,075,063 7,562,029
NET ASSETS
Beginning of year ...................... -- 449,001,946 378,621,160 7,562,029 --
- -------------------------------------------------------------------------------------------------------------------------------
END OF YEAR ............................ $ 8,311,461 $406,302,095 $ 449,001,946 $ 10,637,092 $ 7,562,029
===============================================================================================================================
</TABLE>
* For the period beginning October 28, 1999 (inception date) to December 31,
1999.
** For the period beginning March 4, 1998 (inception date) to December 31,
1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
47
<PAGE> 113
DAILY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<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) .................. 0.04 0.05 0.05 0.05 0.05
Net realized and unrealized gain on
investments .............................. 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations ........... 0.04 0.05 0.05 0.05 0.05
- ------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income ...................... (0.04) (0.05) (0.05) (0.05) (0.05)
Net realized gain .......................... 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------
Total distributions ...................... (0.04) (0.05) (0.05) (0.05) (0.05)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR .................. $1.00 $1.00 $1.00 $1.00 $1.00
==================================================================================================================
TOTAL RETURN .................................. 4.56% 4.91% 4.92% 4.81% 5.38%
==================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) ........... $63,734 $58,577 $53,033 $57,871 $52,699
Ratio of gross expenses before
voluntary expense limitation to
average net assets ......................... 0.84% 0.87% 0.83% 0.81% 0.87%
Ratio of net investment income to
average net assets (a) ..................... 4.47% 4.80% 4.80% 4.71% 5.25%
Ratio of expenses to average net
assets (a) ................................. 0.80% 0.80% 0.80% 0.76% 0.75%
</TABLE>
- ------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
48
<PAGE> 114
SHORT-TERM GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
MAY 1, 1995
(INCEPTION DATE)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .............. $5.09 $5.07 $5.05 $5.09 $5.00
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) .................... 0.23 0.25 0.26 0.26 0.18
Net realized and unrealized gain (loss)
on investments ............................. (0.09) 0.02 0.02 (0.04) 0.09
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ............. 0.14 0.27 0.28 0.22 0.27
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income ........................ (0.23) (0.25) (0.26) (0.26) (0.18)
Net realized gain ............................ 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions .......................... (0.23) (0.25) (0.26) (0.26) (0.18)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR .................... $5.00 $5.09 $5.07 $5.05 $5.09
===============================================================================================================================
TOTAL RETURN .................................... 2.88% 5.51% 5.73% 4.46% 5.44%(b)
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) ............. $34,459 $23,930 $16,187 $7,692 $2,658
Ratio of gross expenses before voluntary expense
limitation to average net assets ............. 0.86% 1.03% 1.27% 2.30% 6.21%(c)
Ratio of net investment income to
average net assets (a) ....................... 4.63% 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% 0.75%(c)
Portfolio turnover rate ......................... 9% 57% 12% 21% 11%(c)
</TABLE>
- --------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE~Advisers.
(b) Aggregate total return for the year.
(c) Annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
49
<PAGE> 115
SHORT-TERM BOND FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............... $5.21 $5.18 $5.15 $5.19 $4.95
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a).................... 0.28 0.29 0.30 0.29 0.28
Net realized and unrealized gain (loss)
on investments............................. (0.12) 0.03 0.03 (0.04) 0.24
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations............. 0.16 0.32 0.33 0.25 0.52
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income........................ (0.28) (0.29) (0.30) (0.29) (0.28)
Net realized gain............................ 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions.......................... (0.28) (0.29) (0.30) (0.29) (0.28)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $5.09 $5.21 $5.18 $5.15 $5.19
===============================================================================================================================
TOTAL RETURN................................... 3.21% 6.40% 6.62% 5.16% 10.81%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)............ $171,694 $146,350 $108,898 $81,470 $62,125
Ratio of gross expenses before voluntary expense
limitation to average net assets............ 0.83% 0.84% 0.87% 0.76% 0.86%
Ratio of net investment income to
average net assets (a)...................... 5.48% 5.53% 5.75% 5.72% 5.49%
Ratio of expenses to average net assets (a).... 0.75% 0.75% 0.75% 0.75% 0.75%
Portfolio turnover rate........................ 37% 62% 55% 49% 35%
</TABLE>
- -----------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
50
<PAGE> 116
STOCK INDEX FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
OCTOBER 28, 1999
(INCEPTION DATE)
TO DECEMBER 31,
1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................................................................ $10.00
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) ................................................................................ 0.01
Net realized and unrealized gain
on investments ......................................................................................... 0.96
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ........................................................................ 0.97
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income .................................................................................... (0.01)
Net realized gain ........................................................................................ 0.00
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions ...................................................................................... (0.01)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ................................................................................ $10.96
===============================================================================================================================
TOTAL RETURN ................................................................................................ 9.65%(b)
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) ......................................................................... $8,311
Ratio of gross expenses before voluntary expense
limitation to average net assets ......................................................................... n/a
Ratio of net investment income to
average net assets (a) ................................................................................... 0.54%(c)
Ratio of expenses to average net assets (a) ................................................................. 0.72%(c)
Portfolio turnover rate ..................................................................................... n/a
</TABLE>
- --------------------------
(a) Excludes excess administrative fees and other expenses in accordance with
the Expense Limitation Agreement with RE Advisers.
