<PAGE>
Law Offices
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
April 29, 1999
VIA EDGAR TRANSMISSION
- ----------------------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, DC 20549
Re: The Kent Funds Form N-1A
Post-Effective Amendment No. 31
File Nos. 33-8398 and 811-4824
-------------------------------
Ladies and Gentlemen:
Please accept for filing Post-Effective Amendment No. 31 (the
"Amendment") to the Registration Statement on Form N-1A of The Kent Funds (the
"Trust") under the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended. The Amendment is being filed
pursuant to Rule 485(b) under the Securities Act of 1933 in order to (i) include
the Company's audited financial statements for the fiscal year ended December
31, 1998, (ii) update certain financial information and (iii) make other non-
material changes. On behalf of the Trust, I hereby certify that this Amendment
does not contain disclosures that would render it ineligible to become effective
under paragraph (b) of Rule 485. As requested in the staff's generic comment
letter dated February 25, 1994, we note for your information that shares of the
Trust are marketed in part through banks.
Questions and comments concerning the enclosed materials may be directed
to the undersigned at (215) 988-1146.
Sincerely,
/s/ Diana E. McCarthy
---------------------
Diana E. McCarthy
<PAGE>
As filed with the Securities and Exchange Commission on April 29, 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. 31 and/or [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 32
(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:
[X] immediately upon filing pursuant to paragraph (b)
[_] on pursuant to paragraph (b)
[_] 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
The purpose of this filing is to:
(i) update certain financial and other annual information in the Kent Funds'
Prospectus and Statement of Additional Information covering the Growth and
Income, Index Equity, Large Company Growth, Small Company Growth, International
Growth, Income, Intermediate Bond, Short Term Bond, Tax-Free Income,
Intermediate Tax-Free, Michigan Municipal Bond, Money Market, Government Money
Market and Michigan Municipal Money Market Funds.
<PAGE>
[KENT FUNDS RIGHT ON THE MONEY LOGO APPEARS HERE]
Prospectus EQUITY FUNDS
May 1, 1999 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
-----------------------------------------------
NEED INFORMATION?
Call 1-800-633-KENT (5368)
or your Investment Representative.
-----------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THE SHARES DESCRIBED IN
THIS PROSPECTUS OR DETERMINED WHETHER THIS PRO-
SPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF
CONTENTS
Carefully review RISK/RETURN SUMMARY AND FUND EXPENSES
this important sec-
tion, which summa-
rizes each Fund's
investments, risks,
past performance,
and fees.
3 Overview
EQUITY FUNDS
4 Investment Objectives,
Principal Investment Strategies and
Performance Information
9 Principal Risks
11 Fees and Expenses
BOND FUNDS
12 Investment Objectives,
Principal Investment Strategies and
Performance Information
16 Principal Risks
17 Fees and Expenses
MUNICIPAL BOND FUNDS
18 Investment Objectives,
Principal Investment Strategies and
Performance Information
21 Principal Risks
23 Fees and Expenses
MONEY MARKET FUNDS
24 Investment Objectives,
Principal Investment Strategies and
Performance Information
27 Principal Risks
29 Fees and Expenses
1
<PAGE>
ADDITIONAL INFORMATION
30 Investing for Defensive Purposes
30 Year 2000 and the Kent Funds
Review this section FUND MANAGEMENT
for details
on the people and 31 Investment Adviser
organizations
who oversee the 32 Portfolio Managers
Funds.
32 Distributor, Administrator and Sub-Administrator
Review this section SHAREHOLDER INFORMATION
for details on
how shares are 33 Pricing of Fund Shares
valued, how to pur-
chase, sell and 34 Purchasing and Selling Your Investment Shares
exchange shares,
related charges and 40 Purchasing and Selling Your Institutional Shares
payments of
dividends and 40 General Policies on Selling Shares
distributions.
41 Distribution and Service Fees
42 Exchanging Your Shares
43 Dividends and Distributions
43 Taxation
45 FINANCIAL HIGHLIGHTS
BACK COVER
Where to learn more about the Funds
2
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
This prospectus describes the following funds offered by the Kent Funds (the
"Funds"). On the following pages, you will find important information about
each Fund, including:
. the investment objective
. principal investment strategy
. performance information
. fees and expenses, and
. principal risks associated with each Fund
The Funds are managed by Lyon Street Asset Management Company ("Lyon Street" or
the "Adviser").
