<PAGE>
LYON STREET INSTITUTIONAL MONEY MARKET FUND
Supplement dated February 22, 2000
to the
Prospectus
for the
Lyon Street Institutional Money Market Fund
Dated June 1, 1999
The Annual Fund Operating Expenses table under the heading "Fees and
Expenses" on page 4 of the prospectus is replaced with the following:
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.40%
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Distribution and Service (12b-1) Fees None
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Other Expenses 0.27%
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Total Annual Fund Operating Expenses 0.67%
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Fee Waiver 0.45%
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Net Annual Fund Operating Expenses 0.22%*
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* This is the actual total fund operating expense you will pay as an
investor in this Fund. That's because the Adviser has contractually agreed
to waive a portion of the annual management fees, and the Administrator has
contractually agreed to waive a portion of the administration fee, payable
by the Fund. The Fund's total annual fund operating expenses and net
annual fund operating expenses are estimated based on expenses expected to
be incurred in the current fiscal year.
The second paragraph under the heading "Investment Adviser" on page 7 of the
prospectus is replaced with the following:
Lyon Street is entitled to receive management fees in the amount of 0.40%
of the average daily net assets of the Fund. However, Lyon Street has
contractually agreed to waive until December 31, 2000, a portion of its
management fees so that the total annual operating expenses of the Fund
will not exceed 0.22%.
INVESTORS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
THE KENT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
for
The Lyon Street Institutional Money Market Fund
June 1, 1999, as amended and restated February 22, 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 Lyon
Street Institutional Money Market Fund (the "Fund"), dated June 1, 1999, as
amended or supplemented from time to time. A copy of the prospectus may be
obtained by writing to The Kent Funds, P.O. Box 182201, Columbus, Ohio 43218-
2201 or by calling 1-800-633-KENT (5368). Capitalized terms not otherwise
defined herein have the same meaning as in the prospectus.
Shares of the Fund are not bank deposits or obligations of, or guaranteed
or endorsed by, Old Kent Bank or any of its affiliates, and are not insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency. The Fund seeks to maintain a net asset value per share of
$1.00 although there can be no assurance that it will be able to do so.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
THE TRUST....................................................................... 3
INVESTMENT POLICIES............................................................. 3
INVESTMENT RESTRICTIONS......................................................... 11
SECURITIES TRANSACTIONS......................................................... 13
VALUATION OF SECURITIES......................................................... 14
TRUSTEES AND OFFICERS........................................................... 16
INVESTMENT ADVISER.............................................................. 17
ADMINISTRATOR................................................................... 19
DISTRIBUTOR..................................................................... 20
TRANSFER AGENT.................................................................. 20
CUSTODIAN, AUDITORS AND COUNSEL................................................. 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................................. 21
DIVIDENDS AND TAXES............................................................. 21
DECLARATION OF TRUST............................................................ 23
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS.................................. 24
ADVERTISING INFORMATION......................................................... 25
ADDITIONAL INFORMATION.......................................................... 26
APPENDIX A...................................................................... A-1
</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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THE TRUST
The Kent Funds (the "Trust") is an open-end management investment company,
commonly known as a mutual fund, which was organized on May 9, 1986 as a
Massachusetts business trust. The original name of the Trust was "Master
Municipal Trust." The Trust changed its name to "The Kent Funds" on May 1,
1990. The Trust consists of fifteen separate investment portfolios, each of
which is diversified and has a distinct investment objective and distinct
investment policies. This SAI relates solely to the Lyon Street Institutional
Money Market Fund. The Trust also offers the following investment portfolios,
which are described in a separate Statement of Additional Information: The Kent
Large Company Growth Fund, The Kent Growth and Income Fund, The Kent Index
Equity Fund, The Kent Small Company Growth Fund, The Kent International Growth
Fund, The Kent Income Fund, The Kent Intermediate Bond Fund, The Kent Short Term
Bond Fund, The Kent Intermediate Tax-Free Fund, The Kent Michigan Municipal Bond
Fund, The Kent Money Market Fund, The Kent Government Money Market Fund and The
Kent Michigan Municipal Money Market Fund. The Fund is advised by Lyon Street
Asset Management Company ("Lyon Street" or the "Investment Adviser").
Important information about the Trust and the Fund is contained in the
Fund's prospectus. This SAI provides additional information about the Trust and
the Fund that may be of interest to some investors.
INVESTMENT POLICIES
The following information supplements the description of the Fund's
investment objective and policies as set forth in the prospectus.
Money Market Instruments
The Fund may invest in a broad range of "money market instruments," a term
that includes, among other things, bank obligations, commercial paper, variable
amount master demand notes and corporate bonds and U.S. Government obligations
with remaining maturities of thirteen months or less.
Bank obligations include certificates of deposit, bankers' acceptances and
time deposits, issued or supported by the credit of U.S. or foreign banks or
savings institutions. Certificates of deposit are negotiable certificates
issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return. Bankers' acceptances are negotiable drafts
or bills of exchange, normally drawn by an importer or exporter to pay for
specific merchandise, which are "accepted" by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties that
vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a
beneficial interest in a fixed time deposit to a third party, although there is
no market for such deposits. All investments in bank obligations are limited to
the obligations of financial institutions having more than $1 billion in total
assets at the time of purchase.
The Fund may invest a portion of its assets in the obligations issued or
guaranteed by one or more foreign governments or one of their agencies or
instrumentalities, including obligations of supranational entities. The Fund
may also invest a portion of its assets in the obligations of foreign banks and
foreign branches of domestic banks. Such obligations include Eurodollar
Certificates of Deposit ("ECDs") which
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are U.S. dollar-denominated certificates of deposit issued by offices of foreign
and domestic banks located outside the United States; Eurodollar Time Deposits
("ETDs") which are U.S. dollar-denominated deposits in a foreign branch of a
U.S. bank or a foreign bank; Canadian Time Deposits ("CTDs") which are
essentially the same as ETDs except they are issued by Canadian offices of major
Canadian banks; Schedule Bs, which are obligations issued by Canadian branches
of foreign or domestic banks; Yankee Certificates of Deposit ("Yankee CDs")
which are U.S. dollar-denominated certificates of deposit issued by a U.S.
branch of a foreign bank and held in the United States; and Yankee Bankers'
Acceptances ("Yankee BAs") which are U.S. dollar-denominated bankers'
acceptances issued by a U.S. branch of a foreign bank and held in the United
States.