(b) Aggregate total return for the period.
(c) Annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
51
<PAGE> 117
VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $26.50 $25.50 $20.99 $18.44 $14.50
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a).................... 0.41 0.40 0.37 0.39 0.41
Net realized and unrealized gain
on investments............................. (1.23) 1.72 5.22 2.91 4.47
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations............. (0.82) 2.12 5.59 3.30 4.88
- -------------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income........................ (0.41) (0.40) (0.37) (0.39) (0.41)
Net realized gain............................ (1.74) (0.72) (0.71) (0.36) (0.53)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions.......................... (2.15) (1.12) (1.08) (0.75) (0.94)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR.................... $23.53 $26.50 $25.50 $20.99 $18.44
===============================================================================================================================
TOTAL RETURN.................................... (3.21)% 8.31% 26.70% 17.94% 33.78%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)............. $406,302 $449,002 $378,621 $238,550 $147,506
Ratio of gross expenses before
voluntary expense limitation to
average net assets........................... n/a n/a n/a n/a n/a
Ratio of net investment income to
average net assets (a)....................... 1.47% 1.52% 1.59% 2.08% 2.50%
Ratio of expenses to average net
assets (a)................................... 0.74% 0.72% 0.79% 0.73% 0.84%
Portfolio turnover rate......................... 17% 10% 6% 5% 10%
</TABLE>
- --------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
52
<PAGE> 118
SMALL COMPANY STOCK FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
MARCH 4, 1998
YEAR ENDED (INCEPTION DATE)
DECEMBER 31, TO DECEMBER 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.85 $10.00
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income (a) 0.05 0.05
Net realized and unrealized gain (loss)
on investments (0.10) (1.15)
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.05) (1.10)
- -------------------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.05) (0.05)
Net realized gain (0.43) 0.00
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (0.48) (0.05)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.32 $8.85
===============================================================================================================================
TOTAL RETURN (0.55)% (11.02)%(b)
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands) $10,637 $7,562
Ratio of gross expenses before voluntary expense
limitation to average net assets 2.02% 3.11%(c)
Ratio of net investment income to
average net assets (a) 0.65% 1.04%(c)
Ratio of expenses to average net assets (a) 1.50% 1.50%(c)
Portfolio turnover rate 23% 20%(C)
</TABLE>
- --------------------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with RE Advisers.
(b) Aggregate total return for the year.
(c) Annualized.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
53
<PAGE> 119
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Homestead Funds, Inc. (Homestead Funds) is a Maryland corporation registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 (the Act) as a no-load, open-end diversified management investment company.
Homestead Funds (the Fund) currently consists of six funds: Daily Income Fund,
Short-Term Government Securities Fund, Short-Term Bond Fund, Stock Index Fund,
Value Fund, and Small Company Stock Fund. The Stock Index Fund commenced
operations on October 28, 1999.
Each Fund is a separate investment portfolio with distinct investment
objectives, investment programs, policies and restrictions. The investment
objectives of the Fund as well as the nature and risks of the investment
activities of each Fund are set forth more fully in the Homestead Funds'
Prospectus and Statement of Additional Information.
