Activa
[Activa logo]
Prospectus
APRIL 29, 2000
ACTIVA MONEY MARKET FUND
Sub-Adviser: JP Morgan Investment
Management Inc.
ACTIVA INTERMEDIATE BOND FUND
Sub-Adviser: Van Kampen Management Inc.
ACTIVA VALUE FUND
Sub-Adviser: Wellington Management Co. LLP
ACTIVA GROWTH FUND
Sub-Adviser: State Street Research &
Management Company
ACTIVA INTERNATIONAL FUND
Sub-Adviser: Nicholas-Applegate Capital
Management
A selection of stock, bond, and money market funds, managed by professional
advisers, which are designed to help investors meet their financial goals.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the accuracy of this
Prospectus. Any representation to the contrary is a criminal offense.
[ACTIVA Mutual Funds - LOGO]
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ACTIVA Mutual Funds Prospectus
Contents
Page
FACTS AT A GLANCE 1
ACTIVA MONEY MARKET FUND 2
ACTIVA INTERMEDIATE BOND FUND 3
ACTIVA VALUE FUND 4
ACTIVA GROWTH FUND 6
ACTIVA INTERNATIONAL FUND 6
EXPENSES 7
ORGANIZATION AND MANAGEMENT
Organization of the Funds 8
Investment Management 8
The Sub-Advisers 8
Fundamental Investment Policies 9
Pricing of Fund Shares 9
Purchase of Fund Shares 9
How Shares are Redeemed 9
Exchange Privilege 11
Additional Account Policies 11
Page
Internet Address 11
Retirement Plans 11
Dividend & Capital Gain
Distributions to Shareholders 11
Tax Consequences 11
Distribution Plan 12
Shareholder Inquiries 12
SUB-ADVISERS HISTORICAL PERFORMANCE 13
RISK FACTORS AND SPECIAL CONSIDERATION
General Investment Risks 14
International Investment Risks
and Considerations 14
General Fixed Income
Securities Risks 15
Other Risks 15
FINANCIAL HIGHLIGHTS 18
[ACTIVA Mutual Funds - LOGO]
Activa Mutual Funds
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288 (800) 346-2670
<PAGE>
FACTS AT A GLANCE
Investment Objective
Each of the five Activa mutual funds (the "Funds") seeks as high a level of
return over time as is consistent with its particular investment strategy and
level of potential risk. There is no assurance the funds will achieve their
objective.
Strategies and Risks/Reward
ACTIVA MONEY MARKET FUND. A money market fund which seeks as high a level of
current income as is consistent with the preservation of capital and liquidity.
The Fund invests in high quality money market securities. Risk/Reward. Lowest
potential risk and reward.
ACTIVA INTERMEDIATE BOND FUND. A bond fund which seeks as high a level of income
as is consistent with moderate risk of capital and maintenance of liquidity. The
Fund invests primarily in marketable debt securities. Risk/Reward. Potential for
moderate to high income with commensurate share price fluctuation.
ACTIVA VALUE FUND. A stock fund which seeks long-term growth of capital. The
Fund invests primarily in stocks believed by the Fund to be undervalued by the
marketplace with above-average potential for capital appreciation. Risk/Reward.
Lower risk than a fund investing in growth stocks, but greater risk than a bond
fund.
ACTIVA GROWTH FUND. A stock fund which seeks long-term growth of capital
appreciation. The Fund invests primarily in stocks believed by the Fund to have
long-term growth potential. Risk/Reward. Lower risk than an international fund,
but greater than a value fund.
ACTIVA INTERNATIONAL FUND. A stock fund which seeks maximum long-term capital
appreciation. The Fund invests primarily in common stocks of non-U.S. companies
which the Fund believes to have long-term growth potential. Risk/Reward. The
Fund's share price will fluctuate with changes in market, economic, and foreign
currency exchange conditions. High potential risk and reward.
Investment Management
Activa Asset Management, LLC is responsible for the overall administration and
management of each fund. Day-to-day decisions with respect to the purchase and
sale of securities are made by each Fund's Sub-Adviser. The Sub-Advisers have
been selected by Activa Asset Management, Inc. and the Board of Trustees of each
Fund.
LOWER RISK/ HIGHER RISK/
LOWER REWARD HIGHER REWARD
THE ACTIVA MONEY MARKET FUND
THE ACTIVA INTERMEDIATE BOND FUND
THE ACTIVA VALUE FUND
THE ACTIVA GROWTH FUND
THE ACTIVA INTERNATIONAL FUND
ACTIVA Mutual Funds Prospectus 1
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ACTIVA Money Market Fund
Investment Objective
The Fund seeks as high a level of current income as is consistent with the
preservation of capital and liquidity.
Principal Investment Strategy
The Fund invests in a broad spectrum of high-quality U.S. dollar-denominated
money market securities. The Fund's investments may include obligations issued
by the U.S. Treasury, government agencies, domestic and foreign banks and
corporations, foreign governments, repurchase agreements, as well as
asset-backed securities, taxable municipal obligations, and other money market
instruments. The average weighted maturity of the securities held by the fund
will not exceed 90 days.
The Fund's Sub-Adviser, J.P. Morgan Investment Management Inc., analyzes a range
of factors, including current yields, economic forecasts, and anticipated fiscal
and monetary policies, in order to establish the desired dollar weighted average
maturity for the Fund. Investments are made across different sectors for
diversification and to take advantage of yield spreads.
The Fund is newly organized and has not completed its first year of operations.
Accordingly, information as to historical investment performance is not included
in this prospectus.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. For example,
the issuer or guarantor of a portfolio security could default on its obligation.
Or an unexpected rise in interest rates could lead to a loss in share price. To
the extent that the fund invests in foreign securities, the Fund could lose
money because of foreign government actions, political instability, or lack of
adequate and accurate information. For additional information regarding risk
factors, please see "Risk and Special Considerations" starting on page 14.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
2 ACTIVA Mutual Funds Prospectus
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ACTIVA Intermediate Bond Fund
Investment Objective
The Fund seeks as high a level of current income as is consistent with moderate
risk of capital and maintenance of liquidity.
Principal Investment Strategy
The Fund invests primarily in investment-grade debt securities, including U.S.
Government and agency securities, corporate bonds, asset-backed and
mortgage-backed securities, that it believes have the potential to provide a
high total return over time. The average maturity of securities held by the Fund
is expected to be three to ten years. Investment-grade debt securities include
bonds rated BBB or higher by Standard and Poor's or Baa or higher by Moody's.
The Fund's Sub-Adviser, Van Kampen Management Inc., analyzes of a range of
factors, including current yields, economic forecasts, and anticipated fiscal
and monetary policies, in order to establish the desired average maturity for
the Fund. Investments are made across different sectors for diversification and
to take advantage of yield spreads.
The Fund is newly organized and has not completed its first year of operations.
Accordingly, information as to historical investment performance is not
including in this prospectus.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. The principal
risks are credit risk (the risk that the issuer of a portfolio security could
default on its obligation), market risk (the risk that an unexpected rise in
interest rates could lead to a loss in share price) and prepayment risk (the
risk that an issuer may prepay a fixed income security before maturity). For
additional information regarding risk factors, please see "Risk and Special
Considerations" starting on page 14.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Therefore, it is possible to lose money by investing in the Fund.
ACTIVA Mutual Funds Prospectus 3
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ACTIVA Value Fund
Investment Objective
The Fund seeks maximum long-term capital appreciation. Dividend income, while a
factor in portfolio selection, is secondary to the Fund's principal objective.
Principal Investment Strategy
The Fund invests primarily in common stocks of large and medium-size U.S.
companies which the Fund's Sub-Adviser believes are undervalued by the
marketplace with above-average potential for capital appreciation.
The Fund's Sub-Adviser, Wellington Management Company, LLP, implements the
construction of the Fund's portfolio based upon the analysis and input of the
firm's industry analysts. These analysts often spend their entire careers
covering a single industry. Their in-depth knowledge and broad perspective makes
them well positioned to recognize change early, enabling them to identify
companies which appear to have potential for long-term growth, but which are
trading at low valuations relative to intrinsic worth and/or historical market
levels. Such stocks are typically called "value stocks". Diversification is
achieved by investing in a number of different industries and companies.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. The value of
the Fund's investments will vary from day to day in response to the activities
of individual companies and general market and economic conditions. While
investments are selected which the Sub-Adviser believes have potential for
appreciation, their value could decline. It is therefore possible to lose money
by investing in the Fund. For further information about risk factors, please see
"Risk Factors and Special Considerations" starting on page 14.
Past Performance
The two tables below show the Fund's annual returns and its long-term
performance. The first table provides indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year. The
second compares the Fund's performance over time to that of the Standard and
Poor's 500 Stock Index ("S&P 500") and the Russell 1000 Value Index ("Value
Index").
As with all mutual funds, past performance is not a prediction of future
results.
4 ACTIVA Mutual Funds Prospectus
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ACTIVA Value Fund continued
Year-by-Year Performance
Annual Total Return
of the Activa Value Fund
[chart info]
1990 1.01%
1991 41.81%
1992 1.77%
1993 10.85%
1994 (5.87)%
1995 30.55%
1996 23.18%
1997 22.47%
1998 10.17%
1999 (6.70)%
During the periods shown in the chart, the Fund's highest return for a quarter
was 20.53% (quarter ending March 31, 1991), and the Fund's lowest return for a
quarter was -14.60% (quarter ending September 30, 1999).
* Wellington Management Company, LLP, has been the Fund's Sub-Adviser since
December 30, 1999.
<TABLE>
<CAPTION>
Average Annual Total Return for the
Periods Ended December 31, 1999*
---------------------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
ACTIVA VALUE FUND -6.70% 15.15% 11.90%
RUSSELL 1000 VALUE* 7.35% 23.07% 15.60%
S&P 500* 21.04% 28.54% 18.20%
</TABLE>
* The S&P 500 Index represents an unmanaged index generally representative of
the U.S. stock market. The Value Index represents a composite of value stocks
representative of the Fund's investment objectives and strategies, which is
compiled independently by the Frank Russell Companies. Neither index is impacted
by Fund operating expenses.
ACTIVA Mutual Funds Prospectus 5
<PAGE>
ACTIVA Growth Fund
Investment Objective
The Fund seeks long-term growth of capital.
Principal Investment Strategy
The Fund invests primarily in stocks believed by the investment manager to have
long-term growth potential. In selecting stocks, the Fund's Sub-Adviser, State
Street Research & Management Company, seeks to identify large capitalization
stocks with sustainable above average earnings growth, competitive advantages
and leadership positions. Generally, the Fund invests in a diversified portfolio
of stocks, consistent with the Sub-Adviser's general outlook and fundamental
research on particular companies. Diversification is achieved by investing in a
number of different industries and companies. Additionally, the Fund attempts to
manage risk by employing fundamental and quantitative analysis.
The Fund is newly organized and has not completed its first year of operations.
Accordingly, information as to historical investment performance is not included
in this prospectus.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. The value of
the Fund's investments will vary from day to day in response to the activities
of individual companies and general market and economic conditions. While
investments are selected which the Sub-Adviser believes have growth potential,
their value could decline. Therefore, it is possible to lose money by investing
in the Fund. For further information about risk factors, please see "Risk
Factors and Special Considerations" starting on page 14.
ACTIVA International Fund
Investment Objective
The Fund seeks maximum capital appreciation.
Principal Investment Strategy
The Fund invests primarily in common stocks of large and medium-sized non-U.S.
companies which the Fund believes have the potential for long-term growth.
The Fund's Sub-Adviser, Nicholas-Applegate Capital Management, analyzes the
financial conditions and competitiveness of individual companies worldwide. The
Sub-Adviser uses a blend of fundamental and computer-assisted research to
uncover signs of positive business developments which are not fully reflected in
a company's stock price. Diversification is achieved by investing in a number of
different countries, industries, and companies.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. The value of
the Fund's investments will vary from day to day in response to the activities
of individual companies and general market and economic conditions. Investments
in international stocks are subject to certain additional risks, including
changing currency values, different political and regulatory environments, and
other market and economic factors in the countries where the Fund invests. While
investments are selected which the Sub-Adviser believes have long-term growth
potential, their value could decline. Therefore, it is possible to lose money by
investing in the Fund. For further information about risk factors, please see
"Risk Factors and Special Considerations" starting on page 14.
6 ACTIVA Mutual Funds Prospectus
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EXPENSES
This Table describes the fees and expenses that you may pay if you buy and hold
shares of each of the Funds.
SHAREHOLDER TRANSACTION EXPENSES (FEES PAID
DIRECTLY FROM YOUR INVESTMENT) FOR EACH FUND.
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES NONE
MAXIMUM DEFERRED SALES CHARGE NONE
MAXIMUM SALES CHARGE IMPOSED ON REINVESTED DIVIDENDS NONE
EXCHANGE FEE NONE
ANNUAL FUND OPERATING EXPENSES PAID BY THE FUND
<TABLE>
<CAPTION>
MONEY MARKET BOND VALUE GROWTH INTERNATIONAL
<S> <C> <C> <C> <C> <C>
MANAGEMENT FEES .39% .34% .50% .69% .83%
DISTRIBUTION & SERVICE
(12b-1) FEES -0-% .15% .15% .15% .15%
OTHER EXPENSES .26% .23% .35% .44% .43%
-----------------------------------------------------------------------------------------------------------------------------------
.65% .72% 1.00% 1.28% 1.41%
</TABLE>
Total Fund Operating Expenses for all Funds, other than the Value Fund, are
based upon estimated total annualized expenses to be incurred by each of the
Funds for the year ended December 31, 2000. The Value Fund Operating Expenses
are based upon total expenses incurred by the Fund for Class A for the year
ended December 31, 1999. Adjustments have been made to reflect the Trust's 12b-1
distribution plan which allows a maximum annual rate of 0.25 of 1% of the
average daily net assets of each Fund. The maximum amount presently authorized
by the Trustees is 0.15 of 1% for each Fund except the Money Market Fund. Also,
the advisory fee has been adjusted to reflect the new fee approved by the
Trustees and shareholders effective September 1, 1999.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
MONEY MARKET FUND $ 65.40 $204.86 $356.76 $ 798.38
BOND FUND 73.54 230.20 400.56 894.49
VALUE FUND 102.00 318.40 552.46 1224.62
GROWTH FUND 130.38 402.70 699.07 1542.02
INTERNATIONAL FUND 143.53 446.24 771.07 1690.84
</TABLE>
The example does not reflect sales charges (loads) on reinvested dividends (and
other distributions). If these sales charges (loads) were included, your costs
would be higher.
ACTIVA Mutual Funds Prospectus 7
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ORGANIZATION AND MANAGEMENT
Organization of the Funds
Each Fund is a series of Activa Mutual Fund Trust, a Delaware business trust.
The Funds are governed by a Board of Trustees, which meets regularly to review
the Funds' investments, performance, expenses, and other business affairs. The
policy of each Fund is that a majority of Board members will be independent of
the Fund's Investment Adviser and Sub-Advisers.
Investment Management
Activa Asset Management LLC ("Activa") serves as the Investment Adviser of each
Fund. Activa's offices are located at 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Subject to the direction of the Board of Trustees, Activa
provides overall investment strategy for each Fund and furnishes all office
space, facilities, equipment and personnel which is necessary for servicing the
investments of the Funds.
Activa, together with the Board of Trustees, is responsible for selecting one or
more Sub-Advisers for each Fund. The Sub-Advisers furnish investment advice and
manage on a regular basis the investment portfolio of each Fund. The
Sub-Advisers make investment decisions on behalf of the Funds and place all
orders for the purchase or sale of portfolio securities. The Sub-Advisers are
employed by Activa and Activa, not the Funds, is responsible for paying their
fees.
Activa monitors and evaluates the investment performance of each Sub-Adviser. If
Activa believes it is in a Fund's best interests, Activa may recommend that the
Fund change Sub-Advisers or retain additional Sub-Advisers. Any such action must
be approved by the Fund's Trustees, including a majority of the Fund's
Independent Trustees. Such action would not require approval of the Fund's
shareholders. However, if a Fund hires new or additional Sub-Advisers,
information about the new Sub-Adviser will be provided to the Fund's
shareholders within 90 days. Additional information about the selection of
Sub-Advisers is contained in the Statement of Additional Information.
Activa has ultimate responsibility for the investment performance of the Funds
due to its responsibility, subject to oversight by the Board of Trustees, to
oversee the Sub-Advisers and recommend their hiring, termination, and
replacement.
The Sub-Advisers
The Sub-Adviser of Activa Money Market Fund is J.P. Morgan Investment Management
Inc., New York, New York. The Sub-Adviser is a subsidiary of J.P. Morgan & Co.,
Incorporated ("J.P. Morgan"). J.P. Morgan, through the Sub-Adviser and other
subsidiaries, currently manages approximately $349 billion for individual and
institutional investors. A team of portfolio managers and traders of the
Sub-Adviser are responsible for the day-to-day management of Activa Money Market
Fund.
The Sub-Adviser of Activa Intermediate Bond Fund is Van Kampen Management Inc.,
a wholly-owned subsidiary of Van Kampen Investments Inc. of Oakbrook Terrace,
Illinois. Together with its affiliates, Van Kampen Management Inc. currently
manages and/or supervises over $75 billion for institutional and individual
investors. A team of officers of the Sub-Adviser is responsible for the
day-to-day management of Activa Intermediate Bond Fund.
The Sub-Adviser of Activa Value Fund is Wellington Management Company, LLP,
Boston, Massachusetts. Wellington Management currently manages over $230 billion
for institutional and individual investors. Doris Dwyer Chu, Vice President, is
primarily responsible for the day-to-day management of Activa Value Fund. Ms.
Chu joined Wellington Management in 1998. She was previously a partner and
portfolio manager with Grantham, Mayo, Van Otterloo & Company (1985-1998).
The Sub-Adviser of Activa Growth Fund is State Street Research & Management
Company, Boston, Massachusetts. State Street Research currently manages over $50
billion for individual and institutional investors. The Large Cap Growth
8 ACTIVA Mutual Funds Prospectus
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ORGANIZATION AND MANAGEMENT continued
Team of State Street Research is responsible for the day-to-day management of
Activa Growth Fund.
The Sub-Adviser of Activa International Fund is Nicholas-Applegate Capital
Management, San Diego, California. Nicholas-Applegate currently manages over $30
billion for individual and institutional investors. The International/Global
management team of Nicholas-Applegate is responsible for the day-to-day
management of Activa International Fund.
Fundamental Investment Policies
The fundamental investment policies contained in each Fund's Statement of
Additional Information and the investment objective of each Fund may not be
changed without a shareholder vote. The Board of Trustees of each Fund may
change any other policies or investment strategies.
Pricing of Fund Shares
The net asset value of each Fund's shares is determined by dividing the total
current value of the assets of the Fund, less its liabilities, by the number of
shares outstanding at that time. This determination is made at the close of
business of the New York Stock Exchange, usually 4:00 P.M. Eastern time, on each
business day on which that Exchange is open. Shares will not be priced on
national holidays or other days on which the New York Stock Exchange is closed
for trading.
Each Fund's investments are generally valued at current market value. If market
quotations are not readily available, the Fund's investments will be valued at
fair value as determined by the Fund's Board of Trustees.
Purchase Of Shares
In order to purchase shares for a new account, the completion of an application
form is required. The minimum initial investment for each Fund is $500 or more.
Additional investments of $50 or more can be made at any time by using the lower
portion of your account statement. Checks should be made payable to "Activa
Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 48546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share next calculated
after the Fund receives your investment and application in proper form.
How Shares Are Redeemed
Each Fund will redeem your shares at the net asset value next determined after
your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL: When redeeming by mail, when no certificates have been issued, send a
written request for redemption to Activa Asset Management LLC, 2905 Lucerne
S.E., Suite 200, Grand Rapids, Michigan 49546. The request must state the dollar
amount or shares to be redeemed, including your account number and the signature
of each account owner, signed exactly as your name appears on the records of the
Fund. If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, limited liability companies, retirement
plans, individual retirement accounts and profit sharing plans.
BY PHONE: At the time of your investment in the Fund, or subsequently, you may
elect on the Fund's application to authorize the telephone or telegram exchange
or redemption
ACTIVA Mutual Funds Prospectus 9
<PAGE>
ORGANIZATION AND MANAGEMENT continued
option. You may redeem shares under this option by calling the Fund at the
number indicated on the front of this Prospectus on any business day. Requests
received after 4:00 p.m. when the market has closed will receive the next day's
price. By establishing the telephone or telegram exchange or redemption option,
you authorize the Transfer Agent to honor any telephone or telegram exchange or
redemption request from any person representing themselves to be the investor.
Procedures required by the Fund to ensure that a shareholder's requested
telephone or telegram transaction is genuine include identification by the
shareholder of the account by number, recording of the requested transaction and
sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges or redemptions unless the Fund fails to follow these procedures.
Shares must be owned for 10 business days before redeeming by the telephone and
telegram exchange and cannot be in certificate form unless the certificate is
tendered with the request for redemption. Certificated shares cannot be redeemed
by the telephone and telegram exchange. All redemption proceeds will be
forwarded to the address of record or bank designated on the account
application.
The Transfer Agent and the Fund have reserved the right to change, modify, or
terminate the telephone or telegram exchange or redemption option at any time.
Before this option is effective for a corporation, partnership, or other
organizations, additional documents may be required. This option is not
available for Profit-Sharing Trust and Individual Retirement Accounts. The Fund
and the Transfer Agent disclaim responsibility for verifying the authenticity of
telephone and telegram exchange or redemption requests which are made in
accordance with the procedures approved by shareholders.
SPECIAL CIRCUMSTANCES: In some circumstances a signature guarantee may be
required before shares are redeemed. These circumstances include a change in the
address for an account within the last 30 days, a request to send the proceeds
to a different payee or address from that listed for the account, or a
redemption request for $100,000 or more. A signature guarantee may be obtained
from a bank, broker, or other acceptable financial institution. If a signature
guarantee is required, we suggest that you call us to ensure that the signature
guarantee and redemption request will be processed correctly.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
10 ACTIVA Mutual Funds Prospectus
<PAGE>
ORGANIZATION AND MANAGEMENT continued
Exchange Privilege
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The Exchange Privilege may be exercised by sending written instruction to the
Transfer Agent. See "How Shares Are Redeemed" for applicable signatures and
signature guarantee requirements. Shareholders may authorize telephone or
telegram exchanges or redemptions by making an election on your application.
Procedures required by the Fund to ensure that a shareholder's requested
telephone or telegram transaction is genuine include identification by the
shareholder of the account by number, recording of the requested transaction and
sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges unless the Fund fails to follow these procedures. Shares must be owned
for 10 business days before exchanging and cannot be in certificate form unless
the certificate is tendered with the request for exchange. Exchanges will be
accepted only if the accounts are of the same type and the registration of the
two accounts is identical. Exchange redemptions and purchases are effected on
the basis of the net asset value next determined after receipt of the request in
proper order by the Fund. In the case of exchanges into the Money Market Fund,
dividends generally commence on the following business day. For federal and
state income tax purposes, an exchange is treated as a sale and may result in a
capital gain or loss.
Additional Account Policies
If the value of your Fund account falls below $100, the Fund may mail you a
notice asking you to bring the account back to $100 or close it out. If you do
not take action within 60 days, the Fund may sell your shares and mail the
proceeds to you at the address of record. The Fund does not permit market-timing
or other abusive trading practices. Excessive, short-term (market-timing) and
other abusive trading practices may disrupt portfolio trading strategies and
harm Fund performance. To minimize harm to the Fund and its shareholders, each
Fund reserves the right to reject any purchase order (including exchanges) from
any investor we believe has a history of abusive trading.
Internet Address
Activa's Web site is located at ACTIVAFUNDS.COM. Our Web site offers further
information about the Activa Funds.
Retirement Plans
The Fund sponsors a prototype Profit-Sharing Trust and Individual Retirement
Accounts. Persons interested in additional information regarding these plans
should contact the Fund.
Dividend and Capital Gain Distributions to Shareholders
Each Fund distributes substantially all of its net investment income and capital
gains to shareholders each year.
All distributions may be received in cash or reinvested in additional shares of
the Fund at their net asset value at the time of distribution. This election can
be changed at any time by requesting a change in writing, signed by all account
owners.
Tax Consequences
The Fund will make distributions of ordinary income and capital gains that will
be taxable to shareholders, and subsequently, relieve the Fund of all federal
income taxes. Distributions may be taxable at different rates depending on the
length of time the Fund holds its assets. Distributions, whether in cash or
reinvested in additional shares of the Fund, may be subject to federal income
tax. Shareholders will receive a statement (Form 1099-DIV) annually informing
them of the amount of the income and capital gains which have been distributed
by the Fund during the calendar year.
ACTIVA Mutual Funds Prospectus 11
<PAGE>
ORGANIZATION AND MANAGEMENT continued
Shareholders may realize a capital gain or loss when shares are redeemed or
exchanged. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your tax adviser about the tax consequences of an
investment in the Fund.
Distribution Plan
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, the Adviser provides shareholder services
and services in connection with the sale and distribution of the Fund's shares
and is compensated at a maximum annual rate of 0.25 of 1% of the average daily
net assets of the Fund. The maximum amount presently authorized by the Fund's
Board of Trustees is 0.15 of 1% of the average daily net assets of each Fund
except the Money Market Fund. Since these fees are paid from Fund assets, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
Amounts received by the Adviser pursuant to the Distribution Plan may be
retained by the Adviser as compensation for its services, or paid to other
investment professionals who provide services in connection with the
distribution of Fund shares. The Trustees will review the services provided and
compensation paid pursuant to the Distribution Plan no less often than
quarterly.
Shareholder Inquiries
Shareholder inquiries regarding each Fund should be directed to the Fund by
writing or telephoning the Fund at the address or telephone number indicated on
the back cover of the Prospectus.
12 ACTIVA Mutual Funds Prospectus
<PAGE>
SUB-ADVISERS HISTORICAL PERFORMANCE
The following tables set forth historical performance information for the
Sub-Adviser for each Fund. The performance information for each Sub-Adviser,
other than the Sub-Adviser of Activa Money Market Fund, is based upon the
performance of a composite of accounts managed by each of the Sub-Advisers which
have substantially equivalent investment objectives, policies, strategies and
restrictions as each of the respective Funds. The performance information for
the Sub-Adviser of Activa Money Market Fund represents the performance of a
money market fund managed by the Sub-Adviser which has substantially equivalent
investment objectives, policies, strategies and restrictions as the Activa Money
Market Fund. All performance information has been adjusted to reflect the
expenses which are expected to be borne by the investors in each of the Activa
Funds.
All information set forth in the tables relies on data supplied by each
respective Sub-Adviser, or from statistical services, reports or other sources
believed by each Sub-Adviser to be reliable. However, such information has not
been verified and is unaudited. The historical performance information is that
of the Sub-Advisers, not the Activa Funds, and the performance of the Funds may
differ materially from the results shown below.
<TABLE>
<CAPTION>
Average Annual Returns for the
Periods Ended December 31, 1999*
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
<S> <C> <C> <C>
JP Morgan Investment Management Inc. 4.59% 4.75% 5.21%
IBC First Tier Money Fund Average** 4.48% 4.94% N/A
Van Kampen Management Inc. -1.26% 7.30% 7.33%
Lehman Brother Aggregate Bond Index** -0.82% 7.73% 7.68%
Wellington Management Company, LLP 12.13% N/A*** N/A
Russell 1000 Value** 7.35% 23.07% 15.60%
S&P 500** 21.04% 28.60% 18.20%
State Street Research & Management Co. 20.12% 28.07% 17.08%
S&P 500** 21.04% 28.60% 18.20%
Nicholas-Applegate Capital Management 67.89% 27.51% N/A
MSCI EAFE** 27.22% 12.98% 7.08%
</TABLE>
* All Sub-Adviser performance information has been adjusted to reflect the
expenses which are expected to be borne by the investors in each of the
Activa Funds.
** IBC's first tier money fund average is an average of all major first tier
money fund returns. The Lehman Brothers Aggregate Bond Index represents an
unmanaged total return Index and includes U.S. Treasury and agency
obligations, U.S. dollar denominated foreign obligations and U.S.
investment grade corporate debt. The S&P 500 Index represents an unmanaged
index generally representative of the U.S. stock market. The Value Index
represents a composite of value stocks representative of the Fund's
investment objectives and strategies which is compiled independently by the
Frank Russell Companies. The MSCI EAFE (Morgan Stanley Capital
International Europe, Australia and Far East Index) represents an unmanaged
index of over 1000 foreign common stock prices. Indices are not impacted by
Fund operating expenses.
*** Since inception on July 31, 1995, the average annual return for Wellington
Management Company, LLP, for the past 4 years has been 20.77% vs. 27.50 for
the S&P 500, and 18.83% for the Russell 1000 Value Index.
ACTIVA Mutual Funds Prospectus 13
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
General Investment Risks
Information about the principal investment strategies and related risks for each
of the Funds is set forth in this Prospectus. Additional information about each
Fund's investment strategies and risks is contained in the Statement of
Additional Information which may be obtained by writing or telephoning the Fund.
STOCK MARKET RISKS. The value of equity securities in the Fund's portfolio will
go up and down. These fluctuations could be a sustained trend or a drastic
movement. The Fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
Fund's share price may decline and you could lose money.
International Investment Risks and Considerations
FOREIGN SECURITIES. All of the Funds, except the Intermediate Bond Fund, may
invest in foreign securities as a non-principal strategy. The International Fund
invests in foreign securities as a principal strategy.
CURRENCY FLUCTUATIONS. When a Fund invests in instruments issued by foreign
companies, the principal, income and sales proceeds may be paid to the Fund in
local foreign currencies. A reduction in the value of local currencies relative
to the U.S. dollar could mean a corresponding reduction in the value of a Fund's
investments. Also, a Fund may incur costs when converting from one currency to
another.
SOCIAL, POLITICAL AND ECONOMIC FACTORS. The economies of many of the countries
where the Funds may invest may be subject to a substantially greater degree of
social, political and economic instability than the United States. This
instability might impair the financial conditions of issuers or disrupt the
financial markets in which the Funds invest.
The economies of foreign countries may differ significantly from the economy of
the United States as to, for example, the rate of growth of gross domestic
product or rate of inflation. Governments of many foreign countries continue to
exercise substantial control over private enterprise and own or control over
private enterprise and own or control many companies. Government actions could
have a significant impact on economic conditions in certain countries which
could affect the value of the securities in the Fund.
INFLATION. Certain foreign countries, especially many emerging countries, have
experienced substantial, and in some periods extremely high and volatile, rates
of inflation. Rapid fluctuations in inflation rates and wage and price controls
may continue to have unpredictable effects on the economies, companies and
securities markets of these countries.
DIFFERENCES IN SECURITIES MARKETS. The securities markets in foreign countries
have substantially less trading volume than the markets in the United States and
debt and equity securities of many companies listed on such markets may be less
liquid and more volatile than comparable securities in the United States. Some
of the stock exchanges in foreign countries, to the extent that established
markets exists, are in the earlier stages of their development. The limited
liquidity of certain securities markets may affect the ability of each Fund to
buy and sell securities at the desired price and time.
Trading practices in certain foreign countries are also significantly different
from those in the United States. Although brokerage commissions are generally
higher than those in the U.S., the Sub-Advisers will seek to achieve the most
favorable net results. In addition, securities settlements and clearance
procedures may be less developed and less reliable than those in the United
States. Delays in settlement could result in temporary periods in which the
assets of the Funds are not fully invested, or could result in a Fund being
unable to sell a security in a falling market.
14 ACTIVA Mutual Funds Prospectus
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS continued
CUSTODIAL AND REGISTRATION PROCEDURES. Systems for the registration and transfer
of securities in foreign markets can be less developed than similar systems in
the United States. There may be no standardized process for registration of
securities or a central registration system to track share ownership. The
process for transferring shares may be cumbersome, costly, time-consuming and
uncertain.
GOVERNMENT SUPERVISION OF SECURITIES MARKETS. Disclosure and regulatory
standards in many foreign countries are, in many respects, less stringent than
those in the United States. There may be less government supervision and
regulation of securities exchanges, listed companies, investors, and brokers in
foreign countries than in the United States, and enforcement of existing
regulations may be extremely limited.
FINANCIAL INFORMATION AND REPORTING STANDARDS. Issuers in foreign countries are
general subject to accounting, auditing, and financial standards and
requirements that differ, in some cases materially, from those in the United
States. In particular, the assets and profits appearing in financial statements
may not reflect their financial position or results in the way they would be
reflected had the statements been prepared in accordance with U.S. generally
accepted accounting principles. Consequently, financial data may not reflect the
true condition of those issuers and securities markets.
General Fixed Income Securities Risks
All of the Funds may invest in debt securities as a non-principal strategy. The
Money Market and Intermediate Bond Funds invest in debt securities as a
principal strategy. Fixed income securities are subject to the following risks:
MARKET RISK. Prices of fixed income securities rise and fall in response to
interest rate changes for similar securities. Generally, when interest rates
rise, prices of fixed income securities fall. Interest rate changes have a
greater affect on fixed income securities with longer maturity.
CREDIT RISK. Credit risk is the possibility that an issuer will default (the
issuer fails to repay interest and principal when due). If an issuer defaults,
the Fund will lose money.
Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Services. Fixed income securities receive
different credit ratings depending on the rating company's assessment of the
likelihood of default by the issuer. The lower the rating of the fixed income
security, the greater the credit risk.
CALL RISK. Call risk is the possibility that an issuer may prepay or call a
fixed income security before maturity. If a fixed income security is called, the
Fund may have to reinvest the proceeds in other fixed income securities with
lower interest rates or other less favorable characteristics.
LIQUIDITY RISKS. Fixed income securities that have not been rated or that are
not widely held may trade less frequently than other securities. This may
increase the price volatility of these securities.
FOREIGN RISKS. Foreign debt securities pose additional risks because foreign
economic or political conditions may be less favorable than those of the United
States. Foreign financial markets may also have fewer investor protections. Debt
securities in foreign markets may also be subject to taxation policies that
reduce returns for U.S. investors. Due to these risk factors, foreign debt
securities may be more volatile and less liquid than similar securities traded
in the U.S.
Other Risks
REPURCHASE AGREEMENTS AND RISKS. Each Fund may enter into repurchase agreements
as a non-principal investment strategy that is, the purchase by the Fund of a
security that a seller has agreed to buy back, usually within one to seven days.
The seller's promise to repurchase the security is fully collateralized by
securities equal in value to 102% of the purchase price, including accrued
interest. If the seller
ACTIVA Mutual Funds Prospectus 15
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS continued
defaults and the collateral value declines, the Fund might incur a loss. If the
seller declares bankruptcy, the Fund may not be able to sell the collateral at
the desired time. The Funds enter into these agreements only with brokers,
dealers, or banks that meet credit quality standards established by the Fund and
its Sub-Advisers.
TEMPORARY INVESTMENTS AND RISKS. Each Fund may, from time to time, invest all of
its assets in short-term instruments when the Sub-Adviser determines that
adverse market, economic, political or other conditions call for a temporary
defensive posture. Such a defensive position may result in a Fund failing to
achieve its investment objective.
LENDING OF PORTFOLIO SECURITIES' RISK. In order to generate additional income,
the Fund may lend portfolio securities, on a short-term or a long-term basis, up
to 30% of a Fund's total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the Adviser has determined
are creditworthy under guidelines established by the Board of Trustees and will
receive collateral in the form of cash or U.S. government securities equal to
least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE TRANSACTIONS RISKS. Each of the Funds, except the Money Market Fund,
may trade in derivative contracts to hedge portfolio holdings and for investment
purposes. Hedging activities are intended to reduce various kinds of risks. For
example, in order to protect against certain events that might cause the value
of its portfolio securities to decline, the Fund can buy or sell a derivative
contract (or a combination of derivative contracts) intended to rise in value
under the same circumstances. Hedging activities will not eliminate risk, even
if they work as they are intended to. In addition, these strategies are not
always successful, and could result in increased expenses and losses to the
Fund. The Fund may trade in the following types of derivative contracts.
Futures contacts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a price, date, and
time specified with the contract is made. Futures contracts traded in the
over-the-counter markets are frequently referred to as forward contracts.
Entering into a contract to buy is commonly referred to as buying or purchasing
a contract or holding a long position. Entering into a contract to sell is
commonly referred to as selling a contract or holding a short position. Futures
are considered to be commodity contracts. The Fund can buy or sell futures
contracts on portfolio securities or indexes and engage in foreign currency
forward contracts.
Options are rights to buy or sell an underlying asset for a specified price (the
exercise price) during, or at the end of, a specified period of time. A call
option gives the holder (buyer) the right to purchase the underlying asset from
the seller (writer) of the option. A put option gives the holder the right to
sell the underlying asset to the writer of the option. The writer of the option
receives a payment, or "premium," from the buyer, which the writer keeps
regardless of whether the buyer uses (or exercises) the option.
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the portfolio manger to predict market
conditions based upon certain economic analysis and factors. There is a risk
that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any
16 ACTIVA Mutual Funds Prospectus
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS continued
related options to react differently than the portfolio securities to market
changes. In addition, the portfolio managers could be incorrect in their
expectations about the direction or extent or market factors such as interest
rate movements. In these events, the Fund may lose money on the futures
contracts or options.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Sub-Advisers will consider
liquidity before entering into options transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will exist for any
particular contract or option at any particular time. The Fund's ability to
establish and close out futures and options positions depends on this secondary
market.
ACTIVA Mutual Funds Prospectus 17
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents financial highlights for the Activa Funds.
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years or since inception. Certain
information reflects financial results for a single fund share. The total
returns in the table represent the rate that an investor would have earned or
loss on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by BDO Seidman, whose report,
along with the Value Fund's financial statements, are included in the Fund's
annual report, which is available upon request.
<TABLE>
<CAPTION>
INTER-
MONEY MEDIATE
MARKET BOND VALUE FUND -
FUND** FUND* CLASS A
------- ------- --------------------
1999 1999 1999*** 1998
Per share outstanding throughout the year or
period ended December 31.
