<PAGE>
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
May 28, 1999
Via Edgar Transmission
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Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street
Washington, D.C. 20549
Re: The Kent Funds (the "Registrant")
Registration Nos. 33-8398/811-4824
----------------------------------
Ladies and Gentlemen:
Pursuant to Rule 497(c) under the Securities Act of 1933,
transmitted herewith for filing on behalf of the Registrant are the Prospectus
and the Statement of Additional Information, each dated June 1, 1999, for the
Lyon Street Institutional Money Market Fund.
Questions and comments concerning the enclosed materials may be
directed to the undersigned at (215) 988-2728.
Sincerely,
/s/ Michael Dresnin
-------------------
Michael Dresnin
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[LOGO OF KENT FUNDS APPEARS HERE]
Prospectus LYON STREET INSTITUTIONAL
MONEY MARKET FUND
June 1, 1999
NEED INFORMATION?
Call 1-800-633-KENT (5368) or your
Investment Representative.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE SHARES DESCRIBED IN
THIS PROSPECTUS OR DETERMINED WHETHER THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO
TELLS YOU OTHERWISE IS COMMITTING A CRIME.
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TABLE OF
CONTENTS
<TABLE>
<C> <S> <C>
Carefully review RISK/RETURN SUMMARY AND FUND EXPENSES 2
this important
section, which
summarizes the
Fund's investments,
risks and fees.
Review this section INVESTMENT OBJECTIVES, STRATEGIES AND RISKS 5
for information on
investment strate-
gies and their
risks.
FUND MANAGEMENT
Review this section Investment Adviser 7
for details on the
people and The Distributor, Administrator and Sub-Administrator 7
organizations who
oversee the Fund.
SHAREHOLDER INFORMATION
Review this section Pricing of Fund Shares 8
for details on how Purchasing and Adding to Your Shares 9
shares are valued, Selling Your Shares 10
how to purchase, General Policies on Selling Shares 11
sell and exchange Exchanging Your Shares 12
shares, related Dividends, Distributions and Taxes 13
charges and payments
of dividends and
distributions
BACK COVER
Where to learn more about this Fund
</TABLE>
1
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
The following is a summary of certain key information about the Fund. You will
find additional information about the Fund, including a detailed description of
the risks of an investment in the Fund, after this summary.
RISK/RETURN SUMMARY OF THE LYON STREET INSTITUTIONAL MONEY MARKET FUND
Investment Objectives The Fund seeks current income from short-term
securities while preserving capital and main-
taining liquidity.
Principal Investment Strategies The Fund is a money market fund that seeks to
maintain a stable net asset value of $1.00 per
share. The Fund invests in a broad range of
short-term instruments including commercial pa-
per, short-term corporate obligations and
short-term obligations issued or guaranteed by
the United States Government, its agencies or
instrumentalities.
Principal Investment Risks The Fund's performance per share will change
daily based on many factors, including, the
quality of the instruments in the Fund's in-
vestment portfolio, national and international
economic conditions and general market condi-
tions. Changes in the interest rate will affect
the yield or value of the Fund's investments in
debt securities.
. An investment in the Fund is not a deposit in
a bank and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or
any other govern ment 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.
. If an issuer fails to pay interest or repay
principal, the value of your investment could
decline.
. Because the Fund invests in short-term secu-
rities, a decline in interest rates will af-
fect the Fund's yield as these securities ma-
ture or are sold and the Fund purchases new
short-term securities with a lower yield.
. Foreign investments may be riskier than U.S.
investments because of unstable international
political and economic conditions, foreign
controls on investment and currency exchange,
withholding taxes, a lack of adequate company
information, and lack of government regula-
tion.
. There can be no assurance that the investment
objectives of the Fund will be achieved.
2
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
Who may want to invest? Consider investing in the Fund if you:
. are seeking preservation of capital
. have a low risk tolerance
. are willing to accept lower potential returns
in exchange for a higher degree of safety
. are investing short-term reserves
This Fund will not be appropriate for anyone:
. seeking high total returns
. pursuing a long-term goal or investing for
retirement
3
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
This table describes the FEES AND EXPENSES
fees and expenses that
you may pay if you buy
and hold shares of the
Lyon Street
Institutional Money
Market Fund.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases________________________________None
Annual Fund Operating Expenses/1/
(expenses that are deducted from Fund assets)
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<S> <C>
Management Fees 0.40%
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Distribution and Service (12b-1) Fees None
---------------------------------------
Other Expenses 0.27%
---------------------------------------
Total Annual Fund Operating Expenses 0.67%
---------------------------------------
</TABLE>
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/1/ The Adviser is currently limiting the Management Fee to .10% of average
daily net assets. The Administrator is waiving a portion of the administration
fee so that Other Expenses are expected to be .22% of average daily net assets.
Total Annual Fund Operating Expenses after these fee waivers are expected to be
.22% of average daily net assets. These waivers may be revised or canceled at
any time.
Example
This 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:
.$10,000 investment
.5% annual return
.redemption at the end of each period
.no changes in the Fund's operating expenses
Although your actual costs may be higher or lower, based upon these
assumptions, your costs would be:
<TABLE>
<S> <C> <C>
1 3
Lyon Street Institutional Money Market Fund Year Years
$68 $214
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</TABLE>
4
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
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Investment Objectives, Policies and Strategies
The Fund's investment objective is to seek current income from
short-term securities while preserving capital and maintaining
liquidity. As a money market fund, the Fund must meet the
requirements of the Securities and Exchange Commission's Rule
2a-7. This rule imposes strict requirements on the investment
quality, maturity, and diversification of the Fund's
investments. Under Rule 2a-7, the Fund's investments must have
a remaining maturity of no more than 397 days, and its
investments must maintain an average weighted maturity that
does not exceed 90 days.
With respect to substantially all of its securities, the Fund
will only buy a security if it has the highest short-term
rating from at least two nationally recognized statistical
rating organizations, such as Standard & Poor's Ratings Group
or Moody's Investors Service, Inc., or only one such rating if
only one organization has rated the instrument. If the money
market instrument is not rated, the adviser must determine that
it is of comparable quality to eligible rated instruments. In
addition, the Fund considers an investment's projected rate of
return and whether the investment meets the requirements of
Rule 2a-7.
The Statement of Additional Information has more detailed
information about the investment policies and strategies of the
Fund.
Investment Risks
The Fund's primary risks are interest rate risk and credit
risk. Because the Fund invests in short-term securities, a
decline in interest rates will affect the Fund's yield as these
securities mature or are sold and the Fund purchases new short-
term securities with a lower yield. Generally, an increase in
interest rates causes the value of a debt instrument to
decrease. The change in value for shorter-term securities is
usually smaller than for securities with longer maturities.
Because the Fund invests in securities with short maturities
and seeks to maintain a stable net asset value of $1.00 per
share, it is possible, though unlikely, that an increase in
interest rates would change the value of your investment.
Credit risk is the possibility that a security's credit rating
will be downgraded or that the issuer of the security will
default (fail to make scheduled interest and principal
payments). The Fund invests in highly-rated securities to
minimize credit risk. Under Rule 2a-7, 95% of a money market
fund's holdings must be rated in the highest credit category
(e.g., A-1 or A-1+) and the remaining 5% must be rated no lower
than the second highest credit category.
The Fund's investments in U.S. dollar-denominated obligations
of foreign branches of U.S. banks and U.S. branches of foreign
banks may be subject to foreign risk. Foreign investments
subject the Fund to investment risks different from those
associated with domestic investments. Foreign securities
issuers are usually subject to less regulation than U.S.
issuers. Reporting, accounting, and auditing standards of
foreign countries are less stringent, in some cases
significantly, than U.S. standards. Foreign risk includes
nationalization, expropriation or confiscatory taxation,
currency blockage, political changes or diplomatic developments
that could adversely affect the Fund's investments.
5
<PAGE>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The Fund also is subject to management risk because it is an
actively managed portfolio. The Fund's Adviser uses its
investment techniques and risk analyses in making investment
decisions for the Fund, but there is no guarantee that its
techniques will produce the intended result.
There can be no assurance that the investment objective of the
Fund will be achieved. In addition, the Fund's investment
policies, as well as the relatively short maturity of
obligations purchased by the Fund, may result in frequent
changes in the Fund's portfolio, which may give rise to taxable
gains.
Year 2000 Risks
Like other funds and business organizations around the world,
the Fund could be adversely affected if the computer systems
used by the Adviser and the Fund's other service providers do
not properly process and calculate date-related information for
the year 2000 and beyond. In addition, year 2000 issues may
adversely affect companies in which the Fund invests where, for
example, such companies incur substantial costs to address year
2000 issues or suffer losses caused by the failure to
adequately or timely do so.
The Fund has been assured that the Adviser and other service
providers have developed and are implementing clearly defined
and documented plans intended to minimize risks to services
critical to the Fund's operations associated with year 2000
issues. Internal efforts include a commitment to dedicate
adequate staff and funding to identify and remedy year 2000
issues, and specific actions such as inventorying software
systems, determining inventory items that may not function
properly after December 31, 1999, reprogramming or replacing
such systems, and retesting for year 2000 readiness. The
Adviser and the Fund's service providers are likewise seeking
assurances from their respective vendors and suppliers that
such entities are addressing any year 2000 issues, and each
provider intends to engage, where appropriate, in private
and/or industry interface testing of systems for year 2000
readiness.
