<PAGE> 1
As filed with the Securities and Exchange Commission on February 26, 1999
Securities Act File No. 33-8398
Investment Company Act File No. 811-4824
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No.____ |_|
Post-Effective Amendment No. 28 and/or |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 29
(Check appropriate box or boxes)
THE KENT FUNDS
--------------
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
---------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (614) 470-8000
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath LLP
1345 Chestnut Street, Philadelphia, PA 19107
--------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|_| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|X| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered........................................None
<PAGE> 2
KENT FUNDS
================================================================================
- ----------
PROSPECTUS
- ----------
May 1, 1999
EQUITY FUNDS
Kent Growth and Income Fund
Kent Index Equity Fund
Kent Large Company Growth Fund
Kent Small Company Growth Fund
Kent International Growth Fund
BOND FUNDS
Kent Income Fund
Kent Intermediate Bond Fund
Kent Short Term Bond Fund
MUNICIPAL BOND FUNDS
Kent Tax-Free Income Fund
Kent Intermediate Tax-Free Fund
Kent Michigan Municipal Bond Fund
MONEY MARKET FUNDS
Kent Money Market Fund
Kent Government Money Market Fund
Kent Michigan Municipal Money Market Fund
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE SHARES DESCRIBED IN
THIS PROSPECTUS OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
QUESTIONS?
CALL 1-800-633-KENT (5368)
OR YOUR INVESTMENT REPRESENTATIVE.
================================================================================
<PAGE> 3
TABLE OF CONTENTS
================================================================================
CAREFULLY REVIEW THIS IMPORTANT SECTION, WHICH SUMMARIZES EACH FUND'S
INVESTMENTS, RISKS, PAST PERFORMANCE, AND FEES.
RISK/RETURN SUMMARY AND FUND EXPENSES
EQUITY FUNDS
INVESTMENT OBJECTIVES,
PRINCIPAL INVESTMENT STRATEGIES AND
PERFORMANCE INFORMATION
PRINCIPAL RISKS
FEES AND EXPENSES
BOND FUNDS
INVESTMENT OBJECTIVES,
PRINCIPAL INVESTMENT STRATEGIES AND
PERFORMANCE INFORMATION
PRINCIPAL RISKS
FEES AND EXPENSES
MUNICIPAL BOND FUNDS
INVESTMENT OBJECTIVES,
PRINCIPAL INVESTMENT STRATEGIES AND
PERFORMANCE INFORMATION
PRINCIPAL RISKS
FEES AND EXPENSES
MONEY MARKET FUNDS
INVESTMENT OBJECTIVES,
PRINCIPAL INVESTMENT STRATEGIES AND
PERFORMANCE INFORMATION
PRINCIPAL RISKS
FEES AND EXPENSES
1
<PAGE> 4
ADDITIONAL INFORMATION
INVESTING FOR DEFENSIVE PURPOSES
YEAR 2000 AND THE KENT FUNDS
================================================================================
REVIEW THIS SECTION FOR DETAILS ON THE PEOPLE AND ORGANIZATIONS WHO OVERSEE THE
FUNDS.
FUND MANAGEMENT
THE INVESTMENT ADVISER
THE PORTFOLIO MANAGERS
THE DISTRIBUTOR, ADMINISTRATOR AND
SUB-ADMINISTRATOR
================================================================================
REVIEW THIS SECTION FOR DETAILS ON HOW SHARES ARE VALUED, HOW TO PURCHASE, SELL
AND EXCHANGE SHARES, RELATED CHARGES AND PAYMENTS OF DIVIDENDS AND
DISTRIBUTIONS.
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
PURCHASING AND SELLING YOUR
INVESTMENT SHARES
PURCHASING AND SELLING YOUR
INSTITUTIONAL SHARES
GENERAL POLICIES ON SELLING SHARES
DISTRIBUTION AND SERVICES FEES
EXCHANGING YOUR SHARES
DIVIDENDS, DISTRIBUTIONS AND TAXES
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
BACK COVER
WHERE TO LEARN MORE ABOUT THE FUNDS
2
<PAGE> 5
RISK/RETURN SUMMARY AND FUND EXPENSES
================================================================================
The Risk/Return Summary provides information about:
[ ] the investment objective
[ ] principal investment strategy
[ ] performance information, and
[ ] fees and expenses
for the Equity Funds, Bond Funds, Municipal Bond Funds and Money Market Funds.
The Funds are managed by Lyon Street Asset Management Company ("Lyon Street").
The performance information contained in the summary includes:
[ ] a bar chart showing changes in the Fund's returns from year
to year over the life of the Fund; and
[ ] a table showing how the Fund's average annual returns for one
year and five years (or the life of the Fund) compare to those
of a broad based securities market index.
The Funds' investment objectives are "non-fundamental," which means they can be
changed by the Board of Trustees without shareholder approval. The Funds' other
investment policies are also "non-fundamental" unless specifically identified as
"fundamental."
Investing in the Funds involves the risks common to any investment in
securities. By itself, no Fund constitutes a balanced investment program. There
is no guarantee that any Fund will achieve its investment objective since there
is uncertainty in every investment. An investment in the Funds is not a bank
deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Please be sure to read the risk
information BEFORE you invest.
================================================================================
3
<PAGE> 6
EQUITY FUNDS
INVESTMENT OBJECTIVES
PRINCIPAL INVESTMENT STRATEGIES
AND PERFORMANCE INFORMATION
KENT GROWTH AND INCOME FUND
Ticker Symbol: Investment Shares KNVIX Institutional Shares KNVEX
----- -----
INVESTMENT OBJECTIVES Long-term capital growth with current
income as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in equity
securities of U.S. companies each
having $100 million or more in market
capitalization, that are traded on the
New York Stock Exchange, American Stock
Exchange or over-the-counter. Lyon
Street will select common stocks that
it believes have potential primarily
for capital growth and secondarily for
income. A portion of the Fund's assets
may be invested in preferred stock or
bonds convertible into common stock.
The Fund expects to earn current income
mainly from stock dividends and from
interest on convertible bonds.
================================================================================
MARKET CAPITALIZATION is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
shares that are outstanding.
PERFORMANCE INFORMATION
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Standard and Poor's 500 Composite Stock Price
Index (the "S&P 500") in the table below is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
[BAR GRAPH]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 11.98% 0.51% 34.91% 19.47% 24.14% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
4
<PAGE> 7
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- -------------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- -------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
<S> <C> <C> <C> <C>
Investment Shares 12/1/92 _____% _____% _____%
Institutional Shares 11/2/92 _____% _____% _____%
S&P 500 Index _____% _____% _____%
- ------------------------------------------------- ---------------- ---------------- ----------------- ----------------
</TABLE>
KENT INDEX EQUITY FUND
Ticker Symbol: Investment Shares KNIDX Institutional Shares KNIEX
----- -----
INVESTMENT OBJECTIVES Long-term capital appreciation with
current income as a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES To achieve its objectives, the Fund
invests in common stock of companies
that make up the S&P 500. Lyon Street
will generally try to match the industry
composition of the S&P 500; however, the
Fund may be invested in the S&P 500
companies in different proportions. The
Fund will try to achieve a close
correlation between the performance that
it generates and that of the S&P 500.
Several factors may affect the Fund's
ability to exactly track the S&P 500's
performance, including the timing of
purchases and redemptions, changes in
securities markets and in the size of
the Fund.
The bar chart and table provide an indication of the risks of an investment
in the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Standard and Poor's 500 Composite Stock Price
Index (the "S&P 500")in the table below is an unmanaged index of 500 selected
common stocks, most of which are listed on the New York Stock Exchange.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
[BAR GRAPH]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 9.11% 0.86% 36.23% 22.18% 32.55% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- ---------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ---------------------------------------------------------------
</TABLE>
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 11/25/92 _____% _____% _____%
----------------- ---------------- ----------------- -----------------
INSTITUTIONAL SHARES 11/2/92 _____% _____% _____%
----------------- ---------------- ----------------- -----------------
S&P 500 INDEX _____% _____% _____%
- -------------------------------------------------- ----------------- ---------------- ----------------- -----------------
</TABLE>
KENT LARGE COMPANY GROWTH FUND
Ticker Symbol: Investment Shares N/A Institutional Shares N/A
--- ---
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in equity
securities of U.S. companies with at
least $4 billion in market
capitalization. The Fund intends to
invest in securities of companies which
Lyon Street believes have potential for
above-average growth.
PERFORMANCE BAR CHART AND TABLE
No performance information is shown for the Large Company Growth Fund which
commenced operations on _____________________.
KENT SMALL COMPANY GROWTH FUND
Ticker Symbol: Investment Shares KNEMX Institutional Shares KNEEX
----- -----
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in the equity
securities of a diverse group of
companies whose market capitalizations
are less than $2 billion at the time of
purchase. The Fund intends generally to
purchase common stock issued by each New
York Stock Exchange company that meets
this market capitalization criteria. The
value of the shares purchased will be
based on the company's capitalization
relative to all of the other eligible
companies. Lyon Street may elect to
exclude an eligible company from the
Fund's portfolio if it believes the
company is in financial difficulty or if
it believes that the company's stock is
too illiquid. Lyon Street will consider
selling shares if the issuer's market
capitalization increases to the point
that it is ranked in the top half of all
NYSE companies. The Fund may also
purchase shares of companies which are
listed on other U.S. securities
exchanges or which are traded over the
counter.
6
<PAGE> 9
MARKET CAPITALIZATION is a common measure of the size of a company. It is the
market price of a share of the company's stock multiplied by the number of
shares that are outstanding.
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Russell 2000 Index, in the table below, is an
unmanaged index of the smallest 2,000 companies in the Russell 3000 Index, as
ranked by total market capitalization. The Russell 2000 is widely regarded in
the industry as an index that accurately reflects the universe of small
capitalization stocks
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 17.04% -0.06% 23.75% 19.56% 27.94% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- ---------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ---------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/4/92 _____% _____% _____%
---------------- ---------------- ----------------- ----------------
INSTITUTIONAL SHARES 11/2/92 _____% _____% _____%
---------------- ---------------- ----------------- ----------------
RUSSELL 2000 INDEX _____% _____% _____%
- ------------------------------------------------- ---------------- ---------------- ----------------- ----------------
</TABLE>
KENT INTERNATIONAL GROWTH FUND
Ticker Symbol: Investment Shares KNIVX Institutional Shares KNINX
----- -----
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in the common and
preferred stocks of companies in
Europe, Australia and the Far East.
In allocating the Fund's portfolio, Lyon
Street considers a country's Gross
Domestic Product relative to other
countries and the country's weighting in
the Morgan Stanley Capital International
Europe, Australia and Far East Index.
The allocation of Fund assets may shift
from time to time from countries that
the Fund considers overvalued to
countries that it considers undervalued.
7
<PAGE> 10
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Morgan Stanley Capital International Europe,
Australia and Far East Index is a widely recognized, unmanaged index composed of
a sample of companies representative of the market structure of 20 European and
Pacific Basin countries; the Morgan Stanley Capital International Europe Index
is an unmanaged index of European stocks; and the Morgan Stanley Capital
International Pacific Index is an unmanaged index of stocks in the Pacific
region.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 30.32% 5.73% 13.00% 5.87% 2.54% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- ---------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ---------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/4/92 _____% _____% _____%
---------------- ---------------- ---------------- ------------------
INSTITUTIONAL SHARES 12/4/92 _____% _____% _____%
---------------- ---------------- ---------------- ------------------
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE,
AUSTRALIA AND FAR EAST INDEX _____% _____% _____%
---------------- ---------------- ---------------- ------------------
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE _____% _____% _____%
INDEX
---------------- ---------------- ---------------- ------------------
MORGAN STANLEY CAPITAL INTERNATIONAL PACIFIC _____% _____% _____%
INDEX
- ------------------------------------------------- ---------------- ---------------- ---------------- ------------------
</TABLE>
8
<PAGE> 11
PRINCIPAL RISKS
PRINCIPAL INVESTMENT RISKS - The Equity Funds will invest
ALL EQUITY FUNDS principally in common stocks, which
have historically presented greater
potential for capital appreciation
than fixed income securities, but do
not provide the same protection of
capital or assurance of income. There
is no guarantee that the Funds will
meet their goals. When you sell your
shares in the Funds, they may be worth
more or less than you paid for them. It
is possible to lose money by investing
in the Funds.
The two principal risks of equity
investing are market risk and selection
risk. Market risk means that the stock
market in general has ups and downs,
which may affect the performance of any
individual stock. Selection risk means
that the particular stocks that are
selected for a Fund may underperform the
market or other funds with similar
objectives.
ADDITIONAL PRINCIPAL While stocks of smaller companies
INVESTMENT RISKS can provide greater growth potential and
potentially higher returns, they carry
higher risks than larger companies. They
may trade infrequently or in lower
volumes, making it difficult for a Fund
to sell its shares at the price it
wants. Smaller companies may be more
sensitive to changes in the economy
overall. Historically, small company
stocks have been more volatile than
those of larger companies. As a result,
the Small Company Growth Fund's net
asset value may be subject to rapid and
substantial changes.
Investment in the International Growth
Fund involves additional risks not
present in Equity Funds which invest in
shares of U.S. companies.
Stocks of foreign companies are subject
to special risks:
* Currency risk means that
fluctuations in foreign exchange
rates could affect the dollar value
of a Fund's securities. A decline
in the value of a foreign currency
versus the U.S. dollar reduces the
dollar value of securities
denominated in that currency.
* Compared to companies in the U.S.,
there is generally less publicly
available information about foreign
companies and there may be less
government oversight of foreign
stock exchanges and the companies
traded on them. There may be
different accounting, auditing and
financial reporting standards. In
addition, foreign markets may have
lower trading volumes, resulting in
stocks that may be more difficult
to sell and more volatile in price.
Investments in some foreign
countries could be subject to such
factors as expropriation,
confiscation or difficulties
enforcing contracts. All of these
factors can make foreign
investments more risky than U.S.
investments.
9
<PAGE> 12
* The International Growth Fund may
invest more than 25% of its assets
in a particular foreign country. A
concentration of investments in any
one country could expose the Fund
to increased risk due to changes in
the economic or political
environment within that country.
* Furthermore, transaction fees may
be higher for foreign investments,
due to higher brokerage
commissions, fees on currency
exchanges, and possible imposition
of dividend or interest withholding
by foreign governments. These may
cause higher transaction costs
which can result in lower returns
or decrease liquidity.
A full discussion of all permissible
investments can be found in the
Statement of Additional Information.
WHO MAY WANT TO INVEST? Consider investing in an Equity Fund if
you are:
[ ] PURSUING A LONG-TERM GOAL SUCH AS
RETIREMENT
[ ] SEEKING TO ADD A GROWTH COMPONENT
TO YOUR PORTFOLIO
[ ] WILLING TO ACCEPT HIGHER RISKS OF
INVESTING IN THE STOCK MARKET IN
EXCHANGE FOR POTENTIALLY HIGHER
LONG TERM RETURNS
The Equity Funds will not be appropriate
for anyone:
[ ] SEEKING MONTHLY INCOME
[ ] PURSUING A SHORT-TERM GOAL OR
INVESTING EMERGENCY RESERVES
[ ] SEEKING SAFETY OF PRINCIPAL
10
<PAGE> 13
EQUITY FUNDS
FEES AND EXPENSES
As an investor in the Funds, you will pay the fees and expenses shown in the
table when you buy whole shares. Annual Fund operating expenses are paid out of
Fund assets, and are reflected in the share price.
<TABLE>
<CAPTION>
GROWTH AND INDEX LARGE COMPANY SMALL COMPANY
INCOME FUND EQUITY FUND GROWTH FUND GROWTH FUND
Investment Institutional Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid by you
directly)
Maximum Sales Charge
(Load) on Purchases None None None None None None None None
ANNUAL FUND
OPERATING EXPENSES
(expenses paid from
Fund assets)
Management Fees 0.70% 0.70% 0.30%2 0.30%(2) 0.70% 0.70% 0.70% 0.70%
Distribution and Service
(12b-1) Fees* 0.25% None 0.25% None 0.25% None 0.25% None
Other Expenses 0.23%(1) 0.23%(1) 0.24%(2) 0.24%(2) 0.30%(3) 0.30%(3) 0.24%(4) 0.24%(4)
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.18%(1) 0.93%(1) 0.79%(2) 0.54%(2) 1.25%(3) 1.00%(3) 1.19%(4) 0.94%(4)
Fee Waiver 0.01%(1) 0.01%(1) 0.11%(2) 0.11%(2) 0.01%(4) 0.01%(4)
Net Fund
Operating Expenses 1.17%(1) 0.92%(1) 0.68%(2) 0.43%(2) 1.25% 1.00% 1.18%(4) 0.93%(4)
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH FUND
Investment Institutional
Shares Shares
<S> <C> <C>
SHAREHOLDER FEES
Maximum Sales Charge
(Load) on Purchases None None
ANNUAL FUND
OPERATING EXPENSES
(expenses paid from
Fund Assets)
Management Fees 0.75% 0.75%
Distribution and Service
(12b-1) Fees 0.25% None
Other Expenses 0.31%(5) 0.31%(5)
TOTAL ANNUAL FUND
OPERATING EXPENSES 1.31%(5) 1.06%(5)
Fee Waiver 0.01%(5) 0.01%(5)
Net Fund
Operating Expenses 1.30%(5) 1.05%(5)
===== =====
</TABLE>
- -----------------------------------
(1) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.22%. You will be notified if the waiver is
discontinued after that date.
(2) The Fund's Investment Adviser and its Administrator have contractually
agreed to waive a portion of their investment advisory and administration
fees at least until December 31, 1999. As a result, Management Fees are
expected to be 0.27% for each class and Other Expenses are expected to be
0.16% for each class. You will be notified if either of these waivers is
discontinued after that date.
(3) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.29% for both classes. You will be notified if
the waiver is discontinued after that date.
(4) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.23% for each class. You will be notified if
the waiver is discontinued after that date.
(5) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.30% for each class. You will be notified if
the waiver is discontinued after that date. Expenses for the large company
Growth Fund are estimated based on expenses to be incurred in the
current fiscal year.
* Investors should be aware that, due to the distribution fees, a long term
shareowner in a Fund may pay over time more than the economic equivalent of
the maximum front-end sales charge permitted under the rules of the
National Association of Securities Dealers, Inc.
11
<PAGE> 14
EQUITY FUNDS
(CONTINUED)
EXAMPLE: Use the table below to compare fees and expenses with those of other
funds. Although your actual costs may be higher or lower, this example
illustrates the costs that you would pay, assuming the following:
* $10,000 investment
* 5% annual return
* redemption at the end of each period
* no changes in the Fund's operating expenses, except for the expiration
of the current contractual fee waivers on December 31, 1999.
<TABLE>
<CAPTION>
GROWTH AND INDEX LARGE COMPANY SMALL COMPANY
INCOME FUND EQUITY FUND GROWTH FUND GROWTH FUND
Investment Institutional Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Year
After Purchase $____ $____ $____ $____ $____ $____ $____ $____
Three Years
After Purchase $____ $____ $____ $____ $____ $____ $____ $____
Five Years
After Purchase $____ $____ $____ $____ $____ $____ $____ $____
Ten Years
After Purchase $____ $____ $____ $____ $____ $____ $____ $____
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH FUND
Investment Institutional
Shares Shares
<S> <C> <C>
One Year
After Purchase $____ $____
Three Years
After Purchase $____ $____
Five Years
After Purchase $____ $____
Ten Years
After Purchase $____ $____
</TABLE>
12
<PAGE> 15
BOND FUNDS
INVESTMENT OBJECTIVES
PRINCIPAL INVESTMENT STRATEGIES
AND PERFORMANCE INFORMATION
KENT INCOME FUND
Ticker Symbol: Investment Shares N/A Institutional Shares KNIIX
--- -----
INVESTMENT OBJECTIVE Current income
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in corporate and
government debt securities. The Fund is
permitted to purchase U.S. Government
obligations (those that are issued or
guaranteed by the U.S. Government or its
agencies or instrumentalities) and
investment-grade corporate debt
obligations (those that are rated in one
of the four highest categories by
Nationally Recognized Statistical Rating
Organizations ("Rating Agencies") or
unrated securities of comparable
quality. However, the Fund intends to
invest at least 65% of its total assets
in U.S. Government obligations and
corporate debt obligations that are
rated in one of the three highest
categories by Rating Agencies (or
unrated securities of comparable
quality). The Fund will maintain a
dollar weighted average portfolio
maturity between seven and twenty years.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
- Current yield and yield to
maturity.
- Potential for capital gain.
While the Fund will not normally engage
in frequent trading of portfolio
securities, it will make changes in its
investment portfolio from time to time
as economic conditions and market prices
dictate based on the Fund's investment
objective. The Fund may also sell a
security if it falls below the minimum
credit quality required for purchase. If
the Fund does buy and sell securities
frequently, there will be increased
transaction costs, which can negatively
impact Fund performance, and additional
taxable gains to shareholders.
13
<PAGE> 16
KENT INCOME FUND
(Continued)
PERFORMANCE INFORMATION
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Lehman Brothers Government/Corporate Bond
Index and the Lehman Brothers Long Government/Corporate Bond Index, in the
table below, are unmanaged indices comprised of U.S. Treasury issues, debt of
U.S. Government agencies, corporate debt guaranteed by the U.S. Government and
all publicly issued, fixed-rate, nonconvertible investment-grade
dollar-dominated, SEC-registered corporate debt.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 1.19% 10.55% 0.00%
</TABLE>
<TABLE>
- ---------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ---------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Since Inception
-------------------- ----------------- ----------------------------
<S> <C> <C> <C>
INVESTMENT SHARES 3/22/95 _____% _____%
-------------------- ----------------- ----------------------------
INSTITUTIONAL SHARES 3/20/95 _____% _____%
-------------------- ----------------- ----------------------------
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX
-----% -----%
-------------------- ----------------- ----------------------------
LEHMAN BROTHERS LONG GOVERNMENT/CORPORATE BOND
INDEX
-----% -----%
- -------------------------------------------------- -------------------- ----------------- ----------------------------
</TABLE>
14
<PAGE> 17
KENT INTERMEDIATE BOND FUND
Ticker Symbol: Investment Shares KNFVX Institutional Shares KNFIX
----- -----
INVESTMENT OBJECTIVE Current income
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in corporate and
government debt securities. The Fund is
permitted to purchase U.S. Government
obligations (those that are issued or
guaranteed by the U.S. Government or its
agencies or instrumentalities) and
investment-grade corporate debt
obligations (those that are rated in one
of the four highest categories by Rating
Agencies) or unrated securities of
comparable quality. The Fund will
maintain an average weighted portfolio
maturity between three and ten years.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
- Current yield and yield to
maturity.
- Potential for capital gain.
The Fund will actively buy and sell
securities or types of securities based
on changing economic and market
conditions. The Fund may also sell a
security if it falls below the minimum
credit quality required for purchase. If
the Fund buys and sells securities
frequently, there will be increased
transaction costs, which can negatively
impact Fund performance, and additional
taxable gains to shareholders.
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Lehman Brothers Intermediate Government/
Corporate Bond Index in the table below, is an unmanaged index comprised of U.S.
Treasury issues, publicly issued debt of U.S. Government agencies, corporate
debt guaranteed by the U.S. Government and all publicly issued, fixed-rate,
nonconvertible investment-grade dollar-denominated, SEC-registered corporate
debt.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the class differ.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
[BAR GRAPH]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 8.42% -3.19% 16.18% 3.01% 7.80% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future
<TABLE>
- ---------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ---------------------------------------------------------------
</TABLE>
15
<PAGE> 18
KENT INTERMEDIATE BOND FUND
(Continued)
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 11/25/92 ______% ______% ______%
---------------- --------------- ---------------- ----------------
INSTITUTIONAL SHARES 11/2/92 ______% ______% ______%
---------------- --------------- ---------------- ----------------
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT/CORPORATE BOND INDEX
______% ______% ______%
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------
</TABLE>
KENT SHORT TERM BOND FUND
Ticker Symbol: Investment Shares KNLIX Institutional Shares KNLMX
----- -----
INVESTMENT OBJECTIVE Current income
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 65%
of its total assets in corporate and
government debt securities. The Fund is
permitted to purchase U.S. Government
obligations (those that are issued or
guaranteed by the U.S. Government or its
agencies or instrumentalities) and
investment-grade corporate debt
obligations (those that are rated in one
of the four highest categories by Rating
Agencies) or unrated securities of
comparable quality. The Fund will
maintain an average weighted portfolio
between one and three years.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
Current yield and yield to maturity.
Potential for capital gain.
The Fund may also sell a security if it
falls below the minimum credit quality
required for purchase.
16
<PAGE> 19
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. In the table below, the Lehman Brothers 1-3 Year
Government Bond Index is an unmanaged index of U.S. Treasury issues and publicly
issued debt of U.S. Government agencies with maturities of one to three years;
the 91-day Treasury Bill return tracks the investment returns paid on U.S.
Treasury bills maturing in 91 days; and, the Consumer Price Index is an
unmanaged index measuring price increases in a standardized "market basket" of
consumer products.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 3.36% 1.03% 10.53% 4.22% 6.42% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
<TABLE>
- --------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- --------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/4/92 _____% _____% _____%
------------------ ------------------- ------------------ -------------------
INSTITUTIONAL SHARES 11/2/92 _____% _____% _____%
------------------ ------------------- ------------------ -------------------
LEHMAN BROTHERS 1-3 YEAR GOVERNMENT
BOND INDEX _____% _____% _____%
------------------ ------------------- ------------------ -------------------
CONSUMER PRICE INDEX _____% _____% _____%
------------------ ------------------- ------------------ -------------------
91-DAY TREASURY BILL _____% _____% _____%
- ----------------------------------------- ------------------ ------------------- ------------------ -------------------
</TABLE>
17
<PAGE> 20
PRINCIPAL RISKS
PRINCIPAL INVESTMENT RISKS All bonds fluctuate in value as interest
rates fluctuate. Generally, as interest
rates rise, the value of a Fund's bond
investments will decline, resulting in
capital losses to shareholders. In
general, the shorter the maturity, the
lower the risk and the lower the return.