Equity Funds
Growth and Income Fund Risk/Return Profile of Mutual Funds
Index Equity Fund [CHART APPEARS HERE]
Large Company Growth Fund
Small Company Growth Fund
International Growth Fund
Bond Funds
Income Fund
Intermediate Income Fund
Short Term Bond Fund
Municipal Bond Funds
Tax-Free Income Fund
Intermediate Tax-Free Fund
Michigan Municipal Bond Fund
Money Market Funds
Money Market Fund
Government Money Market Fund
Michigan Municipal Money Market Fund
Principal Risks of the Funds
<TABLE>
<CAPTION>
Foreign Interest
Market Selection Investment Rate Credit Concentration
Risk Risk Risk Risk Risk Risk
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund X X
- -------------------------------------------------------------------------------------
Index Equity Fund X X
- -------------------------------------------------------------------------------------
Large Company Growth
Fund X X
- -------------------------------------------------------------------------------------
Small Company Growth
Fund X X
- -------------------------------------------------------------------------------------
International Growth
Fund X X X X
- -------------------------------------------------------------------------------------
Income Fund X X X X
- -------------------------------------------------------------------------------------
Intermediate Income Fund X X X X
- -------------------------------------------------------------------------------------
Short Term Bond Fund X X X X
- -------------------------------------------------------------------------------------
Tax-Free Income Fund X X X X
- -------------------------------------------------------------------------------------
Intermediate Tax-Free
Fund X X X X
- -------------------------------------------------------------------------------------
Michigan Municipal Bond
Fund X X X X X
- -------------------------------------------------------------------------------------
Money Market Fund X X X X
- -------------------------------------------------------------------------------------
Government Money Market
Fund X X X X
- -------------------------------------------------------------------------------------
Michigan Municipal Money
Market Fund X X X X X
</TABLE>
A complete description of these and other risks can be found in the sections
"Equity Funds - Principal Risks," "Bond Funds - Principal Risks," "Municipal
Bond Funds - Principal Risks" and "Money Market Funds - Principal Risks".
3
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES Long-term capital growth with current income as a
secondary objective.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES 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, Amer-
Market ican Stock Exchange or over-the-counter. The Fund in-
Capitalization tends to invest at least 65% of its total assets in
is a common equity securities that Lyon Street believes have po-
measure of the tential primarily for capital growth and secondarily
size of a for income. A portion of the Fund's assets may be in-
company. It is vested in preferred stock or bonds convertible into
the market price common stock. The Fund expects to earn current income
of a share of mainly from stock dividends and from interest on con-
the company's vertible bonds. The average market capitalization of
stock multiplied the Fund's portfolio securities was $32.7 billion as
by the number of of December 31, 1998.
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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 11.98%
1994 0.51%
1995 34.91%
1996 19.47%
1997 24.14%
1998 28.07%
Best quarter: Q4 199821.19%
Worst quarter: Q3 1998-9.38%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 12/1/92 27.68% 20.58% 18.90%
- -----------------------------------------------------------------------------
Institutional Shares 11/2/92 28.07% 20.83% 19.46%
- -----------------------------------------------------------------------------
S&P 500 Index 10/31/92 28.60% 24.05% 21.86%
- -----------------------------------------------------------------------------
</TABLE>
4
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT INDEX EQUITY FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES Long-term capital appreciation with current income as
a secondary objective.
PRINCIPAL INVESTMENT To achieve its objectives, the Fund invests substan-
STRATEGIES tially all of its assets 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 com-
panies 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.
- --------------------------------------------------------------------------------
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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 9.11%
1994 0.86%
1995 36.23%
1996 22.18%
1997 32.55%
1998 28.26%
Best quarter: Q4 199821.26%
Worst quarter: Q3 1998-9.99%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 11/25/92 27.93% 23.05% 20.60%
- -----------------------------------------------------------------------------
Institutional Shares 11/2/92 28.26% 23.33% 21.08%
- -----------------------------------------------------------------------------
S&P 500 Index 10/31/92 28.60% 24.05% 21.86%
- -----------------------------------------------------------------------------
</TABLE>
5
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT LARGE COMPANY GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES assets in equity securities of U.S. companies with
at least $4 billion in market capitalization. The
Fund intends to invest at least 65% of its total
assets in securities of companies which Lyon Street
believes have potential for above-average growth as
measured by projected earnings per share and growth
in sales.