Although the Fund will invest in obligations of foreign banks or foreign
branches of U.S. banks only when Lyon Street deems the instrument to present
minimal credit risk, such investments nevertheless entail risks that are
different from those of investments in domestic obligations of U.S. banks.
These additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting and record keeping standards than those applicable to
domestic branches of U.S. banks.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by banks or bank holding companies, corporations and finance
companies. Investments by the Fund in taxable commercial paper will consist of
issues that are rated A-1 by Standard & Poor's Ratings Group ("S&P") or Prime-1
by Moody's Investors Service, Inc. ("Moody's"). In addition, the Fund may
acquire unrated commercial paper and corporate bonds that are determined by Lyon
Street at the time of purchase to be of comparable quality to rated instruments
that may be acquired by the Fund. Commercial paper may include variable and
floating rate instruments.
Variable amount master demand notes are unsecured instruments that permit
the indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Although such notes are not normally traded and there may be no
secondary market in the notes, the Fund may demand payment of the principal of
the instrument at any time. If an issuer of a variable amount master demand
note defaulted on its payment obligation, the Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default.
Guaranteed Investment Contracts
The Fund may make limited investments in guaranteed investment contracts
("GICs") issued by highly rated U.S. insurance companies. A GIC is normally a
general obligation of the issuing insurance company and not a separate account.
The purchase price paid for a GIC becomes part of the general assets of the
insurance company, and the contract is paid from the insurance company's general
assets. The Fund will only purchase GICs from insurance companies which, at the
time of purchase, have total assets of $1 billion or more and meet quality and
credit standards established by Lyon Street pursuant to guidelines approved by
the Board of Trustees. Generally, GICs are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in GICs does not currently exist. Therefore, GICs will
normally be considered illiquid investments, and will be subject to the Fund's
limitation on illiquid investments.
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Repurchase Agreements
The Fund may agree to purchase portfolio securities from financial
institutions subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price ("repurchase agreements"). The Fund will enter into
such repurchase agreements only with financial institutions that are deemed to
be creditworthy by Lyon Street, pursuant to guidelines established by the
Trust's Board of Trustees. During the term of any repurchase agreement, Lyon
Street will continue to monitor the creditworthiness of the seller. The Fund
will not enter into repurchase agreements with Lyon Street or its affiliates.
Although the securities subject to a repurchase agreement may bear maturities
exceeding one year, settlement for the repurchase agreement will never be more
than one year after the Fund's acquisition of the securities and normally will
be within a shorter period of time. Repurchase agreements with deemed
maturities in excess of seven days are considered illiquid investments, and will
be subject to the Fund's limitation on illiquid investments. Securities subject
to repurchase agreements are held either by the Trust's custodian or in the
Federal Reserve/Treasury Book-Entry System. The seller under a repurchase
agreement will be required to maintain the value of the securities subject to
the agreement in an amount exceeding the repurchase price (including accrued
interest). Default by the seller would, however, expose the Fund to possible
loss because of adverse market action or delay in connection with the
disposition of the underlying collateral obligations. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940, as
amended (the "1940 Act").
Reverse Repurchase Agreements
The Fund may borrow funds for temporary or emergency purposes by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). Reverse repurchase agreements involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price. The Fund will pay interest on amounts obtained pursuant to a
reverse repurchase agreement. While reverse repurchase agreements are
outstanding, the Fund will maintain in a segregated account cash, U.S.
Government securities or other liquid high-grade debt securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement. Reverse repurchase agreements are considered to be
borrowings by the Fund under the 1940 Act.
Variable and Floating Rate Instruments
The Fund may purchase rated and unrated variable and floating rate
instruments. When purchasing such instruments for the Fund, Lyon Street will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such instruments and, if the instruments are subject to demand
features, will monitor their financial status to meet payment on demand.
In determining weighted average portfolio maturity, an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
can recover payment of principal as specified in the instrument. Variable rate
U.S. Government obligations and certain variable rate instruments having a
nominal maturity of 397 days or less when purchased, however, will be deemed to
have maturities equal to the period remaining until the next interest rate
adjustment. Variable and floating rate instruments purchased by the Fund may
carry nominal maturities in excess of the Fund's maturity limitations if such
instruments carry demand features that comply with conditions established by the
Securities and Exchange Commission. In order to be purchased by the Fund, these
instruments must permit the Fund to demand payment of the principal of the
instrument at least once every 397 days upon not more than 30 days' notice.
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The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the Fund to
dispose of the instruments if the issuer defaulted on its payment obligation or
during periods that the Fund is not entitled to exercise demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments.
Loan Participation Notes
The Fund may purchase loan participation notes. A loan participation note
represents participation in a corporate loan of a commercial bank with a
remaining maturity of one year or less. Such loans must be to corporations in
whose obligations the Fund may invest. Any participation purchased by the Fund
must be issued by a bank in the United States with total assets exceeding $1
billion. Because the issuing bank does not guarantee the participation in any
way, they are subject to the credit risks generally associated with the
underlying corporate borrower. In addition, because it may be necessary under
the terms of the loan participation for the Fund to assert through the issuing
bank such rights as may exist against the corporate borrower if the underlying
corporate borrower fails to pay principal and interest when due, the Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation of such
borrower. Moreover, under the terms of the loan participation the Fund may be
regarded as a creditor of the issuing bank (rather than the underlying corporate
borrower), so that the Fund may also be subject to the risk that the issuing
bank may become insolvent. The secondary market, if any, for loan
participations is extremely limited and any such participation purchased by the
Fund may be regarded as illiquid.
Forward Commitments, When-Issued Securities and Delayed-Delivery Transactions
The Fund may also purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment (sometimes called delayed delivery)
basis. These transactions involve a commitment by the Fund to purchase or sell
securities at a future date. The price of the underlying securities and the
date when the securities will be delivered and paid for (the settlement date)
are fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are normally negotiated directly with the other
party.
The Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or negotiate a commitment after entering into it. The Fund also may
sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date.