In the event that any systems upon which the Fund is dependent
are not year 2000 ready by December 31, 1999, administrative
errors and account maintenance failures would likely occur.
While the ultimate costs or consequences of incomplete or
untimely resolution of year 2000 issues by the Adviser or the
Fund's service providers cannot be accurately assessed at this
time, the Fund currently has no reason to believe that the year
2000 plans of the Adviser and the Fund's service providers will
not be completed by December 31, 1999, or that the anticipated
costs associated with full implementation of their plans will
have a material adverse impact on either their business
operations or financial conditions or those of the Fund. The
Fund and the Adviser will continue to closely monitor
developments relating to this issue, including development by
the Adviser and the Fund's service providers of contingency
plans for providing back-up computer services in the event of a
systems failure or the inability of any provider to achieve
year 2000 readiness. Separately, the Adviser will monitor
potential investment risk related to year 2000 issues.
6
<PAGE>
FUND MANAGEMENT
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
The Fund is advised by Lyon Street Asset Management Company, a
wholly-owned subsidiary of Old Kent Bank. Lyon Street maintains
offices at 111 Lyon Street, NW, Grand Rapids, Michigan 49503.
Old Kent Bank is a wholly owned subsidiary of Old Kent
Financial Corporation, which is a financial services company
with total assets as of December 31, 1998 of approximately
$16.6 billion. The Investment Management Group ("IMG") at Lyon
Street has managed the Kent Funds since their inception. The
Lyon Street Institutional Money Market Fund is one of fifteen
investment portfolios of the Kent Funds. Prior to 1998, IMG
managed the Kent Funds as a division of Old Kent Bank. Old Kent
Bank has managed the financial assets of individual and
institutional investors for over 100 years. Lyon Street employs
an experienced staff of professional investment analysts,
portfolio managers and traders, and uses several proprietary
computer-based systems in conjunction with fundamental analysis
to identify investment opportunities.
Lyon Street is entitled to receive management fees in the
amount of 0.40% of average daily net assets of the Fund as its
investment adviser. However, Lyon Street is waiving 0.30% of
the management fee, resulting in net management fees of 0.10%.
This waiver may be revised or cancelled at any time.
DISTRIBUTOR, ADMINISTRATOR AND SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS Fund Services Limited Partnership ("BISYS") provides
management and administrative services to the Fund, including
providing office space, equipment and clerical personnel to the
Fund and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend disbursing services. BISYS is
also the distributor of the Fund's shares. BISYS Fund Services,
Inc., an affiliate of BISYS, acts as the fund accountant,
transfer agent and dividend paying agent of the Fund. BISYS and
BISYS Fund Services, Inc. are each located at 3435 Stelzer
Road, Columbus, Ohio 43219.
Old Kent Bank provides certain administrative services to the
Fund pursuant to a Sub-Administration Agreement between Old
Kent Bank and BISYS. BISYS has agreed to pay Old Kent Bank a
fee, calculated daily and paid monthly, at an annual rate of up
to 0.05% of the Fund's average daily net assets. The fees paid
to Old Kent Bank by BISYS for such administrative services come
out of BISYS' administration fee and are not an additional
charge to the Fund.
The Statement of Additional Information has more detailed
information about the Adviser and other service providers.
7
<PAGE>
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
How NAV is The Fund's net asset value, or NAV, is expected to be
Calculated constant at $1.00 per share, although this value is
The NAV is calcu- not guaranteed. The NAV is determined at 2 p.m.
lated by adding Eastern time on days the New York Stock Exchange is
the total value of open. Your order for purchase, sale or exchange of
a Fund's invest- shares is priced at the next NAV calculated after
ments and other your order is received in good order by the Fund on
assets, any day that the Exchange and the Fund's custodian
subtracting its are open for business. For example, if you place a
liabilities and purchase order to buy shares of the Fund, it must be
then dividing that received in good order by 2:00 p.m. Eastern time in
figure by the num- order to receive the NAV calculated at 2:00 p.m. that
ber of outstanding day. If your order is received in good order after
shares of the 2:00 p.m., you will receive the NAV calculated at
Fund: 2:00 p.m. Eastern Time the next day. The Fund values
its securities at their amortized cost. The amortized
cost method involves valuing a portfolio security at
its cost and thereafter applying a constant
amortization to maturity of the difference between
the principal amount due at maturity and initial
cost.
- ----------------
NAV =
Total Assets -
Liabilities
- ----------------
Number of
Shares
Outstanding
- ----------------
8
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
- --------------------------------------------------------------------------------
- -------------------------------------------
Account type Minimum Subsequent investments
Initial may be made in any amount.
Investment
Regular
(non-retirement) $ 1,000
Retirement (IRA) $ 250
Automatic Investment Plan $ 250
- -------------------------------------------
- --------------------------------------------------------------------------------
The Fund may waive its minimum investment requirements, and the Distributor may
reject a purchase order if the Distributor considers it in the best interest of
the Fund and its shareholders.
How Can I Purchase Shares?
You can purchase shares by taking the following steps:
1. To open an account, call 1-800-633-KENT (5368) to obtain an account or
wire identification number and to place a purchase order.
2. Wire federal funds, which must be received by the Fund no later than
the close of business the day the purchase order is placed.
You should note that (i) a purchase of shares will not be completed until the
Fund receives the purchase proceeds and (ii) banks may charge for wiring
federal funds to the Fund. You may obtain information on how to wire funds from
any national bank and certain state banks.
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise.
If you wish to receive distributions in cash, notify the Fund at 1-800-633-KENT
(5368) and your distributions will be sent by electronic funds transfer
directly to your designated bank account.
- --------------------------------------------------------------------------------
Avoid 31% Tax Withholding
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- --------------------------------------------------------------------------------
9
<PAGE>
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
- --------------------------------------------------------------------------------
Instructions for Selling Shares
- --------------------------------------------------------------------------------
WITHDRAWING MONEY FROM YOUR FUND
INVESTMENT
-------------------------------------------
As a mutual fund shareholder, you are
technically selling shares when you re-
quest a withdrawal in cash. This is also
known as redeeming shares or a redemp-
tion of shares.
-------------------------------------------
You may sell your shares at any time.
Your sales price will be the next NAV
after your sell order is received in
good order by the Fund.
You can redeem shares on any day that
both the New York Stock Exchange and the Custodian are open for business.
Shares will not be redeemed by the Fund unless all required documents have been
received by the Fund.
The Fund may temporarily stop redeeming shares when the New York Stock Exchange
is closed or trading on the New York Stock Exchange is restricted, when an
emergency exists and the Fund cannot sell its assets or accurately determine
the value of its assets or if the Securities and Exchange Commission orders the
Fund to stop redemptions.
If you intend to redeem shares worth more than $1,000,000, you should notify
the Fund at least one business day in advance.
Redemption proceeds will be wired in federal funds only to the commercial bank
and account number listed on your account application. To change the bank
account, you should call the Fund at 1-800-633-KENT (5368) and request the
appropriate form.
- --------------------------------------------------------------------------------
By telephone Call 1-800-633-KENT (5368) with redemption instruc-
tions.
- --------------------------------------------------------------------------------
By mail 1.Call 1-800-633-KENT (5368) to request redemption
forms or write a letter of instruction indicating:
. your account name and number
. amount or number of shares you wish to redeem
. address where your check should be sent
. account owner signature
. if a stock certificate has been issued, you must
sign the back of the certificate and submit it
together with the redemption request.
2.Mail to:
Lyon Street Institutional Money Market Fund
P.O. Box 182201
Columbus, Ohio 43218-2201
10
<PAGE>
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
- --------------------------------------------------------------------------------
General Redemption
Information During periods of unusual market activity it may
be difficult to reach the Fund by telephone. In
such cases, shareholders should follow the
procedures for redeeming by mail or through a
broker. Neither the Fund nor any of its service
providers will be liable for following telephone
instructions reasonably believed to be genuine
unless it acts with willful misfeasance, bad
faith or gross negligence. In this regard the
Fund and its transfer agent will employ
procedures designed to provide reasonable
assurance that instructions by telephone are
genuine. Such procedures will include the
requirement that personal identification be
provided before accepting a telephone
redemption.
The Fund reserves the right to redeem an account
if its value falls below $100,000 as a result of
redemptions or exchanges (but not as a result of
a decline in net asset value). A shareholder
will be notified in writing and allowed 60 days
to increase the value of the account to the
minimum investment level.
Payment of Redemption You can generally expect to receive redemption
Proceeds proceeds within seven days of receipt of a
request. Payment for shares may be delayed under
extraordinary circumstances or as permitted by
the SEC in order to protect remaining
shareholders.
Redemption in The Fund reserves the right to make payment in
Kind securities rather than cash, known as a
"redemption in kind." This could occur under
extraordinary circumstances, such as a very
large redemption that could affect Fund
operations (for example, more than 1% of the
Fund's net assets). If the Fund deems it
advisable for the benefit of all shareholders, a
redemption in kind will consist of securities
equal in market value to your shares. When you
convert these securities to cash, you will pay
brokerage charges.