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 10.00 $ 7.18 $ 7.73
Income from investment operations:
Net investment income (loss) .02 .19 .09 .08
Net realized and unrealized gains
(losses) on securities -- (.13) (.57) .68
-----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .02 .06 (.48) .76
-----------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income .02 .19 .09 .08
Dividends in excess of net investment income -- -- -- --
Distributions (from capital gains) -- -- -- 1.23
-----------------------------------------------------------------------------------------------------------------------------
Total distributions .02 .19 .09 1.31
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 9.87 $ 6.61 $ 7.18
-----------------------------------------------------------------------------------------------------------------------------
Total return**** 1.83% 0.63% -6.70% 10.17%
Ratios/supplemental data
Net assets, end of period
(ooo's omitted) $122,059 $162,079 $178,438 $179,820
Ratio of expenses to average net assets***** .6% .7% 1.1% 1.0%
Ratio of net income to average net assets*** 5.4% 5.7% 1.2% 1.0%
Portfolio turnover rate N/A 64.6% 144.5% 101.1%
Average commission rate paid per share for
portfolio transaction N/A N/A .0481 .0521
18 ACTIVA Mutual Funds Prospectus
<PAGE>
<CAPTION>
INTER-
VALUE FUND - VALUE FUND - GROWTH NATIONAL
CLASS A CLASS R FUND* FUND*
------------------------------- -------------------- ------- -------
1997 1996 1995 1999 1998****** 1999 1999
Per share outstanding throughout the year or
period ended December 31.
Net asset value, beginning of period $ 7.62 $ 7.43 $ 6.88 $7.16 $8.42 $ 10.00 $ 10.00
Income from investment operations:
Net investment income (loss) .09 .10 .10 .10 .09 (.02) (.03)
Net realized and unrealized gains
(losses) on securities 1.62 1.59 1.98 (.56) (.02) 1.41 4.23
------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.71 1.69 2.08 (.46) .07 1.39 4.20
------------------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income .10 .09 .11 .10 .10 -- --
Dividends in excess of net investment income -- -- -- -- -- -- --
Distributions (from capital gains) 1.50 1.41 1.42 -- 1.23 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total distributions 1.60 1.50 1.53 .10 1.33 -- --
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.73 $ 7.62 $ 7.43 $6.60 $7.16 $ 11.39 $ 14.20
------------------------------------------------------------------------------------------------------------------------------------
Total return**** 22.50% 23.18% 30.55% -6.43% 7.08% 13.80% 42.00%
Ratios/supplemental data
Net assets, end of period
(ooo's omitted) $139,164 $113,327 $77,248 $ 704 $ 135 $33,494 $41,359
Ratio of expenses to average net assets***** 0.9% 1.0% 1.1% 1.1% 1.0% 1.3% 1.4%
Ratio of net income to average net assets*** 1.1% 1.2% 1.2% 1.3% 1.8% -0.5% -0.9%
Portfolio turnover rate 103.1% 100.4% 173.3% 144.5% 101.1% 32.1% 87.6%
Average commission rate paid per share for
portfolio transaction .0574 .0600 .0598 .0481 .0521 .0332 .0258
</TABLE>
* Period from August 30, 1999 (inception) to December 31, 1999
** Period from August 19, 1999 (inception) to December 31, 1999
*** Effective December 30, 1999, Wellington Management Company, LLP entered
into a Sub-Advisory Aggreement with the Fund
**** Total return does not reflect the effect of the sales charge in the years
before 1998.
***** Ratio includes fees paid with brokerage commissions for the fiscal years
ending September 1, 1995; 1999 ratio includes a one time ogranization
expense.
****** The inception date for Value Fund - Class R was 11/1/98.
ACTIVA Mutual Funds Prospectus 19
<PAGE>
ACTIVA Mutual Funds Prospectus
The Statement of Additional Information ("SAI") provides additional details
about the Funds. Also, additional information about each Fund's investments is
available in the Fund's Annual and Semi-Annual Reports. You will find in each
Fund's Annual Report a discussion of market conditions and investment
strategies, which significantly affected the Fund's performance during its last
fiscal year. The SAI, dated April 29, 2000. Annual Reports, and Semi-Annual
Reports are available without charge by writing or telephoning the Fund. The SAI
is incorporated into the Prospectus by reference.
Additional information about the Funds, including the SAI, can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the public reference room is available by calling the Commission at
1-202-942-8090. The Commission's web site (http://www.sec.gov) contains reports
and other information on the Funds. Copies of this information are available
from the Commission upon the payment of a copying fee by writing the Public
Reference Section of the Commission, Washington, D.C. 20549-0102 or by
electronic request at the following Email address: [email protected].
April 29, 2000
20 ACTIVA Mutual Funds Prospectus
<PAGE>
[ACTIVA Mutual Funds - LOGO]
Activa Mutual Funds
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288 (800) 346-2670
WWW.ACTIVAFUNDS.COM
PRESORTED
STANDARD A
U.S. POSTAGE PAID
SOUTH SUBURBAN, IL
PERMIT #3602
Investment Company Act File #811-2168
Printed in U.S.A.
<PAGE>
Activa
[Activa logo]
Class R Prospectus
April 29, 2000
Activa Value Fund
Sub-Adviser: Wellington Management Co. LLP
The Fund's primary investment objective is capital appreciation. The Fund will
attempt to meet its objective by investing in common stocks that it believes are
undervalued. Income may be a factor in portfolio selection, but is secondary to
the principal objective.
This Prospectus contains information with respect to Class R shares of Activa
Value Fund. Class R is offered only to tax exempt retirement and benefit plans
of Amway Corporation and its affiliates. The Fund also offers Class A shares,
which are available to members of the general public. Information about Class A
is contained in the Activa Funds Prospectus dated April 29, 2000, which is
available upon request.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal offense.
[ACTIVA Mutual Funds - LOGO]
<PAGE>
ACTIVA Value Fund Prospectus
Contents
Page
INVESTMENT OBJECTIVE 1
INVESTMENT APPROACH 1
MANAGEMENT/INVESTMENT MANAGERS 1
RISK FACTORS 1
PAST PERFORMANCE 1
EXPENSES 3
FINANCIAL HIGHLIGHTS 4
ORGANIZATION OF THE FUND 6
INVESTMENT MANAGEMENT 6
THE SUB-ADVISERS 6
FUNDAMENTAL INVESTMENT POLICIES 6
Page
PRICING OF FUND SHARES 6
PURCHASE OF FUND SHARES 6
HOW SHARES ARE REDEEMED 7
RETIREMENT PLANS 7
DIVIDEND & CAPITAL GAIN
DISTRIBUTIONS TO SHAREHOLDERS 7
TAX CONSEQUENCES 7
RISK FACTORS AND SPECIAL CONSIDERATIONS 7
GENERAL INVESTMENT RISKS 7
OTHER RISKS 8
SHAREHOLDER INQUIRIES 9
[ACTIVA Mutual Funds - LOGO]
Activa Mutual Funds
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288 (800) 346-2670
<PAGE>
ACTIVA Value Fund
Investment Objective
The Fund seeks maximum long-term capital appreciation. Income, while a factor in
portfolio selection, is secondary to the Fund's principal objective.
Principal Investment Strategy
The Fund invests primarily in common stocks of large and medium-sized U.S.
companies which the Fund's Sub-Adviser believes are undervalued by the
marketplace with above-average potential for capital appreciation.
The Fund's Sub-Adviser, Wellington Management Company, LLP, implements the
construction of the Fund's portfolio based upon the analysis and input of the
firm's industry analysts. These analysts often spend their entire careers
covering a single industry. Their in-depth knowledge and broad perspective makes
them well positioned to recognize change early, enabling them to identify
companies which appear to have potential for long-term growth, but which are
trading at low valuations relative to intrinsic worth and/or historical market
levels. Such stocks are typically called "value stocks". Diversification is
achieved by investing in a number of different industries and companies.
Risk Factors
Like any investment, an investment in the Fund is subject to risk. The value of
the Fund's investments will vary from day to day in response to the activities
of individual companies and general market and economic conditions. While
investments are selected which the Sub-Adviser believes have potential for
appreciation, their value could decline. It is therefore possible to lose money
by investing in the Fund. For further information about risk factors, please see
"Risk Factors and Special Considerations" starting on page 7.
Past Performance
The two tables below show the Fund's annual returns and its long-term
performance. The first table provides indication of the risks of investing in
the Fund by showing changes in the Fund's performance from year to year. The
second compares the Fund's performance over time to that of the Standard and
Poor's 500 Stock Index ("S&P 500") and the Russell 1000 Value Index ("Value
Index"). The investment performance of Class R is expected to be substantially
similar to Class A because both Classes invest in the same portfolio of
securities and investment performance will differ only to the extent that the
classes do not have the same expenses. The estimated expenses for Class R, which
are lower than the expenses for Class A, are disclosed in the Fee Expense Table.
As with all mutual funds, past performance is not a prediction of future
results.
ACTIVA Mutual Funds Prospectus 1
<PAGE>
ACTIVA Value Fund continued
Year-by-Year Performance
Annual Total Return
of the Activa Value Fund*
[chart info]
1990 1.01%
1991 41.81%
1992 1.77%
1993 10.85%
1994 (5.87)%
1995 30.55%
1996 23.18%
1997 22.47%
1998 10.17%
1999 (6.43)%
* The inception date for Class R was November 1, 1998. Annual returns during
the period 1990 through 1998 are returns for Class A. The annual return for
1999 is the Class R return.
During the periods shown in the chart, the Fund's highest return for Class
A for a quarter was 20.53% (quarter ending March 31, 1991), and the Fund's
lowest return for a quarter was -14.60% (quarter ending September 30,1999).
<TABLE>
<CAPTION>
Average Annual Total Return for the
Periods Ended December 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Activa Value Fund*
<S> <C> <C> <C>
- Class A -6.70% 15.15% 11.90%
- Class R -6.43% N/A N/A
Russell 1000 Value** 7.35% 23.07% 15.60%
S&P 500** 21.04% 28.54% 18.20%
</TABLE>
* Wellington Management Company, LLP, has been the Fund's Sub-Adviser since
December 30, 1999.
** The S&P 500 Index represents an unmanaged index generally representative of
the U.S. stock market. The Value Index represents a composite of value
stocks representative of the Fund's investment objectives and strategies
which is compiled independently by the Frank Russell Companies. Neither
index is impacted by Fund operating expenses.
2 ACTIVA Mutual Funds Prospectus
<PAGE>
Expenses
This Table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Transaction Expenses
(Fees Paid Directly From Your Investment)
Maximum Sales Charge Imposed on Purchases None
Maximum Deferred Sales Charge None
Maximum Sales Charge Imposed on None
Reinvested Dividends
Exchange Fee None
Annual Fund Operating Expenses Paid by the Fund
Management Fees .50%
Distribution & Service (12b-1) Fees None
Other Expenses .46%
-----------
Total Fund Operating Expenses* .96%
* Total Fund Operating Expenses are based upon total expenses incurred by the
Fund for Class R for the year ended December 31, 1999. Adjustments have
been made to reflect the Fund's current investment advisory and
administrative fees and the Class R Transfer Agent and Shareholder
Servicing Agreement.
The following example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of these
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your cost would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Value Fund $97.94 $305.85 $530.89 $1,178.05
ACTIVA Mutual Funds Prospectus 3
<PAGE>
ACTIVA Value Fund continued
Financial Highlights
The financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate that an investor would have earned or loss on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by BDO Seidman, the Independent Certified Public
Accountants for the Fund, whose report, along with the Fund's financial
statements, are included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
Value Fund -
Class R
--------------------
1999* 1998****
Per share outstanding throughout the year or
period ended December 31.
<S> <C> <C>
Net asset value, beginning of period $ 7.16 $ 8.42
Income from investment operations:
Net investment income (loss) .10 .09
Net gain (loss) on securities (.56) (.02)
------------------------------------------------------------------------------------------------------
Total from investment operations (.46) .07
------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income .10 .10
Dividends in excess of net investment income -- --
Distributions (from capital gains) -- 1.23
------------------------------------------------------------------------------------------------------
Total distributions .10 1.33
------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.60 $ 7.16
------------------------------------------------------------------------------------------------------
Total return** -6.43% 7.08%
Ratios/supplemental data
Net assets, end of period
(000's omitted) $704 $135
Ratio of expenses to average net assets*** 1.1% 1.0%
Ratio of net income to average net assets 1.3% 1.8%
Portfolio turnover rate 144.5% 101.1%
Average commission paid per share for
portfolio transaction 0.0481 0.0521
4 ACTIVA Mutual Funds Prospectus
<PAGE>
<CAPTION>
Value Fund -
Class A
----------------------------------------------------------------
1999* 1998 1997 1996 1995
Per share outstanding throughout the year or
period ended December 31.
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.18 $7.73 $7.62 $7.43 $6.68
Income from investment operations:
Net investment income (loss) .09 .08 .09 .10 .10
Net gain (loss) on securities (.57) .68 1.62 1.59 1.98
-----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.48) .76 1.71 1.69 2.08
------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income .09 .08 .10 .09 .11
Dividends in excess of net investment income -- -- -- -- --
Distributions (from capital gains) -- 1.23 1.50 1.41 1.42
-----------------------------------------------------------------------------------------------------------------------------------
Total distributions .09 1.31 1.60 1.50 1.53
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.61 $7.18 $7.73 $7.62 $7.43
-----------------------------------------------------------------------------------------------------------------------------------
Total return** -6.70% 10.17% 22.50% 23.18% 30.55%
Ratios/supplemental data
Net assets, end of period
(000's omitted) $178,438 $179,820 $139,164 $113,327 $77,248
Ratio of expenses to average net assets*** 1.1% 1.0% 0.9% 1.0% 1.1%
Ratio of net income to average net assets 1.2% 1.0% 1.1% 1.2% 1.2%
Portfolio turnover rate 144.5% 101.1% 103.1% 100.4% 173.3%
Average commission paid per share for
portfolio transaction 0.0481 0.0521 0.0574 0.0600 0.0598
</TABLE>
* Effective December 30, 1999, Wellington Management Company, LLP entered
into a Sub-Advisory Agreement with the Fund.
** Total return does not reflect the effect of the sales charge in the years
before 1998.
*** Ratio includes fees paid with brokerage commissions for fiscal years ending
after September 1, 1995.
**** The inception date for Value Fund - Class R was 11/1/98.
ACTIVA Mutual Funds Prospectus 5
<PAGE>
ACTIVA Value Fund continued
Organization of the Fund
The Fund is a series of Activa Mutual Fund Trust, a Delaware business trust. The
Fund is governed by a Board of Trustees, which meets regularly to review the
Fund's investments, performance, expenses, and other business affairs. The
policy of the Fund is that a majority of Board members will be independent of
the Fund's Investment Adviser and Sub-Advisers.
Investment Management
Activa Asset Management LLC ("Activa") serves as the Investment Adviser of the
Fund. Activa's offices are located at 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Subject to the direction of the Board of Trustees, Activa
provides overall investment strategy for the Fund and furnishes all office
space, facilities, equipment and personnel which is necessary for servicing the
investments of the Fund.
Activa, together with the Board of Trustees, is responsible for selecting one or
more Sub-Advisers for the Fund. The Sub-Advisers furnish investment advice and
manage on a regular basis the investment portfolio of the Fund. The Sub-Advisers
make investment decisions on behalf of the Fund and place all orders for the
purchase or sale of portfolio securities. The Sub-Advisers are employed by
Activa and Activa, not the Fund, is responsible for paying their fees.
Activa monitors and evaluates the investment performance of each Sub-Adviser. If
Activa believes it is in the Fund's best interests, Activa may recommend that
the Fund change Sub-Advisers or retain additional Sub-Advisers. Any such action
must be approved by the Fund's Trustees, including a majority of the Fund's
Independent Trustees. Such action would not require approval of the Fund's
shareholders. However, if the Fund hires new or additional Sub-Advisers,
information about the new Sub-Adviser will be provided to the Fund's
shareholders within 90 days. Additional information about the selection of
Sub-Advisers is contained in the Statement of Additional Information.
Activa has ultimate responsibility for the investment performance of the Funds
due to its responsibility, subject to oversight by the Board of Trustees, to
oversee the Sub-Advisers and recommend their hiring, termination, and
replacement.
The Sub-Adviser
The Sub-Adviser of Activa Value Fund is Wellington Management Company, LLP,
Boston, Massachusetts. Wellington Management currently manages over $230 billion
for institutional and individual investors. Doris Dwyer Chu, Vice President, is
primarily responsible for the day-to-day management of Activa Value Fund. Ms.
Chu joined Wellington Management in 1998. She was previously a partner and
portfolio manager with Grantham, Mayo, Van Otterloo & Company (1985-1998).
Fundamental Investment Policies
The fundamental investment policies contained in the Fund's Statement of
Additional Information and the investment objective of each Fund may not be
changed without a shareholder vote. The Board of Trustees of the Fund may change
any other policies or investment strategies.
Pricing of Fund Shares
The net asset value of the Fund's shares is determined by dividing the total
current value of the assets of the Fund, less its liabilities, by the number of
shares outstanding at that time. This determination is generally made at the
close of business of the New York Stock Exchange, 4:00 P.M. Eastern time, on
each business day on which that Exchange is open. Shares will not be priced on
national holidays or other days on which the New York Stock Exchange is closed
for trading.
The Fund's investments are generally valued at current market value. If market
quotations are not readily available, the Fund's investments will be valued at
fair value as determined by the Fund's Board of Trustees.
Purchase of Shares
Class R Shares are offered to tax-exempt retirement and benefit plans of Amway
Corporation and its affiliates. There are no minimum investment requirements for
shares of Class R. Participants in the tax-exempt retirement and benefits plans
of Amway Corporation and its affiliates should contact the Plan
6 ACTIVA Mutual Funds Prospectus
<PAGE>
ACTIVA Value Fund continued
Administrator for information about particular procedures or requirements which
may apply to Plan Participants.
All purchases will be made at the Net Asset Value per share net calculated after
the Fund receives your investment and application in proper form.
How Shares Are Redeemed
The Fund will redeem your shares at the net asset value next determined after
your redemption request is received in proper form.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
Participants in the tax-exempt retirement and benefit plans of Amway Corporation
and its affiliates should contact the Plan Administrator for information about
particular redemption procedures or requirements which may apply to Plan
Participants.
Retirement Plans
The Fund sponsors a prototype Profit-Sharing Trust and Individual Retirement
Accounts. Persons interested in additional information regarding these plans
should contact the Fund.
Dividend and Capital Gain
Distributions to Shareholders
The Fund distributes substantially all of its net investment income and capital
gains to shareholders each year. Distributions, in the past, have been paid in
December. The net investment income and capital gain distribution will be paid
on a basis which is consistent with past policy. All distributions may be
received in cash or reinvested in additional shares of the Fund at their net
asset value at the time of distribution. This election can be changed at any
time by requesting a change in writing, signed by all account owners.
Tax Consequences
The Fund will make distributions of ordinary income and capital gains that will
relieve the Fund of all federal income taxes.
Shares of Class R will be held by the qualified retirement and benefit plans of
Amway Corporation and its affiliates ("the plans") for the benefit of plan
participants. The plans do not pay federal income taxes. Plan participants
should consult the plans' governing documents, and their own tax advisers, for
information about the tax consequences associated with participating in the
plans.
Risk Factors and Special Considerations
General Investment Risks
Information about the principal investment strategies and related risks for the
Fund is set forth in this Prospectus.
ACTIVA Mutual Funds Prospectus 7
<PAGE>
ACTIVA Value Fund continued
Additional information about the Fund's investment strategies and risks is
contained in the Statement of Additional Information which may be obtained by
writing or telephoning the Fund.
STOCK MARKET RISKS. The value of equity securities in the Fund's portfolio will
go up and down. These fluctuations could be a sustained trend or a drastic
movement. The Fund's portfolio will reflect changes in prices of individual
portfolio stocks or general changes in stock valuations. Consequently, the
Fund's share price may decline and you could lose money.
Other Risks
REPURCHASE AGREEMENTS AND RISK. Each Fund may enter into repurchase agreements
as a non-principal investment strategy that is, the purchase by the Fund of a
security that a seller has agreed to buy back, usually within one to seven days.
The seller's promise to repurchase the security is fully collateralized by
securities equal in value to 102% of the purchase price, including accrued
interest. If the seller defaults and the collateral value declines, the Fund
might incur a loss. If the seller declares bankruptcy, the Fund may not be able
to sell the collateral at the desired time. The Funds enter into these
agreements only with brokers, dealers, or banks that meet credit quality
standards established by the Board of Trustees.
TEMPORARY INVESTMENTS AND RISKS. The Fund may, from time to time, invest all of
its assets in short-term instruments when the Sub-Adviser determines that
adverse market, economic, political or other conditions call for a temporary
defensive posture. Such a defensive position may result in the Fund failing to
achieve its investment objective.
LENDING OF PORTFOLIO SECURITIES' RISK. In order to generate additional income,
the Fund may lend portfolio securities, on a short-term or a long-term basis, up
to 30% of a Fund's total assets to broker/dealers, banks, or other institutional
borrowers of securities. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the Adviser has determined
are creditworthy under guidelines established by the Board of Trustees and will
receive collateral in the form of cash or U.S. government securities equal to
least 100% of the value of the securities loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
DERIVATIVE TRANSACTION RISKS. The Fund may trade in derivative contracts to
hedge portfolio holdings on a non-principal basis. Hedging activities are
intended to reduce various kinds of risks. For example, in order to protect
against certain events that might cause the value of its portfolio securities to
decline, the Fund can buy or sell a derivative contract (or a combination of
derivative contracts) intended to rise in value under the same circumstances.
Hedging activities will not eliminate risk, even if they work as they are
intended to. In addition, these strategies are not always successful, and could
result in increased expenses and losses to the Fund. The Fund may trade in the
following types of derivative contracts.
Futures contacts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a price, date, and
time specified with the contract is made. Futures contracts traded in the
over-the-counter markets are frequently referred to as forward contracts.
Entering into a contract to buy is commonly referred to as buying or purchasing
a contract or holding a long position. Entering into a contract to sell is
commonly referred to as selling a contract or holding a short position. Futures
are considered to be commodity contracts. The Fund can buy or sell futures
contracts on portfolio securities or indexes and engage in foreign currency
forward contracts.
Options are rights to buy or sell an underlying asset for a specified price (the
exercise price) during, or at the end of, a specified period of time. A call
option gives the holder (buyer) the right to purchase the underlying asset from
the seller (writer) of the option. A put option gives the holder the right to
sell the underlying asset to the writer of the option. The writer of the option
receives a payment, or "premium,"
8 ACTIVA Mutual Funds Prospectus
<PAGE>
ACTIVA Value Fund continued
from the buyer, which the writer keeps regardless of whether the buyer uses (or
exercises) the option.
When the Fund uses financial futures and options on financial futures as hedging
devices, much depends on the ability of the portfolio manger to predict market
conditions based upon certain economic analysis and factors. There is a risk
that the prices of the securities subject to the futures contracts may not
correlate perfectly with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any related options to react differently
than the portfolio securities to market changes. In addition, the portfolio
managers could be incorrect in their expectations about the direction or extent
or market factors such as interest rate movements. In these events, the Fund may
lose money on the futures contracts or options.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times.
Although the Sub-Advisers will consider liquidity before entering into options
transactions, there is no assurance that a liquid secondary market on an
exchange or otherwise will exist for any particular contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
Shareholder Inquiries
Shareholder inquiries regarding the Fund should be directed to the Fund by
writing or telephoning the Fund at the address or telephone number indicated on
the cover page of the Prospectus. Inquiries relating to a specific account
should be directed to the Plan Administrator for the tax-exempt retirement and
benefits plan of Amway Corporation and its affiliates.
ACTIVA Value Fund Class R Prospectus
The Statement of Additional Information ("SAI") provides additional details
about the Fund. Also, additional information about the Fund's investments is
available in the Fund's Annual and Semi-Annual Reports. You will find in the
Fund's Annual Report a discussion of market conditions and investment
strategies, which significantly affected the Fund's performance during its last
fiscal year. The SAI, dated April 29, 2000, Annual Reports, and Semi-Annual
Reports are available without charge by writing or telephoning the Fund. The SAI
is incorporated into the Prospectus by reference.
Additional information about the Fund, including the SAI, can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the public reference room is available by calling the Commission at
1-202-942-8090. The Commission's web site (http://www.sec.gov) contains reports
and other information on the Funds. Copies of this information are available
from the Commission upon the payment of a copying fee by writing the Public
Reference Section of the Commission, Washington, D.C. 20549-0102 or by
electronic request at the following Email address: [email protected].
April 29, 2000
ACTIVA Mutual Funds Prospectus 9
<PAGE>
[ACTIVA Mutual Funds - LOGO]
Activa Mutual Funds
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288 (800) 346-2670
WWW.ACTIVAFUNDS.COM
Investment Company Act File #811-2168
Printed in U.S.A.
<PAGE>
<TABLE>
<CAPTION>
ACTIVA GROWTH FUND ACTIVA MUTUAL FUND LOGO
<S> <C> <C>
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not
Restrictions on the Fund's a prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Prospectus, which can be
Additional Risks and Information requested from the Fund by writing or telephoning
Concerning Certain Investment as indicated above. This Statement of Additional
Techniques 3 Information relates to the Prospectus for the Fund
Brokerage Allocation 13 dated April 29, 2000.
Principal Shareholders 15
Officers and Trustees of the Fund 15
Investment Adviser 17
Sub-Adviser 17
Plan of Distribution and Principal
Underwriter 17
Administrative Agreement 18
Transfer Agent 18
Custodian 19
Auditors 19
Pricing of Fund Shares 19
Purchase of Shares 19
How Shares are Redeemed 19
Exchange Privilege 20
Additional Account Policies 21
Internet Address 21 The date of this Statement of Additional
Federal Income Tax 21 Information is April 29, 2000.
Reports to Shareholders and Annual Audit 22
</TABLE>
Printed in U.S.A.
1
<PAGE>
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998.
The Declaration of Trust authorizes the Trustees to create additional series
and to issue an unlimited number of units of beneficial interest, or "shares."
The Trustees are also authorized to issue different classes of shares of any
series. No series which may be issued by the Trust is entitled to share in the
assets of any other series or is liable for the expenses or liabilities of any
other series. The Fund presently has only one class of shares.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The primary investment objective of the Fund is long-term growth of capital.
The Fund will attempt to meet its objectives by investing primarily in stocks
that the Fund believes have long term growth potential. The Fund seeks to
identify large capitalization stocks with sustainable above average earnings to
growth.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Fund. Except where
otherwise noted, these investment restrictions are "fundamental" policies which,
under the 1940 Act, may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities.
The Fund :
1. May not make any investment inconsistent with the Fund's classification as
a diversified investment company under the Investment Company Act of 1940.
2. May not purchase any security which would cause the Fund to concentrate
its investments in the securities of issuers primarily engaged in any
particular industry except as permitted by the SEC. This restriction
does not apply to instruments considered to be domestic bank money
market instruments.
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities or other issues, except to the extent that
the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may (a) invest in securities or other
instruments directly or indirectly secured by real estate, and (b)
invest in securities or other instruments issued by issuers that invest
in real estate;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by
persons that purchase or sell commodities or commodities contracts; but
this shall not prevent the Fund from purchasing, selling and entering into
financial futures contracts (including futures contracts on indices of
securities, interest rates and currencies), options on financial
futures contracts (including futures contracts on indices of
securities, interests rates and currencies), warrants, swaps, forward
contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities;
and
2
<PAGE>
8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by the Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 15% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities, or short sales against the box; (iii) may not acquire securities of
other investment companies, except as permitted by the 1940 Act or any order
pursuant thereto; (iv) may not enter into reverse repurchase agreements or
borrow money, except from banks for extraordinary or emergency purposes, if such
obligations exceed in the aggregate one-third of the market value of the Fund's
total assets, less liabilities other than obligations created by reverse
repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of other open-end
registered investment companies.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
In view of the Fund's investment objective of long-term growth of capital,
the Fund intends to purchase securities for long-term or short-term profits, as
appropriate. Securities will be disposed of in situations where appropriate, in
management's opinion. Therefore, in order to achieve the Fund's objectives, the
purchase and sale of securities will be made without regard to the length of
time the security is to be held. Higher portfolio turnover rates can result in
corresponding increases in brokerage commissions.
ADDITIONAL RISKS AND INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES
--------------------------------------------------------------------------------
DERIVATIVES.
-----------
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company (the "Sub-Adviser") to aid in achieving the Fund's investment objective.
The Fund may also purchase instruments with characteristics of both futures and
securities (e.g., debt instruments with interest and principal payments
determined by reference to the value of a commodity or a currency at a future
time) and which, therefore, possess the risks of both futures and securities
investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Sub-Adviser anticipates unusually high or low market
volatility.
The Sub-Adviser may enter into derivative positions for the Fund for either
hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies, which are undertaken to profit
from (i) an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
3
<PAGE>
FUTURE CONTRACTS.
----------------
Futures contracts are publicly traded contracts to buy or sell an underlying
asset or group of assets, such as a currency or an index of securities, at a
future time at a specified price. A contract to buy establishes a long position
while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in securities
transactions in that the former does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is like a
performance bond or good faith deposit on the contract. Subsequent payments
(called "maintenance margin") to and from the broker will be made on a daily
basis as the price of the underlying asset fluctuates. This process is known as
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying instrument has declined, the position would be
less valuable, and the Fund would be required to make a maintenance margin
payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
OPTION
------
The Fund may use options to implement its investment strategy. There are two
basic types of options: "puts" and "calls." Each type of option can establish
either a long or a short position, depending upon whether the Fund is the
purchaser or the writer of the option. A call option on a security, for example,
gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees or risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer effects
a closing purchase transaction or until the option expires. To secure its
obligation to deliver the underlying asset in the case of a call
4
<PAGE>
option, or to pay for the underlying asset in the case of a put option, a
covered writer is required to deposit in escrow the underlying security or other
assets in accordance with the rules of the applicable clearing corporation and
exchanges.
Among the options which the Fund may enter are options on securities indices.
In general, options on indices of securities are similar to options on the
securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receiver an amount of cash upon exercise of the option if
the value of the underlying index has fallen below the exercise price. The
amount of cash received will be equal to the difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. As with options on equity securities, or futures
contracts, a Fund may offset its position in index options prior to expiration
by entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included in the
index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
OPTIONS ON FUTURES CONTRACTS
----------------------------
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a future contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option.
LIMITATIONS AND RISKS OF OPTIONS AND FUTURES ACTIVITY
-----------------------------------------------------
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability of
the Fund's nonhedging strategies will depend of the Sub-Adviser to analyze both
the applicable derivatives market and the market for the underlying asset or
group of assets. Derivatives markets are often more volatile than corresponding
securities markets and a relatively small change in the price of the underlying
asset or group of assets can have a magnified effect upon the price of a related
derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market thereof.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures positions prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
SHORT SALES AGAINST THE BOX
---------------------------
The Fund may effect short sales, but only if such transactions are short sale
transactions known as short sales "against the box." A short sale is a
transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
SWAP ARRANGEMENTS
-----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the
5
<PAGE>
floating rate of interest on a so-called notional principal amount (i.e., an
assumed figure selected by the parties for this purpose) in exchange for
agreement by the bank or investment banker to pay the Fund a fixed rate of
interest on the notional principal amount. In a currency swap the Fund would
agree with the other party to exchange cash flows based on the relative
differences in values of a notional amount of two (or more) currencies; in an
index swap, the Fund would agree to exchange cash flows on a notional amount
based on changes in the values of the selected indices. Purchase of a cap
entitles the purchaser to receive payments from the seller on a notional amount
to the extent that the selected index exceeds an agreed upon interest rate or
amount whereas purchase of a floor entitles the purchaser to receive such
payments to the extent the selected index falls below an agreed upon interest
rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale by
the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Sub-Adviser is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these investment
techniques were not used. Moreover, even if the Sub-Adviser is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
REPURCHASE AGREEMENTS.
----------------------
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired-security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's net assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets. To the extent excludable under relevant regulatory interpretations,
repurchase agreements involving U.S. Government securities are not subject to
the Fund's investment restrictions which otherwise limit the amount of the
Fund's total assets which may be invested in one issuer or industry.
6
<PAGE>
REVERSE REPURCHASE AGREEMENTS.
------------------------------
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
WHEN-ISSUED SECURITIES.
----------------------
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
RESTRICTED SECURITIES.
----------------------
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
FOREIGN INVESTMENTS.
--------------------
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issues by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
7
<PAGE>
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or exporpriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-develop countries. Such countries
include countries that have an emerging stock market on which trade a small
number of securities and/or countries with economics that are based on only a
few industries. The Fund may invest in the securities of issuers in countries
with less developed economics as deemed appropriate by the Sub-Adviser. However,
it is anticipated that a majority of the foreign investments by the Fund will
consist of securities of issuers in countries with developed economics.
CURRENCY TRANSACTIONS.
----------------------
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. In entering a forward currency
contract, the Fund is dependent upon the creditworthiness and good faith of the
counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. Although
spot and forward contracts will be used primarily to protect the Fund from
adverse currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, which may result in losses to the
Fund. This method of protecting the value of the Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some future point in time. Although such
contracts tend to minimize the risk of loss due to a decline in the value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
SECURITIES LENDING.
-------------------
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investment of cash collateral
8
<PAGE>
received from loaning portfolio securities involves leverage which magnifies the
potential for gain or loss on monies invested and, therefore, results in an
increase in the volatility of the Fund's outstanding securities. Such loans may
be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery which are deemed by the Sub-Adviser or its agents to be of good
financial standing.
SHORT-TERM TRADING.
-------------------
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
TEMPORARY AND DEFENSIVE INVESTMENTS.
------------------------------------
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Sub-Adviser, such a position is
more likely to provide protection against adverse market conditions than
adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
INDUSTRY CLASSIFICATIONS.
-------------------------
In determining how much of the portfolio is invested in a given industry, the
following industry classifications are currently used. Securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies or
instrumentalities or mixed-ownership Government corporations or sponsored
enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies, or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages and credit card receivables. "Asset-backed-Mortgages"
includes privates pools of nongovernment backed mortgages.
<TABLE>
<CAPTION>
Autos & Transportation Consumer Discretionary Financial Services
---------------------- ---------------------- ------------------
<S> <C> <C>
Air Transport Advertising Agencies Banks & Savings and Loans
Auto parts Casino/Gambling Financial Data Processing
Automobiles Hotel/Motel Services & Systems
Miscellaneous Commercial Services Insurance
Transportation Communications, Media & Miscellaneous Financial
Railroad Equipment Entertainment Real Estate Investment
Railroads Consumer Electronics Trusts
Recreational Vehicles & Consumer Products Rental & Leasing Services:
Boats Consumer Services Commercial
Tires & Rubber Household Furnishings Securities Brokerage &
Truckers Leisure Time Services
Photography
Integrated Oils Printing & Publishing Health Care
--------------- -----------
Oil: Integrated Domestic Restaurants Drugs & Biotechnology
Oil: Integrated International Retail Health Care Facilities
Shoes Health Care Services
9
<PAGE>
<CAPTION>
Textile Apparel Hospital Supply
Manufacturers Service Miscellaneous
Toys
Consumer Staples Financial Services Technology
---------------- ------------------ ----------
<S> <C> <C>
Beverages Banks & Savings and Loans Communications Technology
Drug & Grocery Store Financial Data Processing Computer Software
Chains Services & Systems Computer Technology
Foods Insurance Electronics
Household Products Miscellaneous Financial Electronics: Semi-
Tobacco Real Estate Investment Conductors/Components
Trusts Miscellaneous Technology
Materials & Processing
---------------------- Other Energy Utilities
Agriculture ------------ ---------
Building & Construction Gas Pipelines Miscellaneous Utilities
Chemicals Miscellaneous Energy Utilities: Cable TV & Radio
Containers & Packaging Offshore Drilling Utilities: Electrical
Diversified Manufacturing Oil & Gas Producers Utilities: Gas Distribution
Engineering & Contracting Oil Well Equipment & Utilities: Telecommunications
Services Services Utilities: Water
Fertilizers
Forest Products Producer Durables
Gold & Precious Metals -----------------
Miscellaneous Materials & Aerospace
Processing Electrical Equipment &
Non-Ferrous Metals Components
Office Supplies Electronics: Industrial
Paper & Forest Products Components
Real Estate & Construction Industrial Products
Steel Machine Tools
Textile Products Machinery
Miscellaneous Equipment
Other Miscellaneous Producer
----- Durables
Trust Certificates - Office Furniture & Business
Government Related Equipment
Lending Pollution Control and
Asset-backed Mortgages Environmental Services
Asset-backed-Credit Card Production Technology
Receivables Equipment
Miscellaneous Telecommunications
Multi-Sector Companies Equipment
</TABLE>
OTHER INVESTMENT COMPANIES
--------------------------
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, the Fund may indirectly bear service and other fees in addition to the
fees the Fund pays its service providers. Similarly, other investment companies
may invest in the Fund. Other investment companies that invest in the Fund may
hold significant portions of the Fund and materially affect the sale and
redemption of Fund shares and the Fund's portfolio transactions.
10
<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
-----------------------------------------------
The Fund may invest in long-term and short-term debt securities. Certain debt
securities and money market instruments in which the Fund may invest are
described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills, notes,
certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities, such as the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association, the Government National Mortgage Association and the
Federal Home Loan Mortgage Corporation; and
o obligations of mixed-ownership Government corporations such as Resolution
Funding Corporation.
U.S. Government Securities which the Fund may buy are backed in a variety of
ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Bank, the Federal Farm Credit Bank, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
(TIGRs") and "Certificates of Accrual on Treasury Securities ("CATS"), and may
be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment vehicles,
the assets of which consist principally of U.S. Government securities or other
assets substantially collateralized or supported by such securities, such as
Government trust certificates.
