<PAGE> 1
PROSPECTUS
, 2000
KENT ADVISOR FUNDS
KENT ADVISOR SCIENCE AND TECHNOLOGY FUND
KENT ADVISOR CANTERBURY FUND
KENT ADVISOR CASCADE FUND
[KENT FUNDS LOGO]
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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<C> <C> <S>
Carefully review this important
section, which summarizes each Fund's
investments, risks and fees.
RISK/RETURN SUMMARY AND FUND EXPENSES
2 Overview
3 Kent Advisor Science and Technology Fund
4 Kent Advisor Canterbury Fund
5 Kent Advisor Cascade Fund
6 Principal Risks of Investing in the Funds
8 Performance
9 Fees and Expenses
ADDITIONAL INFORMATION
10 Investment Policies and Practices
Review this section for details on the
people and organizations who oversee
the Funds
FUND MANAGEMENT
13 Investment Adviser
13 Portfolio Managers
Review this section for details on how
shares are valued, how to purchase,
sell and exchange shares, related
charges and payments of dividends and
distributions
SHAREHOLDER INFORMATION
14 Pricing of Fund Shares
15 Purchasing Your Shares
17 Instructions for Opening or Adding to Your Account
19 Adding to Your Account
20 Selling Your Shares
22 General Policies on Selling Shares
23 Exchanging Your Shares
24 Dividends and Distributions
24 Taxation
FINANCIAL HIGHLIGHTS
BACK COVER
Where to learn more about the Funds
</TABLE>
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RISK/RETURN SUMMARY AND FUND EXPENSES
OVERVIEW
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This prospectus describes the Retail Class of shares of the following Kent
Advisor Funds (the "Funds").
KENT ADVISOR SCIENCE AND TECHNOLOGY FUND
KENT ADVISOR CANTERBURY FUND
KENT ADVISOR CASCADE FUND
On the following pages, you will find important information about each Fund,
including:
- - the investment objective
- - principal investment strategy
- - performance information
- - fees and expenses, and
- - principal risks associated with each Fund
The Funds are managed by Lyon Street Asset Management Company ("Lyon Street" or
the "Adviser").
PRINCIPAL RISKS OF THE FUNDS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FOREIGN
MARKET SELECTION INVESTMENT CONCENTRATION
RISK RISK RISK RISK
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Science & Technology Fund X X X X
- -------------------------------------------------------------------------------------------------------------------
Canterbury Fund X X X
- -------------------------------------------------------------------------------------------------------------------
Cascade Fund X X X
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A complete description of these and other risks can be found in the section
entitled "Principal Risks."
The Kent Advisor Science and Technology Fund has two classes of shares: Retail
Class and Institutional Class. The Kent Advisor Canterbury Fund and the Kent
Advisor Cascade Fund each have one class of shares: Retail Class. Retail shares
of the Funds are sold primarily through investment representatives.
Institutional shares of the Kent Advisor Science and Technology Fund are sold
primarily to financial or other institutions. This prospectus only relates to
the Retail Class of shares of each Fund. The Institutional Class of shares of
the Kent Advisor Science and Technology Fund are offered in a separate
prospectus.
2
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RISK/RETURN SUMMARY AND FUND EXPENSES
KENT ADVISOR SCIENCE AND TECHNOLOGY FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT
STRATEGIES The Fund normally invests at least 65% of its
total assets in the common stocks of companies
expected to benefit from the development,
advancement, and use of science and technology.
Some of the industries likely to be included in
the portfolio are:
- computers, including products, software,
hardware and electronic systems and components
- internet
- biotechnology
- pharmaceuticals
- telecommunications
- media and information services
- chemicals and synthetic materials
- defense and aerospace
- medical supply
Lyon Street selects stocks based on intensive
research that assesses a company's fundamental
prospects for above-average earnings. The Fund's
holdings can range from small companies
developing new technologies to blue chip firms
with established track records of developing and
marketing technological advances. The Fund may
also invest in companies that should benefit
from technological advances even if they are not
directly involved in research and development.
The Fund may invest without limit in foreign
securities and American Depositary Receipts
("ADRs"). The Fund may also invest in futures
and options.
The Fund may sell securities for a variety of
reasons, such as to secure gains, limit losses,
or redeploy assets into more promising
opportunities.
3
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT ADVISOR CANTERBURY FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT
STRATEGIES The Fund normally invests at least 65% of its
total assets in equity securities of U.S.
companies with at least $1 billion in market
capitalization. The Fund intends to invest at
least 65% of its total assets in equity
securities of companies which Lyon Street
believes have above-average potential for growth
in revenues, earnings or assets.
The Fund intends generally to purchase common
stock. The Fund may also invest in preferred
stock or bonds that are convertible into common
stock. The Fund may invest a portion of its
assets in foreign securities or ADRs.
MARKET CAPITALIZATION
is a common measure of the
size of a company. It is
the market price of a share
of the company's stock
multiplied by the number of
shares that are
outstanding.
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RISK/RETURN SUMMARY AND FUND EXPENSES
KENT ADVISOR CASCADE FUND
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INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT
STRATEGIES The Fund normally invests at least 65% of its
total assets in the equity securities of a
diverse group of companies whose market
capitalizations are less than $2 billion at the
time of purchase. The Fund intends to invest at
least 65% of its total assets in equity
securities of companies that Lyon Street
believes have above-average potential for growth
in revenues, earnings or assets.
The Fund intends generally to purchase common
stock. The Fund may also invest in preferred
stock or bonds that are convertible into common
stock. The Fund may invest a portion of its
assets in foreign securities or ADRs.
MARKET CAPITALIZATION
is a common measure of the
size of a company. It is
the market price of a share
of the company's stock
multiplied by the number of
shares that are
outstanding.
5
<PAGE> 7
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
- --------------------------------------------------------------------------------
PRINCIPAL INVESTMENT RISKS -
ALL FUNDS Investing in the Funds involves risks common to
any investment in securities. By itself, no Fund
constitutes a balanced investment program. There
is no guarantee that the Funds will meet their
goals. When you sell your shares in the Funds,
they may be worth more or less than you paid for
them. It is possible to lose money by investing
in the Funds.
An investment in a Fund is not a bank deposit
and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency.
A full discussion of all permissible investments
can be found in the Statement of Additional
Information.
Two principal risks of equity investing are
market risk and selection risk. Market risk
means that the stock market in general has ups
and downs, which may affect the performance of
any individual stock. Selection risk means that
the particular stocks that are selected for a
Fund may underperform the market or other funds
with similar objectives.
ADDITIONAL PRINCIPAL
INVESTMENT RISKS CONCENTRATION RISK
To the extent that the Science and Technology
Fund's investments are concentrated in issuers
conducting business in the same technology or
science market sector, the Fund is subject to
legislative or regulatory changes, adverse
market conditions and/or increased competition
affecting that market sector. Competitive
pressures may significantly impact the financial
condition of technology companies. For example,
an increasing number of companies and new
product offerings can lead to price cuts and
slower selling cycles. In addition, many of
these companies may be dependent on the success
of a principal product, may rely on sole source
providers and third-party manufacturers, and may
experience difficulties in managing growth.
INVESTMENT STYLE RISK
Companies in the rapidly changing fields of
science and technology often face unusually high
price volatility, both in terms of gains and
losses. The potential for wide variation in
performance is based on the special risks common
to these stocks. For example, products or
services that at first appear promising may not
prove commercially successful or may become
obsolete quickly. Earnings disappointments can
result in sharp price declines. A portfolio
focused primarily on these stocks is therefore
likely to be much more volatile than one with
broader diversification that includes
investments in more economic sectors. As a
result, the Science and Technology Fund's net
asset value may be subject to rapid and
substantial changes.
While stocks of smaller companies can provide
greater growth potential and potentially higher
returns, they carry higher risks than those of
larger companies. They may trade infrequently or
in lower volumes, making it difficult for a Fund
to sell its shares at a desirable price. Smaller
companies may be more sensitive to changes in
the economy overall. The level of risk will be
increased to the extent that a Fund has
significant exposure to smaller or unseasoned
companies (those with less than a three-year
operating history), which may not have
established products or more experienced
management.
6
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RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS OF INVESTING IN THE FUNDS, CONTINUED
- --------------------------------------------------------------------------------
Historically, small company stocks have been
more volatile than those of larger companies. As
a result, the net asset values of the Cascade
Fund and the Science and Technology Fund may be
subject to rapid and substantial changes.
Growth stocks offer strong revenue and earnings
potential and accompanying capital growth, with
less dividend income than value stocks. Growth
stocks present the risk that they may not
perform as well as other types of stocks, such
as value stocks. Each of the Funds may invest in
growth stocks.
FOREIGN INVESTMENT RISK
Stocks of foreign companies are subject to
special risks, including the following:
- Currency risk means that fluctuations in
foreign exchange rates could affect the dollar
value of a Fund's securities. A decline in the
value of a foreign currency versus the U.S.
dollar reduces the dollar value of securities
denominated in that currency.
- Compared to companies in the U.S., there is
generally less publicly available information
about foreign companies and there may be less
government oversight of foreign stock
exchanges and the companies traded on them.
There may also be less stringent accounting,
auditing and financial reporting standards. In
addition, foreign markets may have lower
trading volumes, resulting in stocks that may
be more difficult to sell and more volatile in
price. Investments in some foreign countries
could be subject to such factors as
expropriation, confiscation or difficulties
enforcing contracts. All of these factors can
make foreign investments more risky than U.S.
investments.
- Furthermore, transaction fees may be higher
for foreign investments, due to higher
brokerage commissions, fees on currency
exchanges, and possible imposition of dividend
or interest withholding by foreign
governments. These may cause higher
transaction costs which can result in lower
returns or decreased liquidity.
Each of the Funds may invest in foreign
securities. As a result, an investment in the
Funds involves additional risks not present in
equity funds which invest solely in shares of
U.S. companies. For additional information on
foreign securities, see "Additional Information
- Investment Policies and Practices."
7
<PAGE> 9
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS OF INVESTING IN THE FUNDS, CONTINUED
- --------------------------------------------------------------------------------
WHO MAY WANT TO INVEST Consider investing in the Funds if you are:
- PURSUING A LONG-TERM GOAL SUCH AS RETIREMENT
- SEEKING TO ADD AN AGGRESSIVE GROWTH COMPONENT
TO YOUR PORTFOLIO
- WILLING TO ACCEPT HIGHER RISKS OF INVESTING IN
THE STOCK MARKET AND THE POTENTIAL FOR
ABOVE-AVERAGE PRICE FLUCTUATIONS IN EXCHANGE
FOR POTENTIALLY HIGHER LONG TERM RETURNS
The Funds will not be appropriate for anyone:
- SEEKING MONTHLY INCOME
- PURSUING A SHORT-TERM GOAL OR INVESTING
EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
PERFORMANCE
- --------------------------------------------------------------------------------
No performance information is shown for the Funds because the Funds had not
commenced operations as of the date of this prospectus. The performance of the
Funds will vary from year to year. As with all mutual funds, a Fund's past
performance will not necessarily indicate how it will perform in the future.
8
<PAGE> 10
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<CAPTION>
SCIENCE AND
TECHNOLOGY FUND CANTERBURY FUND CASCADE FUND
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<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) 5.75%(1) 5.75%(1) 5.75%(1)
Maximum Deferred Sales Charge (Load) 0%(2) 0%(2) 0%(2)
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends 0% 0% 0%
Redemption Fee 0% 0% 0%
Exchange Fee 0% 0% 0%
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees 0.70% 0.70% 0.70%
Distribution (12b-1) Fees(3) 0.25% 0.25% 0.25%
Other Expenses 0.73% 0.62% 0.62%
----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.68% 1.57% 1.57%
===== ===== =====
</TABLE>
1 Sales charges are reduced or eliminated for larger purchases.
2 A contingent deferred sales charge of 1% applies on certain redemptions
made within 12 months following certain purchases made without a sales
charge.
See "Shareholder Information -- Purchasing Your Shares" for additional
information on sales charges.
EXAMPLE: This Example is intended to help you compare the cost of investing in
the Funds 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 to the Funds' operating expenses
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
<TABLE>
<CAPTION>
SCIENCE AND
TECHNOLOGY FUND CANTERBURY FUND CASCADE FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR AFTER PURCHASE $ 736 $ 726 $ 726
THREE YEARS AFTER PURCHASE $1,074 $1,042 $1,042
</TABLE>
9
<PAGE> 11
ADDITIONAL INFORMATION
INVESTMENT POLICIES AND PRACTICES
- --------------------------------------------------------------------------------
This section takes a detailed look at some of the types of securities the Funds
may hold in their portfolios and the various kinds of investment practices that
may be used in day-to-day portfolio management. Although each of the Funds may
invest in the securities and pursue the strategies described below, a Fund will
not necessarily do so.
The investment objectives of the Funds are not fundamental and may be changed by
the Trustees without shareholder approval. The Funds adhere to certain
investment restrictions and policies at the time they make an investment. A
later change in circumstances will not require the sale of an investment if it
was proper at the time it was made.
The Funds' investment programs are subject to further restrictions and risks
described in the Statement of Additional Information.
TYPES OF PORTFOLIO SECURITIES In seeking to meet its investment objective,
each Fund may invest in any type of security or
instrument (including certain potentially
high-risk derivatives described in this section)
whose investment characteristics are consistent
with the Fund's investment program.
The Funds invest primarily in common stocks and
may, to a lesser degree, purchase other types of
securities described below.
COMMON STOCKS
Stocks represent shares of ownership in a
company. After other claims are satisfied,
common stockholders participate in company
profits on a pro-rata basis; profits may be paid
out in dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a company's
stock price, so common stocks generally have the
greatest appreciation and depreciation potential
of all corporate securities.
Value stocks are those that appear to be
underpriced based upon valuation measures, such
as lower price-to-earnings ratios and price-to-
book ratios. Value stocks present the risk that
they may not perform as well as other types of
stocks, such as growth stocks. Each of the Funds
may invest in value stocks.
CONVERTIBLE SECURITIES AND WARRANTS
The Funds may invest in debt or preferred equity
securities convertible into, or exchangeable
for, equity securities. Traditionally,
convertible securities have paid dividends or
interest at rates higher than common stocks but
lower than nonconvertible securities. They
generally participate in the appreciation or
depreciation of the underlying stock into which
they are convertible, but to a lesser degree.
Some convertibles are sold as units that combine
higher or lower current income with options,
warrants and other features. Warrants are
options to buy a stated number of shares of
common stock at a specified price anytime during
the life of the warrants (generally, two or more
years).
FOREIGN SECURITIES
There is no limit to the amount of assets the
Science and Technology Fund may invest in
foreign securities. The Canterbury and Cascade
Funds may invest up to 10% of their total assets
in foreign securities. Such investments increase
a portfolio's diversification and may enhance
return, but they also involve some special
risks, such as exposure to potentially adverse
local political and economic developments;
nationalization and exchange controls;
10
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ADDITIONAL INFORMATION
potentially lower liquidity and higher
volatility; possible problems arising from
accounting, disclosure, settlement, and
regulatory practices that differ from U.S.
standards; and the chance that fluctuations in
foreign exchange rates will decrease the
investment's value (favorable changes can
increase its value). These risks are heightened
for investments in developing countries.