The Bond Funds can acquire corporate
bonds that carry investment grade credit
ratings, which are bonds rated by a
Rating Agency in the fourth highest
rating category. Although bonds rated in
that category are considered to have
speculative characteristics, generally,
the risk of default for such securities
is low. In addition, since the bonds are
part of a diversified portfolio, the
failure of any one issue is unlikely to
have a significant impact upon the
portfolio as a whole. However, interest
and principal payments on these
securities may not be insured or
guaranteed.
Certain securities held by the Bond
Funds may be subject to additional
risks:
* Liquidity risk applies when there is a
limited secondary market for a security.
The security may, therefore, be
difficult to sell at the price desired.
A full discussion of all permissible
investments can be found in the SAI.
An issue of fixed income securities
could default on its obligations to pay
interest and repay principal. A bond's
credit rating could be downgraded.
WHO MAY WANT TO INVEST? Consider investing in a Bond Fund if you
are:
[ ] SEEKING TO ADD A MONTHLY INCOME
COMPONENT TO YOUR PORTFOLIO
[ ] SEEKING HIGHER POTENTIAL RETURNS
THAN THOSE PROVIDED BY MONEY MARKET
FUNDS
[ ] WILLING TO ACCEPT THE RISKS OF PRICE
AND DIVIDEND FLUCTUATIONS
These Funds will not be appropriate for
anyone:
[ ] SEEKING SAFETY OF PRINCIPAL
18
<PAGE> 21
BOND FUNDS
(Continued)
FEES AND EXPENSES
As an investor in the Fund, you will pay the fees and expenses shown in the
table when you buy whole shares. Annual Fund operating expenses are paid out of
Fund assets, and are reflected in the share price.
<TABLE>
<CAPTION>
INTERMEDIATE SHORT TERM
INCOME FUND BOND FUND BOND FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES
(Fees paid by you directly)
Maximum Sales Charge (Load)
on Purchases None None None None None None
ANNUAL FUND OPERATING
EXPENSES (expenses paid
from Fund assets)
Management Fees 0.60% 0.60% 0.55% 0.55% 0.50% 0.50%
Distribution and Services
(12b-1) Fees* 0.25% None 0.25% None 0.25%(3) None
Other Expenses 0.23%(1) 0.23%(1) 0.21%(2) 0.21%(2) 0.24%(3) 0.23%(3)
TOTAL FUND OPERATING
EXPENSES 1.08%(1) 0.83%(1) 1.01%(2) 0.76%(2) 0.99%(3) 0.73%(3)
Fee Waiver 0.01%(1) 0.01%(1) 0.01%(2) 0.01%(2) 0.11%(3) 0.01%(3)
Net Fund Operating Expense 1.07%(1) 0.82%(1) 1.00%(2) 0.75%(2) 0.88%(3) 0.72%(3)
</TABLE>
- -----------------------------------
(1) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.22% for both classes. You will be notified if
the waiver is discontinued after that date.
(2) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.20% for both classes. You will be notified if
the waiver is discontinued after that date.
(3) The Fund's Distributor has contractually agreed to waive a portion of the
Fund's 12b-1 fees for Investment Shares at least until December 31, 1999.
In addition, the Fund's Administrator has contractually agreed to waive a
portion of the administration fee at least until December 31, 1999.
Accordingly, Distribution and Service Fees are expected to be 0.15% and
Other Expenses are expected to be 0.21% for the Investment Shares and Other
Expenses are expected to be 0.22% for the Institutional Shares. You will be
notified if either of these waivers is discontinued after that date.
* Investors should be aware that, due to the distribution fees, a long term
shareowner in a Fund may pay overtime more than the economic equivalent of
the maximum front-end sales charge permitted under the rules of the
National Association of Securities Dealers, Inc.
19
<PAGE> 22
EXAMPLE: Use the table below to compare fees and expenses with those of other
funds. Although your actual costs may be higher or lower, this example
illustrates the costs that you would pay, assuming the following:
* $10,000 investment
* 5% annual return
* redemption at the end of each period
* no changes in the Fund's operating expenses, except for the expiration
of the current contractual fee waivers on December 31, 1999.
<TABLE>
<CAPTION>
INTERMEDIATE SHORT TERM
INCOME FUND BOND FUND BOND FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
One Year After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Three Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Five Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Ten Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
</TABLE>
20
<PAGE> 23
MUNICIPAL BOND FUNDS
INVESTMENT OBJECTIVES
PRINCIPAL INVESTMENT STRATEGIES
AND PERFORMANCE INFORMATION
KENT TAX-FREE INCOME FUND
Ticker Symbol: Investment Shares N/A Institutional Shares KNTIX
--- -----
INVESTMENT OBJECTIVE Current income that is exempt from
federal income tax
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 80%
of its net assets in federally
tax-exempt obligations. Federally
tax-exempt obligations consist of
municipal bonds, notes and commercial
paper issued by states and other local
governments that are exempt from federal
taxes. Securities whose interest is
considered a tax preference item under
the federal alternative minimum tax will
be considered taxable for purposes of
this policy. The Fund maintains a
dollar-weighted average portfolio
maturity between ten and twenty-five
years.
The Fund will purchase securities rated
in one of the four highest rating
categories by Rating Agencies or unrated
securities of comparable quality.
Obligations rated in the fourth highest
rating category are considered to have
speculative characteristics.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
* Current yield and yield to
maturity.
* Potential for capital gain.
The Fund may also sell a security if it
falls below the minimum credit quality
required for purchase.
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Lehman Brothers Municipal Bond Index is an
unmanaged index generally representative of general obligation municipal debt
instruments
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Percentage 3.92% 8.59% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- -----------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- -----------------------------------------------------------------
</TABLE>
21
<PAGE> 24
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Since Inception
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
INVESTMENT SHARES 3/31/95 _____% _____%
--------------------- --------------------- ----------------------
INSTITUTIONAL SHARES 3/20/95 _____% _____%
--------------------- --------------------- ----------------------
LEHMAN BROTHERS MUNICIPAL INDEX _____% _____%
- -------------------------------------------------- --------------------- --------------------- ----------------------
</TABLE>
KENT INTERMEDIATE TAX-FREE FUND
Ticker Symbol: Investment Shares KNMBX Institutional Shares KNMTX
----- -----
INVESTMENT OBJECTIVE Current income that is exempt from
federal income tax
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 80%
of its net assets in federally
tax-exempt obligations. Federally
tax-exempt obligations consist of
municipal bonds, notes and commercial
paper issued by states and other local
governments that are exempt from federal
taxes. Securities whose interest is
considered a tax preference item under
the federal alternative minimum tax will
be considered taxable for purposes of
this policy. The Fund maintains a dollar
weighted average portfolio maturity
between three and ten years.
The Fund will purchase securities rated
in one of the four highest rating
categories by Rating Agencies or unrated
securities of comparable quality.
Obligations rated in the fourth highest
rating category are considered to have
speculative characteristics.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
* Current yield and yield to
maturity.
* Potential for capital gain.
The Fund may also sell a security if it
falls below the minimum credit quality
required for purchase.
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Lehman Brothers Three-Year General Obligation
Municipal Bond Index and the Lehman Brothers Five-Year General Obligation
Municipal Bond Index. These are unmanaged indices of debt instruments issued by
municipalities.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Percentage 8.51% -3.00% 12.90% 3.41% 7.07% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
22
<PAGE> 25
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- --------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- --------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/18/92 _____% _____% _____%
---------------- --------------- ---------------- ----------------
INSTITUTIONAL SHARES 12/16/92 _____% _____% _____%
---------------- --------------- ---------------- ----------------
LEHMAN BROTHERS THREE-YEAR GENERAL OBLIGATION
MUNICIPAL BOND INDEX
-----% -----% -----%
---------------- --------------- ---------------- ----------------
LEHMAN BROTHERS FIVE-YEAR GENERAL OBLIGATION
MUNICIPAL BOND INDEX
-----% -----% -----%
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------
</TABLE>
KENT MICHIGAN MUNICIPAL BOND FUND
Ticker Symbol: Investment Shares KNMVX Institutional Shares KNMIX
----- -----
INVESTMENT OBJECTIVE Current income that is exempt from
federal income tax and Michigan personal
income tax
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 80%
of its net assets in federally
tax-exempt obligations. Federally
tax-exempt obligations consist of
municipal bonds, notes and commercial
paper issued by states and other local
governments that are exempt from federal
taxes. In addition, under normal market
conditions, at least 65% of the Fund's
total assets will be invested in
municipal obligations issued by the
State of Michigan or its political
subdivisions. The Fund maintains a
dollar weighted average portfolio
maturity between three and five years.
No security in the Fund will have a
remaining maturity of more than ten
years.
The Fund will purchase securities rated
in one of the four highest rating
categories by Rating Agencies or unrated
securities of comparable quality.
Obligations rated in the fourth highest
rating category are considered to have
speculative characteristics.
While maturity and credit quality are
the most important investment factors,
the Fund also considers the following
when making investment decisions:
* Current yield and yield to
maturity.
* Potential for capital gain.
The Fund may also sell a security if it
falls below the minimum credit quality
required for purchase.
23
<PAGE> 26
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance from year to year and as compared to a
broad-based securities index. The Lehman Brothers Three-Year General Obligation
Municipal Bond Index is an unmanaged index of debt obligations issued by
municipalities.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares.
(Both the chart and the table assume reinvestment of dividends and
distributions.)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Percentage 0.36% 8.20% 3.51% 5.52% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
<TABLE>
- ----------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- ----------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 5/11/93 _____% _____% _____%
---------------- --------------- ---------------- ----------------
INSTITUTIONAL SHARES 5/3/93 _____% _____% _____%
---------------- --------------- ---------------- ----------------
LEHMAN BROTHERS THREE-YEAR GENERAL OBLIGATION
MUNICIPAL BOND INDEX
-----% -----% -----%
- -------------------------------------------------- ---------------- --------------- ---------------- ----------------
</TABLE>
24
<PAGE> 27
PRINCIPAL RISKS
PRINCIPAL INVESTMENT RISKS INTEREST RATE RISK
------------------
All bonds fluctuate in value as interest
rates fluctuate. Generally, as interest
rates rise, the value of a Fund's bond
investments will decline, resulting in
capital losses to shareholders. In
general, the shorter the maturity, the
lower the risk and the lower the return.
CREDIT RISK
-----------
The types of obligations the Funds
generally invest in are listed below in
descending order of credit quality:
* general obligation bonds, which are
backed by the full faith, credit and
taxing power of the municipality
* revenue bonds, which are backed only
by revenues from a particular facility
or revenue source
* private activity bonds issued by
industrial development authorities,
which are used to finance privately
owned facilities and which are backed by
private entities. The credit quality of
these bonds is a function of the
creditworthiness of the private entity.
* moral obligation securities, which are
typically issued by special purpose
public authorities and are backed by a
reserve fund. If the issuer draws on the
reserve fund, the municipality is under
no legal obligation to restore the
funds.
STATE RISK - MICHIGAN MUNICIPAL BOND
------------------------------------
FUND
----
Due to the level of investment in
municipal obligations insured by the
State of Michigan and its political
subdivisions, the performance of the
Fund will be closely tied to the
economic and political conditions in the
State of Michigan, and, therefore, an
investment in the Fund may be riskier
than an investment in other types of
municipal bond funds.
WHO MAY WANT TO INVEST? Consider investing in a Municipal Bond
Fund if you are:
[ ] SEEKING TO ADD A MONTHLY INCOME
COMPONENT TO YOUR PORTFOLIO
[ ] SEEKING HIGHER POTENTIAL RETURNS
THAN THOSE PROVIDED BY MONEY MARKET
FUNDS
[ ] WILLING TO ACCEPT THE RISKS OF PRICE
AND DIVIDEND FLUCTUATIONS
[ ] SEEKING CURRENT INCOME THAT IS
EXEMPT FROM FEDERAL INCOME TAXES (AND,
IN THE CASE OF THE MICHIGAN MUNICIPAL
BOND FUND, CURRENT INCOME THAT IS EXEMPT
FROM MICHIGAN PERSONAL INCOME TAXES)
WILLING TO RECEIVE DIVIDEND
DISTRIBUTIONS A PORTION OF WHICH MAY BE
SUBJECT TO THE FEDERAL ALTERNATIVE
MINIMUM TAX
The Municipal Bond Funds are not
appropriate for:
[ ] TAX-EXEMPT INSTITUTIONS AND CERTAIN
RETIREMENT PLANS THAT ARE UNABLE TO
BENEFIT FROM THE RECEIPT OF TAX-EXEMPT
DIVIDENDS
[ ] ANYONE SEEKING SAFETY OF PRINCIPAL
25
<PAGE> 28
MUNICIPAL BOND FUNDS
(Continued)
FEES AND EXPENSES
As an investor in the Funds, you will pay the fees and expenses shown in the
table when you buy whole shares. Annual Fund operating expenses are paid out of
Fund assets, and are reflected in the share price.
<TABLE>
<CAPTION>
TAX-FREE INTERMEDIATE MICHIGAN MUNICIPAL
INCOME FUND TAX-FREE FUND BOND FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES
(Fees paid by you directly)
Maximum Sales (Load) Charge on
Purchases None None None None None None
ANNUAL FUND OPERATING
EXPENSES (expenses paid
from Fund assets)
Management Fees 0.55% 0.55% 0.50% 0.50% 0.45% 0.45%
Distribution and Service
(12b-1) Fees* 0.25% None 0.25% None 0.25%(3) None
Other Expenses 0.25%(1) 0.25%(1) 0.23%(2) 0.23%(2) 0.25%(3) 0.25%(3)
TOTAL FUND OPERATING
EXPENSES (expenses deducted from
Fund assets) 1.05%(1) 0.80%(1) 0.98%(2) 0.73%(2) 0.95%(3) 0.70%(3)
Fee Waiver 1.01%(1) 0.01%(1) 0.01%(2) 0.01%(2) 0.11%(3) 0.01%(3)
Net Fund Operating Expenses 1.04%(1) 0.79%(1) 0.97%(2) 0.72%(2) 0.84%(3) 0.69%(3)
</TABLE>
- -----------------
(1) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.24% for each class. You will be notified if
the waiver is discontinued after that date.
(2) The Fund's Administrator has contractually agreed to waive a portion of the
administration fee at least until December 31, 1999. As a result, Other
Expenses are expected to be 0.22% for each class You will be notified if
the waiver is discontinued after that date.
(3) The Fund's Distributor has contractually agreed to waive a portion of the
Fund's 12b-1 fees for Investment Shares at least until December 31, 1999.
In addition, the Fund's Administrator has contractually agreed to waive a
portion of the administration fee at least until December 31, 1999.
Accordingly, Distribution and Service Fees are expected to be 0.15%, and
Other Expenses are expected to be 0.24%, for the Investment Shares and
Institutional Shares. You will be notified if either of these waivers is
discontinued after that date.
* Investors should be aware that, due to the distribution fees, a long term
shareowner in a Fund may pay over time more than the economic equivalent of
the maximum front-end sales charge permitted under the rules of the
National Association of Securities Dealers, Inc.
26
<PAGE> 29
MUNICIPAL BOND FUNDS
(Continued)
EXAMPLE: Use the table below to compare fees and expenses with those of other
funds. Although your actual costs may be higher or lower, this example
illustrates the costs that you would pay, assuming the following:
* $10,000 investment
* 5% annual return
* redemption at the end of each period
* no changes in the Fund's operating expenses, except for the expiration
of the current contractual fee waivers on December 31, 1999.
<TABLE>
<CAPTION>
TAX-FREE INTERMEDIATE MICHIGAN MUNICIPAL
INCOME FUND TAX-FREE FUND BOND FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
One Year After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Three Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Five Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Ten Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
</TABLE>
27
<PAGE> 30
MONEY MARKET FUNDS
INVESTMENT OBJECTIVES
PRINCIPAL INVESTMENT STRATEGIES
AND PERFORMANCE INFORMATION
KENT MONEY MARKET FUND
Ticker Symbol: Investment Shares N/A Institutional Shares KIMXX
--- -----
INVESTMENT OBJECTIVE Current income
PRINCIPAL INVESTMENT STRATEGIES The Fund invests in a broad range of U.S.
Government, bank and commercial
obligations which are considered to be of
high credit quality and easily sold in
the secondary market. These securities
will have short term debt ratings in the
two highest rating categories of at least
two Rating Agencies or will be unrated
securities of comparable quality. The
Fund's average maturity will not exceed
90 days. The Fund will not purchase any
security which matures in more than 397
days.
The bar chart and table provide an indication of the risks of an
investment in the Fund by showing its performance from year to year.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
[BAR GRAPH]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage 5.65% 3.40% 2.68% 3.75% 5.58% 5.06% 5.23% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- -------------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- -------------------------------------------------------------------
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/9/92 _____% _____% _____%
------------------------------------------------------------------
INSTITUTIONAL SHARES 12/3/90 _____% _____% _____%
- --------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
KENT GOVERNMENT MONEY MARKET FUND
Ticker Symbol: Investment Shares N/A Institutional Shares KGIXX
--- -----
INVESTMENT OBJECTIVE Current income
PRINCIPAL INVESTMENT STRATEGIES The Fund invests in a broad range of U.S.
Treasury bills and notes and other
obligations issued by the U.S. Government
and its agencies, repurchase agreements
based on these securities and shares of
registered money market investment
companies that invest exclusively in
these securities. The Fund's average
maturity will not exceed 90 days. The
Fund will not purchase any security which
matures in more than 397 days.
The bar chart and table provide an indication of the risks of an investment
in the Fund by showing its performance from year to year.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
(Both the chart and the table assume reinvestment
of dividends and distributions.)
[BAR GRAPH]
<TABLE>
<CAPTION>
1998
<S> <C>
Percentage 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment Shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- -------------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- -------------------------------------------------------------------
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<CAPTION>
Class Inception Since Inception
------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SHARES 6/2/97 _____%
------------------------------------------------------------------
INSTITUTIONAL SHARES 6/2/97 _____%
- --------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
KENT MICHIGAN MUNICIPAL MONEY MARKET FUND
Ticker Symbol: Investment Shares N/A Institutional Shares KMIXX
--- -----
INVESTMENT OBJECTIVE Current income that is exempt from
federal income tax and Michigan personal
income tax
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests at least 80% of
its net assets in federally tax-exempt
obligations, which consist of municipal
bonds, notes and commercial paper issued
by states and local governments that are
exempt from federal taxes. Normally, the
Fund will invest at least 65% of its
total assets in municipal obligations
issued by the State of Michigan and its
localities. The Fund's average maturity
will not exceed 90 days. The Fund will
not ordinarily purchase any security
which matures in more than 397 days.
The bar chart and table provide an indication of the risks of an investment
in the Fund by showing its performance from year to year.
PERFORMANCE BAR CHART AND TABLE
Year-by-Year Total Returns as of 12/31 for Institutional Shares
[BAR GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage 2.63% 2.00% 2.40% 3.50% 3.11% 3.31% 0.00%
</TABLE>
Past performance does not indicate how the Fund will perform in the future.
The returns for Investment shares will differ from the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
<TABLE>
- -------------------------------------------------------------------
<S> <C> <C>
Best quarter: Q__ ____ +/-_____%
Worst quarter: Q__ ____ +/-_____%
- -------------------------------------------------------------------
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS (for the periods ending December 31, 1998)
<CAPTION>
Class Inception Past Year Past 5 Years Since Inception
------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES 12/15/92 _____% _____% _____%
------------------------------------------------------------------
INSTITUTIONAL SHARES 6/3/91 _____% _____% _____%
- --------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
PRINCIPAL RISKS
PRINCIPAL INVESTMENT RISKS The Money Market Funds expect to maintain
a net asset value of $1.00 per share, but
there is no assurance that they will be
able to do so on a continuous basis. The
Funds' performance per share will change
daily based on many factors, including
fluctuation in interest rates, the
quality of the instruments in each Fund's
investment portfolio, national and
international economic conditions and
general market conditions.
There can be no assurance that the
investment objectives of each Money
Market Fund will be achieved.
The Money Market Funds may also be
subject to credit risks. Therefore, they
could lose money if the issuer of a
security is unable to meet its financial
obligations.
Due to the level of investment in
municipal obligations issued by the State
of Michigan and its local governments,
the performance of the Michigan Municipal
Money Market Fund will be closely tied to
the economic and political conditions in
the State of Michigan, and, therefore, an
investment in the Fund may be riskier
than an investment in other types of
money market funds. The Michigan
Municipal Money Market Fund may also be
subject to credit risks of municipal
issuers which may have historically
experienced periods of financial
difficulties.
WHO MAY WANT TO INVEST? Consider investing in a Money Market Fund
if you:
[ ] ARE SEEKING PRESERVATION OF CAPITAL
[ ] HAVE A LOW RISK TOLERANCE
[ ] ARE WILLING TO ACCEPT LOWER POTENTIAL
RETURNS IN EXCHANGE FOR A HIGH DEGREE
OF SAFETY
[ ] ARE INVESTING SHORT-TERM RESERVES
The Money Market Funds will not be
appropriate for anyone:
[ ] SEEKING HIGH TOTAL RETURNS
[ ] PURSUING A LONG-TERM GOAL OR
INVESTING FOR RETIREMENT
The Michigan Money Market Fund will not
be appropriate for:
[ ] TAX-EXEMPT INSTITUTIONS AND CERTAIN
RETIREMENT PLANS THAT ARE UNABLE TO
BENEFIT FROM THE RECEIPT OF
TAX-EXEMPT DIVIDENDS
31
<PAGE> 34
MONEY MARKET FUNDS
(Continued)
FEES AND EXPENSES
As an investor in the Fund, you will pay the fees and expenses shown in the
table when you buy whole shares. Annual Fund operating expenses are paid out of
Fund assets, and are reflected in the share price.
<TABLE>
<CAPTION>
MONEY GOVERNMENT MONEY MICHIGAN MUNICIPAL
MARKET FUND MARKET FUND MONEY MARKET FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (Fees paid by
you directly)
Maximum Sales (Load) Charge
on Purchases None None None None None None
ANNUAL FUND OPERATING
EXPENSES (expenses paid
from Fund assets)
Management Fees 0.40% 0.40% 0.40%(2) 0.40%(2) 0.40% 0.40%
Distribution and Service
(12b-1 Fees) None None None None None None
Other Expenses 0.22%(1) 0.22%(1) 0.29%(2) 0.29%(2) 0.23%(3) 0.23%(3)
TOTAL FUND OPERATING
EXPENSES (expenses deducted from
Fund assets) 0.62%(1) 0.62%(1) 0.69%(2) 0.69%(2) 0.63%(3) 0.63%(3)
Fee Waiver 0.10%(1) 0.10%(1) 0.34%(2) 0.34%(2) 0.11%(3) 0.11%(3)
Net Fund Operating Expenses 0.52%(1) 0.52%(1) 0.35%(2) 0.35%(2) 0.52%(3) 0.52%(3)
</TABLE>
- ------------------------------------
(1) The Fund's Administrator has contractually agreed to waive a portion of
the administration fee at least until December 31, 1999. As a result,
Other Expenses are expected to be 0.12% for both classes. You will be
notified if the waiver is discontinued after that date.
(2) The Fund's Investment Adviser and its Administrator have contractually
agreed to waive a portion of their investment advisory and
administration fees at least until December 31, 1999. As a result,
Management Fees are expected to be 0.20% and Other Expenses are
expected to be 0.15% for both classes. You will be notified if either
of these waivers is discontinued after that date.
(3) The Fund's Administrator has contractually agreed to waive a portion of
the administration fee at least until December 31, 1999. As a result,
Other Expenses are expected to be 0.12% for both classes. You will be
notified if the waiver is discontinued after that date.
32
<PAGE> 35
EXAMPLE: Use the table below to compare fees and expenses with those of other
funds. Although your actual costs may be higher or lower, this example
illustrates the costs that you would pay, assuming the following:
* $10,000 investment
* 5% annual return
* redemption at the end of each period
* no changes in the Fund's operating expenses, except for the expiration
of the current contractual fee waivers on December 31, 1999
<TABLE>
<CAPTION>
MONEY GOVERNMENT MONEY MICHIGAN MUNICIPAL
MARKET FUND MARKET FUND MONEY MARKET FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C>
One Year After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Three Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Five Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
Ten Years After Purchase $_______ $_______ $_______ $_______ $_______ $_______
</TABLE>
33
<PAGE> 36
ADDITIONAL INFORMATION
================================================================================
INVESTING FOR DEFENSIVE PURPOSES
When Lyon Street determines that market conditions are appropriate, each of the
Equity, Bond and Municipal Bond Funds may, for temporary defensive purposes,
invest up to 100% of its assets in money market instruments. Each of the Bond
and Municipal Funds may also shorten its dollar-weighted average maturity below
its normal range if such action is deemed appropriate by Lyon Street for
temporary defensive purposes. In addition, the Michigan Municipal Bond Fund may
invest up to 100% of its total assets for temporary defensive purposes in
municipal bonds the income on which is exempt from federal income tax but not
exempt from Michigan personal income taxes. The Michigan Municipal Money Market
Fund may, for temporary defensive purposes, hold uninvested cash reserves or
invest in short-term taxable money market obligations in such proportions as, in
the opinion of Lyon Street, prevailing market or economic conditions warrant. If
a Fund is investing defensively, it will not be pursuing its investment
objective.