BANK MONEY INVESTMENTS
----------------------
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
11
<PAGE>
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign banks and
are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
-------------------------------------
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued by
corporations including but not limited to (a) domestic or foreign bank holding
companies or (b) their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
ZERO AND STEP COUPON SECURITIES
-------------------------------
Zero and step coupon securities are debt securities that may pay no interest
for all or a portion of their life but are purchased at a discount to face value
at maturity. Their return consist of the amortization of the discount between
their purchase price and their maturity value, plus in the case of a step
coupon, any fixed rate interest income. Zero coupon securities pay no interest
to holders prior to maturity even though interest on these securities is
reported as income to the Fund. The Fund will be required to distribute all or
substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
COMMERCIAL PAPER RATINGS
------------------------
Commercial paper investments at the time of purchase will be rated within the
"A" major rating category by S&P or within the "Prime" major rating category by
Moody's, or, if not rated, issued by companies having an outstanding long-term
unsecured debt issue rated at least within the "A" category by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least within the "A" category by S&P or within
the "Prime" category by Moody's, within comparable categories of other rating
agencies or considered to be of comparable quality by the Sub-Adviser.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong positions within the industry. The reliability and quality
of management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
12
<PAGE>
The rating Prime is the highest commercial paper rating category assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund by
applicable rating agencies results in a material decline in the overall quality
of the Fund's portfolio, the Trustees of the Trust will review the situation and
take such action as they deem in the best interests of the Fund's shareholders,
including, if necessary, changing the composition of the portfolio.
BROKERAGE ALLOCATION
--------------------------------------------------------------------------------
The Sub-Adviser's policy is to seek for its clients, including the Fund, what
in the Sub-Adviser's judgment will be the best overall execution of purchase or
sale orders and the most favorable net prices in securities transactions
consistent with its judgment as to the business qualifications of the various
broker or dealer firms with whom the Sub-Adviser may do business, and the
Sub-Adviser may not necessarily choose the broker offering the lowest available
commission rate. Decisions with respect to the market where the transaction is
to be completed, to the form of transaction (whether principal or agency), and
to the allocation of orders among brokers or dealers are made in accordance with
this policy. In selecting brokers or dealers to effect portfolio transactions,
consideration is given to their proven integrity and financial responsibility,
their demonstrated execution experience and capabilities both generally and with
respect to particular markets or securities, the competitiveness of their
commission rates in agency transactions (and their net prices in principal
transactions), their willingness to commit capital, and their clearance and
settlement capability. The Sub-Adviser makes every effort to keep informed of
commission rate structures and prevalent bid/ask spread characteristics of the
markets and securities in which transactions for the Fund occur. Against this
background, the Sub-Adviser evaluates the reasonableness of a commission or a
net price with respect to a particular transaction by considering such factors
as difficulty of execution or security positioning by the executing firm. The
Sub-Adviser may or may not solicit competitive bids based on its judgment of the
expected benefit or harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required standards
in respect of a particular transaction, consideration may also be given by the
Sub-Adviser to services other than execution services which certain of such
firms have provided in the past or may provide in the future. Negotiated
commission rates and prices, however, are based upon the Sub-Adviser's judgment
of the rate which reflects the execution requirements of the transaction without
regard to whether the broker provides services in addition to execution. Among
such other services are the supplying of supplemental investment research;
general economic, political and business information; analytical and statistical
data; relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those contained in
certain trading systems and used for portfolio analysis and modeling and also
including software providing investment personnel with efficient access to
current and historical data from a variety of internal and external sources) and
portfolio evaluation services and relative performance of accounts.
In the case of the Fund and other registered investment companies advised by
the Sub-Adviser or its affiliates, the above services may include data relating
to performance, expenses and fees of those investment companies and other
investment companies. This information is used by the Trustees or Directors of
the investment companies to fulfill their responsibility to oversee the quality
of the Sub-Adviser's advisory contracts between the investment companies and the
Sub-Adviser. The Sub-Adviser considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
13
<PAGE>
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Sub-Adviser regularly reviews and evaluates the services furnished by
broker-dealers. The Sub-Adviser's investment management personnel seek to
evaluate the quality of the research and other services provided by various
broker-dealer firms, and the results of these efforts are made available to the
equity trading department, which uses this information as consideration to the
extent described above in the selection of brokers to execute portfolio
transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Sub-Adviser allocates the cost of the
services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Sub-Adviser pays directly from its own funds for that portion allocable to uses
other than research or investment decision-making. Some research and execution
services may benefit the Sub-Adviser's clients as a whole, while others may
benefit a specific segment of clients. Not all such services will necessarily be
used exclusively in connection with the accounts which pay the commissions to
the broker-dealer providing the services.
The Sub-Adviser has no fixed agreements or understandings with any
broker-dealer as to the amount of brokerage business which the firm may expect
to receive for services supplied to the Sub-Adviser or otherwise. There may be,
however, understandings with certain firms that in order for such firms to be
able to continuously supply certain services, they need to receive an allocation
of a specified amount of brokerage business. These understandings are honored to
the extent possible in accordance with the policies set forth above.
It is not the Sub-Adviser's policy to intentionally pay a firm a brokerage
commission higher than that which another firm would charge for handling the
same transaction in recognition of services (other than execution services)
provided. However, the Sub-Adviser is aware that this is an area where
differences of opinion as to fact and circumstances may exist, and in such
circumstances, if any, the Sub-Adviser relies on the provisions of Section 28(e)
of the Securities Exchange Act of 1934.
In the case of the purchase of fixed income securities in underwriting
transactions, the Sub-Adviser follows any instructions received from its clients
as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Sub-Adviser may make such allocations to
broker-dealers which have provided the Sub-Adviser with research and brokerage
services.
In some instances, certain clients of the Sub-Adviser request it to place all
or part of the orders for their account with certain brokers or dealers, which
in some cases provide services to those clients. The Sub-Adviser generally
agrees to honor these requests to the extent practicable. Clients may request
that the Sub-Adviser only effect transactions with the specified broker-dealers
if the broker-dealers are competitive as to price and execution. Where the
request is not so conditioned, the Sub-Adviser may be unable to negotiate
commissions or obtain volume discounts or best execution. In cases where the
Sub-Adviser is requested to use a particular broker-dealer, different
commissions may be charged to clients making the requests. A client who requests
the use of a particular broker-dealer should understand that it may lose the
possible advantage which non-requesting clients derive from aggregation of
orders for several clients as a single transaction for the purchase or sale of a
particular security. Among other reasons why best execution may not be achieved
with directed brokerage is that, in an effort to achieve orderly execution of
transactions, execution of orders that have designated particular brokers may,
at the discretion of the trading desk, be delayed until execution of other
non-designated orders has been completed.
When more than one client of the Sub-Adviser is seeking to buy or sell the
same security, the sale or purchase is carried out in a manner which is
considered fair and equitable to all accounts. In allocating investments among
various clients (including in what sequence orders for trades are placed), the
Sub-Adviser will use its best business judgment and will take into account such
factors as the investment objectives of the clients, the amount of investment
funds available to each, the size of the order, the amount already committed for
each client to a specific investment and the relative risks of the investments,
all in order to provide on balance a fair and equitable result to each client
over time. Although sharing in large transactions may sometimes affect price or
volume of shares acquired or sold, overall it is believed there may be an
advantage in execution. The Sub-Adviser may follow the practice of grouping
orders of various
14
<PAGE>
clients for execution to get the benefit of lower prices or commission rates.
In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Sub-Adviser may not aggregate trades where it believes that it
is in the best interests of clients not to do so, including situations where
aggregation might result in a large number of small transactions with consequent
increased custodial and other transactional costs which may disproportionately
impact smaller accounts. Such disaggregation, depending on the circumstances,
may or may not result in such accounts receiving more or less favorable
execution relative to other clients.
During the year ended December 31, 1999, the Fund paid total brokerage
commissions on purchase and sale of portfolio securities of $23,924.
Transactions in the amount of $18,574,261, involving commissions of
approximately $10,718, were directed to brokers because of research services
provided during 1999. During the calendar year ended December 31, 1999 the
portfolio turnover rate was 32.1%.
The Fund may acquire securities of brokers who execute the Fund's portfolio
transactions. As of December 31, 1999, the Fund owned no such securities.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation ("Amway") indirectly, as of February 18, 2000, owned
2,897,624 shares, or 91.22% of the outstanding shares of the Fund. Jay Van Andel
and Richard M. DeVos are controlling persons of Amway since they own, together
with their spouses, substantially all of its outstanding securities. Amway is a
Michigan manufacturer and direct selling distributor of home care and personal
care products. If Amway were to substantially reduce its investment in the Fund,
it could have an adverse effect on the Fund by decreasing the size of the Fund
and by causing the Fund to incur brokerage charges in connection with the
redemption of Amway's shares.
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
Name and Address Age Office Held Principal Occupation Last Five Years
<S> <C> <C> <C>
---------------- --- ----------- ------------------------------------
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida 33469 in land and cattle)
Allan D. Engel* 48 Trustee, Vice President, Vice President, Real Estate
2905 Lucerne SE, Secretary and Assistant Operations - Enterprise
Suite 200 Treasurer of the Fund; Capital, Inc. Formerly, Sr.
Grand Rapids, Michigan President, and Secretary Manager, Investments and Real
49546 of the Investment Estate, Amway Corporation.
Adviser. Director, President and
Secretary of Amway
Management Company (1981-
1999). Trustee, Vice President
Secretary, Amway Mutual
Fund (1981- 1999).
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice
19017 Vintage Trace Circle President-Treasurer, SPX
Fort Myers, Florida Corporation (Designs,
33912 manufactures and markets
products and services
for the motor vehicle industry),
1986 to 1994.
15
<PAGE>
<CAPTION>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- --- ------------ ------------------------------------
<S> <C> <C> <C>
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation.
49424
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. Officer, JVA Enterprises, LLC.
Suite 200 President, Chief Executive
Grand Rapids, Michigan Officer and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-2000).
Director, Vice President and
Treasurer of Amway Management
Company (1984-1999). Trustee,
President and Treasurer,
Amway Mutual Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
<TABLE>
<CAPTION>
Pension or
Name of Person, Trustee Retirement Estimated Annual Total Compensation
Position Compensation Benefits Accrued as Benefits Paid to Trustees
Part of Fund Upon Retirement
Expenses
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
</TABLE>
* These Trustees are interested persons under the Investment Company Act of
1940, as amended. All Officers and certain Trustees of the Fund and the
Investment Adviser are affiliated with Amway Corporation. The Officers
serve without compensation from the Fund. Fees paid to all Trustees during
the year ended December 31, 1999, amounted to $48,000. Under the
Administrative Agreement, the Investment Adviser pays the fees of the
Trustees of the Fund. The Trustees and Officers of the Fund owned, as a
group, less than 1% of the outstanding shares of the Fund. The Adviser also
serves as the Fund's principal underwriter (see "Distribution of Shares").
16
<PAGE>
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract") with
Activa Asset Management LLC (the "Investment Adviser"). Under the Contract, the
Investment Adviser sets overall investment strategies for the Fund and monitors
and evaluates the investment performance of the Fund's Sub-Adviser, including
compliance with the investment objectives, policies and restrictions of the
Fund. If the Investment Adviser believes it is in the Fund's best interests, it
may recommend that additional or alternative Sub-Advisers be retained on behalf
of the Fund. If more than one Sub-Adviser is retained, the Investment Adviser
will recommend to the Fund's Trustees how the Fund's assets should be allocated
or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from the
Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Except for the exemptive order, these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and the Investment Adviser
became effective on September 1, 1999. For providing services under this
contract, Activa is to receive compensation payable quarterly, at the annual
rate of .70 of 1% of the average of the daily aggregate net asset value of the
Fund on the first $25,000,000 of assets, .65% on the next $25,000,000, and .60%
on assets in excess of $50,000,000. Activa also provides certain administrative
services for the Fund pursuant to a separate agreement. The fees paid by the
Fund to the Investment Adviser during the year ended December 31, 1999 were
$69,526.
Members of the families of Jay Van Andel and Richard M. DeVos indirectly own
substantially all of the outstanding ownership interests of Activa. Jay Van
Andel and Richard M. DeVos are also controlling persons of Amway Corporation
which, as of February 18, 2000, owned 2,897,624 shares, or 91.22%, of the
outstanding shares of the Fund. See "Principal Shareholders."
SUB-ADVISER
--------------------------------------------------------------------------------
A Sub-Advisory Agreement has been entered into between the Investment Adviser
and State Street Research & Management Company, One Financial Center, Boston,
Massachusetts 02111-2690 (Sub-Adviser). Under the Sub-Advisory Agreement, the
Adviser employs the Sub-Adviser to furnish investment advice and manage on a
regular basis the investment portfolio of the Fund, subject to the direction of
the Adviser, the Board of Trustees of the Fund, and to the provisions of the
Fund's current Prospectus. The Sub-Adviser will make investment decisions on
behalf of the Fund and place all orders for the purchase or sale of portfolio
securities for the Fund's account, except when otherwise specifically directed
by the Fund or the Adviser. The fees of the Sub-Adviser are paid by the
Investment Adviser, not the Fund.
As compensation for the services rendered under the Sub-Advisory Agreement,
the Investment Adviser has agreed to pay the Sub-Adviser a fee, which is
computed daily and may be paid monthly, equal to the annual rates of .50% of the
average of the daily aggregate net asset value of the Fund on the first
$25,000,000 of assets, .45% on the next $25,000,000, and .40% on assets in
excess of $50,000,000. The fees paid by the Investment Adviser to the
Sub-Adviser during the year ended December 31, 1999 were $49,430.
PLAN OF DISTRIBUTION & PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, the Adviser provides shareholder services
and services in connection with the sale and distribution of the Fund's shares
and is compensated at a maximum annual rate of 0.25 of 1% of the average daily
net assets of the Fund. The maximum amount presently authorized by the Fund's
Board of Trustees is 0.15 of the average daily net assets of the Fund. Since
these fees are paid from Fund assets, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
17
<PAGE>
During 1999 the Fund paid $17,820 to Activa for the services which it
provided pursuant to the Distribution Plan. The services included printing and
mailing of prospectuses ($3,646) and general and administrative services
($14,174). The latter included activities of Activa's office personnel which are
related to marketing, registration of the Fund's securities under the federal
securities laws, and registration of Activa as a broker-dealer under federal and
state securities laws. Since the Distribution Plan is a compensation plan,
amounts paid under the plan may exceed Activa's actual expenses.
Amounts received by the Adviser pursuant to the Distribution Plan may be
retained by the Adviser as compensation for its services, or paid to other
investment professionals who provide services in connection with the
distribution of Fund shares. The Trustees will review the services provided and
compensation paid pursuant to the Distribution Plan no less often than
quarterly.
Most of the activities financed by the Distribution Plan are related to the
distribution of all of the funds in the Activa family of mutual funds. Other
activities may be related to the distribution of a particular fund. Each Activa
mutual fund (other than the Money Market Fund) contributes the same percentage
of its average net assets to the Distribution Plan. The Money Market Fund does
not presently participate in the Distribution Plan.
The Adviser acts as the exclusive agent for sales of shares of the Fund
pursuant to a Principal Underwriting Agreement. The only compensation currently
received by the Adviser in connection with the sale of Fund shares is pursuant
to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and the Investment
Adviser, the Investment Adviser provides specified assistance to the Fund with
respect to compliance matters, taxes and accounting, the provision of legal
services, meetings of the Fund's Trustees and shareholders, and preparation of
the Fund's registration statement and other filings with the Securities and
Exchange Commission. In addition, the Investment Adviser pays the fees of the
Fund's Trustees, and the salaries and fees of all of the Fund's Trustees and
officers who devote part or all of their time to the affairs of the Investment
Adviser. For providing these services the Investment Adviser receives a fee,
payable quarterly, at the annual rate of 0.15% of the Fund's average daily
assets. During the year ended December 31, 1999, total payments were $15,073.
The Administrative Agreement provides that the Investment Adviser is only
responsible for paying such fees and expenses and providing such services as are
specified in the agreement. The Fund is responsible for all other expenses
including (i) expenses of maintaining the Fund and continuing its existence;
(ii) registration of the Trust under the Investment Company Act of 1940; (iii)
commissions, fees and other expenses connected with the acquisition, disposition
and valuation of securities and other investments; (iv) auditing, accounting and
legal expenses; (v) taxes and interest; (vi) government fees; (vii) expenses of
issue, sale, repurchase and redemption of shares; (viii) expenses of registering
and qualifying the Trust, the Fund and its shares under federal and state
securities laws and of preparing and printing prospectuses for such purposes and
for distributing the same to shareholders and investors; (ix) expenses of
reports and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
18
<PAGE>
In return for its services, the Fund pays the Transfer Agent, a fee of $1.167
per account in existence during the month, payable monthly, less earnings in the
redemption liquidity account after deducting bank fees, if any. The fee schedule
is reviewed annually by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids, Michigan,
are the independent certified public accountants for the Fund. Services include
an annual audit of the Fund's financial statements, tax return preparation, and
review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
In order to purchase shares for a new account, the completion of an
application form is required. The minimum initial investment is $500 or more.
Additional investments of $50 or more can be made at any time by using the lower
portion of your account statement. Checks should be made payable to "Activa
Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share net calculated
after the Fund receives your investment and application in proper form.
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
Each Fund will redeem your shares at the net asset value next determined
after your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL:
--------
When redeeming by mail, when no certificates have been issued, send a written
request for redemption to Activa Asset Management LLC, 2905 Lucerne SE, Suite
200, Grand Rapids, Michigan 49546. The request must state the dollar amount or
shares to be redeemed, including your account number and the signature of each
account owner, signed exactly as your name appears on the records of the Fund.
If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, limited liability companies, retirement
plans, individual retirement accounts and profit sharing plans.
BY PHONE:
---------
At the time of your investment in the Fund, or subsequently, you may elect on
the Fund's application to authorize the telephone or telegram exchange or
redemption option. You may redeem shares under this option by calling the Fund
at the number indicated on the front of this Prospectus on any business day.
Requests received after 4:00 p.m. when the market has closed will receive the
next day's price. By establishing the telephone or telegram exchange or
redemption option, you authorize the Transfer Agent to honor any telephone or
telegram exchange or redemption request from any person representing themselves
to be the investor. Procedures required by the Fund to ensure that a
shareholder's requested telephone or
19
<PAGE>
telegram transaction is genuine include identification by the shareholder of the
account by number, recording of the requested transaction and sending a written
confirmation to shareholders reporting the requested transaction. The Fund is
not responsible for unauthorized telephone or telegram exchanges or redemptions
unless the Fund fails to follow these procedures. Shares must be owned for 10
business days before redeeming by the telephone and telegram exchange and cannot
be in certificate form unless the certificate is tendered with the request for
redemption. Certificated shares cannot be redeemed by the telephone and telegram
exchange. All redemption proceeds will be forwarded to the address of record or
bank designated on the account application.
The Transfer Agent and the Fund have reserved the right to change, modify, or
terminate the telephone or telegram exchange or redemption option at any time.
Before this option is effective for a corporation, partnership, limited
liability companies, or other organizations, additional documents may be
required. This option is not available for Profit-Sharing Trust and Individual
Retirement Accounts. The Fund and the Transfer Agent disclaim responsibility for
verifying the authenticity of telephone and telegram exchange or redemption
requests which are made in accordance with the procedures approved by
shareholders.
SPECIAL CIRCUMSTANCES:
---------------------
In some circumstances a signature guarantee may be required before shares are
redeemed. These circumstances include a change in the address for an account
within the last 30 days, a request to send the proceeds to a different payee or
address from that listed for the account, or a redemption request for $100,000
or more. A signature guarantee may be obtained from a bank, broker, or other
acceptable financial institution. If a signature guarantee is required, we
suggest that you call us to ensure that the signature guarantee and redemption
request will be processed correctly.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The Exchange Privilege may be exercised by sending written instruction to the
Transfer Agent. See "How Shares Are Redeemed" for applicable signatures and
signature guarantee requirements. Shareholders may authorize telephone or
telegram exchanges or redemptions by making an election on your application.
Procedures required by the Fund to ensure that a shareholder's requested
telephone or telegram transaction is genuine include identification by the
shareholder of the account by number, recording of the requested transaction and
sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges unless the Fund fails to follow these procedures. Shares must be owned
for 10 business days before exchanging and cannot be in certificate form unless
the certificate is tendered with the request for exchange. Exchanges will be
accepted only if the registration of the two accounts is identical. Exchange
redemptions and purchases are effected on the basis of the net asset value next
determined after receipt of the request in proper order by the Fund. In the case
of exchanges into the Money Market Fund, dividends generally commence on the
following business day. For federal and state income tax purposes, an exchange
is treated as a sale and may result in a capital gain or loss.
20
<PAGE>
ADDITIONAL ACCOUNT POLICIES
--------------------------------------------------------------------------------
If the value of your account falls below $100, the Fund may mail you a notice
asking you to bring the account back to $100 close it out. If you do not take
action within 60 days, the Fund may sell your shares and mail the proceeds to
you at the address of record.
The Fund does not permit market-timing or other abusive trading practices.
Excessive, short-term (market-timing) and other abusive trading practices may
disrupt portfolio trading strategies and harm Fund performance. To minimize harm
to the Fund and its shareholders, each Fund reserves the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading.
INTERNET ADDRESS
--------------------------------------------------------------------------------
Activa's Web site is located at activafunds.com. Our Web site offers further
information about the Activa Funds.
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund intends to continue to comply with the provisions of Subchapter M of
the Internal Revenue Code applicable to investment companies. As the result of
paying to its shareholders as dividends and distributions substantially all net
investment income and realized capital gains, the Fund will be relieved of
substantially all Federal income tax.
For Federal income tax purposes, distributions of net investment income and
any capital gains will be taxable to shareholders. Distributions of net
investment income will normally qualify for the 70% deduction for dividends
received by corporations. After the last dividend and capital gains distribution
in each year, the Fund will send you a statement of the amount of the income and
capital gains which you should report on your Federal income tax return.
Dividends derived from net investment income and net short-term capital gains
are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or reinvested in
additional shares of the Fund. Qualified long-term capital gain dividends
received by individual shareholders are taxed a maximum rate of 20%.
In addition, shareholders may realize a capital gain or loss when shares are
redeemed. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
On the record date for a distribution, the Fund's share value is reduced by
the amount of the distribution. If a shareholder buys shares just before the
record date ("buying a dividend"), they will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
Also, under the Code, a 4% excise tax is imposed on the excess of the
required distribution for a calendar year over the distributed amount for such
calendar year. The required distribution is the sum of 98% of the Fund's net
investment income for the calendar year plus 98% of its capital gain net income
for the one-year period ended December 31, plus any undistributed net investment
income from the prior calendar year, plus any undistributed capital gain net
income from the prior calendar year, minus any overdistribution in the prior
calendar year. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
Under certain circumstances, the Fund will be required to withhold 31% of a
shareholder's distribution or redemption from the Fund. These circumstances
include failure by the shareholder to furnish the Fund with a proper taxpayer
identification number; notification of the Fund by the Secretary of the Treasury
that a taxpayer identification number is incorrect, or that withholding should
commence as a result of the shareholder's failure to report interest and
dividends; and failure of the shareholder to certify, under penalties of
perjury, that he is not subject to withholding. In this regard, failure of a
shareholder who is a foreign resident to certify that he is a nonresident alien
may result in 31% of his redemption proceeds and 31% of his capital gain
distribution being withheld. In addition, such a foreign resident may be subject
to a 30% or less, as prescribed by an applicable tax treaty, withholding tax on
ordinary income dividends distributed unless he qualifies for relief under an
applicable tax treaty.
Trustees of qualified retirement plans are required by law to withhold 20% of
the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement does not apply to distributions from IRA's or
any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account or IRA. Shareholders should consult their tax
adviser regarding the 20% withholding requirement.
21
<PAGE>
Prior to purchasing shares of the Fund, the impact of any dividends or
capital gain distributions which are about to be declared should be carefully
considered. Any such dividends and capital gain distributions declared shortly
after you purchase shares will have the effect of reducing the per share net
asset value of your shares by the amount of dividends or distributions on the
ex-dividend date. All or a portion of such dividends or distributions, although
in effect a return of capital, are subject to taxes which may be at ordinary
income tax rates.
Each shareholder is advised to consult with his tax adviser regarding the
treatment of distributions to him under various state and local income tax laws.
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
--------------------------------------------------------------------------------
The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once each year, the Fund is audited by independent certified public
accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
22
<PAGE>
====================================
Activa
Growth
ACTIVA GROWTH FUND Fund
(a Series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
====================================
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ACTIVA INTERMEDIATE BOND FUND ACTIVA MUTUAL FUND LOGO
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not a
Restrictions on the Fund's prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Prospectus, which can be
Income Securities 3 requested from the Fund by writing or telephoning
Description of Securities Ratings 6 as indicated above. This Statement of Additional
Portfolio Transactions and Information relates to the Prospectus for the Fund
Brokerage Allocation 11 dated April 29, 2000.
Principal Shareholders 12
Officers and Trustees of the Fund 12
Investment Adviser 14
Sub-Adviser 15
Plan of Distribution and Principal
Underwriter 15
Administrative Agreement 15
Transfer Agent 16
Custodian 16
Auditors 16
Pricing of Fund Shares 16
Purchase of Shares 16
How Shares are Redeemed 17
Exchange Privilege 18
Additional Account Policies 18
Internet Address 18
Federal Income Tax 18
Reports to Shareholders and Annual Audit 19
</TABLE>
The date of this Statement of Additional
Information is April 29, 2000.
Printed in U.S.A.
1
<PAGE>
ACTIVA INTERMEDIATE BOND FUND
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998.
The Declaration of Trust authorizes the Trustees to create additional series
and to issue an unlimited number of units of beneficial interest, or "shares."
The Trustees are also authorized to issue different classes of shares of any
series. No series which may be issued by the Trust is entitled to share in the
assets of any other series or is liable for the expenses or liabilities of any
other series. The Fund presently has only one class of shares.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The investment objective of the Fund is to provide high total return
consistent with moderate risk of capital and maintenance liquidity. The Fund
will attempt to meet its objective by investing in a diversified portfolio of
intermediate and long-term income securities of U.S. issuers.
Fundamental Investment Restrictions
The investment restrictions below have been adopted by the Fund. Except where
otherwise noted, these investment restrictions are "fundamental" policies which,
under the 1940 Act, may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities.
The Fund:
1. May not make any investment inconsistent with the Fund's classification
as a diversified investment company under the Investment Company Act of
1940.
2. May not purchase any security which would cause the Fund to concentrate
its investments in the securities of issuers primarily engaged in any
particular industry except as permitted by the SEC. This restriction
does not apply to instruments considered to be domestic bank money
market instruments.
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities or other issues, except to the extent that
the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may (a) invest in securities or
other instruments directly or indirectly secured by real estate, and (b)
invest in securities or other instruments issued by issuers that invest
in real estate;
7. May not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments
issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing, selling
and entering into financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies),
options on financial futures contracts (including futures contracts on
indices of securities, interests rates and currencies), warrants, swaps,
forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and
8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
2
<PAGE>
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by the Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities; (iii) may not acquire securities of other investment companies,
except as permitted by the 1940 Act or any order pursuant thereto; (iv) may not
enter into reverse repurchase agreements or borrow money, except from banks for
extraordinary or emergency purposes, if such obligations exceed in the aggregate
one-third of the market value of the Fund's total assets, less liabilities other
than obligations created by reverse repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
INCOME SECURITIES
--------------------------------------------------------------------------------
Income securities include securities issued or guaranteed by the U.S.
government, its agencies or its instrumentalities ("U.S. Government
Securities"); mortgage-backed or asset-backed securities; corporate debt
securities; zero-coupon or stripped securities; variable and floating rate debt
securities; commercial paper; certificates of deposit, time deposits and bankers
acceptances; other instruments having investment characteristics substantially
similar to any of the foregoing and repurchase agreements with respect to any of
the foregoing. The following disclosure supplements disclosure in the Prospectus
and does not, standing along, present a complete or accurate explanation of the
matters disclosed.
U.S. Treasury Securities. U.S. Treasury securities include bills, notes
and bonds issued by the U.S. Treasury. These instruments are direct obligations
of the U.S. government and, as such, are backed by the full faith and credit of
the United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
Stripped Treasury Securities. Stripped Treasury securities are obligations
representing an interest in all or a portion of the income or principal
component of an underlying Treasury or pool of Treasury securities. Stripped
Treasury securities include obligations entitled to receive all of the interest
component but none of the principal component (IOs) and obligations entitled to
receive all of the principal component but none of the interest component (POs).
The market values of stripped Treasury securities tend to be more volatile in
response to changes in interest rates than are those of conventional Treasury
securities.
Obligations Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. Obligations issued by agencies of the U.S. government or
instrumentalities established or sponsored by the U.S. government include those
that are guaranteed by federal agencies or instrumentalities and may or may not
be backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association ("GNMA"), the Farmers Home
Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. U.S. Government Securities that are not backed by
the full faith and credit of the United States include, among others,
obligations issued by the Tennessee Valley Authority, the Resolution Trust
Corporation ("FHLMC") and the United States Postal Service, each of which has
the right to borrow from the United States Treasury to meet its obligations, and
obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the
obligations of which may be satisfied only by the individual credit of the
issuing agency. Investments in FHLMC, FNMA and other obligations may include
collateralized mortgage obligations and real estate mortgage investment conduits
issued or guaranteed by such entities. In the case of securities not backed by
the full faith and credit of the United States, a Fund must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment and may
not be able to assert a claim against the U.S. if the agency or instrumentality
does not meet its commitments.
Mortgage-Backed Securities Issued or Guaranteed by U.S. Government
Instrumentalities. Mortgage-backed securities may be issued or guaranteed by
U.S. government agencies such as GNMA, FNMA or FHLMC and represent undivided
ownership interests in pools of mortgages. The mortgages backing these
securities may include conventional 30-year fixed rate mortgages, 15-year fixed
rate mortgages adjustable rate mortgages. The U.S. government or the issuing
agency guarantees the payment of the interest on and principal of these
securities.
3
<PAGE>
However, the guarantees do not extend to the securities' yield or
value, which are likely to vary inversely with fluctuations in interest rates,
nor do the guarantees extend to the yield or value of a Fund's shares. These
securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the principal
amounts of such underlying mortgages may generally be prepaid in whole or in
part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-backed securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments or
principal on the underlying mortgage obligations. The remaining maturity of a
mortgage-backed security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Sub-Adviser on the
basis of assumed prepayment rates with respect to such mortgages. The remaining
expected average life of a pool of mortgages underlying a mortgage-backed
security is a prediction of when the mortgages will be repaid and is based upon
a variety of factors such as the demographic and geographic characteristics of
the borrowers and the mortgaged properties, the length of time that each of the
mortgages has been outstanding, the interest rates payable on the mortgages and
the current interest rate environment. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. When the mortgage obligations underlying mortgage-back
securities can be expected to accelerate. When the mortgage obligations are
prepaid, a Fund reinvests the prepaid amounts in other income producing
securities, the yields of which reflect interest rates prevailing at the time.
Therefore, a Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgage-backed securities. Moreover, prepayments of
mortgages which underlie securities purchased by a Fund at a premium would
result in capital losses. Alternatively, during periods of rising interest
rates, mortgage-backed securities are often more susceptible to extension risk
(i.e. rising interest rates could cause property owners to prepay their mortgage
loans more slowly than expected when the security was purchased by the Fund
which may further reduce the market value of such security and lengthen the
duration of such security) than traditional debt securities.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities.
Collateralized mortgage obligations ("CMOs") are debt obligations collateralized
by mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA and FHLMC certificates, but also may be
collateralized by whole loans or private pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs deemed to be U.S. government securities
are those issued or guaranteed as to principal and interest by a person
controlled or supervised by and acting as an agency or instrumentality of the
U.S. government. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche", is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest typically is paid or accrues on a monthly, quarterly or
semi-annual basis. The principal and interest on the Mortgage Assets may be
allocated among the several classes of a series of CMO in innumerable ways. In
one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier. Planned
Amortization Class CMOs ("PAC Bonds") generally require payments of a specified
amount of principal on each payment date. PAC Bonds are always parallel pay CMOs
with the required principal payments on such securities having the highest
priority after interest has been paid to all classes.
Types of Credit Support. Mortgage-backed securities are often backed by a
pool of assets representing the obligation of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying
4
<PAGE>
assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollaterization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support is
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
Asset-Backed Securities. The securitization techniques used to develop
mortgage-back securities are now also applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables, are being securitized
in pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
Other types of asset-backed securities may be developed in the future.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with mortgage-backed securities, asset-backed securities are
often backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of asset-backed securities backed by automobile
receivables permit the servicers of such receivables to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of
asset-backed securities backed by automobile receivables may not have a proper
security interest in all of the obligations backing such receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities.
Zero-coupon securities. Zero-coupon securities pay no cash interest but are
sold at substantial discounts from their value at maturity. When a zero-coupon
bond is held to maturity, its entire investment return comes from the difference
between its purchase price and its maturity value. The market values of such
securities are generally subject to greater fluctuations in response to market
rates of interest than bonds that pay interest currently. Because such
securities allow an issuer to avoid the need to generate cash to meet current
interest payments, such bonds may involve greater credit risk than bonds paying
cash interest currently.
Premium securities. The Fund may at times invest in securities bearing coupon
rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. If an issuer were to redeem securities held by the Fund during a time
of declining interest rates, the Fund may not be able to reinvest the proceeds
in securities providing the same investment return as the securities redeemed.
If securities purchased by the Fund at a premium are called or sold prior to
maturity, the fund generally will recognize a capital loss to the extent the
call or sale price is less than the Fund's adjusted tax basis in such
securities. Additionally, the Fund generally will recognize a capital loss if it
holds such securities to maturity.
Adjustable and Floating Rate Securities. Adjustable rate securities are
securities having interest rates which are adjusted or reset at periodic
intervals ranging, in general, from one day to several years, based on a spread
over a specific interest rate or interest rate index or on the results of
periodic auctions. There are three main categories of indices: (i) those based
on U.S. Government Securities; (ii) those derived from a calculated measure such
as a cost of funds index; and (iii) those based on a moving average of interest
rates, including mortgage rates. Commonly utilized indices include, for example,
the One Year Constant Maturity Treasury Index, the London Interbank Offered Rate
(LIBOR), the Federal Home Loan Bank Cost of Funds, the prime rate and commercial
paper rates.
5
<PAGE>
Adjustable rate securities allow a Fund to participate in all or a portion of
increases in interest rates through periodic upward adjustments of the coupon
rates of such securities, resulting in higher yields. During period of declining
interest rates however, coupon rates may readjust downward resulting in lower
yields to the Fund. During periods of rising interest rates, changes in the
coupon rate of adjustable rate securities will lag behind changes in the market
interest rate, which may result in such security having a lower value until the
coupon resets to reflect more closely market interest rates. Adjustable rate
securities frequently limit the maximum amount the rate may be adjusted during
any adjustment period, in any one year or during the term of the security.
Defensive Strategies. In certain circumstances market conditions may, in the
Sub-Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Sub-Adviser may use alternative strategies primarily designed to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may invest to a substantial degree in
high-quality, short-term obligations. Such obligations may include: obligations
of the U.S. Government, its agencies or instrumentalities; other debt securities
rated within the three highest grades by either Standard and Poor's ("S&P") or
Moody's Investor Services, Inc. ("Moody's) (or comparably rated by any other
nationally recognized statistical rating organization ("NRSRO")); commercial
paper rated in the highest grade by either rating service (or comparably rated
by any other nationally recognized statistical rating organization);
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Fund considers consistent with such strategy.
BORROWINGS
The Fund may borrow money from banks for temporary, emergency purposes only
(such as meeting share redemption requests), although the Fund does not expect
to do so in an amount exceeding 5% of its respective total assets (after giving
effect to any such borrowing). Borrowing creates special risk considerations
such as increased volatility in the net asset value of the shares and in the
yield on the Fund's portfolio. Borrowing will create interest expenses for a
Fund which can exceed the income from the assets retained.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may purchase and sell portfolio securities on a "when issued" and
"delayed delivery" basis. No income accrues to or is earned by a fund on
purchases of portfolio securities in connection with such transactions prior to
the date the Fund actually takes delivery of such securities. These transactions
are subject to market fluctuation; the value of such securities at delivery may
be more or less than their purchase price, and yields generally available on
such securities when delivery occurs may be higher than yields on such
securities obtained pursuant to such transactions. Because a Fund relies on the
buyer or seller, as the case may be, to consummate the transaction, failure by
the other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. When
the Fund is the buyer in such a transaction, however, it will maintain, in a
segregated account with its custodian, cash or liquid securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase securities on such basis
only with the intention of actually acquiring these securities, but the Fund may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when issued" or "delayed delivery" basis.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year. The
turnover rate may vary greatly from year to year as well as within a year. A
high portfolio turnover (100% or more) increases a Fund's transaction costs,
including brokerage commissions, and may result in the realization of more
short-term capital gains than if the Fund had a lower portfolio turnover. The
turnover rate will not be a limiting factor, however, if the Sub-Adviser deems
portfolio changes appropriate.
DESCRIPTION OF SECURITIES RATINGS
--------------------------------------------------------------------------------
STANDARD & POOR'S - A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follow:
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
A debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
6
<PAGE>
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
as audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment - capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms of
the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
1. LONG-TERM DEBT - INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
meet its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small
degree. Capacity to meet its financial commitment on the obligation is very
strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. Capacity to meet its financial commitment on the obligation is
still strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligors capacity or willingness to meet its
financial commitment on the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grade period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
-: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposes to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DEBT OBLIGATIONS OR ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
7
<PAGE>
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain ratings or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. COMMERCIAL PAPER
A-S & P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market. Ratings are
graded into several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest. These categories are as follow:
A-1: The highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high for issues
designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: This rating is assigned to short-term debt obligations currently
vulnerable to nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment on the
obligation.