IMPORTANT INFORMATION REGARDING STOCK
CERTIFICATES AND REDEMPTION NOTICES. Signatures
on all redemption notices and stock certificates
must be guaranteed by a U.S. stock exchange mem-
ber, a U.S. commercial bank or trust company or
other entity approved by the Fund, unless the
amount redeemed is less than $50,000 and the ac-
count address has been the same for at least 90
days. The Fund can change the above requirements
or require additional documents at any time.
11
<PAGE>
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
- --------------------------------------------------------------------------------
Instructions for Exchanging Shares
Exchanges may be made by sending a
written request to:
Kent Funds
P.O. Box 182201
Columbus, Ohio 43218-2201
or by calling 1-800-633-KENT
(5368)
Please provide the following
information:
. Your name and telephone number
. The exact name on your account
and account number
. Taxpayer identification number
(or Social Security number)
. Dollar value or number of
shares to be exchanged
. The name of the Fund from
which the exchange is to be
made and the account number
. The name of the Fund into
which the exchange is being
made, and if this is an
existing account, please
provide the account number
-------------------------------------------
You may acquire Institutional Shares of
any other investment portfolio of the
Kent Funds by exchanging shares of the
Fund for shares of the new fund. In
effect, you would be redeeming
(reselling to the Fund) shares of the
old fund and purchasing shares of the
new fund. Exchanges are effected at the
net asset value next determined after
the exchange request is received in good
order by the Fund. Be sure to read
carefully the prospectus of any fund
into which you wish to exchange shares.
You must meet the minimum investment
requirements for the Fund into which you
are exchanging. Exchanges from one fund
to another are taxable.
-------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT EXCHANGES
Kent Funds may disallow exchanges of shares if a shareholder has made more than
five exchanges between investment portfolios offered by the Kent Funds in a
year, or more than three exchanges in a calendar quarter. Although unlikely,
the Kent Funds may reject any exchanges or change or terminate rights to ex-
change shares. The exchange privilege is available only in states where shares
of the new fund may be sold.
12
<PAGE>
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
Any income the Fund receives is paid out, less expenses, in the form of
dividends to its shareholders. The Fund declares dividends from net investment
income on every business day. Dividends on the Fund are paid monthly. Capital
gains, if any, for the Fund are distributed at least annually.
The Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss). You will be subject to income tax
on these distributions regardless of whether they are paid in cash or
reinvested in additional shares. Distributions attributable to the net capital
gain of the Fund will be taxable to you as long-term capital gain, regardless
of how long you have held your shares. Other Fund distributions will generally
be taxable as ordinary income.
The Fund expects the dividends will primarily consist of ordinary income or, if
any, short-term capital gains as opposed to long-term capital gains.
You should note that if you purchase shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
Taxable dividends paid in January may be taxable as if they had been paid the
previous December. Each year you will receive in the mail federal tax
information on distributions paid by the Fund.
Generally, shareholders may also be subject to state and local taxes on
distributions and redemptions. State income taxes may not apply, however, to
the portions of the Fund's distributions, if any, that are attributable to
interest on U.S. Government securities or on securities of a particular state.
13
<PAGE>
The following additional information about the Fund is available to you free
upon request:
Annual/Semi-Annual Reports:
The Fund's annual and semi-annual reports to shareholders contain detailed
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of Annual and Semi-Annual Reports and the SAI, request
other information and discuss your questions about the Kent Funds by contacting
a broker or other financial institution that sells the Kent Funds. In addition,
you may contact the Kent Funds at: Kent Funds, P.O. Box 102201, Columbus, Ohio
43218-2201 or:
Telephone: 1-800-633-KENT (5368)
Internet: http://www.kentfunds.com*
You can review the Fund's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get copies:
. For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
. At no charge from the Commission's Website at http://www.sec.gov.
* The Fund's website is not part of this Prospectus.
Investment Company Act file no. 811-4824
KKF-0391 (6/99)
<PAGE>
THE KENT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
for
The Lyon Street Institutional Money Market Fund
June 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus
but relates to, and should be read in conjunction with the prospectus for The
Lyon Street Institutional Money Market Fund (the "Fund"), dated June 1, 1999,
as amended or supplemented from time to time. A copy of the prospectus may be
obtained by writing to The Kent Funds, P.O. Box 182201, Columbus, Ohio
43218-2201 or by calling 1-800-633-KENT (5368). Capitalized terms not otherwise
defined herein have the same meaning as in the prospectus.
Shares of the Fund are not bank deposits or obligations of, or
guaranteed or endorsed by, Old Kent Bank or any of its affiliates, and are not
insured by, guaranteed by, obligations of or otherwise supported by the U.S.
Government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board, or any other governmental agency. The Fund seeks to maintain a net asset
value per share of $1.00 although there can be no assurance that it will be able
to do so.
<PAGE>
TABLE OF CONTENTS
THE TRUST.....................................................................3
INVESTMENT POLICIES...........................................................3
INVESTMENT RESTRICTIONS......................................................11
SECURITIES TRANSACTIONS......................................................13
VALUATION OF SECURITIES......................................................14
TRUSTEES AND OFFICERS........................................................16
INVESTMENT ADVISER...........................................................17
ADMINISTRATOR................................................................19
DISTRIBUTOR..................................................................20
TRANSFER AGENT...............................................................20
CUSTODIAN, AUDITORS AND COUNSEL..............................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................21
DIVIDENDS AND TAXES..........................................................21
DECLARATION OF TRUST.........................................................23
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS...............................24
ADVERTISING INFORMATION......................................................25
ADDITIONAL INFORMATION.......................................................26
APPENDIX A..................................................................A-1
No person has been authorized to give any information or to make any
representation not contained in this SAI, or in the prospectus related hereto,
in connection with the offering made by the prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust or its Distributor. This SAI and the prospectus do not
constitute an offering by the Trust or by its Distributor in any jurisdiction in
which such offering may not lawfully be made.
-2-
<PAGE>
THE TRUST
The Kent Funds (the "Trust") is an open-end management investment
company, commonly known as a mutual fund, which was organized on May 9, 1986 as
a Massachusetts business trust. The original name of the Trust was "Master
Municipal Trust." The Trust changed its name to "The Kent Funds" on May 1, 1990.
The Trust consists of fifteen separate investment portfolios, each of which is
diversified and has a distinct investment objective and distinct investment
policies. This SAI relates solely to the Lyon Street Institutional Money Market
Fund. The Trust also offers the following investment portfolios, which are
described in a separate Statement of Additional Information: The Kent Large
Company Growth Fund, The Kent Growth and Income Fund, The Kent Index Equity
Fund, The Kent Small Company Growth Fund, The Kent International Growth Fund,
The Kent Income Fund, The Kent Intermediate Bond Fund, The Kent Short Term Bond
Fund, The Kent Tax-Free Income Fund, The Kent Intermediate Tax-Free Fund, The
Kent Michigan Municipal Bond Fund, The Kent Money Market Fund, The Kent
Government Money Market Fund and The Kent Michigan Municipal Money Market Fund.
The Fund is advised by Lyon Street Asset Management Company ("Lyon Street" or
the "Investment Adviser").
Important information about the Trust and the Fund is contained in the
Fund's prospectus. This SAI provides additional information about the Trust and
the Fund that may be of interest to some investors.
INVESTMENT POLICIES
The following information supplements the description of the Fund's
investment objective and policies as set forth in the prospectus.
Money Market Instruments
The Fund may invest in a broad range of "money market instruments," a
term that includes, among other things, bank obligations, commercial paper,
variable amount master demand notes and corporate bonds and U.S. Government
obligations with remaining maturities of thirteen months or less.
Bank obligations include certificates of deposit, bankers' acceptances
and time deposits, issued or supported by the credit of U.S. or foreign banks or
savings institutions. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. All investments in bank obligations are limited to the
obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
The Fund may invest a portion of its assets in the obligations issued
or guaranteed by one or more foreign governments or one of their agencies or
instrumentalities, including obligations of supranational entities. The Fund may
also invest a portion of its assets in the obligations of foreign banks and
foreign branches of domestic banks. Such obligations include Eurodollar
Certificates of
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Deposit ("ECDs") which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs") which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs") which are essentially the same as ETDs except they are issued
by Canadian offices of major Canadian banks; Schedule Bs, which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs") which are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the United States; and
Yankee Bankers' Acceptances ("Yankee BAs") which are U.S. dollar-denominated
bankers' acceptances issued by a U.S. branch of a foreign bank and held in the
United States.
Although the Fund will invest in obligations of foreign banks or
foreign branches of U.S. banks only when Lyon Street deems the instrument to
present minimal credit risk, such investments nevertheless entail risks that are
different from those of investments in domestic obligations of U.S. banks. These
additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting and record keeping standards than those applicable to
domestic branches of U.S. banks.
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by banks or bank holding companies, corporations and
finance companies. Investments by the Fund in taxable commercial paper will
consist of issues that are rated A-1 by Standard & Poor's Ratings Group ("S&P")
or Prime-1 by Moody's Investors Service, Inc. ("Moody's"). In addition, the Fund
may acquire unrated commercial paper and corporate bonds that are determined by
Lyon Street at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the Fund. Commercial paper may include
variable and floating rate instruments.