The Stock Index Fund seeks to achieve its investment objective by investing
substantially all of its assets in the Equity 500 Index Portfolio (the
Portfolio), which is registered under the Act as an open-end management
investment company advised by Bankers Trust Company and is designed to replicate
the broad diversification and returns of the S&P 500 Index. At December 31,
1999, the Stock Index Fund's investment was 0.102% of the Portfolio. The
financial statements of the Portfolio are contained in Appendix A of this report
and should be read in conjunction with the Stock Index Fund's financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security valuation: The Daily Income Fund values all money market instruments on
an amortized cost basis, which approximates market value. Under the amortized
cost method, discounts and premiums on securities purchased are amortized over
the life of the respective securities.
The Short-Term Government Securities Fund, the Short-Term Bond Fund, the Value
Fund and the Small Company Stock Fund value investments in common stocks,
preferred stocks, and convertible preferred stocks traded on national securities
exchanges and certain over-the-counter securities at the last quoted sale price
at the close of the New York Stock Exchange. Short-term debt instruments with a
remaining maturity of more than 60 days, intermediate and long-term bonds,
convertible bonds, and other debt securities are generally valued at market
prices furnished by an independent pricing service. Over-the-counter issues not
quoted on the NASDAQ system, other equity securities and debt instruments for
which a sale price is not available are valued at the mean of the closing bid
and asked prices, or the last available sale price may be used for
exchange-traded debt securities. Securities with a maturity of 60 days or less
are valued on an amortized cost basis, which approximates market value.
The Stock Index Fund records its investment in the Portfolio at value, which
reflects its proportionate interest in the net assets of the Portfolio.
Valuation of the securities held by the Portfolio is discussed in the notes to
the Portfolio's financial statements included in Appendix A of this report.
Distributions to shareholders: Dividends to shareholders are recorded on the
ex-dividend date. Income dividends for the Daily Income Fund, the Short-Term
Government Securities Fund and the Short-Term Bond Fund are declared daily and
paid monthly. Income dividends for the Stock Index Fund are declared and paid
quarterly. Income dividends for the Value Fund are declared and paid
semi-annually. Income dividends for the Small Company Stock Fund are declared
and paid annually. Capital gains dividends, if any, are declared and paid at the
end of each fiscal year.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other: Dividend income is recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Investment transactions are recorded
on the trade date. Realized gains and losses from investment transactions are
reported on the identified cost basis.
The Stock Index Fund records its pro rata share of the Portfolio's income,
expenses, and realized and unrealized gains and losses in addition to the fund's
own expenses which are accrued daily.
3. FEDERAL INCOME TAXES
The Homestead Funds comply with the provisions of Subchapter M of the Internal
Revenue Code that are applicable to regulated investment companies and
distribute all of their taxable income to their shareholders. Therefore, no
provision for federal income or excise tax is required.
At December 31, 1999, the aggregate costs of investments for the Daily Income
Fund, the Short-Term Government Securities Fund, the Short-Term Bond Fund, the
Stock Index Fund, the Value Fund and the Small Company Stock Fund for federal
income tax is the same as for financial reporting purposes.
54
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS
At December 31, 1999, the Stock Index Fund has a capital loss carryforward of
$2,987, which expires on December 31, 2007.
At December 31, 1999, net unrealized appreciation (depreciation) consisted of
the following:
<TABLE>
<CAPTION>
Gross Gross Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation)
------------ ------------ --------------
<S> <C> <C> <C>
Short-Term
Government
Securities Fund $ 4,547 $ 414,398 ($ 409,851)
Short-Term
Bond Fund $ 112,708 $ 2,386,515 ($ 2,273,807)
Stock Index Fund $ 386,243 $ 24,386 $ 361,857
Value Fund $101,627,164 $24,169,453 $ 77,457,711
Small Company
Stock Fund $ 475,667 $ 1,874,222 ($ 1,398,555)