D: Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are bases on current information furnished to
S & P by the issuer or obtained from other sources it considers reliable. S & P
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
3. PREFERRED STOCK
A S & P preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligation. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the bond rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer. The preferred stock ratings are based on the following
considerations:
I. Likelihood of payment-capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms of
the obligation.
II. Nature of, and provisions of, the issuer.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA: This is the highest rating that may be assigned by S & P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligation.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality,
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
A: An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
8
<PAGE>
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to weakened capacity to make payments for a preferred stock
in this category than for issues in the "A" category.
BB, B AND CCC: Preferred stock rated "BB", "B" and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BBB" indicates the lowest degree of
speculation and "CCC" the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC: The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C: A preferred stock issue rated "C" is a nonpaying issue.
D: A preferred stock rated "D" is a nonpaying issue with the issuer in
default on debt instruments.
NR: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S & P does not rate
a particular type of obligation as a matter of policy. PLUS (+) or MINUS (-): To
provide more detailed indications of preferred stock quality, ratings from "AA"
to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S & P by the issuer or obtained by S & P from other sources it considers
reliable. S & P does not perform an audit in connection with any rating and may,
on occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
MOODY'S INVESTORS SERVICE-a brief description of the applicable Moody's
Investors Service (Moody's) rating symbols and their meanings (as published by
Moody's Investor Service) follows:
1. LONG-TERM DEBT
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 edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protected elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what 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 the 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 some time in the future.
BAA: Bonds which are rated Baa are considered a medium-grade obligation,
(i.e., they are neither highly protected nor poorly secured.) Interest payment
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 in
fact have speculative characteristics as well.
BA: Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
9
<PAGE>
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for the reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgement to be formed; if a bond is
called for redemption; or for other reasons.
1. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment ability of rated issues:
ISSUERS RATED PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-Leading market positions in well-established industries.
-High rates of return on funds employed.
-Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
-Broad margins is earnings coverage of fixed financial charges and high internal
cash generation.
-Well-established access to a range of financial markets and assured sources of
alternate liquidity.
ISSUERS RATED PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
ISSUERS RATED PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes of the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
AAA: An issue which is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
AA: An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A: An issue which is rated "A" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "AAA"
and "AA" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
BAA: An issue which is rated "BAA" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
10
<PAGE>
BA: An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
B: An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
CA: An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
C: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
--------------------------------------------------------------------------------
The Sub-Adviser is responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions on such transactions.
While the Sub-Adviser will be primarily responsible for the placement of the
Fund's portfolio business, the policies and practices in this regard will at all
times be subject to review by the Trustees of the Fund.
Many securities in which the Fund invests are traded principally in the
over-the-counter market. Over-the-counter securities generally are traded on a
net basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a mark-up
to the dealer. Securities purchased in underwritten offerings generally include,
in the price a fixed amount of compensation for the financial advisers,
underwriters and dealers. The Fund also may purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid. Purchases and sales of securities on a stock exchange are effected
through brokers who charge a commission for their services. Day to day
management of the portfolios of each Fund is the responsibility of a team of
officers of the Sub-Adviser.
The Sub-Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Sub-Adviser considers the firm's reliability,
integrity and financial condition and the firm's execution capability, the size
and breadth of the market for the security, the size of and difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the Sub-Adviser, more than one firm can offer comparable
execution services. In selecting among such firms, consideration may be given to
those firms which supply research and other services in addition to execution
services. The Sub-Adviser is authorized to pay higher commissions to brokerage
firms that provide it with investment and research information than to firms
which do not provide such services if the Sub-Adviser determines that such
commissions are reasonable in relation to the overall services provided. No
specific value can be assigned to such research services which are furnished
without cost to the Sub-Adviser. Since statistical and other research
information is only supplementary to the research efforts of the Sub-Adviser to
the Fund and still must be analyzed and reviewed by its staff, the receipt of
research information is not expected to reduce its expenses materially. The
investment advisory fee is not reduced as a result of the Sub-Adviser's receipt
of such research services. Services provided may include (a) furnishing advice
as to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and the
performance of accounts; and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Sub-Adviser in servicing all of
its advisory accounts; not all of such services may be used by the Sub-Adviser
in connection with the Fund. The Sub-Adviser also may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Fund, the Sub-Adviser or the Distributor and with brokerage firms
participating in the distribution of the Fund's shares if it reasonably believes
that the quality of execution and the commission are comparable to that
available from other qualified firms. Similarly, to the extent permitted by law
and subject to the same considers on quality of execution and comparable
commission rates, the Sub-Adviser may direct an executing broker to pay a
portion or all of any
11
<PAGE>
commissions, concessions or discounts to a firm supplying research or other
services or to a firm participating in the distribution of the Fund's shares.
The Sub-Adviser may place portfolio transactions at or about the same time
for other advisory accounts, including other investment companies. The
Sub-Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Sub-Adviser are the respective sizes of the Fund and other
advisory accounts, the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and
opinions of the persons responsible for recommending the investment.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. The
Trustees have adopted certain policies incorporating the standards of Rule 17e-1
issued by the SEC under the 1940 Act which requires that the commissions, fees
or other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time. The rule and procedures also contain review requirements and
require the Sub-Adviser to furnish reports to the Trustees and to maintain
records in connection with such reviews. After consideration of all factors
deemed relevant, the Trustees will consider from time to time whether the
advisory fee for the Fund will be reduced by all or a portion of the brokerage
commission given to affiliated brokers.
During the calendar year ended December 31, 1999, the portfolio turnover rate
was 64.6%.
The Fund may acquire securities of brokers who execute the Fund's portfolio
transactions. As of December 31, 1999, the Fund owned no such securities.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation ("Amway") indirectly, as of February 18, 2000, owned
16,465,185 shares, or 99.15%, of the outstanding shares of the Fund. Jay Van
Andel and Richard M. DeVos are controlling persons of Amway since they own,
together with their spouses, substantially all of its outstanding securities.
Amway is a Michigan manufacturer and direct selling distributor of home care and
personal care products. If Amway were to substantially reduce its investment in
the Fund, it could have an adverse effect on the Fund by decreasing the size of
the fund and by causing the Fund to incur brokerage charges in connection with
the redemption of Amway's shares.
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- ---- ----------- ------------------------------------
<S> <C> <C> <C>
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida 33469 in land and cattle)
Allan D. Engel* 48 Trustee, Vice Vice President, Real Estate
2905 Lucerne SE, President, Secretary Operations - Enterprise
Suite 200 and Assistant Treasurer Capital, Inc. Formerly, Sr.
Grand Rapids, Michigan of the Fund; President, Manager, Investments and Real
49546 and Secretary of the Estate, Amway Corporation.
Investment Adviser. Director, President and
Secretary of Amway Management
Company (1981-1999). Trustee,
Vice President and Secretary,
Amway Mutual Fund (1981- 1999).
12
<PAGE>
<CAPTION>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- ---- ----------- ------------------------------------
<S> <C> <C> <C>
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice President-
19017 Vintage Trace Circle Treasurer, SPX Corporation
Fort Myers, Florida (Designs, manufactures and
33912 markets products and services
for the motor vehicle industry),
1986 to 1994.
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation.
49424
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. Officer, JVA Enterprises, LLC.
Suite 200 President, Chief Executive
Grand Rapids, Michigan Officer and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-
2000). Director, Vice President
and Treasurer of Amway
Management Company (1984-
1999). Trustee, President and
Treasurer, Amway Mutual
Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
*These Trustees are interested persons under the Investment Company Act of
1940, as amended.
13
<PAGE>
<TABLE>
<CAPTION>
Pension or
----------
Name of Person, Trustee Retirement Estimated Annual Total Compensation
--------------- ------- ---------- ---------------- -------------------
Position Compensation Benefits Accrued as Benefits Paid to Trustees
-------- ------------ ------------------- -------- ----------------
Part of Fund Upon Retirement
------------ ---------------
Expenses
---------
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
</TABLE>
* These Trustees are interested persons under the Investment Company Act of
1940, as amended.
All Officers and certain Trustees of the Fund and the Investment Adviser are
affiliated with Amway Corporation. The Officers serve without compensation from
the Fund. Fees paid to all Trustees during the year ended December 31, 1999,
amounted to $48,000. Under the Administrative Agreement, the Investment Adviser
pays the fees of the Trustees of the Fund. The Trustees and Officers of the Fund
owned, as a group, less than 1% of the outstanding shares of the Fund. The
Adviser also serves as the Fund's principal underwriter (see "Distribution of
Shares").
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract") with
Activa Asset Management LLC (the "Investment Adviser" or "Activa"). Under the
Contract, the Investment Adviser sets overall investment strategies for the Fund
and monitors and evaluates the investment performance of the Fund's Sub-Adviser,
including compliance with the investment objectives, policies and restrictions
of the Fund. If the Investment Adviser believes it is in the Fund's best
interests, it may recommend that additional or alternative Sub-Advisers be
retained on behalf of the Fund. If more than one Sub-Adviser is retained, the
Investment Adviser will recommend to the Fund's Trustees how the Fund's assets
should be allocated or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from the
Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Absent the exemptive order, these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and the Investment Adviser
became effective on June 11, 1999 and amended on March 1, 2000. For the services
to be rendered by Sub-Adviser, as provided herein, AAM shall pay to Sub-Adviser
a fee, payable quarterly, at the annual rate of .40 of 1% of the average of the
daily aggregate net asset value of the Fund on the first $50,000,000 of assets;
.32 of 1% on assets in excess of $50,000,000. The fees paid by the Fund to the
Investment Adviser during the year ended December 31, 1999 was $188,433.
Effective March 1, 2000, the Sub-Advsiory Agreement between the Investment
Adviser and the Fund's Sub-Adviser was amended to reduce the sub-advisory fee on
assets in excess of $150,000,000. In order to give the Fund the benefit of this
reduction in fees, the Investment Adviser has agreed to waive its Investment
Advisory fees to the extent necessary so that its fees equal the lesser of (a)
the amount otherwise payable under the Investment Advisory Agreement, and (b)
the amount payable under the amended Sub-Advisory Agreement, plus 0.20% of
average net assets.
14
<PAGE>
Members of the families of Jay Van Andel and Richard M. DeVos indirectly own
substantially all of the outstanding ownership interests of Activa. Jay Van
Andel and Richard M. DeVos are also controlling persons of Amway Corporation
which, as of February 18, 2000, owned 16,465,185 shares, or 99.15%, of the
outstanding shares of the Fund. See "Principal Shareholders."
SUB-ADVISER
--------------------------------------------------------------------------------
A Sub-Advisory Agreement has been entered into between the Investment Adviser
and Van Kampen Management Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555 (Sub-Adviser). Under the Sub-Advisory Agreement, the Adviser employs
the Sub-Adviser to furnish investment advice and manage on a regular basis the
investment portfolio of the Fund, subject to the direction of the Adviser, the
Board of Directors of the Fund, and to the provisions of the Fund's current
Prospectus. The Sub-Adviser will make investment decisions on behalf of the Fund
and place all orders for the purchase or sale of portfolio securities for the
Fund's account, except when otherwise specifically directed by the Fund or the
Adviser. The fees of the Sub-Adviser are paid by the Investment Adviser, not the
Fund.
As compensation for the services rendered under the Sub-Advisory Agreement,
the Investment Adviser has agreed to pay the Sub-Adviser a fee, which is
computed daily and may be paid monthly, equal to the annual rate of .20 of 1% of
the average of the daily aggregate net asset value of the Fund on the first
$50,000,000 of assets; .12% of 1% on the next $100,000,000 of assets; and .04 of
1% on assets in excess of $150,000,000. Fees paid by the Investment Adviser to
the Sub-Adviser during the year ended December 31, 1999 were $79,141.
PLAN OF DISTRIBUTION & PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, the Adviser provides shareholder services
and services in connection with the sale and distribution of the Fund's shares
and is compensated at a maximum annual rate of 0.25 of 1% of the average daily
net assets of the Fund. The maximum amount presently authorized by the Fund's
Board of Trustees is 0.15 of 1% of the average daily net assets of the Fund.
Since these fees are paid from Fund assets, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
During 1999 the Fund paid $96,957 to Activa for the services which it
provided pursuant to the Distribution Plan. The services included printing and
mailing of prospectuses ($19,837) and general and administrative services
($77,120). The latter included activities of Activa's office personnel which are
related to marketing, registration of the Fund's securities under the federal
securities laws, and registration of Activa as a broker-dealer under federal and
state securities laws. Since the Distribution Plan is a compensation plan,
amounts paid under the plan may exceed Activa's actual expenses.
Amounts received by the Adviser pursuant to the Distribution Plan may be
retained by the Adviser as compensation for its services, or paid to other
investment professionals who provide services in connection with the
distribution of Fund shares. The Trustees will review the services provided and
compensation paid pursuant to the Distribution Plan no less often than
quarterly.
Most of the activities financed by the Distribution Plan are related to the
distribution of all of the funds in the Activa family of mutual funds. Other
activities may be related to the distribution of a particular fund. Each Activa
mutual fund (other than the Money Market Fund) contributes the same percentage
of its average net assets to the Distribution Plan. The Money Market Fund does
not presently participate in the Distribution Plan.
The Adviser acts as the exclusive agent for sales of shares of the Fund
pursuant to a Principal Underwriting Agreement. The only compensation currently
received by the Adviser in connection with the sale of Fund shares is pursuant
to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and Activa Asset
Management LLC ("Activa"), Activa provides specified assistance to the Fund with
respect to compliance matters, taxes and accounting, the provision of legal
services, meetings of the Fund's Trustees and shareholders, and preparation of
the Fund's registration statement and other filings with the Securities and
Exchange Commission. In addition, Activa pays the fees of the Fund's Trustees,
and the salaries and fees of all of the Fund's Trustees and officers who devote
part or all of their time to the affairs of Activa. For providing these services
Activa receives a fee, payable quarterly, at the annual rate of 0.15% of the
Fund's average daily assets. During the year ended December 31, 1999, total
payments were $82,010.
15
<PAGE>
The Administrative Agreement provides that Activa is only responsible for
paying such fees and expenses and providing such services as are specified in
the agreement. The Fund is responsible for all other expenses including (i)
expenses of maintaining the Fund and continuing its existence; (ii) registration
of the Trust under the Investment Company Act of 1940; (iii) commissions, fees
and other expenses connected with the acquisition, disposition and valuation of
securities and other investments; (iv) auditing, accounting and legal expenses;
(v) taxes and interest; (vi) government fees; (vii) expenses of issue, sale,
repurchase and redemption of shares; (viii) expenses of registering and
qualifying the Trust, the Fund and its shares under federal and state securities
laws and of preparing and printing prospectuses for such purposes and for
distributing the same to shareholders and investors; (ix) expenses of reports
and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
In return for its services, the Fund pays the Transfer Agent, a fee of $1.167
per account in existence during the month, payable monthly, less earnings in the
redemption liquidity account after deducting bank fees, if any. The fee schedule
is reviewed annually by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids, Michigan,
are the independent certified public accountants for the Fund. Services include
an annual audit of the Fund's financial statements, tax return preparation, and
review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
In order to purchase shares for a new account, the completion of an
application form is required. The minimum initial investment is $500 or more.
Additional investments of $50 or more can be made at any time by using the lower
portion of your account statement. Checks should be made payable to "Activa
Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share net calculated
after the Fund receives your investment and application in proper form.
16
<PAGE>
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
Each Fund will redeem your shares at the net asset value next determined
after your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL:
--------
When redeeming by mail, when no certificates have been issued, send a written
request for redemption to Activa Asset Management LLC, 2905 Lucerne SE, Suite
200, Grand Rapids, Michigan 49546. The request must state the dollar amount or
shares to be redeemed, including your account number and the signature of each
account owner, signed exactly as your name appears on the records of the Fund.
If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, retirement plans, individual retirement
accounts and profit sharing plans.
BY PHONE:
---------
At the time of your investment in the Fund, or subsequently, you may elect on
the Fund's application to authorize the telephone or telegram exchange or
redemption option. You may redeem shares under this option by calling the Fund
at the number indicated on the front of this Prospectus on any business day.
Requests received after 4:00 p.m. when the market has closed will receive the
next day's price. By establishing the telephone or telegram exchange or
redemption option, you authorize the Transfer Agent to honor any telephone or
telegram exchange or redemption request from any person representing themselves
to be the investor. Procedures required by the Fund to ensure that a
shareholder's requested telephone or telegram transaction is genuine include
identification by the shareholder of the account by number, recording of the
requested transaction and sending a written confirmation to shareholders
reporting the requested transaction. The Fund is not responsible for
unauthorized telephone or telegram exchanges or redemptions unless the Fund
fails to follow these procedures. Shares must be owned for 10 business days
before redeeming by the telephone and telegram exchange and cannot be in
certificate form unless the certificate is tendered with the request for
redemption. Certificated shares cannot be redeemed by the telephone and telegram
exchange. All redemption proceeds will be forwarded to the address of record or
bank designated on the account application.
The Transfer Agent and the Fund have reserved the right to change, modify, or
terminate the telephone or telegram exchange or redemption option at any time.
Before this option is effective for a corporation, partnership, or other
organizations, additional documents may be required. This option is not
available for Profit-Sharing Trust and Individual Retirement Accounts. The Fund
and the Transfer Agent disclaim responsibility for verifying the authenticity of
telephone and telegram exchange or redemption requests which are made in
accordance with the procedures approved by shareholders.
SPECIAL CIRCUMSTANCES:
---------------------
In some circumstances a signature guarantee may be required before shares are
redeemed. These circumstances include a change in the address for an account
within the last 30 days, a request to send the proceeds to a different payee or
address from that listed for the account, or a redemption request for $100,000
or more. A signature guarantee may be obtained from a bank, broker, or other
acceptable financial institution. If a signature guarantee is required, we
suggest that you call us to ensure that the signature guarantee and redemption
request will be processed correctly.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
17
<PAGE>
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The above described Exchange Privilege may be exercised by sending written
instruction to the Transfer Agent. See "How Shares Are Redeemed" for applicable
signatures and signature guarantee requirements. Shareholders may authorize
telephone or telegram exchanges or redemptions by making an election on your
application. Procedures required by the Fund to ensure that a shareholder's
requested telephone or telegram transaction is genuine include identification by
the shareholder of the account by number, recording of the requested transaction
and sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges unless the Fund fails to follow these procedures. Shares must be owned
for 10 business days before exchanging and cannot be in certificate form unless
the certificate is tendered with the request for exchange. Exchanges will be
accepted only if the registration of the two accounts is identical. Exchange
redemptions and purchases are effected on the basis of the net asset value next
determined after receipt of the request in proper order by the Fund. In the case
of exchanges into the Money Market Fund, dividends generally commence on the
following business day. For federal and state income tax purposes, an exchange
is treated as a sale and may result in a capital gain or loss.
ADDITIONAL ACCOUNT POLICIES
--------------------------------------------------------------------------------
If the value of your account falls below $100, the Fund may mail you a notice
asking you to bring the account back to $100 or close it out. If you do not take
action within 60 days, the Fund may sell your shares and mail the proceeds to
you at the address of record.
The Fund does not permit market-timing or other abusive trading practices.
Excessive, short-term (market-timing) and other abusive trading practices may
disrupt portfolio trading strategies and harm Fund performance. To minimize harm
to the Fund and its shareholders, each Fund reserves the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading.
INTERNET ADDRESS
--------------------------------------------------------------------------------
Activa's Web site is located at activafunds.com. Our Web site offers further
information about the Activa Funds.
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund intends to comply with the provisions of Subchapter M of the
Internal Revenue Code applicable to investment companies. As the result of
paying to its shareholders as dividends and distributions substantially all net
investment income and realized capital gains, the Fund will be relieved of
substantially all Federal income tax.
For Federal income tax purposes, distributions of net investment income and
any capital gains will be taxable to shareholders. Distributions of net
investment income will normally qualify for the 70% deduction for dividends
received by corporations. After the last dividend and capital gains distribution
in each year, the Fund will send you a statement of the amount of the income and
capital gains which you should report on your Federal income tax return.
Dividends derived from net investment income and net short-term capital gains
are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or reinvested in
additional shares of the Fund. Qualified long-term capital gain dividends
received by individual shareholders are taxed a maximum rate of 20%.
In addition, shareholders may realize a capital gain or loss when shares are
redeemed. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
On the record date for a distribution, the Fund's share value is reduced by
the amount of the distribution. If a shareholder buys shares just before the
record date ("buying a dividend"), they will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
18
<PAGE>
Also, under the Code, a 4% excise tax is imposed on the excess of the
required distribution for a calendar year over the distributed amount for such
calendar year. The required distribution is the sum of 98% of the Fund's net
investment income for the calendar year plus 98% of its capital gain net income
for the one-year period ended December 31, plus any undistributed net investment
income from the prior calendar year, plus any undistributed capital gain net
income from the prior calendar year, minus any overdistribution in the prior
calendar year. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
Under certain circumstances, the Fund will be required to withhold 31% of a
shareholder's distribution or redemption from the Fund. These circumstances
include failure by the shareholder to furnish the Fund with a proper taxpayer
identification number; notification of the Fund by the Secretary of the Treasury
that a taxpayer identification number is incorrect, or that withholding should
commence as a result of the shareholder's failure to report interest and
dividends; and failure of the shareholder to certify, under penalties of
perjury, that he is not subject to withholding. In this regard, failure of a
shareholder who is a foreign resident to certify that he is a nonresident alien
may result in 31% of his redemption proceeds and 31% of his capital gain
distribution being withheld. In addition, such a foreign resident may be subject
to a 30% or less, as prescribed by an applicable tax treaty, withholding tax on
ordinary income dividends distributed unless he qualifies for relief under an
applicable tax treaty.
Trustees of qualified retirement plans are required by law to withhold 20% of
the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement does not apply to distributions from IRA's or
any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account or IRA. Shareholders should consult their tax
adviser regarding the 20% withholding requirement.
Prior to purchasing shares of the Fund, the impact of any dividends or
capital gain distributions which are about to be declared should be carefully
considered. Any such dividends and capital gain distributions declared shortly
after you purchase shares will have the effect of reducing the per share net
asset value of your shares by the amount of dividends or distributions on the
ex-dividend date. All or a portion of such dividends or distributions, although
in effect a return of capital, are subject to taxes which may be at ordinary
income tax rates.
Each shareholder is advised to consult with his tax adviser regarding the
treatment of distributions to him under various state and local income tax laws.
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
--------------------------------------------------------------------------------
The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once each year, the Fund is audited by independent certified public
accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
19
<PAGE>
====================================
Activa
Intermediate
ACTIVA INTERMEDIATE BOND FUND Bond
(a Series of Activa Mutual Fund Trust) Fund
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
====================================
20
<PAGE>
ACTVA INTERNATIONAL FUND ACTIVA MUTUAL FUND LOGO
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
<S> <C>
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not
Restrictions on the Fund's a prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Prospectus, which can be
Securities Descriptions & requested from the Fund by writing or telephoning
Techniques 3 as indicated above. This Statement of Additional
Risk Management & Return Information relates to the Prospectus for the Fund
Enhancement Strategies 6 dated April 29, 2000.
Portfolio Transactions & Brokerage 15
Principal Shareholders 16
Officers & Trustees of the Fund 16
Investment Adviser 18
Sub-Adviser 18
Plan of Distribution & Principal
Underwriters 18
Administrative Agreement 19
Transfer Agent 20
Custodian 20
Auditors 20
Pricing of Fund Shares 20
Purchase of Shares 20
How Shares are Redeemed 20
Exchange Privilege 21
Additional Account Policies 22 The date of this Statement of Additional
Internet Address 22 Information is April 29, 2000.
Federal Income Tax 22
Reports to Shareholders
and Annual Audit 23
</TABLE>
Printed in U.S.A.
1
<PAGE>
ACTIVA INTERNATIONAL FUND
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998.
The Declaration of Trust authorizes the Trustees to create additional
series and to issue an unlimited number of units of beneficial interest, or
"shares." The Trustees are also authorized to issue different classes of shares
of any series. No series which may be issued by the Trust is entitled to share
in the assets of any other series or is liable for the expenses or liabilities
of any other series. The Fund presently has only one class of shares.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The primary investment objective of the Fund is capital appreciation. The
Fund will attempt to meet its objectives by investing primarily in common stocks
and equity-related securities of non-U.S. companies. The Fund's policy is to
invest in a broadly diversified portfolio and not to concentrate investments in
a particular industry or group of industries.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Fund. Except
where otherwise noted, these investment restrictions are "fundamental" policies
which, under the 1940 Act, may not be changed without the vote of a majority of
the outstanding voting securities of the Fund, as the case may be. A "majority
of the outstanding voting securities" is defined in the 1940 Act as the lesser
of (a) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities are present or represented
by proxy, or (b) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions below apply at the time of
the purchase of securities.
The Fund :
1. May not make any investment inconsistent with the Fund's
classification as a diversified investment company under the
Investment Company Act of 1940.
2. May not purchase any security which would cause the Fund to
concentrate its investments in the securities of issuers primarily
engaged in any particular industry except as permitted by the SEC.
This restriction does not apply to instruments considered to be
domestic bank money market instruments.
3. May not issue senior securities, except as permitted under the
Investment Company Act of 1940 or any rule, order or interpretation
thereunder;
4. May not borrow money, except to the extent permitted by applicable
law;
5. May not underwrite securities or other issues, except to the extent
that the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may (a) invest in securities or
other instruments directly or indirectly secured by real estate, and
(b) invest in securities or other instruments issued by issuers that
invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments
issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing,
selling and entering into financial futures contracts (including
futures contracts on indices of securities, interest rates and
currencies), options on financial futures contracts (including futures
contracts on indices of securities, interests rates and currencies),
warrants, swaps, forward contracts, foreign currency spot and forward
contracts or other derivative instruments that are not related to
physical commodities; and
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8. May make loans to other persons, in accordance with the Fund's
investment objective and policies and to the extent permitted by
applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by their Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities; (iii) may not acquire securities of other investment companies,
except as permitted by the 1940 Act or any order pursuant thereto; (iv) may not
enter into reverse repurchase agreements or borrow money, except from banks for
extraordinary or emergency purposes, if such obligations exceed in the aggregate
one-third of the market value of the Fund's total assets, less liabilities other
than obligations created by reverse repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
In view of the Fund's investment objective of capital appreciation, the
Fund intends to purchase securities for long-term or short-term profits, as
appropriate. Securities will be disposed of in situations where, in management's
opinion, such potential is no longer feasible or the risk of decline in the
market price is too great. Therefore, in order to achieve the Fund's objectives,
the purchase and sale of securities will be made without regard to the length of
time the security is to be held. Higher portfolio turnover rates can result in
corresponding increases in brokerage commissions.
SECURITIES DESCRIPTIONS AND TECHNIQUES
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The following discussion provides the various principal and non-principal
investment policies and techniques employed by the Fund.
EQUITY SECURITIES:
------------------
COMMON STOCK is the most prevalent type of equity security. Common
stockholders receive the residual value of the issuers earning and assets after
the issuer pays its creditors and any preferred stockholders. As a result,
changes in an issuer's earnings directly influence the value of its common
stock.
PREFERRED STOCKS have the right to receive specified dividends or
distributions before the payment of dividends or distributions on common stock.
Some preferred stocks also participate in dividends and distributions paid on
common stock. Preferred stocks may also permit the issuer to redeem the stock.
WARRANTS give the Funds the option to buy the issuer's stock or other
equity securities at a specified price. The Funds may buy the designated shares
by paying the exercise price before the warrant expires. Warrants may become
worthless if the price of the stock does not rise above the exercise price by
the expiration date. Rights are the same as warrants, except they are typically
issued to existing stockholders.
CONVERTIBLE SECURITIES are fixed income securities that a Fund has the
option to exchange for equity securities at a specified conversion price. The
option allows the Fund to realize additional returns if the market price of the
equity securities exceeds the conversion price.
Convertible securities have lower yields than comparable fixed income
securities to compensate for the value of the conversion option. In addition,
the conversion price exceeds the market value of the underlying equity
securities at the time a convertible security is issued. Thus, convertible
securities may provide lower returns than non-convertible fixed-income
securities or equity securities depending upon changes in the price of the
underlying equity securities. However, convertible securities permit a Fund to
realize some of the potential appreciation of the underlying equity securities
with less risk of losing its initial investment.
The Fund treats convertible securities as equity securities for purposes of
their investment policies and limitations, because of their unique
characteristics.
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FIXED INCOME SECURITIES:
------------------------
CORPORATE DEBT SECURITIES are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt security. The credit risks of corporate debt securities vary
widely among issuers.
ZERO COUPON SECURITIES do not pay interest or principal until final
maturity. Most debt securities provide periodic payments of interest (referred
to as a "coupon payment"). In contrast, investors buy zero coupon securities at
a price below the amount payable at maturity. The difference between the price
and the amount paid at maturity represents interest on the zero coupon security.
This increases the market and credit risk of a zero coupon security, because an
investor must wait until maturity before realizing any return on the investment.
There are many forms of zero coupon securities. Some securities are
originally issued at a discount and are referred to as "zero coupon" or "capital
appreciation" bonds. Others are created by separating the right to receive
coupon payments from the principal due at maturity, a process known as "coupon
stripping." Treasury STRIPs, IOs, and POs are the most common forms of
"stripped" zero coupon securities. In addition, some securities give the issuer
the option to deliver additional securities in place of cash interest payments,
thereby increasing the amount payable at maturity. These are referred to as
"pay-in-kind" or "PIK" securities.
COMMERCIAL PAPER is an issuer's draft or note with a maturity of less than
nine months. Companies typically issue commercial paper to fund current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. Commercial paper may default
if the issuer cannot continue to obtain liquidity in this fashion. The sort
maturity of commercial paper reduces both the market and credit risk as compared
to other debt securities of the same issuer.
BANK INSTRUMENTS are unsecured interest-bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Instruments denominated in U.S. dollars and issued by
non-U.S. branches of U.S. or foreign banks are commonly referred to as
Eurodollar instruments. Instruments denominated in U.S. dollars are issued by
U.S. branches of foreign banks are referred to as Yankee instruments.
DEMAND INSTRUMENTS are corporate debt securities that the issuer must repay
upon demand. Other demand instruments require a third party, such as a dealer or
bank, to repurchase the security for its face value upon demand. The Fund treats
demand instruments as short-term securities, even though their stated maturity
may extend beyond one year. Insurance contracts include guaranteed investment
contracts, funding agreements and annuities.
GOVERNMENT OBLIGATIONS include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association. No assurances can be
given that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
PARTICIPATION INTERESTS represent an undivided interest in or assignment of
a loan made by an issuing financial institution. Participation interests are
primarily dependent upon the financial strength of the borrowing corporation,
which is obligated to make payments of principal and interest on the loan, and
there is a risk that such borrowers may have difficulty making payments. In the
event the borrower fails to pay scheduled interest or principal payments, a Fund
could experience a reduction in its income and might experience a decline in the
net asset value of its shares. In the event of a failure by the financial
institution to perform its obligations in connection with the participation, a
Fund might incur certain costs and delays in realizing payment or may suffer a
loss of principal and/or interest.
In acquiring participation interests, the Sub-Adviser will conduct analysis
and evaluation of the financial condition of each co-lender and participant to
ensure that the participation interest meets a high quality standard and will
continue to do so as long as it holds a participation. In conducting its
analysis and evaluation, the Sub-Adviser will consider all relevant factors in
determining the credit quality of the underlying or borrower, the amount and
quality of the collateral, the terms of the loan participation agreement and
other relevant agreements (including any intercreditor agreements), the degree
to which the credit of an intermediary was deemed material to the decision to
purchase the loan participation, the interest rate environment, and general
economic conditions applicable to the borrower and the intermediary.
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VARIABLE AND FLOATING RATE INSTRUMENTS are generally not rated by credited
rating agencies; however, the Sub-Adviser under guidelines established by the
Trust's Board of Trustees will determine what unrated and variable and floating
rate instruments are of comparable quality at the time of the purchase to rated
instruments eligible for purchase by the Fund. In making such determinations,
the Sub-Adviser considers the earning power, cash flow and other liquidity
ratios of the issuers of such instruments (such issuers include financial,
merchandising, bank holding and other companies) and will monitor their
financial condition. An active secondary market may not exist with respect to
particular variable or floating rate instruments purchased by a Fund. The
absence of such an active secondary market could make it difficult for a Fund to
dispose of the variable or floating rate instrument involved in the event of the
issuer of the instrument defaulting on its payment obligation or during periods
in which a Fund is not entitled to exercise its demand rights, and a Fund could,
for these or other reasons, suffer a loss to the extent of the default. Variable
and floating rate instruments may be secured by bank letters of credit.
FOREIGN SECURITIES:
Foreign securities are securities of issuers based outside the U.S. They
are primarily denominate in foreign currencies and traded outside of the United
States. In addition to the risks normally associated with equity and fixed
income securities, foreign securities are subject to country risk and currency
risks. Trading in certain foreign markets is also subject to liquidity risks.
FOREIGN EXCHANGE CONTRACTS are used by a Fund to convert U.S. dollars into
the currency needed to buy a foreign security, or to convert foreign currency
received from the sale of a foreign security into U.S. dollars ("spot currency
trades"). The Fund may also enter into derivative contracts in which a foreign
currency is an underlying asset. Use of these derivative contracts may increase
or decrease the Fund's exposure to currency risk.
FOREIGN GOVERNMENT SECURITIES generally consist of fixed income securities
supported by national, state, or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.
Foreign government securities also include fixed income securities of
"quasi-governmental agencies" which are either issued by entities that are owned
by a national, state or equivalent government or are obligations of a political
unit that are not backed by the national government's full faith and credit and
general taxing powers. Further, foreign government securities include
mortgage-related securities issued or guaranteed by national, state or
provincial governmental instrumentalities, including guasi-governmental
agencies.
DEPOSITORY RECEIPTS are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by foreign issuers.
ADRs in registered form, are designed for use in U.S. securities markets. Such
depository receipts may be sponsored by the foreign issuer or may be
unsponsored. The Fund may also invest in European and Global Depository Receipts
("EDRs" and "GDRs"), which in bearer form, are designed for use in European
securities markets, and in other instruments representing securities of foreign
companies. Such depository receipts may be sponsored by the foreign issuer or
may be unsponsored. Unsponsored depository receipts are organized independently
and without the cooperation of the foreign issuer of the underlying securities;
as a result, available information regarding the issuer may not be as current as
for sponsored depository receipts, and the prices of unsponsored depository
receipts may be more volatile than if they were sponsored by the issuer of the
underlying securities. ADRs may be listed on a national securities exchange or
may trade in the over-the-counter market. ADR prices are denominated in U.S.
dollars; the underling security may be denominated in a foreign currency,
although the underlying security may be subject to foreign governmental taxes
which would reduce the yield on such securities.
EURODOLLAR CONVERTIBLE SECURITIES are fixed income securities of a U.S.
issuer or a foreign issuer that are issued outside the United States and are
convertible into equity securities of the same or a different issuer. Interest
and dividends on Eurodollar securities are payable in U.S. dollars outside the
United States. The Fund may invest without limitation in Eurodollar convertible
securities, subject to its investment policies and restrictions, that are
convertible into foreign equity securities listed, or represented by ADRs
listed, on the New York Stock Exchange or the American Stock Exchange or
convertible into publicly traded common stock of U.S. companies.
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EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS are bonds that pay interest and
principal in U.S. dollars held in banks outside the United States, primarily in
Europe. Eurodollar instruments are usually issued on behalf of multinational
companies and foreign governments by large underwriting groups composed of banks
and issuing houses from may countries. Yankee Dollar instruments are U.S. dollar
denominated bonds issued in the U.S. by foreign banks and corporations.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
--------------------------------------------------------------------------------
The Fund may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to enhance return.
The Fund, and thus its investors, may lose money through any unsuccessful use of
these strategies. These strategies include the use of foreign currency forward
contracts, options, futures contracts and options thereon. The Fund's ability to
use these strategies may be limited by various factors, such as market
conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, the Fund may use them to the
extent consistent with its investment objectives and polices.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES. Participation
in the options and futures markets and in currency exchange transactions
involves investment risks and transaction costs to which a Fund would not be
subject absent the use of these strategies. The Fund, and thus its investors,
may lose money through any unsuccessful use of these strategies. If the
Sub-Adviser's predictions of movements in the direction of the securities,
foreign currency or interest rate markets are inaccurate, the adverse
consequences to a Fund may leave the Fund in a worse position than if such
strategies were not used. Risk inherent in the use of options, foreign currency
and futures contracts and options on futures contracts include (1) dependence on
the Sub-Adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the risk that the
counterparty may be unable to complete the transaction; and (6) the possible
liability of a Fund to purchase or sell a portfolio security at a
disadvantageous time, due to the need for a Fund to maintain "cover" or to
segregate assets in connection with hedging transactions.
DERIVATIVES:
INDEX AND CURRENCY-LINKED SECURITIES are debt securities of companies that
call for interest payments and/or payment at maturity in different terms than
the typical note where the borrower agrees to make fixed interest payments and
to pay a fixed sum at maturity. Principal and/or interest payments on an
index-linked note depend on the performance of one or more market indices, such
as the S&P 500 Index or a weighted index of commodity futures such as crude oil,
gasoline and natural gas. The Fund may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the principal amount of an
equity-linked debt security is exchanged for common stock of the issuer or is
payable in an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are short-term or intermediate term
instruments having a value at maturity, and/or an interest rate, determined by
reference to one or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one currency against
another currency, or against an index.
MORTGAGE-RELATED SECURITIES are derivative interests in pools of mortgage
loans made to U.S. residential home buyers, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-thoughts." These securities entitle the holder to receive all
interest and principal payments owed on the
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mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related grantors 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 and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insure
or guaranteed by any government agency 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.
FHLMC is a government-sponsored corporation created to increase availability of
mortgage credit for residential housing and owned entirely by private
stockholders. FHLMC issues participation certificates which represent interests
in conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the United
States Government.