AMERICAN DEPOSITARY RECEIPTS
The Funds may invest in American Depositary
Receipts ("ADRs"). ADRs are receipts typically
issued by a United States bank or trust company
evidencing ownership of underlying foreign
securities and are denominated in U.S. dollars.
Securities underlying such investments, however,
are denominated in foreign currencies.
HYBRID INSTRUMENTS
Each Fund may invest up to 10% of its total
assets in hybrid instruments. These instruments
(a type of potentially high-risk derivative) can
combine the characteristics of securities,
futures, and options. For example, the principal
amount, redemption, or conversion terms of a
security could be related to the market price of
some commodity, currency, or securities index.
Such securities may bear interest or pay
dividends at below market or even relatively
nominal rates. Under certain conditions, the
redemption value of such an investment could be
zero. Hybrids can have volatile prices and
limited liquidity, and their use by a Fund may
not be successful.
PRIVATE PLACEMENTS
These securities are sold directly to a small
number of investors, usually institutions.
Unlike public offerings, such securities are not
registered with the SEC. Although most of these
securities may be readily sold, for example,
under Rule 144A or Section 4(2), others may be
illiquid, and their sale may involve substantial
delays and additional costs.
TYPES OF INVESTMENT
MANAGEMENT PRACTICES FUTURES AND OPTIONS
Futures (a type of potentially high-risk
derivative) are often used to manage or hedge
risk because they enable the investor to buy or
sell an asset in the future at an agreed-upon
price. Options (another type of potentially
high-risk derivative) give the investor the
right (where the investor purchases the option),
or the obligation (where the investor writes
(sells) the option), to buy or sell an asset at
a predetermined price in the future. The Funds
may buy and sell futures and options contracts
for any number of reasons, including: to manage
its exposure to changes in securities prices and
foreign currencies; as an efficient means of
adjusting the Fund's overall exposure to certain
markets; as a cash management tool; and to
protect the value of portfolio securities. The
Funds may purchase and write options on futures
contracts. The Funds may also purchase put and
call options and write covered call and secured
put options on securities, indices, financial
instruments and foreign currencies.
MANAGING FOREIGN CURRENCY RISK
Investors in foreign securities may "hedge"
their exposure to potentially unfavorable
currency changes by purchasing a contract to
exchange one currency for another on some future
date at a specified exchange rate. If a Fund
were to engage in foreign
11
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ADDITIONAL INFORMATION
currency transactions, they would be used
primarily to protect the Fund's foreign
securities from adverse currency movements
relative to the U.S. dollar or another foreign
currency. Such transactions involve the risk
that anticipated currency movements will not
occur, and the Fund's total return could be
reduced.
PORTFOLIO TURNOVER
The Funds will not generally trade in securities
for short-term profits, but, when circumstances
warrant, securities may be purchased and sold
without regard to the length of time held. A
high turnover rate may increase transaction
costs and result in higher capital gain
distributions by a Fund.
INVESTING FOR DEFENSIVE PURPOSES
When Lyon Street determines that market
conditions are appropriate, each of the Funds
may, for temporary defensive purposes, invest up
to 100% of its assets in money market
instruments. If a Fund is investing defensively,
it will not be pursuing its investment
objective.
12
<PAGE> 14
FUND MANAGEMENT
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Lyon Street is the investment adviser to the Funds and provides the Funds with
professional investment supervision and management. 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 or its
affiliates have served as investment adviser to the Kent Funds since their
inception.
Lyon Street maintains offices at 111 Lyon Street, NW, Grand Rapids, Michigan
49503. Lyon Street is a wholly-owned subsidiary of Old Kent Bank. 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, 1999, of
approximately $18 billion.
As compensation for Lyon Street's investment advisory services, each Fund pays
Lyon Street an annual fee of 0.70% of the Fund's average daily net assets.
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Lyon Street has several portfolio managers committed to the day-to-day
management of the Funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGER EXPERIENCE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JOSEPH T. KEATING, President and Chief Investment Officer at - Mr. Keating is responsible for developing and implementing
Lyon Street the Funds' investment policies.
- Mr. Keating has over twenty years of portfolio management
experience, including twelve years with Old Kent and Lyon
Street.
- ------------------------------------------------------------------------------------------------------------------------------------
ALLAN J. MEYERS, CFA, Chief Equity Officer at Lyon Street - Mr. Meyers has over twenty-four years of portfolio
management experience, including fifteen years with Old Kent
and Lyon Street.
- Mr. Meyers is also the portfolio manager for the Kent
Growth and Income and the Kent Large Company Growth Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT CUMMISFORD, CFA, Director of Small Company Stock - Mr. Cummisford has over eight years of portfolio
Management at Lyon Street management experience, including over three years with Old
Kent and Lyon Street.
- Prior to joining Old Kent, he was a Senior Consultant with
Ibbotson Associates.
- Mr. Cummisford is also the portfolio manager for the Kent
Small Company Growth Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID C. EDER, Director of Structured Equity Management at - Mr. Eder has over seven years of portfolio management
Lyon Street experience with Old Kent and Lyon Street.
- Mr. Eder is also a co-portfolio manager for the Kent Index
Equity and the Kent International Growth Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
DANIEL SKUBIZ - Prior to joining Lyon Street, Mr. Skubiz was an equity
trader with Trade Street Securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
KENT ADVISOR SCIENCE AND TECHNOLOGY FUND
There is an investment advisory team that is responsible for the day-to-day
management of the Science and Technology Fund. The Fund's investment advisory
team is composed of the following members: David C. Eder, Allan J. Meyers,
Robert Cummisford and Daniel Skubiz. The investment advisory team has had
day-to-day responsibility for managing the Fund since the Fund's inception.
KENT ADVISOR CANTERBURY FUND
Allan J. Meyers and Daniel Skubiz are responsible for the day-to-day management
of the Canterbury Fund. Mr. Meyers and Mr. Skubiz have had day-to-day
responsibility for managing the Fund since its inception.
KENT ADVISOR CASCADE FUND
Robert Cummisford is responsible for the day-to-day management of the Cascade
Fund. Mr. Cummisford has had day-to-day responsibility for managing the Fund
since its inception.
The Statement of Additional Information has more detailed information about Lyon
Street and the Funds' other service providers.
13
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SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
HOW NAV IS CALCULATED
The net asset value ("NAV") of a
share of the Retail Class of
each Fund is calculated by
adding the total value of the
Fund's investments and other
assets attributable to the
Retail Class, subtracting the
liabilities of the Fund
attributable to the Retail Class
and then dividing that figure by
the number of outstanding shares
of the Fund attributable to the
Retail Class:
NAV =
Total Assets attributable to
class
- Liabilities attributable to
class
------------------------------
Number of Shares Outstanding
attributable to class
The per share NAV for each class
of a Fund is determined at the
close of regular trading on the
New York Stock Exchange,
normally at 4:00 p.m. Eastern
time, on each day the Exchange
is open.
HOW OFFERING PRICE IS CALCULATED
The offering price is the NAV plus the front-end
sales charge.
HOW THE FUNDS' SECURITIES ARE VALUED
The Funds' securities, other than short-term
debt obligations, are generally valued at
current market prices unless market quotations
are not available, in which case securities will
be valued by a method that the Board of Trustees
believes accurately reflects fair value. Debt
obligations with remaining maturities of 60 days
or less are valued at amortized cost or based on
their acquisition cost. A Fund may invest in
securities primarily listed on foreign exchanges
and that trade on days when the Fund does not
price its shares. As a result, a Fund's net
asset value may change on days when shareholders
are not able to purchase or redeem the Fund's
shares.
HOW YOUR PURCHASE OR SALE PRICE IS DETERMINED
Your shares will be purchased at the offering
price, or sold at the NAV, next determined after
your request is received in good order by the
Fund on any day that the New York Stock Exchange
is open for business. For example: If you place
a purchase order to buy shares of a Fund, it
must be received by 4:00 p.m. Eastern time in
order to receive the NAV calculated at 4:00 p.m.
Eastern time on that day. If your order is
received after 4:00 p.m. Eastern time, you will
receive the NAV calculated on the next day at
4:00 p.m. Eastern time.
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<PAGE> 16
SHAREHOLDER INFORMATION
PURCHASING YOUR SHARES
- --------------------------------------------------------------------------------
You may purchase shares of the Kent Advisor Funds through any investment
representative authorized to sell the Funds' shares. The investment
representative is responsible for transmitting orders by close of business and
may have an earlier cut-off time for purchase and sale requests. Consult your
investment representative or institution for specific information.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
ACCOUNT TYPE INITIAL INVESTMENT* SUBSEQUENT INVESTMENT
<S> <C> <C>
- - Non-retirement accounts $1,000 None
- - Retirement Accounts $ 100 None
- - Automatic investment plans $1,000 $50
</TABLE>
- - All purchases must be in U.S. dollars.
- - A fee will be charged for any checks that do not clear.
- - Third-party checks are not accepted.
- - Shares of the Funds may be purchased through IRAs and Rollover IRAs, which are
available through the Kent Advisor Funds.
A Fund may waive its minimum investment requirements and each Fund may reject a
purchase order if it considers it in the best interests of the Fund and its
shareholders.
* Minimum initial investments may be waived for employees of Old Kent and its
affiliates, investors in tax-sheltered plans, and investors in certain qualified
retirement accounts.
- --------------------------------------------------------------------------------
AVOID 31% TAX WITHHOLDING
Each 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.
- --------------------------------------------------------------------------------
SALES CHARGES
A sales charge may apply to your purchase. Your sales charge may be reduced for
larger purchases as indicated below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Sales Charge as a Percentage of Dealer Commission as a
----------------------------------- Percentage of
Investment Offering Price Net Asset Value Offering Price*
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Less than $25,000 5.75% 6.10% 5.00%
- ---------------------------------------------------------------------------------------------------------------------
$25,000 but less than $50,000 5.00 5.26 4.25
- ---------------------------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.50 4.71 3.75
- ---------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50 3.63 2.75
- ---------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50 2.56 2.00
- ---------------------------------------------------------------------------------------------------------------------
$500,000 but less than $750,000 2.00 2.04 1.60
- ---------------------------------------------------------------------------------------------------------------------
$750,000 but less than $1 million 1.50 1.52 1.20
- ---------------------------------------------------------------------------------------------------------------------
$1 million and above See below See below See below
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*The Dealer Commission may change periodically.
15
<PAGE> 17
SHAREHOLDER INFORMATION
PURCHASING YOUR SHARES, CONTINUED
- --------------------------------------------------------------------------------
PURCHASES NOT SUBJECT TO SALES CHARGE; CONTINGENT DEFERRED SALES
CHARGE. Investments of $1 million or more are sold with no initial sales charge.
However a 1% contingent deferred sales charge may be imposed on the NAV of the
shares redeemed if redemptions are made within one year of purchase. Shares
exchanged from the Retail Class of another Kent Advisor Fund and reinvested
dividend shares are not subject to an initial sales charge. The Funds may pay a
dealer concession of up to 1% under its Distribution Plan on investments made
with no initial sales charge.
REDUCING YOUR SALES CHARGE
You and your "immediate family" (your spouse and your children under the age of
21) may combine investments to reduce your sales charge. You must let your
investment representative or the Funds' transfer agent know at the time of
purchase that you qualify for a reduction in your sales charge using one or any
combination of the methods described below and in the Statement of Additional
Information.
AGGREGATING ACCOUNTS. To receive a reduced sales charge, investments made by you
and your immediate family (see above) may be aggregated if made for their own
account(s) and/or:
- trust accounts established by the above individuals. However, if the
person(s) who established the trust is deceased, the trust account may be
aggregated with accounts of the person who is the primary beneficiary of
the trust.
- solely-controlled business accounts
- single-participant retirement plans
Other types of accounts may also be aggregated. You should check with your
financial adviser or consult the Statement of Additional Information for more
information.
CONCURRENT PURCHASES. You may combine simultaneous purchases of two or more Kent
Advisor Funds to qualify for a reduced sales charge.
RIGHTS OF ACCUMULATION. You may take into account the current value of your
existing holdings in the Kent Advisor Funds to determine your sales charge.
STATEMENT OF INTENTION. You may establish a Statement of Intention (SOI) that
allows you to combine the purchases you intend to make over a 13-month period in
any Kent Advisor Fund. At your request purchases made during the previous 90
days may be included; however, capital appreciation and reinvested dividends and
capital gains do not apply toward these combined purchases. An SOI allows you to
take immediate advantage of the maximum quantity discount available. A portion
of your account may be held in escrow to cover additional sales charges which
may be due if your total investments over the 13-month period do not qualify for
the applicable sales charge reduction.
PLAN OF DISTRIBUTION
The Board of Trustees of the Trust has adopted a Distribution Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Under the Distribution
Plan, a Fund's distributor and other dealers and investment representatives are
entitled to receive a distribution fee of up to 0.25% from each Fund. 12b-1 fees
compensate the Fund's distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of shares and for providing shareholder services to purchasers. 12b-1 fees are
paid from Fund assets on an ongoing basis and will increase the cost of your
investment. 12b-1 fees may cost you more than paying other types of sales
charges.
16
<PAGE> 18
SHAREHOLDER INFORMATION
INSTRUCTIONS FOR OPENING OR ADDING TO YOUR ACCOUNT
- --------------------------------------------------------------------------------
You can open an account or add to your existing account by using the convenient
options described below. The Funds reserve the right to change or eliminate
these privileges at any time with 60 days' notice.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
BY REGULAR MAIL OR OVERNIGHT SERVICE INITIAL INVESTMENT.
If you would like to purchase shares of the Kent Advisor
Funds through your investment representative or financial
institution, simply tell your investment representative that
you wish to purchase shares of the Funds and he or she will
take care of the necessary documentation. For all other
purchases, follow the instructions below.
1. Carefully read and complete a Kent Advisor Funds
application. Establishing your account privileges now saves
you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to the
"Kent Advisor Funds" and include the name of the appropriate
Fund(s) on the check.
3. Send by your application and payment:
By regular mail to: Kent Advisor Funds, P.O. Box 182201,
Columbus, OH 43218-2201.
By overnight service to: Kent Advisor Funds, c/o BISYS
Fund Services, Attn: T.A. Operations, 3435 Stelzer Road,
Columbus, OH 43219.
SUBSEQUENT INVESTMENTS.
If you would like to add to your account through your
investment representative or financial institution, simply
tell your investment representative that you wish to
purchase additional shares of the Funds and he or she will
take care of the necessary documentation. Your investment
representative or financial institution may have transaction
minimums and/or transaction times which will affect your
investment.
For all other subsequent investments, follow the
instructions below.
1. Complete the investment slip attached to your account
statement, or, if unavailable, provide the following
information in writing:
- Fund name
- Share class
- Amount invested
- Account name
- Account number
2. Make check, bank draft or money order payable to the
"Kent Advisor Funds" and include the name of the appropriate
Fund(s) on the check.
3. Send by your investment slip and payment:
By regular mail to: Kent Advisor Funds, P.O. Box 182201,
Columbus, OH 43218-2201.
By overnight service to:Kent Advisor Funds, c/o BISYS
Fund Services, Attn: T.A.