</TABLE>
4. INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term and U.S.
Government securities, for the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Proceeds
Purchases from sales
--------- ----------
<S> <C> <C>
Short-Term
Government
Securities Fund $ 8,930,321 $ 670,734
Short-Term
Bond Fund $99,869,049 $54,981,022
Value Fund $71,710,790 $85,575,203
Small Company
Stock Fund $ 6,042,367 $ 2,100,496
</TABLE>
Purchases and proceeds from sales of long-term U.S. Government securities, for
the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Proceeds
Purchases from sales
--------- ----------
<S> <C> <C>
Short-Term
Government
Securities Fund $11,900,358 $1,752,599
Short-Term
Bond Fund $ 3,250,000 $3,314,746
</TABLE>
5. INVESTMENT MANAGER
The investment management agreements between Homestead Funds, with respect to
each Fund, and RE Advisers Corporation (Manager), an indirect, wholly-owned
subsidiary of National Rural Electric Cooperative Association (NRECA), provide
for an annual investment management fee, computed daily and paid monthly, based
on each Fund's average daily net assets. The annualized management fee rates
are: 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, .40%
of average daily net assets in excess of $400 million; 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.
With respect to the Stock Index Fund, an Administrative Services Agreement with
RE Advisers Corporation has been contracted. Pursuant to this agreement, RE
Advisers Corporation receives a fee of 0.25% of the Fund's average daily net
assets. Under a Third Party Feeder Agreement between the Stock Index Fund, RE
Advisers Corporation and Bankers Trust, Bankers Trust receives a fee of 0.08% of
the Stock Index Fund's average daily net assets.
RE Advisers has agreed, as part of the Expense Limitation Agreements entered
into with Homestead Funds, with respect to each Fund, to waive its management
fee and/or reimburse for all Fund operating expenses, excluding certain
non-recurring expenses, which in any year exceed .80% of the average daily net
assets of the Daily Income Fund, .75% of the average daily net assets of the
Short-Term Government Securities Fund and the Short-Term Bond Fund, .75% of the
average daily net assets of the Stock Index Fund, 1.25% of the average daily net
assets of the Value Fund and 1.50% of the average daily net assets of the Small
Company Stock Fund.
Pursuant to the Expense Limitation Agreements, management fees waived for the
year ended December 31, 1999 amounted to $28,196 for the Daily Income Fund,
$33,139 for the Short-Term Government Securities Fund, $125,597 for the
Short-Term Bond Fund and $51,178 for the Small Company Stock Fund.
At December 31, 1999 certain officers and directors of the Homestead Funds, and
NRECA and its affiliates owned 8% of the Stock Index Fund shares outstanding, 5%
of the Daily Income Fund and Small Company Stock Fund shares outstanding, 1% of
the Value Fund shares outstanding, and less than 1% of the Short-Term Government
Securities Fund and the Short-Term Bond Fund shares outstanding.
55
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS
6. CAPITAL SHARE TRANSACTIONS
As of December 31, 1999, 300 million shares of $.01 par value capital shares are
authorized for the Daily Income Fund, 200 million shares for the Short-Term Bond
Fund and the Value Fund, and 100 million shares for the Short-Term Government
Securities Fund, the Stock Index Fund and the Small Company Stock Fund.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL TOTAL
SHARES IN REINVESTMENT SHARES SHARES NET
SOLD OF DIVIDENDS ISSUED REDEEMED INCREASE
------------ --------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
In Dollars
Daily Income Fund ............... $98,168,759 $2,725,187 $100,893,946 ($95,737,108) $5,156,838
Short-Term Government
Securities Fund ............... $17,447,442 $1,356,069 $18,803,511 ($7,704,728) $11,098,783
Short-Term Bond Fund ............ $71,000,149 $8,483,858 $79,484,007 ($50,454,368) $29,029,639
Stock Index Fund * .............. $8,029,448 $3,936 $8,033,384 ($80,793) $7,952,591
Value Fund ...................... $149,227,975 $33,774,869 $183,002,844 ($177,369,873) $5,632,971
Small Company Stock Fund ........ $6,185,800 $574,045 $6,759,845 ($2,830,052) $3,929,793
In Shares
Daily Income Fund ............... 98,168,759 2,725,187 100,893,946 (95,737,108) 5,156,838