Although the underlying mortgage loans in a pool may have maturities of up
to 30 years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. In the even higher than
anticipated prepayments of principal, a Fund may be subject to reinvestment in a
market of lower interest rates. Conversely, when interest rates are rising, the
rate of prepayments tends to decrease, thereby lengthening the actual average
life of the certificates. Accordingly, it is not possible to predict accurately
the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO in
which a Fund may invest is a hybrid between mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life 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 and interest received from
the pool of underlying mortgages, including prepayments, is first returned to
the class having the earliest maturity date or highest maturity. Classes that
have longer maturity dates and lower seniority will receive principal only after
the higher class has been retired.
SYNTHETIC CONVERTIBLE SECURITIES are derivative positions composed of two
or more different securities whose investment characteristics, taken together,
resemble those of convertible securities. For example, a Fund may purchase a
non-convertible debt security and a warrant or option, which enables the Fund to
have a convertible-like position with respect to a company, group of companies
or stock index. Synthetic convertible securities are typically offered by
financial institutions and investment banks in private placement transactions.
Upon conversion, a Fund generally receives an amount in cash equal to the
difference between the conversion price and the then current value of the
underlying security. Unlike a true convertible security, a synthetic convertible
comprises two or more separate securities, each with its own market value.
Therefore, the market value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertible component. For this reason,
the values of a synthetic convertible and a true convertible security may
respond differently to market fluctuations. The Fund only invests in synthetic
convertibles with respect to companies whose corporate debt securities are rated
"A" or higher by Moody's or "A" or higher by Standard and Poor's.
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OPTIONS AND FUTURES:
OPTIONS are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period of time. A
call option gives the holder (buyer) the right to purchase the underlying asset
from the seller (writer) of the option. A put option gives the holder the right
to sell the underlying asset to the writer of the option. The writer of the
option receives a payment, or "premium", from the buyer, which the writer keeps
regardless of whether the buyer uses (or exercises) the option.
The Fund may:
o Buy call options on foreign currency in anticipation of an increase in
the value of the underlying asset.
o Buy put options on foreign currency, portfolio securities, and futures
in anticipation of a decrease in the value of the underlying asset.
o Write call options on portfolio securities and futures to generate
income from premiums, and in anticipation of a decrease or only
limited increase in the value of the underlying asset. If a call
written by a Fund is exercised, the Fund foregoes any possible profit
from an increase in the market price of the underlying asset over the
exercise price plus the premium received. When a Fund writes options
on futures contracts, it will be subject to margin requirements
similar to those applied to futures contracts.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options with
respect to the S&P 500 and other stock indices. The Fund may purchase such
options as a hedge against changes in the values of portfolio securities or
securities which it intends to purchase or sell, or to reduce risks inherent in
the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain
risks not found in stock options generally. 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 Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options on a stock
index depends on the Investment Adviser's ability to predict correctly movements
in the direction of the stock market generally. This requires different skills
and techniques than predicting changes in the price of individual stocks.
Index prices may be distorted if circumstances disrupt trading of certain
stocks included in the index, such as if trading were halted in a substantial
number of stocks included in the index. If this happens, the Fund could not be
able to close out options which it had purchased, and if restrictions on
exercise were imposed, the Fund might be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Fund purchases put or
call options only with respect to an index which the Sub-Adviser believes
includes a sufficient number of stocks to minimize the likelihood of a trading
halt in the index.
FOREIGN CURRENCY OPTIONS. The Fund may buy or sell put and call options on
foreign currencies. A put or call option on foreign currency gives the purchaser
of the option the right to sell or purchase a foreign currency at the exercise
price until the option expires. The Fund uses foreign currency options
separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
a call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price of an in-the-money strike prices. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Funds to reduce foreign currency risk using such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fix number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency at a future date, which may
be any fixed number of days from the date of the contract
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agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
FUTURES CONTRACTS provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a price, date, and
time specified when the contract is made. Futures contracts traded OTC are
frequently referred to as "forward contracts". Entering into a contract to buy
is commonly referred to as buying or purchasing a contract or holding a long
position. Entering into a contract to sell is commonly referred to as selling a
contract or holding a short position. Futures are considered to be commodity
contracts.
The Fund may buy and sell interest rate or financial futures, futures on
indices, foreign currency exchange contracts, forward foreign currency exchange
contracts, foreign currency options, and foreign currency futures contracts.
Interest Rate or Financial Futures Contracts. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures markets, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial future sale by a Fund obligates
the Fund, as seller, to deliver the specific type of financial instrument called
for in the contract at a specific future time for a specified price. A futures
contract purchased by a Fund obligates the Fund, as purchaser, to take delivery
of the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without delivery of securities. A Fund
closes out a futures contract sale by entering into a futures contract purchase
for the same aggregate amount of the specific type of financial instrument and
the same delivery date. If the price in the sale exceeds the price in the
offsetting purchase, the Fund receives the difference and thus realizes a gain.
If the offsetting purchase price exceeds the sale price, the Fund pays the
difference and realizes a loss. Similarly, a Fund closes out a futures contract
purchase by entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase options on the futures
contracts it can purchase or sell, as describe above. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at any
time during the period of the option. Upon exercise, the writer of the option is
obligated to pay the difference between the cash value of the futures contract
and the exercise price. Like the buyer or seller of a futures contract, the
holder or writer of an option has the right to terminate its position prior to
the scheduled expiration of the option by selling, or purchasing an option of
the same series, at which time the person entering into the closing transaction
will realize a gain or loss. There is no guarantee that such closing
transactions can be effected.
Investments in futures options involve some of the same considerations as
investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of 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. Depending on the pricing of the contract
will note be fully reflected in the value of the option. Depending on the
pricing of the option compared to either the futures contract upon which it is
based, or upon the price of the securities being hedged, an option may or may
not be less risky than ownership of the futures contract or such securities. In
general, the market prices of options are more volatile than the market prices
on the underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve
9
<PAGE>
less potential risk to the Fund because the maximum amount at risk is limited to
the premium paid for the options (plus transaction costs).
RISKS OF TRANSACTIONS IN OPTIONS AND FUTURES CONTRACTS. There are several
risks related to the use of futures as a hedging device. One risk arises because
of the imperfect correlation between movements in the price of the options or
futures contract and movements in the price of the securities which are the
subject of the hedge. The price of the contract may move more or less than the
price of the securities being hedged. If the price of the contract moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, a Fund would be in a better position than if
it had not hedged at all. If the price of the security being hedged has moved in
a favorable direction, this advantage will be partially offset by the loss on
the contract. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the contract
which will not be completely offset by movements in the price of the securities
which are subject to the hedge.
When contracts are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If a Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the contract that
is not offset by a reduction in the price of securities purchased.
Although the Fund intends to purchase or sell contracts only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a liquid secondary market on an exchange or board of trade
will exist for any particular contract or at any particular time. In such event,
it may not be possible to close a futures position, and in the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
the trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund depends on the Sub-Adviser's ability
to predict correctly movements in the direction of the market. For example, if
the Fund hedges against the possibility of a decline in the market adversely
affecting stocks held in its portfolio and stock prices increase instead, the
Fund will lose part or all of the benefit of the increased value of the stocks
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund engages in
transactions in futures contracts or options, the Fund could experience delays
and losses in liquidating open positions purchased or sold through the broker,
and incur a loss of all or part of its margin deposits with the broker.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS
Except as described below under "Non Hedging Strategic Transactions", the
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. The Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
10
<PAGE>
Upon the purchase of futures contracts, the Fund will deposit an amount of
cash or liquid debt or equity securities, equal to the market value of the
futures contracts, in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of the Fund.
INTEREST RATE AND CURRENCY SWAPS:
For hedging purposes, the Fund may enter into interest rate and currency
swap transactions and purchase or sell interest rate and currency caps and
floors. An interest rate or currency swap involves an agreement between a Fund
and another party to exchange payments calculated as if they were interest on a
specified ("notional") principal amount (e.g., an exchange of floating rate
payments by one party for fixed rate payments by the other). An interest rate
cap or floor entitles the purchaser, in the exchange for a premium, to receive
payments of interest on a notional principal amount from the seller of the cap
or floor, to the extent that a specified reference rate exceeds or falls below a
predetermined level.
CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); and exchange of principal at the start of the
swap (the initial exchange) is optional. An initial exchange of notional
principal amounts at the spot exchange rate serves the same function as a spot
transaction in the foreign exchange market (for an immediate exchange of foreign
exchange risk). An exchange at maturity of notional principal amounts at the
spot exchange rate serves the same function as a forward transaction in the
foreign exchange market (for a future transfer of foreign exchange risk). The
currency swap market convention is to use the spot rate rather than the forward
rate for the exchange at maturity. The economic difference is realized through
the coupon exchanges over the life of the swap. In contrast to single currency
interest rate swaps, cross-currency swaps involve both interest rate risk and
foreign exchange risk.
SWAP OPTIONS. The Fund may invest in swap options. A swap option is a
contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts at some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or
American-style (exercisable during a designated period). The right pursuant to a
swap option must be exercised by the right holder. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.
SECURITIES SWAPS. The Fund may enter into securities swaps, a technique
primarily used to indirectly participate in the securities market of a country
from which a Fund would otherwise be precluded for lack of an established
securities custody and safekeeping system. The fund deposits an amount of cash
with its custodian (or the broker, if legally permitted) in an amount equal to
the selling price of the underlying security. Thereafter, the Fund pays or
receives cash from the broker equal to the change in the value of the underlying
security.
INTEREST RATE SWAPS. As indicated above, an interest rate swap is a
contract between two entities ("counterparties") to exchange interest payments
(of the same currency) between the parties. In the most common interest rate
swap structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional principal
amount." In most such transactions, the floating rate payments are tied to the
London Interbank Offered Rate, which is the offered rate for short-term
Eurodollar deposits between major international banks. As there is no exchange
of principal amounts, an interest rate swap is not in investment or a borrowing.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate and
currency swaps and interest rate caps and floors are similar to those described
above with respect to dealer options. In connection with such transactions, a
Fund relies on the other party to the transaction to perform its obligations
pursuant to the underlying agreement. If there were a default by the other party
to the transaction, the Fund would have contractual remedies pursuant to the
agreement, but could incur delays in obtaining the expected benefit of the
transaction or loss of such benefit. In the event of insolvency of the other
party, the Fund might be
11
<PAGE>
unable to obtain its expected benefit. In addition, while the Fund will seek to
enter into such transactional only with parties which are capable of entering
into closing transactions with the Fund, there can be no assurance that the Fund
will be able to close out such a transaction with the other party, or obtain an
offsetting position with any other party, at any time prior to the end of the
term of the underlying agreement. This may impair the Fund's ability to enter
into other transactions at a time when doing so might be advantageous.
The Fund usually enter into such transactions on a "net" basis, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of accrued on a daily basis, and an amount of
cash or high-quality liquid securities having an aggregate net asset value at
least equal to the accrued excess is maintained in a segregated account by the
Trust's custodian. If the Fund enters into a swap on other than a net basis, or
sells caps or floors, the Fund maintains a segregated account of the full amount
accrued on a daily basis of the fund's obligations with respect to the
transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
The Fund will not enter into any of these transactions unless the unsecured
senior debt or the claims paying ability of the other party to the transaction
is rated at least "high quality" at the time of the purchase by at least one of
the established rating agencies (e.g., AAA or AA by S&P).
SPECIAL TRANSACTIONS
TEMPORARY INVESTMENTS. The Fund may temporarily depart from its principal
investment strategies in response to adverse market, economic, political or
other conditions by investing their assets in cash, cash items, and short-term,
higher quality debt securities. The Fund may do this to minimize potential
losses and maintain liquidity to meet shareholder redemptions during adverse
market conditions. A defensive posture taken by the Fund may result in the Fund
failing to achieve its investment objective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest
its assets in securities of other investment companies, including the securities
of affiliated money market funds, as an efficient means of carrying out its
investment policies and managing its uninvested cash. It should be noted that
investment companies incur certain expenses, such as management fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
"ROLL" TRANSACTIONS. The Fund may enter into "roll" transactions, which are
the sale of GNMA certificates and other securities together with a commitment to
purchase similar, but not identical, securities at a later date from the same
party. During the roll period, a Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the even
the buyer of securities under a roll transaction files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the transactions may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its custodian in which it will maintain liquid assets in an amount
sufficient to meet is payment obligations with respect to these transactions.
The Fund will not enter into roll transactions if, as a result, more than 15% of
the fund's net assets would be segregated to cover such contracts.
NON-HEDGING STRATEGIC TRANSACTIONS
The Fund's options, futures and swap transactions will generally be entered
into for hedging purposes-to protect against possible changes in the market
values of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets, currency or interest rate fluctuations, to
protect the Fund's unrealized gains in the values of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchase or
sale of particular securities. However, in addition to the hedging transactions
referred to above, the Fund may enter into options, futures and swap
transactions to enhance potential gain in circumstances where hedging is not
involved. The Fund's net loss exposure resulting from transactions entered into
for each purpose will not exceed 5% of the Fund's net assets at any one time
and, to the extent necessary, the Fund will close out
12
<PAGE>
transactions in order to comply with this limitation. Such transactions are
subject to the limitations described above under "Options," "Futures Contracts,"
and "Interest Rate and Currency Swaps".
REPURCHASE AGREEMENTS are agreements are transactions in which a Fund buys
a security from a dealer or bank and agrees to sell the security back at a
mutually agreed upon time and price. Pursuant to such agreements, the Fund
acquires securities from financial institutions as are deemed to be creditworthy
by the Sub-Adviser, subject to the seller's agreement to repurchase and the
Fund's agreement to resell such securities at a mutually agreed upon date and
price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Fund's custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund holding
the repurchase agreement will suffer a loss to the extent that the proceeds from
a sale of the underlying securities is less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements may be considered to be loans under the Investment Company
Act.
The Fund's custodian is required to take possession of the securities
subject to repurchase agreements. The Sub-Adviser or the custodian will monitor
the value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements, which involve the sale of a security to a Fund and its agreement to
repurchase the security (or, in the case of mortgage-backed securities,
substantially similar but not identical securities) at a specified time and
price. A Fund will maintain in a segregated account with its custodian cash,
U.S. Government securities or other appropriate liquid securities in an amount
sufficient to cover its obligations under these agreements with broker-dealers
(no such collateral is required on such agreements with banks). Under the
Investment Company Act, these agreements may be considered borrowings by the
Funds, an are subject to the percentage limitations on borrowings describe
below. The agreements are subject to the same types of risks as borrowings.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS. The
Fund may purchase securities on a "when-issued," forward commitment or delayed
settlement basis. In this event, the Fund's custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, a Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash.
The Fund does not intend to engage in these transactions for speculative
purposes but only in furtherance of their investment objectives. Because the
Fund will set aside cash or liquid portfolio securities to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Sub-Adviser to manage it may be affected in the event the Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceed 15% of the value of its net assets.
When a Fund engages in when-issued, forward commitments and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
BORROWING. The use of borrowing by a Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of a Fund's assets fluctuate in
value, whereas the interest obligation resulting form a borrowing remain fixed
by the terms of the Fund's agreement with its lender, the asset value per share
of the Fund tends to increase more when its portfolio securities increase in
value and to decrease more when its portfolio assets decrease in value than
would otherwise be the case if the Fund did not borrow funds. In addition,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the return earned on borrowed funds.
Under adverse market conditions, the Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales.
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<PAGE>
SHORT SALES. The Fund may make short sales of securities they own or have
the right to acquire at no added cost through conversion or exchange or other
securities they own (referred to as short sales "against the box") and short
sales of securities which they do not own or have the right to acquire.
In a short sale that is not "against the box," a Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security (generally
from the broker through which the short sale is made) in order to make delivery
to the buyer. The Fund must replace the security borrowed by purchasing it at
the market price at the time of replacement. The Fund is said to have a "short
position" in the securities sold until it delivers them to the broker. The
period during which the Fund has a short position can range from one day to more
than a year. Until the Fund replaces the security, the proceeds of the short
sale are retained by the broker, and the Fund must pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund must deposit with the
broker additional cash or securities so that it maintains with the broker a
total deposit equal to 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Since a Fund in effect profits from a decline in the price of the
securities sold short without the need to invest the full purchase price of the
securities on the date of the short sale, the Fund's net asset value per share
tends to increase more when the securities it has sold short increase in value,
than would otherwise be the case if it had not engage in such short sale. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although a Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.
As a matter of policy, the Fund will not make short sales of securities or
maintain a short position if to do so could create liabilities or require
collateral deposits and segregation of assets aggregating more than 25% of the
Fund's total assets, taken at market value.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven days. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and the Fund night be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption within seven days. The Fund might
also have to register such restricted securities in order to dispose of them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
uninterested in purchasing such securities.
The Fund may invest in foreign securities that are restricted against
transfer within the United States or to United States persons. Although
securities subject to such transfer restrictions may be marketable abroad, they
may be less liquid than foreign securities of the same class that are not
subject to such restrictions. Unless these securities are acquired directly from
the issuer or its underwriter, the Fund treats
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<PAGE>
foreign securities whose principal market is abroad as not subject to the
investment limitation on securities subject to legal or contractual restrictions
on resale.
PORTFOLIO TRANSACTIONS AND BROKERAGE
--------------------------------------------------------------------------------
Subject to policies established by the Trust's Board of Trustees, the
Sub-Adviser executes the Fund's portfolio transactions and allocates the
brokerage business. In executing such transactions, the Sub-Adviser seeks to
obtain the best price and execution for the Fund, taking into account such
factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Fund
invests may be traded in the over-the-counter markets, and the Fund deals
directly with the dealers who make the markets in such securities except in
those circumstances where better prices and execution are available elsewhere.
The Sub-Adviser negotiates commission rates with brokers or dealers based on the
quality or quantity of services provided in light of generally prevailing rates,
and while the Sub-Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commissions available. The
Board of Trustees of the Trust periodically reviews the commission rates and
allocation of orders.
The Fund has no obligation to deal with any broker or group of brokers in
executing transactions in portfolio securities. Subject to obtaining the best
price and execution, brokers who sell shares of the Fund or provide supplemental
research, market and statistical information and other research services and
products to the Sub-Adviser may receive orders for transactions by the Fund.
Such information, services and products are those which brokerage houses
customarily provide to institutional investors, and include items such as
statistical and economic data, research reports on particular companies and
industries, and computer software used for research with respect on investment
decisions. Information, services and products so received are in addition to and
not in lieu of the services required to be performed by the Sub-Adviser under
the Sub-Advisory Agreement, and the expenses of the Sub-Adviser are not
necessary reduced as a result to the receipt of such supplemental information,
service and products. Such information, services and products may be useful to
the Sub-Adviser in providing services to clients other than the Trust, and not
all such information, services and products are used by the Sub-Adviser, in
connection with the Fund. Similarly, such information, services and products
provided to the Sub-Adviser by brokers and dealers through whom other clients of
the Investment Adviser effect securities transactions may be useful to the
Sub-Adviser in providing services to the Fund. The Sub-Adviser may pay higher
commissions on brokerage transactions for the Fund to brokers in order to secure
the information, services and products described above, subject to review by the
Trust's Board of Trustees from time to time as to the extent and continuation of
this practice.
Although the Sub-Adviser makes investment decisions for the Trust
independently from those of its other accounts, investment of the kind made by
the Fund may often also be made by such other accounts. When the Sub-Adviser
buys and sells the same security at substantially the same time on behalf of the
Fund and one or more other accounts managed by the Sub-Adviser, the Sub-Adviser
allocates available investments by such means as, in its judgment, result in
fair treatment. The Sub-Adviser aggregates orders for purchases and sales of
securities of the same issuer on the same day among the Fund and its other
managed accounts, and the price paid to or received by the Fund and those
accounts is the average obtained in those orders. In some cases, such
aggregation and allocation procedures may affect adversely the price paid or
received by the Fund or the size of the position purchased or sold by the Fund.
Securities trade in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's commission or discount. On occasion, certain money market
instruments and agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid.
During the year ended December 31, 1999, the Fund paid total brokerage
commissions on purchase and sale of portfolio securities of $124,096.
Transactions in the amount of $1,340,809, involving commissions of approximately
$2,790, were directed to brokers because of research services provided during
1999. During the calendar year ended December 31, 1999, the portfolio turnover
rate was 87.6%.
The Sub-Adviser furnishes investment advice to other clients. The other
accounts may also make investments in the same investment securities and at the
same time as the Fund. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount and price in a manner considered equitable to each, so
that each receives, to the extent practicable, the average price of such
transactions, which may or may not be beneficial to the Fund.
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<PAGE>
The Board of Trustees of the Fund believes that the benefits of the
Sub-Adviser's organization outweigh any limitations that may arise from
simultaneous transactions.
The Fund may acquire securities of brokers who execute the Fund's portfolio
transactions. As of December 31, 1999, the Fund owned no such securities.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation ("Amway") indirectly, as of February 18, 2000, owned
2,897,624 shares, or 96.48%, of the outstanding shares of the Fund. Jay Van
Andel and Richard M. DeVos are controlling persons of Amway since they own,
together with their spouses, substantially all of its outstanding securities.
Amway is a Michigan manufacturer and direct selling distributor of home care and
personal care products. If Amway were to substantially reduce its investment in
the Fund, it could have an adverse effect on the Fund by decreasing the size of
the fund and by causing the Fund to incur brokerage charges in connection with
the redemption of Amway's shares.
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- --- ----------- ------------------------------------
<S> <C> <C> <C>
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida 33469 in land and cattle)
Allan D. Engel* 48 Trustee, Vice Vice President, Real Estate
2905 Lucerne SE, President, Secretary Operations-Enterprise Capital,
Suite 200 and Assistant Treasurer Inc. Formerly, Sr. Manager,
Grand Rapids, Michigan of the Fund; President, Investments and Real Estate,
49546 and Secretary of the Amway Corporation. Director,
Investment Adviser. President and Secretary of
Amway Management Company
(1981-1999). Trustee, Vice
President and Secretary,
Amway Mutual Fund (1981-
1999).
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice President-
19017 Vintage Trace Circle Treasurer, SPX Corporation
Fort Myers, Florida (Designs, manufactures and
33912 markets products and services
for the motor vehicle industry),
1986 to 1994.
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation
49424
16
<PAGE>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- --- ----------- ------------------------------------
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. Officer, JVA Enterprises, LLC.
Suite 200 President, Chief Executive
Grand Rapids, Michigan Office and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-
2000). Director, Vice President
and Treasurer of Amway
Management Company (1984-
1999). Trustee, President and
Treasurer, Amway Mutual
Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
<TABLE>
<CAPTION>
Pension or
Name of Person, Trustee Retirement Estimated Annual Total Compensation
Position Compensation Benefits Accrued as Benefits Paid to Trustees
Part of Fund Upon Retirement
Expenses
--------------- ------------ ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
</TABLE>
*These Trustees are interested persons under the Investment Company Act of
1940, as amended.
All Officers and certain Trustees of the Fund and the Investment Adviser
are affiliated with Amway Corporation. The Officers serve without compensation
from the Fund. Fees paid to all Trustees during the year ended December 31,
1999, amounted to $48,000. Under the Administrative Agreement, the Investment
Adviser pays the fees of the Trustees of the Fund. The Trustees and Officers of
the Fund own, as a group, less than 1% of the outstanding shares of the Fund.
The Adviser also serves as the Fund's principal underwriter (see "Distribution
of Shares").
17
<PAGE>
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract")
with Activa Asset Management LLC (the "Investment Adviser"). Under the
Contract, the Investment Adviser sets overall investment strategies for the Fund
and monitors and evaluates the investment performance of the Fund's Sub-Adviser,
including compliance with the investment objectives, policies and restrictions
of the Fund. If the Investment Adviser believes it is in the Fund's best
interests, it may recommend that additional or alternative Sub-Advisers be
retained on behalf of the Fund. If more than one Sub-Adviser is retained, the
Investment Advisor will recommend to the Fund's Trustees how the Fund's assets
should be allocated or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from
the Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Absent the exemptive order, these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and Activa became
effective on June 11, 1999. For providing services under this contract, Activa
is to receive compensation payable quarterly, at the annual rate of .85 of 1% on
the average of the daily aggregate net asset value of the Fund on the first
$50,000,000 of assets and .75% on the assets in excess of $50,000,000. Activa
also provides certain administrative services for the Fund pursuant to a
separate agreement. The fees paid by the Fund to the Investment Adviser during
the year ended December 31, 1999 were $92,574.
Members of the families of Jay Van Andel and Richard M. DeVos indirectly
own substantially all of the outstanding ownership interests of Activa. Jay Van
Andel and Richard M. DeVos are also controlling persons of Amway Corporation
which, as of February 18, 2000, owned 2,897,624 shares, or 96.48%, of the
outstanding shares of the Fund. See "Principal Shareholders."
SUB-ADVISER
--------------------------------------------------------------------------------
A Sub-Advisory Agreement has been entered into between the Investment
Adviser and Nicholas-Applegate Capital Management, 600 West Broadway, 30th
Floor, San Diego, California 92101 (Sub Adviser). Under the Sub-Advisory
Agreement, the Adviser employes the Sub-Adviser to furnish investment advice and
manage on a regular basis the investment portfolio of the Fund, subject to the
direction of the Adviser, the Board of Trustees of the Fund, and to the
provisions of the Fund's current Prospectus. The Sub-Adviser will make
investment decisions on behalf of the Fund and place all orders for the purchase
or sale of portfolio securities for the Fund's account, except when otherwise
specifically directed by the Fund or the Adviser. The fees of the Sub-Adviser
are paid by the Investment Adviser, not the Fund.
As compensation for the services rendered under the Sub-Advisory Agreement,
the Investment Adviser has agreed to pay the Sub-Adviser a fee, which is
computed daily and may be paid quarterly, equal to the annual rates of .65 of 1%
of the average of the daily aggregate net asset value of the Fund on the first
$50,000,000 of assets and .55% on the assets in excess of $50,000,000. The fees
paid by the Investment Adviser to the Sub-Adviser during the year ended December
31, 1999 were $70,092.
PLAN OF DISTRIBUTION & PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, the Adviser provides shareholder services
and services in connection with the sale and distribution of the Fund's shares
and is compensated at a maximum annual rate of 0.25 of 1% of the average daily
net assets of the Fund. The maximum amount presently authorized by the Fund's
Board of Trustees is 0.15 of 1% of the average daily net assets of the Fund.
Since these fees are paid from Fund assets, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
18
<PAGE>
During 1999 the Fund paid $19,315 to Activa for the services which it
provided pursuant to the Distribution Plan. The services included printing and
mailing of prospectuses ($3,952) and general and administrative services
($15,363). The latter included activities of Activa's office personnel which are
related to marketing, registration of the Fund's securities under the federal
securities laws, and registration of Activa as a broker-dealer under federal and
state securities laws. Since the Distribution Plan is a compensation plan,
amounts paid under the plan may exceed Activa's actual expenses.
Amounts received by the Adviser pursuant to the Distribution Plan may be
retained by the Adviser as compensation for its services, or paid to other
investment professionals who provide services in connection with the
distribution of Fund shares. The Trustees will review the services provided and
compensation paid pursuant to the Distribution Plan no less often than
quarterly.
Most of the activities financed by the Distribution Plan are related to the
distribution of all of the funds in the Activa family of mutual funds. Other
activities may be related to the distribution of a particular fund. Each Activa
mutual fund (other than the Money Market Fund) contributes the same percentage
of its average net assets to the Distribution Plan. The Money Market Fund does
not presently participate in the Distribution Plan.
The Adviser acts as the exclusive agent for sales of shares of the Fund
pursuant to a Principal Underwriting Agreement. The only compensation currently
received by the Adviser in connection with the sale of Fund shares is pursuant
to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and the
Investment Adviser, the Investment Adviser provides specified assistance to the
Fund with respect to compliance matters, taxes and accounting, the provision of
legal services, meetings of the Fund's Trustees and shareholders, and
preparation of the Fund's registration statement and other filings with the
Securities and Exchange Commission. In addition, the Investment Adviser pays the
fees of the Fund's Trustees, and the salaries and fees of all of the Fund's
Trustees and officers who devote part or all of their time to the affairs of the
Investment Adviser. For providing these services the Investment Adviser receives
a fee, payable quarterly, at the annual rate of 0.15% of the Fund's average
daily assets. During the year ended December 31, 1999, total payments were
$92,574.
The Administrative Agreement provides that the Investment Adviser is only
responsible for paying such fees and expenses and providing such services as are
specified in the agreement. The Fund is responsible for all other expenses
including (i) expenses of maintaining the Fund and continuing its existence;
(ii) registration of the Trust under the Investment Company Act of 1940; (iii)
commissions, fees and other expenses connected with the acquisition, disposition
and valuation of securities and other investments; (iv) auditing, accounting and
legal expenses; (v) taxes and interest; (vi) government fees; (vii) expenses of
issue, sale, repurchase and redemption of shares; (viii) expenses of registering
and qualifying the Trust, the Fund and its shares under federal and state
securities laws and of preparing and printing prospectuses for such purposes and
for distributing the same to shareholders and investors; (ix) expenses of
reports and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
19
<PAGE>
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
In return for its services, the Fund pays the Transfer Agent, a fee of
$1.167 per account in existence during the month, payable monthly, less earnings
in the redemption liquidity account after deducting bank fees, if any. The fee
schedule is reviewed annually by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids,
Michigan, are the independent certified public accountants for the Fund.
Services include an annual audit of the Fund's financial statements, tax return
preparation, and review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
In order to purchase shares for a new account, the completion of an
application form is required. The minimum initial investment is $500 or more.
Additional investments of $50 or more can be made at any time by using the lower
portion of your account statement. Checks should be made payable to "Activa
Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share net calculated
after the Fund receives your investment and application in proper form.
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
Each Fund will redeem your shares at the net asset value next determined
after your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL:
--------
When redeeming by mail, when no certificates have been issued, send a
written request for redemption to Activa Asset Management LLC, 2905 Lucerne SE,
Suite 200, Grand Rapids, Michigan 49546. The request must state the dollar
amount or shares to be redeemed, including your account number and the signature
of each account owner, signed exactly as your name appears on the records of the
Fund. If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, limited liability companies, retirement
plans, individual retirement accounts and profit sharing plans.
20
<PAGE>
BY PHONE:
---------
At the time of your investment in the Fund, or subsequently, you may elect
on the Fund's application to authorize the telephone or telegram exchange or
redemption option. You may redeem shares under this option by calling the Fund
at the number indicated on the front of this Prospectus on any business day.
Requests received after 4:00 p.m. when the market has closed will receive the
next day's price. By establishing the telephone or telegram exchange or
redemption option, you authorize the Transfer Agent to honor any telephone or
telegram exchange or redemption request from any person representing themselves
to be the investor. Procedures required by the Fund to ensure that a
shareholder's requested telephone or telegram transaction is genuine include
identification by the shareholder of the account by number, recording of the
requested transaction and sending a written confirmation to shareholders
reporting the requested transaction. The Fund is not responsible for
unauthorized telephone or telegram exchanges or redemptions unless the Fund
fails to follow these procedures. Shares must be owned for 10 business days
before redeeming by the telephone and telegram exchange and cannot be in
certificate form unless the certificate is tendered with the request for
redemption. Certificated shares cannot be redeemed by the telephone and telegram
exchange. All redemption proceeds will be forwarded to the address of record or
bank designated on the account application.
The Transfer Agent and the Fund have reserved the right to change, modify,
or terminate the telephone or telegram exchange or redemption option at any
time. Before this option is effective for a corporation, partnership, limited
liability company, or other organizations, additional documents may be required.
This option is not available for Profit-Sharing Trust and Individual Retirement
Accounts. The Fund and the Transfer Agent disclaim responsibility for verifying
the authenticity of telephone and telegram exchange or redemption requests which
are made in accordance with the procedures approved by shareholders.
SPECIAL CIRCUMSTANCES:
----------------------
In some circumstances a signature guarantee may be required before shares
are redeemed. These circumstances include a change in the address for an account
within the last 30 days, a request to send the proceeds to a different payee or
address from that listed for the account, or a redemption request for $100,000
or more. A signature guarantee may be obtained from a bank, broker, or other
acceptable financial institution. If a signature guarantee is required, we
suggest that you call us to ensure that the signature guarantee and redemption
request will be processed correctly.
Payment for redeemed shares is normally made by check and mailed within
three days thereafter. However, under the Investment Company Act of 1940, the
right of redemption may be suspended or the date of payment postponed for more
than seven days: (1) for any period during which the New York Stock Exchange is
closed, other than for customary weekend and holiday closings; (2) when trading
on the New York Stock Exchange is restricted, as determined by the SEC; (3) when
an emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares
in cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The Exchange Privilege may be exercised by sending written instruction to
the Transfer Agent. See "How Shares Are Redeemed" for applicable signatures and
signature guarantee requirements. Shareholders may authorize telephone or
telegram exchanges or redemptions by making an election on your application.
Procedures required by the Fund to ensure that a shareholder's requested
telephone or telegram transaction is genuine include identification by the
shareholder of the account by number, recording of the requested
21
<PAGE>
transaction and sending a written confirmation to shareholders reporting the
requested transaction. The Fund is not responsible for unauthorized telephone or
telegram exchanges unless the Fund fails to follow these procedures. Shares must
be owned for 10 business days before exchanging and cannot be in certificate
form unless the certificate is tendered with the request for exchange. Exchanges
will be accepted only if the registration of the two accounts is identical.
Exchange redemptions and purchases are effected on the basis of the net asset
value next determined after receipt of the request in proper order by the Fund.
In the case of exchanges into the Money Market Fund, dividends generally
commence on the following business day. For federal and state income tax
purposes, an exchange is treated as a sale and may result in a capital gain or
loss.
ADDITIONAL ACCOUNT POLICIES
--------------------------------------------------------------------------------
If the value of your account falls below $100, the Fund may mail you a
notice asking you to bring the account back to $100 or close it out. If you do
not take action within 60 days, the Fund may sell your shares and mail the
proceeds to you at the address of record.
The Fund does not permit market-timing or other abusive trading practices.
Excessive, short-term (market-timing) and other abusive trading practices may
disrupt portfolio trading strategies and harm Fund performance. To minimize harm
to the Fund and its shareholders, each Fund reserves the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading.
INTERNET ADDRESS
--------------------------------------------------------------------------------
Activa's Web site is located at activafunds.com. Our Web site offers
further information about the Activa Funds.
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund intends to comply with the provisions of Subchapter M of the
Internal Revenue Code applicable to investment companies. As the result of
paying to its shareholders as dividends and distributions substantially all net
investment income and realized capital gains, the Fund will be relieved of
substantially all Federal income tax.
For Federal income tax purposes, distributions of net investment income and
any capital gains will be taxable to shareholders. Distributions of net
investment income will normally qualify for the 70% deduction for dividends
received by corporations. After the last dividend and capital gains distribution
in each year, the Fund will send you a statement of the amount of the income and
capital gains which you should report on your Federal income tax return.
Dividends derived from net investment income and net short-term capital gains
are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or reinvested in
additional shares of the Fund. Qualified long-term capital gain dividends
received by individual shareholders are taxed a maximum rate of 20%.
In addition, shareholders may realize a capital gain or loss when shares
are redeemed. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
On the record date for a distribution, the Fund's share value is reduced by
the amount of the distribution. If a shareholder buys shares just before the
record date ("buying a dividend"), they will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
Also, under the Code, a 4% excise tax is imposed on the excess of the
required distribution for a calendar year over the distributed amount for such
calendar year. The required distribution is the sum of 98% of the Fund's net
investment income for the calendar year plus 98% of its capital gain net income
for the one-year period ended December 31, plus any undistributed net investment
income from the prior calendar year, plus any undistributed capital gain net
income from the prior calendar year, minus any overdistribution in the prior
calendar year. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
Under certain circumstances, the Fund will be required to withhold 31% of a
shareholder's distribution or redemption from the Fund. These circumstances
include failure by the shareholder to furnish the Fund with a proper taxpayer
identification number; notification of the Fund by the Secretary of the Treasury
that a taxpayer identification number is incorrect, or that withholding should
commence as a result of the shareholder's failure to report interest and
dividends; and failure of the shareholder to certify, under
22
<PAGE>
penalties of perjury, that he is not subject to withholding. In this regard,
failure of a shareholder who is a foreign resident to certify that he is a
nonresident alien may result in 31% of his redemption proceeds and 31% of his
capital gain distribution being withheld. In addition, such a foreign resident
may be subject to a 30% or less, as prescribed by an applicable tax treaty,
withholding tax on ordinary income dividends distributed unless he qualifies for
relief under an applicable tax treaty.
Trustees of qualified retirement plans are required by law to withhold 20%
of the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement does not apply to distributions from IRA's or
any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account or IRA. Shareholders should consult their tax
adviser regarding the 20% withholding requirement.
Prior to purchasing shares of the Fund, the impact of any dividends or
capital gain distributions which are about to be declared should be carefully
considered. Any such dividends and capital gain distributions declared shortly
after you purchase shares will have the effect of reducing the per share net
asset value of your shares by the amount of dividends or distributions on the
ex-dividend date. All or a portion of such dividends or distributions, although
in effect a return of capital, are subject to taxes which may be at ordinary
income tax rates.
Each shareholder is advised to consult with his tax adviser regarding the
treatment of distributions to him under various state and local income tax laws.
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
--------------------------------------------------------------------------------
The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once each year, the Fund is audited by independent certified
public accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
23
<PAGE>
====================================
Activa
International
ACTIVA INTERNATIONAL FUND Fund
(a Series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
====================================
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ACTIVA MONEY MARKET FUND ACTIVA MUTUAL FUND LOGO
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not
Restrictions on the Fund's a prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Prospectus, which can be
Investment Strategies 3 requested from the Fund by writing or telephoning
Portfolio Transactions 7 as indicated above. This Statement of Additional
Principal Shareholders 8 Information relates to the Prospectus for the Fund
Officers and Trustees of the Fund 8 dated April 29, 2000.
Investment Adviser 10
Sub-Adviser 10
Plan of Distribution and Principal
Underwriter 12
Administrative Agreement 12
Transfer Agent 13
Custodian 13
Auditors 13
Pricing of Fund Shares 13
Purchase of Shares 13
How Shares are Redeemed 13
Exchange Privilege 14
Additional Account Policies 15
Internet Address 15
Federal Income Tax 15
Reports to Shareholders
and Annual Audit 16 The date of this Statement of Additional
Appendix A 17 Information is April 29, 2000.