Variable amount master demand notes are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Although such notes are not normally traded and there may
be no secondary market in the notes, the Fund may demand payment of the
principal of the instrument at any time. If an issuer of a variable amount
master demand note defaulted on its payment obligation, the Fund might be unable
to dispose of the note because of the absence of a secondary market and might,
for this or other reasons, suffer a loss to the extent of the default.
Guaranteed Investment Contracts
The Fund may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. insurance companies. A GIC is
normally a general obligation of the issuing insurance company and not a
separate account. The purchase price paid for a GIC becomes part of the general
assets of the insurance company, and the contract is paid from the insurance
company's general assets. The Fund will only purchase GICs from insurance
companies which, at the time of purchase, have total assets of $1 billion or
more and meet quality and credit standards established by Lyon Street pursuant
to guidelines approved by the Board of Trustees. Generally, GICs are not
assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in GICs does not currently exist.
Therefore, GICs will normally be considered illiquid investments, and will be
subject to the Fund's limitation on illiquid investments.
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Repurchase Agreements
The Fund may agree to purchase portfolio securities from financial
institutions subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price ("repurchase agreements"). The Fund will enter into
such repurchase agreements only with financial institutions that are deemed to
be creditworthy by Lyon Street, pursuant to guidelines established by the
Trust's Board of Trustees. During the term of any repurchase agreement, Lyon
Street will continue to monitor the creditworthiness of the seller. The Fund
will not enter into repurchase agreements with Lyon Street or its affiliates.
Although the securities subject to a repurchase agreement may bear maturities
exceeding one year, settlement for the repurchase agreement will never be more
than one year after the Fund's acquisition of the securities and normally will
be within a shorter period of time. Repurchase agreements with deemed maturities
in excess of seven days are considered illiquid investments, and will be subject
to the Fund's limitation on illiquid investments. Securities subject to
repurchase agreements are held either by the Trust's custodian or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to maintain the value of the securities subject to the agreement in
an amount exceeding the repurchase price (including accrued interest). Default
by the seller would, however, expose the Fund to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying collateral obligations. Repurchase agreements are considered to be
loans by the Fund under the Investment Company Act of 1940, as amended (the
"1940 Act").
Reverse Repurchase Agreements
The Fund may borrow funds for temporary or emergency purposes by
selling portfolio securities to financial institutions such as banks and
broker/dealers and agreeing to repurchase them at a mutually specified date and
price ("reverse repurchase agreements"). Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Fund may decline
below the repurchase price. The Fund will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, the Fund will maintain in a segregated account cash, U.S.
Government securities or other liquid high-grade debt securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement. Reverse repurchase agreements are considered to be
borrowings by the Fund under the 1940 Act.
Variable and Floating Rate Instruments
The Fund may purchase rated and unrated variable and floating rate
instruments. When purchasing such instruments for the Fund, Lyon Street will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such instruments and, if the instruments are subject to demand
features, will monitor their financial status to meet payment on demand.
In determining weighted average portfolio maturity, an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
can recover payment of principal as specified in the instrument. Variable rate
U.S. Government obligations and certain variable rate instruments having a
nominal maturity of 397 days or less when purchased, however, will be deemed to
have maturities equal to the period remaining until the next interest rate
adjustment. Variable and floating rate instruments purchased by the Fund may
carry nominal maturities in excess of the Fund's maturity limitations if such
instruments carry demand features that comply with conditions established by the
Securities and Exchange Commission. In order to be purchased by the Fund, these
instruments must permit the Fund to demand payment of the principal of the
instrument at least once every 397 days upon not more than 30 days' notice.
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The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments.
Loan Participation Notes
The Fund may purchase loan participation notes. A loan participation
note represents participation in a corporate loan of a commercial bank with a
remaining maturity of one year or less. Such loans must be to corporations in
whose obligations the Fund may invest. Any participation purchased by the Fund
must be issued by a bank in the United States with total assets exceeding $1
billion. Because the issuing bank does not guarantee the participation in any
way, they are subject to the credit risks generally associated with the
underlying corporate borrower. In addition, because it may be necessary under
the terms of the loan participation for the Fund to assert through the issuing
bank such rights as may exist against the corporate borrower if the underlying
corporate borrower fails to pay principal and interest when due, the Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation of such
borrower. Moreover, under the terms of the loan participation the Fund may be
regarded as a creditor of the issuing bank (rather than the underlying corporate
borrower), so that the Fund may also be subject to the risk that the issuing
bank may become insolvent. The secondary market, if any, for loan participations
is extremely limited and any such participation purchased by the Fund may be
regarded as illiquid.
Forward Commitments, When-Issued Securities and Delayed-Delivery Transactions
The Fund may also purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called delayed
delivery) basis. These transactions involve a commitment by the Fund to purchase
or sell securities at a future date. The price of the underlying securities and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued purchases
and forward commitment transactions are normally negotiated directly with the
other party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
Securities purchased or sold on a when-issued or forward commitment
basis involve a risk of loss if the value of the security to be purchased
declines, or the value of the security to be sold increases, before the
settlement date. When the Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
When the Fund purchases securities on a when-issued or forward
commitment basis, the Trust's custodian will segregate cash or liquid
securities having a value (determined daily) at least equal to the amount of the
Fund's purchase commitments. In the case of a forward commitment to sell
portfolio securities, the custodian will hold the portfolio securities
themselves in a segregated account while the commitment is
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outstanding. These procedures are designed to ensure that the Fund will maintain
sufficient assets at all times to cover its obligations under when-issued and
forward commitment transactions. Because the Fund sets aside liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its purchase
commitments exceed 25% of the value of its assets. For purposes of determining
the Fund's average dollar-weighted maturity, the maturity of when-issued or
forward commitment securities will be calculated from the commitment date.
United States Government Obligations
Examples of the types of U.S. Government obligations that may be
acquired by the Fund include U.S. Treasury bills, notes and bonds and
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, Federal
National Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA"), General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks, Tennessee Valley Authority, Resolution Funding Corporation and Maritime
Administration. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as those of the GNMA, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the FNMA, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, are supported only by the credit of the instrumentality. No assurance
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.
Zero Coupon Obligations
The Fund may acquire zero coupon obligations. Zero coupon obligations
do not make interest payments; instead they are sold at a deep discount from
their face value and are redeemed at face value when they mature. Because zero
coupon obligations do not pay current income, their prices can be volatile when
interest rates change. The Fund will accrue income on such investments for tax
and accounting purposes, as required, and such income must be distributed to
shareholders. The Fund may be required to liquidate other portfolio securities
to satisfy its distribution obligations because no cash is received at the time
of such income accruals. The return on a zero coupon obligation, when held to
maturity, equals the difference between the par value and the original purchase
price.
Stripped Obligations
The Fund may purchase U.S. Treasury obligations and their unmatured interest
coupons that have been separated ("stripped") by their holder, typically a
custodian bank or other institution. These "stripped" U.S. Treasury obligations
are offered under the Separate Trading of Registered Interest and Principal
Securities ("STRIPS") program or Coupon Under Bank-Entry Safekeeping ("CUBES")
program. The Fund may also purchase other stripped securities issued by agencies
or instrumentalities of the U.S. government. STRIPS and CUBES represent either
future interest or principal payments and are direct obligations of the U.S.
Government that clear through the Federal Reserve System. These participations,
which may be issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions, are
issued at a discount to their face value. Stripped securities may exhibit
greater price volatility than ordinary debt securities because of the manner in
which their principal and interest are returned to investors. The Fund also may
purchase U.S. dollar-denominated stripped securities that evidence ownership in
the future interest payments or principal payments on obligations of foreign
governments.
Within the past several years, the Treasury Department has facilitated
transfers of ownership of stripped securities by accounting separately for the
beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal
Securities." Under the STRIPS program, the
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Fund will be able to have its beneficial ownership of stripped securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
In addition, the Fund may acquire other U.S. Government obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder. Having separated the interest coupons from the underlying principal of
the U.S. Government obligations, the holder will resell the stripped securities
in custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on
Treasury Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
purposes. The Trust is unaware of any binding legislative, judicial or
administrative authority on this issue. The staff of the Securities and Exchange
Commission believes that participations in TIGRs, CATS and other similar trusts
are not U.S. Government securities.
Although a "stripped" security may not pay interest to holders prior to
maturity, federal income tax regulations require the Fund to recognize as
interest income a portion of the security's discount each year. This income must
then be distributed to shareholders along with other income earned by the Fund.
To the extent that any shareholders in the Fund elect to receive their dividends
in cash rather than reinvest such dividends in additional Fund shares, cash to
make these distributions will have to be provided from the assets of the Fund or
other sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including those
representing an undivided ownership interest in a pool of mortgages, such as
certificates of the GNMA and the FHLMC. These certificates are in most cases
pass-through instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. The average life of a mortgage-backed security varies with
the underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of prepayments,
mortgage refinancings or foreclosure. Mortgage prepayment rates are affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Such prepayments are passed through to the registered holder with the regular
monthly payments of principal and interest and have the effect of reducing
future payments.