Short-Term Government
Securities Fund ............... 3,456,514 269,455 3,725,969 (1,530,213) 2,195,756
Short-Term Bond Fund ............ 13,754,138 1,649,586 15,403,724 (9,796,530) 5,607,194
Stock Index Fund * .............. 765,672 359 766,031 (7,489) 758,542
Value Fund ...................... 5,410,019 1,405,465 6,815,484 (6,486,098) 329,386
Small Company Stock Fund ........ 671,623 68,995 740,618 (317,218) 423,400
YEAR ENDED DECEMBER 31, 1998
In Dollars
Daily Income Fund ............... $50,754,909 $2,545,721 $53,300,630 ($47,756,876) $5,543,754
Short-Term Government
Securities Fund ................. $13,125,555 $936,286 $14,061,841 ($6,404,569) $7,657,272
Short-Term Bond Fund ............ $63,541,739 $6,831,113 $70,372,852 ($33,523,983) $36,848,869
Value Fund ...................... $136,947,678 $18,005,072 $154,952,750 ($97,514,378) $57,438,372
Small Company Stock Fund ** ..... $8,897,919 $39,024 $8,936,943 ($831,089) $8,105,854
In Shares
Daily Income Fund ............... 50,754,909 2,545,721 53,300,630 (47,756,876) 5,543,754
Short-Term Government
Securities Fund ................. 2,582,187 184,187 2,766,374 (1,259,834) 1,506,540
Short-Term Bond Fund ............ 12,219,972 1,313,728 13,533,700 (6,449,494) 7,084,206
Value Fund ...................... 5,106,585 674,375 5,780,960 (3,686,922) 2,094,038
Small Company Stock Fund ** ..... 941,021 4,410 945,431 (90,774) 854,657
</TABLE>
- ----------------
* For the period beginning October 28, 1999 (commencement of operations) to
December 31, 1999.
** For the period beginning March 4, 1998 (commencement of operations) to
December 31, 1998.
56
<PAGE> 122
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
1.(a). Articles of Incorporation of Homestead Funds, Inc.(1)
1.(b). Articles Supplementary to the Articles of
Incorporation.
2. By-Laws of Homestead Funds, Inc.(1)
3.(a). Specimen Certificate of Stock of the Daily Income Fund.
(3)
3.(b). Specimen Certificate of Stock of the Value Fund.(3)
3.(c). Specimen Certificate of Stock of the Short-Term Bond
Fund.(4)
3.(d). Specimen Certificate of Stock of the Short-Term
Government Securities Fund.(9)
3.(e). Specimen Certificate of Stock of the Small Company
Stock Fund.(13)
4.(a). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Daily Income
Fund,and RE Advisers Corporation.(11)
4.(b). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Value Fund,
and RE Advisers Corporation.(11)
36
<PAGE> 123
4.(c). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Short-Term
Bond Fund, and RE Advisers Corporation.(11)
4.(d). Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Short-Term
Government Securities Fund, and RE Advisers
Corporation.(11)
4.(e) Investment Management Agreement by and between
Homestead Funds, Inc., on behalf of the Small
Company Stock Fund, and RE Advisers
Corporation.(13)
4.(f) Third Party Fund Agreement by and among RE Advisers
Corporation, on behalf of its Stock Index Fund,
BT Investment Funds, RE Investment Corporation and
Bankers Trust Company.
5. Distribution Agreement between Homestead Funds, Inc.
and RE Investment Corporation.(3)
6. Not applicable.
7. Custodian Agreement by and between Homestead Funds,
Inc. and Wilmington Trust Company assigned to PNC
Bank.(9)
8.(a). Transfer Agency Agreement by and between Homestead
Funds, Inc. and Rodney Square Management
Corporation assigned to PFPC, Inc.(9)
8.(b). Joint Services Agreement among National Rural Electric
Cooperative Association, RE Investment
Corporation, and RE Advisers Corporation.(2)
8.(c). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Daily Income Fund,
and RE Advisers Corporation.(11)
8.(d). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Value Fund, and RE
Advisers Corporation.(11)
8.(e). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Short-Term Bond Fund,
and RE Advisers Corporation.(11)
8.(f). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Short-Term Government
Securities Fund, and RE Advisers Corporation.(11)
8.(g). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Small Company Stock
Fund, and RE Advisers Corporation.(13)
8.(h). Expense Limitation Agreement by and between Homestead
Funds, Inc., on behalf of the Stock Index Fund,
and RE Advisers Corporation.
8.(i). Administrative Service Agreement by and between
Homestead Funds, Inc. on behalf of the Stock Index
Fund, and RE Advisers Corporation.