Securities purchased or sold on a when-issued or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
When the Fund engages in when-issued and forward commitment transactions, it
relies on the other party to consummate the trade. Failure of such party to do
so may result in the Fund incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
When the Fund purchases securities on a when-issued or forward commitment
basis, the Trust's custodian will segregate cash or liquid securities having a
value (determined daily) at least equal to the amount of the Fund's purchase
commitments. In the case of a forward commitment to sell portfolio securities,
the custodian will hold the portfolio securities themselves in a segregated
account while the commitment is 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
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transactions. Because the Fund sets aside liquid assets to satisfy its purchase
commitments in the manner described, its liquidity and ability to manage its
portfolio might be affected in the event its purchase commitments exceed 25% of
the value of its assets. For purposes of determining the Fund's average dollar-
weighted maturity, the maturity of when-issued or forward commitment securities
will be calculated from the commitment date.
United States Government Obligations
Examples of the types of U.S. Government obligations that may be acquired
by the Fund include U.S. Treasury bills, notes and bonds and obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks, Tennessee
Valley Authority, Resolution Funding Corporation and Maritime Administration.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the GNMA, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government would provide financial support to U.S. Government-
sponsored instrumentalities if it is not obligated to do so by law.
Zero Coupon Obligations
The Fund may acquire zero coupon obligations. Zero coupon obligations zero
coupon obligations do not make interest payments; instead they are sold at a
deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon obligations do not pay current income, their prices
can be volatile when interest rates change. The Fund will accrue income on such
investments for tax and accounting purposes, as required, and such income must
be distributed to shareholders. The Fund may be required to liquidate other
portfolio securities to satisfy its distribution obligations because no cash is
received at the time of such income accruals. The return on a zero coupon
obligation, when held to maturity, equals the difference between the par value
and the original purchase price.
Stripped Obligations
The Fund may purchase U.S. Treasury obligations and their unmatured
interest coupons that have been separated ("stripped") by their holder,
typically a custodian bank or other institution. These "stripped" U.S. Treasury
obligations are offered under the Separate Trading of Registered Interest and
Principal Securities ("STRIPS") program or Coupon Under Bank-Entry Safekeeping
("CUBES") program. The Fund may also purchase other stripped securities issued
by agencies or instrumentalities of the U.S. government. STRIPS and CUBES
represent either future interest or principal payments and are direct
obligations of the U.S. Government that clear through the Federal Reserve
System. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their face value. Stripped
securities may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The Fund also may purchase U.S. dollar-denominated stripped
securities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
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Within the past several years, the Treasury Department has facilitated
transfers of ownership of stripped securities by accounting separately for the
beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal
Securities." Under the STRIPS program, the Fund will be able to have its
beneficial ownership of stripped securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
In addition, the Fund may acquire other U.S. Government obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder. Having separated the interest coupons from the underlying principal of
the U.S. Government obligations, the holder will resell the stripped securities
in custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on
Treasury Securities" ("CATS"). The stripped coupons are sold separately from
the underlying principal, which is usually sold at a deep discount because the
buyer receives only the right to receive a future fixed payment on the security
and does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are ostensibly owned by the bearer or holder), in
trust on behalf of the owners. Counsel to the underwriters of these
certificates or other evidences of ownership of U.S. Treasury securities have
stated that, in their opinion, purchasers of the stripped securities most likely
will be deemed the beneficial holders of the underlying U.S. Government
obligations for federal tax purposes. The Trust is unaware of any binding
legislative, judicial or administrative authority on this issue. The staff of
the Securities and Exchange Commission believes that participations in TIGRs,
CATS and other similar trusts are not U.S. Government securities.
Although a "stripped" security may not pay interest to holders prior to
maturity, federal income tax regulations require the Fund to recognize as
interest income a portion of the security's discount each year. This income
must then be distributed to shareholders along with other income earned by the
Fund. To the extent that any shareholders in the Fund elect to receive their
dividends in cash rather than reinvest such dividends in additional Fund shares,
cash to make these distributions will have to be provided from the assets of the
Fund or other sources such as proceeds of sales of Fund shares and/or sales of
portfolio securities. In such cases, the Fund will not be able to purchase
additional income producing securities with cash used to make such distributions
and its current income may ultimately be reduced as a result.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including those
representing an undivided ownership interest in a pool of mortgages, such as
certificates of the GNMA and the FHLMC. These certificates are in most cases
pass-through instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the certificate,
net of certain fees. The average life of a mortgage-backed security varies with
the underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of prepayments,
mortgage refinancings or foreclosure. Mortgage prepayment rates are affected by
factors including the level of interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Such prepayments are passed through to the registered holder with the regular
monthly payments of principal and interest and have the effect of reducing
future payments.
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In periods of falling interest rates, the rate of mortgage prepayments
tends to increase. During such periods, the reinvestment of prepayment proceeds
by the Fund will generally be at lower rates than the rates that were carried by
the obligations that have been prepaid. As a result, the relationship between
mortgage prepayments and interest rates may give some high-yielding mortgage-
related securities less potential for growth in value than conventional bonds
with comparable maturities. In calculating the average weighted maturity of the
Fund, the maturity of mortgage-backed will be based on estimates of average
life.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by GNMA include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes"), which are guaranteed as to the timely payment of principal
and interest by GNMA and backed by the full faith and credit of the United
States. GNMA certificates also are supported by the authority of GNMA to borrow
funds from the U.S. Treasury to make payments under its guarantee. Mortgage-
backed securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes"), which are solely the obligations of
FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. Fannie Maes are guaranteed as to timely payment of the principal and
interest by FNMA. Mortgage-related securities issued by FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "Pcs").
Freddie Macs are not guaranteed and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Macs entitle the
holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
There are risks inherent in the purchase of mortgage-backed securities.
For example, these securities are subject to a risk that default in payment will
occur on the underlying mortgages. In addition to default risk, these
securities are subject to the risk that prepayment on the underlying mortgages
will occur earlier or later or at a lessor or greater rate than expected. To
the extent that Lyon Street's assumptions about prepayments are inaccurate,
these securities may expose the Fund to significantly greater market risks than
expected.
Asset-Backed Securities
The Fund may purchase asset-backed securities, which are securities backed
by installment contracts, credit card receivables or other assets. Asset-backed
securities represent interests in "pools" of assets in which payments of both
interest and principal on the securities are made monthly, thus in effect
"passing through" monthly payments made by the individual borrowers on the
assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and is likely to be
substantially less than the original maturity of the assets underlying the
securities as a result of prepayments. For this and other reasons, an asset-
backed security's stated maturity may be shortened, and the security's total
return may be difficult to predict precisely.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of a security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the
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right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may not, in some cases,
be able to support payments on these securities.