Operations, 3435 Stelzer Road, Columbus, OH 43219.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
SHAREHOLDER INFORMATION
INSTRUCTIONS FOR OPENING OR ADDING TO YOUR ACCOUNT, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ELECTRONIC PURCHASES Your financial institution must participate in the Automated
Clearing House (ACH) and must be a U.S. bank, credit union
or savings and loan.
Select the electronic purchase option on your account
application or call 1-800-633-KENT (5368). Your account can
generally be set up for electronic purchases within 15 days.
CALL 1-800-633-KENT (5368) to arrange a transfer from your
bank account.
Note: Your bank or broker may charge for this service.
- ---------------------------------------------------------------------------------------------------------
BY WIRE TRANSFER For initial and subsequent investments, call 1-800-633-KENT
(5368) for wire instructions, a confirmation number and
instructions for returning your completed application.
After instructing your bank to wire the funds, call
1-800-633-KENT (5368) to advise us of the amount being
transferred and the name of your bank.
Note: Your bank may charge a wire transfer fee.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
ELECTRONIC VS. WIRE TRANSFER.
Wire transfers allow financial institutions to send
funds to each other, almost instantaneously. With an
electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH). ACH
transactions usually clear within 2 to 3 days, but
may take up to 8 days. There is generally no fee for
ACH transactions.
18
<PAGE> 20
SHAREHOLDER INFORMATION
ADDING TO YOUR ACCOUNT
- --------------------------------------------------------------------------------
You can add to your account through your investment representative or financial
institution or by using the convenient options described below. The Funds
reserve the right to change or eliminate these privileges at any time with 60
day's notice.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN You can make automatic investments in the Funds from your
bank account. Automatic investments can be as little as $50,
once you have invested the $1,000 minimum required to open
the account. Make sure you note:
To invest regularly from your bank account:
- Complete the Automatic Investment Plan portion on your
Account Application.
- Your bank name, address and account number
- The amount you wish to invest automatically (minimum $50)
- How often you want to invest (every month, 4 times a year,
twice a year or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check,
CALL 1-800-633-KENT (5368) for an enrollment form.
- ---------------------------------------------------------------------------------------------------------
DIRECTED DIVIDEND OPTION By selecting the appropriate box in the Account Application,
you can elect to receive your distributions in cash (check)
or have distributions (capital gains and dividends)
reinvested in another Kent Advisor Fund. You must maintain
the minimum balance in each Fund into which you plan to
reinvest dividends or the reinvestment will be suspended and
your dividends will be paid to you in cash. The Funds may
modify or terminate this reinvestment option without notice.
You can change or terminate your participation in the
reinvestment option at any time.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
- --------------------------------------------------------------------------------
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
You may sell your shares at any time the New York Stock Exchange is open for
business. Your sales price will be the next NAV after your sell order is
received by the Kent Advisor Funds, the Funds' transfer agent, or your
investment representative. Normally you will receive your proceeds within a week
after your request is received in good order. See section on "General Policies
on Selling Shares" below for certain exceptions.
If you intend to redeem shares worth more than $1,000,000, you should notify the
Funds at least one day in advance.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
THROUGH YOUR DEALER If you are selling shares through your investment
(certain charges may apply) representative, ask him or her for redemption procedures.
Your investment representative and/or institution may have
transaction minimums and/or transaction times which will
affect your redemption.
Shares held for you in your dealer's name must be sold
through your dealer. For all other sales transactions,
follow the instructions below.
- ---------------------------------------------------------------------------------------------------------
BY TELEPHONE You can redeem up to $50,000 worth of shares by calling
(unless you have declined telephone 1-800-633-KENT (5368). If the amount redeemed is less than
sales privileges) $2,500, then a check for the proceeds will be mailed to you.
If the amount redeemed is equal to or greater than $2,500,
then the proceeds will be mailed or sent by wire or
electronic funds transfer to the bank listed on your account
application.
- ---------------------------------------------------------------------------------------------------------
BY MAIL 1. Call 1-800-633-KENT (5368)to request redemption forms or
(See "General Policies on Selling write a letter of instruction indicating:
Shares - When Written Redemption - your Fund and your account number
Requests are Required" below.) - amount you wish to redeem
- address where your check should be sent
- account owner signature
If you have a stock certificate, you must sign on the back
and send it to the Kent Advisor Funds.*
2. Mail to:
Kent Advisor Funds
P.O. Box 182201
Columbus, OH 43218-2201
- ---------------------------------------------------------------------------------------------------------
BY OVERNIGHT SERVICE Send to:
(See instruction 1 above) Kent Advisor Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
- ---------------------------------------------------------------------------------------------------------
*Signatures on stock certificates must be guaranteed if the amount is greater than $50,000, if the
proceeds are to be mailed to an address other than the address of record, or the proceeds are to be made
payable to a party other than the owner of the account. See "General Policies on Selling Shares" for
instructions regarding signature guarantees.
</TABLE>
20
<PAGE> 22
SHAREHOLDER INFORMATION
SELLING YOUR SHARES, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
WIRE TRANSFER CALL 1-800-633-KENT (5368) to request a wire transfer. If
(You must indicate this option on your you call by 4 p.m. Eastern time, your payment will normally
application) be wired to your bank on the next business day.
The Funds may charge a wire transfer fee. Your financial
institution may also charge a separate fee.
- ---------------------------------------------------------------------------------------------------------
ELECTRONIC REDEMPTIONS CALL 1-800-633-KENT (5368) to request an electronic
(Your bank must participate in the redemption. If you call by 4 p.m. Eastern time, the NAV of
Automated Clearing House (ACH) and must your shares will normally be determined on the same day and
be a U.S. bank) the proceeds will be credited within 8 days.
Your bank may charge for this service.
- ---------------------------------------------------------------------------------------------------------
AUTOMATIC WITHDRAWAL PLAN You can receive automatic payments from your account on a
monthly, quarterly, semi-annual or annual basis. The minimum
withdrawal is $100 and no more than 1.5% per month when your
Automatic Withdrawal Plan was started. To activate this
feature:
- Make sure you've checked the appropriate box on the
Account Application or call 1-800-633-KENT (5368).
- Include a voided personal check.
- Your account must have a value of $10,000 or more to start
automatic redemptions of shares.
- If the value of your account falls below $1,000 due to
redemptions, you may be asked to add sufficient funds to
bring the account back to $1,000, or the Funds may close
your account and mail the proceeds to you.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
- --------------------------------------------------------------------------------
WHEN WRITTEN REDEMPTION REQUESTS ARE REQUIRED
You must request redemptions in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ("IRAs").
2. Redemption requests requiring a signature guarantee, which include each of
the following:
- Redemptions over $50,000
- The check is not being mailed to the address on your account
- The check is not being made payable to the owner of the account
- The redemption proceeds are being transferred to another Fund account with
a different registration
Signature guarantees can be obtained from a U.S. stock exchange member, a U.S.
commercial bank or trust company, or any other financial institution that is a
member of the STAMP (Securities Transfer Agents Medallion Program), MSP (New
York Stock Exchange Medallion Signature Program) or SEMP (Stock Exchanges
Medallion Program) or is approved by the Kent Advisor Funds.
VERIFYING TELEPHONE REDEMPTIONS
The Funds make every effort to ensure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, the Funds will not be liable for
any fraudulent telephone orders.
REDEMPTIONS WITHIN 10 DAYS OF INVESTMENT
When you have made your investment by check, you cannot redeem any portion of it
until the Funds' transfer agent is satisfied that the check has cleared (which
may require up to 10 business days). You can avoid this delay by purchasing
shares with a certified check.
REFUSAL OF REDEMPTION REQUEST
The Funds may postpone payment for shares at times when the New York Stock
Exchange is closed or under any emergency circumstances as determined by the
U.S. Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send the Funds your request by regular or express mail. Follow the
instructions above under "Withdrawing Money From Your Fund Account--By Mail" in
this section.
REDEMPTION IN KIND
The Funds reserve the right to make payment in 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 a Fund's net assets). If the Funds deem 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.
CLOSING OF SMALL ACCOUNTS
If your account falls below $1,000 due to redemptions ($100 for IRA Accounts), a
Fund may ask you to increase your balance. If it is still below the minimum
level after 60 days, the Fund may close your account and send you the proceeds
at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2) remain
uncashed for six months, your account will be changed automatically so that all
future distributions are reinvested in your account. Checks that remain uncashed
for six months will be canceled and the money reinvested in the appropriate
Fund.
22
<PAGE> 24
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
- --------------------------------------------------------------------------------
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to Kent Advisor Funds, P.O.
Box 182201, Columbus OH 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 (usually your Social Security number, if you
are an individual)
- Dollar value or number of shares to be exchanged
- The name of the Fund from which the exchange is to be made
- The name of the Fund into which the exchange is being made.
You can exchange your shares in one Kent Advisor Fund for
shares of the same class of another Kent Advisor Fund. No
sales charge or transaction fees are charged for exchanges.
You must meet the minimum investment requirements for the Fund
into which you are exchanging. Exchanges from one Fund to
another are taxable.
See "General Policies on Selling your Shares" above for important information
about telephone transactions.
To prevent disruption in the management of the Funds due to market timing
strategies, exchange activity may be limited to five exchanges within a year, or
no more than three exchanges in a calendar quarter. The Funds may reject
exchanges, or change or terminate rights to exchange shares.
- --------------------------------------------------------------------------------
NOTES ON EXCHANGES
The registration and tax identification numbers of the two accounts must be
identical. If you don't have an account with the new Fund, a new account will be
opened with the same features unless you write to tell us to change them.
The exchange privilege (including automatic exchanges) may be changed or
eliminated at any time.
Be sure to read carefully the Prospectus of any Fund into which you wish to
exchange shares.
The exchange privilege is available only in states where shares of the new Fund
may be sold.
If shares of a Fund are purchased by check, those shares cannot be exchanged
until your check has cleared. This could take 10 days or more.
All exchanges are based on the relative net asset value next determined after
the exchange order is received by the Funds.
23
<PAGE> 25
SHAREHOLDER INFORMATION
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Funds pay dividends to their shareholders from the Funds' respective net
investment income. The Funds distribute any net capital gains that have been
realized. Income dividends on each Fund are declared and paid annually. Capital
gains, if any, for all Funds are distributed at least annually.
Dividends on each share class of the Funds are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. With regard to the Science and Technology
Fund, since Retail Shares have higher distribution and service fees than
Institutional Shares, the dividends paid to shareholders owning Retail Shares
will be lower than those paid to shareholders owning Institutional Shares.
All dividends and distributions will be automatically reinvested unless you
request otherwise. You can receive them in cash or by electronic funds transfer
to your bank account if you are not a participant in an IRA account or in a
tax-qualified plan.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A TAXABLE
DISTRIBUTION.
TAXATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
Each 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 a 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. You will be notified annually of the tax status of
distributions to you.
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 taxed 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."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.)
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
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.
It is expected that the Funds will be subject to foreign withholding taxes with
respect to dividends or interest received from sources in foreign countries.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
STATE AND LOCAL TAXES
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 each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or an agency
thereof.
24
<PAGE> 26
FINANCIAL HIGHLIGHTS
No financial highlights have been included because the Funds had not commenced
operations as of the date of this prospectus.
25
<PAGE> 27
[KENT FUNDS LOGO]
THE FOLLOWING ADDITIONAL INFORMATION IS AVAILABLE TO YOU UPON REQUEST AND
WITHOUT CHARGE:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Statement of Additional Information (SAI): The SAI provides more detailed information about the Funds,
including their operations and investment policies. It is
incorporated by reference and is legally considered to be a
part of this prospectus.
</TABLE>
You can get a free copy of the SAI, request other information and discuss your
questions about the Funds by contacting a broker or other financial institution
that sells the Funds. In addition, you may contact the Funds at KENT ADVISOR
FUNDS, P.O. BOX 182201, COLUMBUS, OHIO 43218-2201.
Information about the Funds, including the SAI, is available:
- For review and copying at the Public Reference Room of the Securities and
Exchange Commission. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-202-942-8090.
- At no charge on the Commission's Internet site at http://www.sec.gov.
- For a fee, by electronic request at the following E-mail address:
[email protected] or by writing the Commission's Public Reference Section,
Washington, D.C. 20549.
Investment Company Act File No. 811-4824
* The Funds' website is not part of this Prospectus.
<PAGE> 28
[KENT FUNDS LOGO]
KENT SCIENCE AND TECHNOLOGY FUND
PROSPECTUS
, 2000
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. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<C> <C> <S>
Carefully review this important
section, which summarizes the Fund's
investments, risks and fees.
RISK/RETURN SUMMARY AND FUND EXPENSES
2 Overview
3 Kent Science and Technology Fund
4 Principal Risks of Investing in the Fund
6 Performance
7 Fees and Expenses
ADDITIONAL INFORMATION
8 Investment Policies and Practices
Review this section for details on the
people and organizations who oversee
the Fund
FUND MANAGEMENT
11 Investment Adviser
11 Portfolio Managers
Review this section for details on how
shares are valued, how to purchase and
sell shares, related charges and
payments of dividends and distributions
SHAREHOLDER INFORMATION
12 Pricing of Fund Shares
13 Purchasing Your Shares
14 Selling Your Shares
15 General Policies on Selling Shares
16 Exchanging Your Shares
17 Dividends and Distributions
17 Taxation
FINANCIAL HIGHLIGHTS
BACK COVER
Where to learn more about the Fund
</TABLE>
1
<PAGE> 30
RISK/RETURN SUMMARY AND FUND EXPENSES
OVERVIEW
- --------------------------------------------------------------------------------
This prospectus describes the Institutional Class of shares of the Kent Advisor
Science and Technology Fund (the "Kent Science and Technology Fund" or the
"Fund").
On the following pages, you will find important information about the Fund,
including:
- - the investment objective
- - principal investment strategy
- - performance information
- - fees and expenses, and
- - principal risks associated with the Fund
The Fund is managed by Lyon Street Asset Management Company ("Lyon Street" or
the "Adviser").
PRINCIPAL RISKS OF THE FUND
<TABLE>
<CAPTION>
----------------------------------------------------------
FOREIGN
MARKET SELECTION INVESTMENT CONCENTRATION
RISK RISK RISK RISK
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
X X X X
----------------------------------------------------------
</TABLE>
A complete description of these and other risks can be found in the section
entitled "Principal Risks."
The Kent Advisor Science and Technology Fund has two classes of shares: Retail
Class and Institutional Class. The Institutional Class of shares of the Fund is
sold primarily to financial or other institutions. The Retail Class of shares of
the Fund is sold primarily through investment representatives. This prospectus
only relates to the Institutional Class of shares of the Kent Advisor Science
and Technology Fund. The Retail Class of shares of the Kent Advisor Science and
Technology Fund are offered in a separate prospectus.
2
<PAGE> 31
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT SCIENCE AND TECHNOLOGY FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT
STRATEGIES The Fund normally invests at least 65% of its
total assets in the common stocks of companies
expected to benefit from the development,
advancement, and use of science and technology.