YEAR 2000 AND THE KENT FUNDS
Like other mutual funds, financial and business organizations and individuals
around the world, the Kent Funds could be adversely affected if the computer
systems used by Lyon Street and the Kent Funds' other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This possibility is commonly known as the "Year 2000 Problem."
Lyon Street is taking steps to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain assurances that comparable steps are
being taken by the Kent Funds' other major service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Kent Funds.
34
<PAGE> 37
FUND MANAGEMENT
================================================================================
THE INVESTMENT ADVISER
The Funds are advised by Lyon Street, a wholly owned subsidiary of Old
Kent Bank. Lyon Street maintains offices at 111 Lyon Street, NW, Grand Rapids,
Michigan 49503. Old Kent Bank is a wholly owned subsidiary of Old Kent Financial
Corporation, which is a financial services company with total assets as of
December 31, 1998 of approximately $____billion. The Investment Management Group
("IMG") at Lyon Street has managed the Kent Funds since their inception. Prior
to 1998, IMG managed the Funds as a division of Old Kent Bank. Old Kent Bank has
managed the financial assets of individual and institutional investors since
_____________. 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.
For these advisory services, the Funds paid fees as follows during the fiscal
year ended December 31, 1998:
<TABLE>
<CAPTION>
================================================================================= ==========================
AS A PERCENTAGE OF
AVERAGE NET ASSETS AS OF
12/31/98
- --------------------------------------------------------------------------------- --------------------------
<S> <C>
Growth and Income Fund .70%
- --------------------------------------------------------------------------------- --------------------------
Index Equity Fund .25%*
- --------------------------------------------------------------------------------- --------------------------
Large Company Growth Fund N/A
- --------------------------------------------------------------------------------- --------------------------
Small Company Growth Fund .70%
- --------------------------------------------------------------------------------- --------------------------
International Growth Fund .75%
- --------------------------------------------------------------------------------- --------------------------
Income Fund .60%
- --------------------------------------------------------------------------------- --------------------------
Intermediate Bond Fund .55%
- --------------------------------------------------------------------------------- --------------------------
Short Term Bond Fund .50%
- --------------------------------------------------------------------------------- --------------------------
Tax-Free Income Fund .55%
- --------------------------------------------------------------------------------- --------------------------
Intermediate Tax-Free Fund .50%
- --------------------------------------------------------------------------------- --------------------------
Michigan Municipal Bond Fund .45%
- --------------------------------------------------------------------------------- --------------------------
Money Market Fund .40%
- --------------------------------------------------------------------------------- --------------------------
Government Money Market Fund .20%*
- --------------------------------------------------------------------------------- --------------------------
Michigan Municipal Money Market Fund .40%
- --------------------------------------------------------------------------------- --------------------------
</TABLE>
* Lyon Street waived a portion of its contractual fees for these Funds for the
most recent fiscal year. Contractual fees (without waivers) are: the Index
Equity Fund, 0.30% and the Government Money Market Fund, 0.40%.
35
<PAGE> 38
THE PORTFOLIO MANAGERS
Lyon Street has several portfolio managers committed to the day-to-day
management of the Funds:
<TABLE>
<CAPTION>
- --------------------------------------- -------------------------------------- --------------------------------------
NAME/MANAGER FUND EXPERIENCE
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
JOSEPH T. KEATING, President and Mr. Keating is responsible for Mr. Keating has over twenty-two
Chief Investment Officer at Lyon developing and implementing the years of investment experience,
Street Funds' investment policies. including eleven years with IMG.
- --------------------------------------- -------------------------------------- --------------------------------------
ALLAN J. MEYERS, CFA, Chief Equity Mr. Meyers is co-portfolio manager Mr. Meyers has over twenty-three
Officer at Lyon Street for the GROWTH AND INCOME FUND and years of investment experience,
the LARGE COMPANY GROWTH FUND. Mr. including fourteen years with IMG.
Meyers has been co-portfolio
manager for the GROWTH AND INCOME
FUND since November 10, 1997 and
the co-portfolio manager for the
LARGE COMPANY GROWTH FUND since
January __, 1999.
- --------------------------------------- -------------------------------------- --------------------------------------
DAVID C. EDER, Director of Structured Mr. Eder is co-portfolio manager Mr. Eder has over six years
Equity Management at Lyon Street for the Index Equity and of investment experience with
International Growth Funds. IMG.
He has been co-portfolio manager
of the Index Equity Fund and
International Growth Fund since
January 1995.
- --------------------------------------- -------------------------------------- --------------------------------------
BRIAN J. SMOLINSKI, Investment Mr. Smolinski has been Prior to joining IMG, Mr.
Officer. co-portfolio manager for the Smolinski worked as an
INDEX EQUITY and INTERNATIONAL Applications Business Analyst
GROWTH FUNDS since June 1998. at Old Kent Bank for nine years.
Mr. Smolinski is also
responsible for developing and
maintaining proprietary
software that is used in
researching structured equity
investments.
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
36
<PAGE> 39
<TABLE>
- --------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
ROBERT CUMMISFORD, CFA, Director Mr. Cummisford is portfolio * Mr. Cummisford has over six
of Small Company Stock Management at manager for the SMALL COMPANY years of investment
Lyon Street GROWTH FUND. experience, including over two
years with IMG.
* Prior to joining Old Kent, he
was a Senior Consultant with
Ibbotson Associates.
- --------------------------------------- -------------------------------------- --------------------------------------
MITCHELL L. STAPLEY, CFA, Chief Fixed Mr. Stapley is the portfolio He has over fifteen years of
Income Officer at Lyon Street manager of the INCOME FUND and investment experience,
INTERMEDIATE BOND FUND, which he including eleven years with IMG.
has managed since their
inception, and the SHORT TERM
BOND FUND, which he has managed
since November 1996.
- --------------------------------------- -------------------------------------- --------------------------------------
MICHAEL J. MARTIN, CFA, Director of Mr. Martin is co-portfolio * Mr. Martin has over seven years of
Tax-Free Fixed Income Management at manager for each of the MUNICIPAL experience at Old Kent including
Lyon Street BOND FUNDS and is responsible for four years of experience with IMG.
their day-to-day management. Mr. * Prior to IMG, Mr. Martin was an
Martin has managed the TAX-FREE INCOME Analyst of Special Assets for Old
FUND and INTERMEDIATE TAX-FREE FUND Kent.
since November 10, 1997. He has been
co-portfolio manager for the MICHIGAN
MUNICIPAL BOND FUND since January 1995.
- --------------------------------------- -------------------------------------- --------------------------------------
KERBY WALLICK, Investment Officer Mr. Wallick is co-portfolio manager * Mr. Wallick joined IMG in
of the Growth and Income and Large January 1999 with ten years of
Company Growth Funds. investment experience.
* Prior to joining IMG, Mr.
Wallick was a Trust Portfolio
Officer at Old Kent since
February 1996.
* Prior to Old Kent, Mr. Wallick
was a Portfolio Manager at
FirstMerit Corporation.
- --------------------------------------- -------------------------------------- --------------------------------------
SARAH M. QUIRK, Investment Officer Ms. Quirk has been co-portfolio Prior to joining Lyon Street, she
manager for each of the MUNICIPAL was a Retail Trader-Fixed Income
BOND FUNDS since May 1, 1998. Securities at Tucker Anthony, Inc.
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
The Statement of Additional Information has more detailed information about Lyon
Street and the Funds' other service providers.
37
<PAGE> 40
THE DISTRIBUTOR, ADMINISTRATOR AND SUB-ADMINISTRATOR
BISYS provides management and administrative services to the Fund, including
providing office space, equipment and clerical personnel to the Fund and
supervising custodial, auditing, valuation, bookkeeping, legal and dividend
dispersing services. BISYS is also the distributor of the Fund's shares. BISYS
Fund Services, Inc., an affiliate of BISYS, acts as the fund accountant,
transfer agent and dividend paying agent of the Fund. BISYS and BISYS Fund
Services, Inc. are each located at 3435 Stelzer Road, Columbus, Ohio 43219.
Old Kent provides certain administrative services to the Fund pursuant to a
Sub-Administration Agreement between Old Kent and BISYS. BISYS has agreed to
pay Old Kent a fee, calculated daily and paid monthly, at an annual rate of up
to 0.05% of the Fund's average daily net assets. The fees paid to Old Kent by
BISYS for such administrative services come out of BISYS' administration fees
and are not an additional charge to the Fund.
38
<PAGE> 41
SHAREHOLDER INFORMATION
- -----------------------
PRICING OF FUND SHARES
How NAV is Calculated
The NAV is calculated by adding the total value of a Fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the Fund:
NAV =
TOTAL ASSETS - LIABILITIES
- --------------------------
Number of Shares
Outstanding
1. NAV is calculated separately for the Investment Shares and the
Institutional Shares.
2. You can find most Funds' NAV daily in The Wall Street Journal and in other
newspapers.
Money Market Funds
Each Money Market Fund's net asset value, or NAV, is expected to be constant at
$1.00 per share, although this value is not guaranteed. The NAV is determined at
12 noon Eastern time for the Michigan Municipal Money Market Fund and at 2:00
p.m. Eastern time for the Money Market Fund and Government Money Market Fund on
days the New York Stock Exchange is open.
Other Funds
The per share NAV for each non-Money Market Fund is determined and its shares
are priced at the close of regular trading on the New York Stock Exchange,
normally at 4:00 p.m. Eastern time, on days the Exchange is open.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is accepted by the Fund on any day that both the New
York Stock Exchange and the Funds' custodian are open for business. For example:
If you place a purchase order to buy shares of the Income Fund, it must be
received by 4:00 p.m. Eastern time in order to receive the NAV calculated at
4:00 p.m. Eastern time. If your order is received after 4:00 p.m. Eastern time,
you will receive the NAV calculated on the next day at 4:00 p.m. Eastern time.
The NAV, also known as the offering price, is calculated separately for the
Investment Shares and Institutional Shares.
The Funds' securities, other than short-term debt obligations, are generally
valued at current market prices unless market quotations are not available, in
which case securities will be valued by a method that the Board of Trustees
believes accurately reflects fair value. Debt obligations with remaining
maturities of 60 days or less are valued at amortized cost or based on their
acquisition cost. This method involves valuing a portfolio security initially
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and initial cost.
39
<PAGE> 42
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND SELLING YOUR INVESTMENT SHARES
PURCHASING AND ADDING TO YOUR SHARES
You may purchase shares of the Funds through the Funds' Distributor or through
banks, brokers and other investment representatives, which may charge additional
fees and may require higher minimum investments or impose other limitations on
buying and selling shares. If you purchase shares through an investment
representative, that party is responsible for transmitting orders by close of
business and may have an earlier cut-off time for purchase and sale requests.
Consult your investment representative or institution for specific information.
<TABLE>
<CAPTION>
ACCOUNT TYPE MINIMUM MINIMUM
INITIAL INVESTMENT* SUBSEQUENT
INVESTMENT
INVESTMENT SHARES
<S> <C> <C>
* Non-retirement accounts $ 1,000 None
* Retirement accounts $ 100 None
* Automatic investment $ 1,000 $50
plans
</TABLE>
All purchases must be in U.S. dollars. A fee will be charged for any checks that
do not clear. Third-party checks are not accepted. Investment Shares of certain
Funds may be purchased through IRAs and Rollover IRAs, which are available
through the Kent Funds. For details and application forms, call 1-800-633-KENT
(5368) or write to: Kent Funds, PO Box 182201, Columbus, OH 43218-2201.
The Distributor may reject a purchase order if it considers it in the best
interests of the Funds and their shareholders.
================================================================================
*MINIMUM INITIAL INVESTMENTS MAY BE WAIVED FOR LYON STREET AND OLD KENT
EMPLOYEES, INVESTORS IN TAX-SHELTERED PLANS, AND INVESTORS IN CERTAIN QUALIFIED
RETIREMENT ACCOUNTS.
- --------------------------------------------------------------------------------
Avoid 31% Tax Withholding
Each Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with IRS
rules. To avoid this, make sure you provide your correct Tax Identification
Number (Social Security Number for most investors) on your account application.
- --------------------------------------------------------------------------------
40
<PAGE> 43
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND SELLING YOUR INVESTMENT SHARES
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
(FOR INSTITUTIONAL SHARES, SEE "PURCHASING AND SELLING YOUR INSTITUTIONAL
SHARES")
BY REGULAR MAIL OR OVERNIGHT SERVICE
Initial Investment:
If purchasing through your financial adviser or brokerage account, simply tell
your adviser or broker that you wish to purchase shares of the Funds and he or
she will take care of the necessary documentation. For all other purchases,
follow the instructions below.
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to the "Kent Funds" and
include the name of the appropriate Fund(s) on the check.
3. If by regular mail to: Kent Funds, PO Box 182201, Columbus, OH 43218-2201.
If by overnight service, send to: Kent Funds, c/o BISYS Fund Services,
Attn: T.A. Operations, 3435 Stelzer Road, Columbus, OH 43219.
Subsequent Investments:
1. Use the investment slip attached to your account statement, or, if
unavailable, include the following information in writing:
* Fund name
* Share class
* Amount invested
* Account name
* Account number
Include your account number on your check.
2. Make check, bank draft or money order payable to the "Kent Funds."
3. If by regular mail to: Kent Funds, PO Box 182201, Columbus, OH 43218-2201.
If by overnight service, send to: Kent Funds, c/o BISYS Fund Services,
Attn: T.A. Operations, 3435 Stelzer Road, Columbus, OH 43219.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be a
U.S. bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-633-KENT (5368). Your account can generally be set up for electronic
purchases within 15 days.
Call 1-800-633-KENT (5368) to arrange a transfer from your bank account.
41
<PAGE> 44
SHAREHOLDER INFORMATION
- -----------------------
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial institutions to send funds to each other, almost
instantaneously. With an electronic purchase or sale, the transaction is made
through the Automated Clearing House (ACH). ACH transactions usually clear
within 2 to 3 days, but may take up to 8 days. There is generally no fee for ACH
transactions.
- --------------------------------------------------------------------------------
BY WIRE TRANSFER
For Initial Investments: Call 1-800-633-KENT (5368) to obtain the fax number
that can be used to send your completed application.
Fax the completed application, along with a request for a confirmation number.
Follow the instructions below after receiving your confirmation number.
For Initial and Subsequent Investments:
Instruct your bank to wire transfer your investment to:
Name of Bank: Huntington Bank
Routing Number: ABA #044000024
DDA# 01899607493
Include:
Your name
Your confirmation number
After instructing your bank to wire the funds, call 1-800-633-KENT (5368) to
advise us of the amount being transferred and the name of your bank.
NOTE: YOUR BANK MAY CHARGE A WIRE TRANSFER FEE.
- --------------------------------------------------------------------------------
You can add to your account by using the convenient options described below. The
Funds reserve the right to change or eliminate these privileges at any time with
60 days' notice.
- --------------------------------------------------------------------------------
42
<PAGE> 45
SHAREHOLDER INFORMATION
AUTOMATIC INVESTMENT PLAN
(Investment Shares Only)
You can make automatic investments in the Funds from your bank account, through
payroll deduction or from your federal employment, Social Security Supplemental
Security Income, or other regular government checks. Automatic investments can
be as little as $50, once you've invested the $1,000 minimum required to open
the account.
To invest regularly from your bank account:
- Complete the Automatic Investment Plan portion on your Account
Application. Make sure you note:
* Your bank name, address and account number
* The amount you wish to invest automatically (minimum $50)
* How often you want to invest (every month, 4 times a year, twice a
* year or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck or government check: Call 1-800-633-KENT
(5368) for an enrollment form
DIRECTED DIVIDEND OPTION (Investment Shares Only)
By selecting the appropriate box in the Account Application, you can elect to
receive your distributions in cash (check) or have distributions (capital gains
and dividends) reinvested in another Kent Fund. You must maintain the minimum
balance in each Fund into which you plan to reinvest dividends or the
reinvestment will be suspended and your dividends will be paid to you. The Funds
may modify or terminate this reinvestment option without notice. You can change
or terminate your participation in the reinvestment option at any time.
- --------------------------------------------------------------------------------
Dividends and Distributions
All dividends and distributions will be automatically reinvested unless you
request otherwise. You can receive them in cash or by electronic funds transfer
to your bank account if you are not a participant in an IRA account or in a
tax-qualified plan. Dividends are higher for Institutional Shares than for
Investment Shares, because Institutional Shares have lower distribution
expenses. Capital gains are distributed at least annually.
DISTRIBUTIONS ARE MADE ON A PER SHARE BASIS REGARDLESS OF HOW LONG YOU'VE OWNED
YOUR SHARES. THEREFORE, IF YOU INVEST SHORTLY BEFORE THE DISTRIBUTION DATE, SOME
OF YOUR INVESTMENT WILL BE RETURNED TO YOU IN THE FORM OF A TAXABLE
DISTRIBUTION.
- --------------------------------------------------------------------------------
43
<PAGE> 46
SHAREHOLDER INFORMATION
- -----------------------
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares. If you intend to redeem shares worth more than $1,000,000,
you should notify the Funds at least one day in advance.
INSTRUCTIONS FOR SELLING SHARES
- --------------------------------------------------------------------------------
WITHDRAWING MONEY FROM YOUR
FUND ACCOUNT
You may sell your shares at any time the New York Stock Exchange and custodian
are open for business. Your sales price will be the next NAV after your sell
order is received by the Kent Funds, the Funds' transfer agent, or your
investment representative. Normally you will receive your proceeds within a week
after your request is received. See section on "General Policies on Selling
Shares below."
If selling shares through your financial adviser or broker, ask him or her for
redemption procedures. Your adviser and/or broker may have transaction minimums
and/or transaction times which will affect your redemption.
For all other sales transactions, follow the instructions below.
By telephone
(unless you have declined telephone sales privileges)
You can redeem up to $50,000 worth of Investment Shares by calling
1-800-633-KENT (5368). If the amount redeemed is less than $2,500, then a check
will be mailed to you and if equal to or greater than $2,500, then the proceeds
will be mailed or sent by wire or electronic funds transfer to the bank listed
on your account application.
By mail (See "General Policies on Selling
Shares - Redemption in Writing Required" below.)
1. Call 1-800-633-KENT (5368) to request redemption forms or write a letter of
instruction indicating:
* your Fund and your account number
* amount you wish to redeem
* address where your check should be sent
* account owner signature
If you have a stock certificate, you must sign on the back and send it to the
Kent Funds.*
2. Mail to:
Kent Funds
PO Box 182201
Columbus, OH 43218-2201
*Signatures on stock certificates must be guaranteed if the amount is greater
than $50,000 or your address has changed within the last 3 months. See "General
Policies on Selling Shares" for instructions regarding signature guarantees.
44
<PAGE> 47
SHAREHOLDER INFORMATION
- -----------------------
By overnight service See instruction 1 above.
Send to:
Kent Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road
Columbus, OH 43219
Wire transfer Call 1-800-633-KENT (5368) to request
You must indicate this option on a wire transfer.
your application. If you call by 4 p.m. Eastern time,
your payment will normally be wired
to your bank on the next business
day.
The Funds may charge a wire transfer
fee.
Note: Your financial institution may
also charge a separate fee.
- ------------------------------------------ -------------------------------------
Electronic Redemptions Call 1-800-633-KENT (5368) to request
an electronic redemption.
Your bank must participate in the
Automated Clearing House (ACH) and If you call by 4 p.m. Eastern time,
must be a U.S. bank. the NAV of your shares will normally
be determined on the same day and the
proceeds will be credited within 8
days.
Your bank may charge for this service.
AUTOMATIC WITHDRAWAL PLAN
You can receive automatic payments from your account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $100 and no more than
1.5% per month when your Automatic Withdrawal Plan was started. To activate this
feature:
* Make sure you've checked the appropriate box on the Account Application
or call 1-800-633-KENT (5368).
* Include a voided personal check.
* Your account must have a value of $10,000 or more to start automatic
redemptions of Investment Shares.
* If the value of your account falls below $1,000, you may be asked to add
sufficient funds to bring the account back to $1,000, or the Funds may close
your account and mail the proceeds to you.
45
<PAGE> 48
SHAREHOLDER INFORMATION
- -----------------------
PURCHASING AND SELLING YOUR INSTITUTIONAL SHARES
INSTRUCTIONS FOR ACCOUNTS
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT
Choose the Fund in which you want to invest.
Each Fund's minimum initial investment amount for Institutional Shares is
$100,000.
TO SELL SHARES
Choose from which Fund you wish to sell your shares.
You can sell Institutional Shares by mail, by telephone or through a broker by
following the procedures described for Investment Shares. We will send you
Institutional Share proceeds by wire in federal funds to your commercial bank.
To change the bank account, you should call the Funds at 1-800-633-KENT (5368).
- --------------------------------------------------------------------------------
To open an account, call 1-800-633-KENT (5368) to obtain an account or wire
identification number and to place an order.*
- --------------------------------------------------------------------------------
*Your purchase of Institutional Shares will not be completed until the Funds
receive the actual purchase proceeds by wire transfer. Banks may charge for
wiring federal funds.
GENERAL POLICIES ON SELLING SHARES
- ----------------------------------
WHEN WRITTEN REDEMPTION REQUESTS ARE REQUIRED
You must request redemptions in writing in the following situations:
1. Redemptions from Individual Retirement Accounts ("IRAs").
2. Redemption requests requiring a signature guarantee, which include each of
the following:
* Redemptions over $50,000
* The account address has changed within the last 90 days
* The check is not being mailed to the address on your account
* The check is not being made payable to the owner of the account
* The redemption proceeds are being transferred to another Fund account
with a different registration.
Signature guarantees can be obtained from a U.S. stock exchange member, a U.S.
commercial bank or trust company, or any other financial institution that is a
member of the STAMP (Securities Transfer Agents Medallion Program), MSP (New
York Stock Exchange Medallion Signature Program) or SEMP (Stock Exchanges
Medallion Program) or is approved by the Kent Funds.
46
<PAGE> 49
SHAREHOLDER INFORMATION
- -----------------------
VERIFYING TELEPHONE REDEMPTIONS
The Funds make every effort to ensure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders.
REDEMPTIONS WITHIN 10 DAYS OF INVESTMENT
When you have made your investment by check, you cannot redeem any portion of it
until the Transfer Agent is satisfied that the check has cleared (which may
require up to 10 business days). You can avoid this delay by purchasing shares
with a certified check.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect Fund
shareholders.
REDEMPTION IN KIND
The Fund reserves the right to make payment in securities rather than cash,
known as a "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund operations
(for example, more than 1% of the Fund's net assets). If the Fund deems it
advisable for the benefit of all shareholders, a redemption in kind will consist
of securities equal in market value to your shares. When you convert these
securities to cash, you will pay brokerage charges.
CLOSING OF SMALL ACCOUNTS
If your account falls below $1,000 ($100 for IRA Accounts) for Investment Shares
or $100,000 for Institutional Shares the Fund may ask you to increase your
balance. If it is still below the minimum level after 60 days, the Fund may
close your account and send you the proceeds at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the Fund.
47
<PAGE> 50
SHAREHOLDER INFORMATION
- -----------------------
DISTRIBUTION AND SERVICE FEES UNDER RULE 12b-1 PLAN
This section describes the distribution and service fees that will apply to
Investment Shares.
<TABLE>
<CAPTION>
- ------------------------------------- ----------------------------------- ------------------------------------
INVESTMENT SHARES INSTITUTIONAL SHARES
- ------------------------------------- ----------------------------------- ------------------------------------
<S> <C> <C>
Distribution and Service Fees* Subject to annual distribution N/A
and shareholder servicing fees of
up to .25% of each Fund's assets.
- ------------------------------------- ----------------------------------- ------------------------------------
Fund Expenses Higher annual expenses than Lower annual expenses than
Institutional shares. Investment shares.
- ------------------------------------- ----------------------------------- ------------------------------------
</TABLE>
*For Non-Money Market Funds Only.
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and distribution
of Investment Shares and for providing shareholder services to purchasers of
Investment Shares. 12b-1 fees are paid from Fund assets relating to Investment
Shares on an ongoing basis and will increase the cost of your investment. 12b-1
fees may cost you more than paying other types of sales charges.
48
<PAGE> 51
SHAREHOLDER INFORMATION
- -----------------------
You can exchange your shares in one Fund for shares of the same class of another
Kent Fund. No transaction fees are charged for exchanges.
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable.
EXCHANGING YOUR SHARES
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to Kent Funds,
P.O. Box 182201, Columbus OH 43218-2201, or by calling 1-800-633-KENT (5368).
Please provide the following information:
* Your name and telephone number
* The exact name on your account and account number
* Taxpayer identification number (usually your Social Security number)
* Dollar value or number of shares to be exchanged
* The name of the Fund from which the exchange is to be made
* The name of the Fund into which the exchange is being made.
See "Selling your Shares" for important information about telephone
transactions.
To prevent disruption in the management of the Funds, due to market timing
strategies, exchange activity may be limited to five exchanges within a year, or
no more than three exchanges in a calendar quarter. Although unlikely, the Funds
may reject exchanges, or change or terminate rights to exchange shares.
- --------------------------------------------------------------------------------
NOTES ON EXCHANGES
The registration and tax identification numbers of the two accounts must be
identical. If you don't have an account with the new Fund, a new account will be
opened with the same features unless you write to tell us to change them.