Illiquid and Restricted Securities
The Fund will not invest more than 10% of the value of its net assets in
securities that are illiquid because of restrictions on transferability or other
reasons. Repurchase agreements with deemed maturities in excess of seven days,
time deposits maturing in more than seven days, GICs and securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), but
that may be purchased by institutional buyers under Rule 144A are subject to
this limit (unless such securities are variable amount master demand notes with
maturities of nine months or less or unless the Board determines that a liquid
trading market exists).
Rule 144A allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers. Lyon Street
believes that the market for certain restricted securities such as institutional
commercial paper may expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Lyon Street monitors the liquidity of restricted securities in the Fund's
portfolio under the supervision of the Board of Trustees. In reaching liquidity
decisions, Lyon Street will consider such factors as: (a) the frequency of
trades and quotes for the security; (b) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (c)
the willingness of dealers to undertake to make a market in the security; and
(d) the nature of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer). The use of Rule 144A transactions could have
the effect of increasing the level of illiquidity in the Fund during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities.
Securities Lending
The Fund may lend its portfolio securities to broker-dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Such loans will not be made by the Fund
if, as a result, the aggregate of all outstanding loans of the Fund exceeds one-
third of the value of its total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by Lyon Street to
be of good standing and when, in Lyon Street's judgment, the income to be earned
from the loan justifies the attendant risks.
Collateral for loans of portfolio securities made by the Fund may consist
of cash, securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, irrevocable bank letters
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<PAGE>
of credit or any other liquid high-grade short-term instrument approved for use
as collateral by the Securities and Exchange Commission (or any combination
thereof). The borrower of securities will be required to maintain the market
value of the collateral at not less than the market value of the loaned
securities, and such value will be monitored on a daily basis. When the Fund
lends its securities, it continues to receive dividends and interest on the
securities loaned and may simultaneously earn interest on the investment of the
cash collateral. Although voting rights, or rights to consent, attendant to
securities on loan pass to the borrower, such loans will be called so that the
securities may be voted by the Fund if a material event affecting the investment
is to occur.
Investment Companies
The Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the expenses of such other investment company, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations, and
may represent a duplication of fees to shareholders of the Fund.
Yields and Ratings
The yields on certain obligations are dependent on a variety of factors,
including general economic conditions, conditions in the particular market for
the obligation, financial condition of the issuer, size of the offering,
maturity of the obligation and ratings of the issue. The ratings of a
nationally recognized statistical rating organization (an "NRSRO") represent its
opinion as to the quality of the obligations it undertakes to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices.
After its purchase by the Fund, a rated security may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Fund. Lyon Street will consider such an event in determining whether the Fund
should continue to hold the security. For a description of applicable
securities ratings, see Appendix A.
Temporary Defensive Positions
The Fund may temporarily hold up to 100% of its total assets in investments
that are not part of its main investment strategy during unfavorable market
conditions. These investments may include cash (which will not earn any
income). This strategy could prevent the Fund from achieving its investment
objective.
INVESTMENT RESTRICTIONS
The following investment restrictions include those that have been
designated as "fundamental," which may not be changed without the vote of a
"majority" of the Fund's outstanding shares (as defined in "Declaration of
Trust--Voting Rights"), and those that have been designated as "non-
fundamental," which may be changed without shareholder approval. If a
percentage limitation is satisfied at the time of investment, a later increase
in such percentage resulting from a change in the value of the Fund's assets
will not constitute a violation of the limitation.
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<PAGE>
The following investment restrictions are fundamental:
The Fund may not:
(1) Purchase any security (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) of any
issuer if as a result more than 5% of its total assets would be invested in
securities of the issuer, except that up to 25% of its total assets may be
invested without regard to this limit;
(2) Borrow money, which includes entering into reverse repurchase
agreements, except that the Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks exceed 5% of the Fund's net assets, any such borrowings
and reverse repurchase agreements will be repaid before additional investments
are made;
(3) Pledge more than 15% of its net assets to secure indebtedness;
the purchase or sale of securities on a "when issued" basis is not deemed to be
a pledge of assets;
(4) Issue senior securities; the purchase or sale of securities on a
"when issued" basis is not deemed to be the issuance of a senior security;
(5) Make loans, except that the Fund may purchase or hold debt
securities consistent with its investment objective, lend Fund securities valued
at not more than 33 1/3% of its total assets to brokers, dealers and financial
institutions, and enter into repurchase agreements;
(6) Purchase any security of any issuer if as a result more than 25%
of its total assets would be invested in a single industry; except that there is
no restriction with respect to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
(7) Purchase or sell commodities or commodity contracts or real
estate, except the Fund may purchase and sell securities secured by real estate
and securities of companies which deal in real estate;
(8) Underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
The following investment restrictions are "non-fundamental" and may be
changed with or without shareholder approval:
The Fund may not:
(1) Purchase securities on margin, except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(2) Invest more than 10% of its net assets in (i) securities with
legal or contractual restrictions on resale; (ii) securities for which market
quotations are not readily available; and (iii) repurchase agreements maturing
in more than seven days;
(3) Invest more than 5% of its total assets in securities of any
company having a record, together with its predecessors, of less than three
years of continuous operation;
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<PAGE>
(4) Make short sales of securities or maintain a short position
unless at all times when a short position is open it owns an equal amount of
such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short; or
(5) Invest in the securities of other investment companies except as
permitted by the Investment Company Act of 1940, as amended, or the rules
promulgated thereunder.
In order to comply with Securities and Exchange Commission regulations
relating to money market funds, the Fund will limit investments in the
securities of any single issuer (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase agreements
collateralized by such securities) to not more than 5% of the value of its total
assets at the time of purchase, except for 25% of the value of its total assets
which may be invested in "First Tier Securities" (as defined by the Securities
and Exchange Commission) of any one issuer for a period of up to three business
days. In addition, the Fund will not borrow money, pursuant to Fundamental
Investment Restriction (2), in excess of 10% of its total assets. With respect
to Fundamental Investment Restriction (6), the Fund is permitted to invest in
excess of 25% of its total assets in obligations of U.S. banks and domestic
branches of foreign banks that are subject to the same regulation as U.S. banks.