Some of the industries likely to be included in
the portfolio are:
- computers, including products, software,
hardware and electronic systems and components
- internet
- biotechnology
- pharmaceuticals
- telecommunications
- media and information services
- chemicals and synthetic materials
- defense and aerospace
- medical supply
Lyon Street selects stocks based on intensive
research that assesses a company's fundamental
prospects for above-average earnings. The Fund's
holdings can range from small companies
developing new technologies to blue chip firms
with established track records of developing and
marketing technological advances. The Fund may
also invest in companies that should benefit
from technological advances even if they are not
directly involved in research and development.
The Fund may invest without limit in foreign
securities and American Depositary Receipts. The
Fund may also invest in futures and options.
The Fund may sell securities for a variety of
reasons, such as to secure gains, limit losses,
or redeploy assets into more promising
opportunities.
3
<PAGE> 32
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS OF INVESTING IN THE FUND
- --------------------------------------------------------------------------------
Investing in the Fund involves risks common to any investment in securities. By
itself, no Fund constitutes a balanced investment program. There is no guarantee
that the Fund will meet its goals. When you sell your shares in the Fund, they
may be worth more or less than you paid for them. It is possible to lose money
by investing in the Fund.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
A full discussion of all permissible investments can be found in the Statement
of Additional Information.
Two principal risks of equity investing are market risk and selection risk.
Market risk means that the stock market in general has ups and downs, which may
affect the performance of any individual stock. Selection risk means that the
particular stocks that are selected for the Fund may underperform the market or
other funds with similar objectives.
CONCENTRATION RISK To the extent that the Fund's investments are
concentrated in issuers conducting business in
the same technology or science market sector,
the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or
increased competition affecting that market
sector. Competitive pressures may significantly
impact the financial condition of technology
companies. For example, an increasing number of
companies and new product offerings can lead to
price cuts and slower selling cycles. In
addition, many of these companies may be
dependent on the success of a principal product,
may rely on sole source providers and
third-party manufacturers, and may experience
difficulties in managing growth.
INVESTMENT STYLE RISK Companies in the rapidly changing fields of
science and technology often face unusually high
price volatility, both in terms of gains and
losses. The potential for wide variation in
performance is based on the special risks common
to these stocks. For example, products or
services that at first appear promising may not
prove commercially successful or may become
obsolete quickly. Earnings disappointments can
result in sharp price declines. A portfolio
focused primarily on these stocks is therefore
likely to be much more volatile than one with
broader diversification that includes
investments in more economic sectors. As a
result, the Fund's net asset value may be
subject to rapid and substantial changes.
While stocks of smaller companies can provide
greater growth potential and potentially higher
returns, they carry higher risks than those of
larger companies. They may trade infrequently or
in lower volumes, making it difficult for the
Fund to sell its shares at a desirable price.
Smaller companies may be more sensitive to
changes in the economy overall. The level of
risk will be increased to the extent that the
Fund has significant exposure to smaller or
unseasoned companies (those with less than a
three-year operating history), which may not
have established products or more experienced
management. Historically, small company stocks
have been more volatile than those of larger
companies. As a result, the net asset value of
Fund may be subject to rapid and substantial
changes.
Growth stocks offer strong revenue and earnings
potential and accompanying capital growth, with
less dividend income than value stocks. Growth
stocks present the risk that they may not
perform as
4
<PAGE> 33
RISK/RETURN SUMMARY AND FUND EXPENSES
- --------------------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND, CONTINUED
well as other types of stocks, such as value
stocks. The Fund may invest in growth stocks.
FOREIGN INVESTMENT RISK Stocks of foreign companies are subject to
special risks, including the following:
- Currency risk means that fluctuations in
foreign exchange rates could affect the dollar
value of a Fund's securities. A decline in the
value of a foreign currency versus the U.S.
dollar reduces the dollar value of securities
denominated in that currency.
- Compared to companies in the U.S., there is
generally less publicly available information
about foreign companies and there may be less
government oversight of foreign stock
exchanges and the companies traded on them.
There may also be less stringent accounting,
auditing and financial reporting standards. In
addition, foreign markets may have lower
trading volumes, resulting in stocks that may
be more difficult to sell and more volatile in
price. Investments in some foreign countries
could be subject to such factors as
expropriation, confiscation or difficulties
enforcing contracts. All of these factors can
make foreign investments more risky than U.S.
investments.
- Furthermore, transaction fees may be higher
for foreign investments, due to higher
brokerage commissions, fees on currency
exchanges, and possible imposition of dividend
or interest withholding by foreign
governments. These may cause higher
transaction costs which can result in lower
returns or decreased liquidity.
The Fund may invest in foreign securities. As a
result, an investment in the Fund involves
additional risks not present in equity funds
which invest solely in shares of U.S. companies.
For additional information on foreign
securities, see "Additional Information -
Investment Policies and Practices."
WHO MAY WANT TO INVEST Consider investing in the Fund if you are:
- PURSUING A LONG-TERM GOAL SUCH AS RETIREMENT
- SEEKING TO ADD AN AGGRESSIVE GROWTH COMPONENT
TO YOUR PORTFOLIO
- WILLING TO ACCEPT HIGHER RISKS OF INVESTING IN
THE STOCK MARKET AND THE POTENTIAL FOR
ABOVE-AVERAGE PRICE FLUCTUATIONS IN EXCHANGE
FOR POTENTIALLY HIGHER LONG TERM RETURNS
The Fund will not be appropriate for anyone:
- SEEKING MONTHLY INCOME
- PURSUING A SHORT-TERM GOAL OR INVESTING
EMERGENCY RESERVES
- SEEKING SAFETY OF PRINCIPAL
5
<PAGE> 34
RISK/RETURN SUMMARY AND FUND EXPENSES
PERFORMANCE
- --------------------------------------------------------------------------------
No performance information is shown for the Fund because the Fund had not
commenced operations as of the date of this prospectus. The performance of the
Fund will vary from year to year. As with all mutual funds, the Fund's past
performance will not necessarily indicate how it will perform in the future.
6
<PAGE> 35
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption Fee None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees 0.70%
Distribution (12b-1) Fees None
Other Expenses 0.73%
-----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.43%
=====
</TABLE>
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 to the Funds' operating expenses
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
<TABLE>
<S> <C> <C>
ONE YEAR AFTER PURCHASE $171
THREE YEARS AFTER PURCHASE $477
</TABLE>
7
<PAGE> 36
ADDITIONAL INFORMATION
INVESTMENT POLICIES AND PRACTICES
- --------------------------------------------------------------------------------
This section takes a detailed look at some of the types of securities the Fund
may hold in its portfolio and the various kinds of investment practices that may
be used in day-to-day portfolio management. Although the Fund may invest in the
securities and pursue the strategies described below, the Fund will not
necessarily do so.
The investment objective of the Fund is not fundamental and may be changed by
the Trustees without shareholder approval. The Fund adheres to certain
investment restrictions and policies at the time it makes an investment. A later
change in circumstances will not require the sale of an investment if it was
proper at the time it was made.
The Fund's investment program is subject to further restrictions and risks
described in the Statement of Additional Information.
TYPES OF PORTFOLIO SECURITIES In seeking to meet its investment objective, the
Fund may invest in any type of security or
instrument (including certain potentially
high-risk derivatives described in this section)
whose investment characteristics are consistent
with the Fund's investment program.
The Fund invests primarily in common stocks and
may, to a lesser degree, purchase other types of
securities described below.
COMMON STOCKS
Stocks represent shares of ownership in a
company. After other claims are satisfied,
common stockholders participate in company
profits on a pro-rata basis; profits may be paid
out in dividends or reinvested in the company to
help it grow. Increases and decreases in
earnings are usually reflected in a company's
stock price, so common stocks generally have the
greatest appreciation and depreciation potential
of all corporate securities.
Value stocks are those that appear to be
underpriced based upon valuation measures, such
as lower price-to-earnings ratios and price-to-
book ratios. Value stocks present the risk that
they may not perform as well as other types of
stocks, such as growth stocks. The Fund may
invest in value stocks.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in debt or preferred equity
securities convertible into, or exchangeable
for, equity securities. Traditionally,
convertible securities have paid dividends or
interest at rates higher than common stocks but
lower than nonconvertible securities. They
generally participate in the appreciation or
depreciation of the underlying stock into which
they are convertible, but to a lesser degree.
Some convertibles are sold as units that combine
higher or lower current income with options,
warrants and other features. Warrants are
options to buy a stated number of shares of
common stock at a specified price anytime during
the life of the warrants (generally, two or more
years).
FOREIGN SECURITIES
There is no limit on the amount of assets the
Fund may invest in foreign securities. Such
investments increase a portfolio's
diversification and may enhance return, but they
also involve some special risks, such as
exposure to potentially adverse local political
and economic developments; nationalization and
exchange controls; potentially lower liquidity
and higher volatility; possible problems arising
from accounting, disclosure, settlement, and
regulatory practices that differ from U.S.
standards; and the chance that fluctuations in
foreign exchange rates will decrease the
investment's value (favorable
8
<PAGE> 37
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT POLICIES AND PRACTICES, CONTINUED
changes can increase its value). These risks are
heightened for investments in developing
countries.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in American Depositary
Receipts ("ADRs"). ADRs are receipts typically
issued by a United States bank or trust company
evidencing ownership of underlying foreign
securities and are denominated in U.S. dollars.
Securities underlying such investments, however,
are denominated in foreign currencies.
HYBRID INSTRUMENTS
The Fund may invest up to 10% of its total
assets in hybrid instruments. These instruments
(a type of potentially high-risk derivative) can
combine the characteristics of securities,
futures, and options. For example, the principal
amount, redemption, or conversion terms of a
security could be related to the market price of
some commodity, currency, or securities index.
Such securities may bear interest or pay
dividends at below market or even relatively
nominal rates. Under certain conditions, the
redemption value of such an investment could be
zero. Hybrids can have volatile prices and
limited liquidity, and their use by a Fund may
not be successful.
PRIVATE PLACEMENTS
These securities are sold directly to a small
number of investors, usually institutions.
Unlike public offerings, such securities are not
registered with the SEC. Although most of these
securities may be readily sold, for example,
under Rule 144A or Section 4(2), others may be
illiquid, and their sale may involve substantial
delays and additional costs.
TYPES OF INVESTMENT
MANAGEMENT PRACTICES FUTURES AND OPTIONS
Futures (a type of potentially high-risk
derivative) are often used to manage or hedge
risk because they enable the investor to buy or
sell an asset in the future at an agreed-upon
price. Options (another type of potentially
high-risk derivative) give the investor the
right (where the investor purchases the option),
or the obligation (where the investor writes
(sells) the option), to buy or sell an asset at
a predetermined price in the future. The Fund
may buy and sell futures and options contracts
for any number of reasons, including: to manage
its exposure to changes in securities prices and
foreign currencies; as an efficient means of
adjusting the Fund's overall exposure to certain
markets; as a cash management tool; and to
protect the value of portfolio securities. The
Fund may purchase and write options on futures
contracts. The Fund may also purchase put and
call options and write covered call and secured
put options on securities, indices, financial
instruments and foreign currencies.
MANAGING FOREIGN CURRENCY RISK
Investors in foreign securities may "hedge"
their exposure to potentially unfavorable
currency changes by purchasing a contract to
exchange one currency for another on some future
date at a specified exchange rate. If the Fund
were to engage in foreign currency transactions,
they would be used primarily to protect the
Fund's foreign securities from adverse currency
movements relative to the U.S. dollar or another
foreign currency. Such transactions
9
<PAGE> 38
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT POLICIES AND PRACTICES, CONTINUED
involve the risk that anticipated currency
movements will not occur, and the Fund's total
return could be reduced.
PORTFOLIO TURNOVER
The Fund will not generally trade in securities
for short-term profits, but, when circumstances
warrant, securities may be purchased and sold
without regard to the length of time held. A
high turnover rate may increase transaction
costs and result in higher capital gain
distributions by the Fund.
INVESTING FOR DEFENSIVE PURPOSES
When Lyon Street determines that market
conditions are appropriate, the Fund may, for
temporary defensive purposes, invest up to 100%
of its assets in money market instruments. If
the Fund is investing defensively, it will not
be pursuing its investment objective.
10
<PAGE> 39
FUND MANAGEMENT
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Lyon Street is the investment adviser to the Fund and provides the Fund with
professional investment supervision and management. 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 or its
affiliates have served as investment adviser to the Kent Funds since their
inception.
Lyon Street maintains offices at 111 Lyon Street, NW, Grand Rapids, Michigan
49503. Lyon Street is a wholly-owned subsidiary of Old Kent Bank. 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, 1999, of
approximately $18 billion.
As compensation for Lyon Street's investment advisory services, the Fund pays
Lyon Street an annual fee of 0.70% of the Fund's average daily net assets.
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
There is an investment advisory team that is responsible for the day-to-day
management of the Fund. The Fund's investment advisory team is composed of the
following members: David C. Eder, Allan J. Meyers, Robert Cummisford, and Daniel
Skubiz. The investment advisory team has had day-to-day responsibility for
managing the Fund since the Fund's inception.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGER EXPERIENCE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JOSEPH T. KEATING, President and Chief Investment Officer at - Mr. Keating is responsible for developing and implementing
Lyon Street the Trust's investment policies.
- Mr. Keating has over twenty years of portfolio management
experience, including twelve years with Old Kent and Lyon
Street.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID C. EDER, Director of Structured Equity Management at - Mr. Eder has over seven years of portfolio management
Lyon Street experience with Old Kent and Lyon Street.
- Mr. Eder is also a co-portfolio manager for the Kent Index
Equity and the Kent International Growth Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
ALLAN J. MEYERS, CFA, Chief Equity Officer at Lyon Street - Mr. Meyers has over twenty-four years of portfolio
management experience, including fifteen years with Old
Kent and Lyon Street.
- Mr. Meyers is also the portfolio manager for the Kent
Growth and Income and the Kent Large Company Growth Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT CUMMISFORD, CFA, Director of Small Company Stock - Mr. Cummisford has over eight years of portfolio
Management at Lyon Street management experience, including over three years with Old
Kent and Lyon Street.
- Prior to joining Old Kent, he was a Senior Consultant with
Ibbotson Associates.
- Mr. Cummisford is also the portfolio manager for the Kent
Small Company Growth Fund.
- ------------------------------------------------------------------------------------------------------------------------------------
DANIEL SKUBIZ - Prior to joining Lyon Street, Mr. Skubiz was an equity
trader with Trade Street Securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Statement of Additional Information has more detailed information about Lyon
Street and the Funds' other service providers.
11
<PAGE> 40
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
HOW NAV IS CALCULATED
The net asset value ("NAV") of a
Share of the Institutional Class
of the Fund is calculated by
adding the total value of the
Fund's investments and other
assets attributable to the
Institutional Class, subtracting
the liabilities of the Fund
attributable to the
Institutional Class and then
dividing that figure by the
number of outstanding shares of
the Institutional Class of the
Fund:
NAV =
Total Assets attributable to
class
- Liabilities attributable to
class
------------------------------
Number of Shares Outstanding
attributable to class
The per share NAV for each class
of the Fund is determined at the
close of regular trading on the
New York Stock Exchange,
normally at 4:00 p.m. Eastern
time, on each day the Exchange
is open.