The exchange privilege (including automatic exchanges) may be changed or
eliminated at any time.
Be sure to read the Prospectus carefully of any Fund into which you wish to
exchange shares.
The exchange privilege is available only in states where shares of the new Fund
may be sold.
If shares of a Fund are purchased by check, those shares cannot be exchanged
until your check has been collected. This could take 10 days or more.
All exchanges are based on the relative net asset value next determined after
the exchange order is received by the Funds.
When Institutional Shares are distributed to the beneficial owners of trust
accounts 401(k) plans, fiduciary or agency accounts, they can be in the form of
Investment Shares.
49
<PAGE> 52
SHAREHOLDER INFORMATION
- -----------------------
DIVIDENDS AND DISTRIBUTIONS
The Funds pay dividends to their shareholders from the Funds' respective net
investment income. The Funds distribute any net capital gains that have been
realized. Income dividends on each Fund are declared and paid monthly, except
for the Money Market Funds, which declare dividends daily and pay them monthly,
and the International Growth Fund, which pays dividends annually. Capital gains,
if any, for all Funds are distributed at least annually.
Dividends on each share class of the Funds are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. Since Investment Shares have higher
distribution and service fees than Institutional Shares, the dividends paid to
shareholders owning Investment Shares will be lower than those paid to
shareholders owning Institutional Shares.
TAXATION
FEDERAL TAXES
Each Fund contemplates declaring as dividends each year all or substantially all
of its taxable income, including its net capital gain (the excess of long-term
capital gain over short-term capital loss). You will be subject to income tax on
these distributions regardless of whether they are paid in cash or reinvested in
additional shares. Distributions attributable to the net capital gain of a Fund
will be taxable to you as long-term capital gain, regardless of how long you
have held your shares. Other Fund distributions will generally be taxable as
ordinary income. You will be notified annually of the tax status of
distributions to you.
You should note that if you purchase shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
Except in the case of the Money Market Funds, you will recognize taxable gain or
loss on a sale, exchange or redemption of your shares, including an exchange for
shares of another Fund based on the difference between your tax basis in the
shares and the amount you receive for them. (To aid in computing your tax basis,
you generally should retain your account statements for the periods during which
you held shares.) Any loss realized on shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends that were received on the shares.
The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other
tax-qualified plan) will not be currently taxable.
THE INTERNATIONAL GROWTH FUND. It is expected that the International Growth Fund
will be subject to foreign withholding taxes with respect to dividends or
interest received from sources in foreign countries. The International Growth
Fund may make an election to treat a proportionate amount of such taxes as
constituting a distribution to each shareholder, which would allow each
shareholder either (1) to credit
50
<PAGE> 53
such proportionate amount of taxes against U.S. federal income tax liability or
(2) to take such amount as an itemized deduction.
THE MICHIGAN MUNICIPAL MONEY MARKET AND THE MUNICIPAL BOND FUNDS. It is expected
that the Michigan Municipal Money Market Fund and the Municipal Bond Funds will
distribute dividends derived from interest earned on tax-exempt securities, and
these "exempt interest dividends" will be exempt income for shareholders for
federal income tax purposes. However, distributions, if any, derived from net
capital gains will generally be taxable to you as capital gains. The Municipal
Bond Funds may pay such capital gains distributions from time to time.
Dividends, if any, derived from taxable interest income will be taxable to you
as ordinary income.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Michigan Municipal Money Market Fund and the Municipal Bond Funds
generally will not be deductible for federal income tax purposes.
You should note that a portion of the exempt-interest dividends paid by the
Michigan Municipal Money Market Fund and the Municipal Bond Funds may constitute
an item of tax preference for purposes of determining federal alternative
minimum tax liability. Exempt-interest dividends will also be considered along
with other adjusted gross income in determining whether any Social Security or
railroad retirement payments received by you are subject to federal income
taxes.
If you receive an exempt-interest dividend with respect to any share and the
share is held by you for six months or less, any loss on the sale or exchange of
the share will be disallowed to the extent of such dividend amount.
The foregoing is only a summary of certain tax considerations under current law,
which may be subject to change in the future. You should consult your tax
adviser for further information regarding federal, state, local and/or foreign
tax consequences relevant to your specific situation.
STATE AND LOCAL TAXES
Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply, however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or an agency
thereof.
Because the Michigan Municipal Bond Fund and the Michigan Municipal Money Market
Fund intend to invest substantially all of their assets in tax-exempt
obligations of the State of Michigan or its political subdivisions, shareholders
who are subject to Michigan state income tax will generally not be subject to
tax on dividends paid by these Funds to the extent that the dividends are
attributable to interest income of these Funds. Shareholders should consult
their tax advisers regarding the tax status of distributions in their state and
locality.
51
<PAGE> 54
FINANCIAL HIGHLIGHTS
INSERT PAST 5 YEARS'
FINANCIAL HIGHLIGHTS
FROM ANNUAL REPORT.
THE FINANCIAL HIGHLIGHTS TABLES ARE INTENDED TO HELP YOU UNDERSTAND THE FUNDS'
FINANCIAL PERFORMANCE FOR THE PAST 5 YEARS OR, IF SHORTER, THE PERIOD OF THE
FUND'S OPERATIONS. CERTAIN INFORMATION REFLECTS FINANCIAL RESULTS FOR A SINGLE
FUND SHARE. THE TOTAL RETURNS IN THE TABLES REPRESENT THE RATE THAT AN INVESTOR
WOULD HAVE EARNED OR LOST ON AN INVESTMENT IN A FUND (ASSUMING REINVESTMENT OF
ALL DIVIDENDS AND DISTRIBUTIONS). THIS INFORMATION HAS BEEN AUDITED BY _________
WHOSE REPORT, ALONG WITH THE FUNDS' FINANCIAL STATEMENTS, ARE INCLUDED IN THE
FUNDS' ANNUAL REPORT, WHICH IS AVAILABLE UPON REQUEST.
EQUITY FUND FINANCIAL HIGHLIGHTS
BOND FUND FINANCIAL HIGHLIGHTS
MUNICIPAL BOND FUND FINANCIAL HIGHLIGHTS
MONEY MARKET FUND FINANCIAL HIGHLIGHTS
52
<PAGE> 55
The following additional information is available to you upon request and
without charge:
ANNUAL/SEMI-ANNUAL REPORTS:
Annual and Semi-Annual reports to shareholders contain additional information
about the Funds' investments. In the annual report, you will find a discussion
of the market conditions and investment strategies that significantly affected
Fund performance during the previous fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds, including their operations and investment policies.
It is incorporated by reference and is legally considered to be a part of this
prospectus.
- --------------------------------------------------------------------------------
YOU CAN GET FREE COPIES OF ANNUAL AND SEMI-ANNUAL REPORTS AND THE SAI, REQUEST
OTHER INFORMATION AND DISCUSS YOUR QUESTIONS ABOUT FUNDS BY CONTACTING A BROKER
OR OTHER FINANCIAL INSTITUTION THAT SELLS THE FUNDS. IN ADDITION, YOU MAY
CONTACT THE FUNDS AT:
KENT FUNDS
ATTENTION: T.A. OPERATIONS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
TELEPHONE: 1-800-633-KENT (5368)
E-MAIL: invest.serv@__________.com
INTERNET: http://www.kentfunds.com*
- --------------------------------------------------------------------------------
You can review the Annual and Semi-Annual Reports and the SAI at the Public
Reference Room of the Securities and Exchange Commission. You can get text-only
copies:
* For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
* At no charge from the Commission's Website at http://www.sec.gov.
* The Fund's website is not part of this Prospectus.
Investment Company Act file no. 811-4824.
53
<PAGE> 56
THE KENT FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR
INVESTMENT AND INSTITUTIONAL SHARES
OF
THE KENT GROWTH AND INCOME FUND
THE KENT INDEX EQUITY FUND
THE KENT LARGE COMPANY GROWTH FUND
THE KENT SMALL COMPANY GROWTH FUND
THE KENT INTERNATIONAL GROWTH FUND
THE KENT INCOME FUND
THE KENT INTERMEDIATE BOND FUND
THE KENT SHORT TERM BOND FUND
THE KENT TAX-FREE INCOME FUND
THE KENT INTERMEDIATE TAX-FREE FUND
THE KENT MICHIGAN MUNICIPAL BOND FUND
THE KENT MONEY MARKET FUND
THE KENT GOVERNMENT MONEY MARKET FUND
THE KENT MICHIGAN MUNICIPAL MONEY MARKET FUND
May 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus
but relates to, and should be read in conjunction with the prospectus for the
Investment Shares and Institutional Shares of the foregoing Funds dated May 1,
1999, as amended or supplemented from time to time. The Financial Statements
included in the Funds' December 31, 1998 Annual Report to Shareholders are
incorporated by reference into this SAI. No other part of the Annual Reports is
incorporated herein. Copies of the prospectus and Financial Statements contained
in the Annual Report 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 FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, OLD KENT BANK OR ANY OF ITS AFFILIATES, AND ARE NOT
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. EACH MONEY MARKET FUND SEEKS TO
MAINTAIN A NET ASSET VALUE PER SHARE OF $1.00 ALTHOUGH THERE CAN BE NO ASSURANCE
THAT THEY WILL BE ABLE TO DO SO.
<PAGE> 57
TABLE OF CONTENTS
The Trust.............................................................
Investment Objectives and Policies....................................
Investment Restrictions...............................................
Securities Transactions...............................................
Valuation Of Securities...............................................
Trustees And Officers.................................................
Investment Adviser....................................................
Administrator.........................................................
Distributor...........................................................
Transfer Agent........................................................
Custodian, Auditors And Counsel.......................................
Distribution Plan.....................................................
Additional Purchase And Redemption Information........................
Dividends And Taxes...................................................
Declaration Of Trust..................................................
Standardized Total Return And Yield Quotations........................
Advertising Information...............................................
Financial Statements..................................................
Additional Information................................................
Appendix A............................................................
Appendix B............................................................
Appendix C............................................................
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS SAI, OR IN THE PROSPECTUS RELATED HERETO,
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THIS SAI AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFERING BY THE TRUST OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE> 58
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 consists of fifteen separate investment portfolios,
each of which is diversified and has a distinct investment objective and
distinct investment policies. This SAI relates to the following fourteen
investment portfolios (individually, a "Fund," and collectively, the "Funds"),
each of which has established two classes of shares, Investment Shares and
Institutional Shares: 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 (collectively, the "Equity Funds"), The Kent
Income Fund, The Kent Intermediate Bond Fund, The Kent Short Term Bond Fund
(collectively, the "Bond Funds"), The Kent Tax-Free Income Fund, The Kent
Intermediate Tax-Free Fund, The Kent Michigan Municipal Bond Fund (collectively,
the "Municipal Bond Funds"), The Kent Money Market Fund, The Kent Government
Money Market Fund, and The Kent Michigan Municipal Money Market Fund
(collectively, the "Money Market Funds"). The Equity Funds, Bond Funds and
Municipal Bond Funds are sometimes collectively referred to as the "Non-Money
Market Funds." The Municipal Bond Funds and The Kent Michigan Municipal Money
Market Fund are sometimes collectively referred to as the "Municipal Funds."
Each Fund is advised by Lyon Street Asset Management Company ("Lyon Street" or
the "Investment Adviser").
Important information about the Trust and the Investment and
Institutional Shares of the Funds is contained in the Funds' prospectus. This
SAI provides additional information about the Trust and the Investment and
Institutional Shares of the Funds that may be of interest to some investors. The
Trust also offers the following investment portfolio in a single class of
shares, which is described in a separate prospectus and Statement of Additional
Information: The Lyon Street Institutional Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the description of each Fund's
investment objective and policies as set forth in the prospectus.
EQUITY FUNDS
The Trust currently offers the five Equity Funds described below.
GROWTH AND INCOME FUND
OTHER INVESTMENT STRATEGIES: Under ordinary circumstances, the Fund intends to
invest at least 65% of its total assets in U.S. companies with at least $100
million in net capitalization which are listed on the NYSE or American Stock
Exchange or are traded over the counter. Up to 10% of the Fund's assets may also
be invested in foreign securities and American Depository Receipts ("ADRs"),
which are U.S. dollar denominated securities representing ownership in foreign
securities. A portion of the Fund's assets may be invested in preferred stock or
bonds convertible into common stock. The Fund will purchase only convertible
bonds having a rating in one of the four highest rating categories by a
nationally recognized statistical rating organization (a "NRSRO") or those
which, if not rated, are of comparable quality as determined by Lyon Street. The
Fund expects to earn current income mainly from stock dividends and interest on
convertible bonds. This section should be read in conjunction with the relevant
prospectus section describing the Fund's principal strategies.
INDEX EQUITY FUND
OTHER INVESTMENT STRATEGIES: Although Lyon Street will generally try to
match the industry composition of the S&P 500 exactly, because of the difficulty
and expense of executing relatively small stock transactions, the Fund may not
always be invested in the less heavily weighted S&P 500 stocks, or may be
invested in stocks in different proportions than the S&P 500, especially when
the Fund has a low level of assets. The Fund will try to achieve a correlation
between the performance of its portfolio and that of the S&P 500 of at least
0.95 (not accounting for expenses). A correlation of 1.0 would mean that the
Fund's NAV (including the value of its dividends and capital gains
distributions) increases or decreases in exact proportion to changes in the S&P
500. This section should be read in conjunction with the relevant prospectus
section describing the Fund's principal strategies.
LARGE COMPANY GROWTH FUND
OTHER INVESTMENT STRATEGIES: Under ordinary circumstances, the Fund intends to
invest at least 65% of its total assets in equity securities of U.S. companies
with at least $100 million in net capitalization which are listed on the New
York Stock Exchange or the American Stock Exchange or are traded over the
counter. The Fund may also invest in foreign securities and American Depository
Receipts. A portion of the Fund's assets may also be invested in preferred stock
or bonds that are convertible into common stock. This section should be read in
conjunction with the relevant prospectus section describing the Fund's principal
strategies. This section should be read in conjunction with the relevant
prospectus section describing the Fund's principal strategies.
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SMALL COMPANY GROWTH FUND
OTHER INVESTMENT STRATEGIES: Under ordinary circumstances, the Fund intends to
invest at least 65% of its total assets in a diverse group of small U.S.
companies, which are companies whose market capitalizations are less than $1
billion. The Fund may also purchase stocks which are listed on other U.S.
securities exchanges or which are traded over the counter. This section should
be read in conjunction with the relevant prospectus section describing the
Fund's principal strategies.
INTERNATIONAL GROWTH FUND
OTHER INVESTMENT STRATEGIES: The Fund will invest mostly in common and preferred
stocks. Under ordinary circumstances, the Fund intends to invest at least 65% of
its total assets in at least 3 countries other than the United States, including
(but not limited to) Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Italy, Japan, Malaysia, the Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The Fund
seeks to approximate the performance of the Morgan Stanley Europe, Australia and
Far East Index (the "EAFE Index"). Lyon Street believes that the EAFE Index is
generally representative of the performance of the common stocks of large
companies in industrialized countries traded outside of the United States taken
as a whole. Stocks are included in the EAFE Index based on national and industry
representation and are weighted according to their relative market values. The
Fund may also invest in American Depository Receipts ("ADRs"), which are U.S.
dollar-denominated securities representing ownership in foreign companies, and
enter into currency and other futures contracts and related options for hedging
purposes. The Fund may invest more than 25% of its assets in a particular
foreign country. This section should be read in conjunction with the relevant
prospectus section describing the Fund's principal strategies.
BOND FUNDS
The Trust currently offers the three Bond Funds: Income Fund, Intermediate Bond
Fund and Short Term Bond Fund.
OTHER INVESTMENT STRATEGIES: Under ordinary circumstances, each Bond Fund
intends to invest at least 65% of its total assets in debt securities. In
addition, the Income Fund intends to invest at least 65% of its total assets in
a combination of (i) corporate debt obligations that are rated in one of
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the three highest rating categories by a NRSRO (for example, A or higher by
Standard & Poor's Ratings Group ("S&P") or by Moody's Investors Service, Inc.
("Moody's")) or, if unrated, will be deemed to be of comparable quality by Lyon
Street, or (ii) obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Debt securities, other than securities known as
zero coupon bonds, pay interest at set times, at either a fixed (set) rate or a
variable (changing) rate. Debt securities purchased by the Bond Funds may
include corporate debt obligations, U.S. Government securities, stripped
securities, variable and floating rate securities, mortgage-backed securities,
custodial receipts for Treasury certificates, zero-coupon bonds, asset-backed
securities, equipment trust certificates and certain so-called "derivative
securities." Each Bond Fund may also invest a portion of its assets in bonds
convertible into common stock.
Debt securities purchased by the Bond Funds will be rated in one of the four
highest rating categories by an NRSRO (for example, BBB or higher by S&P, or Baa
or higher by Moody's) or, if unrated, will be deemed to be of comparable quality
by Lyon Street. See Appendix A to the SAI for a description of applicable S&P,
Moody's and other NRSRO ratings. This section should be read in conjunction
with the relevant prospectus sections describing each Bond Fund's principal
strategies.
MUNICIPAL BOND FUNDS
The Trust currently offers three Municipal Bond Funds: Tax-Free Income Fund,
Intermediate Tax-Free Fund and Michigan Municipal Bond Fund.
OTHER INVESTMENT STRATEGIES: Each Municipal Bond Fund intends to invest at least
80% of its net assets in federally tax-exempt obligations, except during periods
of unusual market conditions. This policy is a fundamental policy which cannot
be changed by a Municipal Bond Fund without the approval of its shareholders. In
calculating the 80% limitation, for all Municipal Bond Funds other than Michigan
Municipal Bond Fund, a security whose interest is treated as a specific tax
preference item under the Federal alternative minimum tax is considered taxable.
Under ordinary circumstances, at least 65% of the Michigan Municipal Bond Fund's
total assets will be invested in municipal obligations issued by the State of
Michigan or its political subdivisions, authorities or corporations.
The Municipal Bond Funds will principally invest in municipal bonds which are
issued by state or local governments typically for general funding purposes or
to finance specific projects.
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The amount of information regarding the financial condition of issuers of
municipal obligations may be less extensive than the information for public
corporations, and the secondary market for municipal obligations may be less
liquid than that for taxable obligations. Accordingly, the ability of a
Municipal Bond Fund to buy and sell municipal obligations may, at any particular
time and with respect to any particular securities, be limited. In addition,
municipal obligations purchased by the Municipal Bond Funds include obligations
backed by letters of credit and other forms of credit enhancement issued by
domestic and foreign banks, as well as other financial institutions and
corporations. Adverse changes in the credit quality of these institutions could
cause loss to a Municipal Bond Fund and affect its share price.
Municipal obligations purchased by the Municipal Bond Funds will be rated in one
of the four highest rating categories by an NRSRO (for example, BBB or higher by
S&P, or Baa or higher by Moody's) or, if unrated, will be deemed to be of
comparable quality by Lyon Street. See Appendix A to the SAI for a description
of applicable S&P, Moody's and other NRSRO ratings. This section should be read
in conjunction with the relevant prospectus sections describing each Municipal
Bond Fund's principal strategies.
MONEY MARKET FUNDS
The Trust currently offers the three Money Market Funds described below. Money
market funds typically seek to maintain a stable net asset value of $1.00 per
share, although there is no guarantee that their net asset value will not vary.
The Money Market Funds, in general, will only purchase U.S. dollar-denominated
"Eligible Securities" (as defined by the Commission), which are generally
securities that either (i) have short-term debt ratings when purchased in the
two highest rating categories by at least two NRSROs, or (ii) are unrated, but
are deemed by Lyon Street to be of comparable quality pursuant to guidelines
approved by the Board of Trustees. The dollar-weighted average maturity of each
Money Market Fund's portfolio will not exceed 90 days and with certain
exceptions, the Money Market Funds will not purchase any securities which mature
in more than 397 days from the date of purchase. All securities purchased by the
Money Market Funds will be determined by Lyon Street, under guidelines
established by the Board of Trustees, to present minimal credit risks.
MONEY MARKET FUND
OTHER INVESTMENT STRATEGIES: The Fund invests in a broad range of government,
bank and commercial obligations. These instruments primarily include obligations
of banks having total assets in excess of $1 billion at the time of purchase and
commercial paper that matures in 13 months
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or less. The Fund may also invest in short-term obligations guaranteed by the
U.S. Government, its agencies or instrumentalities. This section should be read
in conjunction with the relevant prospectus section describing the Fund's
principal strategies.
GOVERNMENT MONEY MARKET FUND
The investment strategies and risks of investing in the Fund are disclosed in
the Prospectus.
MICHIGAN MUNICIPAL MONEY MARKET FUND
OTHER INVESTMENT STRATEGIES: At least 80% of the Fund's net assets will be
invested in federally tax-exempt obligations, except during periods of unusual
market conditions. This policy is a fundamental policy which cannot be changed
by the Fund without the approval of its shareholders. Federally tax-exempt
obligations consist of municipal bonds, notes and commercial paper issued by
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which is, in the opinion of counsel to the issuer of such
obligations, exempt from Federal income taxes. Under ordinary circumstances, the
Fund intends to invest at least 65% of its total assets in municipal obligations
issued by the State of Michigan or its political subdivisions, authorities or
corporations. Taxable obligations acquired by the Fund will not exceed 20% of
the Fund's net assets at the time of purchase under normal market conditions.
This section should be read in conjunction with the relevant prospectus section
describing the Fund's principal strategies.
DETAILED DESCRIPTION OF INVESTMENT VEHICLES AND POTENTIAL RISKS
The investment policies discussed below are applicable to all Funds unless
otherwise noted, except that the Government Money Market Fund will purchase only
U.S. Treasury bills, notes and other obligations issued by the U.S. Government,
its agencies or instrumentalities, repurchase agreements with respect to such
securities and shares of registered money market investment companies that
invest exclusively in such securities.
MONEY MARKET INSTRUMENTS
To the extent described in the Funds' prospectus or statement of
additional information, each Fund may invest from time to time in "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
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obligations are limited to the obligations of financial institutions having more
than $1 billion in total assets at the time of purchase.
The Funds may invest a portion of their assets in the obligations of
foreign banks and foreign branches of domestic banks. Such obligations include
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs") which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs") which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States.
Although the Funds will invest in obligations of foreign banks or
foreign branches of U.S. banks only when Lyon Street deems the instrument to
present minimal credit risk, such investments nevertheless entail risks that are
different from those of investments in domestic obligations of U.S. banks. These
additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting and record keeping standards than those applicable to
domestic branches of U.S. banks. Commercial paper represents short-term
unsecured promissory notes issued in bearer form by banks or bank holding
companies, corporations and finance companies. Investments by the Funds in
taxable commercial paper will consist of issues that are rated A-1 by Standard &
Poor's Ratings Group ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's"). In addition, the Funds may acquire unrated commercial paper 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 Funds.
Commercial paper may include variable and floating rate instruments. Commercial
paper issues include securities issued by corporations without registration
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on
the exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) Paper").
Section 4(2) Paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Section
4(2) Paper is normally resold to other institutional investors through or with
the assistance of investment dealers which make a market in Section 4(2) Paper,
thus providing liquidity. For purposes of each Fund's limitation on purchases of
illiquid instruments, Section 4(2) Paper will not be considered illiquid if Lyon
Street has determined, in accordance with guidelines approved by the Board of
Trustees, that an adequate trading market exists for such securities.
Variable amount master demand notes are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Although such notes are not normally traded and there may
be no secondary market in the notes, the Funds may demand payment of the
principal of the instrument at any time. If an issuer of a variable amount
master demand note defaulted on its payment obligation, the Funds might be
unable to dispose of the note because of the absence of a secondary market and
might, for this or other reasons, suffer a loss to the extent of the default.
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GUARANTEED INVESTMENT CONTRACTS (The Bond Funds and Money Market Fund only)
The Bond Funds and Money Market Fund may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under a GIC, the Fund gives cash to an insurance company which
credits the Fund with the amount given plus interest based on a certain index,
which interest is guaranteed to be not less than a certain minimum rate. 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 Bond Funds and Money Market 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 a Fund's limitation on illiquid
investments.
REPURCHASE AGREEMENTS
Each Fund may agree to purchase portfolio securities from financial
institutions subject to the seller's agreement to repurchase them at a mutually
agreed upon date and price ("repurchase agreements"). The Funds will enter into
such repurchase agreements only with financial institutions that are deemed to
be creditworthy by Lyon Street, 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 Funds
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 a Fund's acquisition of the securities and normally will be
within a shorter period of time. Repurchase agreements with deemed maturities in
excess of seven days are considered illiquid investments, and will be subject to
a Fund's limitation on illiquid investments. Securities subject to repurchase
agreements are held either by the Trust's custodian or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to maintain the value of the securities subject to the agreement in
an amount exceeding the repurchase price (including accrued interest). Default
by the seller would, however, expose a Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
collateral obligations. Repurchase agreements are considered to be loans by a
Fund under the Investment Company Act of 1940, as amended (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow funds for temporary or emergency purposes by
selling portfolio securities to financial institutions such as banks and
broker/dealers and agreeing to repurchase them at a mutually specified date and
price ("reverse repurchase agreements"). Reverse repurchase agreements involve
the risk that the market value of the securities sold by a Fund may decline
below the repurchase price. A Fund will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, a Fund will maintain in a segregated account cash, U.S.
Government securities or other liquid high-grade debt securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement. Reverse repurchase agreements are considered to be
borrowings by a Fund under the 1940 Act.