SECURITIES TRANSACTIONS
Lyon Street, under policies established by the Board of Trustees, selects
broker-dealers to execute transactions for the Fund. It is the policy of the
Trust, in effecting transactions in portfolio securities, to seek best price and
execution of orders. The determination of what may constitute best price and
execution in the execution of a transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund, involving both price paid or received and any commissions
and other costs paid, the breadth of the market where the transaction is
executed, the efficiency with which the transaction is effected, the ability to
effect the transaction at all where a large block is involved, the availability
of the broker to stand ready to execute potentially difficult transactions in
the future and the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by Lyon Street in determining the
overall reasonableness of brokerage commissions paid. In determining best price
and execution and selecting brokers to execute transactions, Lyon Street may
consider brokerage and research services, such as analyses and reports
concerning issuers, industries, securities, economic factors and trends, and
other statistical and factual information provided to the Fund. Lyon Street is
authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing the Fund's transactions which is in excess
of the amount of commission another broker-dealer would have charged for
effecting that transaction if, but only if, Lyon Street determines in good faith
that such commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer viewed in terms of that
particular transaction or the overall responsibilities of Lyon Street to the
Fund. Any such research and other statistical and factual information provided
by brokers to the Fund or Lyon Street is considered to be in addition to and not
in lieu of services required to be performed by Lyon Street under its Investment
Advisory Agreement with the Trust. The cost, value and specific application of
such information are indeterminable and hence are not practicably allocable
among the Trust and other clients of Lyon Street who may indirectly benefit from
the availability of such information. Similarly, the Trust may indirectly
benefit from information made available as a result of transactions effected for
such other clients.
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<PAGE>
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, Lyon Street will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of newly issued securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. The Fund may participate, if and when practicable, in
group bidding for the purchase of certain securities directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group.
Neither Lyon Street nor the Fund intends to place securities transactions
with any particular broker-dealer or group thereof. However, the Trust's Board
of Trustees has determined that the Fund may follow a policy of considering
sales of the Fund's shares as a factor in the selection of broker-dealers to
execute portfolio transactions, subject to the requirements of best price and
execution described above. The policy of the Fund with respect to brokerage is
and will be reviewed by the Trust's Board of Trustees from time to time.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the foregoing practices
may be changed, modified or eliminated.
Lyon Street expects that purchases and sales of debt instruments for the
Fund usually will be principal transactions. Debt instruments are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. There usually will be no brokerage commissions paid by the Fund
for such purchases.
Investment decisions for the Fund are made independently by Lyon Street
from those of the other investment portfolios of the Trust and investment
accounts advised by Lyon Street. It may frequently develop that the same
investment decision is made for more than one investment portfolio of the Trust
or other account advised by Lyon Street. Simultaneous transactions are
inevitable when the same security is suitable for the investment objective of
more than one investment portfolio or account. When two or more investment
portfolios or accounts are engaged in the purchase or sale of the same security,
the transaction is allocated as to amount in accordance with a formula which
Lyon Street believes is equitable to each investment portfolio or account. It
is recognized that in some cases this system could have a detrimental effect on
the price or volume of the security as far as a particular investment portfolio
is concerned. To the extent permitted by law, Lyon Street may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for another investment portfolio or account.
In no instances will securities held by the Fund be purchased from or sold
to Lyon Street, the Trust's Distributor or any of their "affiliated persons," as
defined in the 1940 Act, except as may be permitted by any applicable regulatory
exemption or exemptive order.
VALUATION OF SECURITIES
As stated in the prospectus, the Fund seeks to maintain a net asset value
of $1.00 per share and, in this connection, value its instruments on the basis
of amortized cost pursuant to Rule 2a-7 under the 1940 Act. This method values
a security at its cost on the date of purchase and thereafter assumes a constant
accretion or amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
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<PAGE>
price the Fund would receive if the Fund sold the instrument. During such
periods the yield to investors in the Fund may differ somewhat from that
obtained in a similar entity which uses available indications as to market value
to value its portfolio instruments. For example, if the use of amortized cost
resulted in a lower (higher) aggregate Fund value on a particular day, a
prospective investor in the Fund would be able to obtain a somewhat higher
(lower) yield and ownership interest than would result from investment in such
similar entity and existing investors would receive less (more) investment
income and ownership interest. However, the Trust expects that the procedures
and limitations referred to in the following paragraphs of this section will
tend to minimize the differences referred to above.
Under Rule 2a-7, the Trust's Board of Trustees, in supervising the
Fund's operations and delegating special responsibilities involving portfolio
management to Lyon Street, has established procedures that are intended, taking
into account current market conditions and the Fund's investment objectives, to
stabilize the net asset value of the Fund, as computed for the purposes of
purchases and redemptions, at $1.00 per share. The Trustees' procedures include
periodic monitoring of the difference between the amortized cost value per share
and the net asset value per share based upon available indications of market
value (the "Market Value Difference"). Available indications of market value
consist of actual market quotations or appropriate substitutes which reflect
current market conditions and include (a) quotations or estimates of market
value for individual portfolio instruments and/or (b) values for individual
portfolio instruments derived from market quotations relating to varying
maturities of a class of money market instruments.
In the event the Market Value Difference exceeds 1/2 of 1%, the
Trustees' procedures provide that the Trustees will take such steps as they
consider appropriate (e.g., selling portfolio instruments to shorten the
dollar-weighted average portfolio maturity or to realize capital gains or
losses, reducing or suspending shareholder income accruals, redeeming shares in
kind, or utilizing a net asset value per share based upon available indications
of market value which under such circumstances would vary from $1.00) to
eliminate or reduce to the extent reasonably practicable any material dilution
or other unfair results to investors or existing shareholders which might arise
from Market Value Differences.
The Fund limits its investments to instruments which Lyon Street has
determined present minimal credit risk (pursuant to guidelines established by
the Board of Trustees) and which are "Eligible Securities" as defined by Rule
2a-7. The Fund is also required to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share. Should the disposition of a security
result in a dollar-weighted average portfolio maturity of more than 90 days, the
Fund will invest its available cash in such a manner as to reduce such maturity
to 90 days or less as soon as practicable.
It is the normal practice of the Fund to hold securities to maturity
and realize par therefor, unless a sale or other disposition is mandated by
redemption requirements or other extraordinary circumstances. Under the
amortized cost method of valuation traditionally employed by institutions for
valuation of money market instruments, neither the amount of daily income nor
the net asset value is affected by any unrealized appreciation or depreciation
of the Fund. In periods of declining interest rates, the indicated daily yield
on shares of the Fund, computed by dividing its annualized daily income by the
net asset value computed as above, may tend to be lower than similar
computations made by utilizing a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the daily yield of shares at
the value computed as described above may tend to be higher than a similar
computation made by utilizing a method of calculation based upon market prices
and estimates.