HOW THE FUNDS' SECURITIES ARE VALUED
The Fund's securities, other than short-term
debt obligations, are generally valued at
current market prices unless market quotations
are not available, in which case securities will
be valued by a method that the Board of Trustees
believes accurately reflects fair value. Debt
obligations with remaining maturities of 60 days
or less are valued at amortized cost or based on
their acquisition cost. The Fund may invest in
securities primarily listed on foreign exchanges
and that trade on days when the Fund does not
price its shares. As a result, the Fund's net
asset value may change on days when shareholders
are not able to purchase or redeem the Fund's
shares.
HOW YOUR PURCHASE OR SALE PRICE IS DETERMINED
Your shares will be purchased or sold at the NAV
next determined after your request is received
in good order by the Fund on any day that the
New York Stock Exchange is open for business.
For example: If you place a purchase order to
buy shares of a Fund, it must be received by
4:00 p.m. Eastern time in order to receive the
NAV calculated at 4:00 p.m. Eastern time on that
day. If your order is received after 4:00 p.m.
Eastern time, you will receive the NAV
calculated on the next day at 4:00 p.m. Eastern
time.
12
<PAGE> 41
SHAREHOLDER INFORMATION
PURCHASING YOUR SHARES
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT
To open an account:
1. Complete an application.
2. Call 1-800-633 KENT (5368) to obtain an account or wire identification number
and to place a purchase order.
3. 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 must establish an
account with the Fund prior to sending the wire. The wire must include your
Fund account number.
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.
To add to your account, follow instructions 2 and 3 above.
MINIMUM INVESTMENTS
The minimum initial investment amount for Institutional Shares is $100,000.
Subsequent investments may be made in any amount.
The Fund may waive its minimum investment requirements and may reject a purchase
order if it considers it in the best interest of the Fund and its shareholders.
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 CALL
1-800-633-KENT (5368) and your distributions will be sent by electric 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.
- --------------------------------------------------------------------------------
13
<PAGE> 42
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
- --------------------------------------------------------------------------------
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
You may sell your shares at any time the New York Stock Exchange is open for
business. Your sales price will be the next NAV after your sell order is
received in good order by the Fund.
If you intend to redeem shares worth more than $1,000,000, you should notify the
Funds 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.
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------
BY TELEPHONE You can redeem up to $50,000 worth of shares by calling
(unless you have declined telephone 1-800-633-KENT (5368). If the amount redeemed is less than
sales privileges) $2,500, then a check for the proceeds will be mailed to you.
If the amount redeemed is equal to or greater than $2,500,
then the proceeds will be mailed or sent by wire or
electronic funds transfer to the bank listed on your account
application.
- ---------------------------------------------------------------------------------------------------------
BY MAIL 1. Call 1-800-633-KENT (5368) to request redemption forms or
(See "General Policies on Selling write a letter of instruction indicating:
Shares - When Written Redemption - your Fund and your account number
Requests are Required" below.) - amount you wish to redeem
- address where your check should be sent
- account owner signature
If you have a stock certificate, you must sign on the back
and send it to the Kent Funds.*
2. Mail to:
Kent Funds
P.O. Box 182201
Columbus, OH 43218-2201
- ---------------------------------------------------------------------------------------------------------
BY OVERNIGHT SERVICE Send to:
(See instruction 1 above)
Kent Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
- ---------------------------------------------------------------------------------------------------------
*Signatures on stock certificates must be guaranteed if the amount is greater than $50,000, if the
proceeds are to be mailed to an address other than the address of record, or the proceeds are to be made
payable to a party other than the owner of the account. See "General Policies on Selling Shares" for
instructions regarding signature guarantees.
</TABLE>
14
<PAGE> 43
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
- --------------------------------------------------------------------------------
WHEN WRITTEN REDEMPTION REQUESTS ARE REQUIRED
You must request redemptions in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ("IRAs").
2. Redemption requests requiring a signature guarantee, which include each of
the following:
- Redemptions over $50,000
- The check is not being mailed to the address on your account
- The check is not being made payable to the owner of the account
- The redemption proceeds are being transferred to another Fund account with
a different registration
Signature guarantees can be obtained from a U.S. stock exchange member, a U.S.
commercial bank or trust company, or any other financial institution that is a
member of the STAMP (Securities Transfer Agents Medallion Program), MSP (New
York Stock Exchange Medallion Signature Program) or SEMP (Stock Exchanges
Medallion Program) or is approved by the Kent Funds.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to ensure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, the Fund will not be liable for
any fraudulent telephone orders.
REDEMPTIONS WITHIN 10 DAYS OF INVESTMENT
When you have made your investment by check, you cannot redeem any portion of it
until the Fund's transfer agent is satisfied that the check has cleared (which
may require up to 10 business days). You can avoid this delay by purchasing
shares with a certified check.
REFUSAL OF REDEMPTION REQUEST
The Fund may postpone payment for shares at times when the New York Stock
Exchange is closed or under any emergency circumstances as determined by the
U.S. Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send the Fund your request by regular or express mail. Follow the
instructions above under "Withdrawing Money From Your Fund Account--By Mail" in
this section.
REDEMPTION IN KIND
The Fund reserves the right to make payment in 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 a 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.
CLOSING OF SMALL ACCOUNTS
If your account falls below $1,000 due to redemptions ($100 for IRA Accounts),
the Fund may ask you to increase your balance. If it is still below the minimum
level after 60 days, the Fund may close your account and send you the proceeds
at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash: If
distribution checks (1) are returned and marked as "undeliverable" or (2) remain
uncashed for six months, your account will be changed automatically so that all
future distributions are reinvested in your account. Checks that remain uncashed
for six months will be canceled and the money reinvested in the Fund.
15
<PAGE> 44
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 an 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 carefully read
the prospectus of any fund into which you wish to exchange
shares.
You must meet the minimum investment requirement 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. The Kent Funds may
reject any exchanges or change or terminate rights to exchange shares. The
exchange privilege is available only in states where shares of the new fund may
be sold.
The registration and tax identification numbers of the two accounts must be
identical. If you don't have an account with the new Fund, a new account will be
opened with the same features unless you write to tell us to change them.
The exchange privilege (including automatic exchanges) may be changed or
eliminated at any time.
Be sure to read carefully the Prospectus of any Fund into which you wish to
exchange shares.
All exchanges are based on the relative net asset value next determined after
the exchange order is received by the Funds.
16
<PAGE> 45
SHAREHOLDER INFORMATION
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund pays dividends to its shareholders from the Fund's net investment
income. The Fund distributes any net capital gains that have been realized.
Income dividends on the Fund are declared and paid annually. Capital gains, if
any, for the Fund are distributed at least annually.
Dividends on each share class of the Fund are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. Since Retail Shares of the Fund have
higher distribution and service fees than Institutional Shares, the dividends
paid to shareholders owning Retail Shares will be lower than those paid to
shareholders owning Institutional Shares.
All dividends and distributions will be automatically reinvested unless you
request otherwise. You can receive them in cash or by electronic funds transfer
to your bank account if you are not a participant in an IRA account or in a
tax-qualified plan.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A TAXABLE
DISTRIBUTION.
TAXATION
- --------------------------------------------------------------------------------
FEDERAL TAXES
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. You will be notified annually of the tax status of
distributions to you.
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 taxed 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."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another fund based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares.
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.
It is expected that the Fund will be subject to foreign withholding taxes with
respect to dividends or interest received from sources in foreign countries.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
STATE AND LOCAL TAXES
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 federal
securities or interest on securities of the particular state or an agency
thereof.
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FINANCIAL HIGHLIGHTS
No financial highlights have been included because the Fund had not commenced
operations as of the date of this prospectus.
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[KENT FUNDS LOGO]
THE FOLLOWING ADDITIONAL INFORMATION IS AVAILABLE TO YOU UPON REQUEST AND
WITHOUT CHARGE:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Statement of Additional Information (SAI): The SAI provides more detailed information about the Fund,
including its operations and investment policies. It is
incorporated by reference and is legally considered to be a
part of this prospectus.
</TABLE>
You can get a free copy of the SAI, request other information and discuss your
questions about the Fund by contacting a broker or other financial institution
that sells the Fund. In addition, you may contact the Fund at KENT FUNDS, P.O.
BOX 182201, COLUMBUS, OHIO 43218-2201.
Information about the Fund, including the SAI, is available:
- For review and copying at the Public Reference Room of the Securities and
Exchange Commission. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-202-942-8090.
- At no charge on the Commission's Internet site at http://www.sec.gov.
- For a fee, by electronic request at the following E-mail address:
[email protected] or by writing the Commission's Public Reference Section,
Washington, D.C. 20549.
Investment Company Act File No. 811-4824
<PAGE> 48
THE KENT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
KENT ADVISOR SCIENCE AND TECHNOLOGY FUND
KENT ADVISOR CANTERBURY FUND
KENT ADVISOR CASCADE FUND
, 2000
---------------
This Statement of Additional Information ("SAI") is not a prospectus
but relates to, and should be read in conjunction with the prospectus for the
Funds dated , 2000, as amended or supplemented from time to time.
Copies of the prospectus may be obtained by writing to Kent Advisor 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 FUNDS 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. AN INVESTMENT IN THE FUNDS INVOLVES
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
<PAGE> 49
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Trust........................................................................................................3
Common Types of Investments and Management Practices and Potential Risks.........................................3
Investment Restrictions.........................................................................................18
Securities Transactions.........................................................................................19
Valuation Of Securities.........................................................................................21
Trustees And Officers...........................................................................................22
Investment Adviser..............................................................................................24
Administrator...................................................................................................26
Distributor.....................................................................................................27
Transfer Agent..................................................................................................27
Custodian, Auditors And Counsel.................................................................................27
Distribution Plan...............................................................................................28
Additional Purchase And Redemption Information..................................................................29
Dividends And Taxes.............................................................................................33
Declaration Of Trust............................................................................................33
Standardized Total Return Quotations............................................................................35
Advertising Information.........................................................................................36
Financial Statements............................................................................................37
Additional Information..........................................................................................37
Appendix A.....................................................................................................A-1
Appendix B.....................................................................................................B-1
</TABLE>
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.
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<PAGE> 50
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 Trust changed its name from "Master
Municipal Trust" on May 1, 1990. The Trust consists of eighteen separate series,
each of which is diversified and has a distinct investment objective and
distinct investment policies.
This SAI relates to the following three series (individually, a "Fund,"
and collectively, the "Funds"): Kent Advisor Science and Technology Fund, Kent
Advisor Canterbury Fund, and Kent Advisor Cascade Fund. The Kent Advisor Science
and Technology Fund has two classes of shares: Retail Class and Institutional
Class. The Kent Advisor Canterbury Fund and the Kent Advisor Cascade Fund each
have one class of shares: Retail Class. This SAI relates to both the Retail and
Institutional Classes of shares of the Kent Advisor Science and Technology Fund
and the Retail Class of shares of the Kent Advisor Canterbury Fund and the Kent
Advisor Cascade Fund.
Important information about the Trust and the Funds is contained in the
Funds' prospectuses. This SAI provides additional information about the Trust
and the Funds that may be of interest to some investors. The Trust also offers
an Institutional Class of shares of the Kent Advisor Science and Technology Fund
which are described in a separate prospectus and additional series which are
described in separate prospectuses and statements of additional information.
Each Fund is advised by Lyon Street Asset Management Company ("Lyon
Street" or the "Investment Adviser").
COMMON TYPES OF INVESTMENTS AND MANAGEMENT PRACTICES AND POTENTIAL RISKS
This section describes some of the types of securities a Fund may hold
in its portfolio and the various kinds of investment practices that may be used
in day-to-day portfolio management. A Fund may, but will not necessarily, invest
in the following securities or engage in the following practices to the extent
that such securities and practices are consistent with the Series' investment
objective(s) and policies described in the Prospectus and in this SAI.
AMERICAN DEPOSITARY RECEIPTS. Each Fund may invest in American
Depositary Receipts ("ADRs"). ADRs are receipts typically issued by a United
States bank or trust company evidencing ownership of underlying foreign
securities and are denominated in U.S. dollars. ADRs traded in the
over-the-counter market, which do not have an active or substantial secondary
market, will be considered illiquid and therefore will be subject to the Funds'
respective limitations with respect to such securities. Investments in ADRs
involve risks similar to those accompanying direct investments in foreign
securities.
Some institutions issuing ADRs may not be sponsored by the issuer. If a
Fund invests in an unsponsored ADR, there may be less information available to
the Fund concerning the issuer
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<PAGE> 51
of the securities underlying the unsponsored ADR than is available for an issuer
of securities underlying a sponsored ADR. A non-sponsored depository may not
provide the same shareholder information that a sponsored depository is required
to provide under its contractual arrangement with the issuer. Certain of these
risks are described above under "Foreign Securities."
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
Convertible securities entitle the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible securities
mature or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities, Lyon Street will consider, among
other factors, the creditworthiness of the issuers of the securities; the
interest or dividend income generated by the securities; the potential for
capital appreciation of the securities and the underlying common stocks; the
prices of the securities relative to other comparable securities and to the
underlying common stocks; whether the securities are entitled to the benefits of
sinking funds or other protective conditions; diversification of a Fund's
portfolio as to issuers; and whether the securities are rated by a rating agency
and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
CURRENCY SWAPS. Each Fund may also enter into currency swaps for
hedging purposes or to increase total return. Currency swaps involve the
exchange of the rights of a Fund and another party to make or receive payments
in specific currencies. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each currency swap will be
accrued on a daily basis and an amount of liquid assets, such as cash, U.S.
Government securities or other liquid securities, having an aggregate net asset
value at least equal to such accrued
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<PAGE> 52
excess will be maintained in segregated accounts by the Trust's custodian.
Inasmuch as these transactions are entered into for good faith hedging purposes,
Lyon Street believe that such obligations do not constitute senior securities as
defined in the Investment Company Act of 1940 ("1940 Act") and, accordingly,
will not treat them as being subject to the Fund's borrowing restrictions.
The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If Lyon Street is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique was not used.
The Funds will not enter into a currency swap unless the unsecured
commercial paper, senior debt or the claims-paying ability of the other party
thereto is rated either A or A-1 or better by S&P or Moody's. If there is a
default by the other party to such transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction.
FOREIGN CURRENCY TRANSACTIONS. In order to protect against a possible
loss on investments resulting from a decline in the value of a particular
foreign currency against the U.S. dollar or another foreign currency, the Funds
are authorized to enter into forward currency exchange contracts. A forward
currency exchange contract is an obligation to purchase or sell a specific
currency, or a "basket" of currencies, at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of contract. Although the contracts may be used to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might be realized
should the value of such currency increase. The Funds may also engage in
cross-hedging by using forward currency exchange contracts in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if Lyon Street believes that there is a pattern of correlation between
the two currencies.