In periods of falling interest rates, the rate of mortgage prepayments
tends to increase. During such periods, the reinvestment of prepayment proceeds
by the Fund will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. As a result, the relationship between
mortgage prepayments and interest rates may give some high-yielding
mortgage-related
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securities less potential for growth in value than conventional bonds with
comparable maturities. In calculating the average weighted maturity of the Fund,
the maturity of mortgage-backed will be based on estimates of average life.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes"), which are guaranteed as to the timely payment of principal and interest
by GNMA and backed by the full faith and credit of the United States. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-backed
securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes"), which are solely the obligations of
FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. Fannie Maes are guaranteed as to timely payment of the principal and
interest by FNMA. Mortgage-related securities issued by FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
Freddie Macs are not guaranteed and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
There are risks inherent in the purchase of mortgage-backed securities.
For example, these securities are subject to a risk that default in payment will
occur on the underlying mortgages. In addition to default risk, these securities
are subject to the risk that prepayment on the underlying mortgages will occur
earlier or later or at a lessor or greater rate than expected. To the extent
that Lyon Street's assumptions about prepayments are inaccurate, these
securities may expose the Fund to significantly greater market risks than
expected.
Asset-Backed Securities
The Fund may purchase asset-backed securities, which are securities
backed by installment contracts, credit card receivables or other assets.
Asset-backed securities represent interests in "pools" of assets in which
payments of both interest and principal on the securities are made monthly, thus
in effect "passing through" monthly payments made by the individual borrowers on
the assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and is likely to be
substantially less than the original maturity of the assets underlying the
securities as a result of prepayments. For this and other reasons, an
asset-backed security's stated maturity may be shortened, and the security's
total return may be difficult to predict precisely.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of a security interest in the underlying 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
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers 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 automobile receivables. In addition, because of the
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large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Illiquid and Restricted Securities
The Fund will not invest more than 10% of the value of its net assets
in securities that are illiquid because of restrictions on transferability or
other reasons. Repurchase agreements with deemed maturities in excess of seven
days, time deposits maturing in more than seven days, GICs and securities that
are not registered under the Securities Act of 1933, as amended (the "1933
Act"), but that may be purchased by institutional buyers under Rule 144A are
subject to this limit (unless such securities are variable amount master demand
notes with maturities of nine months or less or unless the Board determines that
a liquid trading market exists).
Rule 144A allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
Lyon Street believes that the market for certain restricted securities such as
institutional commercial paper may expand further as a result of this regulation
and the development of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
Lyon Street monitors the liquidity of restricted securities in the
Fund's portfolio under the supervision of the Board of Trustees. In reaching
liquidity decisions, Lyon Street will consider such factors as: (a) the
frequency of trades and quotes for the security; (b) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (c) the willingness of dealers to undertake to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). The use of Rule 144A
transactions could have the effect of increasing the level of illiquidity in the
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities.
Securities Lending
The Fund may lend its portfolio securities to broker-dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Such loans will not be made by the Fund
if, as a result, the aggregate of all outstanding loans of the Fund exceeds
one-third of the value of its total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by Lyon Street to
be of good standing and when, in Lyon Street's judgment, the income to be earned
from the loan justifies the attendant risks.
Collateral for loans of portfolio securities made by the Fund may
consist of cash, securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable bank letters of credit or any other
liquid high-grade short-term instrument approved for use as collateral by the
Securities and Exchange Commission (or any combination thereof). The borrower of
securities will be required to maintain the market value of the collateral at
not less than the market value of the loaned securities, and such value will be
monitored on a daily basis. When the Fund lends its securities, it
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continues to receive dividends and interest on the securities loaned and may
simultaneously earn interest on the investment of the cash collateral. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans will be called so that the securities may be voted by the
Fund if a material event affecting the investment is to occur.
Investment Companies
The Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the expenses of such other investment company, 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, and
may represent a duplication of fees to shareholders of the Fund.
Yields and Ratings
The yields on certain obligations are dependent on a variety of
factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of a
nationally recognized statistical rating organization (an "NRSRO") represent its
opinion as to the quality of the obligations it undertakes to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices.
After its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Fund. Lyon Street will consider such an event in determining whether the
Fund should continue to hold the security. For a description of applicable
securities ratings, see Appendix A.
Temporary Defensive Positions
The Fund may temporarily hold up to 100% of its total assets in
investments that are not part of its main investment strategy during unfavorable
market conditions. These investments may include cash (which will not earn any
income). This strategy could prevent the Fund from achieving its investment
objective.
INVESTMENT RESTRICTIONS
The following investment restrictions include those that have been
designated as "fundamental," which may not be changed without the vote of a
"majority" of the Fund's outstanding shares (as defined in "Declaration of
Trust--Voting Rights"), and those that have been designated as
"non-fundamental," which may be changed without shareholder approval. If a
percentage limitation is satisfied at the time of investment, a later increase
in such percentage resulting from a change in the value of the Fund's assets
will not constitute a violation of the limitation.
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The following investment restrictions are fundamental:
The Fund may not:
(1) Purchase any security (other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities) of any issuer if as a
result more than 5% of its total assets would be invested in securities of the
issuer, except that up to 25% of its total assets may be invested without regard
to this limit;
(2) Borrow money, which includes entering into reverse repurchase
agreements, except that the Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks exceed 5% of the Fund's net assets, any such borrowings
and reverse repurchase agreements will be repaid before additional investments
are made;
(3) Pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis is not deemed to be a
pledge of assets;
(4) Issue senior securities; the purchase or sale of securities on a "when
issued" basis is not deemed to be the issuance of a senior security;
(5) Make loans, except that the Fund may purchase or hold debt securities
consistent with its investment objective, lend Fund securities valued at not
more than 33 1/3% of its total assets to brokers, dealers and financial
institutions, and enter into repurchase agreements;
(6) Purchase any security of any issuer if as a result more than 25% of its
total assets would be invested in a single industry; except that there is no
restriction with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(7) Purchase or sell commodities or commodity contracts or real estate,
except the Fund may purchase and sell securities secured by real estate and
securities of companies which deal in real estate;
(8) Underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The following investment restrictions are "non-fundamental" and may be
changed with without shareholder approval:
The Fund may not:
(1) Purchase securities on margin, except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(2) Invest more than 10% of its net assets in (i) securities with legal or
contractual restrictions on resale; (ii) securities for which market quotations
are not readily available; and (iii) repurchase agreements maturing in more than
seven days;
(3) Invest more than 5% of its total assets in securities of any company
having a record, together with its predecessors, of less than three years of
continuous operation;
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(4) Make short sales of securities or maintain a short position unless at
all times when a short position is open it owns an equal amount of such
securities or of securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same issue as, and
equal in amount to, the securities sold short; or
(5) Invest in the securities of other investment companies except as
permitted by the Investment Company Act of 1940, as amended, or the rules
promulgated thereunder.
In order to comply with Securities and Exchange Commission regulations
relating to money market funds, the Fund will limit investments in the
securities of any single issuer (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
collateralized by such securities) to not more than 5% of the value of its total
assets at the time of purchase, except for 25% of the value of its total assets
which may be invested in "First Tier Securities" (as defined by the Securities
and Exchange Commission) of any one issuer for a period of up to three business
days. In addition, the Fund will not borrow money, pursuant to Fundamental
Investment Restriction (2), in excess of 10% of its total assets. With respect
to Fundamental Investment Restriction (6), the Fund is permitted to invest in
excess of 25% of its total assets in obligations of U.S. banks and domestic
branches of foreign banks that are subject to the same regulation as U.S. banks.
SECURITIES TRANSACTIONS
Lyon Street, under policies established by the Board of Trustees,
selects broker-dealers to execute transactions for the Fund. It is the policy of
the Trust, in effecting transactions in portfolio securities, to seek best price
and execution of orders. The determination of what may constitute best price and
execution in the execution of a transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund, involving both price paid or received and any commissions
and other costs paid, the breadth of the market where the transaction is
executed, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by Lyon Street in determining the
overall reasonableness of brokerage commissions paid. In determining best price
and execution and selecting brokers to execute transactions, Lyon Street may
consider brokerage and research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
other statistical and factual information provided to the Fund. Lyon Street is
authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing the Fund's transactions which is in excess
of the amount of commission another broker-dealer would have charged for
effecting that transaction if, but only if, Lyon Street determines in good faith
that such commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer viewed in terms of that
particular transaction or the overall responsibilities of Lyon Street to the
Fund. Any such research and other statistical and factual information provided
by brokers to the Fund or Lyon Street is considered to be in addition to and not
in lieu of services required to be performed by Lyon Street under its Investment
Advisory Agreement with the Trust. The cost, value and specific application of
such information are indeterminable and hence are not practicably allocable
among the Trust and other clients of Lyon Street who may indirectly benefit from
the availability of such information. Similarly, the Trust may indirectly
benefit from information made available as a result of transactions effected for
such other clients.
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<PAGE>
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, Lyon Street will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of newly issued securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. The Fund may participate, if and when practicable, in
group bidding for the purchase of certain securities directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group.
Neither Lyon Street nor the Fund intends to place securities
transactions with any particular broker-dealer or group thereof. However, the
Trust's Board of Trustees has determined that the Fund may follow a policy of
considering sales of the Fund's shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best price and execution described above. The policy of the Fund with respect to
brokerage is and will be reviewed by the Trust's Board of Trustees from time to
time. Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the foregoing
practices may be changed, modified or eliminated.