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<PAGE>
TRUSTEES AND OFFICERS
The Trust is governed by a Board of Trustees. The Trustees are
responsible for the overall management of the Trust and retain and supervise the
Funds' Adviser, Administrator, Distributor, Transfer Agent and Custodian.
The names and principal occupations during the last five years of the
Trustees and officers of the Trust are listed below. The address of all the
Trustees and officers is 3435 Stelzer Road, Columbus, Ohio 43219.
Joseph F. Damore, Trustee, 46; President and Chief Executive Officer
of Sparrow Hospital and Health System; formerly Director and Executive Vice
President, Sisters of Mercy Health Corporation.
* E. Philip Farley, Trustee, 59; 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.
* Walter B. Grimm, Trustee, Chairman and Vice President, 53; Senior
Vice President of Client Services for BISYS Fund Services; formerly President of
Lehigh Investments.
James F. Rainey, Trustee, 56; Associate Dean for Academic Affairs in
The Eli Broad Graduate School of Management at Michigan State University.
Ronald F. VanSteeland, Trustee, 58; Vice President for Finance and
Administration and Treasurer of Grand Valley State University, Allendale,
Michigan; and Treasurer of Grand Valley State University Foundation.
James F. Duca, II, President, 41; Vice President of Old Kent Financial
Corporation; and formerly Vice President and Trust Counsel for Marshall & Ilsley
Trust Company.
R. Jeffrey Young, Vice President and Assistant Secretary, 34; Vice
President - Client Services for BISYS Fund Services; and formerly employed by
The Heebink Group.
Martin R. Dean, Treasurer, 35; Vice President - Fund Administration
for BISYS Fund Services; and formerly employed by KPMG Peat Marwick LLP.
Robert L. Tuch, Secretary, 47; Vice President - Legal Services for
BISYS Fund Services.
W. Bruce McConnel, III, Assistant Secretary, 56; Partner in the law
firm of Drinker Biddle & Reath LLP.
Alaina V. Metz, Assistant Secretary, 32; Chief Administrator of the
Blue Sky Department for BISYS Fund Services and formerly employed by Alliance
Capital Management.
- -----------------------------------
* This Trustee is an interested person of the Trust as defined under the 1940
Act.
During the fiscal year ended December 31, 1998, no officer, director or
employee of the Trust's service contractors, or any of their parents or
subsidiaries, received any direct remuneration from the Trust for serving as a
Trustee or officer of the Trust, although BISYS and its affiliates, of which
Messrs.
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Grimm, Young, Dean, and Tuch and Ms. Metz are also employees, received fees from
the Trust for administrative, fund accounting and transfer agency services.
Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal
fees as counsel to the Trust. Each Trustee earns an annual fee of $8,000 and
additional fees of $1,750 for each regular meeting attended, $1,000 for each
special meeting attended and $500 for each telephonic meeting, plus
reimbursement of expenses incurred as a Trustee.
Listed below is the compensation paid to each Trustee by the Trust for
the fiscal year ended December 31, 1998. The Board of Trustees has established
The Kent Funds Deferred Compensation Plan (the "Deferred Compensation Plan")
pursuant to which the Trustees may elect to defer receipt of the compensation
payable to them by the Trust. Under the terms of the Deferred Compensation Plan,
amounts deferred by the Trustees are credited with the earnings on certain
investment options which may include one or more of the Trust's Funds. Trustees
receive payment of their deferred compensation and any related earnings upon
ceasing to be a Trustee of the Trust. Such payment is made at the election of
the Trustee, either in a lump sum or in annual installments over two to fifteen
years. The Trust's obligation to pay the Trustee's deferred compensation is a
general unsecured obligation.
<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 $15,000* $15,000
E. Philip Farley, Trustee $ 0 $ 0
Walter B. Grimm, Trustee $ 0 $ 0
James F. Rainey, Trustee $15,000* $15,000
Ronald F. VanSteeland, Trustee $15,000 $15,000
</TABLE>
___________________
* During the fiscal year ended December 31, 1998, Mr. Damore deferred
$15,000 of his compensation and Mr. Rainey deferred $7,500 of his
compensation pursuant to the Deferred Compensation Plan.
As of the date hereof, the Trustees and officers of the Trust as a
group beneficially owned less than 1% of the Trust's outstanding shares.
INVESTMENT ADVISER
Lyon Street Asset Management Company
Lyon Street is the investment adviser to the Fund. As of December 31,
1998, Lyon Street managed assets of approximately $6.1 billion. The Trust is the
first registered investment company for
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which Lyon Street has provided investment advisory services. Lyon Street is
located at 111 Lyon Street, N.W., Grand Rapids, MI 49503.
Old Kent Bank ("Old Kent"), of which Lyon Street is a wholly-owned
subsidiary, is a Michigan banking corporation which, with its affiliates,
provided commercial and retail banking and trust services through more than 200
banking offices in Michigan and Illinois as of December 31, 1998. Old Kent
offers a broad range of financial services, including commercial and consumer
loans, corporate and personal trust services, demand and time deposit accounts,
letters of credit and international financial services.
Old Kent is a subsidiary of Old Kent Financial Corporation, a bank
holding company headquartered in Grand Rapids, Michigan, with approximately
$16.6 billion in total consolidated assets as of December 31, 1998. Through
offices in numerous states, Old Kent Financial Corporation and its subsidiaries
provide a broad range of financial services to individuals and businesses.
Lyon Street employs an experienced staff of professional investment
analysts, portfolio managers and traders and uses several proprietary
computer-based systems in conjunction with fundamental analysis to identify
investment opportunities.
Investment Advisory Agreement
The overall supervision and management of the Fund rests with the
Trust's Board of Trustees. Pursuant to a written Investment Advisory Agreement
with the Trust, dated October 12, 1990, as amended, Lyon Street furnishes to the
Trust investment advice with respect to the Fund, makes all investment decisions
for the Fund, and places purchase and sale orders for the Fund's securities.
Lyon Street is responsible for all expenses incurred by it in connection with
its advisory activities, other than the cost of securities and other investments
purchased or sold for the Fund, and any brokerage commissions or other
transaction charges that may be associated with such purchases and sales.