Printed in U.S.A.
</TABLE>
1
<PAGE>
ACTIVA MONEY MARKET FUND
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998.
The Declaration of Trust authorizes the Trustees to create additional series
and to issue an unlimited number of units of beneficial interest, or "shares."
The Trustees are also authorized to issue different classes of shares of any
series. No series which may be issued by the Trust is entitled to share in the
assets of any other series or is liable for the expenses or liabilities of any
other series. The Fund presently has only one class of shares.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The Fund's investment objective is to maximize current income consistent with
the preservation of capital and same day liquidity. The Fund seeks to achieve
its investment objective by maintaining a dollar-weighted average portfolio
maturity of not more than 90 days and by investing in U.S. dollar denominated
securities described in this Statement of Additional Information that meet
certain rating criteria, present minimal credit risk and have effective
maturities of not more than thirteen months. The Fund's ability to achieve
maximum current income is affected by its high quality standards. See "Quality
and Diversification Requirements."
INVESTMENT FUNDAMENTAL RESTRICTIONS
The investment restrictions below have been adopted by the Fund. Except where
otherwise noted, these investment restrictions are "fundamental policies which,
under the 1940 Act, may or may not be changed without the vote of a majority of
the outstanding voting securities of the Fund, as the case may be. A "majority
of the outstanding voting securities" is defined in the 1940 Act as the lesser
of (a) 67% or more of the voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities are present or represented
by proxy, or (b) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions below apply at the time of
the purchase of securities.
The Fund:
1. May not make any investment inconsistent with the Fund's classification as
a diversified investment company under the Investment Company Act of 1940.
2. May not purchase any security which would cause the Fund to concentrate
its investments in the securities of issuers primarily engaged in any
particular industry except as permitted by the SEC. This restriction
does not apply to instruments considered to be domestic bank money
market instruments.
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. ay not underwrite securities or other issues, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may (a) invest in securities or other
instruments directly or indirectly secured by real estate, and (b) invest
in securities or other instruments issued by issuers that invest in real
estate;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by
persons that purchase or sell commodities or commodities contracts; but
this shall not prevent the Fund from purchasing, selling and entering into
financial futures contracts (including futures contracts on indices of
securities, interest rates and currencies), options on financial futures
contracts (including futures contracts on indices of securities, interests
rates and currencies), warrants, swaps, forward contracts, foreign currency
spot and forward contracts or other derivative instruments that are not
related to physical commodities; and
8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
2
<PAGE>
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by the Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities; (iii) may not acquire securities of other investment companies,
except as permitted by the 1940 Act or any order pursuant thereto; (iv) may not
enter into reverse repurchase agreements or borrow money, except from banks for
extraordinary or emergency purposes, if such obligations exceed in the aggregate
one-third of the market value of the Fund's total assets, less liabilities other
than obligations created by reverse repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Sub-Adviser may classify issuers by industry in accordance
with classifications set forth in the Directory of Companies Filing Annual
Reports With The Securities and Exchange Commission or other sources. In the
absence of such classification or if the Sub-Adviser determines in good faith
based on its own information that the economic characteristics affecting a
particular issue make it more appropriately considered to be engaged in a
different industry, the Sub-Adviser may classify accordingly. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
INVESTMENT STRATEGIES
--------------------------------------------------------------------------------
The following discussion supplements the information regarding the investment
objective of the Fund and the policies to be employed to achieve the objective
by the Fund as set forth herein and in the Prospectus.
The Fund is designed for investors who seek high current income consistent
with the preservation of capital and same day liquidity from a portfolio of high
quality money market instruments. The Fund's investment objective is to maximize
current income consistent with the preservation of capital and same day
liquidity.
The Fund seeks to achieve its investment objective by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in U.S. dollar denominated securities described in this Statement of
Additional Information that meet certain rating criteria, present minimal credit
risk and have effective maturities of not more than thirteen months. The Fund's
ability to achieve maximum current income is affected by its high quality
standards. See "Quality and Diversification Requirements."
MONEY MARKET INSTRUMENTS
A description of the various types of money market instruments that may be
purchased by the Fund appears below. Also see "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. Securities which are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank. In the
case of securities not backed by the full faith and credit of the United States,
the Fund must look principally to the federal agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Securities in which the Fund may invest that are not
backed by the full faith and credit of the United States include, but are not
limited to: (i) obligations of the Tennessee Valley Authority, the Federal Home
Loan Mortgage Corporation, the Federal Home Loan Banks and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations; (ii) securities issued by the Federal National Mortgage
Association, which are supported by the discretionary authority of the U.S.
Government to purchase the agency's
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<PAGE>
obligations; and (iii) obligations of the Federal Farm Credit System and the
Student Loan Marketing Association, each of whose obligations may be satisfied
only by the individual credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. The Fund, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. See "Foreign Investments." These securities must be
denominated in the U.S. dollar.
BANK OBLIGATIONS. The Fund, unless otherwise noted in the Prospectus or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
the laws of the United States or any state, (ii) foreign branches of these banks
or of foreign banks of equivalent size (Euros) and (iii) U.S. branches of
foreign banks of equivalent size (Yankees). See "Foreign Investments." The Fund
will not invest in obligations for which the Sub-Adviser, or any of its
affiliated persons, is the ultimate obligor or accepting bank. The Fund may also
invest in obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment Bank, the
Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. The Fund may invest in commercial paper, including master
demand obligations. Master demand obligations are obligations that provide for a
periodic adjustment in the interest rate paid and permit daily changes in the
amount borrowed. Master demand obligations are governed by agreements between
the issuer and the Sub-Adviser acting as agent, for no additional fee. The
monies loaned to the borrower come from accounts managed by the Sub-Adviser or
its affiliates, pursuant to arrangements with such accounts. Interest and
principal payments are credited to such accounts. The Sub-Adviser has the right
to increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Sub-Adviser. Since master demand obligations
typically are not rated by credit rating agencies, the Fund may invest in such
unrated obligations only if at the time of an investment the obligation is
determined by the the Sub-Adviser to have a credit quality which satisfies the
Fund's quality restrictions. See "Quality and Diversification Requirements."
Although there is no secondary market for master demand obligations, such
obligations are considered by the Fund to be liquid because they are payable
upon demand. The Fund does not have any specific percentage limitation on
investments in master demand obligations. It is possible that the issuer of a
master demand obligation could be a client to whom the Sub-Adviser's affiliate,
Morgan Guaranty Trust Company of New York, in its capacity as a commercial bank,
has made a loan.
ASSET-BACKED SECURITIES. The Fund may also invest in securities generally
referred to as asset-backed securities, which directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets, such as motor vehicle or credit card
receivables or other asset-backed securities collateralized by such assets.
Asset-backed securities provide periodic payments that generally consist of both
interest and principal payments. Consequently, the life of an asset-backed
security varies with the prepayment experience of the underlying obligations.
Payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit issued by a financial
institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the Funds'
Trustees. In a repurchase agreement, the Fund buys a security from a seller that
has agreed to repurchase the same security at a mutually agreed upon date and
price. The resale price normally is in excess of the purchase price, reflecting
an agreed upon interest rate. This interest rate is effective for the period of
time a Fund is invested in the agreement and is not related to the coupon rate
on the underlying security. A repurchase agreement may also be viewed as a fully
collateralized loan of money by a Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject
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<PAGE>
to repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Fund will always
receive securities as collateral whose market value is, and during the entire
term of the agreement remains, at least equal to 100% of the dollar amount
invested by the Fund in each agreement plus accrued interest, and the Fund will
make payment for such securities only upon physical delivery or upon evidence of
book entry transfer to the account of the Custodian. The Fund will be fully
collateralized within the meaning of paragraph (a)(4) of Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act"). If the seller
defaults, the Fund might incur a loss if the value of the collateral securing
the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including, without
limitation, corporate and foreign bonds, asset-backed securities and other
obligations described in the Prospectus or this Statement of Additional
Information.
FOREIGN INVESTMENTS
The Fund may invest in certain foreign securities. All investments must be
U.S. dollar-denominated. Investment in securities of foreign issuers and in
obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers. There
may be limited publicly available information with respect to foreign issuers,
and foreign issuers are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
domestic companies. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase.
Investors should realize that the value of the Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
ADDITIONAL INVESTMENTS
MUNICIPAL BONDS. The Fund may invest in municipal bonds issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities. The Fund may also invest in municipal notes of various types,
including notes issued in anticipation of receipt of taxes, the proceeds of the
sale of bonds, other revenues or grant proceeds, as well as municipal commercial
paper and municipal demand obligations such as variable rate demand notes and
master demand obligations. These municipal bonds and notes will be taxable
securities; income generated from these investments will be subject to federal,
state and local taxes.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities
on a when-issued or delayed delivery basis. For example, delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities,
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. Also, the Fund may be disadvantaged if the other party to
the transaction defaults.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may
be acquired by the Fund to the extent permitted under the 1940 Act or any order
pursuant thereto. These limits currently require that, as determined
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<PAGE>
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund, provided however, that a Fund may invest all of
its investable assets in an open-end investment company that has the same
investment objective as the Fund. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Fund bears directly in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase the same security at a mutually agreed upon date and price
reflecting the interest rate effective for the term of the agreement. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. Leverage
may cause any gains or losses for the Fund to be magnified. The Fund will invest
the proceeds of borrowings under reverse repurchase agreements. In addition,
except for liquidity purposes, the Fund will enter into a reverse repurchase
agreement only when the expected return from the investment of the proceeds is
greater than the expense of the transaction. The Fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. The Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for the Fund's
limitations on reverse repurchase agreements and bank borrowings.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment restrictions,
the Fund is permitted to lend its securities in an amount up to 33 1/3% of the
value of the Fund's net assets. The Fund may lend its securities if such loans
are secured continuously by cash or equivalent collateral or by a letter of
credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and no Fund will make
any loans in excess of one year. Loans of portfolio securities may be considered
extensions of credit by the Funds. The risks to the Fund with respect to
borrowers of its portfolio securities are similar to the risks to the Fund with
respect to sellers in repurchase agreement transactions. See "Repurchase
Agreements". The Fund will not lend its securities to any officer, Trustee,
Director, employee or other affiliate of the Fund, the Adviser , the
Sub-Adviser, or the Distributor, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS, PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES.
The Fund may invest in privately placed, restricted, Rule 144A or other
unregistered securities. The Fund may not acquire any illiquid holdings if, as a
result thereof, more than 10% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act") and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Fund. The price the Fund pays for illiquid securities or receives upon
resale may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly the valuation of these securities will reflect
any limitations on their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Adviser
and approved by the Trustees. The Trustees will monitor the Sub-Adviser's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the 1933
Act, before it may be sold, the Fund may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
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<PAGE>
SYNTHETIC INSTRUMENTS. The Fund may invest in certain synthetic instruments.
Such instruments generally involve the deposit of asset-backed securities in a
trust arrangement and the issuance of certificates evidencing interests in the
trust. The certificates are generally sold in private placements in reliance on
Rule 144A. The Sub-Adviser will review the structure of synthetic instruments to
identify credit and liquidity risks and will monitor those risks. See "Illiquid
Investments, Privately Placed and Certain Unregistered Securities".
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Fund intends to meet the diversification requirements of the 1940 Act.
Current 1940 Act diversification requirements require that with respect to 75%
of the assets of the Fund: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for the
other 25% of the Fund's assets not subject to the limitation described above,
there is no limitation on investment of these assets under the 1940 Act, so that
all of such assets may be invested in securities of any one issuer. Investments
not subject to the limitations described above could involve an increased risk
to a Fund should an issuer, or a state or its related entities, be unable to
make interest or principal payments or should the market value of such
securities decline.
At the time the Fund invests in any taxable commercial paper, master demand
obligation, bank obligation or repurchase agreement, the issuer must have
outstanding debt rated A or higher by Moody's or Standard & Poor's, the issuer's
parent corporation, if any, must have outstanding commercial paper rated Prime-1
by Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Sub-Adviser's opinion.
In order to maintain a stable net asset value, the Fund will (i) limit its
investment in the securities (other than U.S. Government securities) of any one
issuer to no more than 5% of its assets, measured at the time of purchase,
except for investments held for not more than three business days; and (ii)
limit investments to securities that present minimal credit risks and securities
(other than U.S. Government securities) that are rated within the highest
short-term rating category by at least two nationally recognized statistical
rating organizations ("NRSROs") or by the only NRSRO that has rated the
security. Securities which originally had a maturity of over one year are
subject to more complicated, but generally similar rating requirements. A
description of illustrative credit ratings is set forth in "Appendix A." The
Fund may also purchase unrated securities that are of comparable quality to the
rated securities described above. Additionally, if the issuer of a particular
security has issued other securities of comparable priority and security and
which have been rated in accordance with (ii) above, that security will be
deemed to have the same rating as such other rated securities.
In addition, the Board of Trustees has adopted procedures which (i) require
the Board of Trustees to approve or ratify purchases by the Fund of securities
(other than U.S. Government securities) that are unrated; (ii) require the Fund
to maintain a dollar-weighted average portfolio maturity of not more than 90
days and to invest only in securities with a remaining maturity of not more than
397 days; and (iii) require the Fund, in the event of certain downgradings of or
defaults on portfolio holdings, to dispose of the holding, subject in certain
circumstances to a finding by the Trustees that disposing of the holding would
not be in the Fund's best interest.
PORTFOLIO TRANSACTIONS
--------------------------------------------------------------------------------
The Sub-Adviser places orders for the Fund for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Fund. See "Investment Objectives and Policies."
Fixed income and debt securities are generally traded at a net price with
dealers acting as principal for their own accounts without a stated commission.
The price of the security usually includes profit to the dealers. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain securities may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objective in relation to expected movements in the general
level of interest rates. The Fund may engage in short-term trading consistent
with its objectives. See "Investment Objectives and Policies - Portfolio
Turnover."
In connection with portfolio transactions for the Fund, the Sub-Adviser
intends to seek best execution on a competitive basis for both purchases and
sales of securities.
The Fund has a policy of investing only in securities with maturities of not
more than thirteen months, which will result in high portfolio turnovers. Since
brokerage commissions are not normally paid on investments which the Fund makes,
turnover resulting from such investments should not adversely affect the net
asset value or net income of the Fund.
Subject to the overriding objective of obtaining best execution of orders,
the Sub-Adviser may allocate a portion of the Fund's brokerage transactions to
affiliates of the Sub-Adviser. In order for affiliates of the Sub-Adviser to
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<PAGE>
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliates must be reasonable and fair compared to
the commissions, fees, or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. Furthermore,
the Trustees of the Fund, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to or
through the Sub-Adviser or any other "affiliated person" (as defined in the 1940
Act) of the Sub-Adviser when such entities are acting as principals, except to
the extent permitted by law. In addition, the Fund will not purchase securities
during the existence of any underwriting group relating thereto of which the
Sub-Adviser or an affiliate of the Sub-Adviser is a member, except to the extent
permitted by law.
On those occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interests of the Fund as well as other customers, the
Sub-Adviser to the extent permitted by applicable laws and regulations, may, but
is not obligated to, aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other customers in order to obtain
best execution, including lower brokerage commissions if appropriate. In such
event, allocation of the securities so purchased or sold as well as any expenses
incurred in the transaction will be made by the Sub-Adviser in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the Fund. In some instances, this procedure might adversely affect the Fund.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation ("Amway") indirectly, as of February 18, 2000, owned
101,937,554 shares, or 90.72%, of the outstanding shares of the Fund. Jay Van
Andel and Richard M. DeVos are controlling persons of Amway since they own,
together with their spouses, substantially all of its outstanding securities.
Amway is a Michigan manufacturer and direct selling distributor of home care and
personal care products. If Amway were to substantially reduce its investment in
the Fund, it could have an adverse effect on the Fund by decreasing the size of
the Fund and by causing the Fund to incur brokerage charges in connection with
the redemption of Amway's shares
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five Years
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida in land and cattle)
33469
Allan D. Engel* 48 Trustee, Vice Vice President, Real Estate
2905 Lucerne SE, President, Secretary Operations - Enterprise
Suite 200 and Assistant Treasurer Capital, Inc. Formerly, Sr.
Grand Rapids, Michigan of the Fund; President, Manager, Investments and Real
49546 and Secretary of the Estate, Amway Corporation.
Investment Adviser. Director, President and
Secretary of Amway Management
Company (1981-1999). Trustee,
Vice President and Secretary,
Amway Mutual Fund (1981- 1999).
8
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five Years
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice
19017 Vintage Trace Circle Treasurer, SPX Corporation
Fort Myers, Florida (Designs, manufactures and
33912 markets products and services
for the motor vehicle industry),
1986 to 1994.
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation
49424
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. Officer, JVA Enterprises, LLC.
Suite 200 President, Chief Executive
Grand Rapids, Michigan Officer and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-
2000). Director, Vice President
and Treasurer of Amway
Management Company (1984-
1999). Trustee, President and
Treasurer, Amway Mutual
Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
*These Trustees are interested persons under the Investment Company Act of
1940, as amended.
All Officers and certain Trustees of the Fund and the Investment Adviser are
affiliated with Amway Corporation. The Officers serve without compensation from
the Fund. Fees paid to all Trustees during the year ended December 31, 1998,
amounted to $48,000. Under the Administrative Agreement, the Investment Adviser
pays the fees of the Trustees of the Fund. The Trustees and Officers of the Fund
owned, as a group, less than 1% of the outstanding shares of the Fund. The
Adviser also serves as the Fund's principal underwriter (see "Distribution of
Shares").
9
<PAGE>
<TABLE>
<CAPTION>
Pension or
Name of Person, Trustee Retirement Estimated Annual Total Compensation
Position Compensation Benefits Accrued as Benefits Paid to Trustees
Part of Fund Upon Retirement
Expenses
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
</TABLE>
*These Trustees are interested persons under the Investment Company Act of 1940,
as amended.
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract") with
Activa Asset Management LLC (the "Investment Adviser" or "Activa"). Under the
Contract, the Investment Adviser sets overall investment strategies for the Fund
and monitors and evaluates the investment performance of the Fund's Sub-Adviser,
including compliance with the investment objectives, policies and restrictions
of the Fund. If the Investment Adviser believes it is in the Fund's best
interests, it may recommend that additional or alternative Sub-Advisers be
retained on behalf of the Fund. If more than one Sub-Adviser is retained, the
Investment Adviser will recommend to the Fund's Trustees how the Fund's assets
should be allocated or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from the
Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Except for the exemptive order, these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and Investment Adviser
became effective on June 11, 1999. For providing services under this contract,
Activa is to receive a fee, payable quarterly, at the annual rate of .35 of 1%
of the average of the daily aggregate net asset value of the Fund until
aggregate assets total $500,000,000. When assets total $500,000,000, then the
fee will be .35 of 1% of the average of the daily aggregate net asset value of
the Fund on the first $100,000,000; .325% on the next $100,000,000; and .30% on
the assets in excess of $200,000,000. Activa also provides certain
administrative services for the Fund pursuant to a separate agreement. The fees
paid by the Fund to the Investment Adviser during the year ended December 31,
1999 were $156,807.
Members of the families of Jay Van Andel and Richard M. DeVos indirectly own
substantially all of the outstanding ownership interests of Investment Adviser.
Jay Van Andel and Richard M. DeVos are also controlling persons of Amway
Corporation which, as of February 18, 2000, owned 101,937,554 shares, or 90.72%,
of the outstanding shares of the Fund. See "Principal Shareholders."
SUB-ADVISER
--------------------------------------------------------------------------------
A Sub-Advisory Agreement has been entered into between the Investment Adviser
and J.P. Morgan Investment Management, Inc. ("JPMIM"), 522 Fifth Avenue, New
York, New York 10036 (Sub-Adviser). Under the Sub-Advisory Agreement, the
Investment Adviser employs the Sub-Adviser to furnish investment advice and
manage on a regular basis the investment portfolio of the Fund, subject to the
direction of the Investment Adviser, the Board of Trustees of the Fund, and to
the provisions of the Fund's current Prospectus. The Sub-Adviser will make
investment decisions on behalf of the Fund and place all orders for the purchase
or sale of portfolio securities for the Fund's
10
<PAGE>
account, except when otherwise specifically directed by the Fund or the Adviser.
The fees of the Sub-Adviser are paid by the Investment Adviser, not the Fund.
The Fund's Sub-Adviser is JPMIM. Subject to the supervision of the Fund's
Trustees and Investment Adviser, the Sub-Adviser makes the Fund's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages the Fund's investments. JPMIM, a wholly owned subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan"), is a registered investment
adviser under the Investment Advisers Act of 1940, as amended, which manages
employee benefit funds of corporations, labor unions and state and local
governments and the accounts of other institutional investors, including
investment companies.
J.P. Morgan, through the Sub-Adviser and other subsidiaries, acts as
investment adviser to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $320 billion.
J.P. Morgan has a long history of services as advisers, underwriters and
lender to an extensive roster of major companies and as a financial adviser to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Sub-Adviser's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ over 300 capital
market researchers, portfolio managers and traders. The Sub-Adviser's fixed
income investment process is based on analysis of real rates, sector
diversification and quantitative and credit analysis.
The investment advisory services the Sub-Adviser provides to the Fund are not
exclusive under the terms of the Sub-Advisory Agreement. The Sub-Adviser is free
to and does render similar investment advisory services to others. The
Sub-Adviser and its affiliate companies serve as investment adviser to personal
investors and other investment companies and acts as fiduciary for trusts,
estates and employee benefit plans. The accounts which are managed or advised by
the Sub-Adviser have varying investment objectives and the Sub-Adviser invests
assets of such accounts in investments substantially similar to, or the same as,
those which are expected to constitute the principal investments of the Fund.
Such accounts are supervised by officers and employees of the Sub-Adviser who
may also be acting in similar capacities for the Fund. See "Portfolio
Transactions."
Sector weightings are generally similar to a benchmark with the emphasis on
security selection as the method to achieve investment performance superior to
the benchmark. The benchmark for the Fund is currently IBC's First Tier Money
Fund Average.
The Fund is managed by officers of the Sub-Adviser who, in acting for their
customers, including the Fund, do not discuss their investment decisions with
any personnel of J.P. Morgan or any of its affiliated persons, with the
exception of certain other investment management affiliates of J.P. Morgan.
As compensation for the services rendered under the Sub-Advisory Agreement,
the Investment Adviser has agreed to pay the Sub-Adviser a fee, which is
computed daily and may be paid quarterly, equal to the annual rates of 0.15% of
the Fund's average daily net assets until assets total $500,000,000. When assets
total $500,000,000, then the fee will be .15 of 1% of the average of the daily
aggregate net asset value of the Fund on the first $100,000,000, .125% on the
next $100,000,000 and .10% on the assets in excess of $200,000,000. The fees
paid by the Investment Adviser to the Sub-Adviser during the year ended December
31, 1999 were $68,238.
On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law, the
relevant provisions of which go into effect March 11, 2000. Until March 11,
2000, federal banking law, specifically the Glass-Steagall Act and the Bank
Holding Company Act, generally prohibits banks and bank holding companies and
their subsidiaries, such as the Sub-Adviser, from engaging in the business of
underwriting or distributing securities. Pursuant to interpretations issued
under these laws by the Board of Governors of the Federal Reserve System, such
entitites also may not sponsor, organize or control a registered open-end
investment company continuously engaged in the issuance of its shares (together
with underwriting and distributing securities, the "Prohibited Activities"),
such as the Fund. These laws and interpretations do not prohibit a bank holding
company or a subsidiary thereof from acting as investor adviser and custodian to
such an investment company. The Sub-Adviser believes that it may perform the
services for the Fund contemplated by the Sub-Advisory Agreement without
violation of the laws in effect until March 11, 2000. Effective March 11, 2000,
the sections of the Glass-Steagall Act which prohibited the Prohibited
Activities are repealed, and the Bank Holding Company Act is amended to permit
bank holding, companies which satisfy certaincapitalization, managerial and
other criteria (the "Criteria") to engage in the Prohibited Activities; bank
holding companies which do not satisfy the Criteria may continue to engage in
any activity that was permissible for a bank holding company under the Bank
Holding Company Act as of November 11, 1999. Because the services to be
performed for the Fund udner the Sub-Advisory Agreement were permissiable for a
bank holding company as of
11
<PAGE>
November 11, 1999, the Sub-Adviser believes that it also may perform such
services after March 11, 2000 whether or not the Sub-Adviser's parent satisfies
the Criteria. State laws on this issue may differ from the interpretation of
relevant federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws.
If the Sub-Adviser were prohibited from acting as investment adviser to the
Fund, it is expected that the Trustees of the Fund would select another
qualified sub-adviser.
PLAN OF DISTRIBUTION & PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, the Adviser provides shareholder services
and services in connection with the sale and distribution of the shares of
certain series of the Trust and is compensated at a maximum annual rate of 0.25
of 1% of the average daily net assets of each such series. The Adviser is not
presently providing services under the distribution plan on behalf of the Fund
and is receiving no such compensation.
The Adviser acts as the exclusive agent for sales of shares of the Fund
pursuant to a Principal Underwriting Agreement. The only compensation currently
received by the Adviser in connection with the sale of Fund shares is pursuant
to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and the Investment
Adviser, the Investment Adviser provides specified assistance to the Fund with
respect to compliance matters, taxes and accounting, the provision of legal
services, meetings of the Fund's Trustees and shareholders, and preparation of
the Fund's registration statement and other filings with the Securities and
Exchange Commission. In addition, the Investment Adviser pays the fees of the
Fund's Trustees, and the salaries and fees of all of the Fund's Trustees and
officers who devote part or all of their time to the affairs of the Investment
Adviser. For providing these services ACTIVA receives a fee, payable quarterly,
at the annual rate of 0.15% of the Fund's average daily assets. During the year
ended December 31, 1999, total payments were $67,204.
The Administrative Agreement provides that the Investment Adviser is only
responsible for paying such fees and expenses and providing such services as are
specified in the agreement. The Fund is responsible for all other expenses
including (i) expenses of maintaining the Fund and continuing its existence;
(ii) registration of the Trust under the Investment Company Act of 1940; (iii)
commissions, fees and other expenses connected with the acquisition, disposition
and valuation of securities and other investments; (iv) auditing, accounting and
legal expenses; (v) taxes and interest; (vi) government fees; (vii) expenses of
issue, sale, repurchase and redemption of shares; (viii) expenses of registering
and qualifying the Trust, the Fund and its shares under federal and state
securities laws and of preparing and printing prospectuses for such purposes and
for distributing the same to shareholders and investors; (ix) expenses of
reports and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
12
<PAGE>
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
In return for its services, the Fund pays the Transfer Agent, a fee of $1.167
per account in existence during the month, payable monthly, less earnings in the
redemption liquidity account after deducting bank fees, if any. The fee schedule
is reviewed annually by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids, Michigan,
are the independent certified public accountants for the Fund. Services include
an annual audit of the Fund's financial statements, tax return preparation, and
review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
In order to purchase shares for a new account, the completion of an
application form is required. The minimum initial investment is $500 or more.
Additional investments of $50 or more can be made at any time by using the lower
portion of your account statement. Checks should be made payable to "Activa
Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand Rapids,
Michigan 49546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share next calculated
after the Fund receives your investment and application in proper form.
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
Each Fund will redeem your shares at the net asset value next determined
after your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL:
--------
When redeeming by mail, when no certificates have been issued, send a written
request for redemption to Activa Asset Management LLC, 2905 Lucerne SE, Suite
200, Grand Rapids, Michigan 49546. The request must state the dollar amount or
shares to be redeemed, including your account number and the signature of each
account owner, signed exactly as your name appears on the records of the Fund.
If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, limited liability companies, retirement
plans, individual retirement accounts and profit sharing plans.
BY PHONE:
---------
At the time of your investment in the Fund, or subsequently, you may elect on
the Fund's application to authorize the telephone or telegram exchange or
redemption option. You may redeem shares under this option by calling the Fund
at the number indicated on the front of this Prospectus on any business day.
Requests received after 4:00 p.m. when the market has closed will receive the
next day's price. By establishing the telephone or telegram exchange or
redemption option, you authorize the Transfer Agent to honor any telephone or
telegram exchange or redemption request from any person representing themselves
to be the investor. Procedures required by the Fund to ensure that a
shareholder's requested telephone or telegram transaction is genuine include
identification by the shareholder of the
13
<PAGE>
account by number, recording of the requested transaction and sending a written
confirmation to shareholders reporting the requested transaction. The Fund is
not responsible for unauthorized telephone or telegram exchanges or redemptions
unless the Fund fails to follow these procedures. Shares must be owned for 10
business days before redeeming by the telephone and telegram exchange and cannot
be in certificate form unless the certificate is tendered with the request for
redemption. Certificated shares cannot be redeemed by the telephone and telegram
exchange. All redemption proceeds will be forwarded to the address of record or
bank designated on the account application.
The Transfer Agent and the Fund have reserved the right to change, modify, or
terminate the telephone or telegram exchange or redemption option at any time.
Before this option is effective for a corporation, partnership, or other
organizations, additional documents may be required. This option is not
available for Profit-Sharing Trust and Individual Retirement Accounts. The Fund
and the Transfer Agent disclaim responsibility for verifying the authenticity of
telephone and telegram exchange or redemption requests which are made in
accordance with the procedures approved by shareholders.
SPECIAL CIRCUMSTANCES:
----------------------
In some circumstances a signature guarantee may be required before shares are
redeemed. These circumstances include a change in the address for an account
within the last 30 days, a request to send the proceeds to a different payee or
address from that listed for the account, or a redemption request for $100,000
or more. A signature guarantee may be obtained from a bank, broker, or other
acceptable financial institution. If a signature guarantee is required, we
suggest that you call us to ensure that the signature guarantee and redemption
request will be processed correctly.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The Exchange Privilege may be exercised by sending written instruction to the
Transfer Agent. See "How Shares Are Redeemed" for applicable signatures and
signature guarantee requirements. Shareholders may authorize telephone or
telegram exchanges or redemptions by making an election on your application.
Procedures required by the Fund to ensure that a shareholder's requested
telephone or telegram transaction is genuine include identification by the
shareholder of the account by number, recording of the requested transaction and
sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges unless the Fund fails to follow these procedures. Shares must be owned
for 10 business days before exchanging and cannot be in certificate form unless
the certificate is tendered with the request for exchange. Exchanges will be
accepted only if the registration of the two accounts is identical. Exchange
redemptions and purchases are effected on the basis of the net asset value next
determined after receipt of the request in proper order by the Fund. In the case
of exchanges into the Money Market Fund, dividends generally commence on the
following business day. For federal and state income tax purposes, an exchange
is treated as a sale and may result in a capital gain or loss.
14
<PAGE>
ADDITIONAL ACCOUNT POLICIES
--------------------------------------------------------------------------------
If the value of your account falls below $100, the Fund may mail you a notice
asking you to bring the account back to $100 or close it out. If you do not take
action within 60 days, the Fund may sell your shares and mail the proceeds to
you at the address of record.
The Fund does not permit market-timing or other abusive trading practices.
Excessive, short-term (market-timing) and other abusive trading practices may
disrupt portfolio trading strategies and harm Fund performance. To minimize harm
to the Fund and its shareholders, each Fund reserves the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading.
INTERNET ADDRESS
--------------------------------------------------------------------------------
Activa's Web site is located at activafunds.com. Our Web site offers further
information about the Activa Funds.
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund intends to comply with the provisions of Subchapter M of the
Internal Revenue Code applicable to investment companies. As the result of
paying to its shareholders as dividends and distributions substantially all net
investment income and realized capital gains, the Fund will be relieved of
substantially all Federal income tax.
For Federal income tax purposes, distributions of net investment income and
any capital gains will be taxable to shareholders. Distributions of net
investment income will normally qualify for the 70% deduction for dividends
received by corporations. After the last dividend and capital gains distribution
in each year, the Fund will send you a statement of the amount of the income and
capital gains which you should report on your Federal income tax return.
Dividends derived from net investment income and net short-term capital gains
are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or reinvested in
additional shares of the Fund. Qualified long-term capital gain dividends
received by individual shareholders are taxed a maximum rate of 20%.
In addition, shareholders may realize a capital gain or loss when shares are
redeemed. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
On the record date for a distribution, the Fund's share value is reduced by
the amount of the distribution. If a shareholder buys shares just before the
record date ("buying a dividend"), they will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
Also, under the Code, a 4% excise tax is imposed on the excess of the
required distribution for a calendar year over the distributed amount for such
calendar year. The required distribution is the sum of 98% of the Fund's net
investment income for the calendar year plus 98% of its capital gain net income
for the one-year period ended December 31, plus any undistributed net investment
income from the prior calendar year, plus any undistributed capital gain net
income from the prior calendar year, minus any overdistribution in the prior
calendar year. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
Under certain circumstances, the Fund will be required to withhold 31% of a
shareholder's distribution or redemption from the Fund. These circumstances
include failure by the shareholder to furnish the Fund with a proper taxpayer
identification number; notification of the Fund by the Secretary of the Treasury
that a taxpayer identification number is incorrect, or that withholding should
commence as a result of the shareholder's failure to report interest and
dividends; and failure of the shareholder to certify, under penalties of
perjury, that he is not subject to withholding. In this regard, failure of a
shareholder who is a foreign resident to certify that he is a nonresident alien
may result in 31% of his redemption proceeds and 31% of his capital gain
distribution being withheld. In addition, such a foreign resident may be subject
to a 30% or less, as prescribed by an applicable tax treaty, withholding tax on
ordinary income dividends distributed unless he qualifies for relief under an
applicable tax treaty.
Trustees of qualified retirement plans are required by law to withhold 20% of
the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement does not apply to distributions from IRA's or
any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account or IRA. Shareholders should consult their tax
adviser regarding the 20% withholding requirement.
Prior to purchasing shares of the Fund, the impact of any dividends or
capital gain distributions which are about to be declared should be carefully
considered. Any such dividends and capital gain distributions declared shortly
after you purchase shares will have the effect of reducing the per share net
asset value of your shares by the amount of
15
<PAGE>
dividends or distributions on the ex-dividend date. All or a portion of such
dividends or distributions, although in effect a return of capital, are subject
to taxes which may be at ordinary income tax rates.
Each shareholder is advised to consult with his tax adviser regarding the
treatment of distributions to him under various state and local income tax laws.
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
--------------------------------------------------------------------------------
The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once each year, the Fund is audited by independent certified public
accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
16
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small
degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1,2, and 3 to indicate the relative degree
of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to
pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
17
<PAGE>
MOODY'S
Corporate and Muncipal Bonds
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 an "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aa 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 as 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 in fact have
speculative characteristics as well.
Commercial Paper, including Tax Exempt
Prime 1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the
following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Short-Term Tax-Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes
with this rating enjoy strong protection from established cash flows
of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection
not as large as MIG-1.
18
<PAGE>
========================
Activa
Money
ACTIVA MONEY MARKET FUND Market
(a Series of Activa Mutual Fund Trust) Fund
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
========================
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ACTIVA VALUE FUND ACTIVA MUTUAL FUND LOGO
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670 CLASS R
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not
Restrictions on the Fund's a prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Class R Prospectus, which can
Additional Risks & Information be requested from the Fund by writing or
Concerning Certain Investment telephoning as indicated above. This Statement of
Techniques 3 Additional Information relates to the Class R
Portfolio Transactions and Prospectus for the Fund dated April 29, 2000.
Brokerage 12 -
Principal Shareholders 13 Class R shares are available only to tax-exempt
Officers and Trustees of the Fund 13 retirement and benefits plans of Amway Corporation
Investment Adviser 15 and its affiliates. The Fund also offers Class A
Sub-Adviser 15 shares, which are available to members of the
Principal Underwriter 16 general public. Information about Class A is
Administrative Agreement 16 contained in the Class A prospectus dated April 29,
Transfer Agent 17 2000, which is available upon request.
Custodian 17 -
Auditors 17
Pricing of Fund Shares 17
Purchase of Shares 17
How Shares are Redeemed 17
Federal Income Tax 18
Investment Performance Information 18 The date of this Statement of Additional
Reports to Shareholders and Annual Audit 19 Information is April 29, 2000.
Printed in U.S.A.
</TABLE>
1
<PAGE>
ACTIVA MUTUAL FUND
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998. The Fund is the successor of Amway Mutual Fund, Inc., which
was organized as a Delaware corporation on February 13, 1970.
The Declaration of Trust authorizes the Trustees to create additional series
and to issue an unlimited number of units of beneficial interest, or "shares."
The Trustees are also authorized to issue different classes of shares of any
series. No series which may be issued by the Trust is entitled to share in the
assets of any other series or is liable for the expenses or liabilities of any
other series.
Shares of beneficial interest of Class A are offered to members of the
general public. When issued, shares of Class A will be fully paid and
non-assessable. The Board of Trustees of the Fund has authorized Class R, which
is offered to tax-exempt retirement and benefit plans of Amway Corporation and
its affiliates. Each share of Class A and Class R will represent an equal
proportionate interest in the Fund and, generally, will have identical voting,
dividend, liquidation, and other rights and the same terms and conditions,
except that (a) expenses allocated to a particular Class ("Class Expenses") will
be borne solely by that Class, and (b) each Class will have exclusive voting
rights with respect to matters affecting only that Class. Examples of Class
Expenses include: (1) Rule 12b-1fees, (2) transfer agent and shareholder
services fees attributable to a specified Class, (3) stationary, printing,
postage, and delivery expenses related to preparing and distributing materials
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a Class, (4) Blue Sky registration fees incurred by a Class, (5)
SEC registration fees incurred by a Class, (6) trustees' fees or expenses
incurred as a result of issues relating to one Class, (8) accounting fees
relating solely to one Class, (9) litigation expenses and legal fees and
expenses relating to a particular Class, and (10) expenses incurred in
connection with shareholders meetings as a result of issues relating to one
Class. Shares are freely transferable and have no preemptive, subscription or
conversion rights.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The primary investment objective of the Fund is capital appreciation. The
Fund will attempt to meet its objectives by investing primarily in stocks and
convertible securities that the Fund believes have long term gorwth potential.