Lyon Street expects that purchases and sales of debt instruments for
the Fund usually will be principal transactions. Debt instruments are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually will be no brokerage commissions paid by the Fund
for such purchases.
Investment decisions for the Fund are made independently by Lyon Street
from those of the other investment portfolios of the Trust and investment
accounts advised by Lyon Street. It may frequently develop that the same
investment decision is made for more than one investment portfolio of the Trust
or other account advised by Lyon Street. Simultaneous transactions are
inevitable when the same security is suitable for the investment objective of
more than one investment portfolio or account. When two or more investment
portfolios or accounts are engaged in the purchase or sale of the same security,
the transaction is allocated as to amount in accordance with a formula which
Lyon Street believes is equitable to each investment portfolio or account. It is
recognized that in some cases this system could have a detrimental effect on the
price or volume of the security as far as a particular investment portfolio is
concerned. To the extent permitted by law, Lyon Street may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for another investment portfolio or account.
In no instances will securities held by the Fund be purchased from or
sold to Lyon Street, the Trust's Distributor or any of their "affiliated
persons," as defined in the 1940 Act, except as may be permitted by any
applicable regulatory exemption or exemptive order.
VALUATION OF SECURITIES
As stated in the prospectus, the Fund seeks to maintain a net asset
value of $1.00 per share and, in this connection, value its instruments on the
basis of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This method
values a security at its cost on the date of purchase and thereafter assumes a
constant accretion or amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in
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<PAGE>
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if the
Fund sold the instrument. During such periods the yield to investors in the Fund
may differ somewhat from that obtained in a similar entity which uses available
indications as to market value to value its portfolio instruments. For example,
if the use of amortized cost resulted in a lower (higher) aggregate Fund value
on a particular day, a prospective investor in the Fund would be able to obtain
a somewhat higher (lower) yield and ownership interest than would result from
investment in such similar entity and existing investors would receive less
(more) investment income and ownership interest. However, the Trust expects that
the procedures and limitations referred to in the following paragraphs of this
section will tend to minimize the differences referred to above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the
Fund's operations and delegating special responsibilities involving portfolio
management to Lyon Street, has established procedures that are intended, taking
into account current market conditions and the Fund's investment objectives, to
stabilize the net asset value of the Fund, as computed for the purposes of
purchases and redemptions, at $1.00 per share. The Trustees' procedures include
periodic monitoring of the difference between the amortized cost value per share
and the net asset value per share based upon available indications of market
value (the "Market Value Difference"). Available indications of market value
consist of actual market quotations or appropriate substitutes which reflect
current market conditions and include (a) quotations or estimates of market
value for individual portfolio instruments and/or (b) values for individual
portfolio instruments derived from market quotations relating to varying
maturities of a class of money market instruments.
In the event the Market Value Difference exceeds 1/2 of 1%, the
Trustees' procedures provide that the Trustees will take such steps as they
consider appropriate (e.g., selling portfolio instruments to shorten the
dollar-weighted average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a net asset value per share based upon available indications
of market value which under such circumstances would vary from $1.00) to
eliminate or reduce to the extent reasonably practicable any material dilution
or other unfair results to investors or existing shareholders which might arise
from Market Value Differences.
The Fund limits its investments to instruments which Lyon Street has
determined present minimal credit risk (pursuant to guidelines established by
the Board of Trustees) and which are "Eligible Securities" as defined by Rule
2a-7. The Fund is also required to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share. Should the disposition of a security
result in a dollar-weighted average portfolio maturity of more than 90 days, the
Fund will invest its available cash in such a manner as to reduce such maturity
to 90 days or less as soon as practicable.
It is the normal practice of the Fund to hold securities to maturity
and realize par therefor, unless a sale or other disposition is mandated by
redemption requirements or other extraordinary circumstances. Under the
amortized cost method of valuation traditionally employed by institutions for
valuation of money market instruments, neither the amount of daily income nor
the net asset value is affected by any unrealized appreciation or depreciation
of the Fund. In periods of declining interest rates, the indicated daily yield
on shares of the Fund, computed by dividing its annualized daily income by the
net asset value computed as above, may tend to be lower than similar
computations made by utilizing a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the daily yield of shares at
the value computed as described above may tend to be higher than a similar
computation made by utilizing a method of calculation based upon market prices
and estimates.
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TRUSTEES AND OFFICERS
The Trust is governed by a Board of Trustees. The Trustees are
responsible for the overall management of the Trust and retain and supervise the
Funds' Adviser, Administrator, Distributor, Transfer Agent and Custodian.
The names and principal occupations during the last five years of the
Trustees and officers of the Trust are listed below. The address of all the
Trustees and officers is 3435 Stelzer Road, Columbus, Ohio 43219.
Joseph F. Damore, Trustee, 46; President and Chief Executive Officer of
Sparrow Hospital and Health System; formerly Director and Executive Vice
President, Sisters of Mercy Health Corporation.
* Walter B. Grimm, Trustee, Chairman and Vice President, 53; Senior
Vice President of Client Services for BISYS Fund Services; formerly President of
Lehigh Investments.
James F. Rainey, Trustee, 56; Associate Dean for Academic Affairs in
The Eli Broad Graduate School of Management at Michigan State University.
Ronald F. VanSteeland, Trustee, 58; Vice President for Finance and
Administration and Treasurer of Grand Valley State University, Allendale,
Michigan; and Treasurer of Grand Valley State University Foundation.
James F. Duca, II, President, 41; Vice President of Old Kent Financial
Corporation; and formerly Vice President and Trust Counsel for Marshall & Ilsley
Trust Company.
R. Jeffrey Young, Vice President and Assistant Secretary, 34; Vice
President - Client Services for BISYS Fund Services; and formerly employed by
The Heebink Group.
Martin R. Dean, Treasurer, 35; Vice President - Fund Administration for
BISYS Fund Services; and formerly employed by KPMG Peat Marwick LLP.
Robert L. Tuch, Secretary, 47; Vice President - Legal Services for
BISYS Fund Services.
W. Bruce McConnel, III, Assistant Secretary, 56; Partner in the law
firm of Drinker Biddle & Reath LLP.
Alaina V. Metz, Assistant Secretary, 32; Chief Administrator of the
Blue Sky Department for BISYS Fund Services and formerly employed by Alliance
Capital Management.
- -----------------------------------
* This Trustee is an interested person of the Trust as defined under the 1940
Act.
During the fiscal year ended December 31, 1998, no officer, director or
employee of the Trust's service contractors, or any of their parents or
subsidiaries, received any direct remuneration from the Trust for serving as a
Trustee or officer of the Trust, although BISYS and its affiliates, of which
Messrs. Grimm, Young, Dean, and Tuch and Ms. Metz are also employees, receives
fees from the Trust for administrative, fund accounting and transfer agency
services. Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Trust. Each Trustee earns an annual fee of
$8,000 and additional fees of $1,750 for each regular meeting attended, $1,000
for each special
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<PAGE>
meeting attended and $500 for each telephonic meeting, plus reimbursement of
expenses incurred as a Trustee.
Listed below is the compensation paid to each Trustee by the Trust for
the fiscal year ended December 31, 1998. The Board of Trustees has established
The Kent Funds Deferred Compensation Plan (the "Deferred Compensation Plan")
pursuant to which the Trustees may elect to defer receipt of the compensation
payable to them by the Trust. Under the terms of the Deferred Compensation Plan,
amounts deferred by the Trustees are credited with the earnings on certain
investment options which may include one or more of the Trust's Funds. Trustees
receive payment of their deferred compensation and any related earnings upon
ceasing to be a Trustee of the Trust. Such payment is made at the election of
the Trustee, either in a lump sum or in annual installments over two to fifteen
years. The Trust's obligation to pay the Trustee's deferred compensation is a
general unsecured obligation.
Total Compensation
from the Trust and
Name of Person Aggregate Compensation Fund Complex Paid
and Position from the Trust to Trustees
------------ -------------- -----------
Joseph F. Damore, Trustee $15,000* $15,000
Walter B. Grimm, Trustee $ 0 $ 0
James F. Rainey, Trustee $15,000* $15,000
Ronald F. VanSteeland, Trustee $15,000 $15,000
- -------------------
* During the fiscal year ended December 31, 1998, Mr. Damore deferred
$15,000 of his compensation and Mr. Rainey deferred $7,500 of his
compensation pursuant to the Deferred Compensation Plan.
As of the date hereof, the Trustees and officers of the Trust as a
group beneficially owned less than 1% of the Trust's outstanding shares.
INVESTMENT ADVISER
Lyon Street Asset Management Company
Lyon Street is the investment adviser to the Fund. As of December 31,
1998, Lyon Street managed assets of approximately $6.1 billion. The Trust is the
first registered investment company for which Lyon Street has provided
investment advisory services. Lyon Street is located at 111 Lyon Street, N.W.,
Grand Rapids, MI 49503.
Old Kent Bank ("Old Kent"), of which Lyon Street is a wholly-owned
subsidiary, is a Michigan banking corporation which, with its affiliates,
provided commercial and retail banking and trust services through more than
200 banking offices in Michigan and Illinois as of December 31, 1998. Old Kent
offers a broad range of financial services, including commercial and consumer
loans, corporate and
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<PAGE>
personal trust services, demand and time deposit accounts, letters of credit and
international financial services.