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VARIABLE AND FLOATING RATE INSTRUMENTS (The Bond Funds, Municipal Bond Funds and
Money Market Funds only)
The Bond, Municipal Bond and Money Market Funds may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the amount of indebtedness to
vary in addition to providing for periodic adjustments in the interest rate.
Such notes are direct lending arrangements between the Fund and a borrower and,
therefore, the notes generally are not traded and there is no market in which to
sell them to third parties. A Fund could suffer a loss if, for example, the
borrower defaults on the note. This type of note will be subject to a Fund's
limitations on illiquid investments if the Fund cannot demand payment of the
principal amount of the note within seven days. The absence of an active
secondary market with respect to particular variable and floating rate
instruments could make it difficult for a 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 a Fund could, for these or other
reasons, suffer a loss with respect to such instruments.
When purchasing such instruments for the Funds, 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 a 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 Money Market
Funds may carry nominal maturities in excess of those Funds' maturity
limitations if such instruments carry demand features that comply with
conditions established by the Securities and Exchange Commission.
LOAN PARTICIPATION NOTES (the Money Market Fund and Michigan Municipal Money
Market Fund only)
The Money Market Fund and Michigan Municipal Money Market 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
Funds may invest. Any participation purchased by a 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 a 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, a 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 a 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 a Fund may be regarded as illiquid.
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FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS
To the extent as described in the Funds' prospectus, each Fund may
purchase securities on a when-issued basis or purchase or sell securities on a
forward commitment (sometimes called delayed delivery) basis. These transactions
involve a commitment by the Fund to purchase or sell securities at a future
date. The price of the underlying securities and the date when the securities
will be delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitment
transactions are normally negotiated directly with the other party.
A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or negotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date.
Securities purchased or sold on a when-issued or forward commitment
basis involve a risk of loss if the value of the security to be purchased
declines, or the value of the security to be sold increases, before the
settlement date. When a Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
When a Fund purchases securities on a when-issued or forward commitment
basis, the Trust's custodian will maintain in a segregated account cash, U.S.
Government securities or other liquid high-grade debt securities having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments. In the case of a forward commitment to sell portfolio securities,
the custodian will hold the portfolio securities themselves in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued and forward commitment transactions. Because a
Fund sets aside liquid assets to satisfy its purchase commitments in the manner
described, its liquidity and ability to manage its portfolio might be affected
in the event its purchase commitments exceed 25% of the value of its assets. For
purposes of determining a 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
Each Fund may purchase U.S. Government obligations, which are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Examples of the types of U.S. Government obligations that may
be acquired by the Funds include U.S. Treasury bills, notes and bonds and
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, Federal
National Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA"), General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks, Tennessee Valley Authority, Resolution Funding Corporation and Maritime
Administration. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as those of the GNMA, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the FNMA, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, are supported only by the credit of the
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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 Bond Funds and Money Market Funds only)
The Bond Funds and Money Market Funds may acquire zero coupon
obligations, which have greater price volatility than coupon obligations and
which will not result in the payment of interest until maturity, provided that
the greater price volatility of any such zero coupon obligation is not
inconsistent with the Fund's investment objective. The Funds will accrue income
on such investments for tax and accounting purposes, as required, and such
income must be distributed to shareholders. Because no cash is received at the
time of such accruals, a Fund may be required to liquidate other portfolio
securities to satisfy its distribution obligations.
STRIPPED OBLIGATIONS (The Bond Funds and Money Market Funds only)
The Bond and Money Market Funds may also purchase "stripped" U.S.
Treasury obligations offered under the Separate Trading of Registered Interest
and Principal Securities ("STRIPS") program or Coupon Under Bank-Entry
Safekeeping ("CUBES") program or other stripped securities issued directly 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," and may, with
respect to the Bond Funds, include stripped mortgage-backed securities ("SMBS").
Stripped securities, particularly SMBS, may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The Funds 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.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal.
However, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
are generally higher than prevailing market yields on other mortgage-backed
obligations because their cash flow patterns are also volatile and there is a
greater risk that the initial investment will not be fully recouped.
SMBS which are not issued by the U.S. Government (or a U.S. Government
agency or instrumentality) are considered illiquid. SMBS issued by the U.S.
Government (or a U.S. Government agency or instrumentality) may be considered
liquid under guidelines established by the Trust's Board of Trustees if they can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of a Fund's per share net asset value.
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
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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 Funds will be
able to have their 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 Bond Funds and Money Market Funds may acquire other
U.S. Government obligations and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or investment
brokerage firm. 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 a 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 a 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 Bond Funds and Money Market Funds only)
The Bond Funds and Money Market Funds 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 a 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 each 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.
The Bond Funds also may acquire collateralized mortgage obligations
("CMOs"), which provide the holder with a specified interest in the cash flow of
a pool of underlying mortgages or other mortgage-backed securities. Issuers of
CMOs ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways.
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 Funds to significantly greater market risks than
expected.
ASSET-BACKED SECURITIES (The Bond Funds and Money Market Funds only)
The Bond Funds and Money Market Funds 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
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of prepayments. For this and other reasons, an asset-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
predict precisely.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of a security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the 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.
CERTAIN DERIVATIVE SECURITIES (The Bond Funds and Municipal Bond Funds only)
The Bond Funds and Municipal Bond Funds may invest in structured notes,
bonds or other instruments with interest rates that are determined by reference
to changes in the value of other interest rates, indices or financial indicators
("References") or the relative change in two or more References. Such Funds also
may hold derivative instruments that have interest rates that reset inversely to
changing current market rates and/or have embedded interest rate floors and caps
that require the issuer to pay an adjusted interest rate if market rates fall
below or rise above a specified rate. These instruments represent relatively
recent innovations in the bond markets, and the trading market for these
instruments is less developed than the markets for traditional types of debt
instruments. It is uncertain how these instruments will perform under different
economic and interest-rate scenarios. Because certain of these instruments are
leveraged, their market values may be more volatile than other types of bonds
and may present greater potential for capital gain or loss. On the other hand,
the embedded option features of other derivative instruments could limit the
amount of appreciation a Fund can realize on its investment, could cause a Fund
to hold a security it might otherwise sell or could force the sale of a security
at inopportune times or for prices that do not reflect current market value. The
possibility of default by the issuer or the issuer's credit provider may be
greater for these structured and derivative instruments than for other types of
instruments. In some cases it may be difficult to determine the fair value of a
structured or derivative instrument because of a lack of reliable objective
information and an established secondary market for some instruments may not
exist. With respect to purportedly tax-exempt derivative securities, in many
cases the Internal Revenue Service has not ruled on whether the interest
received on such securities is in fact free from Federal income taxes. Purchases
of such securities by the Municipal Bond Funds are therefore based on the
opinion of counsel to the sponsors of the security.
MUNICIPAL OBLIGATIONS (The Municipal Funds only)
The two principal classifications of municipal obligations which may be
held by the Municipal Funds are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are generally payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Private activity bonds (e.g., bonds
issued by industrial development authorities) are issued by or on behalf of
public authorities to finance various privately-operated facilities. Private
activity bonds are in most cases revenue securities and are not
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payable from the unrestricted revenues of the issuer. Additionally, the
principal and interest on these obligations may or may not be payable from the
general revenue of the users of the facilities involved. The credit quality of
private activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. The Funds may also purchase "moral
obligation" securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular Federal income tax and, in the case
of Michigan municipal obligations, Michigan state personal income tax, are
rendered by counsel to the respective issuing authorities at the time of
issuance. Such opinions may contain various assumptions, qualifications or
exceptions that are reasonably acceptable to Lyon Street. Neither the Trust nor
Lyon Street will review the proceedings relating to the issuance of municipal
obligations or the bases for such opinions.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal obligations may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
Federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their Federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in the future in
Congress as regards the Federal income tax status of interest on municipal
obligations or which proposals, if any, might be enacted. Such proposals, if
enacted, might materially adversely affect the availability of municipal
obligations and a Fund's liquidity and value. In such an event the Board of
Trustees would reevaluate the Funds' investment objectives and policies and
consider changes in their structure or possible dissolution.
Certain of the municipal obligations held by a Fund may be insured as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the municipal obligations at the time of
its original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. The
Municipal Funds may invest more than 25% of their assets in municipal
obligations covered by insurance policies.
The Municipal Funds also may purchase municipal obligations known as
"certificates of participation" which represent undivided proportional interests
in lease payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by applicable municipal charter
provisions or the nature of the appropriation for the lease. In particular,
lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the
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entity cannot be compelled to make such payments. Furthermore, a lease may or
may not provide that the certificate trustee can accelerate lease obligations
upon default. If the trustee could not accelerate lease obligations upon
default, the trustee would only be able to enforce lease payments as they became
due. In the event of a default or failure of appropriation, it is unlikely that
the trustee would be able to obtain an acceptable substitute source of payment.
Certificates of participation are generally subject to redemption by the issuing
municipal entity under specified circumstances. If a specified event occurs, a
certificate is callable at par either at any interest payment date or, in some
cases, at any time. As a result, certificates of participation are not as liquid
or marketable as other types of municipal obligations and are generally valued
at par or less than par in the open market. Municipal leases may be considered
liquid, however, under guidelines established by the Trust's Board of Trustees.
The guidelines will provide for determination of the liquidity and proper
valuation of a municipal lease obligation based on factors including the
following: (1) the frequency of trades and quotes for the obligation; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; and (4) the nature of the marketplace trades, including
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer. Lyon Street, under the supervision of the Trust's
Board of Trustees, will also consider the continued marketability of a municipal
lease obligation based upon an analysis of the general credit quality of the
municipality issuing the obligation and the essentiality to the municipality of
the property covered by the lease.
STANDBY COMMITMENTS (The Municipal Funds only)
The Municipal Funds may enter into standby commitments with respect to
municipal obligations held by them. Under a standby commitment, a dealer agrees
to purchase at a Fund's option a specified municipal obligation at its amortized
cost value to the Fund plus accrued interest, if any. Standby commitments may be
exercisable by a Fund at any time before the maturity of the underlying
municipal obligations and may be sold, transferred or assigned only with the
instruments involved.
The Funds expect that standby commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Funds may pay for a standby commitment either
separately in cash or by paying a higher price for municipal obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities).
The Funds intend to enter into standby commitments only with dealers,
banks and broker-dealers which, in Lyon Street's opinion, present minimal credit
risks. The Funds will acquire standby commitments solely to facilitate portfolio
liquidity and do not intend to exercise their rights thereunder for trading
purposes. Standby commitments will be valued at zero in determining net asset
value of a Fund. Accordingly, where a Fund pays directly or indirectly for a
standby commitment, its cost will be reflected as unrealized depreciation for
the period during which the commitment is held by the Fund and will be reflected
in realized gain or loss when the commitment is exercised or expires.
WARRANTS (The Equity Funds only)
The Equity Funds may purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. The purchase of warrants involves the risk
that a Fund could lose the purchase value of a warrant if the right to subscribe
to additional shares is not exercised prior to the warrant's expiration. Also,
the purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
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value of the subscribed security's market price such as when there is no
movement in the level of the underlying security.
FOREIGN SECURITIES
The International Growth Fund intends to invest primarily in the
securities of foreign issuers. In addition, the Large Company Growth Fund and
the Growth and Income Fund may invest a portion of their assets in such
securities. These obligations may be issued by supranational entities, including
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and internal banking institutions
and related government agencies. As noted above, all of the Funds may invest in
certain obligations of foreign banks and foreign branches of domestic banks.
Investment in foreign securities involves special risks. The
performance of investments in securities denominated in a foreign currency will
depend on the strength of the foreign currency against the U.S. dollar and the
interest rate environment in the country issuing the currency. Absent other
events which could otherwise affect the value of a foreign security (such as a
change in the political climate or an issuer's credit quality), appreciation in
the value of the foreign currency increases the value of a foreign
currency-denominated security in terms of U.S. dollars. A rise in foreign
interest rates or decline in the value of the foreign currency relative to the
U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.
There are other risks and costs involved in investing in foreign
securities which are in addition to the usual risks inherent in domestic
investments. Investment in foreign securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political
and economic developments, the possible imposition of withholding taxes on
dividend income, the possible seizure or nationalization of foreign holdings,
the possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect an investment in foreign
securities. With respect to securities issued by foreign governments, such
governments may default on their obligations, may not respect the integrity of
such debt, may attempt to renegotiate the debt at a lower rate, and may not
honor investments by United States entities or citizens.
Although the Large Company Growth Fund, the Growth and the Income Fund
and the International Growth Fund may invest in securities denominated in
foreign currencies, their portfolio securities and other assets are valued in
U.S. dollars. Currency exchange rates may fluctuate significantly over short
periods of time causing, together with other factors, a Fund's net asset value
to fluctuate as well. Currency exchange rates generally are determined by the
forces of supply and demand in the foreign exchange markets and the relative
merits of investments in different countries, actual or anticipated changes in
interest rates and other complex factors, as seen from an international
perspective. Currency exchange rates also can be affected unpredictably by the
intervention or the failure to intervene by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. The Funds are also subject to the possible imposition of exchange
control regulations or freezes on convertibility of currencies.
Dividends and interest payable on a Fund's foreign portfolio securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. Federal income
tax law, they may reduce the net return to the shareholders.
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AMERICAN DEPOSITORY RECEIPTS (The Equity Funds only)
The Equity Funds can invest in American Depository Receipts ("ADRs").
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of underlying foreign securities and are denominated in
U.S. dollars. Some institutions issuing ADRs may not be sponsored by the issuer.
A non-sponsored depository may not provide the same shareholder information that
a sponsored depository is required to provide under its contractual arrangement
with the issuer.
FOREIGN CURRENCY TRANSACTIONS (The International Growth Fund only)
In order to protect against a possible loss on investments resulting
from a decline or appreciation in the value of a particular foreign currency
against the U.S. dollar or another foreign currency or for other reasons, the
International Growth Fund is authorized to enter into forward currency exchange
contracts. A forward currency exchange contract is an obligation to purchase or
sell a specific currency, or a "basket" of currencies, at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of contract. Although the contracts may be
used to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might be
realized should the value of such currency increase. The Fund may also engage in
cross-hedging by using forward currency exchange contracts in one currency to
hedge against fluctuations in the value of securities denominated in a different
currency if Lyon Street believes that there is a pattern of correlation between
the two currencies.
The Fund may enter into forward currency exchange contracts in several
circumstances. When entering into a contract for the purchase or sale of a
security, the Fund may enter into a forward currency exchange contract for the
amount of the purchase or sale price to protect against variations, between the
date the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When Lyon Street anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Fund may enter into a forward contract to sell, for
a fixed amount, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency. Similarly,
when the securities held by the Fund create a short position in a foreign
currency, the Fund may enter into a forward contract to buy, for a fixed amount,
an amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. While forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. The Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A separate account consisting of cash, U.S. Government securities or
other liquid high-grade debt securities, equal to the amount of the Fund's
assets that could be required to consummate forward contracts will be
established with the Fund's custodian except to the extent the contracts are
otherwise "covered." For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market or
fair value. If the market or fair value of such securities declines, additional
cash or securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund. A forward
contract to sell a foreign currency is "covered"
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if the Fund owns the currency (or securities denominated in the currency)
underlying the contract, or holds a forward contract (or call option) permitting
the Fund to buy the same currency at a price no higher than the Fund's price to
sell the currency. A forward contract to buy a foreign currency is "covered" if
a Fund holds a forward contract (or put option) permitting the Fund to sell the
same currency at a price as high as or higher than the Fund's price to buy the
currency.
CURRENCY SWAPS (The International Growth Fund only)
The International Growth Fund may also enter into currency swaps, which
involve the exchange of the rights of the Fund and another party to make or
receive payments in specific currencies. The net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each currency
swap will be accrued on a daily basis and an amount of liquid assets, such as
cash, U.S. Government securities or other liquid high-grade debt securities,
having an aggregate net asset value at least equal to such accrued excess will
be maintained in segregated accounts by the Trust's custodian. Inasmuch as these
transactions are entered into for good faith hedging purposes, the Funds and
Lyon Street believe that such obligations do not constitute senior securities as
defined in the 1940 Act and, accordingly, will not treat them as being subject
to the Fund's borrowing restrictions.
The Fund will not enter into a currency swap unless the unsecured
commercial paper, senior debt or the claims-paying ability of the other party
thereto is rated either A or A-1 or better by S&P or Moody's. If there is a
default by the other party to such transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with markets for other similar instruments which
are traded in the Interbank market.
OPTIONS (The Equity, Bond and Municipal Bond Funds only)
The above-referenced Funds may buy put and call options and write
covered call and secured put options. Such options may relate to particular
securities, indices, financial instruments or foreign currencies, and may or may
not be listed on a domestic or foreign securities exchange and may or may not be
issued by the Options Clearing Corporation. Options trading is a highly
specialized activity which entails greater than ordinary investment risk.
Options may be more volatile than the underlying instruments, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying instruments themselves. A Fund
will not purchase put or call options where the aggregate premiums on
outstanding options exceed 5% of the Fund's net assets and will not write
options on more than 25% of the value of its net assets.
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer has the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Options on indices provide the holder with the right to make or receive a cash
settlement upon exercise of the option. With respect to options on indices, the
amount of the settlement will equal the difference between the closing price of
the index at the time of exercise and the exercise price of the option expressed
in dollars, times a specified multiple.
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The Funds will write call options only if they are "covered." In the
case of a call option on a security or currency, the option is "covered" if a
Fund owns the instrument underlying the call or has an absolute and immediate
right to acquire that instrument without additional cash consideration (or, if
additional cash consideration is required, cash, U.S. Government securities or
other liquid high-grade debt securities, in such amount are held in a segregated
account by the Fund's custodian) upon conversion or exchange of other securities
held by it. For a call option on an index, the option is covered if a Fund
maintains with its custodian a diversified portfolio of securities comprising
the index or liquid assets equal to the contract value. A call option is also
covered if a Fund holds a call on the same instrument or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Fund in liquid
assets in a segregated account with its custodian. The Funds will write put
options only if they are "secured" by liquid assets maintained in a segregated
account by the Funds' custodian in an amount not less than the exercise price of
the option at all times during the option period.
A Fund's obligation to sell an instrument subject to a covered call
option written by it, or to purchase an instrument subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize a
profit on an outstanding option, to prevent an underlying instrument from being
called, to permit the sale of the underlying instrument or to permit the writing
of a new option containing different terms on such underlying instrument. The
cost of such a liquidation purchase plus transaction costs may be greater than
the premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument (in the case of a covered call option) or liquidate the
segregated account (in the case of a secured put option) until the option
expires or the optioned instrument or currency is delivered upon exercise with
the result that the writer in such circumstances will be subject to the risk of
market decline or appreciation in the instrument during such period.
When a Fund purchases an option, the premium paid by it is recorded as
an asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by a Fund is included in the
liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the current bid price. If an option
purchased by a Fund expires unexercised the Fund realizes a loss equal to the
premium paid. If a Fund enters into a closing sale transaction on an option
purchased by it, the Fund will realize a gain if the premium received by the
Fund on the closing transaction is more than the premium paid to purchase the
option, or a loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by a Fund is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options. For
example, there are significant differences between the securities, currency and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a
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liquid secondary market for particular options, whether traded over-the-counter
or on an exchange may be absent for reasons which include the following: there
may be insufficient trading interest in certain options; restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities or currencies;
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; the facilities of an exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading value; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
FUTURES CONTRACTS AND RELATED OPTIONS (The Equity, Bond and Municipal Bond Funds
only)
The Equity, Bond and Municipal Bond Funds may also purchase futures
contracts, which are contracts in which a Fund agrees, at maturity, to take or
make delivery of certain securities, other financial instruments, the cash value
of a specified index or, in the case of the International Growth Fund, a stated
quantity of foreign currency. The Equity, Bond and Municipal Bond Funds may also
purchase and sell put and call options on futures contracts traded on an
exchange or board of trade. Futures may be used for hedging purposes or to
provide liquid assets. A Fund will not enter into a futures contract unless
immediately after any such transaction the aggregate amount of margin deposits
on its existing futures positions plus premiums paid for related options is less
than 5% of the Fund's net assets. For a detailed description of futures
contracts and related options, see Appendix C to this SAI.
ILLIQUID AND RESTRICTED SECURITIES
The Funds will not invest more than 15% (10% in the case of the Money
Market Funds) of the value of their 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, currency swaps, SMBSs issued by private
issuers, unlisted over-the-counter options, 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
Funds' portfolios 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
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mechanics of the transfer). The use of Rule 144A transactions could have the
effect of increasing the level of illiquidity in the Funds during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities.
SECURITIES LENDING
A Fund may lend its portfolio securities to broker-dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Such loans will not be made by a Fund if,
as a result, the aggregate of all outstanding loans of the Fund exceeds
one-third of the value of its total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or
(including the value of the collateral received for the loan) even a loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans are made only to borrowers deemed by Lyon Street to be of good
standing and when, in Lyon Street's judgment, the income to be earned from the
loan justifies the attendant risks.
Collateral for loans of portfolio securities made by a Fund may consist
of cash, securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, irrevocable bank letters of credit or any other liquid
high-grade short-term instrument approved for use as collateral by the
Securities and Exchange Commission (or any combination thereof). The borrower of
securities will be required to maintain the market value of the collateral at
not less than the market value of the loaned securities, and such value will be
monitored on a daily basis. When a Fund lends its securities, it continues to
receive dividends and interest on the securities loaned and may simultaneously
earn interest on the investment of the cash collateral. Although voting rights,
or rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Fund if a material
event affecting the investment is to occur.
CONVERTIBLE SECURITIES (The Large Company Growth Fund, The Growth and Income
Fund and the Bond Funds only)
Convertible securities entitle the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure and
therefore generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities, Lyon Street will consider, among
other factors, the creditworthiness of the issuers of the securities; the
interest or dividend income generated by the securities; the potential for
capital appreciation of the securities and the underlying common stocks; the
prices of the securities relative to other comparable securities and to the
underlying common stocks; whether the securities are entitled to the benefits of
sinking funds or other protective conditions; diversification of the Funds'
portfolios as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
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underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
INVESTMENT COMPANIES
The Funds may invest in securities issued by other investment
companies, including, but not limited to, money market investment companies,
within the limits prescribed by the 1940 Act. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the expenses of such other investment company, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations, and
may represent a duplication of fees to shareholders of a Fund.
YIELDS AND RATINGS
The yields on certain obligations, including the money market
instruments in which the Funds invest, 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 a 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.
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MISCELLANEOUS
The Funds are not restricted by policy with regard to portfolio
turnover and will make changes in their investment portfolios from time to time
as business and economic conditions as well as market prices may dictate.
Securities may be purchased on margin by the Funds only to obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities. The Funds will not engage in selling securities short. The Non-Money
Market Funds may, however, make short sales against the box. "Selling short
against the box" involves selling a security that a Fund owns for delivery at a
specified date in the future. The Equity Funds may acquire corporate debt
securities as a consequence of distributions that are made to holders of equity
securities by certain corporations. The Equity Funds do not intend to hold such
debt securities for investment purposes but, rather, will liquidate their
holdings in such securities at an appropriate time following receipt.
INVESTMENT RESTRICTIONS
The following investment restrictions include those that have been
designated as "fundamental," which may not be changed with respect to a Fund
without the vote of a "majority" of the Fund's outstanding shares (as defined in
"Declaration of Trust--Voting Rights"), and those that have been designated as
"non-fundamental," which may be changed without shareholder approval. If a
percentage limitation is satisfied at the time of investment, a later increase
in such percentage resulting from a change in the value of a Fund's assets will
not constitute a violation of the limitation. Unless otherwise stated, each
restriction applies to all Funds.
The following investment restrictions are fundamental:
A Fund may not:
(1) Purchase any security (other than obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities) of any issuer if as a
result more than 5% of its total assets would be invested in securities of the
issuer, except that up to 25% of its total assets may be invested without regard
to this limit;
(2) Borrow money, which includes entering into reverse repurchase
agreements, except that a Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks exceed 5% of a Fund's net assets, any such borrowings and
reverse repurchase agreements will be repaid before additional investments are
made;
(3) Pledge more than 15% of its net assets to secure indebtedness; the
purchase or sale of securities on a "when issued" basis, or collateral
arrangements with respect to the writing of options on securities, are not
deemed to be a pledge of assets;
(4) Issue senior securities; the purchase or sale of securities on a
"when issued" basis, or collateral arrangements with respect to the writing of
options on securities, are not deemed to be the issuance of a senior security;
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(5) Make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objective, lend Fund securities valued at not
more than 33 1/3% of its total assets to brokers, dealers and financial
institutions, and enter into repurchase agreements;
(6) With respect to each Fund, other than the Municipal Funds, 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) With respect to the Municipal Funds, 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 25% of its total
assets would be invested in a single industry, including industrial development
bonds from the same facility or similar types of facilities if backed solely by
non-governmental users; governmental issuers of municipal bonds are not regarded
as members of an industry, and the Michigan Municipal Bond Fund and the Michigan
Municipal Money Market Fund may invest more than 25% of its assets in industrial
development bonds;
(8) Purchase or sell commodities or commodity contracts or real estate,
except a Fund may purchase and sell securities secured by real estate and
securities of companies which deal in real estate and may engage in currency or
other financial futures contracts and related options transactions;
(9) Underwrite securities of other issuers, except that a Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective; or
(10) With respect to the Equity Funds, purchase any security (other
than U.S. Government securities) of any issuer if as a result the Fund would
hold more than 10% of the voting securities of the issuer.