- --------------------------------------------------------------------------------
No performance information
is shown for the Large
Company Growth Fund which
has not commenced
operations as of the date
of this prospectus.
6
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT SMALL COMPANY GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES Long-term capital appreciation.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES 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
Market to invest at least 65% of its total assets in equity
Capitalization securities of companies that Lyon Street believes
is a common have above-average potential for growth in revenues,
measure of the earnings or assets. The Fund intends generally to
size of a purchase common stock issued by companies that meet
company. It is this market capitalization criteria that are listed
the market price on the New York Stock Exchange, but may also purchase
of a share of shares of companies that meet this capitalization
the company's criteria that are listed on other U.S. securities ex-
stock multiplied changes or trade over the counter. The value of the
by the number of shares purchased will be based on the company's capi-
shares that are talization relative to all of the other eligible com-
outstanding. panies. 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.
- --------------------------------------------------------------------------------
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 Russell 2000 In-dex, 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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 17.04%
1994 -0.06%
1995 23.75%
1996 19.56%
1997 27.56%
1998 -6.15%
Best quarter: Q2 199718.02%
Worst quarter: Q3 1998-21.20%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 12/4/92 -6.40% 11.94% 12.94%
- -----------------------------------------------------------------------------
Institutional Shares 11/2/92 -6.15% 12.17% 14.15%
- -----------------------------------------------------------------------------
Russell 2000 Index 10/31/92 -2.55% 11.87% 14.62%
- -----------------------------------------------------------------------------
</TABLE>
7
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Long-term capital appreciation.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES assets in the common and preferred stocks of compa-
nies located in at least three countries in Europe,
Australia and the Far East.
Lyon Street considers a country's Gross Domestic
Product and market capitalization relative to other
countries when determining region and country alloca-
tions among Europe, Australia and the Pacific Rim.
Allocation among companies is determined based on a
stock's market capitalization and industry attrac-
tiveness. Stocks are selected from the companies rep-
resented in the Morgan Stanley Capital International
Europe, Australia and Far East Index (the "EAFE In-
dex"). The allocation of Fund assets may shift from
time to time from countries that the Fund considers
overvalued to countries that it considers underval-
ued. Although the Fund seeks to equal or exceed the
return of the EAFE Index, the Fund may invest its as-
sets in proportions that differ from this index. The
Fund is not, therefore, an "index" fund, which typi-
cally holds securities in approximately the same pro-
portion as the index it attempts to replicate. The
Fund may at times invest more than 25% of its total
assets in a particular country.
- --------------------------------------------------------------------------------
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 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 re-
gion.
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 distribu-
tions.)
[BAR CHART APPEARS HERE]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
30.32% 5.73% 13.00% 5.87% 2.54% 17.92%
Best quarter: Q4 1998 19.50%
Worst quarter: Q3 1998 -13.69%
Past performance does not indicate how the
Fund will perform in the future.
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
Average Annual Total Returns (for the periods ending December 31, 1998)
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 12/4/92 17.60% 8.62% 11.77%
- ----------------------------------------------------------------------------------------
Institutional Shares 12/4/92 17.92% 8.87% 12.07%
- ----------------------------------------------------------------------------------------
Morgan Stanley Capital
International Europe, Australia
and Far East Index 11/30/92 20.33% 9.50% 13.01%
- ----------------------------------------------------------------------------------------
Morgan Stanley Capital
International Europe Index 11/30/92 28.91% 19.53% 21.33%
- ----------------------------------------------------------------------------------------
Morgan Stanley Capital
International Pacific Index 11/30/92 2.69% -3.95% 1.57%
- ----------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS
- --------------------------------------------------------------------------------
Principal Investing in the Equity Funds involves risks common
Investment Risks - to any investment in securities. By itself, no Fund
All Equity Funds constitutes a balanced investment program.