Income may be a factor in portfolio selection but is secondary to the principal
objective. The Fund's policy is to invest in a broadly diversified portfolio and
not to concentrate investments in a particular industry or group of industries.
Fundamental Investment Restrictions
The investment restrictions below have been adopted by the Fund. Except where
otherwise noted, these investment restrictions are "fundamental" policies which,
under the 1940 Act, may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities.
The Fund :
1. May not make any investment inconsistent with the Fund's classification
as a diversified investment company under the Investment Company Act
of 1940.
2
<PAGE>
2. May not purchase any security which would cause the Fund to concentrate
its investments in the securities of issuers primarily engaged in any
particular industry except as permitted by the SEC. This restriction
does not apply to instruments considered to be domestic bank money
market instruments.
3. May not issue senior securities, except as permitted under the
Investment Company Act of 1940 or any rule, order or interpretation
thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities or other issues, except to the extent
that the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may (a) invest in securities or
other instruments directly or indirectly secured by real estate, and
(b) invest in securities or other instruments issued by issuers that
invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments
issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing,
selling and entering into financial futures contracts (including
futures contracts on indices of securities, interest rates and
currencies), options on financial futures contracts (including futures
contracts on indices of securities, interests rates and currencies),
warrants, swaps, forward contracts, foreign currency spot and forward
contracts or other derivative instruments that are not related to
physical commodities; and
8. May make loans to other persons, in accordance with the Fund's
investment objective and policies and to the extent permitted by
applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by the Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities; (iii) may not acquire securities of other investment companies,
except as permitted by the 1940 Act or any order pursuant thereto; (iv) may not
enter into reverse repurchase agreements or borrow money, except from banks for
extraordinary or emergency purposes, if such obligations exceed in the aggregate
one-third of the market value of the Fund's total assets, less liabilities other
than obligations created by reverse repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
In view of the Fund's investment objective of capital appreciation, with
income as a secondary objective, the Fund intends to purchase securities for
long-term or short-term profits, as appropriate. Securities will be disposed of
in situations where, in management's opinion, such potential is no longer
feasible or the risk of decline in the market price is too great. Therefore, in
order to achieve the Fund's objectives, the purchase and sale of securities will
be made without regard to the length of time the security is to be held. Higher
portfolio turnover rates can result in corresponding increases in brokerage
commissions.
ADDITIONAL RISKS AND INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES
--------------------------------------------------------------------------------
DERIVATIVES.
------------
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by Ark Asset Management Company (the
"Sub-Adviser") to aid in achieving the Fund's investment objective. The Fund may
also purchase instruments with characteristics of both futures and securities
(e.g., debt instruments
3
<PAGE>
with interest and principal payments determined by reference to the value of a
commodity or a currency at a future time) and which, therefore, possess the
risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Sub-Adviser anticipates unusually high or low market
volatility.
The Sub-Adviser may enter into derivative positions for the Fund for either
hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies, which are undertaken to profit
from (i) an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
FUTURE CONTRACTS.
-----------------
Futures contracts are publicly traded contracts to buy or sell an underlying
asset or group of assets, such as a currency or an index of securities, at a
future time at a specified price. A contract to buy establishes a long position
while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in securities
transactions in that the former does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is like a
performance bond or good faith deposit on the contract. Subsequent payments
(called "maintenance margin") to and from the broker will be made on a daily
basis as the price of the underlying asset fluctuates. This process is known as
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying instrument has declined, the position would be
less valuable, and the Fund would be required to make a maintenance margin
payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
OPTION
------
The Fund may use options to implement its investment strategy. There are two
basic types of options: "puts" and "calls." Each type of option can establish
either a long or a short position, depending upon whether the Fund is the
purchaser or the writer of the option. A call option on a security, for example,
gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset
4
<PAGE>
at the exercise price during the option period. Conversely, a put option on a
security gives the purchaser the right to sell, and the writer the obligation to
buy, the underlying asset at the exercise price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees or risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer effects
a closing purchase transaction or until the option expires. To secure its
obligation to deliver the underlying asset in the case of a call option, or to
pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities indices.
In general, options on indices of securities are similar to options on the
securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receiver an amount of cash upon exercise of the option if
the value of the underlying index has fallen below the exercise price. The
amount of cash received will be equal to the difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. As with options on equity securities, or futures
contracts, a Fund may offset its position in index options prior to expiration
by entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included in the
index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
OPTIONS ON FUTURES CONTRACTS
----------------------------
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a future contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity
The Fund may no establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability of
the Fund's nonhedging strategies will depend of the Sub-Adviser to analyze both
the applicable derivatives market and the market for the underlying asset or
group of assets. Derivatives markets are often more volatile than corresponding
securities markets and a relatively small change in the price of the underlying
asset or group of assets can have a magnified effect upon the price of a related
derivative instrument.
5
<PAGE>
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market thereof.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures positions prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
SHORT SALES AGAINST THE BOX
---------------------------
The Fund may effect short sales, but only if such transactions are short sale
transactions known as short sales "against the box." A short sale is a
transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
SWAP ARRANGEMENTS
-----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale by
the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Sub-Adviser is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these
6
<PAGE>
investment techniques were not used. Moreover, even if the Sub-Adviser is
correct in its forecasts, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
REPURCHASE AGREEMENTS.
----------------------
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired-security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's net assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets. To the extent excludable under relevant regulatory interpretations,
repurchase agreements involving U.S. Government securities are not subject to
the Fund's investment restrictions which otherwise limit the amount of the
Fund's total assets which may be invested in one issuer or industry.
REVERSE REPURCHASE AGREEMENTS.
------------------------------
The Fund may enter into reverse repurchase agreements. However, the Fund may
not engage in reverse repurchase agreements in excess of 5% of the Fund's total
assets. In a reverse repurchase agreement the Fund transfers possession of a
portfolio instrument to another person, such as a financial institution, broker
or dealer, in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed-upon rate. The ability to use reverse repurchase agreements may enable,
but does not ensure the ability of, the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
WHEN-ISSUED SECURITIES.
-----------------------
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
RESTRICTED SECURITIES.
----------------------
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the
7
<PAGE>
effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the subjective
valuation of such securities in the absence of a market for them. Restricted
securities that are not resalable under Rule 144A may be subject to risks of
illiquidity and subjective valuations to a greater degree than Rule 144A
Securities.
FOREIGN INVESTMENTS.
--------------------
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issues by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or exporpriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-develop countries. Such countries
include countries that have an emerging stock market on which trade a small
number of securities and/or countries with economics that are based on only a
few industries. The Fund may invest in the securities of issuers in countries
with less developed economics as deemed appropriate by the Sub-Adviser. However,
it is anticipated that a majority of the foreign investments by the Fund will
consist of securities of issuers in countries with developed economics.
CURRENCY TRANSACTIONS.
----------------------
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. In entering a forward currency
contract, the Fund is dependent
8
<PAGE>
upon the creditworthiness and good faith of the counterparty. The Fund attempts
to reduce the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. Although spot and forward contracts will be
used primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
SECURITIES LENDING.
-------------------
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investment of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery which are deemed by the Sub-Adviser or its agents to be of good
financial standing.
SHORT-TERM TRADING.
-------------------
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
TEMPORARY AND DEFENSIVE INVESTMENTS.
------------------------------------
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Sub-Adviser, such a position is
more likely to provide protection against adverse market conditions than
adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
INDUSTRY CLASSIFICATIONS.
-------------------------
For purposes of fundamental investment restrictions regarding industry
concentration, the Sub-Adviser may classify by industry in accordance with
classification set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Sub-Adviser determines in good faith based on its
own information that the economic characteristics affecting a particular issue
make it more appropriately considered to be engaged in a different industry, the
Sub-Adviser may classify accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of the parents.
9
<PAGE>
OTHER INVESTMENT COMPANIES
--------------------------
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, the Fund may indirectly bear service and other fees in addition to the
fees the Fund pays its service providers. Similarly, other investment companies
may invest in the Fund. Other investment companies that invest in the Fund may
hold significant portions of the Fund and materially affect the sale and
redemption of Fund shares and the Fund's portfolio transactions.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
-----------------------------------------------
The Fund may invest in long-term and short-term debt securities. Certain debt
securities and money market instruments in which the Fund may invest are
described below.
U.S. Government and Related Securities. U.S. Government securities are
--------------------------------------
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage Corporation;
and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government Securities which the Fund may buy are backed in a variety of
ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Bank, the Federal Farm Credit Bank, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
(TIGRs") and "Certificates of Accrual on Treasury Securities ("CATS"), and may
be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment vehicles,
the assets of which consist principally of U.S. Government securities or other
assets substantially collateralized or supported by such securities, such as
Government trust certificates.
10
<PAGE>
BANK MONEY INVESTMENTS
----------------------
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
-------------------------------------
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued by
corporations including but not limited to (a) domestic or foreign bank holding
companies or (b) their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
ZERO AND STEP COUPON SECURITIES
-------------------------------
Zero and step coupon securities are debt securities that may pay no interest
for all or a portion of their life but are purchased at a discount to face value
at maturity. Their return consist of the amortization of the discount between
their purchase price and their maturity value, plus in the case of a step
coupon, any fixed rate interest income. Zero coupon securities pay no interest
to holders prior to maturity even though interest on these securities is
reported as income to the Fund. The Fund will be required to distribute all or
substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
COMMERCIAL PAPER RATINGS
------------------------
Commercial paper investments at the time of purchase will be rated within the
"A" major rating category by S&P or within the "Prime" major rating category by
Moody's, or, if not rated, issued by companies having an outstanding long-term
unsecured debt issue rated at least within the "A" category by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least within the "A" category by S&P or within
the "Prime" category by Moody's, within comparable categories of other rating
agencies or considered to be of comparable quality by the Sub-Adviser.
11
<PAGE>
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong positions within the industry. The reliability and quality
of management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund by
applicable rating agencies results in a material decline in the overall quality
of the Fund's portfolio, the Trustees of the Trust will review the situation and
take such action as they deem in the best interests of the Fund's shareholders,
including, if necessary, changing the composition of the portfolio.
PORTFOLIO TRANSACTIONS AND BROKERAGE
--------------------------------------------------------------------------------
It is the policy of the Fund when purchasing and selling portfolio securities
to obtain the highest possible price on sales and the lowest possible price on
purchases of securities, consistent with the best execution of portfolio
transactions. Activa Asset Management, LLC, the ("Investment Adviser"), or the
Sub-Advisers will select the brokers and resulting allocation of brokerage
commission; but, the Investment Adviser's practice is subject to review by the
Board of Trustees of the Fund, which has the primary responsibility in this
regard, and must be consistent with the policies stated above.
The Investment Adviser and Sub-Adviser, in effecting purchases and sales of
portfolio securities for the account of the Fund, will implement the Fund's
policy of seeking best execution of orders, which includes best net prices.
Consistent with this policy, orders for portfolio transactions are placed with
broker-dealer firms giving consideration to the quality, quantity, and nature of
each firm's professional services which include execution, clearance procedures,
wire service quotations, research information, statistical, and other services
provided to the Fund, Adviser, and the Sub-Adviser. Any research benefits
derived by the Sub-Adviser are available to all clients of the Sub-Adviser.
Since research information, statistical and other services are only
supplementary to the research efforts of the Sub-Adviser and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to materially reduce expenses.
Also, subject to the policy of seeking best price and execution of orders,
certain Fund expenses may be paid through the use of directed brokerage
commissions. While the Sub-Adviser will be primarily responsible for the
placement of the Fund's business, the policies and practices in this regard must
be consistent with the foregoing and will at all times be subject to review by
the Trustees of the Fund.
During the years ended December 31, 1999, 1998 and 1997, the Fund paid total
brokerage commissions on purchase and sale of portfolio securities of $730,824,
$358,825, and $301,990, respectively. Transactions in the amount of
$113,640,730, involving commissions of approximately $142,616, were directed to
brokers because of research services provided during 1999. During the calendar
year ended December 31, 1999 the portfolio turnover rate was 144.5% which was an
increase over the previous year's rate of 101.1% resulting from the change in
the Fund's sub-adviser and the restructuring of the Fund's portfolio.
The Sub-Adviser furnishes investment advice to other clients. The other
accounts may also make investments in the same investment securities and at the
same time as the Fund. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount and price in a manner considered equitable to each, so
that each receives, to the extent practicable, the average price of such
transactions, which may or may not be beneficial to the Fund.
12
<PAGE>
The Board of Trustees of the Fund believes that the benefits of the
Sub-Adviser's organization outweigh any limitations that may arise from
simultaneous transactions.
The Fund may acquire securities of brokers who execute the Fund's portfolio
transactions. As of December 31, 1999, the Fund owned no such securities.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation indirectly, as of February 18, 2000, owned 842,738 shares,
or 3.43%, of the outstanding shares of the Fund. Jay Van Andel and Richard M.
DeVos are controlling persons of Amway Corporation since they own, together with
their spouses, substantially all of its outstanding securities. Amway
Corporation is a Michigan manufacturer and direct selling distributor of home
care and personal care products. Jay Van Andel owns all the outstanding
securities of JVA Properties Corporation, the General Partner for JVA
Enterprises Limited Partnership, which owns, as of February 18, 2000, 7,477,289
shares, or 30.43%, of the outstanding shares of the Fund. The Jay and Betty Van
Andel Foundation, as of February 18, 2000, owns 1,919,507 shares, or 7.81%, of
the outstanding shares of the Fund. No other person is known by the Fund to own
of record or beneficially 5% or more of the Fund's shares.
As noted above, Jay Van Andel together with his spouse beneficially owns more
than 25% of the Fund's voting securities. Accordingly, he may be deemed to
control the Fund.
If any of the Fund's principal shareholders were to substantially reduce its
investment in the Fund, it could have an adverse effect on the Fund by
decreasing the size of the Fund and by causing the Fund to incur brokerage
charges in connection with the redemption of the Fund's shares.
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five
Years
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida 33469 in land and cattle)
Allan D. Engel* 48 Trustee, Vice President, Vice President, Real Estate
2905 Lucerne SE, Secretary and Assistant Operations-Enterprise Capital,
Suite 200 Treasurer of the Fund; Inc. Formerly, Sr. Manager,
Grand Rapids, Michigan President, and Secretary Investments and Real Estate,
49546 of the Investment Adviser. Amway Corporation. Director,
President and Secretary of
Amway Management Company (1981-1999).
Trustee, Vice President and Secretary,
Amway Mutual Fund (1981-1999).
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice President-Treasurer,
19017 Vintage Trace Circle SPX Corporation (Designs, manufactures
Fort Myers, Florida and markets products and services for the
33912 motor vehicle industry), 1986 to 1994.
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation.
49424
13
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five
Years
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. JVA Enterprises, LLC.
Suite 200 President, Chief Executive Officer
Grand Rapids, Michigan and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-2000). Director,
Vice President and Treasurer of Amway
Management Company (1984-1999). Trustee,
President and Treasurer, Amway Mutual
Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
<TABLE>
<CAPTION>
Pension or
Name of Person, Trustee Retirement Estimated Annual Total Compensation
Position Compensation Benefits Accrued as Benefits Paid to Trustees
Part of Fund Upon Retirement
Expenses
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
</TABLE>
*These Trustees are interested persons under the Investment Company Act of
1940, as amended.
All Officers and certain Trustees of the Fund and the Investment Adviser are
affiliated with Amway Corporation. The Officers serve without compensation from
the Fund. Fees paid to all Trustees during the year ended December 31, 1999,
amounted to $48,000. Under the Administrative Agreement, the Investment Adviser
pays the fees of the Trustees of the Fund. The Trustees and Officers of the Fund
owned, as a group, less than 1% of the outstanding shares of the Fund. The
Adviser also serves as the Fund's principal underwriter (see "Distribution of
Shares").
14
<PAGE>
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract") with
Activa Asset Management, LLC (the "Investment Adviser or Activa"). Under the
Contract, the Investment Adviser sets overall investment strategies for the Fund
and monitors and evaluates the investment performance of the Fund's Sub-Adviser,
including compliance with the investment objectives, policies and restrictions
of the Fund. If the Investment Adviser believes it is in the Fund's best
interests, it may recommend that additional or alternative Sub-Advisers be
retained on behalf of the Fund. If more than one Sub-Adviser is retained, the
Investment Adviser will recommend to the Fund's Trustees how the Fund's assets
should be allocated or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from the
Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Except for the exemptive order these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and the Investment Adviser
became effective on September 1, 1999. For providing services under this
contract, the Investment Adviser is to receive compensation payable quarterly,
at the annual rate of 0.65 of 1% on the first $100,000,000 of average daily net
assets of the Fund, 0.60% on the next $50,000,000 in assets, and 0.55% on the
next $50,000,000 in assets. When the Fund's assets reach $200,000,000, the rate
shall be 0.60% on assets up to $200,000,000, and 0.55% on assets in excess of
$200,000,000, so long as the Fund continues to have at least $200,000,000 in
assets. The fees paid by the Fund to the Investment Adviser during the year
ended December 31, 1999 were $391,047.
Effective December 30, 1999, Wellington Management Company, LLP became the
Fund's new Sub-Adviser. The compensation schedule under the new Sub-Advisory
Agreement, which is further described below, provides for a reduction in
Sub-Advisory fees as the size of the Fund's assets increases. The new
Sub-Advisory agreement, compared to the Fund's prior sub-advisory agreement,
provides for lower sub-advisory fees so long as the Fund's assets exceed
approximately $78,000,000. In order to give the Fund the benefit of this
reduction in fees, the Investment Adviser has agreed to waiver its Investment
Advisory fees to the extent necessary so that its fees equal the lesser of (a)
the amount otherwise payable under the Investment Advisory Agreement, and (b)
the amount payable under the new Sub-Advisory Agreement, plus .20% of average
net assets.
Prior to September 1, 1999, Amway Management Company ("AMC") served as the
Fund's investment adviser. Pursuant to an Advisory and Service Contract between
the Fund and AMC, AMC provided certain administrative services to the Fund. The
fees paid by the Fund to AMC pursuant to this contract during the years ended
December 31, 1999, 1998, and 1997, were $671,045, $864,715, and $727,102,
respectively.
Members of the families of Jay Van Andel and Richard M. DeVos indirectly own
substantially all of the outstanding ownership interests of Activa. Members of
these families also indirectly own substantially all of the outstanding
securities of AMC.
SUB-ADVISER
--------------------------------------------------------------------------------
Effective December 31, 1999, a Sub-Advisory Agreement has been entered into
between the Investment Adviser and Wellington Management Company, LLP, 75 State
Street, Boston, Massachusetts (Sub-Adviser). Under the Sub-Advisory Agreement,
the Adviser employs the Sub-Adviser to furnish investment advice and manage on a
regular basis the investment portfolio of the Fund, subject to the direction of
the Adviser, the Board of Trustees of the Fund, and to the provisions of the
Fund's current Prospectus. The Sub-Adviser will make investment decisions on
behalf of the Fund and place all orders for the purchase or sale of portfolio
securities for the Fund's account, except when otherwise specifically directed
by the Fund or the Adviser. The fees of the Sub-Adviser are paid by the
Investment Adviser, not the Fund.
15
<PAGE>
As compensation for its services as the Fund's new Sub-Adviser, Wellington
Management will receive a fee from the Fund's Investment Adviser at the annual
rate of 0.30% of the first $350 million of average daily net assets of the Fund,
and 0.25% of the assets in excess of $350 million; the minimum annual fee shall
be $350,000. The annual compensation formerly paid by the Investment Adviser to
Ark Asset Managemetn Co., Inc. was 0.35% of Fund assets in excess of $200
million; larger percentage fees (up to a maximum of 0.45%) were paid if the
Fund's assets were less than $200 million. The fees paid by the Investment
Adviser to the Sub-Adviser during the years ended December 31, 1999, 1998, and
1997 were $806,398, $702,560, and $594,900, respectively.
PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
Activa will serve as the exclusive agent for sales of the Fund's shares
pursuant to a Principal Underwriting Agreement. Previously, Amway Management
Company served as the Fund's Principal Underwriter. Prior to April 22, 1998, the
Principal Underwriter received a sales commission of 3% of the offering price of
the Fund's shares. The sales commission was eliminated when the Fund adopted the
Distribution Plan. During the years ended December 31, 1998 and 1997, AMC
received sales commissions of $473,151 and $513,417, respectively. The only
compensation currently received by the Adviser in connection with the sale of
Fund shares is pursuant to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and Activa, Activa
provides specified assistance to the Fund with respect to compliance matters,
taxes and accounting, the provision of legal services, meetings of the Fund's
Trustees and shareholders, and preparation of the Fund's registration statement
and other filings with the Securities and Exchange Commission. In addition,
Activa pays the fees of the Fund's Trustees, and the salaries and fees of all of
the Fund's Trustees and officers who devote part or all of their time to the
affairs of Activa. For providing these services Activa receives a fee, payable
quarterly, at the annual rate of 0.15% of the Fund's average daily assets.
During the year ended December 31, 1999, total payments were $97,811.
The Administrative Agreement provides that Activa is only responsible for
paying such fees and expenses and providing such services as are specified in
the agreement. The Fund is responsible for all other expenses including (i)
expenses of maintaining the Fund and continuing its existence; (ii) registration
of the Trust under the Investment Company Act of 1940; (iii) commissions, fees
and other expenses connected with the acquisition, disposition and valuation of
securities and other investments; (iv) auditing, accounting and legal expenses;
(v) taxes and interest; (vi) government fees; (vii) expenses of issue, sale,
repurchase and redemption of shares; (viii) expenses of registering and
qualifying the Trust, the Fund and its shares under federal and state securities
laws and of preparing and printing prospectuses for such purposes and for
distributing the same to shareholders and investors; (ix) expenses of reports
and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
The Administration Agreement became effective on September 1, 1999.
Administrative services were previously provided to the Fund by AMC pursuant to
the Advisory and Service Agreement between the Fund and AMC. See "Investment
Adviser."
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
16
<PAGE>
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
In return for its services, the Fund pays the Transfer Agent monthly, a fee
of .20% of the average daily net assets of the Fund per account in existence
during the month, payable monthly, less earnings in the redemption liquidity
account after deducting bank fees, if any. The fee schedule is reviewed annually
by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids, Michigan,
are the independent certified public accountants for the Fund. Services include
an annual audit of the Fund's financial statements, tax return preparation, and
review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
Class R Shares are offered to tax-exempt retirement and benefit plans of
Amway Corporation and its affiliates. There are no minimum investment
requirements for shares of Class R. Participants in the tax-exempt retirement
and benefits plans of Amway Corporation and its affiliates should contact the
Plan Administrator for information about particular procedures or requirements
which may apply to Plan Participants.
All purchases will be made at the Net Asset Value per share net calculated
after the Fund receives your investment and application in proper form.
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
The Fund will redeem your shares at the net asset value next determined after
your redemption request is received in proper form.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
17
<PAGE>
Participants in the tax-exempt retirement and benefit plans of Amway
Corporation and its affiliates should contact the Plan Administrator for
information about particular redemption procedures or requirements which may
apply to Plan Participants.
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund will make distributions of ordinary income and capital gains that
will relieve the Fund of all federal income taxes.
Shares of Class R will be held by the qualified retirement and benefit plans
of Amway Corporation and its affiliates ("the plans") for the benefit of plan
participants. The plans do not pay federal income taxes. Plan participants
should consult the plans' governing documents, and their own tax advisers, for
information about the tax consequences associated with participating in the
plans.
INVESTMENT PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
Following is the average annual total return percentages for one, five and
ten years for the Fund for annual periods ended December 31, 1999. The
investment performance of Class R is expected to be substantially similar to
Class A because both Classes invest in the same portfolio of securities and
investment performance will differ only to the extent that the classes do not
have the same expenses. The estimated expenses for Class R, which are lower than
the expenses for Class A, are disclosed in the Fee Expense Table.
AVERAGE ANNUAL TOTAL
RETURN FOR THE PERIODS PAST PAST PAST
ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
ACTIVA VALUE FUND*
- CLASS A -6.70% 15.15% 11.90%
- CLASS R -6.43% N/A N/A
RUSSELL 1000 VALUE** 7.35% 23.07% 15.60%
S&P 500** 21.04% 28.54% 18.20%
*Wellington Management Company, LLP, has been the Fund's sub-adviser since
December 30, 1999.
**The S&P 500 Index represents an unmanaged index generally representative of
the U.S. stock market. The Value Index represents a composite of value stocks
representative of the Fund's investment objectives and strategies which is
compiled independently by the Frank Russell Companies. Neither index is impacted
by Fund operating expenses.
Total return performance for the Fund is calculated by making an initial
investment of $1,000 at the beginning of the period, in the Fund's shares at the
net asset value (without sales charge) and reinvesting all ordinary income
dividends and capital gain distributions paid during the period in additional
shares at net asset value per share on the reinvestment dates. The illustration
includes recurring expenses incurred by all shareholder accounts and not those
incurred for specific shareholder purposes such as bank fees for wire transfers,
Individual Retirement Accounts, or Profit-Sharing Trusts.
The average annual total return for the Fund for a specific period is found
by dividing the ending total value by the cost of the initial investment for the
period and taking this quotient to the Nth root, then subtracting 1 (N
represents the number of years in the period). The average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Such calculation is with all ordinary income dividends
and capital gain distributions reinvested at net asset value exclusive of sales
charges. No adjustment has been made for any income taxes payable by
shareholders on ordinary income dividends and capital gain distributions
accepted in shares which are payable by shareholders in the tax year received.
Average annual total return percentages of the Fund will vary and the
publication of performance results is not a representation as to future
investment performance. Factors affecting the Fund's performance include general
market conditions, operating expenses and investment management. Net asset
values of the Fund will fluctuate. Additional information about the performance
of the Fund is contained in the Annual Shareholders Report which can be obtained
without charge.
18
<PAGE>
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
--------------------------------------------------------------------------------
The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once during each year, the Fund is audited by independent certified
public accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
The financial statements for the Fund are contained in the Fund's 1999 Annual
Report to Shareholders along with additional information about the performance
of the Fund, which is incorporated herein by reference and may be obtained by
writing or calling the Fund.
19
<PAGE>
=========================
ACTIVA VALUE FUND Activa
(a Series of Activa Mutual Fund Trust) Value
2905 Lucerne SE, Suite 200 Fund
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Class R
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
=========================
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ACTIVA VALUE FUND ACTIVA MUTUAL FUND LOGO
(a series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670 CLASS A
STATEMENT OF ADDITIONAL
Contents Page INFORMATION
Organization of the Fund 2
Objectives, Policies, and This Statement of Additional Information is not a
Restrictions on the Fund's prospectus. Therefore, it should be read only in
Investments 2 conjunction with the Class A Prospectus, which can
Additional Risks & Information be requested from the Fund by writing or
Concerning Certain Investment telephoning as indicated above. This Statement of
Techniques 4 Additional Information relates to the Class A
Portfolio Transactions & Brokerage 12 Prospectus for the Fund dated April 29, 2000.
Principal Shareholders 13
Officers and Trustees of the Fund 13 Class A is offered to members of the general
Investment Adviser 15 public. The Fund also offers Class R shares, which
Sub-Adviser 15 are available only to tax-exempt retirement and
Plan of Distribution and Principal benefits plans of Amway Corporation and its
Underwriter 16 affiliates. Information about Class R is contained
Administrative Agreement 16 in the Class R prospectus dated April 29, 2000,
Transfer Agent 17 which is available upon request.
Custodian 17
Auditors 17
Pricing of Fund Shares 17
Purchase of Shares 18
How Shares are Redeemed 18
Exchange Privilege 19
Additional Account Policies 19 The date of this Statement of Additional
Internet Address 19 Information is April 29, 2000.
Federal Income Tax 20
Investment Performance Information 20
Reports to Shareholders and Annual Audit 20
Printed in U.S.A.
</TABLE>
1
<PAGE>
ACTIVA MUTUAL FUND
ORGANIZATION OF THE FUND
--------------------------------------------------------------------------------
The Fund is a series of Activa Mutual Fund Trust, an open-end diversified
management investment company which was organized as a Delaware business trust
on February 2, 1998. The Fund is the successor of Amway Mutual Fund, Inc., which
was organized as a Delaware corporation on February 13, 1970.
The Declaration of Trust authorizes the Trustees to create additional series
and to issue an unlimited number of units of beneficial interest, or "shares."
The Trustees are also authorized to issue different classes of shares of any
series. No series which may be issued by the Trust is entitled to share in the
assets of any other series or is liable for the expenses or liabilities of any
other series.
Shares of beneficial interest of Class A are offered to members of the
general public. When issued, shares of Class A will be fully paid and
non-assessable. The Board of Trustees of the Fund has authorized Class R, which
is offered to tax-exempt retirement and benefit plans of Amway Corporation and
its affiliates. Each share of Class A and Class R will represent an equal
proportionate interest in the Fund and, generally, will have identical voting,
dividend, liquidation, and other rights and the same terms and conditions,
except that (a) expenses allocated to a particular Class ("Class Expenses") will
be borne solely by that Class, and (b) each Class will have exclusive voting
rights with respect to matters affecting only that Class. Examples of Class
Expenses include: (1) Rule 12b-1fees, (2) transfer agent and shareholder
services fees attributable to a specified Class, (3) stationary, printing,
postage, and delivery expenses related to preparing and distributing materials
such as shareholder reports, prospectuses, and proxy statements to current
shareholders of a Class, (4) Blue Sky registration fees incurred by a Class, (5)
SEC registration fees incurred by a Class, (6) trustees' fees or expenses
incurred as a result of issues relating to one Class, (8) accounting fees
relating solely to one Class, (9) litigation expenses and legal fees and
expenses relating to a particular Class, and (10) expenses incurred in
connection with shareholders meetings as a result of issues relating to one
Class. Shares are freely transferable and have no preemptive, subscription or
conversion rights.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. Shareholders of the Trust will have voting
rights only with respect to the limited number of matters specified in the
Declaration of Trust, and such other matters as may be determined or as may be
required by law. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. In the event a meeting of shareholders is held, shareholders
will be entitled to one vote for each dollar of net asset value (or a
proportionate fractional vote with respect to fractional dollar amounts) on all
matters presented to shareholders, including the election of Trustees.
OBJECTIVES, POLICIES AND RESTRICTIONS ON THE FUND'S INVESTMENTS
--------------------------------------------------------------------------------
The primary investment objective of the Fund is capital appreciation. The
Fund will attempt to meet its objectives by investing primarily in stocks and
convertible securities that the Fund believes have long term gorwth potential.
Income may be a factor in portfolio selection but is secondary to the principal
objective. The Fund's policy is to invest in a broadly diversified portfolio and
not to concentrate investments in a particular industry or group of industries.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Fund. Except where
otherwise noted, these investment restrictions are "fundamental" policies which,
under the 1940 Act, may not be changed without the vote of a majority of the
outstanding voting securities of the Fund, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities.
2
<PAGE>
The Fund :
1. May not make any investment inconsistent with the Fund's
classification as a diversified investment company under the
Investment Company Act of 1940.
2. May not purchase any security which would cause the Fund to
concentrate its investments in the securities of issuers primarily
engaged in any particular industry except as permitted by the SEC.
This restriction does not apply to instruments considered to be
domestic bank money market instruments.
3. May not issue senior securities, except as permitted under the
Investment Company Act of 1940 or any rule, order or interpretation
thereunder;
4. May not borrow money, except to the extent permitted by applicable
law;
5. May not underwrite securities or other issues, except to the extent
that the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may (a) invest in securities or
other instruments directly or indirectly secured by real estate, and
(b) invest in securities or other instruments issued by issuers that
invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments
issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing,
selling and entering into financial futures contracts (including
futures contracts on indices of securities, interest rates and
currencies), options on financial futures contracts (including futures
contracts on indices of securities, interests rates and currencies),
warrants, swaps, forward contracts, foreign currency spot and forward
contracts or other derivative instruments that are not related to
physical commodities; and
8. May make loans to other persons, in accordance with the Fund's
investment objective and policies and to the extent permitted by
applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental policies of
the Fund and may be changed by the Fund's Trustees. These non-fundamental
investment policies require that the Fund: (i) may not acquire any illiquid
securities, if as a result thereof, more than 10% of the market value of the
Fund's total assets would be in investments which are illiquid; (ii) may not
purchase securities on margin, make short sales of securities, or maintain a
short position, provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities; (iii) may not acquire securities of other investment companies,
except as permitted by the 1940 Act or any order pursuant thereto; (iv) may not
enter into reverse repurchase agreements or borrow money, except from banks for
extraordinary or emergency purposes, if such obligations exceed in the aggregate
one-third of the market value of the Fund's total assets, less liabilities other
than obligations created by reverse repurchase agreements and borrowings.
Not withstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in the securities of a single open-end
registered investment company with substantially the same investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that restriction
is complied with at the time the relevant action is taken notwithstanding a
later change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
In view of the Fund's investment objective of capital appreciation, with
income as a secondary objective, the Fund intends to purchase securities for
long-term or short-term profits, as appropriate. Securities will be disposed of
in situations where, in management's opinion, such potential is no longer
feasible or the risk of decline in the market price is too great. Therefore, in
order to achieve the Fund's objectives, the purchase and sale of securities will
be made without regard to the length of time the security is to be held. Higher
portfolio turnover rates can result in corresponding increases in brokerage
commissions.
3
<PAGE>
ADDITIONAL RISKS AND INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES
--------------------------------------------------------------------------------
DERIVATIVES.
------------
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by Ark Asset Management Company (the
"Sub-Adviser") to aid in achieving the Fund's investment objective. The Fund may
also purchase instruments with characteristics of both futures and securities
(e.g., debt instruments with interest and principal payments determined by
reference to the value of a commodity or a currency at a future time) and which,
therefore, possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Sub-Adviser anticipates unusually high or low market
volatility.
The Sub-Adviser may enter into derivative positions for the Fund for either
hedging or non-hedging purposes. The term hedging is applied to defensive
strategies designed to protect the Fund from an expected decline in the market
value of an asset or group of assets that the Fund owns (in the case of a short
hedge) or to protect the Fund from an expected rise in the market value of an
asset or group of assets which it intends to acquire in the future (in the case
of a long or "anticipatory" hedge). Non-hedging strategies include strategies
designed to produce incremental income (such as the option writing strategy
described below) or "speculative" strategies, which are undertaken to profit
from (i) an expected decline in the market value of an asset or group of assets
which the Fund does not own or (ii) expected increases in the market value of an
asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
FUTURE CONTRACTS.
-----------------
Futures contracts are publicly traded contracts to buy or sell an underlying
asset or group of assets, such as a currency or an index of securities, at a
future time at a specified price. A contract to buy establishes a long position
while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in securities
transactions in that the former does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is like a
performance bond or good faith deposit on the contract. Subsequent payments
(called "maintenance margin") to and from the broker will be made on a daily
basis as the price of the underlying asset fluctuates. This process is known as
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying instrument has declined, the position would be
less valuable, and the Fund would be required to make a maintenance margin
payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
4
<PAGE>
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
OPTION
------
The Fund may use options to implement its investment strategy. There are two
basic types of options: "puts" and "calls." Each type of option can establish
either a long or a short position, depending upon whether the Fund is the
purchaser or the writer of the option. A call option on a security, for example,
gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees or risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer effects
a closing purchase transaction or until the option expires. To secure its
obligation to deliver the underlying asset in the case of a call option, or to
pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities indices.
In general, options on indices of securities are similar to options on the
securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receiver an amount of cash upon exercise of the option if
the value of the underlying index has fallen below the exercise price. The
amount of cash received will be equal to the difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. As with options on equity securities, or futures
contracts, a Fund may offset its position in index options prior to expiration
by entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included in the
index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
OPTIONS ON FUTURES CONTRACTS
----------------------------
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a future contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option.
LIMITATIONS AND RISKS OF OPTIONS AND FUTURES ACTIVITY
-----------------------------------------------------
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
5
<PAGE>
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability of
the Fund's nonhedging strategies will depend of the Sub-Adviser to analyze both
the applicable derivatives market and the market for the underlying asset or
group of assets. Derivatives markets are often more volatile than corresponding
securities markets and a relatively small change in the price of the underlying
asset or group of assets can have a magnified effect upon the price of a related
derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market thereof.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures positions prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
SHORT SALES AGAINST THE BOX
---------------------------
The Fund may effect short sales, but only if such transactions are short sale
transactions known as short sales "against the box." A short sale is a
transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
SWAP ARRANGEMENTS
-----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale by
the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
6
<PAGE>
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a portion of the Fund's portfolio. However,
the Fund may, as noted above, enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission for
entities which are not commodity pool operators, such as the Fund. In entering a
swap arrangement, the Fund is dependent upon the creditworthiness and good faith
of the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, reputable institutions. The
swap market is still relatively new and emerging; positions in swap arrangements
may become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Sub-Adviser is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these investment
techniques were not used. Moreover, even if the Sub-Adviser is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
REPURCHASE AGREEMENTS.
----------------------
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired-security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's net assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 15% of the Fund's
net assets. To the extent excludable under relevant regulatory interpretations,
repurchase agreements involving U.S. Government securities are not subject to
the Fund's investment restrictions which otherwise limit the amount of the
Fund's total assets which may be invested in one issuer or industry.
REVERSE REPURCHASE AGREEMENTS.
------------------------------
The Fund may enter into reverse repurchase agreements. However, the Fund may
not engage in reverse repurchase agreements in excess of 5% of the Fund's total
assets. In a reverse repurchase agreement the Fund transfers possession of a
portfolio instrument to another person, such as a financial institution, broker
or dealer, in return for a percentage of the instrument's market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed-upon rate. The ability to use reverse repurchase agreements may enable,
but does not ensure the ability of, the Fund to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
WHEN-ISSUED SECURITIES.