The Funds may enter into forward currency exchange contracts in several
circumstances. When entering into a contract for the purchase or sale of a
security, a Fund may enter into a forward currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When Lyon Street anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, a Fund may enter into a forward contract to sell, for a
fixed amount, the amount of foreign currency approximating the value of some or
all of the Fund's securities denominated in such foreign currency. Similarly,
when the securities held by a Fund create a short position in a foreign
currency, the Fund may enter into a forward contract to buy, for a fixed amount,
an amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market
5
<PAGE> 53
movements between the date the forward contract is entered into and the date it
matures. While forward contracts may offer protection from losses resulting from
declines in the value of a particular foreign currency, they also limit
potential gains which might result from changes in the value of such currency. A
Fund will also incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
A separate account consisting of cash, U.S. Government securities or
other liquid securities, equal to the amount of a Fund's assets that could be
required to consummate forward contracts will be established with the Fund's
custodian except to the extent the contracts are otherwise "covered." For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be marked to market. If the value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Fund. A forward contract to sell a foreign currency is "covered" if a Fund owns
the currency (or securities denominated in the currency) underlying the
contract, or holds a forward contract (or call option) permitting the Fund to
buy the same currency at a price no higher than the Fund's price to sell the
currency. A forward contract to buy a foreign currency is "covered" if a Fund
holds a forward contract (or put option) permitting the Fund to sell the same
currency at a price as high as or higher than the Fund's price to buy the
currency.
While a Fund may enter into forward contract to reduce currency
exchange rate risks, transaction in such contracts involve certain other risks.
Thus, while a Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be an imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by such
Fund. Such imperfect correlation may cause a Fund to sustain losses which will
prevent the Fund from achieving a complete hedge or expose the Fund to risk of
foreign exchange loss.
Markets for trading foreign forward currency contracts offer less
protection against defaults than is available when trading in currency
instruments on an exchange. Forward contracts are subject to the risk that the
counterparty to such contract will default on its obligations. Since a forward
foreign currency exchange contract is not guaranteed by an exchange or clearing
house, a default on the contract would deprive a Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to cover
its purchase or sale commitments, if any, at the current market price. A Fund
will not enter into such transactions unless the credit quality of the unsecured
senior debt or the claims-paying ability of the counterparty is considered to be
investment grade by Lyon Street.
FOREIGN SECURITIES. The Kent Advisor Science and Technology Fund may
invest without limit in the securities of foreign issuers. The Kent Advisor
Canterbury Fund and the Kent Advisor Cascade Fund may invest up to 10% of their
total assets in securities of foreign issuers. These obligations may be issued
by supranational entities, including international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and internal banking institutions and related
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<PAGE> 54
government agencies. As noted under the heading "Money Market Instruments," all
of the Funds may invest in certain obligations of foreign banks and foreign
branches of domestic banks.
Investment in foreign securities involves special risks. The
performance of investments in securities denominated in a foreign currency will
depend on the strength of the foreign currency against the U.S. dollar and the
interest rate environment in the country issuing the currency. Absent other
events which could otherwise affect the value of a foreign security (such as a
change in the political climate or an issuer's credit quality), appreciation in
the value of the foreign currency increases the value of a foreign
currency-denominated security in terms of U.S. dollars. A rise in foreign
interest rates or decline in the value of the foreign currency relative to the
U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. With respect to securities issued by foreign governments, such
governments may default on their obligations, may not respect the integrity of
such debt, may attempt to renegotiate the debt at a lower rate, and may not
honor investments by United States entities or citizens.
Although the Funds may invest in securities denominated in foreign
currencies, their portfolio securities and other assets are valued in U.S.
dollars. Currency exchange rates may fluctuate significantly over short periods
of time causing, together with other factors, a Fund's net asset value to
fluctuate as well. Currency exchange rates generally are determined by the
forces of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries, actual or anticipated changes in
interest rates and other complex factors, as seen from an international
perspective. Currency exchange rates also can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. The Funds are also subject to the possible imposition of exchange
control regulations or freezes on convertibility of currencies.
Dividends and interest payable on a Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax law, they may reduce the net return to the shareholders.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S.
7
<PAGE> 55
companies, there may be less publicly available information about a foreign
company than about a U.S. company. Volume and liquidity in most foreign
securities markets are less than in the United States and securities of many
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges, although each
Fund endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign securities exchanges, brokers, dealers and listed and unlisted companies
than in the United States. For example, there may be no comparable provisions
under certain foreign laws to insider trading and similar investor protection
securities laws that apply with respect to securities transactions consummated
in the United States. Mail service between the United States and foreign
countries may be slower or less reliable than within the United States, thus
increasing the risk of delayed settlement of portfolio transactions or loss of
certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when some of a Fund's assets are uninvested and no return
is earned on such assets. The inability of a Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio securities or, if the Fund has entered into a
contract to sell the securities, could result in possible liability to the
purchaser. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect a Fund's investments
in those countries. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. Each Fund may 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.
A 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, a Fund may dispose
of or negotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date.
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<PAGE> 56
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 a 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 a Fund purchases securities on a when-issued or forward commitment
basis, the Fund 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 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 a
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.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Fund may also purchase
futures contracts, which are contracts in which a Fund agrees, at maturity, to
take or make delivery of certain securities, other financial instruments, the
cash value of a specified index or a stated quantity of foreign currency. Each
Fund may also purchase and sell put and call options on futures contracts traded
on an exchange or board of trade. Futures may be used for hedging purposes or to
provide liquid assets. A Fund will not enter into a futures contract unless
immediately after any such transaction the aggregate amount of margin deposits
on its existing futures positions plus premiums paid for related options is less
than 5% of the Fund's net assets. For a detailed description of futures
contracts and related options, see Appendix B to this SAI.
HYBRID INSTRUMENTS. Each Fund may invest in Hybrid Instruments. Hybrid
Instruments (a type of potentially high-risk derivative) combine the elements of
futures contracts or options with those of debt, preferred equity, or a
depository instrument. Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit, or
other evidence of indebtedness on which a portion of or all interest payments,
and/or the principal or stated amount payable at maturity, redemption, or
retirement, is determined by reference to prices, changes in prices, or
differences between prices, of securities, currencies, intangibles, goods,
articles, or commodities (collectively "Underlying Assets") or by another
objective index, economic factor, or other measure, such as interest rates,
currency exchange rates, commodity indices, and securities indices (collectively
"Benchmarks"). Thus, Hybrid Instruments may take a variety of forms, including,
but not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
or securities index at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but
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avoid the transaction costs associated with buying and currency-hedging its
securities positions. One solution would be to purchase a U.S.
dollar-denominated Hybrid Instrument whose redemption price is linked to the
average three-year interest rate in a designated group of countries. The
redemption price formula would provide for payoffs of greater than par if the
average interest rate was lower than a specified level, and payoffs of less than
par if rates were above the specified level. Furthermore, a Fund could limit the
downside risk of the security by establishing a minimum redemption price so that
the principal paid at maturity could not be below a predetermined minimum level
if interest rates were to rise significantly. The purpose of this arrangement,
known as a structured security with an embedded put option, would be to give the
Fund the desired European security exposure while avoiding currency risk,
limiting downside market risk, and lowering transactions costs. Of course, there
is no guarantee that the strategy will be successful, and a Fund could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars, or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets, and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time. Hybrid Instruments may bear interest or pay
preferred dividends at below market (or even relatively nominal) rates.
Alternatively, Hybrid Instruments may bear interest at above market rates but
bear an increased risk of principal loss (or gain). The latter scenario may
result if "leverage" is used to structure the Hybrid Instrument. Leverage risk
occurs when the Hybrid Instrument is structured so that a given change in a
Benchmark or Underlying Asset is multiplied to produce a greater value change in
the Hybrid Instrument, thereby magnifying the risk of loss as well as the
potential for gain. Hybrid Instruments may also carry liquidity risk since the
instruments are often "customized" to meet the portfolio needs of a particular
investor, and therefore, the number of investors that are willing and able to
buy such instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in
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an over-the-counter market without the guarantee of a central clearing
organization or in a transaction between the Fund and the issuer of the Hybrid
Instrument, the creditworthiness of the counter party of issuer of the Hybrid
Instrument would be an additional risk factor which the Fund would have to
consider and monitor. Hybrid Instruments also may not be subject to regulation
of the Commodities Futures Trading Commission ("CFTC"), which generally
regulates the trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of a Fund. Accordingly, each Fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it is
possible that a Fund's investment in Hybrid Instruments will account for more
than 10% of the Fund's return (positive or negative).
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its total assets
in illiquid securities. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Illiquid investments generally
include: repurchase agreements not terminable within seven days; securities for
which market quotations are not readily available; restricted securities not
determined to be liquid in accordance with guidelines established by the Trust's
Board of Trustees; over-the-counter (OTC) options and, in certain instances,
their underlying collateral; and securities involved in swap, cap, collar and
floor transactions.
INVESTMENT COMPANIES. Each Fund may invest in securities issued by
other investment companies, including, but not limited to, money market
investment companies, within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a 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 a Fund bears directly in connection with its
own operations, and may represent a duplication of fees to shareholders of a
Fund.
Each Fund may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs are interests in a unit investment trust ("UIT") that may be
obtained from the UIT or purchased in the secondary market (SPDRs are listed on
the American Stock Exchange). The UIT will issue SPDRs in aggregations known as
"Creation Units" in exchange for a "Portfolio Deposit" consisting of (a) a
portfolio of securities substantially similar to the component securities
("Index Securities") of the Standard & Poor's 500 Composite Stock Price Index
(the "S&P Index"), (b) a cash payment equal to a pro rata portion of the
dividends accrued on the UIT's portfolio securities cine the last dividend
payment by the UIT, net of expenses and liabilities, and (c) a cash payment or
credit ("Balancing Amount") designed to equalize the net asset value of the S&P
Index and the net asset value of a Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs therefore, will depend upon the
existence of a secondary market. Upon
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redemption of a Creation Unit, the Fund will receive Index Securities and Cash
identical to the Portfolio Deposit required of an investor wishing to purchase a
Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basked to stocks. Disruption in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
The Funds may also purchase chares of investment companies investing
primarily in foreign securities, including "country funds." Country funds have
portfolios consisting primarily of securities of issuers located in one foreign
country or region. The Funds may also invest in World Equity Benchmark Shares
("WEBS") and similar securities that invest in securities included in foreign
securities indices.
MONEY MARKET INSTRUMENTS. Each Fund may invest from time to time in
"money market instruments," a term that includes, among other things, bank
obligations, commercial paper, corporate bonds with maturities of less than one
year, variable amount master demand notes 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 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.
Obligations of foreign banks and foreign branches of domestic banks
include Eurodollar Certificates of 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 Funds will invest in
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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 Funds 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
Funds may acquire unrated commercial paper 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 Funds. Commercial paper may include variable and floating
rate instruments. Commercial paper issues include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the exemption in Section 3(a)(3), and
commercial paper issued in reliance on the so-called "private placement"
exemption in Section 4(2) ("Section 4(2) Paper"). Section 4(2) Paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) Paper is
normally resold to other institutional investors through or with the assistance
of investment dealers which make a market in Section 4(2) Paper, thus providing
liquidity. For purposes of each Fund's limitation on purchases of illiquid
instruments, Section 4(2) Paper will not be considered illiquid if Lyon Street
has determined, in accordance with guidelines approved by the Board of Trustees,
that an adequate trading market exists for such securities.
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 Funds 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 Funds 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.
OPTIONS. Each Fund may buy put and call options and write covered call
and secured put options. Such options may relate to particular securities,
indices, financial instruments or foreign currencies, and may or may not be
listed on a domestic or foreign securities exchange and may or may not be issued
by the Options Clearing Corporation. Options trading is a highly specialized
activity which entails greater than ordinary investment risk. Options may be
more volatile than the underlying instruments, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. A Fund will not purchase
put or call options where the aggregate premiums on outstanding options
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exceed 5% of the Fund's net assets and will not write options on more than 25%
of the value of its net assets.
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer has the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Options on indices provide the holder with the right to make or receive a cash
settlement upon exercise of the option. With respect to options on indices, the
amount of the settlement will equal the difference between the closing price of
the index at the time of exercise and the exercise price of the option expressed
in dollars, times a specified multiple.
The Funds will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, cash, U.S. Government securities or
other liquid securities, in such amount are held in a segregated account by the
Fund's custodian) upon conversion or exchange of other securities held by it.
For a call option on an index, the option is covered if a Fund maintains with
its custodian a diversified portfolio of securities comprising the index or
liquid assets equal to the contract value. A call option is also covered if a
Fund holds a call on the same instrument or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. The Funds will write put options only if
they are secured by liquid assets maintained in a segregated account by the
Funds' custodian in an amount not less than the exercise price of the option at
all times during the option period.
A Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effectedby purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership ofan
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying instrument from being
called, to permit the sale of the underlying instrument or to permit the writing
of a new option containing different terms on such underlying instrument. The
cost of such a liquidation purchase plus transaction costs may be greater than
the premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated account (in the case of a secured put option) until the option
expires or the optioned instrument or
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currency is delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or appreciation in
the instrument during such period.
When a Fund purchases an option, the premium paid by it is recorded as
an asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised, the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on an exchange may be absent for reasons which include the
following: there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying
securities or currencies; unusual or unforeseen circumstances may interrupt
normal operations on an exchange; the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
value; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
PORTFOLIO TURNOVER. The Funds are not restricted by policy with regard
to portfolio turnover and will make changes in their investment portfolios from
time to time as business and economic conditions as well as market prices may
dictate.
REPURCHASE AGREEMENTS. Each 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 Funds will enter into such repurchase agreements only with
financial institutions that are deemed to be creditworthy by Lyon Street. During
the term of any repurchase agreement, Lyon Street will continue to monitor the
creditworthiness of the seller. The Funds will not enter into repurchase
agreements with Lyon
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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 a 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 a 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
a 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 a Fund under the 1940 Act".
RESTRICTED SECURITIES. Each Fund may purchase restricted securities.
Restricted securities are securities with legal or contractual restrictions on
resale.
Restricted securities include securities that are not registered under
the 1933 Act but that may be purchased by institutional buyers under Rule 144A
or Section 4(2). Rule 144A and Section 4(2) allow for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A and Section 4(2) establish 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 may determine securities eligible for resale pursuant to
Rule 144A of the Securities Act of 1933 or commercial paper issued in reliance
upon the exemption from registration contained in Section 4(2) of that Act to be
liquid in accordance with guidelines established by 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 and
Section 4(2) transactions could have the effect of increasing the level of
illiquidity in the Funds during any period that qualified institutional buyers
become uninterested in purchasing these restricted securities.
REVERSE REPURCHASE AGREEMENTS. Each 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 a
Fund may decline below the repurchase price. A Fund will pay interest on amounts
obtained pursuant to a reverse repurchase agreement. While reverse repurchase
agreements are outstanding, a Fund will maintain in a segregated account cash,
U.S.
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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 a Fund under the 1940 Act.
SECURITIES LENDING. Each 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 a Fund if, as a result, the aggregate of all outstanding
loans of the Fund exceeds one-third of the value of its total assets (including
the value of the collateral received for the loan). 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 a Fund may consist
of cash, securities issuedor 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 a Fund lends its securities, it 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 a Fund if a material
event affecting the investment is to occur.
UNITED STATES GOVERNMENT OBLIGATIONS. Each Fund may purchase U.S.
Government obligations, which are obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Examples of the types of U.S.
Government obligations that may be acquired by the Funds 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.