9.(a). Opinion and Consent of Counsel regarding the legality
of the securities being registered.(1)
9.(b). Opinion and Consent of Counsel regarding the legality
of the securities being registered. (4)
10.(a). Consent of Deloitte & Touche LLP, independent auditors.
10.(b). Consent of Jorden Burt Boros Cicchetti Berenson &
Johnson LLP
11. Not applicable.
12.(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)
12.(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)
37
<PAGE> 124
12.(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)
12.(d) Stock Subscription Agreement by and between RE
Advisers Corporation and Homestead Funds, Inc. on
behalf of the Small Company Stock Fund.(13)
13. Not applicable.
14. Not applicable.
15. Not applicable.
16.(a). Power of Attorney.(1)
16.(b). Power of Attorney.(2)
16.(c). Power of Attorney.(12)
16.(d). Power of Attorney
(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-1A, 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.
38
<PAGE> 125
(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.
(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 24. 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 October 28, 1999 relating to "control persons" is
incorporated herein by reference.
ITEM 25. INDEMNIFICATION
Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Form N-1A registration statement filed on October
1, 1990.
ITEM 26. 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.
39
<PAGE> 126
Below is 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 27. 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>
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 28. 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
40
<PAGE> 127
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, 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 29. MANAGEMENT SERVICES.
RE Advisers, pursuant to the Investment Management Agreements, performs
certain administrative services for the Homestead Funds.
ITEM 30. UNDERTAKINGS.
Not applicable.
41
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this registration statement under Rule 485(b)
under the Securities Act of 1933 and has duly caused this registration statement
to be signed on its behalf by the undersigned, duly authorized, in the City of
Arlington, and State of Virginia on the 1st day of May 2000.
Homestead Funds, Inc.
---------------------------------
(Registrant)
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>
Anthony C. Williams* President May 1, 2000
- ---------------------------
Anthony C. Williams
Francis P. Lucier* Director May 1, 2000
- ---------------------------
Francis P. Lucier
Anthony M. Marinello* Vice President and Director May 1, 2000
- ---------------------------
Anthony M. Marinello
Peter R. Morris* Secretary, Treasurer and Director May 1, 2000
- ---------------------------
Peter R. Morris
James F. Perna* Director May 1, 2000
- ---------------------------
James F. Perna
*By:/s/William P. McKeithan
- ---------------------------
William P. McKeithan, Esq.
(Attorney-in-Fact)
</TABLE>
42
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Equity 500 Index Portfolio has duly caused
this registration statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Baltimore, and State of Maryland, on the 1st day of
May, 2000.
EQUITY 500 INDEX PORTFOLIO
By:
--------------------------
Daniel O. Hirsch
Secretary
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.
SIGNATURE TITLE DATE
/s/ John A. Keffer* President and Chief May 1, 2000
- ------------------- Executive Officer
John A. Keffer
/s/ Charles A. Rizzo* Treasurer May 1, 2000
- ---------------------
Charles A. Rizzo
/s/ Charles P. Biggar* Trustee May 1, 2000
- ----------------------
Charles P. Biggar
/s/ S. Leland Dill* Trustee May 1, 2000
- -------------------
S. Leland Dill*
/s/ Philip Saunders, Jr.* Trustee May 1, 2000
- --------------------------
Philip Saunders, Jr.
/s/ Martin J. Gruber* Trustee May 1, 2000
- ---------------------
Martin J. Gruber
/s/ Richard T. Hale* Trustee May 1, 2000
- --------------------
Richard T. Hale
/s/ Richard J. Herring* Trustee May 1, 2000
- -----------------------
Richard J. Herring
/s/ Bruce E. Langton* Trustee May 1, 2000
- ---------------------
Bruce E. Langton
/s/ Harry Van Benschoten* Trustee May 1, 2000
- -------------------------
Harry Van Benschoten
By:
-----------------------
Daniel O. Hirsch
Secretary and Attorney-in-Fact
*By power of attorney
<PAGE> 1
Exhibit 10(a)
INDEPENDENT AUDITORS' CONSENT
Homestead Funds, Inc.:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 18 to Registration Statement No. 33-35788 our report dated February 11,
2000 appearing in the Homestead Funds, Inc. Annual Report to Shareholders for
the year ended December 31, 1999 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
May 1, 2000