The following investment restrictions are "non-fundamental" and may be
changed with respect to a Fund without shareholder approval:
A Fund may not:
(1) Purchase securities on margin, except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(2) Invest more than 15% of its total assets (10% of total assets for
the Money Market Funds) 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 except that each of the Small Company Growth Fund
and the International Growth Fund may invest up to 10% of its total assets in
such companies;
(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
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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.
With respect to Non-Fundamental Investment Restriction (2), the Funds
currently intend to limit investment in illiquid securities to no more than 15%
(10% for the Money Market Funds) of each Fund's respective net assets. With
respect to Fundamental Investment Restriction (7), examples of types of
facilities using industrial development bonds purchased by the Municipal Funds
include water treatment plants, educational and hospital facilities.
In order to comply with Securities and Exchange Commission regulations
relating to money market funds, the Money Market Funds 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 their total assets at the time of purchase, except for 25% of the value of
their total assets which, in the case of the Michigan Municipal Money Market
Fund, may be invested without regard to the 5% limit in "First Tier Securities"
(as defined by the Securities and Exchange Commission), and, in the case of the
Money Market Fund and the Government Money Market Fund, may be invested in First
Tier Securities of any one issuer for a period of up to three business days. In
addition, no Money Market Fund will engage in options or futures as provided in
Fundamental Investment Restrictions (3), (4) and (8), nor will the Money Market
Funds borrow money, pursuant to Fundamental Investment Restriction (2), in
excess of 10% of their total assets. With respect to Fundamental Investment
Restrictions (6) and (7), the Money Market Funds are permitted to invest in
excess of 25% of their 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 Funds. It is the policy
of the Trust, in effecting transactions in portfolio securities, to seek best
price and execution of orders. The determination of what may constitute best
price and execution in the execution of a transaction by a broker involves a
number of considerations, including, without limitation, the overall direct net
economic result to a Fund, involving both price paid or received and any
commissions and other costs paid, the breadth of the market where the
transaction is executed, the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
the availability of the broker to stand ready to execute potentially difficult
transactions in the future and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by Lyon Street in
determining the overall reasonableness of brokerage commissions paid. In
determining best price and execution and selecting brokers to execute
transactions, Lyon Street may consider brokerage and research services, such as
analyses and reports concerning issuers, industries, securities, economic
factors and trends, and other statistical and factual information provided to a
Fund. Lyon Street is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a Fund's transactions
which is in excess of the amount of commission another broker-dealer would have
charged for effecting that transaction if, but only if, Lyon Street determines
in good faith that such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer viewed in
terms of that particular transaction or the overall responsibilities of Lyon
Street to the Funds. Any such research and other statistical and factual
information provided by brokers to a Fund or Lyon Street is considered to be in
addition to and not in lieu of services required to be performed by Lyon Street
under its Investment
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Advisory Agreement with the Trust. The cost, value and specific application of
such information are indeterminable and hence are not practicably allocable
among the Trust and other clients of Lyon Street who may indirectly benefit from
the availability of such information. Similarly, the Trust may indirectly
benefit from information made available as a result of transactions effected for
such other clients.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of a transaction may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed. Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, Lyon Street will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of newly issued securities purchased from
underwriters includes an underwriting commission or concession, and the prices
at which securities are purchased from and sold to dealers include a dealer's
mark-up or mark-down. Each Fund may participate, if and when practicable, in
group bidding for the purchase of certain securities directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group.
Neither Lyon Street nor the Funds intend to place securities
transactions with any particular broker-dealer or group thereof. However, the
Trust's Board of Trustees has determined that each Fund may follow a policy of
considering sales of the Funds' shares as a factor in the selection of
broker-dealers to execute portfolio transactions, subject to the requirements of
best price and execution described above. The policy of each Fund with respect
to brokerage is and will be reviewed by the Trust's Board of Trustees from time
to time. Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the foregoing
practices may be changed, modified or eliminated.
Lyon Street expects that purchases and sales of securities for the
Equity Funds usually will be effected through brokerage transactions for which
commissions are payable. Lyon Street expects that purchases and sales of
municipal bonds and other debt instruments for the Bond Funds, Municipal Bond
Funds and Money Market Funds usually will be principal transactions. Municipal
bonds and other 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 Funds for such purchases.
For the fiscal years ended December 31, 1996, 1997 and 1998, the
following Funds paid commissions in the amounts indicated: $478,044, $1,400,322
and $___________, respectively, for the Growth and Income Fund; $34,687,
$235,105 and $___________, respectively, for the Index Equity Fund; $453,811,
$710,902 and $___________, respectively, for the Small Company Growth Fund; and
$211,929, $234,749 and $___________, respectively, for the International Growth
Fund. The increase in the amount of brokerage commissions paid by the Index
Equity Fund and the Small Company Growth Fund is attributable to an increase in
the size of each Fund and, in the case of the Small Company Growth Fund, an
increase in the Fund's portfolio turnover. The Tax-Free Income Fund paid
commissions in the amount of $2,500 for the fiscal year ended December 31, 1996.
No other Fund paid brokerage commissions during the last three fiscal years. No
Fund paid any brokerage commissions to an affiliated broker of the Trust.
Investment decisions for each Fund are made independently by Lyon
Street from those of the other Funds and investment accounts advised by Lyon
Street. It may frequently develop that the same
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investment decision is made for more than one Fund or account. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one Fund or account. When two or more Funds or
accounts are engaged in the purchase or sale of the same security, the
transaction is allocated as to amount in accordance with a formula which Lyon
Street believes is equitable to each Fund or account. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a particular Fund is concerned. To the extent permitted
by law, Lyon Street may aggregate the securities to be sold or purchased for a
Fund with those to be sold or purchased for another Fund or account.
In no instances will securities held by a Fund be purchased from or
sold to Lyon Street, the Trust's Distributor or any of their "affiliated
persons," as defined in the 1940 Act, except as may be permitted by any
applicable regulatory exemption or exemptive order.
As of December 31, 1998, Growth and Income Fund owned equity securities
of J.P. Morgan & Co. in the amount of $_______________, equity securities of
Merrill Lynch & Co. in the amount of $_______________, and equity securities of
Charles Schwab Corp. in the amount of $_______________; Index Equity Fund owned
equity securities of Merrill Lynch & Co. in the amount of $_______________,
equity securities of Charles Schwab Corp. in the amount of $_______________, and
equity securities of J.P. Morgan & Co. in the amount of $_______________; Small
Company Growth Fund owned equity securities of McDonald & Co. Investments, Inc.
in the amount of $_______________; Income Fund owned debt securities of Lehman
Brothers Holdings, Inc. in the amount of $_______________, and debt securities
of Salomon, Inc. in the amount of $_______________; Intermediate Bond Fund owned
debt securities of J.P. Morgan & Co. in the amount of $_______________, debt
securities of Smith Barney Holdings, Inc. in the amount of $_______________;
debt securities of Salomon, Inc. in the amount of $_______________, debt
securities of Bear Stearns Co. in the amount of $_______________, and debt
securities of Lehman Brothers, Inc. in the amount of $_______________; Short
Term Bond Fund owned debt securities of Goldman Sachs Group, L.P. in the amount
of $_______________, debt securities of Morgan Stanley Group, Inc. in the amount
of $_______________, and debt securities of Salomon, Inc. in the amount of
$_______________; and the Money Market Fund owned debt securities of J.P. Morgan
& Co. in the amount of $_______________. As of December 31, 1998, no other Fund
owned securities of the Trust's regular broker-dealers.
VALUATION OF SECURITIES
MONEY MARKET FUNDS
As stated in the prospectus, the Money Market Funds seek to maintain a
net asset value of $1.00 per share and, in this connection, value their
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 price a 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
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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
Money Market Funds' 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 Funds'
investment objectives, to stabilize the net asset value of each Money Market
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 Funds limit their 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 Funds are 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, a 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 Funds 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 Funds. In periods of declining interest rates, the indicated daily yield
on shares of the Funds, 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.
NON-MONEY MARKET FUNDS
Current values for the Non-Money Market Funds' portfolio securities are
determined as follows:
(1) Common stock, preferred stock and other equity securities listed on
the NYSE are valued on the basis of the last sale price on the exchange. In the
absence of any sales, such securities are valued at the last bid price;
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(2) Common stock, preferred stock and other equity securities listed on
other U.S. or foreign exchanges will be valued as described in (1) above using
quotations on the exchange on which the security is primarily traded;
(3) Common stock, preferred stock and other equity securities which are
unlisted and quoted on the National Market System (NMS) are valued at the last
sale price, provided a sale has occurred. In the absence of any sales, such
securities are valued at the high or "inside" bid, which is the bid supplied by
the National Association of Securities Dealers on its NASDAQ system for
securities traded in the over-the-counter market;
(4) Common stock, preferred stock and other equity securities which are
quoted on the NASDAQ system but not listed on NMS are valued at the high or
"inside" bid;
(5) Common stock, preferred stock and other equity securities which are
not listed and not quoted on the NASDAQ System and for which over-the-counter
market quotations are readily available are valued at the mean between the
current bid and asked prices for such securities;
(6) Non-U.S. common stock, preferred stock and other equity securities
which are not listed or are listed and subject to restrictions on sale are
valued at prices supplied by a dealer selected by Lyon Street and approved by
the Board of Trustees;
(7) Bonds, debentures and other debt securities, whether or not listed
on any national securities exchange, are valued at a price supplied by a pricing
service or a bond dealer selected by Lyon Street and approved by the Board of
Trustees;
(8) Short-term debt securities which when purchased have maturities of
sixty days or less are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount) which, when
combined with accrued interest, approximates market value and which reflects
fair value as determined by the Board of Trustees;
(9) Short-term debt securities having maturities of more than sixty
days when purchased which are held on the sixtieth day prior to maturity are
thereafter valued at amortized cost (market value on the sixtieth day adjusted
for amortization of premium or accretion of discount) which, when combined with
accrued interest, approximates market value and which reflects fair value as
determined by the Board of Trustees; and
(10) The following are valued at prices deemed in good faith to be fair
under procedures established by the Board of Trustees: (a) securities, including
restricted securities, for which market quotations are not readily available,
and (b) any other security for which the application of the above methods is
deemed by Lyon Street not to be representative of the market value of such
security.
In valuing each Fund's assets, the Trust's fund accountant will
"mark-to-market" the current value of a Fund's open futures contracts and
options. For valuation purposes, quotations of securities denominated in foreign
currencies are converted to into U.S. dollars at the prevailing currency
exchange rate on the day of the conversion.
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TRUSTEES AND OFFICERS
The Trust is governed by a Board of Trustees. The Trustees are
responsible for the overall management of the Trust and retain and supervise the
Funds' Adviser, Administrator, Distributor, Transfer Agent and Custodian.
The names, ages and principal occupations during the last five years of
the Trustees and officers of the Trust are listed below. The address of all the
Trustees and officers is 3435 Stelzer Road, Columbus, Ohio 43219.
JOSEPH F. DAMORE, Trustee, 46; President and Chief Executive Officer of
Sparrow Hospital and Health System; formerly Director and Executive Vice
President, Sisters of Mercy Health Corporation.
* WALTER B. GRIMM, Trustee, Chairman and Vice President, 53; Senior
Vice President of Client Services for BISYS Fund Services; formerly President of
Lehigh Investments.
JAMES F. RAINEY, Trustee, 56; Associate Dean for Academic Affairs in
The Eli Broad Graduate School of Management at Michigan State University.
RONALD F. VANSTEELAND, Trustee, 58; Vice President for Finance and
Administration and Treasurer of Grand Valley State University, Allendale,
Michigan and Treasurer of Grand Valley State University Foundation.
JAMES F. DUCA, II, President, 41; Vice President of Old Kent Financial
Corporation; and formerly Vice President and Trust Counsel for Marshall & Ilsley
Trust Company.
R. JEFFREY YOUNG, Vice President and Assistant Secretary, 34; Vice
President - Client Services for BISYS Fund Services; and formerly employed by
The Heebink Group.
MARTIN R. DEAN, Treasurer, 35; Vice President - Fund Administration for
BISYS Fund Services; and formerly employed by KPMG Peat Marwick LLP.
ROBERT L. TUCH, Secretary, 47; Vice President - Legal Services for
BISYS Fund Services.
W. BRUCE MCCONNEL, III, Assistant Secretary, 56; Partner in the law
firm of Drinker Biddle & Reath LLP.
ALAINA V. METZ, Assistant Secretary, 32; Chief Administrator of the
Blue Sky Department for BISYS Fund Services; and formerly employed by Alliance
Capital Management.
- -----------------------------------
* This Trustee is an interested person of the Trust as defined under the 1940
Act.
During the fiscal year ended December 31, 1998, no officer, director or
employee of the Trust's service contractors, or any of their parents or
subsidiaries, received any direct remuneration from the Trust for serving as a
Trustee or officer of the Trust, although BISYS and its affiliates, of which
Messrs. Grimm, Young, Dean, and Tuch and Ms. Metz are also employees, receives
fees from the Trust for administrative, fund accounting and transfer agency
services. Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Trust. Each Trustee earns an annual fee of
$8,000 and additional fees of $1,750 for each regular meeting attended, $1,000
for each special
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<PAGE> 88
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 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 $ ___________* $ ___________
Walter B. Grimm, Trustee $ 0 $ 0
James F. Rainey, Trustee $ ___________* $ ___________
Ronald F. VanSteeland, Trustee $ ___________ $ ___________
- -------------------
* During the fiscal year ended December 31, 1998, Mr. Damore deferred
$_____________ of his compensation and Mr. Rainey deferred
$_____________ of his compensation pursuant to the Deferred
Compensation Plan.
</TABLE>
As of the date hereof, the Trustees and officers of the Trust as a
group beneficially owned less than 1% of the Trust's outstanding shares.
INVESTMENT ADVISER
LYON STREET ASSET MANAGEMENT COMPANY
Lyon Street is the investment adviser to the Funds. Effective as of
March 2, 1998, Lyon Street, a wholly-owned subsidiary of Old Kent Bank ("Old
Kent"), assumed the investment advisory responsibilities of Old Kent for each of
the Funds on the terms and conditions stated in the prospectus. This change did
not involve a change in control or management of the investment adviser or a
change in the Funds' portfolio managers. As of December 31, 1998, Lyon Street
managed assets of approximately $________ billion. The Trust is the first
registered investment company for which Lyon Street has
33
<PAGE> 89
provided investment advisory services. Lyon Street is located at 111 Lyon
Street, N.W., Grand Rapids, MI 49503.
Old Kent 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
$________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 Funds rests with the
Trust's Board of Trustees. Pursuant to a written Investment Advisory Agreement
with the Trust, dated October 12, 1990, as amended, Lyon Street furnishes to the
Trust investment advice with respect to the Funds, makes all investment
decisions for the Funds, and places purchase and sale orders for the Funds'
securities. Lyon Street is responsible for all expenses incurred by it in
connection with its advisory activities, other than the cost of securities and
other investments purchased or sold for the Funds, and any brokerage commissions
or other transaction charges that may be associated with such purchases and
sales.
For its services to each Fund, Lyon Street is entitled to an annual fee
based on the average daily net asset value of each Fund, payable monthly, at the
following rates: the Large Company Growth Fund, 0.70%; the Growth and Income
Fund, 0.70%; the Index Equity Fund, 0.30%; the Small Company Growth Fund, 0.70%;
the International Growth Fund, 0.75%; the Income Fund, 0.60%; the Intermediate
Bond Fund, 0.55%; the Short Term Bond Fund, 0.50%; the Tax-Free Income Fund,
0.55%; the Intermediate Tax-Free Fund, 0.50%; the Michigan Municipal Bond Fund,
0.45%; the Money Market Fund, 0.40%; the Government Money Market Fund, 0.40%;
and the Michigan Municipal Money Market Fund, 0.40%. Lyon Street may rebate its
advisory fees to certain of its institutional customers.
For the fiscal years ended December 31, 1996, 1997 and 1998, Lyon
Street and Old Kent, the Trust's former investment adviser, earned the following
advisory fees for each Fund: $3,202,775, $4,568,032 and $____________,
respectively, for the Growth and Income Fund; $654,709, $1,278,392 and
$____________, respectively, for the Index Equity Fund; $3,613,394, $4,597,213
and $____________, respectively, for the Small Company Growth Fund; $2,465,291,
$3,529,317, and $____________, respectively, for the International Growth Fund;
$4,537,199, $4,262,333, and $____________, respectively, for the Intermediate
Bond Fund; $1,421,272, $857,575, and $____________, respectively, for the Short
Term Bond Fund; $1,458,010, $1,424,578, respectively, for the Intermediate
Tax-Free Fund; $772,339, $563,275, and $____________, respectively, for the
Michigan Municipal Bond Fund; $1,747,159, $2,092,414, and $____________,
respectively, for the Money Market Fund; $653,417, $781,668, and $____________,
respectively, for the Michigan Municipal Money Market Fund; $1,209,526,
$1,489,950, and $____________, respectively, for the Income Fund and $595,616,
$642,997 and $____________, respectively, for the Tax-Free Income Fund. For the
fiscal
34
<PAGE> 90
period ended December 31, 1997, and the fiscal year ended December 31, 1998, Old
Kent and Lyon Street earned $226,041 and $____________, respectively in advisory
fees for the Government Money Market Fund.
For the fiscal years ended December 31, 1997 and December 31, 1998, Old
Kent and Lyon Street waived a portion of their advisory fees for the Index
Equity Fund. Net of such waivers, they received $1,158,610 and $____________,
respectively. For the fiscal period ended December 31, 1997 and the fiscal year
ended December 31, 1998, Old Kent and Lyon Street waived a portion of their
advisory fees for the Government Money Market Fund.
Net of such waivers, Old Kent and Lyon Street received $112,896 and $__________,
respectively.
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, most recently approved the agreement, as amended, on May 22,
1998. The Agreement continues in effect from year to year with respect to each
Fund only if such continuance is specifically approved at least annually by the
Trustees of the Trust, including the "non-interested" Trustees, or by vote of a
majority of the outstanding voting shares of such Fund. The Investment Advisory
Agreement will terminate automatically upon its assignment and may be terminated
with respect to any Fund or Funds without penalty on 60-days' written notice at
the option of either party or by a vote of the shareholders of such Fund or
Funds.
SUB-ADMINISTRATION AGREEMENT
Old Kent provides certain administrative services to the Funds pursuant
to a Sub-Administration Agreement between Old Kent and BISYS. BISYS has agreed
to pay Old Kent a fee, calculated daily and paid monthly, at an annual rate of
up to 0.05% of each Fund's average daily net assets. The fees paid to Old Kent
by BISYS for such administrative services come out of BISYS' administration fee
and are not an additional charge to the Funds.
THE GLASS-STEAGALL ACT AND OTHER APPLICABLE LAWS
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting, selling or distributing securities,
although national and state-chartered banks generally are permitted to purchase
and sell securities upon the order and for the account of their customers. In
1971, the United States Supreme Court held in INVESTMENT COMPANY INSTITUTE v.
CAMP that the Glass-Steagall Act prohibits a national bank from operating a fund
for the collective investment of managed agency accounts. Subsequently, the
Board of Governors of the Federal Reserve System (the "Board") issued a
regulation and interpretation to the effect that the Glass-Steagall Act and such
decision forbid a bank holding company or any non-bank affiliate of a bank
holding company from sponsoring, organizing or controlling a registered,
open-end investment company continuously engaged in the issuance of its shares,
but do not prohibit such a holding company or affiliate from acting as
investment adviser, transfer agent and custodian to such an investment company.
In 1981, the United States Supreme Court held in BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM v. INVESTMENT COMPANY INSTITUTE that the Board did not
exceed its authority under the Bank Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to registered closed-end
investment companies.
35
<PAGE> 91
Old Kent has been advised by the Financial Institutions Bureau of the
Department of Commerce of the State of Michigan, which is the bureau that
regulates Michigan state chartered banks, that it is the position of that Bureau
that a bank (such as Old Kent) which has been authorized to exercise full trust
powers is authorized under Michigan banking laws to provide investment advice to
an entity such as a mutual fund.
Lyon Street believes it may lawfully serve as investment adviser to the
Trust and perform the services for the Trust required by the Investment Advisory
Agreement described in the prospectus and this SAI. However, Lyon Street's
authority to serve in such capacity has not been definitively established by any
state or federal law or regulation or any judicial decision or regulatory
interpretation that constitutes binding authority with respect to the activities
of Lyon Street. In addition, state and federal laws and regulations relating to
the permissible activities of banks and bank holding companies may change and
may be subject to further judicial or administrative interpretation, the result
of which may be to cause Lyon Street to conclude that it would be unlawful or
inadvisable to continue its relationship with the Trust. If Lyon Street
discontinues its services as investment adviser to the Trust, it is expected
that the Board of Trustees of the Trust would select a new investment adviser
and recommend that the Trust's shareholders approve the new investment adviser
so recommended.
ADMINISTRATOR
BISYS Fund Services Limited Partnership, 3435 Stelzer Road, Columbus,
Ohio 43219, a wholly-owned subsidiary of The BISYS Group, Inc., serves as the
Administrator of the Trust under an Administration Agreement dated August 5,
1996. BISYS provides management and administrative services and, in general,
supervises the operation of each Fund (other than investment advisory
operations). The current term of the Administration Agreement ends on July 31,
1999. Thereafter, the agreement may be renewed for successive one-year periods.
By the terms of the Administration Agreement, BISYS is required to
provide to the Funds management and administrative services, as well as all
necessary office space, equipment and clerical personnel for managing and
administering the affairs of the Funds. BISYS is required to supervise the
provision of custodial, auditing, valuation, bookkeeping, legal, stock transfer
and dividend disbursing services and provide other management and administrative
services.
As compensation for the services and facilities provided to the Funds
pursuant to the Administration Agreement, BISYS is entitled to receive an annual
fee, payable monthly as one twelfth of the annual fee, based on the Trust's
aggregate average daily net assets as follows: up to $5.0 billion - .185% of
such assets; between $5.0 and $7.5 billion - .165% of such assets; and over $7.5
billion - .135% of such assets provided, however, that such annual fee shall be
subject to an annual minimum fee of $45,000 per fund that is applicable to
certain Funds of the Trust. All expenses (other than those specifically referred
to as being borne by BISYS in the Administration Agreement) incurred by BISYS in
connection with the operation of the Trust are borne by the Funds. To the extent
that BISYS incurs any such expenses or provides certain additional services to
the Trust, the Funds promptly will reimburse BISYS therefor.
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, a
wholly-owned subsidiary of The BISYS Group, Inc., serves as the Trust's Fund
Accountant pursuant to a Fund Accounting Agreement, dated August 5, 1996. Under
the Fund Accounting Agreement, BISYS Fund Services, Inc. prices each Fund's
shares, calculates each Fund's net asset value, and maintains the general ledger
accounting records for each Fund. For these services, BISYS Fund Services, Inc.
is entitled to receive a fee computed daily at the annual rate of .015% of the
Trust's average daily net assets. The
36
<PAGE> 92
current term of the Fund Accounting Agreement ends on July 31, 1999. Thereafter,
the agreement may be renewed for successive one-year periods.
For the fiscal periods ended December 31, 1996, 1997 and 1998, the
Trust paid the following administration fees to BISYS and the Trust's former
administrator: $896,290, $1,169,235, and $ ___________, respectively, for the
Growth and Income Fund; $212,487, $464,741, and $ ___________, respectively, for
the Index Equity Fund; $1,011,600, $1,176,682, and $ ___________, respectively,
for the Small Company Growth Fund; $643,425, $842,845, and $ ___________,
respectively, for the International Growth Fund; $1,618,455, $1,386,330 and $
___________, respectively, for the Intermediate Bond Fund; $558,367, $306,274
and $ ___________, respectively, for the Short Term Bond Fund; $571,869,
$509,532 and $ ___________, respectively, for the Intermediate Tax-Free Fund;
$337,467, $223,672 and $ ___________, respectively, for the Michigan Municipal
Bond Fund; $425,618, $504,642 and $ ___________, respectively, for the Money
Market Fund; $159,777, $178,917 and $ ___________, respectively, for the
Michigan Municipal Money Market Fund; $393,938, $444,179 and $ ___________,
respectively for the Income Fund; and $227,178, $209,139 and $ ___________,
respectively, for the Tax Free Income Fund. For the fiscal period ended December
31, 1997 and the fiscal year ended December 31, 1998, the Government Money
Market Fund paid $36,124 and $ ___________, respectively, in administration
fees.
DISTRIBUTOR
The Trust has entered into a Distribution Agreement dated August 5,
1996 with BISYS. Unless otherwise terminated, the Distribution Agreement will
continue in effect from year to year if approved at least annually at a meeting
called for that purpose by a majority of the Trustees and a majority of the
"non-interested" Trustees, as that term is defined in the 1940 Act. Shares of
the Funds are sold on a continuous basis by BISYS as agent for the Trust, and
BISYS has agreed to use its best efforts to solicit orders for the sale of
shares of the Funds.
For the fiscal years ended 1996, 1997 and 1998, the Trust paid BISYS
and the Trust's former distributor total underwriting commissions of $527,141,
$55,000 and $ ___________, respectively. This entire amount was re-allocated to
broker-dealers which had selling agreements with the distributor.
TRANSFER AGENT
BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219,
also serves as the Trust's transfer agent and dividend disbursing agent pursuant
to a Transfer Agency Agreement. Under the Transfer Agency Agreement, BISYS Fund
Services, Inc. processes purchases and redemptions of each Fund's shares and
maintains each Fund's shareholder transfer and accounting records, such as the
history of purchases, redemptions, dividend distributions, and similar
transactions in a shareholder's account.
CUSTODIAN, AUDITORS AND COUNSEL
The Bank of New York, ___________________________________________, New
York, New York _________ is custodian of all securities and cash of the Trust.