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WARRANTS. Each Fund may purchase warrants and similar rights, which
entitle the holder to subscribe to and purchase a specified number of equity
securities at a specified price during a specified period of time. The purchase
of warrants involves the risk that a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of warrants involves the risk that
the effective price paid for the warrant added to the subscription price of the
related security may exceed the value of the subscribed security's market price
such as when there is no movement in the level of the underlying security.
INVESTMENT RESTRICTIONS
The following investment restrictions include those that have been
designated as "fundamental," which may not be changed with respect to a Fund
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 a Fund's assets will
not constitute a violation of the limitation. Unless otherwise stated, each
restriction applies to all Funds.
FUNDAMENTAL RESTRICTIONS. The following investment restrictions are
fundamental. A 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 a 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 (including the value of
the collateral received for the loan); provided that while borrowings from banks
exceed 5% of a 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, or collateral
arrangements with respect to the writing of options on securities, are not
deemed to be a pledge of assets;
(4) Issue senior securities; the purchase or sale of securities on a
"when issued" basis, or collateral arrangements with respect to the writing of
options on securities, are not deemed to be the issuance of a senior security;
(5) Make loans, except that a 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;
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(6) With respect to the Kent Advisor Canterbury Fund and the Kent
Advisor Cascade Fund, 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 a Fund may purchase and sell securities secured by real estate
and securities of companies which deal in real estate and may engage in currency
or other financial futures contracts and related options transactions;
(8) Underwrite securities of other issuers, except that a Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective; or
(10) Purchase any security (other than U.S. Government securities) of
any issuer if as a result the Fund would hold more than 10% of the voting
securities of the issuer.
NON-FUNDAMENTAL RESTRICTIONS. The following investment restrictions are
"non-fundamental" and may be changed with respect to a Fund without shareholder
approval. A 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 15% of its total assets in illiquid securities;
(3) 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
(4) 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.
SECURITIES TRANSACTIONS
Lyon Street, under policies established by the Board of Trustees,
selects broker-dealers to execute transactions for the Funds. 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 a 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
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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 a Fund. Lyon Street is
authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing a 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 Funds. Any
such research and other statistical and factual information provided by brokers
to a 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.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of a transaction may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. 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. Each 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 Funds intend to place securities
transactions with any particular broker-dealer or group thereof. However, the
Trust's Board of Trustees has determined that each Fund may follow a policy of
considering sales of the Funds' 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 each 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 securities for the
Funds usually will be effected through brokerage transactions for which
commissions are payable.
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Investment decisions for each Fund are made independently by Lyon
Street from those of the other Funds and investment accounts advised by Lyon
Street. It may frequently develop that the same investment decision is made for
more than one Fund or account. Simultaneous transactions are inevitable when the
same security is suitable for the investment objective of more than one Fund or
account. When two or more Funds 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 Fund 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 Fund is concerned.
To the extent permitted by law, Lyon Street may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for another Fund
or account.
In no instances will securities held by a 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
Current values for Funds' portfolio securities are determined as
follows:
(1) Common stock, preferred stock and other equity securities listed
on the NYSE are valued on the basis of the last sale price on the exchange. In
the absence of any sales, such securities are valued at the last bid price;
(2) Common stock, preferred stock and other equity securities listed
on other U.S. or foreign exchanges; will be valued as described in (1) above
using quotations on the exchange on which the security is primarily traded;
(3) Common stock, preferred stock and other equity securities which
are unlisted and quoted on the National Market System (NMS) are valued at the
last sale price, provided a sale has occurred. In the absence of any sales, such
securities are valued at the last bid price;
(4) Common stock, preferred stock and other equity securities which
are quoted on the NASDAQ system but not listed on NMS are valued at the last bid
price;
(5) Common stock, preferred stock and other equity securities which
are not listed and not quoted on NASDAQ and for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked prices for such securities;
(6) Non-U.S. common stock, preferred stock and other equity securities
which are not listed or are listed and subject to restrictions on sale are
valued at prices supplied by a dealer selected by Lyon Street;
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<PAGE> 69
(7) Bonds, debentures and other debt securities, whether or not listed
on any national securities exchange, are valued at a price supplied by a pricing
service or a bond dealer selected by Lyon Street and approved by the Board of
Trustees;
(8) Short-term debt securities which when purchased have maturities of
sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which, when
combined with accrued interest, approximates market value and which reflects
fair value as determined by the Board of Trustees;
(9) Short-term debt securities having maturities of more than sixty
days when purchased which are held on the sixtieth day prior to maturity are
thereafter valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market value and which reflects fair value as
determined by the Board of Trustees; and
(10) The following are valued at prices deemed in good faith to be
fair under procedures established by the Board of Trustees: (a) securities,
including restricted securities, for which market quotations are not readily
available, and (b) any other security for which the application of the above
methods is deemed by Lyon Street not to be representative of the market value of
such security.
In valuing each Fund's assets, the Trust's fund accountant will
"mark-to-market" the current value of a Fund's open futures contracts and
options. For valuation purposes, quotations of securities denominated in foreign
currencies are converted to into U.S. dollars at the prevailing currency
exchange rate on the day of the conversion.
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' investment adviser, administrator, distributor, transfer agent and
custodian.
The names, ages 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, 47; President and Chief Executive Officer of
Sparrow Hospital and Health System; formerly Director and Executive Vice
President, Sisters of Mercy Health Corporation.
* E. PHILIP FARLEY, Trustee, 60; retired; formerly Executive Vice
President of Old Kent Financial Corporation - Manager of Community Banks from
1998 to retirement; prior to that Executive Vice President of the Investment
Management and Trust Department of Old Kent Bank.
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<PAGE> 70
* WALTER B. GRIMM, Trustee, Chairman and Vice President, 54; Senior
Vice President of Client Services for BISYS Fund Services; formerly President of
Lehigh Investments.
JAMES F. RAINEY, Trustee, 60; Professor of Business Administration and
Associate Dean Emeritus at The Eli Broad Graduate School of Management at
Michigan State University.
RONALD F. VANSTEELAND, Trustee, 59; 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, 42; 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, 35; Vice
President - Client Services for BISYS Fund Services.
MARTIN R. DEAN, Treasurer, 36; Vice President - Fund Administration for
BISYS Fund Services; and formerly employed by KPMG Peat Marwick LLP.
AMY D. EISENBEIS, Secretary, 35; Vice President - Securities Attorney
for Old Kent Securities Corporation; and formerly Assistant Vice President and
Associate General Counsel for Jackson National Life Insurance Company.
ROBERT L. TUCH, Assistant Secretary, 48; Vice President - Legal
Services for BISYS Fund Services.
W. BRUCE MCCONNEL, III, Assistant Secretary, 57; Partner in the law
firm of Drinker Biddle & Reath LLP.
ALAINA V. METZ, Assistant Secretary, 33; 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, 1999, 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, received
fees from the Trust and from Old Kent Securities Corporation 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 meeting attended and $500
for each telephonic meeting, plus reimbursement of expenses incurred as a
Trustee.
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Listed below is the compensation paid to each Trustee by the Trust for
the fiscal year ended December 31, 1999. 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 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.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM THE TRUST AND
NAME OF PERSON AGGREGATE COMPENSATION FUND COMPLEX PAID
AND POSITION FROM THE TRUST TO TRUSTEES
<S> <C> <C>
Joseph F. Damore, Trustee $ 16,000* $ 16,000
E. Philip Farley, Trustee** $ 12,250 $ 12,250
Walter B. Grimm, Trustee $ 0 $ 0
James F. Rainey, Trustee $ 16,000* $ 16,000
Ronald F. VanSteeland, Trustee $ 16,000 $ 16,000
</TABLE>
- -------------------
* During the fiscal year ended December 31, 1999, Mr. Damore deferred
$16,000 of his compensation and Mr. Rainey deferred $8,000 of his
compensation pursuant to the Deferred Compensation Plan.
* Mr. Farley was elected as a Trustee of the Trust on June 3, 1999.
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 Funds and provides the
Funds with professional investment supervision and management. 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 or its affiliates have served as investment adviser to the Kent Funds
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<PAGE> 72
since March 2, 1998. As of December 31, 1999, Lyon Street managed assets of
approximately $6.2 billion.
Lyon Street is a wholly-owned subsidiary of Old Kent Bank ("Old Kent")
and is located at 111 Lyon Street, NW, Grand Rapids, Michigan 49503. Old Kent is
a Michigan banking corporation which, with its affiliates, provides commercial
and retail banking and trust services through more than 230 banking offices in
Michigan, Indiana and Illinois. Old Kent offers a broad range of financial
services, including commercial and consumer loans, corporate and 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 $18
billion in total consolidated assets as of December 31, 1999. 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 Funds 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 Funds, makes all investment
decisions for the Funds, and places purchase and sale orders for the Funds'
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 Funds and any brokerage commissions
or other transaction charges that may be associated with such purchases and
sales.
As compensation for its investment advisory services, Lyon Street is
entitled to an annual fee of 0.70% of the average daily net assets of each Fund,
payable monthly.
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 Agreement continues in effect from year to year with respect to
each 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 such Fund. The Investment
Advisory Agreement will terminate automatically upon its assignment and may be
terminated with respect to any Fund or Funds without penalty on 60-days' written
notice at the option of either party or by a vote of the shareholders of such
Fund or Funds.
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ADMINISTRATOR
Old Kent Securities Corporation, 111 Lyon Street NW, Grand Rapids,
Michigan 49503 ("OKSC"), serves as the Administrator of the Trust under an
Administration Agreement dated December 1, 1999. OKSC is an affiliate of Lyon
Street. OKSC provides management and administrative services and, in general,
supervises the operation of each Fund (other than investment advisory
operations). The current term of the Administration Agreement ends on December
31, 2001. Thereafter, the agreement may be renewed for successive one-year
periods.
By the terms of the Administration Agreement, OKSC is required to
provide to the Funds management and administrative services, as well as all
necessary office space, equipment and clerical personnel for managing and
administering the affairs of the Funds. OKSC 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.
As compensation for the services and facilities provided to the Funds
pursuant to the Administration Agreement, OKSC 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 - 0.185% of
such assets; between $5.0 and $7.5 billion - 0.165% of such assets; and over
$7.5 billion - 0.135% of such assets, provided, however, that such annual fee
shall be subject to an annual minimum fee of $45,000 per fund that is applicable
to certain Funds of the Trust. All expenses (other than those specifically
referred to as being borne by OKSC in the Administration Agreement) incurred by
OKSC in connection with the operation of the Trust are borne by the Funds. To
the extent that OKSC incurs any such expenses or provides certain additional
services to the Trust, the Funds promptly will reimburse OKSC therefor.
OKSC also serves as the Trust's Fund Accountant pursuant to a Fund
Accounting Agreement, dated December 1, 1999. Under the Fund Accounting
Agreement, OKSC prices each Fund's shares, calculates each Fund's net asset
value, and maintains the general ledger accounting records for each Fund. For
these services, OKSC is entitled to receive a fee computed daily at the annual
rate of 0.015% of the Trust's average daily net assets, provided, however, that
such annual fee shall be subject to an annual minimum fee of $10,000 per fund
that is applicable to certain Funds of the Trust. The current term of the Fund
Accounting Agreement ends on December 31, 2001. Thereafter, the agreement may be
renewed for successive one-year periods.
SUB-ADMINISTRATION AND SUB-FUND ACCOUNTING AGREEMENTS
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
("BISYS"), provides certain administrative services to the Trust pursuant to a
Sub-Administration Agreement between OKSC and BISYS. BISYS also provides certain
fund accounting services to the Trust pursuant to a Sub-Fund Accounting
Agreement between OKSC and BISYS. As compensation for the services provided by
it under the Sub-Administration Agreement, Sub-Fund Accounting Agreement and
Sub-Transfer Agency Agreement (described under the heading "Transfer Agent"),
BISYS is entitled to receive a fee from OKSC computed daily at the annual rate
of
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<PAGE> 74
0.045% of the Trust's average daily net assets. The fees paid to BISYS by OKSC
for such services come out of OKSC's fees and are not an additional charge to
the Funds.
DISTRIBUTOR
The Trust has entered into a Distribution Agreement dated July 1, 1999,
with Kent Fund Distributors, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
("KFDI"). After the initial one year term, 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 Funds are sold on a continuous basis by
KFDI as agent for the Trust, and KFDI has agreed to use its best efforts to
solicit orders for the sale of shares of the Funds.
TRANSFER AGENT
OKSC serves as the Trust's transfer agent and dividend disbursing agent
pursuant to a Transfer Agency Agreement. Under the Transfer Agency Agreement,
OKSC processes purchases and redemptions of each Fund's shares and maintains
each Fund's shareholder transfer and accounting records, such as the history of
purchases, redemptions, dividend distributions, and similar transactions in a
shareholder's account. For these services, OKSC is entitled to receive an annual
fee of $16.50 per account for active accounts and $7.50 per account for closed
accounts, provided, however, that such annual fee shall be subject to an annual
minimum fee of $15,000 per fund that is applicable to certain Funds of the
Trust. All expenses (other than those specifically referred to as being borne by
OKSC in the Transfer Agency Agreement) incurred by OKSC in connection with its
services to the Trust are borne by the Funds.
BISYS provides certain transfer agent and dividend disbursing agent
services to the Trust pursuant to a Sub-Transfer Agency Agreement between OKSC
and BISYS. In addition to the fees described under the heading
"Sub-Administration and Sub-Fund Accounting Agreements," BISYS is entitled to
receive from OKSC a $15 per account annual processing fee for all Trust accounts
in excess of 22,000.
CUSTODIAN, AUDITORS AND COUNSEL
The Bank of New York, 100 Church Street, New York, New York 10286, is
custodian of all securities and cash of the Trust.
_________________________ are the independent auditors for the Trust.
Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry Streets,
Philadelphia, PA 19103, serves as counsel to the Trust.
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<PAGE> 75
DISTRIBUTION PLAN
As described in the prospectuses, the Trust has adopted a Distribution
Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act which regulates
circumstances under which an investment company may bear expenses associated
with the distribution of its shares. The Plan provides that the Retail Shares of
a Fund may incur certain expenses which may not exceed a maximum amount equal to
0.25% (on an annualized basis) of the average daily net asset value of the
Retail Shares. Under the Plan, the Distributor is entitled to receive from the
Fund a distribution fee, which is accrued daily and paid monthly, of up to
0.25%. The Plan obligates a Fund, during the period it is in effect, to accrue
and pay to the Distributor on behalf of a Fund the fee agreed to under the
Distribution Plan. Payments under the Plan are not tied exclusively to expenses
actually incurred by the Distributor, and the payments may exceed distribution
expenses actually incurred.
All persons authorized to direct the disposition of monies paid or
payable by a Fund pursuant to the Plan or any related agreement must provide to
the Trust's Board of Trustees at least quarterly a written report of the amounts
so expended and the purposes for which such expenditures were made.
Representatives, brokers, dealers or others receiving payments pursuant to the
Plan must determine that such payments and the services provided in connection
with such payments are appropriate for such persons and are not in violation of
regulatory limitations applicable to such persons.