For its services to the Fund, Lyon Street is entitled to an annual fee
based on the average daily net asset value of the Fund, payable monthly, at the
rate of 0.40%. Lyon Street may rebate its advisory fees to certain of its
institutional customers.
Under the Investment Advisory Agreement, Lyon Street's liability in
connection with rendering services thereunder is limited to situations involving
a breach of its fiduciary duty, its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The Trustees of the Trust, including a majority of those Trustees who
are not parties to the Investment Advisory Agreement or interested persons of
any such party, approved the agreement with respect to the Fund on November 19,
1998. The Agreement continues in effect from year to year with respect to the
Fund only if such continuance is specifically approved at least annually by the
Trustees of the Trust, including the "non-interested" Trustees, or by vote of a
majority of the outstanding voting shares of the Fund. The Investment Advisory
Agreement will terminate automatically upon its assignment and may be terminated
without penalty on 60-days' written notice at the option of either party or by a
vote of the shareholders of the Fund.
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<PAGE>
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 provides management and
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administrative services and, in general, supervises the operation of the 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 Fund management and administrative services, as well as all
necessary office space, equipment and clerical personnel for managing and
administering the affairs of the Fund. 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 Fund
and the Trust's other investment portfolios 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 - .185% of such assets; between $5.0 and
$7.5 billion - .165% of such assets; and over $7.5 billion - .135% of such
assets, provided, however, that such annual fee shall be subject to an annual
minimum fee of $45,000 per investment portfolio that is applicable to the Fund.
All expenses (other than those specifically referred to as being borne by OKSC
in the Administration Agreement) incurred by OKSC in connection with the
operation of the Trust are borne by the Fund and the Trust's other investment
portfolios. To the extent that OKSC incurs any such expenses or provides certain
additional services to the Trust, the Fund 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 the Fund's shares, calculates the Fund's net asset value,
and maintains the general ledger accounting records for the Fund. For these
services and those provided to the Trust's other investment portfolios, OKSC is
entitled to receive a fee computed daily at the annual rate of .015% of the
Trust's average daily net assets. 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 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 Funds 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
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called for that purpose by a majority of the Trustees and a majority of the
"non-interested" Trustees, as that term is defined in the 1940 Act. Shares of
the Fund are sold on a continuous basis by 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 Fund.
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 the Fund's shares and
maintains the Fund's shareholder transfer and accounting records, such as the
history of purchases, redemptions, dividend distributions, and similar
transactions in a shareholder's account.
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.
KPMG LLP, Two Nationwide Plaza, Suite 1600, Columbus, Ohio 43215,
Certified Public Accountants, 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The prospectus for the Fund describes those investors who are eligible
to purchase shares of the Fund.
In an exchange, shares in the investment portfolio from which an
investor is withdrawing will be redeemed at the net asset value per share next
determined after the exchange request is received. Shares of the investment
portfolio in which the investor is investing will also normally be purchased at
the net asset value per share next determined after acceptance of the purchase
order by the Trust in accordance with its customary policies for accepting
investments.
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the NYSE is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the NYSE is closed for other than customary weekend and
holiday closings; (c) the Securities and Exchange Commission has by order
permitted such suspension; or (d) an emergency exists as determined by the
Securities and Exchange Commission. (The
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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 "How Can I
Redeem Shares," the Trust may redeem shares involuntarily if it appears
appropriate to do so in light of the Trust's responsibilities under the 1940
Act, to reimburse the Fund for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder, or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Fund shares as provided in the prospectus
from time to time.
The Fund may make payment for redemption in securities or other property if
it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other
property, shareholders may incur additional costs in connection with the
conversion thereof to cash. Redemption in kind is not as liquid as a cash
redemption. Shareholders who receive a redemption in kind may receive less than
the redemption value of their shares upon sale of the securities or property
received, particularly where such securities are sold prior to maturity.
The Trust has filed an election pursuant to Rule 18f-1 under the 1940 Act
which provides that each portfolio of the Trust is obligated to redeem shares
solely in cash up to $250,000 or 1% of such portfolio's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount may be made in proceeds other than cash.
DIVIDENDS AND TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
The discussion of federal income tax consequences in the prospectus and
this SAI is based on the Internal Revenue Code of 1986, as amended (the "Code")
and the laws and regulations issued thereunder as in effect on the date of this
SAI. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
The Fund will be treated as a separate corporate entity under the Code and
intends to elect to qualify as a regulated investment company. In order to
qualify as a regulated investment company, the Fund must comply with certain
requirements in the Code. The Fund is required to distribute annually an amount
equal to at least the sum of 90% of its investment company income and 90% of its
net tax-exempt interest income (the "Distribution Requirement"). The Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund
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has not invested more than 5% of the value of its total assets in securities of
any one issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of any one issuer), and no more than 25% of the
value of the Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses.
The Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain"), if any, for
each taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as long-term capital gain, regardless of the length of
time the shareholder has held the shares, whether such gain was recognized by
the Fund prior to the date on which a shareholder acquired shares of the Fund,
or whether the distribution was paid in cash or reinvested in shares. In
addition, investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain dividends have been paid
with respect to such shares.
Ordinary income of individuals is taxable at a maximum marginal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the effective maximum marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum nominal rate of 20% for assets held more than 18 months
and 28% for assets held more than 12 months but not more than 18 months. For
corporations, long-term capital gains and ordinary income are both taxable at a
maximum nominal rate of 35%.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
all distributions would be taxable as ordinary income to the extent of the
Fund's current and accumulated earnings and profits.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all Federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Fund may be subject
to the tax laws of such states or localities.
DECLARATION OF TRUST
Description of Shares
The Trust's Restatement of Declaration of Trust authorizes the issuance of
an unlimited number of shares of beneficial interest in one or more separate
series, and the creation of one or more classes of shares within each series.
Each share of a series represents an equal proportionate interest in the Trust
with each other share of that series. Each series represents interests in a
different investment portfolio. The Trust currently offers fifteen series of
shares. The Fund has a single class of shares. The other series
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of the Trust have two separate classes -- Investment Shares and Institutional
Shares. Each share of the Trust has no par value and is entitled to such
dividends and distributions of the income earned on its respective series'
assets as are declared at the discretion of the Trustees. Each class or series
is entitled upon liquidation of such class or series to a pro rata share in the
net assets of that class or series. Shareholders have no preemptive rights. When
issued for payment as described in the prospectus, shares will be legally
issued, fully paid and non-assessable.