An investment in an Equity Fund is not a bank deposit
and is not insured or guaranteed by the Federal De-
posit Insurance Corporation or any other government
agency.
The Equity Funds will invest principally in common
stocks, which have historically presented greater po-
tential 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.
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. Se-
lection risk means that the particular stocks that
are selected for a Fund may underperform the market
or other funds with similar objectives.
Additional Investment Style Risk
Principal While stocks of smaller companies can provide greater
Investment Risks growth potential and potentially higher returns, they
carry higher risks than those of larger companies.
They may trade infrequently or in lower volumes, mak-
ing it difficult for a Fund to sell its shares at the
price it wants. Smaller companies may be more sensi-
tive 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. The Growth and In-
come Fund is also subject to the same risk.
Growth stocks offer strong revenue and earnings po-
tential and accompanying capital growth, with less
dividend income than value stocks. Growth stocks
present the risk that they may not perform as well as
other types of stocks, such as value stocks. Each of
the Equity Funds may invest in growth stocks.
Value stocks are those that appear to be underpriced
based upon valuation measures, such as lower price-
to-earnings ratios and price-to-book ratios. Value
stocks present the risk that they may not perform as
well as other types of stocks, such as growth stocks.
Each of the Equity Funds may invest in value stocks.
Indexing is a strategy whereby the Index Equity Fund
attempts to weight its securities to match those of a
broadly-based securities index (the S&P 500) in an
attempt to approximate the index's performance. There
is the risk that the Index Equity Fund's investment
results may fail to match those of the S&P 500. There
is also the risk that if the S&P 500 does not perform
well, the investment results of the Index Equity Fund
may not be as favorable as other funds.
9
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS, Continued
- --------------------------------------------------------------------------------
Foreign Investment Risk
-----------------------
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 for-
eign currency versus the U.S. dollar reduces the
dollar value of securities denominated in that cur-
rency.
. Compared to companies in the U.S., there is gener-
ally less publicly available information about for-
eign companies and there may be less government
oversight of foreign stock exchanges and the compa-
nies traded on them. There may also be less strin-
gent 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, con-
fiscation or difficulties enforcing contracts. All
of these factors can make foreign investments more
risky than U.S. investments.
. Furthermore, transaction fees may be higher for
foreign investments, due to higher brokerage com-
missions, fees on currency exchanges, and possible
imposition of dividend or interest withholding by
foreign governments. These may cause higher trans-
action costs which can result in lower returns or
decreased liquidity.
Concentration Risk
------------------
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.
A full discussion of all permissible investments can
be found in the Statement of Additional Information.
Who May Want to Consider investing in an Equity Fund if you are:
Invest? .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>
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<CAPTION>
GROWTH AND INDEX LARGE COMPANY
INCOME FUND EQUITY FUND GROWTH FUND
Investment Institutional Investment Institutional Investment Institutional
Shares Shares Shares Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Fees
(fees paid
directly from
your investment)
Maximum Sales
Charge (Load)
Imposed on
Purchases None None None None None None
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)
Management Fees 0.70% 0.70% 0.30%/2/ 0.30%/2/ 0.70% 0.70%
Distribution
(12b-1) Fees/6/ 0.25% None 0.25% None 0.25% None
Other Expenses 0.24%/1/ 0.24%/1/ 0.25%/2/ 0.25%/2/ 0.40%/3/ 0.40%/3/
-------- -------- -------- -------- -------- --------
Total Annual
Fund
Operating Expenses 1.19%/1/ 0.94%/1/ 0.80%/2/ 0.55%/2/ 1.35%/3/ 1.10%/3/
Fee Waiver 0.01%/1/ 0.01%/1/ 0.13%/2/ 0.13%/2/ - -
-------- -------- -------- -------- -------- --------
Net Annual Fund
Operating Expenses 1.18%/1/ 0.93%/1/ 0.67%/2/ 0.42%/2/ 1.35% 1.10%
- --------------------------------------------------
======== ======== ======== ======== ======== ========
<CAPTION>
SMALL COMPANY INTERNATIONAL
GROWTH FUND GROWTH FUND
Investment Institutional Investment Institutional
Shares Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Fees
(fees paid
directly from
your investment)
Maximum Sales
Charge (Load)
Imposed on
Purchases None None None None
Annual Fund
Operating
Expenses
(expenses that
are deducted
from Fund
assets)
Management Fees 0.70% 0.70% 0.75% 0.75%
Distribution
(12b-1) Fees/6/ 0.25% None 0.25% None
Other Expenses 0.25%/4/ 0.25%/4/ 0.31%/5/ 0.31%/5/
---------- ------------- ---------- -------------
Total Annual
Fund
Operating Expenses 1.20%/4/ 0.95%/4/ 1.31%/5/ 1.06%/5/
Fee Waiver 0.01%/4/ 0.01%/4/ 0.01%/5/ 0.01%/5/
---------- ------------- ---------- -------------
Net Annual Fund
Operating Expenses 1.19%/4/ 0.94%/4/ 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 would be 0.23%. 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 would
be 0.25% for each class and Other Expenses would be 0.17% 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 0.39% for both classes. You will be
notified if the waiver is discontinued after that date. Expenses for the
Large Company Growth Fund are estimated based on expenses expected to be
incurred in the current fiscal year.