Old Kent is a subsidiary of Old Kent Financial Corporation, a bank
holding company headquartered in Grand Rapids, Michigan, with approximately
$16.6 billion in total consolidated assets as of December 31, 1998. Through
offices in numerous states, Old Kent Financial Corporation and its subsidiaries
provide a broad range of financial services to individuals and businesses.
Lyon Street employs an experienced staff of professional investment
analysts, portfolio managers and traders and uses several proprietary
computer-based systems in conjunction with fundamental analysis to identify
investment opportunities.
Investment Advisory Agreement
The overall supervision and management of the Fund rests with the
Trust's Board of Trustees. Pursuant to a written Investment Advisory Agreement
with the Trust, dated October 12, 1990, as amended, Lyon Street furnishes to the
Trust investment advice with respect to the Fund, makes all investment decisions
for the Fund, and places purchase and sale orders for the Fund's securities.
Lyon Street is responsible for all expenses incurred by it in connection with
its advisory activities, other than the cost of securities and other investments
purchased or sold for the Fund, and any brokerage commissions or other
transaction charges that may be associated with such purchases and sales.
For its services to the Fund, Lyon Street is entitled to an annual fee
based on the average daily net asset value of the Fund, payable monthly, at the
rate of 0.40%. Lyon Street may rebate its advisory fees to certain of its
institutional customers.
Under the Investment Advisory Agreement, Lyon Street's liability in
connection with rendering services thereunder is limited to situations involving
a breach of its fiduciary duty, its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The Trustees of the Trust, including a majority of those Trustees who
are not parties to the Investment Advisory Agreement or interested persons of
any such party, approved the agreement with respect to the Fund on November 19,
1998. The Agreement continues in effect from year to year with respect to the
Fund only if such continuance is specifically approved at least annually by the
Trustees of the Trust, including the "non-interested" Trustees, or by vote of a
majority of the outstanding voting shares of the Fund. The Investment Advisory
Agreement will terminate automatically upon its assignment and may be terminated
without penalty on 60-days' written notice at the option of either party or by a
vote of the shareholders of the Fund.
Sub-Administration Agreement
Old Kent provides certain administrative services to the Fund pursuant
to a Sub-Administration Agreement between Old Kent and BISYS. BISYS has agreed
to pay Old Kent a fee, calculated daily and paid monthly, at an annual rate of
up to 0.05% of the Fund's average daily net assets. The fees paid to Old Kent by
BISYS for such administrative services come out of BISYS' administration fee and
are not an additional charge to the Fund.
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<PAGE>
The Glass-Steagall Act and Other Applicable Laws
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting, selling or distributing securities,
although national and state-chartered banks generally are permitted to purchase
and sell securities upon the order and for the account of their customers. In
1971, the United States Supreme Court held in Investment Company Institute v.
Camp that the Glass-Steagall Act prohibits a national bank from operating a fund
for the collective investment of managed agency accounts. Subsequently, the
Board of Governors of the Federal Reserve System (the "Board") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company or any non-bank affiliate of a bank
holding company from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
but do not prohibit such a holding company or affiliate from acting as
investment adviser, transfer agent and custodian to such an investment company.
In 1981, the United States Supreme Court held in Board of Governors of the
Federal Reserve System v. Investment Company Institute that the Board did not
exceed its authority under the Bank Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
Old Kent has been advised by the Financial Institutions Bureau of the
Department of Commerce of the State of Michigan, which is the bureau that
regulates Michigan state chartered banks, that it is the position of that Bureau
that a bank (such as Old Kent) which has been authorized to exercise full trust
powers is authorized under Michigan banking laws to provide investment advice to
an entity such as a mutual fund.
Lyon Street believes it may lawfully serve as investment adviser to the
Trust and perform the services for the Trust required by the Investment Advisory
Agreement described in the prospectus and this SAI. However, Lyon Street's
authority to serve in such capacity has not been definitively established by any
state or federal law or regulation or any judicial decision or regulatory
interpretation that constitutes binding authority with respect to the activities
of Lyon Street. In addition, state and federal laws and regulations relating to
the permissible activities of banks and bank holding companies may change and
may be subject to further judicial or administrative interpretation, the result
of which may be to cause Lyon Street to conclude that it would be unlawful or
inadvisable to continue its relationship with the Trust. If Lyon Street
discontinues its services as investment adviser to the Trust, it is expected
that the Board of Trustees of the Trust would select a new investment adviser
and recommend that the Trust's shareholders approve the new investment adviser
so recommended.
ADMINISTRATOR
BISYS Fund Services Limited Partnership, 3435 Stelzer Road, Columbus,
Ohio 43219, a wholly-owned subsidiary of The BISYS Group, Inc., serves as the
Administrator of the Trust under an Administration Agreement dated August 5,
1996. BISYS provides management and administrative services and, in general,
supervises the operation of the Fund (other than investment advisory operations)
pursuant to the agreement.
By the terms of the Administration Agreement, BISYS is required to
provide to the Fund management and administrative services, as well as all
necessary office space, equipment and clerical personnel for managing and
administering the affairs of the Fund. BISYS is required to supervise the
provision of custodial, auditing, valuation, bookkeeping, legal, stock transfer
and dividend disbursing services and provide other management and administrative
services.
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<PAGE>
As compensation for the services and facilities provided to the Fund
and the Trust's other investment portfolios pursuant to the Administration
Agreement, BISYS is entitled to receive an annual fee, payable monthly as one
twelfth of the annual fee, based on the Trust's aggregate average daily net
assets as follows: up to $5.0 billion - .185% of such assets; between $5.0 and
$7.5 billion - .165% of such assets; and over $7.5 billion - .135% of such
assets provided, however, that such annual fee shall be subject to an annual
minimum fee of $45,000 per investment portfolio that is applicable to the Fund.
All expenses (other than those specifically referred to as being borne by BISYS
in the Administration Agreement) incurred by BISYS in connection with the
operation of the Trust are borne by the Fund and the Trust's other investment
portfolios. To the extent that BISYS incurs any such expenses or provides
certain additional services to the Trust, the Fund promptly will reimburse BISYS
therefor.
BISYS Fund Services, Inc., a wholly-owned subsidiary of The BISYS
Group, Inc., serves as the Trust's Fund Accountant pursuant to a Fund Accounting
Agreement, dated August 5, 1996. Under the Fund Accounting Agreement, BISYS Fund
Services, Inc. prices the Fund's shares, calculates the Fund's net asset value,
and maintains the general ledger accounting records for the Fund. For these
services and those provided to the Trust's other investment portfolios, BISYS
Fund Services, Inc. is entitled to receive a fee computed daily at the annual
rate of .015% of the Trust's average daily net assets.
DISTRIBUTOR
The Trust has entered into a Distribution Agreement dated August 5,
1996 with BISYS Fund Services Limited Partnership, 3435 Stelzer Road, Columbus,
Ohio 43219. Unless otherwise terminated, the Distribution Agreement will
continue in effect from year to year if approved at least annually at a meeting
called for that purpose by a majority of the Trustees and a majority of the
"non-interested" Trustees, as that term is defined in the 1940 Act. Shares of
the Fund are sold on a continuous basis by BISYS as agent for the Trust, and
BISYS has agreed to use its best efforts to solicit orders for the sale of
shares of the Fund.
TRANSFER AGENT
BISYS Fund Services, Inc. also serves as the Trust's transfer agent and
dividend disbursing agent pursuant to a Transfer Agency Agreement. Under the
Transfer Agency Agreement, BISYS Fund Services, Inc. processes purchases and
redemptions of the Fund's shares and maintains the Fund's shareholder transfer
and accounting records, such as the history of purchases, redemptions, dividend
distributions, and similar transactions in a shareholder's account.
CUSTODIAN, AUDITORS AND COUNSEL
The Bank of New York, 90 Washington Street, New York, New York 10286
is custodian of all securities and cash of the Trust.
KPMG LLP, Two Nationwide Plaza, Suite 1600, Columbus, Ohio 43215,
Certified Public Accountants are the independent auditors for the Trust.
Drinker Biddle & Reath LLP, 1345 Chestnut Street, Philadelphia, PA
19107, serves as counsel to the Trust.
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<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The prospectus for the Fund describes those investors who are eligible
to purchase shares of the Fund.
In an exchange, shares in the investment portfolio from which an
investor is withdrawing will be redeemed at the net asset value per share next
determined after the exchange request is received. Shares of the investment
portfolio in which the investor is investing will also normally be purchased at
the net asset value per share next determined after acceptance of the purchase
order by the Trust in accordance with its customary policies for accepting
investments.
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the NYSE is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the NYSE is closed for other than customary weekend and
holiday closings; (c) the Securities and Exchange Commission has by order
permitted such suspension; or (d) an emergency exists as determined by the
Securities and Exchange Commission. (The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
In addition to the situation described in the prospectus under
"Shareholder Information--General Redemption Information," the Trust may redeem
shares involuntarily if it appears appropriate to do so in light of the Trust's
responsibilities under the 1940 Act, to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder, or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the prospectus from time to time.
The Fund may make payment for redemption in securities or other
property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. In the event shares are redeemed for
securities or other property, shareholders may incur additional costs in
connection with the conversion thereof to cash. Redemption in kind is not as
liquid as a cash redemption. Shareholders who receive a redemption in kind may
receive less than the redemption value of their shares upon sale of the
securities or property received, particularly where such securities are sold
prior to maturity.