____________________________________________________, Certified Public
Accountants, are the independent auditors for the Trust.
Drinker Biddle & Reath LLP, 1345 Chestnut Street, Philadelphia, PA
19107, serves as counsel to the Trust.
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<PAGE> 93
DISTRIBUTION PLAN
THIS SECTION RELATES ONLY TO THE INVESTMENT SHARES OF THE FUNDS. THE
INSTITUTIONAL SHARES HAVE NOT ADOPTED A DISTRIBUTION PLAN.
As described in the prospectuses, the Trust has adopted with respect to
its Investment Shares a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act which regulates circumstances under which an investment
company may bear expenses associated with the distribution of its shares. The
Plan provides that the Investment Shares of a Fund may incur certain expenses
which may not exceed a maximum amount equal to 0.25% (on an annualized basis) of
the average daily net asset value of the Investment Shares.
All persons authorized to direct the disposition of monies paid or
payable by a Fund pursuant to the Plan or any related agreement must provide to
the Trust's Board of Trustees at least quarterly a written report of the amounts
so expended and the purposes for which such expenditures were made.
Representatives, brokers, dealers or others receiving payments pursuant to the
Plan must determine that such payments and the services provided in connection
with such payments are appropriate for such persons and are not in violation of
regulatory limitations applicable to such persons.
The services under the Plan may include assistance in advertising and
marketing of Investment Shares, aggregating and processing purchase, exchange
and redemption requests for Investment Shares, maintaining account records,
issuing confirmations of transactions and providing sub-accounting with respect
to Investment Shares.
As required by Rule 12b-1, the Plan and the related Distribution and
Servicing Agreements have been approved, and are subject to annual approval, by
a majority of the Trust's Board of Trustees, and by a majority of the Trustees
who are not "interested" persons of the Trust (as defined by the 1940 Act) and
who have no direct or indirect interest in the operation of the Plan and the
agreements related thereto ("Independent Trustees"), by a vote cast in person at
a meeting called for the purpose of voting on the Plan and related agreements.
The Plan was most recently approved by the Board of Trustees as a whole and by
the Independent Trustees on November 19, 1998. In compliance with Rule 12b-1,
the Trustees requested and evaluated information they thought necessary to an
informed determination of whether the Plan and related agreements should be
implemented, and concluded, in the exercise of reasonable business judgment and
in light of their fiduciary duties, that there was a reasonable likelihood that
the Plan and the related agreements would benefit the Funds and their
shareholders. The Plan may not be amended in order to increase materially the
amount of distribution expenses permitted under the Plan without such amendment
being approved by a majority vote of the outstanding Investment Shares of the
affected Fund. The Plan may be terminated at any time by a majority vote of the
Independent Trustees or by a majority vote of the outstanding Investment Shares
of the affected Fund.
While the Plan is in effect, the selection and nomination of Trustees
who are not "interested persons" has been committed to the discretion of the
"non-interested" Trustees then in office.
For the fiscal year ended December 31, 1998, the following payments
were made under the Plan: Growth and Income Fund, $106,634.07; Index Equity
Fund, $84,563.28; Small Company Growth Fund, $57,552.16; International Growth
Fund, $26,627.46; Income Fund, $20,249.06; Intermediate Bond Fund, $21,909.02;
Short Term Bond Fund, $10,162.75; Tax-Free Income Fund, $348,155.08;
Intermediate Tax-Free Fund, $8,819.10; and Michigan Municipal Bond Fund,
38
<PAGE> 94
$6,721.86. All of such payments were made to broker-dealers and other selling
and/or servicing institutions. For the current fiscal year, Investment Shares of
the Growth and Income Fund, Index Equity Fund, Small Company Growth Fund,
International Growth Fund, Income Fund, Intermediate Bond Fund, Tax-Free Income
Fund and Intermediate Tax-Free Fund will be charged a fee pursuant to the Plan
at an annual rate of 0.25% of their average Investment class net assets. For the
current fiscal year, Investment Shares of the Short Term Bond Fund, and Michigan
Municipal Bond Fund will be charged a fee pursuant to the Plan at an annual rate
of 0.15% of their average Investment class net assets. The Trust does not
currently intend to charge a fee under the Plan for the Money Market Funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The prospectus for the Funds describe those investors who are eligible
to purchase Investment Shares and those who are eligible to purchase
Institutional Shares.
In an exchange, shares in the Fund from which an investor is
withdrawing will be redeemed at the net asset value per share next determined
after the exchange request is received. Shares of the Fund in which the investor
is investing will also normally be purchased at the net asset value per share
next determined after acceptance of the purchase order by the Trust in
accordance with its customary policies for accepting investments.
Under the 1940 Act, the Trust may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the NYSE is restricted by applicable rules and regulations of the Securities and
Exchange Commission; (b) the NYSE is closed for other than customary weekend and
holiday closings; (c) the Securities and Exchange Commission has by order
permitted such suspension; or (d) an emergency exists as determined by the
Securities and Exchange Commission. (The Trust may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
In addition to the situation described in the prospectus under
"Shareholder Information--Closing of Small Accounts," the Trust may redeem
shares involuntarily if it appears appropriate to do so in light of the Trust's
responsibilities under the 1940 Act, to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder, or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the prospectus from time to time.
A Fund may make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other property,
shareholders may incur additional costs in connection with the conversion
thereof to cash. Redemption in kind is not as liquid as a cash redemption.
Shareholders who receive a redemption in kind may receive less than the
redemption value of their shares upon sale of the securities or property
received, particularly where such securities are sold prior to maturity.
The Trust has filed an election pursuant to Rule 18f-1 under the 1940
Act which provides that each portfolio of the Trust is obligated to redeem
shares solely in cash up to $250,000 or 1% of such portfolio's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount may be made in proceeds other than cash.
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<PAGE> 95
DIVIDENDS AND TAXES
FEDERAL - GENERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute its income to
shareholders each year, so that each Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
As described in the prospectus for the Municipal Funds, such Funds are
designed to provide investors with tax-exempt interest income. The Municipal
Funds are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Municipal Funds would
not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts because such plans and accounts are generally
tax-exempt and, therefore, would not gain any additional benefit from the Funds'
dividends being tax-exempt. In addition, the Municipal Funds may not be an
appropriate investment for persons or entities that are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person which regularly uses a part of such facilities in its trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, which occupies more than 5% of the usable area
of such facilities or for which such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.
In order for the Municipal Funds to pay Federal tax-exempt dividends
with respect to any taxable year, at the close of each taxable quarter at least
50% of the aggregate value of the Fund must consist of exempt-interest
obligations.
The provisions regarding financial instruments, foreign currencies and
foreign corporations may from time to time cause a Fund to recognize income in
excess of cash received in a transaction. Moreover, a Fund's investment
alternatives will to some extent be constrained by tax requirements applicable
to regulated investment companies.
DECLARATION OF TRUST
DESCRIPTION OF SHARES
The Trust's Restatement of Declaration of Trust authorizes the issuance
of an unlimited number of shares of beneficial interest in one or more separate
series, and the creation of one or more classes of shares within each series.
Each share of a series represents an equal proportionate interest in the Trust
with each other share of that series. Each series represents interests in a
different investment portfolio. The Trust currently offers fifteen series of
shares. One of those series has established a single class of shares. The other
fourteen series have established two separate classes of shares - 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
40
<PAGE> 96
net assets of that class or series. Shareholders have no preemptive rights. When
issued for payment as described in the prospectus, shares will be legally
issued, fully paid and non-assessable.
The proceeds received by each Fund for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to that Fund and with a share of the general
liabilities of the Trust. Expenses with respect to the portfolios of the Trust
are normally allocated in proportion to the net asset value of the respective
portfolios except where allocations of direct expenses can otherwise be fairly
made.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
Business Trust." Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, there is a possibility that shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, even if the Trust were held to be a
partnership, the possibility of the shareholders incurring financial loss for
that reason appears remote because the Trust's Restatement of Declaration of
Trust contains an express disclaimer of shareholder liability for obligations of
the Trust and requires that notice of such disclaimer be given in every note,
bond, contract or other undertaking entered into or executed by the Trust or the
Trustees. In addition, the Restatement of Declaration of Trust provides for
indemnification 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" of a Fund means the vote
of the lesser of (i) 67% or more of the shares of the Fund present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding shares
of the Fund.
Shares of the Trust have non-cumulative voting rights, which means that
the holders of more than 50% of the shares of the Trust voting for the election
of Trustees can elect 100% of the Trustees to be elected at a meeting and, in
such event, the holders of the remaining less than 50% of the shares of the
Trust voting will not be able to elect any Trustees.
41
<PAGE> 97
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
MONEY MARKET FUNDS
The yields for the Investment Shares and Institutional Shares of the
Money Market Funds 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 for each Fund is determined
similarly. Based on the foregoing formula, for the 7-day period ended December
31, 1998, the yields of the Institutional Shares of the Money Market Fund,
Government Money Market Fund and Michigan Municipal Money Market Fund were
_____%, _____% and _____%, respectively. For the same period, the 7-day yields
of the Investment Shares of the Money Market Fund, Government Money Market Fund
and Michigan Municipal Money Market Fund were _____%, _____% and _____%,
respectively. The yield figures reflect waivers of certain expenses.
If realized and unrealized gains and losses were included in the yield
calculation, the yield of a Fund might vary materially from that reported in
advertisements.
In addition to the yields for each class of shares of the Money Market
Funds, the effective yields for each class 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
42
<PAGE> 98
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. Based
on the foregoing formula, for the period ended December 31, 1998, the effective
yields of the Institutional Shares of the Money Market Fund, Government Money
Market Fund and Michigan Municipal Money Market Fund were _____%, _____% and
_____%, respectively. For the same period, the effective yields of the
Investment Shares of the Money Market Fund, Government Money Market Fund and
Michigan Municipal Money Market Fund were _____%, _____% and _____%,
respectively. These yield figures reflect waivers of certain expenses.
Each Money Market Fund may also quote from time to time its total
return in accordance with Securities and Exchange Commission Regulations.
NON-MONEY MARKET FUNDS
A Fund calculates its "average annual total return" by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
ERV 1/n
T = [(-------) - 1]
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year (or other) periods at the end of such
applicable period (or a fractional portion
thereof);
P = hypothetical initial payment of $1,000; and
n = number of years.
43
<PAGE> 99
Based on the foregoing calculation, the average annual total returns for the
Funds for the periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 12/01/92
Index Equity Fund 11/25/92
Large Company Growth Fund __/__/95 N/A N/A N/A
Small Company Growth Fund 12/04/92
International Growth Fund 12/04/92
Income Fund 03/22/95 N/A
Intermediate Bond Fund 11/25/92
Short Term Bond Fund 12/04/92
Tax-Free Income Fund 03/31/95 N/A
Intermediate Tax-Free Fund 12/18/92
Michigan Municipal Bond Fund 05/11/93
Money Market Fund 12/09/92
Government Money Market Fund 06/02/97 N/A
Michigan Municipal Money Market Fund 12/15/92
</TABLE>
44
<PAGE> 100
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 11/02/92
Index Equity Fund 11/02/92
Large Company Growth Fund 01/__/99 N/A N/A N/A
Small Company Growth Fund 11/02/92
International Growth Fund 12/04/92
Income Fund 03/20/95 N/A
Intermediate Bond Fund 11/02/92
Short Term Bond Fund 11/02/92
Tax-Free Income Fund 03/20/95 N/A
Intermediate Tax-Free Fund 12/16/92
Michigan Municipal Bond Fund 05/03/93
Money Market Fund 12/03/90
Government Money Market Fund 06/02/97 N/A
Michigan Municipal Money Market Fund 06/03/91
</TABLE>
45
<PAGE> 101
A Fund calculates its "aggregate total return" by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-------) - 1]
P
Based on the foregoing calculation, the aggregate total returns for the Funds
for the periods ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 12/01/92
Index Equity Fund 11/25/92
Large Company Growth Fund 01/__/99 N/A N/A N/A
Small Company Growth Fund 12/04/92
International Growth Fund 12/04/92
Income Fund 03/22/95 N/A
Intermediate Bond Fund 11/25/92
Short Term Bond Fund 12/04/92
Tax-Free Income Fund 03/31/95 N/A
Intermediate Tax-Free Fund 12/18/92
Michigan Municipal Bond Fund 05/11/93
Money Market Fund 12/09/92
Government Money Market Fund 06/02/97 N/A
Michigan Municipal Money Market Fund 12/15/92
</TABLE>
46
<PAGE> 102
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 11/02/92
Index Equity Fund 11/02/92
Large Company Growth Fund 01/__/99 N/A N/A N/A
Small Company Growth Fund 11/02/92
International Growth Fund 12/04/92
Income Fund 03/20/95 N/A
Intermediate Bond Fund 11/02/92
Short Term Bond Fund 11/02/92
Tax-Free Income Fund 03/20/95 N/A
Intermediate Tax-Free Fund 12/16/92
Michigan Municipal Bond Fund 05/03/93
Money Market Fund 12/03/90
Government Money Market Fund 06/02/97 N/A
Michigan Municipal Money Market Fund 06/03/91
</TABLE>
The calculations are made assuming that (a) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, and (b) all recurring fees charged to
all shareholder accounts are included. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all nonrecurring charges at the end
of the measuring period.
A Fund calculates its 30-day (or one month) standard yield in
accordance with the method prescribed by the Securities and Exchange Commission
for mutual funds:
a - b
Yield = 2 [ (------ + 1)(6) - 1]
cd
Where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during
the period entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
47
<PAGE> 103
Based on the foregoing calculations, for the 30-day period ended
December 31, 1998, the yields for the Investment Shares of the Bond Funds and
Municipal Bond Funds were as follows: Income Fund, _____%; Intermediate Bond
Fund, _____%; Short Term Bond Fund, 5.21%; Tax-Free Income Fund, _____%;
Intermediate Tax-Free Fund, _____%; and Michigan Municipal Bond Fund, _____%.
For the same period, the yields on the Institutional Shares of the Bond Funds
and Municipal Bond Funds were as follows: Income Fund, _____%; Intermediate Bond
Fund, _____%; Short Term Bond Fund, _____%; Tax-Free Income Fund, _____%;
Intermediate Tax-Free Fund, _____%; and Michigan Municipal Bond Fund, _____%.
THE MUNICIPAL FUNDS
The Investment Shares and the Institutional Shares of the Municipal
Funds may also advertise "tax equivalent yield." Tax equivalent yield is
calculated by dividing that portion of the Fund's yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's yield that is not tax-exempt. For the 30-day period ended December
31, 1998, the tax equivalent yields, assuming a 39.6% tax rate for the
Investment Shares of the Municipal Funds were as follows: Tax-Free Income Fund,
_____%; Intermediate Tax-Free Fund, _____%; Michigan Municipal Bond Fund,
_____%; Limited Term Tax-Free Fund, _____%; and Michigan Municipal Money Market
Fund, _____%. For the same period, the yields on the Institutional Shares of the
Municipal Funds were as follows: Tax-Free Income Fund, _____%; Intermediate
Tax-Free Fund, _____%; Michigan Municipal Bond Fund, _____%; and Michigan
Municipal Money Market Fund, _____%.
ADVERTISING INFORMATION
The Funds may from time to time include in advertisements, sales
literature, communications to shareholders and other materials (collectively,
"Materials") a total return figure that more accurately compares a Fund's
performance with other measures of investment return than the total return
calculated as described above. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, a Fund may calculate its aggregate total return for the
period of time specified in the Materials by assuming the investment of $10,000
in shares of a Fund and assuming the reinvestment of all dividends and
distributions. Percentage increases are determined by subtracting the initial
value of the investment from the ending value and by dividing the remainder by
the beginning value.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Materials. "Compounding" refers
to the fact that, if dividends or other distributions on an investment in a Fund
are paid in the form of additional shares of the Fund, any future income or
capital appreciation of the Fund would increase the value, not only of the
original investment, but also of the additional shares received through
reinvestment. As a result, the value of the investment in the Fund would
increase more quickly than if dividends or other distributions had been paid in
cash.
In addition, the Funds may also include in Materials discussions and/or
illustrations of the potential investment goals of a prospective investor,
investment management strategies, techniques, policies or investment suitability
of a Fund (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but not
limited to, stocks, bonds and
48
<PAGE> 104
Treasury securities. From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the adviser as to current
market, economic, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to a Fund. The Funds may also include in Materials charts, graphs
or drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Funds and/or other mutual funds, or
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, Treasury securities and
shares of a Fund and/or other mutual funds. Materials may include a discussion
of certain attributes or benefits to be derived by an investment in a Fund
and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and investment alternatives to certificates of deposit and other
financial instruments. Such Materials may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
FINANCIAL STATEMENTS
The Financial Statements included in the Funds' December 31, 1998
Annual Report to Shareholders are incorporated by reference into this SAI. No
other part of the Annual Reports are incorporated herein. Copies of the
Financial Statements may be obtained without charge by contacting The Kent Funds
at P.O. Box 182201, Columbus, Ohio 43218-2201 or at 1-800-633-KENT (5368).
ADDITIONAL INFORMATION
Set forth below are the record owners or, to the Trust's knowledge, the
beneficial owners of 5% or more of the outstanding Investment and Institutional
Shares of the Funds as of February 20, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
- ---------------- ---- ----- -------------
<S> <C> <C> <C>
Trent & Co. Growth and Income Fund Institutional 93.4920%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Growth and Income Fund Investment 44.3948%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Growth and Income Fund Investment 10.6693%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Index Equity Fund Institutional 86.3669%
4420 44th Street Suite A
Kentwood, MI 49512
Corelink Financial, Inc. Index Equity Fund Institutional 13.0033%
P.O. Box 4054
Concord, CA 94524
BHC Securities, Inc. Index Equity Fund Investment 55.1978%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Trent & Co. Small Company Growth Institutional 93.9323%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Small Company Growth Investment 24.2601%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Small Company Growth Investment 16.9320%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. International Growth Institutional 95.4618%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
49
<PAGE> 105
<TABLE>
<CAPTION>
Percentage of
Name and Address Fund Class Ownership
- ---------------- ---- ----- -------------
<S> <C> <C> <C>
BHC Securities, Inc. International Growth Investment 23.3034%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company International Growth Investment 22.5570%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Income Fund Institutional 95.1301%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Income Fund Investment 42.2204%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Income Fund Investment 34.2995%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Intermediate Bond Institutional 96.7846%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Intermediate Bond Investment 14.4095%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Intermediate Bond Investment 45.4502%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Short Term Bond Institutional 97.4912%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Short Term Bond Investment 66.6366%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
</TABLE>
50
<PAGE> 106
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
---------------- ---- ----- -------------
<S> <C> <C> <C>
Trent & Co. Tax Free Income Institutional 97.2348%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Tax Free Income Investment 38.9875%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Tax Free Income Investment 26.2344%
One Freedom Valley Drive
Oaks, PA 19456
Fotru Co. Tax Free Income Investment 5.8010%
Evelyn G. Varner Trust
P.O. Box 1828
Grand Rapids, MI 49501-1828
Trent & Co. Intermediate Tax Free Institutional 97.5749%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Intermediate Tax Free Investment 13.3922%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Intermediate Tax Free Investment 22.4271%
One Freedom Valley Drive
Oaks, PA 19456
Northern Trust Company Intermediate Tax Free Investment 7.4352%
Richard U. Light Irrev. S Trust
P.O. Box 92956
Chicago, IL 60675
Northern Trust Company Intermediate Tax Free Investment 10.9391%
Richard U. Light Rev. S Trust
P.O. Box 92956
Chicago, IL 60675
Trent & Co. Michigan Muni Bond Institutional 98.7783%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
51
<PAGE> 107
<TABLE>
<CAPTION>
Percentage of
Name and Address Fund Class Ownership
---------------- ---- ----- -------------
<S> <C> <C> <C>
BHC Securities, Inc. Michigan Muni Bond Investment 28.1800%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Michigan Muni Bond Investment 5.1224%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Michigan Muni Bond Investment 25.6535%
4420 44th Street Suite A
Kentwood, MI 49512
Northern Trust Company Michigan Muni Bond Investment 20.9009%
Richard U. Light Irrev. S Trust
P.O. Box 92956
Chicago, IL 60675
Trent & Co. Money Market Fund Institutional 93.6277%
4420 44th Street Suite A
Kentwood, MI 49512
V. Donna Berg Money Market Fund Investment 12.3499%
403 Midlakes Boulevard
Plainwell, MI 49080
SEI Trust Company Money Market Fund Investment 10.7345%
One Freedom Valley Drive
Oaks, PA 19456
BHC Securities, Inc. Money Market Fund Investment 34.5511%
Twelve Hundred
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Old Kent Bank Government Money Market Institutional 71.4392%
111 Lyon Street, NW
Grand Rapids, MI 49503
Trent & Co. Government Money Market Institutional 28.5608%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
52
<PAGE> 108
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
- ---------------- ---- ----- -------------
<S> <C> <C> <C>
Daniel P. Kreuz Government Money Market Investment 37.1634%
139 Horseshoe Lane
Marlton, NJ 08053
Helen Glynn Government Money Market Investment 20.9879%
Margaret A. McGovern Trust
11050 Valley Drive
Fountain Hills, AZ 85268
Mary E. Jones Government Money Market Investment 17.4665%
125 Walnut
Schoolcroft, MI 49087
Trent & Co. Michigan Muni Money Institutional 96.2377%
4420 44th Street Suite A Market
Kentwood, MI 49512
BHC Securities, Inc. Michigan Muni Money Investment 84.7371%
Twelve Hundred Market
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
</TABLE>
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.
53
<PAGE> 109
APPENDIX A
DESCRIPTION OF SECURITIES
COMMERCIAL PAPER RATINGS
A S&P 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 S&P 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 in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent 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 S&P 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.
"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
A-1
<PAGE> 110
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 to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer 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> 111
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates 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 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 BankWatch:
"TBW-1" - This designation represents Thomson 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 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 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 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" - 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.
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"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. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
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"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: Moody's applies numeric modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa." The modifier 1: indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
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.
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"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 credit
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 credit 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 credit 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 is this the case for 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 solely 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," "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. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson 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 broker-dealers. The following
summarizes the rating categories used by Thomson 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 BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A S&P rating reflects the liquidity concerns and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by S&P Ratings Group for municipal notes:
"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.
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"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 present 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 that are 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. Debt
instruments in this category lack 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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APPENDIX B
THE KENT MICHIGAN MUNICIPAL BOND FUND
THE KENT MICHIGAN MUNICIPAL MONEY MARKET FUND
SPECIAL INVESTMENT CONSIDERATIONS RELATING
TO INVESTING IN MICHIGAN MUNICIPAL OBLIGATIONS
The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information drawn from the
Governor's Executive Budget for fiscal year 1999-2000 issued February 11, 1999,
and from other sources available as of the date of this Statement of Additional
Information. While the Trust has not independently verified such information, it
has no reason to believe that such information is not correct in all material
respects.
1998 ECONOMIC REVIEW AND 1999 ECONOMIC OUTLOOK
The State's economy is principally dependent on manufacturing
(particularly automobiles, office equipment and other durable goods), tourism
and agriculture and historically has been highly cyclical. However it has been
undergoing certain basic changes in its underlying structure and these changes
continued in 1998. These changes reflect a diversifying economy which is less
reliant on the automobile industry. As a result, the State anticipates that its
economy in the future will be somewhat less susceptible to cyclical swings and
somewhat more resilient when national downturns occur.
Total wage and salary employment is estimated to have grown by 1.9% in
1998. The rate of unemployment is estimated to have been 3.8% in 1998, below the
national average for the fifth consecutive year. Personal income grew at an
estimated 5.1% annual rate in 1998, up from 4.6% in 1997.
1998-99 STATE OF MICHIGAN BUDGET AND PRIOR RESULTS
During the past five years, improvements in the Michigan economy have
resulted in increased revenue collections which, together with restraints on the
expenditure side of the budget, have resulted in State General Fund budget
surpluses, most of which were transferred to the State's counter-cyclical Budget
and Economic Stabilization Fund. The balance of that Fund as of September 30,
1998 is estimated to have been in excess of $1.1 billion.
The State budget for the 1998-99 fiscal year, which began October 1,
1998, has been accepted by the Legislature. This budget projects State General
Fund/General Purpose revenues of approximately $9.0 billion, an increase of
approximately 3.7% from the prior year. Among the budget uncertainties facing
the State during the next several years are whether the recently-enacted school
finance reform package will provide adequate revenues to fund Kindergarten
through Twelfth Grade education in the future, whether international monetary or
financial crises will adversely affect Michigan's economy, particularly
automobile production and the general cyclicality of the automotive industry,
whether there will be adequate funds available to address the State's need for
more correctional facilities, and the uncertainties presented by proposed
changes in Federal aid policies for state and local governments.
STATE CONSTITUTIONAL PROVISIONS AFFECTING REVENUES AND EXPENDITURES
The State Constitution provides that proposed expenditures and revenues
of any State operating fund must be in balance and that any prior year's surplus
or deficit must be included in the succeeding year's budget for that fund.
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The State Constitution limits the amount of total State revenues that
can be raised from taxes and certain other sources. State revenues (excluding
federal aid and revenues for payment of principal and interest on general
obligation bonds) in any fiscal year are limited to a fixed percentage of State
personal income in the prior calendar year or average of the prior three
calendar years, whichever is greater, and this fixed percentage equals the
percentage of the 1978-79 fiscal year state government revenues to total
calendar 1977 State personal income (which was 9.49%).