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 would be 0.24% 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 would be 0.30% for each class. You will be notified if the
waiver is discontinued after that date.
6 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.
Example: This Example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The Example as-
sumes:
. $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 (with the
exception of the Large Company Growth Fund which assumes no contractual
fee waivers)
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
<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 $ 120 $ 95 $ 68 $ 43 $ 137 $ 112 $ 121 $ 96
Three Years
After Purchase $ 377 $ 299 $242 $163 $ 428 $ 350 $ 381 $ 302
Five Years
After Purchase $ 653 $ 519 $431 $294 $ 739 $ 606 $ 660 $ 525
Ten Years
After Purchase $1,442 $1,154 $978 $677 $1,624 $1,340 $1,458 $1,165
<CAPTION>
INTERNATIONAL
GROWTH FUND
Investment Institutional
Shares Shares
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year
After Purchase $ 132 $ 107
Three Years
After Purchase $ 414 $ 336
Five Years
After Purchase $ 717 $ 584
Ten Years
After Purchase $1,578 $1,293
</TABLE>
11
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES assets in corporate and government debt securities.
The Fund is permitted to purchase U.S. Government ob-
ligations (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 cat-
egories by Nationally Recognized Statistical Rating
Organizations ("Rating Agencies"), or unrated securi-
ties 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 compara-
ble quality). The Fund will maintain a dollar-
weighted average portfolio maturity between seven and
twenty years.
While maturity and credit quality are the most impor-
tant 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 eco-
nomic 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 im-
pact Fund performance, and cause additional taxable
gains to shareholders.
12
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
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-
denominated, SEC-registered corporate debt.
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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1996 1997 1998
---- ---- ----
1.19% 10.55% 9.29%
Best quarter: Q2 1997 4.63%
Worst quarter: Q1 1996 -3.63%
Past performance does not indicate how the Fund
will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Since Inception
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Shares 3/22/95 9.04% 9.14%
- --------------------------------------------------------------------------------------
Institutional Shares 3/20/95 9.29% 9.41%
- --------------------------------------------------------------------------------------
Lehman Brothers
Government/Corporate Bond Index 3/31/95 9.47% 9.48%
- --------------------------------------------------------------------------------------
Lehman Brothers
Long Government/Corporate Bond Index 3/31/95 11.77% 12.63%
- --------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT INTERMEDIATE BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES assets in corporate and government debt securities.
The Fund is permitted to purchase U.S. Government ob-
ligations (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 cat-
egories by Rating Agencies), or unrated securities of
comparable quality. The Fund will maintain a dollar-
weighted average portfolio maturity between three and
ten years.
While maturity and credit quality are the most impor-
tant 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 cause additional taxable gains to shareholders.
- --------------------------------------------------------------------------------
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 Intermediate
Government/Corporate Bond Index in the table below, is an unmanaged index com-
prised 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.