The Trust has filed an election pursuant to Rule 18f-1 under the 1940
Act which provides that each portfolio of the Trust is obligated to redeem
shares solely in cash up to $250,000 or 1% of such portfolio's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount may be made in proceeds other than cash.
DIVIDENDS AND TAXES
The following summarizes certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
The discussion of federal income tax consequences in the prospectus and
this SAI is based on the Internal Revenue Code of 1986, as amended (the "Code")
and the laws and regulations issued thereunder
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<PAGE>
as in effect on the date of this SAI. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
The Fund will be treated as a separate corporate entity under the Code
and intends to elect to qualify as a regulated investment company. In order to
qualify as a regulated investment company, the Fund must comply with certain
requirements in the Code. The Fund is required to distribute annually an amount
equal to at least the sum of 90% of its investment company income and 90% of its
net tax-exempt interest income (the "Distribution Requirement"). The Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of its total assets in
securities of any one issuer and as to which the Fund does not hold more than
10% of the outstanding voting securities of any one issuer), and no more than
25% of the value of the Fund's total assets may be invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain"), if
any, for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held the shares, whether such gain was
recognized by the Fund prior to the date on which a shareholder acquired shares
of the Fund, or whether the distribution was paid in cash or reinvested in
shares. In addition, investors should be aware that any loss realized upon the
sale, exchange or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent any capital gain dividends
have been paid with respect to such shares.
Ordinary income of individuals is taxable at a maximum marginal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the effective maximum marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum nominal rate of 20% for assets held more than 18 months
and 28% for assets held more than 12 months but not more than 18 months. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions would be taxable as ordinary income to the extent of
the Fund's current and accumulated earnings and profits.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
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Although the Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
DECLARATION OF TRUST
Description of Shares
The Trust's Restatement of Declaration of Trust authorizes the issuance
of an unlimited number of shares of beneficial interest in one or more separate
series, and the creation of one or more classes of shares within each series.
Each share of a series represents an equal proportionate interest in the Trust
with each other share of that series. Each series represents interests in a
different investment portfolio. The Trust currently offers fifteen series of
shares. The Fund has a single class of shares. The other series of the Trust
have two separate classes -- Investment Shares and Institutional Shares. Each
share of the Trust has no par value and is entitled to such dividends and
distributions of the income earned on its respective series' assets as are
declared at the discretion of the Trustees. Each class or series is entitled
upon liquidation of such class or series to a pro rata share in the net assets
of that class or series. Shareholders have no preemptive rights. When issued for
payment as described in the prospectus, shares will be legally issued, fully
paid and non-assessable.
The proceeds received by the Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of the Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to the Fund and with a share of the general
liabilities of the Trust. Expenses with respect to the portfolios of the Trust
are normally allocated in proportion to the net asset value of the respective
portfolios except where allocations of direct expenses can otherwise be fairly
made.
Shareholder Liability
The Trust is an entity of the type commonly known as a "Massachusetts
Business Trust." Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, there is a possibility that shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Trust. However, even if the Trust were held to be a
partnership, the possibility of the shareholders incurring financial loss for
that reason appears remote because the Trust's Restatement of Declaration of
Trust contains an express disclaimer of shareholder liability for obligations of
the Trust and requires that notice of such disclaimer be given in every note,
bond, contract or other undertaking entered into or executed by the Trust or the
Trustees. In addition, the Restatement of Declaration of Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable for the obligations of the Trust.
Voting Rights
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
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upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement, a
distribution plan subject to Rule 12b-1, or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of that
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Trust voting together in the aggregate without
regard to a particular investment portfolio.
The term "majority of the outstanding shares" means the vote of the
lesser of (i) 67% or more of the shares of the Fund present at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
Shares of the Trust have non-cumulative voting rights, which means that
the holders of more than 50% of the shares of the Trust voting for the election
of Trustees can elect 100% of the Trustees to be elected at a meeting and, in
such event, the holders of the remaining less than 50% of the shares of the
Trust voting will not be able to elect any Trustees.
As a general matter, the Trust does not hold annual or other meetings
of shareholders. At such time, however, as less than a majority of the Trustees
holding office have been elected by shareholders, the Trustees then in office
will call a shareholders meeting for the election of Trustees. The Trustees
shall continue to hold office indefinitely, unless otherwise required by law,
and may appoint successor Trustees. A Trustee may be removed from office: (1) at
any time by two-thirds vote of the Trustees; or (2) at a special meeting of
shareholders by a two-thirds vote of the outstanding shares. Trustees may also
voluntarily resign from office.
Limitation of Trustees' Liability
The Restatement of Declaration of Trust provides that the Trustees
shall not be responsible or liable for any neglect or wrongdoing of any officer,
agent, employee or adviser of the Trust, provided that they have exercised
reasonable care in the selection of such individuals. The Restatement of
Declaration of Trust also provides that a Trustee shall be indemnified against
all liabilities and expenses reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding in which said Trustee is
involved by reason of being or having been a Trustee of the Trust, except with
respect to any matter as to which such Trustee has been finally adjudicated not
to have acted in good faith in the reasonable belief that his or her actions
were in the best interest of the Trust. Nothing in the Restatement of
Declaration of Trust shall protect a Trustee against any liability for his or
her willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office as Trustee.
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
The yields of the Fund as they may appear from time to time in
advertisements will be calculated by determining the net change exclusive of
capital changes (all realized and unrealized gains and losses) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the
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<PAGE>
period, dividing the net change in account value by the value of the account at
the beginning of the base period to obtain the base period return, multiplying
the base period return by (365/7) and carrying the resulting yield figure to the
nearest hundredth of one percent. The determination of net change in account
value will reflect the value of additional shares purchased with dividends from
the original share and dividends declared on both the original share and any
such additional shares and all fees charged to all shareholder accounts for each
class of shares in proportion to the length of the base period and the average
account size for each class. The 30-day yield is determined similarly.
If realized and unrealized gains and losses were included in the yield
calculation, the yield of the Fund might vary materially from that reported in
advertisements.
In addition to the yields of the Fund, the effective yields may appear
from time to time in advertisements. The effective yield will be calculated by
compounding the unannualized base period return by adding 1 to the quotient,
raising the sum to a power equal to 365 divided by 7, subtracting 1 from the
result and carrying the resulting effective yield figure to the nearest
hundredth of one percent.
The Fund may also quote from time to time its total return in
accordance with Securities and Exchange Commission Regulations.
ADVERTISING INFORMATION
The Fund may from time to time include in advertisements, sales
literature, communications to shareholders and other materials (collectively,
"Materials") a total return figure that compares the Fund's performance with
other measures of investment return. For example, in comparing the Fund's total
return with data published by Lipper Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of an index,
the Fund may calculate its aggregate total return for the period of time
specified in the Materials by assuming the investment of $10,000 in shares of
the Fund and assuming the reinvestment of all dividends and distributions.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on an investment in the
Fund are paid in the form of additional shares of the Fund, any future income or
capital appreciation of the Fund would increase the value, not only of the
original investment, but also of the additional shares received through
reinvestment. As a result, the value of the investment in the Fund would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Fund may also include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of the Fund (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and Treasury securities. From time to time, Materials
may summarize the substance of information contained in shareholder reports
(including the investment composition of the Fund), as well as the views of the
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of
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<PAGE>
relevance to the Fund. The Fund may also include in Materials charts, graphs or
drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Fund and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of the Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and investment alternatives to certificates of deposit and other
financial instruments. Such Materials may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
ADDITIONAL INFORMATION
Except as otherwise stated in the Trust's prospectus, this SAI or
required by law, the Trust reserves the right to change the terms of the offers
stated in its prospectus or this SAI without shareholder approval, including the
right to impose or change certain fees for services provided.
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APPENDIX A
DESCRIPTION OF SECURITIES
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard & Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations rated "A-1". However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations 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 to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are 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 Standard & Poor's
believes such payments will be made during such grace period. The "D" rating
will also be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (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 in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuers (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.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
A-2
<PAGE>
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
securities rated "F1."
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. this
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by S&P for corporate
and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by S&P. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A-3
<PAGE>
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to non-
payment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"B" - An obligation rated "B" is more vulnerable to non-
payment 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 obligor's capacity or willingness
to meet its financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
non-payment, 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" - An obligation rated "CC" is currently highly vulnerable
to non-payment.
"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" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will be used upon the filing of a bankruptcy petition or the taking of
similar action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating 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, commodities, or
currencies; obligations exposed to severe prepayment risk - such as interest-
only and principal-only mortgage securities; and obligations with unusually
risky interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
A-4
<PAGE>
"Aaa" - Bonds 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 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 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 in "Aaa"
securities.
"A" - Bonds 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A-5
<PAGE>
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is very unlikely to
be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to adverse changes in
circumstances or in economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
A-6
<PAGE>
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e. below 50%.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and financial
broker-dealers. The following summarizes the rating categories used by Thomson
Financial BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents the lowest investment-
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is
in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A S&P rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by S&P Ratings Group for municipal notes:
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"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality
is present. Protection commonly regarded as required of an investment security
is present and although not distinctly or predominantly speculative there is
specific risk.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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