If in any fiscal year revenues exceed the revenue limitation by 1% or
more, the entire amount of such excess must be rebated in the following fiscal
year's personal income tax or single business tax. Any excess of less than 1%
may be transferred to the State's Budget and Economic Stabilization Fund, a cash
reserve intended to mitigate the adverse effects on the State budget of
downturns in the business cycle. The State may raise taxes in excess of the
limit for emergencies when deemed necessary by the Governor and two-thirds of
the members of each house of the Legislature.
The State Constitution also provides that the proportion of State
spending paid to all units of local government to total State spending may not
be reduced below the proportion in effect in the 1978-79 fiscal year. The State
originally determined that portion to be 41.6%. If such spending does not meet
the required level in a given year, an additional appropriation for local
governmental units is required by the following fiscal year; which means the
year following the determinations of the shortfall, according to an opinion
issued by the State's Attorney General. Spending for local units met this
requirement for fiscal years 1986-87 through 1991-92. As the results of
litigation, the State agreed to reclassify certain expenditures, beginning with
fiscal year 1992-93, and has recalculated the required percentage of spending
paid to local government units to be 48.97%.
The State Constitution also requires the State to finance any new or
expanded activity of local governments mandated by State law. Any expenditures
required by this provision would be counted as State spending for local units of
government for the purpose of determining compliance with the provision cited
above.
STATE AND STATE-RELATED INDEBTEDNESS
The State Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes, (ii) short- and long-term debt for
the purpose of making loans to school districts, and (iii) long-term debt for
voter-approved purposes.
Short-term debt for operating purposes is limited to an amount not in
excess of 15% of undedicated revenues received during the preceding fiscal year
and must be issued only to meet obligations incurred pursuant to appropriation
and repaid during the fiscal year in which incurred. Such debt does not require
voter approval.
The amount of debt incurred by the State for the purpose of making
loans to school districts is recommended by the Superintendent of Public
Instruction, who certifies the amounts necessary for loans to school districts
for the ensuing two calendar years. The bonds may be issued in whatever amount
required without voter approval. All other general obligation bonds issued by
the State must be approved as to amount, purpose and method of repayment by a
two-thirds vote of each house of the Legislature and by a majority vote of the
public at a general election. There is no limitation as to number or size of
such general obligation issues.
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There are also various State authorities and special purpose agencies
created by the State which issue bonds secured by specific revenues. Such debt
is not a general obligation of the State.
GENERAL OBLIGATION BONDS AND NOTES AND SCHOOL BOND LOAN FUND
The State has issued and outstanding general obligation full faith and
credit bonds for Water Resources, Environmental Protection Program, Recreation
Program and School Loan purposes. As of September 30, 1998, the State had
approximately $874 million of general obligations bonds outstanding.
The State may issue notes or bonds without voter approval for the
purposes of making loans to school districts. The proceeds of such notes or
bonds are deposited in the School Bond Loan Fund maintained by the State
Treasurer and used to make loans to school districts for payment of debt on
qualified general obligations bonds issued by local school districts.
As of February 19, 1999, the ratings on State of Michigan general
obligation bonds were "Aa1" by Moody's, "AA+" by S&P and "AA+" by Fitch
Investors Services. There is no assurance that such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn.
Because all or most of the Michigan Municipal Obligations are revenue or general
obligations of local governments or authorities, rather than general obligations
of the State of Michigan itself, ratings on such Michigan Municipal Obligations
may be different from those given to the State of Michigan.
LITIGATION
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State programs or finances. As of early 1998, these
lawsuits involved programs generally in the areas of corrections, tax
collection, commerce, and proceedings involving other budgetary reductions to
school districts and governmental units, and court funding. Notable among these
legal proceedings are lawsuits brought by a number of school districts
challenging the constitutionality of certain state-mandated special education
services without corresponding funding. The ultimate disposition of these
proceedings was not determinable as of early 1999.
PROPERTY TAX AND SCHOOL FINANCE REFORM
The State Constitution limits the extent to which municipalities or
political subdivisions may levy taxes upon real and personal property through a
process that regulates assessments.
On March 15, 1994, Michigan voters approved a property tax and school
finance reform measure known as Proposal A. Under Proposal A, as approved,
effective May 1, 1994, the State sales and use tax increased from 4% to 6%, the
State income tax decreased from 4.6% to 4.4%, the cigarette tax increased from
$.25 to $.75 per pack and an additional tax of 16% of the wholesale price began
to be imposed on certain other tobacco products. A .75% real estate transfer tax
became effective January 1, 1995. Beginning in 1994, a state property tax of 6
mills began to be imposed on all real and personal property currently subject to
the general property tax. All local school boards are authorized, with voter
approval, to levy up to the lesser of 18 mills or the number of mills levied in
1993 for school operating purposes on nonhomestead property and nonqualified
agricultural property. Proposal A contains additional provisions regarding the
ability of local school districts to levy taxes, as well as a limit on
assessment increases for each parcel of property, beginning in 1995. Such
increases for each parcel of property are limited to the lesser of 5% or the
rate of inflation. When property is subsequently sold, its assessed value will
revert to the current assessment level of 50% of true cash value. Under Proposal
A, much of the additional revenue generated by the new taxes will be dedicated
to the State School Aid Fund.
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Proposal A shifted significant portions of the cost of local school
operations from local school districts to the State and raised additional State
revenues to fund these additional State expenses. These additional revenues will
be included within the State's constitutional revenue limitations and may impact
the State's ability to raise additional revenues in the future.
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APPENDIX C
As stated in the Prospectus, certain of the Funds may enter into
futures contracts and options. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund might use interest rate futures
as a defense, or hedge, against anticipated interest rate changes. This would
include the use of futures contract sales to protect against expected increases
in interest rates and futures contract purchases to offset the impact of
interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund entering
into a futures contract purchase for the same aggregate amount of the specific
type of financial instrument and the same delivery date. If the price of the
sale exceeds the price of the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. The Funds will deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
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A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month U.S. Treasury Bills; and ninety-day
commercial paper. A Fund may trade in any interest rate futures contract for
which there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
-----------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index, which fluctuates with changes in the market values of the
stocks or bonds included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as a
whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in anticipation
of changes in the composition of its portfolio holdings. For example, in the
event that a Fund expects to narrow the range of industry groups represented in
its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially, a
Fund will be required to deposit with the broker or in a segregated account with
the Custodian an amount of cash or cash equivalents, known as initial margin,
based on the value of the contract. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract assuming all contractual
obligations have been satisfied. Subsequent payments, called variation margin,
to and from the broker, will be made on a daily basis as the price of the
underlying instruments fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as marking-to-market.
For example, when a particular Fund has purchased a futures contract and the
price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a
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variation margin payment equal to that increase in value. Conversely, where a
Fund has purchased a futures contract and the price of the futures contract has
declined in response to a decrease in the underlying instruments, the position
would be less valuable and the Fund would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures contract,
Lyon Street may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the future and movements in the price of the instruments which are
the subject of the hedge. The price of the future may move more than or less
than the price of the instruments being hedged. If the price of the future moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the future. If the price of the future moves more than the
price of the hedged instruments, the Fund involved will experience either a loss
or gain on the future which will not be completely offset by movements in the
price of the instruments which are the subject of the hedge. To compensate for
the imperfect correlation of movements in the price of instruments being hedged
and movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of instruments being
hedged if the volatility over a particular time period of the prices of such
instruments has been greater than the volatility over such time period of the
futures, or if otherwise deemed to be appropriate by Lyon Street. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the instruments being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by Lyon Street. It is also possible that,
where a Fund has sold futures to hedge its portfolio against a decline in the
market, the market may advance and the value of instruments held in the Fund may
decline. If this occurred, the Fund would lose money on the future and also
experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by
C-3
<PAGE> 124
speculators in the futures market may also cause temporary price distortions.
Due to the possibility of price distortion in the futures market, and because of
the imperfect correlation between the movements in the cash market and movements
in the price of futures, a correct forecast of general market trends or interest
rate movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will normally not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in
a futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by a Fund is also subject to Lyon Street's
ability to predict correctly movements in the direction of the market. For
example, if a particular Fund has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. A Fund may also have to
sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
----------------------------
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased.
C-4
<PAGE> 125
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be expected to be
more volatile than the market prices on the underlying futures contract.
Compared to the purchase or sale of futures contracts, however, the purchase of
call or put options on futures contracts may frequently involve less potential
risk to a Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
VII. Other Matters
-------------
Accounting for futures contracts and related options will be in
accordance with generally accepted accounting principles.
C-5
<PAGE> 126
THE KENT FUNDS
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Registrant's Restatement of Declaration of Trust was filed with
Registrant's Post-Effective Amendment No. 24 as Exhibit 24(b)(1) and is
incorporated by reference herein.
(b) Registrant's Amended and Restated By-Laws were filed with Registrant's
Post-Effective Amendment No. 24 as Exhibit 24(b)(2) and are
incorporated by reference herein.
(c) See Articles III, V and VIII of Registrant's Restatement of Declaration
of Trust and Article II of Registrant's Amended and Restated By-Laws.
(d) The First Amendment to the Investment Advisory Agreement between
Registrant and Old Kent Bank and Trust Company (now known as Old Kent
Bank) was filed with Registrant's Post-Effective Amendment No. 24 as
Exhibit 24(b)(5)(a) and is incorporated by reference herein.
Amended Schedule A to the First Amendment to the Investment Advisory
Agreement between Registrant and Old Kent Bank and Trust Company was
filed with Registrant's Post-Effective Amendment No. 24 as Exhibit
24(b)(5)(b) and is incorporated by reference herein.
The notice to Old Kent Bank pursuant to the Investment Advisory
Agreement between Registrant and Old Kent Bank relating to The Kent
Government Money Market Fund was filed with Registrant's Post-Effective
Amendment No. 24 as Exhibit 24(b)(5)(c) and is incorporated by
reference herein.
Assumption Agreement between Old Kent Bank and Lyon Street Asset
Management Co. dated March 2, 1998 was filed with Registrant's
Post-Effective Amendment No. 24 as Exhibit 24(b)(5)(d) and is
incorporated by reference herein.
The notice to Lyon Street Asset Management Co. pursuant to the
Investment Advisory Agreement between Registrant and Old Kent Bank
(which has been assumed by Lyon Street Asset Management Co.) relating
to The Kent Large Company Growth Fund was filed with Registrant's
Post-Effective Amendment No. 25 as Exhibit 24(d)(1) and is incorporated
by reference herein.
The notice to Lyon Street Asset Management Co. pursuant to the
Investment Advisory Agreement between Registrant and Old Kent Bank
(which has been assumed by Lyon Street Asset Management Co.) relating
to The Lyon Street Institutional Money Market
<PAGE> 127
Fund was filed with Registrant's Post-Effective Amendment No. 26 as
Exhibit 24(d)(2) and is incorporated by reference herein.
(e) The Distribution Agreement between Registrant and BISYS Fund Services
Limited Partnership dated August 5, 1996 was filed with Registrant's
Post-Effective Amendment No. 21 as Exhibit 24(b)(6)(a) and is
incorporated by reference herein.
The notice to BISYS Fund Services Limited Partnership pursuant to the
Distribution Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Kent Government Money Market Fund
was filed with Registrant's Post-Effective Amendment No. 23 as Exhibit
24(b)(6)(b) and is incorporated by reference herein.
The notice to BISYS Fund Services Limited Partnership pursuant to the
Distribution Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Kent Large Company Growth Fund was
filed with Registrant's Post-Effective Amendment No. 25 as Exhibit
24(e)(1) and is incorporated by reference herein.
The notice to BISYS Fund Services Limited Partnership pursuant to the
Distribution Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Lyon Street Institutional Money
Market Fund was filed with Registrant's Post-Effective Amendment No. 26
as Exhibit 24(e)(2) and is incorporated by reference herein.
(f) The Kent Funds Deferred Compensation Plan and form of Deferred
Compensation Agreement relating to the Deferred Compensation Plan were
filed with Registrant's Post-Effective Amendment No. 21 as Exhibit
24(b)(7) and are incorporated by reference herein.
(g) The Custody Agreement between Registrant and Bankers Trust Company was
filed with Registrant's Post-Effective Amendment No. 18 as Exhibit
24(b)(8) and is incorporated by reference herein.
(h)(1) The Administration Agreement between Registrant and BISYS Fund Services
Limited Partnership dated August 5, 1996 was filed with Registrant's
Post-Effective Amendment No. 21 as Exhibit 24(b)(9)(a) and is
incorporated by reference herein.
The notice to BISYS Fund Services Limited Partnership pursuant to the
Administration Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Kent Government Money Market Fund
was filed with Registrant's Post-Effective Amendment No. 23 as Exhibit
24(b)(9)(a)(i) and is incorporated by reference herein.
The notice to BISYS Fund Services Limited Partnership pursuant to the
Administration Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Kent Large Company Growth Fund was
filed with Registrant's Post-Effective Amendment No. 25 as Exhibit
24(h)(1)(a) and is incorporated by reference herein.
-2-
<PAGE> 128
The notice to BISYS Fund Services Limited Partnership pursuant to the
Administration Agreement between Registrant and BISYS Fund Services
Limited Partnership relating to The Lyon Street Institutional Money
Market Fund was filed with Registrant's Post-Effective Amendment No. 26
as Exhibit 24(h)(1)(b) and is incorporated by reference herein.
(h)(2) The Fund Accounting Agreement between Registrant and BISYS Fund
Services, Inc. dated August 5, 1996 was filed with Registrant's
Post-Effective Amendment No. 21 as Exhibit 24(b)(9)(b) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Fund Accounting
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Kent Government Money Market Fund was filed with Registrant's
Post-Effective Amendment No. 23 as Exhibit 24(b)(9)(b)(i) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Fund Accounting
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Kent Large Company Growth Fund was filed with Registrant's
Post-Effective Amendment No. 25 as Exhibit 24(h)(2)(a) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Fund Accounting
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Lyon Street Institutional Money Market Fund was filed with
Registrant's Post-Effective Amendment No. 26 as Exhibit 24(h)(2)(b) and
is incorporated by reference herein.
(h)(3) The Transfer Agency Agreement between Registrant and BISYS Fund
Services, Inc. dated October 7, 1996 was filed with Registrant's
Post-Effective Amendment No. 21 as Exhibit 24(b)(9)(c) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Transfer Agency
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Kent Government Money Market Fund was filed with Registrant's
Post-Effective Amendment No. 23 as Exhibit 24(b)(9)(c)(i) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Transfer Agency
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Kent Large Company Growth Fund was filed with Registrant's
Post-Effective Amendment No. 25 as Exhibit 24(h)(3)(a) and is
incorporated by reference herein.
The notice to BISYS Fund Services, Inc. pursuant to the Transfer Agency
Agreement between Registrant and BISYS Fund Services, Inc. relating to
The Lyon Street Institutional Money Market Fund was filed with
Registrant's Post-Effective Amendment No. 26 as Exhibit 24(h)(3)(b) and
is incorporated by reference herein.
(i) Not Applicable.
-3-
<PAGE> 129
(j)(1) Consent of Drinker Biddle & Reath LLP is filed herewith as Exhibit
(j)(2).
(k) Not applicable.
(l) The subscription agreement was filed with Registrant's Registration
Statement as Exhibit 24(b)(13) and is incorporated by reference herein.
(m) Registrant's Amended and Restated Master Distribution Plan for
Investment Shares and related form of agreement were filed with
Registrant's Post-Effective Amendment No. 21 as Exhibit 24(b)(15)(a)
and Exhibit 24(b)(15)(b), respectively, and are incorporated by
reference herein.
(n) Not applicable.
(o) Registrant's Rule 18f-3 Plan was filed with Registrant's Post-Effective
Amendment No. 23 as Exhibit 24(b)(18) and is incorporated by reference
herein.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
See Article VIII of Section 3 of Registrant's Restatement of
Declaration of Trust which was filed with Registrant's Post-Effective Amendment
No. 24 as Exhibit 24(b)(1) and is incorporated by reference herein. See Section
1.12 of the Distribution Agreement between Registrant and BISYS Fund Services
Limited Partnership which was filed with Registrant's Post-Effective Amendment
No. 21 as Exhibit 24(b)(6)(a) and is incorporated by reference herein.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information as to any other business, profession, vocation or
employment of a substantial nature in which each director and officer of Lyon
Street Asset Management Company is, or at any time during the past two years has
been, engaged for his or her own account or in the capacity of director,
officer, employee, partner or trustee is incorporated by reference to Schedules
A and D of Lyon Street Asset Management Company's Form ADV (File No. 801-55015)
filed on March 2, 1998, as amended.
-4-
<PAGE> 130
ITEM 27. PRINCIPAL UNDERWRITERS
(a) BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services acts as distributor and administrator for
Registrant. BISYS Fund Services also distributes the
securities of:
Alpine Equity Trust
American Performance Funds
AmSouth Mutual Funds
The ARCH Fund, Inc.
The BB&T Mutual Funds Group
The Coventry Group
ESC Strategic Funds, Inc.
The Eureka Funds
Fifth Third Funds
Governor Funds,
Gradison Custodian Trust,
Gradison Growth Trust,
Gradison-McDonald Cash Reserves Trust,
Gradison-McDonald Municipal Custodian Trust
Hirtle Callaghan Trust
HSBC Funds Trust
HSBC Mutual Funds Trust
The Infinity Mutual Funds, Inc.
INTRUST Funds Trust
Magna Funds
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D. & T. Funds
Pacific Capital Funds
The Parkstone Advantage Fund
Pegasus Funds
Puget Sound Alternative Investment Series Trust
Republic Funds Trust
The Republic Advisors Funds Trust
Sefton Funds Trust
The Sessions Group
SSqA International Liquidity Fund
Summit Investment Trust
Variable Insurance Funds
The Victory Portfolios
The Victory Variable Insurance Funds
Vintage Mutual Funds, Inc.
-5-
<PAGE> 131
(b) Partners of BISYS Fund Services Limited Partnership are as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Addresses with BISYS Fund Services with Registrant
- ------------------ ------------------------ ---------------
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, Ohio 43219
WC Subsidiary Corporation Sole Limited Partner None
150 Clove Road
Little Falls, NJ 07424
</TABLE>
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 to 31a-3 thereunder is maintained by BISYS Fund Services at 3435
Stelzer Road, Columbus, Ohio 43219, except for Registrant's minute books, which
are maintained by Drinker Biddle & Reath LLP, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
-6-
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Columbus, in the State of
Ohio, on the 26th day of February, 1999.
THE KENT FUNDS
By: */ s/ James F. Duca, II
-----------------------
James F. Duca, II
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registrant's Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
*/s/ James F. Duca, II President February 26, 1999
- -------------------------------
James F. Duca, II
*/s/ Martin R. Dean Treasurer (Principal Accounting February 26, 1999
- ------------------------------- and Financial Officer)
Martin R. Dean
*/s/ Walter B. Grimm Chairman and Trustee February 26, 1999
- -------------------------------
Walter B. Grimm
*/s/ Joseph F. Damore Trustee February 26, 1999
- -------------------------------
Joseph F. Damore
*/s/ James F. Rainey Trustee February 26, 1999
- -------------------------------
James F. Rainey
*/s/ Ronald F. VanSteeland Trustee February 26, 1999
- -------------------------------
Ronald F. VanSteeland
</TABLE>
*By: /s/ Robert L. Tuch
---------------------------------
Robert L. Tuch
Attorney-in-Fact
* Robert L. Tuch, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named Trustees and Officers of
Registrant pursuant to powers of attorney duly executed by such
persons.
<PAGE> 133
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, James F. Duca, II, hereby appoint W. Bruce McConnel, III and Robert
L. Tuch, and either of them, my true and lawful attorneys and agents, with power
of substitution and resubstitution, to perform any and all acts and things and
to execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable The
Kent Funds, a Massachusetts business trust (the "Fund"), to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended ("Acts"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement pursuant to said Acts, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in my name and on my behalf as a trustee and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and I hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
/s/ James F. Duca, II
----------------------
James F. Duca, II
Date: April 17, 1998
<PAGE> 134
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, Martin R. Dean, hereby appoint W. Bruce McConnel, III and Robert L.
Tuch, and either of them, my true and lawful attorneys and agents, with power of
substitution and resubstitution, to perform any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable The
Kent Funds, a Massachusetts business trust (the "Fund"), to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended ("Acts"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement pursuant to said Acts, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in my name and on my behalf as a trustee and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and I hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
/s/ Martin R. Dean
------------------
Martin R. Dean
Date: April 30, 1998
<PAGE> 135
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, Walter B. Grimm, hereby appoint W. Bruce McConnel, III and Robert L.
Tuch, and either of them, my true and lawful attorneys and agents, with power of
substitution and resubstitution, to perform any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable The
Kent Funds, a Massachusetts business trust (the "Fund"), to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended ("Acts"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement pursuant to said Acts, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in my name and on my behalf as a trustee and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and I hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
/s/ Walter B. Grimm
-------------------
Walter B. Grimm
Date: April 30, 1998
<PAGE> 136
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, Joseph F. Damore, hereby appoint W. Bruce McConnel, III and Robert
L. Tuch, and either of them, my true and lawful attorneys and agents, with power
of substitution and resubstitution, to perform any and all acts and things and
to execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable The
Kent Funds, a Massachusetts business trust (the "Fund"), to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended ("Acts"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement pursuant to said Acts, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in my name and on my behalf as a trustee and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and I hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
/s/ Joseph F. Damore
--------------------
Joseph F. Damore
Date: April 29, 1998
<PAGE> 137
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, James F. Rainey, hereby appoint W. Bruce McConnel, III and Robert L.
Tuch, and either of them, my true and lawful attorneys and agents, with power of
substitution and resubstitution, to perform any and all acts and things and to
execute any and all instruments which said attorneys and agents, or either of
them, may deem necessary or advisable or which may be required to enable The
Kent Funds, a Massachusetts business trust (the "Fund"), to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended ("Acts"), and any rules, regulations or requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing and
effectiveness of any and all amendments (including post-effective amendments) to
the Fund's Registration Statement pursuant to said Acts, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in my name and on my behalf as a trustee and/or officer of the Fund any and
all such amendments filed with the Securities and Exchange Commission under said
Acts, and any other instruments or documents related thereto, and I hereby
ratify and confirm all that said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
/s/ James F. Rainey
-------------------
James F. Rainey
Date: April 29, 1998
<PAGE> 138
THE KENT FUNDS
POWER OF ATTORNEY
-----------------
I, Ronald F. VanSteeland, hereby appoint W. Bruce McConnel, III and
Robert L. Tuch, and either of them, my true and lawful attorneys and agents,
with power of substitution and resubstitution, to perform any and all acts and
things and to execute any and all instruments which said attorneys and agents,
or either of them, may deem necessary or advisable or which may be required to
enable The Kent Funds, a Massachusetts business trust (the "Fund"), to comply
with the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended ("Acts"), and any rules, regulations or requirements of the
Securities and Exchange Commission in respect thereof, in connection with the
filing and effectiveness of any and all amendments (including post-effective
amendments) to the Fund's Registration Statement pursuant to said Acts,
including specifically, but without limiting the generality of the foregoing,
the power and authority to sign in my name and on my behalf as a trustee and/or
officer of the Fund any and all such amendments filed with the Securities and
Exchange Commission under said Acts, and any other instruments or documents
related thereto, and I hereby ratify and confirm all that said attorneys and
agents, or either of them, shall do or cause to be done by virtue hereof.
/s/ Ronald F. VanSteeland
-------------------------
Ronald F. VanSteeland
Date: April 27, 1998
<PAGE> 139
CERTIFICATE OF SECRETARY
The following resolution was duly adopted by the Board of
Trustees of The Kent Funds on August 20, 1998, and remains in full force and
effect as of the date hereof:
RESOLVED, that the Trustees and officers of the Trust who may
be required to execute any amendments to the Trust's Registration
Statement be, and each of them hereby is, authorized to execute a power
of attorney appointing W. Bruce McConnel, III and Robert L. Tuch, and
either of them, their true and lawful attorneys to execute in their
name, place and stead, in their capacity as Trustee or officer, or
both, of the Trust any and all amendments to the Registration
Statement, and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange
Commission; and either of said attorneys shall have the power to act
thereunder with or without the other of said attorneys and shall have
full power of substitution and resubstitution; and either of said
attorneys shall have full power and authority to do in the name and on
behalf of said Trustees and officers, or any or all of them, in any and
all capacities, every act whatsoever requisite or necessary to be done
in the premises, as full and to intents and purposes as each of said
Trustees or officers, or any or all of them, might or could do in
person, said acts of said attorneys, or either of them, being thereby
ratified and approved.
IN WITNESS WHEREOF, I have hereunto signed my name.
DATED: February 26, 1999 By: /s/ Robert L. Tuch
------------------
Robert L. Tuch
Secretary
<PAGE> 140
EXHIBIT INDEX
Exhibit (j)(1) Consent of Drinker Biddle & Reath LLP.
<PAGE> 1
Exhibit (j)(1)
CONSENT OF COUNSEL
We hereby consent to use of our name and to the reference to
our firm under the caption "Custodian, Auditors and Counsel" in the Statement of
Additional Information that is included in Post-Effective Amendment No. 28 to
the Registration Statement (No. 33-8398) on Form N-1A under the Securities Act
of 1933, as amended, of The Kent Funds. This consent does not constitute a
consent under Section 7 of the Securities Act of 1933, and in consenting to the
use of our name and the references to our firm under such caption we have not
certified any part of the Registration Statement and do not otherwise come
within the categories of persons whose consent is required under Section 7 or
the rules and regulations of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
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Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
Date: February 26, 1999