The services under the Plan may include assistance in advertising and
marketing of Retail Shares, aggregating and processing purchase, exchange and
redemption requests for Retail Shares, maintaining account records, issuing
confirmations of transactions and providing sub-accounting with respect to
Retail Shares.
As required by Rule 12b-1, the Plan and the related Distribution and
Servicing Agreements have been approved, and are subject to annual approval, by
a majority of the Trust's Board of Trustees, and by a majority of the Trustees
who are not "interested" persons of the Trust (as defined by the 1940 Act) and
who have no direct or indirect interest in the operation of the Plan and the
agreements related thereto ("Independent Trustees"), by a vote cast in person at
a meeting called for the purpose of voting on the Plan and related agreements.
The Plans were approved by the Board of Trustees as a whole and by the
Independent Trustees on May 25, 2000. In compliance with Rule 12b-1, the
Trustees requested and evaluated information they thought necessary to an
informed determination of whether the Plan and related agreements should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there was a reasonable likelihood that
the Plan and the related agreements would benefit the Funds and their
shareholders. The Trustees concluded that the Plan could enhance the retail
distribution of the Funds, thereby resulting in growth of the Funds' assets and
a wider shareholder base. This could help the Funds to remain competitive with
other funds by, among other things, lessening the impact on shareholders of
redemptions, attracting talented investment managers and providing more
flexibility to portfolio managers in the execution of Fund orders. The Plan may
not be amended in order to increase materially the amount of distribution
expenses permitted under the Plan without such amendment being approved by a
majority vote of the outstanding Retail Shares of the affected Fund. The Plan
may be terminated
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<PAGE> 76
at any time by a majority vote of the Independent Trustees or by a majority vote
of the outstanding Retail Shares of the affected Fund.
While the Plan is in effect, the selection and nomination of Trustees
who are not "interested persons" has been committed to the discretion of the
"non-interested" Trustees then in office.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Financial institutions or their designees that have entered into
agreements with the Kent Funds or its agent may enter confirmed purchase orders
on behalf of clients and customers, with payment to follow no later than a
Fund's pricing on the following business day. If payment is not received by the
Funds' transfer agent by such time, the financial institution could be held
liable for resulting fees or losses. The Kent Funds may be deemed to have
received a purchase or redemption order when a financial institution or its
designee accepts the order. Order received by the Funds in proper form will be
priced at the Funds' NAV next computed after they are accepted by the financial
institution or its designee. Financial institutions are responsible for their
customers and The Kent Funds for timely transmission of all subscription and
redemption requests, investment information, documentation and money.
The net asset value ("NAV") of each class of shares of each Fund is
calculated by adding the total value of the Fund's investments and other assets
attributable to the class, subtracting the liabilities of the Fund attributable
to the class and diving by the number of outstanding shares of the Fund
attributable to the class. The per share NAV for each class of shares of each
Fund is determined at the close of regular trading on the New York Stock
Exchange, normally at 4:00 p.m. Eastern time, on each day the Exchange is open.
The offering price for shares of the Retail Class is the NAV plus the
front-end sales charge. The offering price of the Institutional Class of shares
of the Science and Technology Fund is the NAV.
SALES CHARGES
The Funds may sell shares of the Retail Class at net asset value to:
(1) current or retired directors, trustees, officers and advisory board
members of the funds managed by Lyon Street Asset Management Company,
employees of Old Kent Securities Corporation, employees of Old Kent
Bank and its affiliated companies, employees of the Distributor,
certain family members of the above persons, and trusts or plans
primarily for such persons;
(2) current registered representatives, retired registered
representatives with respect to accounts established while active, or
full-time employees (and their spouses, parents, and children) of
dealers who have sales agreements with the Fund's distributor (or who
clear transactions through such dealers) and plans for such persons or
the dealers;
(3) companies exchanging securities with the Funds through a merger,
acquisition or exchange offer; and
(4) Old Kent Bank and its affiliated companies.
Shares of the Retail Class are offered at net asset value to these
persons and organizations due to anticipated economies in sales effort and
expense.
DEALER COMMISSIONS. Commissions of up to 1% will be paid to dealers who
initiate and are responsible for purchases of $1 million or more, for purchases
by any employer-sponsored 403(b) plan or purchases by any defined contribution
plan qualified under Section 401(a) of the Internal Revenue Code including a
"401(k)" plan with 100 or more eligible employees, and for
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<PAGE> 77
purchases made at net asset value by certain retirement plans of organizations
with collective retirement plan assets of $50 million or more: 1.00% on amounts
of $1 million to $4 million, 0.50% on amounts over $4 million to $10 million,
and 0.25% on amounts over $10 million.
STATEMENT OF INTENTION. You may enter into a non-binding commitment to
purchase shares of the Retail Class of one or more Kent Advisor Funds over a
13-month period and receive the same sales charge as if all shares had been
purchased at once. This includes purchases made during the previous 90 days, but
does not include appreciation of your investment or reinvested distributions.
The reduced sales charges and offering prices set forth in the Prospectus apply
to purchases of $25,000 or more made within a 13-month period subject to the
following statement of intention (the "Statement"). The Statement is not a
binding obligation to purchase the indicated amount. When a shareholder elects
to utilize a Statement in order to qualify for a reduced sales charge, shares
equal to 5% of the dollar amount specified in the Statement will be held in
escrow in the shareholder's account out of the initial purchase (or subsequent
purchases, if necessary) by the Funds' transfer agent. All dividends and any
capital gain distributions on shares held in escrow will be credited to the
shareholder's account in shares (or paid in cash, if requested). If the intended
investment is not completed within the specified 13-month period, the purchaser
will remit to the Fund's distributor the difference between the sales charge
actually paid and the sales charge which would have been paid if the total of
such purchases had been made at a single time. If the difference is not paid by
the close of the period, the appropriate number of shares held in escrow will be
redeemed to pay such difference. If the proceeds from this redemption are
inadequate, the purchaser will be liable to the Fund's distributor for the
balance still outstanding. The Statement may be revised upward at any time
during the 13-month period, and such a revision will be treated as a new
Statement, except that the 13-month period during which the purchase must be
made will remain unchanged. Existing holdings eligible for rights of
accumulation (see the account application) may be credited toward satisfying the
Statement. During the Statement period, reinvested dividends and capital gain
distributions and investments made under a right of reinstatement will not be
credited toward satisfying the Statement.
Shareholders purchasing shares of the Retail Class at a reduced sales
charge under a Statement indicate their acceptance of these terms with their
first purchase.
AGGREGATION. Sales charge discounts on purchases of shares of the
Retail Class are available for certain aggregated investments. Qualifying
investments include those by you, your spouse and your children under the age of
21, if all parties are purchasing shares for their own accounts and/or:
- employee benefit plan(s), such as an IRA, individual-type 403(b)
plan, or single-participant Keogh-type plan;
- business accounts solely controlled by these individuals (for
example, the individuals own the entire business);
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- trust accounts established by the above individuals. However, if
the person(s) who established the trust is deceased, the trust
account may be aggregated with accounts of the person who is the
primary beneficiary of the trust.
Individual purchases of shares of the Retail Class by a trustee(s) or
other fiduciary(ies) may also be aggregated if the investments are:
- for a single trust estate or fiduciary account, including an
employee benefit plan other than those described above;
- made for two or more employee benefit plans of a single employer
or of affiliated employers as defined in the 1940 Act, again
excluding employee benefit plans described above; or
- for a diversified common trust fund or other diversified pooled
account not specifically formed for the purpose of accumulating
fund shares.
Purchases made for nominee or street name accounts (securities held in
the name of an investment dealer or another nominee such as a bank trust
department instead of the customer) may not be aggregated with those made for
other accounts and may not be aggregated with other nominee or street name
accounts unless otherwise qualified as described above.
CONCURRENT PURCHASES. You may combine purchases of shares of the Retail
Class of two or more Kent Advisor Funds.
RIGHTS OF ACCUMULATION. You may take into account the current value of
your existing holdings of shares of the Retail Class of the Kent Advisor Funds
to determine your sales charge on investments in accounts eligible to be
aggregated, or when making a gift to an individual or charity.
CONTINGENT DEFERRED SALES CHARGES. A contingent deferred sales charge
of 1% applies to certain redemptions of shares of the Retail Class of the Kent
Advisor Funds made within twelve months of purchase on investments of $1 million
or more. The charge is 1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends and capital gain distributions) or the total
cost of such shares. Shares held for the longest period are assumed to be
redeemed first for purposes of calculating this charge. The charge is waived for
exchanges (except if shares acquired by exchange were then redeemed within 12
months of the initial purchase); for distributions from 403(b) plans or IRAs due
to death, disability or attainment of age 59 1/2; for tax-free returns of excess
contributions to IRAs; and for redemptions through certain automatic withdrawals
not exceeding 10% of the amount that would otherwise be subject to the charge.
EXCHANGES
In an exchange, shares in the Fund from which an investor is
withdrawing will be redeemed at the net asset value per share next determined
after the exchange request is received.
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Shares of both the Retail Class and the Institutional Class of the Fund 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.
REDEMPTIONS
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 - Closing of Small Accounts," 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 Funds 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.
A 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
FEDERAL - GENERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute its income to
shareholders each year, so that each Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund
32
<PAGE> 80
would be subject to corporate income taxes and/or excise taxes in respect of the
shortfall or, if the shortfall is large enough, the Fund could be disqualified
as a regulated investment company.
The provisions regarding financial instruments, foreign currencies and
foreign corporations may from time to time cause a Fund to recognize income in
excess of cash received in a transaction. Moreover, a Fund's investment
alternatives will to some extent be constrained by tax requirements applicable
to regulated investment companies.
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 eighteen series of
shares. The series may have one or more separate classes of shares - Retail
Shares, Investment Shares or 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 each 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 that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that 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
33
<PAGE> 81
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
upon unless approved by the holders of a majority of the outstanding shares of
each class or series affected by such matter. Rule 18f-2 further provides that a
class or series shall be deemed to be affected by a matter unless the interests
of each class or series in the matter are substantially identical or the matter
does not affect any interest of the class or series. Under the Rule, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a class or
series only if approved by a majority of the outstanding shares of that class or
series. 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 class or
series.
The term "majority of the outstanding shares" of a Fund 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
34
<PAGE> 82
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 QUOTATIONS
A Fund calculates its average annual total return by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
<TABLE>
<S><C>
ERV(1/n)
T = [(----------)-1]
P
Where:
T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
(or other) periods at the end of such applicable
period (or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = number of years.
</TABLE>
A Fund calculates its aggregate total return by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
<TABLE>
<S><C>
ERV
Aggregate Total Return = [(-----------) - 1]
P
</TABLE>
The calculations are made assuming that (a) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, and (b) all recurring fees charged to
all shareholder accounts are included. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
35
<PAGE> 83
ADVERTISING INFORMATION
The Funds may from time to time include in advertisements, sales
literature, communications to shareholders and other materials (collectively,
"Materials") a total return figure that more accurately compares a Fund's
performance with other measures of investment return than the total return
calculated as described above. For example, in comparing a 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, a
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 a 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 Funds 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 a 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 Funds 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 a 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 a 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 relevance to a Fund. The Funds may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Funds 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 a Fund and/or other mutual
funds. Materials may include a discussion of certain attributes or benefits to
be derived by an investment in a 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.
36
<PAGE> 84
FINANCIAL STATEMENTS
No financial statements have been included for the Funds because the
Funds had not commenced operations as of the date of this Statement of
Additional Information.
DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM OFFERING PRICE
PER SHARE - AS OF THE DATE OF COMMENCEMENT OF OPERATIONS OF THE FUNDS
<TABLE>
<CAPTION>
Retail Shares Institutional Shares
------------- --------------------
<S> <C> <C>
Net Assets $ 10.00 $ 10.00
Number of Shares Outstanding 1 1
NAV Per Share $ 10.00 $ 10.00
Sales Charge (5.75% of offering price $ 0.61 $ 0.00
or 6.10% of NAV)
Offering Price Per Share $ 10.61 $ 10.00
</TABLE>
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.
PERSONAL INVESTING POLICY
The Trust, Lyon Street and KFDI, have adopted codes of ethics under
Rule 17j-1 of the 1940 Act which allow for personnel subject to the codes to
invest in securities, including securities that may be purchased or held by the
Funds.
37
<PAGE> 85
APPENDIX A
DESCRIPTION OF SECURITIES
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S. A Standard & Poor's commercial paper rating is a
current opinion of the creditworthiness of an obligor with respect to financial
obligations having an original maturity of no more than 365 days. The following
summarizes the rating categories used by Standard and 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 on the obligation 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 in
higher rating categories. 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 upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the 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 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 a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks. Country risk considerations
are a standard part of Standard & Poor's analysis for credit ratings on any
issuer or issue. Currency of repayment is a key factor in this analysis. An
obligor's capacity to repay foreign obligations may be lower than its capacity
to repay obligations in its local currency due to the sovereign government's own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
A-1
<PAGE> 86
MOODY'S. 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.
"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.
DUFF & PHELPS. 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.
A-2
<PAGE> 87
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to 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 failed to meet scheduled principal and/or interest
payments.
FITCH IBCA. 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 best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"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 the higher ratings.
"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 uncertain 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
THOMSON FINANCIAL BANKWATCH. 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.
A-3
<PAGE> 88
"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.
A-4
<PAGE> 89
APPENDIX B
As stated in the Prospectus, the Funds may enter into futures contracts
and options. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund might use interest rate futures
as a defense, or hedge, against anticipated interest rate changes. This would
include the use of futures contract sales to protect against expected increases
in interest rates and futures contract purchases to offset the impact of
interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund entering
into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
B-1
<PAGE> 90
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. The Funds will deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month U.S. Treasury Bills; and ninety-day
commercial paper. A Fund may trade in any interest rate futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
A stock or bond index assigns relative values to the stocks or bonds
included in the index, which fluctuates with changes in the market values of the
stocks or bonds included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in anticipation
of changes in the composition of its portfolio holdings. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
B-2
<PAGE> 91
IV. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially, a
Fund will be required to deposit with the broker or in a segregated account with
its custodian an amount of cash or cash equivalents, known as initial margin,
based on the value of the contract. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying instruments fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as marking-to-market.
For example, when a particular Fund has purchased a futures contract and the
price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, Lyon Street may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the future and movements in the price of the instruments which are
the subject of the hedge. The price of the future may move more than or less
than the price of the instruments being hedged. If the price of the future moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged instruments, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the instruments which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of instruments being hedged
and movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of instruments being
hedged if the volatility over a particular time period of the prices of such
instruments has been greater than the volatility over such time period of the
futures, or if otherwise deemed to be appropriate by Lyon Street. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the instruments being hedged is less than
B-3
<PAGE> 92
the volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by Lyon Street. It is also possible that,
where a Fund has sold futures to hedge its portfolio against a decline in the
market, the market may advance and the value of instruments held in the Fund may
decline. If this occurred, the Fund would lose money on the future and also
experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will normally not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity
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exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions.
Successful use of futures by a Fund is also subject to Lyon Street's
ability to predict correctly movements in the direction of the market. For
example, if a particular Fund has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may also have to
sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). The writing of an option
on a futures contract involves risks similar to those risks relating to the sale
of futures contracts.
VII. Other Matters
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
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