-----------------------
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed
7
<PAGE>
deliveries or forward commitments are frequently characterized as when-issued
transactions and are similarly treated by the Fund.
RESTRICTED SECURITIES.
----------------------
It is the Fund's policy not to make an investment in restricted securities,
including restricted securities sold in accordance with Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities") if, as a result, more than 35%
of the Fund's total assets are invested in restricted securities, provided not
more than 10% of the Fund's total assets are invested in restricted securities
other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain circumstances
only to qualified institutional buyers as defined in the rule, and the markets
and trading practices for such securities are relatively new and still
developing; depending on the development of such markets, Rule 144A Securities
may be deemed to be liquid as determined by or in accordance with methods
adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
FOREIGN INVESTMENTS.
--------------------
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issues by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or exporpriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-develop countries. Such countries
include countries that have an emerging stock market on which trade a small
number of securities and/or countries with economics that are based on only a
few industries. The Fund may invest in the securities of issuers in countries
with less
8
<PAGE>
developed economics as deemed appropriate by the Sub-Adviser. However, it is
anticipated that a majority of the foreign investments by the Fund will consist
of securities of issuers in countries with developed economics.
CURRENCY TRANSACTIONS.
----------------------
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. In entering a forward currency
contract, the Fund is dependent upon the creditworthiness and good faith of the
counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. Although
spot and forward contracts will be used primarily to protect the Fund from
adverse currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, which may result in losses to the
Fund. This method of protecting the value of the Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some future point in time. Although such
contracts tend to minimize the risk of loss due to a decline in the value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
SECURITIES LENDING.
-------------------
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investment of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery which are deemed by the Sub-Adviser or its agents to be of good
financial standing.
SHORT-TERM TRADING.
-------------------
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
TEMPORARY AND DEFENSIVE INVESTMENTS.
------------------------------------
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Sub-Adviser, such a position is
more likely to provide protection against adverse market conditions than
adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard &
9
<PAGE>
Poor's Corporation ("S&P") or the "Prime" major rating category by Moody's
Investor's Service, Inc. ("Moody's"), or if not rated, issued by companies
having an outstanding long-term unsecured debt issued rated at least within the
"A" category by S&P or Moody's.
INDUSTRY CLASSIFICATIONS.
-------------------------
For purposes of fundamental investment restrictions regarding industry
concentration, the Sub-Adviser may classify by industry in accordance with
classification set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Sub-Adviser determines in good faith based on its
own information that the economic characteristics affecting a particular issue
make it more appropriately considered to be engaged in a different industry, the
Sub-Adviser may classify accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of the parents.
OTHER INVESTMENT COMPANIES
--------------------------
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, the Fund may indirectly bear service and other fees in addition to the
fees the Fund pays its service providers. Similarly, other investment companies
may invest in the Fund. Other investment companies that invest in the Fund may
hold significant portions of the Fund and materially affect the sale and
redemption of Fund shares and the Fund's portfolio transactions.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
-----------------------------------------------
The Fund may invest in long-term and short-term debt securities. Certain debt
securities and money market instruments in which the Fund may invest are
described below.
U.S. Government and Related Securities. U.S.Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage Corporation;
and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government Securities which the Fund may buy are backed in a variety of
ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Bank, the Federal Farm Credit Bank, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of
10
<PAGE>
depository financial institutions, which then trade the component parts
independently. Obligations of Resolution Funding Corporation are similarly
divided into principal and interest components and maintained as such on the
book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
(TIGRs") and "Certificates of Accrual on Treasury Securities ("CATS"), and may
be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment vehicles,
the assets of which consist principally of U.S. Government securities or other
assets substantially collateralized or supported by such securities, such as
Government trust certificates.
BANK MONEY INVESTMENTS
----------------------
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
-------------------------------------
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued by
corporations including but not limited to (a) domestic or foreign bank holding
companies or (b) their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
ZERO AND STEP COUPON SECURITIES
-------------------------------
Zero and step coupon securities are debt securities that may pay no interest
for all or a portion of their life but are purchased at a discount to face value
at maturity. Their return consist of the amortization of the discount between
their purchase price and their maturity value, plus in the case of a step
coupon, any fixed rate interest income. Zero coupon securities pay no interest
to holders prior to maturity even though interest on these securities is
reported as income to the Fund. The Fund will be required to distribute all or
substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to
11
<PAGE>
liquidate portfolio assets in order to make such distributions at a time when
the Fund may have otherwise chosen not to sell such securities. The market value
of such securities may be more volatile than that of securities which pay
interest at regular intervals.
COMMERCIAL PAPER RATINGS
------------------------
Commercial paper investments at the time of purchase will be rated within the
"A" major rating category by S&P or within the "Prime" major rating category by
Moody's, or, if not rated, issued by companies having an outstanding long-term
unsecured debt issue rated at least within the "A" category by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least within the "A" category by S&P or within
the "Prime" category by Moody's, within comparable categories of other rating
agencies or considered to be of comparable quality by the Sub-Adviser.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term senior debt is rated within the "A" category or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong positions within the industry. The reliability and quality
of management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the Fund by
applicable rating agencies results in a material decline in the overall quality
of the Fund's portfolio, the Trustees of the Trust will review the situation and
take such action as they deem in the best interests of the Fund's shareholders,
including, if necessary, changing the composition of the portfolio.
PORTFOLIO TRANSACTIONS AND BROKERAGE
--------------------------------------------------------------------------------
It is the policy of the Fund when purchasing and selling portfolio securities
to obtain the highest possible price on sales and the lowest possible price on
purchases of securities, consistent with the best execution of portfolio
transactions. Activa Asset Management, LLC, the ("Investment Adviser"), or the
Sub-Advisers will select the brokers and resulting allocation of brokerage
commission; but, the Investment Adviser's practice is subject to review by the
Board of Trustees of the Fund, which has the primary responsibility in this
regard, and must be consistent with the policies stated above.
The Investment Adviser and Sub-Adviser, in effecting purchases and sales of
portfolio securities for the account of the Fund, will implement the Fund's
policy of seeking best execution of orders, which includes best net prices.
Consistent with this policy, orders for portfolio transactions are placed with
broker-dealer firms giving consideration to the quality, quantity, and nature of
each firm's professional services which include execution, clearance procedures,
wire service quotations, research information, statistical, and other services
provided to the Fund, Adviser, and the Sub-Adviser. Any research benefits
derived by the Sub-Adviser are available to all clients of the Sub-Adviser.
Since research information, statistical and other services are only
supplementary to the research efforts of the Sub-Adviser and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to materially reduce expenses.
Also, subject to the policy of seeking best price and execution of orders,
certain Fund expenses may be paid through the use of directed brokerage
commissions. While the Sub-Adviser will be primarily responsible for the
placement of the Fund's business, the policies and practices in this regard must
be consistent with the foregoing and will at all times be subject to review by
the Trustees of the Fund.
12
<PAGE>
During the years ended December 31, 1999, 1998, and 1997, the Fund paid total
brokerage commissions on purchase and sale of portfolio securities of $730,824,
$358,825, and $301,990, respectively. Transactions in the amount of
$113,640,730, involving commissions of approximately $142,616, were directed to
brokers because of research services provided during 1999. During the calendar
year ended December 31, 1999 the portfolio turnover rate was 144.5% which was an
increase over the previous year's rate of 101.1% resulting from the change in
the Fund's sub-adviser and the restructuring of the Fund's portfolio.
The Sub-Adviser furnishes investment advice to other clients. The other
accounts may also make investments in the same investment securities and at the
same time as the Fund. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount and price in a manner considered equitable to each, so
that each receives, to the extent practicable, the average price of such
transactions, which may or may not be beneficial to the Fund. The Board of
Trustees of the Fund believes that the benefits of the Sub-Adviser's
organization outweigh any limitations that may arise from simultaneous
transactions.
The Fund may acquire securities of brokers who execute the Fund's portfolio
transactions. As of December 31, 1999, the Fund owned no such securities.
PRINCIPAL SHAREHOLDERS
--------------------------------------------------------------------------------
Amway Corporation indirectly, as of February 18, 2000, owned 842,738 shares,
or 3.43%, of the outstanding shares of the Fund. Jay Van Andel and Richard M.
DeVos are controlling persons of Amway Corporation since they own, together with
their spouses, substantially all of its outstanding securities. Amway
Corporation is a Michigan manufacturer and direct selling distributor of home
care and personal care products. Jay Van Andel owns all the outstanding
securities of JVA Properties Corporation, the General Partner for JVA
Enterprises Limited Partnership, which owns, as of February 18, 2000, 7,477,289
shares, or 30.43%, of the outstanding shares of the Fund. The Jay and Betty Van
Andel Foundation, as of February 18, 2000 owns 1,919,507 shares, or 7.81%, of
the outstanding shares of the Fund. No other person is known by the Fund to own
of record or beneficially 5% or more of the Fund's shares.
As noted above, Jay Van Andel together with his spouse beneficially owns more
than 25% of the Fund's voting securities. Accordingly, he may be deemed to
control the Fund.
If any of the Fund's principal shareholders were to substantially reduce its
investment in the Fund, it could have an adverse effect on the Fund by
decreasing the size of the Fund and by causing the Fund to incur brokerage
charges in connection with the redemption of the Fund's shares.
OFFICERS AND TRUSTEES OF THE FUND
--------------------------------------------------------------------------------
The business affairs of the fund are managed and under the direction of the
Board of Trustees. The following are the Officers and Trustees of the Fund or
the Adviser or both, together with their principal occupations during the past
five years:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- --- ----------- ------------------------------------
Richard A. DeWitt 86 Trustee of the Fund President, DeWitt Land and
10001 Buttonwood Way Cattle Company (investments
Tequesta, Florida 33469 in land and cattle)
Allan D. Engel* 48 Trustee, Vice President, Vice President, Real Estate
2905 Lucerne SE, Secretary and Assistant Operations-Enterprise Capital,
Suite 200 Treasurer of the Fund; Inc. Formerly, Sr. Manager,
Grand Rapids, Michigan President, and Secretary Investments and Real Estate,
49546 of the Investment Adviser. Amway Corporation. Director,
President and Secretary of
Amway Management Company (1981-1999).
Trustee, Vice President and Secretary,
Amway Mutual Fund (1981- 1999).
13
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Name and Address Age Office Held Principal Occupation Last Five Years
---------------- --- ----------- ------------------------------------
Donald H. Johnson 70 Trustee of the Fund Retired, Former Vice President-Treasurer,
19017 Vintage Trace Circle SPX Corporation (Designs, manufactures
Fort Myers, Florida and markets products and services for the
33912 motor vehicle industry), 1986 to 1994.
Walter T. Jones 58 Trustee of the Fund Retired, Former Senior Vice
936 Sycamore Ave. President-Chief Financial
Holland, Michigan Officer, Prince Corporation.
49424
James J. Rosloniec* 55 Trustee, President and President & Chief Operating
2905 Lucerne SE Treasurer of the Fund. JVA Enterprises, LLC.
Suite 200 President, Chief Executive Officer
Grand Rapids, Michigan and Director, Enterprise
49546 Capital, Inc. Formerly, Vice
President-Audit and Control,
Amway Corporation (1991-2000). Director,
Vice President and Treasurer of Amway
Management Company (1984-1999). Trustee,
President and Treasurer, Amway Mutual
Fund, (1981-1999).
Richard E. Wayman 65 Trustee of the Fund Retired, Former Finance
24578 Rutherford Director, Amway Corporation,
Ramona, California 1976 to 1996
92065
</TABLE>
<TABLE>
<CAPTION>
Pension or
----------
Name of Person, Trustee Retirement Estimated Annual Total Compensation
--------------- ------- ---------- ---------------- ------------------
Position Compensation Benefits Accrued as Benefits Paid to Trustees
-------- ------------ ------------------- -------- ----------------
Part of Fund Upon Retirement
------------ ---------------
Expenses
--------
<S> <C> <C> <C> <C>
Richard A. DeWitt $8,000 -0- -0- $8,000
Trustee
Allan D. Engel* $8,000 -0- $8,000
Trustee
Donald H. Johnson $8,000 -0- -0- $8,000
Trustee
Walter T. Jones $8,000 -0- -0- $8,000
Trustee
James J. Rosloniec $8,000 -0- -0- $8,000
Trustee
Richard E. Wayman $8,000 -0- -0- $8,000
Trustee
*These Trustees are interested persons under the Investment Company Act of
1940, as amended.
</TABLE>
14
<PAGE>
All Officers and certain Trustees of the Fund and the Investment Adviser are
affiliated with Amway Corporation. The Officers serve without compensation from
the Fund. Fees paid to all Trustees during the year ended December 31, 1999,
amounted to $48,000. Under the Administrative Agreement, the Investment Adviser
pays the fees of the Trustees of the Fund. The Trustees and Officers of the Fund
owned, as a group, less than 1% of the outstanding shares of the Fund. The
Adviser also serves as the Fund's principal underwriter (see "Distribution of
Shares").
INVESTMENT ADVISER
--------------------------------------------------------------------------------
The Fund has entered into an Investment Advisory Contract ("Contract") with
Activa Asset Management, LLC (the "Investment Adviser or Activa"). Under the
Contract, the Investment Adviser sets overall investment strategies for the Fund
and monitors and evaluates the investment performance of the Fund's Sub-Adviser,
including compliance with the investment objectives, policies and restrictions
of the Fund. If the Investment Adviser believes it is in the Fund's best
interests, it may recommend that additional or alternative Sub-Advisers be
retained on behalf of the Fund. If more than one Sub-Adviser is retained, the
Investment Adviser will recommend to the Fund's Trustees how the Fund's assets
should be allocated or reallocated from time to time, among the Sub-Advisers.
The Investment Adviser and the Fund have received an exemptive order from the
Securities and Exchange Commission with respect to certain provisions of the
Investment Company Act. Except for the exemptive order these provisions would
require that any change of Sub-Advisers be submitted to the Fund's shareholders
for approval. Pursuant to the exemptive order, any change in the Fund's
Sub-Advisers must be approved by the Fund's Trustees, including a majority of
the Fund's independent Trustees. If the Fund hires a new or an additional
Sub-Adviser, information about the new Sub-Adviser will be provided to the
Fund's shareholders within 90 days.
The Investment Advisory Agreement between the Fund and the Investment Adviser
became effective on September 1, 1999. For providing services under this
contract, the Investment Adviser is to receive compensation payable quarterly,
at the annual rate of 0.65% of 1% on the first $100,000,000 of average daily net
assets of the Fund, 0.60% on the next $50,000,000 in assets, and 0.55% on the
next $50,000,000 in assets. When the Fund's assets reach $200,000,000 the rate
shall be 0.60% on assets up to $200,000,000, and 0.55% on assets in excess of
$200,000,000, so long as the Fund continues to have at least $200,000,000 in
assets. The fees paid by the Fund the Investment Adviser during the year ended
December 31, 1999 were $391,047.
Effective December 30, 1999, Wellington Management Company, LLP became the
Fund's new Sub-Adviser. The compensation schedule under the new Sub-Advisory
Agreement, which is further described below, provides for a reduction in
Sub-Advisory fees as the size of the Fund's assets increases. The new
Sub-Advisory agreement, compared to the Fund's prior sub-advisory agreement,
provides for lower sub-advisory fees so long as the Fund's assets exceed
approximately $78,000,000. In order to give the Fund the benefit of this
reduction in fees, the Investment Adviser has agreed to waiver its Investment
Advisory fees to the extent necessary so that its fees equal the lesser of (a)
the amount otherwise payable under the Investment Advisory Agreement, and (b)
the amount payable under the new Sub-Advisory Agreement, plus .20% of average
net assets.
Prior to September 1, 1999, Amway Management Company ("AMC") served as the
Fund's investment adviser. Pursuant to an Advisory and Service Contract between
the Fund and AMC, AMC provided certain administrative services to the Fund. The
fees paid by the Fund to AMC pursuant to this contract during the years ended
December 31, 1999, 1998, and 1997, were $671,045, $864,715, and $727,102,
respectively.
Members of the families of Jay Van Andel and Richard M. DeVos indirectly own
substantially all of the outstanding ownership interests of Activa. Members of
these families also indirectly own substantially all of the outstanding
securities of AMC.
SUB-ADVISER
--------------------------------------------------------------------------------
Effective December 30, 1999 a Sub-Advisory Agreement has been entered into
between the Investment Adviser and Wellington Management Company, LLP, 75 State
Street, Boston, Massachusetts (Sub-Adviser). Under the Sub-Advisory Agreement,
the Adviser employs the Sub-Adviser to furnish investment advice and manage on a
regular basis the investment portfolio of the Fund, subject to the direction of
the Adviser, the Board of Trustees of the Fund, and to the provisions of the
Fund's current Prospectus. The Sub-Adviser will make investment decisions on
behalf of the Fund and place all orders for the purchase or
15
<PAGE>
sale of portfolio securities for the Fund's account, except when otherwise
specifically directed by the Fund or the Adviser. The fees of the Sub-Adviser
are paid by the Investment Adviser, not the Fund.
As compensation for its services as the Fund's new Sub-Adviser, Wellington
Management will receive a fee from the Fund's Investment Adviser at the annual
rate of 0.30% of the first $350 million of average daily net assets of the Fund,
and 0.25% of the assets in excess of $350 million; the minimum annual fee shall
be $350,000. The annual compensation formerly paid by the Investment Adviser to
Ark Asset Management Co., Inc. was 0.35% of Fund assets in excess of $200
million; larger percentage fees (up to a maximum of 0.45%) were paid if the
Fund's assets were less than $200 million. The fees paid by the Investment
Adviser to the Sub-Adviser during the years ended December 31, 1999, 1998, and
1997 were $806,398, $702,560, and $594,900, respectively.
PLAN OF DISTRIBUTION & PRINCIPAL UNDERWRITER
--------------------------------------------------------------------------------
The Trust has adopted a Plan and Agreement of Distribution ("Distribution
Plan"). Under the Distribution Plan, Activa provides shareholder services and
services in connection with the sale and distribution of the Fund's shares and
is compensated at a maximum annual rate of 0.25 of 1% of the average daily net
assets of the Fund. The maximum amount presently authorized by the Fund's Board
of Trustees is 0.15 of 1% of the average daily net assets of the Fund. Since
these fees are paid from Fund assets, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges. Prior to September 1, 1999 AMC provided services pursuant to the
Distribution Plan.
During 1999 the Fund paid $506,232 to Activa for the services which it
provided pursuant to the Distribution Plan. The services included printing and
mailing of prospectuses ($103,570) and general and administrative services
($402,662). The latter included activities of Activa's office personnel which
are related to marketing, registration of the Fund's securities under the
federal securities laws, and registration of Activa as a broker-dealer under
federal and state securities laws. Since the Distribution Plan is a compensation
plan, amounts paid under the plan may exceed Activa's actual expenses.
Amounts received by Activa pursuant to the Distribution Plan may be retained
by Activa as compensation for its services, or paid to other investment
professionals who provide services in connection with the distribution of Fund
shares. The Trustees will review the services provided and compensation paid
pursuant to the Distribution Plan no less often than quarterly.
Most of the activities financed by the Distribution Plan are related to the
distribution of all of the funds in the Activa family of mutual funds. Other
activities may be related to the distribution of a particular fund. Each Activa
mutual fund (other than the Money Market Fund) contributes the same percentage
of its average net assets to the Distribution Plan. The Money Market Fund does
not presently participate in the Distribution Plan.
Activa serves as the exclusive agent for sales of the Fund's shares pursuant
to a Principal Underwriting Agreement. Previously Amway Management Company
served as the Fund's Principal Underwriter. Prior to April 22, 1998, the
Principal Underwriter received a sales commission of 3% of the offering price of
the Fund's shares. The sales commission was eliminated when the Fund adopted the
Distribution Plan. During the years ended December 31, 1998 and 1997, AMC
received sales commissions of $473,151 and $513,417, respectively. The only
compensation currently received by the Adviser in connection with the sale of
Fund shares is pursuant to the Distribution Plan.
ADMINISTRATIVE AGREEMENT
--------------------------------------------------------------------------------
Pursuant to the Administrative Agreement between the Fund and the Investment
Adviser, the Investment Adviser provides specified assistance to the Fund with
respect to compliance matters, taxes and accounting, the provision of legal
services, meetings of the Fund's Trustees and shareholders, and preparation of
the Fund's registration statement and other filings with the Securities and
Exchange Commission. In addition, the Investment Adviser pays the fees of the
Fund's Trustees, and the salaries and fees of all of the Fund's Trustees and
officers who devote part or all of their time to the affairs of the Investment
Adviser. For providing these services the Investment Adviser receives a fee,
payable quarterly, at the annual rate of 0.15% of the Fund's average daily
assets beginning September 1, 1999. During the year ended December 31, 1999,
total payments were $97,811.
The Administrative Agreement provides that Activa is only responsible for
paying such fees and expenses and providing such services as are specified in
the agreement. The Fund is responsible for all other expenses including (i)
expenses of maintaining the Fund and continuing its existence; (ii) registration
16
<PAGE>
of the Trust under the Investment Company Act of 1940; (iii) commissions, fees
and other expenses connected with the acquisition, disposition and valuation of
securities and other investments; (iv) auditing, accounting and legal expenses;
(v) taxes and interest; (vi) government fees; (vii) expenses of issue, sale,
repurchase and redemption of shares; (viii) expenses of registering and
qualifying the Trust, the Fund and its shares under federal and state securities
laws and of preparing and printing prospectuses for such purposes and for
distributing the same to shareholders and investors; (ix) expenses of reports
and notices to stockholders and of meetings of stockholders and proxy
solicitations therefore; (x) expenses of reports to governmental officers and
commissions; (xi) insurance expenses; (xii) association membership dues; (xiii)
fees, expenses and disbursements of custodians and sub-custodians for all
services to the Trust (including without limitation safekeeping of funds and
securities, and keeping of books and accounts); (xiv) fees, expenses and
disbursement of transfer agents, dividend disbursing agents, stockholder
servicing agents and registrars for all services to the Trust; (xv) expenses for
servicing shareholder accounts; (xvi) any direct charges to shareholders
approved by the Trustees of the Trust; and (xvii) such non-recurring items as
may arise, including expenses incurred in connection with litigation,
proceedings and claims and the obligation of the Trust to indemnify its Trustees
and officers with respect thereto.
Activa has provided administration to the Fund since September 1, 1999.
Administrative services were previously provided to the Fund by AMC pursuant to
the Advisory and Service Agreement between the Fund and AMC. See "Investment
Adviser."
The Fund has entered into an agreement with Bisys Fund Services Ohio, Inc.
("Bisys") whereby Bisys provides a portfolio accounting and information system
for portfolio management for the maintenance of records and processing of
information which is needed daily in the determination of the net asset value of
the Fund.
TRANSFER AGENT
--------------------------------------------------------------------------------
Under a separate contract, the functions of the Transfer Agent and Dividend
Disbursing Agent are performed by Activa Asset Management LLC, Grand Rapids,
Michigan, which acts as the Fund's agent for transfer of the Fund's shares and
for payment of dividends and capital gain distributions to shareholders.
In return for its services, the Fund pays the Transfer Agent, a fee of $1.167
per account in existence during the month, payable monthly, less earnings in the
redemption liquidity account after deducting bank fees, if any. The fee schedule
is reviewed annually by the Board of Trustees.
CUSTODIAN
--------------------------------------------------------------------------------
The portfolio securities of the Fund are held, pursuant to a Custodian
Agreement, by Northern Trust Company, 50 South LaSalle, Chicago, Illinois, as
Custodian. The Custodian performs no managerial or policymaking functions for
the Fund.
AUDITORS
--------------------------------------------------------------------------------
BDO Seidman, LLP, 99 Monroe Avenue, N.W., Suite 800, Grand Rapids, Michigan,
are the independent certified public accountants for the Fund. Services include
an annual audit of the Fund's financial statements, tax return preparation, and
review of certain filings with the SEC.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The net asset value of the Fund's shares is determined by dividing the
total current value of the assets of the Fund, less its liabilities, by the
number of shares outstanding at that time. This determination is made at the
close of business of the New York Stock Exchange, usually 4:00 P.M. Eastern
time, on each business day on which that Exchange is open. Shares will not be
priced on national holidays or other days on which the New York Stock Exchange
is closed for trading.
The Fund's investments are generally valued at current market value. If
market quotations are not readily available, the Fund's investments will be
valued at fair value as determined by the Fund's Board of Trustees.
The Fund will redeem your shares at the net asset value next determined after
your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
17
<PAGE>
PURCHASE OF SHARES
--------------------------------------------------------------------------------
In order to purchase shares for a new account, the completion of an
application form is required. The minimum initial investment is $500 or more.
Additional investments of $50 or more can be made in your account at any time by
using the lower portion of your account statement. Checks should be made payable
to "Activa Asset Management LLC" and mailed to 2905 Lucerne SE, Suite 200, Grand
Rapids, Michigan 49546. Third party checks will not be accepted.
All purchases will be made at the Net Asset Value per share net calculated
after the Fund receives your investment and application in proper form.
HOW SHARES ARE REDEEMED
--------------------------------------------------------------------------------
Each Fund will redeem your shares at the net asset value next determined
after your redemption request is received in proper form. There is no redemption
charge by the Fund. However, if a shareholder uses the services of a
broker-dealer for the redemption, there may be a charge by the broker-dealer to
the shareholder for such services. Shares can be redeemed by the mail, telephone
or telegram. If the value of your account is $10,000 or more, you may arrange to
receive periodic cash payments. Please contact the Fund for more information.
Redemption proceeds may be delayed until investments credited to your account
have been received and collected.
BY MAIL:
-------
When redeeming by mail, when no certificates have been issued, send a written
request for redemption to Activa Asset Management LLC, 2905 Lucerne SE, Suite
200, Grand Rapids, Michigan 49546. The request must state the dollar amount or
shares to be redeemed, including your account number and the signature of each
account owner, signed exactly as your name appears on the records of the Fund.
If a certificate has been issued to you for the shares being redeemed, the
certificate (endorsed or accompanied by a signed stock power) must accompany
your redemption request, with your signature guaranteed by a bank, broker, or
other acceptable financial institution. Additional documents will be required
for corporations, trusts, partnerships, retirement plans, individual retirement
accounts and profit sharing plans.
BY PHONE:
--------
At the time of your investment in the Fund, or subsequently, you may elect on
the Fund's application to authorize the telephone or telegram exchange or
redemption option. You may redeem shares under this option by calling the Fund
at the number indicated on the front of this Prospectus on any business day.
Requests received after 4:00 p.m. when the market has closed will receive the
next day's price. By establishing the telephone or telegram exchange or
redemption option, you authorize the Transfer Agent to honor any telephone or
telegram exchange or redemption request from any person representing themselves
to be the investor. Procedures required by the Fund to ensure that a
shareholder's requested telephone or telegram transaction is genuine include
identification by the shareholder of the account by number, recording of the
requested transaction and sending a written confirmation to shareholders
reporting the requested transaction. The Fund is not responsible for
unauthorized telephone or telegram exchanges or redemptions unless the Fund
fails to follow these procedures. Shares must be owned for 10 business days
before redeeming by the telephone and telegram exchange and cannot be in
certificate form unless the certificate is tendered with the request for
redemption. Certificated shares cannot be redeemed by the telephone and telegram
exchange. All redemption proceeds will be forwarded to the address of record or
bank designated on the account application.
The Transfer Agent and the Fund have reserved the right to change, modify, or
terminate the telephone or telegram exchange or redemption option at any time.
Before this option is effective for a corporation, partnership, or other
organizations, additional documents may be required. This option is not
available for Profit-Sharing Trust and Individual Retirement Accounts. The Fund
and the Transfer Agent disclaim responsibility for verifying the authenticity of
telephone and telegram exchange or redemption requests which are made in
accordance with the procedures approved by shareholders.
SPECIAL CIRCUMSTANCES:
---------------------
In some circumstances a signature guarantee may be required before shares are
redeemed. These circumstances include a change in the address for an account
within the last 30 days, a request to send the proceeds to a different payee or
address from that listed for the account, or a redemption request for $100,000
or more. A signature guarantee may be obtained from a bank, broker, or other
acceptable
18
<PAGE>
financial institution. If a signature guarantee is required, we suggest that you
call us to ensure that the signature guarantee and redemption request will be
processed correctly.
Payment for redeemed shares is normally made by check and mailed within three
days thereafter. However, under the Investment Company Act of 1940, the right of
redemption may be suspended or the date of payment postponed for more than seven
days: (1) for any period during which the New York Stock Exchange is closed,
other than for customary weekend and holiday closings; (2) when trading on the
New York Stock Exchange is restricted, as determined by the SEC; (3) when an
emergency exists, as determined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of its securities or determine
the value of its net assets; or (4) for such other period as the SEC may by
order permit for the protection of the shareholders. During such a period, a
shareholder may withdraw his request for redemption or receive the net asset
value next computed when regular trading resumes.
The Fund has filed with the SEC an election to pay for all redeemed shares in
cash up to a limit, as to any one shareholder during any 90-day periods, of
$250,000 or 1% of the net asset value of the Fund, whichever is less. Beyond
that limit, the Fund is permitted to pay the redemption price wholly or partly
"in kind," that is, by distribution of portfolio securities held by the Fund.
This would occur only upon specific authorization by the Board of Trustees when,
in their judgment, unusual circumstances make it advisable. It is unlikely that
this will ever happen, but if it does, you will incur a brokerage charge in
converting the securities received in this manner into cash. Portfolio
securities distributed "in kind" will be valued as they are valued for the
determination of the net asset value of the Fund's shares.
EXCHANGE PRIVILEGE
--------------------------------------------------------------------------------
Shares of each Fund may be exchanged for shares of any other Activa Fund.
The above described Exchange Privilege may be exercised by sending written
instruction to the Transfer Agent. See "How Shares Are Redeemed" for applicable
signatures and signature guarantee requirements. Shareholders may authorize
telephone or telegram exchanges or redemptions by making an election on your
application. Procedures required by the Fund to ensure that a shareholder's
requested telephone or telegram transaction is genuine include identification by
the shareholder of the account by number, recording of the requested transaction
and sending a written confirmation to shareholders reporting the requested
transaction. The Fund is not responsible for unauthorized telephone or telegram
exchanges unless the Fund fails to follow these procedures. Shares must be owned
for 10 business days before exchanging and cannot be in certificate form unless
the certificate is tendered with the request for exchange. Exchanges will be
accepted only if the registration of the two accounts is identical. Exchange
redemptions and purchases are effected on the basis of the net asset value next
determined after receipt of the request in proper order by the Fund. In the case
of exchanges into the Money Market Fund, dividends generally commence on the
following business day. For federal and state income tax purposes, an exchange
is treated as a sale and may result in a capital gain or loss.
ADDITIONAL ACCOUNT POLICIES
--------------------------------------------------------------------------------
If the value of your account falls below $100, the Fund may mail you a notice
asking you to bring the account back to $100 or close it out. If you do not take
action within 60 days, the Fund may sell your shares and mail the proceeds to
you at the address of record.
The Fund does not permit market-timing or other abusive trading practices.
Excessive, short-term (market-timing) and other abusive trading practices may
disrupt portfolio trading strategies and harm Fund performance. To minimize harm
to the Fund and its shareholders, each Fund reserves the right to reject any
purchase order (including exchanges) from any investor we believe has a history
of abusive trading.
INTERNET ADDRESS
--------------------------------------------------------------------------------
Activa's Web site is located at activafunds.com. Our Web site offers further
information about the Activa Funds.
19
<PAGE>
FEDERAL INCOME TAX
--------------------------------------------------------------------------------
The Fund intends to continue to comply with the provisions of Subchapter M of
the Internal Revenue Code applicable to investment companies. As the result of
paying to its shareholders as dividends and distributions substantially all net
investment income and realized capital gains, the Fund will be relieved of
substantially all Federal income tax.
For Federal income tax purposes, distributions of net investment income and
any capital gains will be taxable to shareholders. Distributions of net
investment income will normally qualify for the 70% deduction for dividends
received by corporations. After the last dividend and capital gains distribution
in each year, the Fund will send you a statement of the amount of the income and
capital gains which you should report on your Federal income tax return.
Dividends derived from net investment income and net short-term capital gains
are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or reinvested in
additional shares of the Fund. Qualified long-term capital gain dividends
received by individual shareholders are taxed a maximum rate of 20%.
In addition, shareholders may realize a capital gain or loss when shares are
redeemed. For most types of accounts, the Fund will report the proceeds of
redemptions to shareholders and the IRS annually. However, because the tax
treatment also depends on the purchase price and a shareholder's personal tax
position, you should also keep your regular account statements to use in
determining your tax.
On the record date for a distribution, the Fund's share value is reduced by
the amount of the distribution. If a shareholder buys shares just before the
record date ("buying a dividend"), they will pay the full price for the shares,
and then receive a portion of the price back as a taxable distribution.
Also, under the Code, a 4% excise tax is imposed on the excess of the
required distribution for a calendar year over the distributed amount for such
calendar year. The required distribution is the sum of 98% of the Fund's net
investment income for the calendar year plus 98% of its capital gain net income
for the one-year period ended December 31, plus any undistributed net investment
income from the prior calendar year, plus any undistributed capital gain net
income from the prior calendar year, minus any overdistribution in the prior
calendar year. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
Under certain circumstances, the Fund will be required to withhold 31% of a
shareholder's distribution or redemption from the Fund. These circumstances
include failure by the shareholder to furnish the Fund with a proper taxpayer
identification number; notification of the Fund by the Secretary of the Treasury
that a taxpayer identification number is incorrect, or that withholding should
commence as a result of the shareholder's failure to report interest and
dividends; and failure of the shareholder to certify, under penalties of
perjury, that he is not subject to withholding. In this regard, failure of a
shareholder who is a foreign resident to certify that he is a nonresident alien
may result in 31% of his redemption proceeds and 31% of his capital gain
distribution being withheld. In addition, such a foreign resident may be subject
to a 30% or less, as prescribed by an applicable tax treaty, withholding tax on
ordinary income dividends distributed unless he qualifies for relief under an
applicable tax treaty.
Trustees of qualified retirement plans are required by law to withhold 20% of
the taxable portion of any distribution that is eligible to be "rolled over."
The 20% withholding requirement does not apply to distributions from IRA's or
any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account or IRA. Shareholders should consult their tax
adviser regarding the 20% withholding requirement.
Prior to purchasing shares of the Fund, the impact of any dividends or
capital gain distributions which are about to be declared should be carefully
considered. Any such dividends and capital gain distributions declared shortly
after you purchase shares will have the effect of reducing the per share net
asset value of your shares by the amount of dividends or distributions on the
ex-dividend date. All or a portion of such dividends or distributions, although
in effect a return of capital, are subject to taxes which may be at ordinary
income tax rates.
Each shareholder is advised to consult with his tax adviser regarding the
treatment of distributions to him under various state and local income tax laws.
20
<PAGE>
INVESTMENT PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
Following is the average annual total return percentages for one, five and
ten years for the Fund for annual periods ended December 31, 1999.
AVERAGE ANNUAL TOTAL
RETURN FOR THE PERIODS PAST PAST PAST
ENDED DECEMBER 31, 1999 1 YEAR 5 YEARS 10 YEARS
----
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ACTIVA VALUE FUND -6.70% 15.15% 11.90%
RUSSELL 1000 VALUE 7.35% 23.07% 15.60%
S&P 500* 21.04% 28.54% 18.20%
*The S&P 500 Index represents an unmanaged index generally representative of
the U.S. stock market. The Value Index represents a composite of value stocks
representative of the Fund's investment objectives and strategies which is
compiled independently by the Frank Russell Companies. Neither index is impacted
by Fund operating expenses.
Total return performance for the Fund is calculated by making an initial
investment of $1,000 at the beginning of the period, in the Fund's shares at the
net asset value (without sales charge) and reinvesting all ordinary income
dividends and capital gain distributions paid during the period in additional
shares at net asset value per share on the reinvestment dates. The illustration
includes recurring expenses incurred by all shareholder accounts and not those
incurred for specific shareholder purposes such as bank fees for wire transfers,
Individual Retirement Accounts, or Profit-Sharing Trusts.
The average annual total return for the Fund for a specific period is found
by dividing the ending total value by the cost of the initial investment for the
period and taking this quotient to the Nth root, then subtracting 1 (N
represents the number of years in the period). The average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Such calculation is with all ordinary income dividends
and capital gain distributions reinvested at net asset value exclusive of sales
charges. No adjustment has been made for any income taxes payable by
shareholders on ordinary income dividends and capital gain distributions
accepted in shares which are payable by shareholders in the tax year received.
Average annual total return percentages of the Fund will vary and the
publication of performance results is not a representation as to future
investment performance. Factors affecting the Fund's performance include general
market conditions, operating expenses and investment management. Net asset
values of the Fund will fluctuate. Additional information about the performance
of the Fund is contained in the Annual Shareholders Report which can be obtained
without charge.
REPORTS TO SHAREHOLDERS AND ANNUAL AUDIT
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The Fund's year begins on January 1 and ends on December 31. At least
semiannually, the shareholders of the Fund receive reports, pursuant to
applicable laws and regulations, containing financial information. The annual
shareholders report is incorporated by reference into the Statement of
Additional Information. The cost of printing and distribution of such reports to
shareholders is borne by the Fund.
At least once during each year, the Fund is audited by independent certified
public accountants appointed by resolution of the Board and approved by the
shareholders. The fees and expenses of the auditors are paid by the Fund.
The financial statements for the Fund are contained in the Fund's 1998 Annual
Report to Shareholders along with additional information about the performance
of the Fund, which is incorporated herein by reference and may be obtained by
writing or calling the Fund.
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Activa
Value
ACTIVA VALUE FUND Fund
(a Series of Activa Mutual Fund Trust)
2905 Lucerne SE, Suite 200
Grand Rapids, Michigan 49546
(616) 787-6288
(800) 346-2670
Statement of
Additional Information
April 29, 2000
ACTIVA MUTUAL FUND LOGO
Printed in U.S.A.
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