The proceeds received by the Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to and
constitute the underlying assets of the Fund. The underlying assets of the Fund
will be segregated on the books of account, and will be charged with the
liabilities in respect to the Fund and with a share of the general liabilities
of the Trust. Expenses with respect to the portfolios of the Trust are normally
allocated in proportion to the net asset value of the respective portfolios
except where allocations of direct expenses can otherwise be fairly made.
Shareholder Liability
The Trust is an entity of the type commonly known as a "Massachusetts
Business Trust." Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, there is a possibility that shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, even if the Trust were held to be a
partnership, the possibility of the shareholders incurring financial loss for
that reason appears remote because the Trust's Restatement of Declaration of
Trust contains an express disclaimer of shareholder liability for obligations of
the Trust and requires that notice of such disclaimer be given in every note,
bond, contract or other undertaking entered into or executed by the Trust or the
Trustees. In addition, the Restatement of Declaration of Trust provides for
indemnification out of the Trust property for any shareholder held personally
liable for the obligations of the Trust.
Voting Rights
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interests of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement, a
distribution plan subject to Rule 12b-1, or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of that
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Trust voting together in the aggregate without
regard to a particular investment portfolio.
The term "majority of the outstanding shares" means the vote of the lesser
of (i) 67% or more of the shares of the Fund present at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
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Shares of the Trust have non-cumulative voting rights, which means that the
holders of more than 50% of the shares of the Trust voting for the election of
Trustees can elect 100% of the Trustees to be elected at a meeting and, in such
event, the holders of the remaining less than 50% of the shares of the Trust
voting will not be able to elect any Trustees.
As a general matter, the Trust does not hold annual or other meetings of
shareholders. At such time, however, as less than a majority of the Trustees
holding office have been elected by shareholders, the Trustees then in office
will call a shareholders meeting for the election of Trustees. The Trustees
shall continue to hold office indefinitely, unless otherwise required by law,
and may appoint successor Trustees. A Trustee may be removed from office: (1) at
any time by two-thirds vote of the Trustees; or (2) at a special meeting of
shareholders by a two-thirds vote of the outstanding shares. Trustees may also
voluntarily resign from office.
Limitation of Trustees' Liability
The Restatement of Declaration of Trust provides that the Trustees shall
not be responsible or liable for any neglect or wrongdoing of any officer,
agent, employee or adviser of the Trust, provided that they have exercised
reasonable care in the selection of such individuals. The Restatement of
Declaration of Trust also provides that a Trustee shall be indemnified against
all liabilities and expenses reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding in which said Trustee is
involved by reason of being or having been a Trustee of the Trust, except with
respect to any matter as to which such Trustee has been finally adjudicated not
to have acted in good faith in the reasonable belief that his or her actions
were in the best interest of the Trust. Nothing in the Restatement of
Declaration of Trust shall protect a Trustee against any liability for his or
her willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office as Trustee.
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
The yields of the Fund as they may appear from time to time in
advertisements will be calculated by determining the net change exclusive of
capital changes (all realized and unrealized gains and losses) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base period return,
multiplying the base period return by (365/7) and carrying the resulting yield
figure to the nearest hundredth of one percent. The determination of net change
in account value will reflect the value of additional shares purchased with
dividends from the original share and dividends declared on both the original
share and any such additional shares and all fees charged to all shareholder
accounts for each class of shares in proportion to the length of the base period
and the average account size for each class. The 30-day yield is determined
similarly.
If realized and unrealized gains and losses were included in the yield
calculation, the yield of the Fund might vary materially from that reported in
advertisements.
In addition to the yields of the Fund, the effective yields may appear from
time to time in advertisements. The effective yield will be calculated by
compounding the unannualized base period return by adding 1 to the quotient,
raising the sum to a power equal to 365 divided by 7, subtracting 1 from the
result and carrying the resulting effective yield figure to the nearest
hundredth of one percent.
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The Fund may also quote from time to time its total return in accordance
with Securities and Exchange Commission Regulations.
ADVERTISING INFORMATION
The Fund may from time to time include in advertisements, sales literature,
communications to shareholders and other materials (collectively, "Materials") a
total return figure that compares the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
the Fund may calculate its aggregate total return for the period of time
specified in the Materials by assuming the investment of $10,000 in shares of
the Fund and assuming the reinvestment of all dividends and distributions.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value.
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in Materials. "Compounding" refers to the fact that,
if dividends or other distributions on an investment in the Fund are paid in the
form of additional shares of the Fund, any future income or capital appreciation
of the Fund would increase the value, not only of the original investment, but
also of the additional shares received through reinvestment. As a result, the
value of the investment in the Fund would increase more quickly than if
dividends or other distributions had been paid in cash.
In addition, the Fund may also include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of the Fund (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and Treasury securities. From time to time, Materials
may summarize the substance of information contained in shareholder reports
(including the investment composition of the Fund), as well as the views of the
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Materials charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Materials may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Materials may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
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ADDITIONAL INFORMATION
Except as otherwise stated in the Trust's prospectus, this SAI or required
by law, the Trust reserves the right to change the terms of the offers stated in
its prospectus or this SAI without shareholder approval, including the right to
impose or change certain fees for services provided.
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APPENDIX A
DESCRIPTION OF SECURITIES
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
& Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1." However, the obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes such
payments will be made during such grace period. The "D" rating will also be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
A-2
<PAGE>
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood
of an untimely payment of principal and interest of debt instruments with
original maturities of one year or less. The following summarizes the ratings
used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as non-
investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by S&P for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A-3
<PAGE>
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" - are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to non-payment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to non-payment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
non-payment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating is also
used upon the filing of a bankruptcy petition or the taking of similar action if
payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, commodities, or currencies;
obligations exposed to severe prepayment risk - such as interest-only and
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A-5
<PAGE>
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
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"CCC", "CC" and "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have
the highest potential for recovery around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e. below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and financial broker-dealers. The
following summarizes the rating categories used by Thomson Financial BankWatch
for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are, however, more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by Thomson
Financial BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
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PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A S&P rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. The following summarizes the
ratings used by S&P Ratings Group for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality is
present. Protection commonly regarded as required of an investment security is
present and although not distinctly or predominantly speculative there is
specific risk.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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