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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
8.42% -3.19% 16.18% 3.01% 7.80% 7.65%
Best quarter: Q2 1995 5.56%
Worst quarter: Q1 1994 -2.55%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 11/25/92 7.26% 5.89% 6.22%
- ---------------------------------------------------------------------------------
Institutional Shares 11/2/92 7.65% 6.09% 6.45%
- ---------------------------------------------------------------------------------
Lehman Brothers
Intermediate Government/
Corporate Bond Index 10/31/92 8.44% 6.60% 6.93%
- ---------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income.
PRINCIPAL INVESTMENT The Fund normally invests at least 65% of its total
STRATEGIES assets in corporate and government debt securities.
The Fund is permitted to purchase U.S. Government ob-
ligations (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 cat-
egories by Rating Agencies), or unrated securities of
comparable quality. The Fund will maintain a dollar-
weighted average portfolio maturity between one and
three years.
While maturity and credit quality are the most impor-
tant 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.
- --------------------------------------------------------------------------------
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. 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.
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.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
3.36% 1.03% 10.53% 4.22% 6.42% 6.14%
Best quarter: Q2 1995 3.16%
Worst quarter: Q1 1996 -0.01%
Past performance does not indicate how the
Fund will perform in the future.
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 6.00% 5.48% 5.06%
- ----------------------------------------------------------------------------------
Institutional Shares 11/2/92 6.14% 5.62% 5.20%
- ----------------------------------------------------------------------------------
Lehman Brothers 1-3 Year
Government Bond Index 10/31/92 6.97% 5.96% 5.84%
- ----------------------------------------------------------------------------------
Consumer Price Index 10/31/92 1.61% 2.37% 2.38%
- ----------------------------------------------------------------------------------
91-Day Treasury Bill 10/31/92 4.88% 5.02% 4.65%
- ----------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS
- --------------------------------------------------------------------------------
Principal Investment Investing in the Bond Funds involves the risks common
Risks - All Bond Funds to any investment in securities. By itself, no Fund
constitutes a balanced investment program.
The Bond Funds will invest primarily in fixed income
securities, which provide income and a level of pro-
tection of capital, but present a lesser potential
for capital appreciation than equity securities.
There is no guarantee that the Funds will meet their
goals. When you sell your shares in the Funds, they
may be worth more or less than you paid for them. It
is possible to lose money by investing in the Funds.
An investment in a Bond Fund is not a bank deposit
and is not insured or guaranteed by the Federal De-
posit Insurance Corporation or any other government
agency.
Two principal risks of fixed income (bond) investing
are market risk and selection risk. Market risk means
that the bond market in general has ups and downs,
which may affect the performance of any individual
fixed income security. Selection risk means that the
particular bonds that are selected for a Fund may
underperform the market or other funds with similar
objectives.
Interest Rate Risk
------------------
All bonds fluctuate in value as interest rates fluc-
tuate. 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 Bond Funds can acquire corporate bonds that carry
investment grade credit ratings, which are bonds
rated by a Rating Agency in the four highest rating
categories. Obligations rated in the fourth highest
rating category are considered to have speculative
characteristics. In addition, interest and principal
payments on these securities may not be insured or
guaranteed.
An issuer of fixed income securities could default on
its obligations to pay interest and repay principal.
A bond's credit rating could be downgraded. Both of
these events could cause a Fund to lose money.
A full discussion of all permissible investments can
be found in the SAI.
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
16
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<CAPTION>
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 directly from
your investment)
Maximum Sales Charge (Load) Imposed on Purchases None None None None None None
Annual Fund Operating Expenses/1/ (expenses that
are deducted from Fund assets)
Management Fees 0.60% 0.60% 0.55% 0.55% 0.50% 0.50%
Distribution (12b-1) Fees/4/ 0.25% None 0.25% None 0.25%/3/ None
Other Expenses 0.24%/1/ 0.24%/1/ 0.22%/2/ 0.22%/2/ 0.27%/3/ 0.27%/3/
----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses 1.09%/1/ 0.84%/1/ 1.02%/2/ 0.77%/2/ 1.02%/3/ 0.77%/3/
Fee Waiver 0.01%/1/ 0.01%/1/ 0.01%/2/ 0.01%/2/ 0.11%/3/ 0.01%/3/
----- ----- ----- ----- ----- -----
Net Annual Fund Operating Expenses 1.08%/1/ 0.83%/1/ 1.01%/2/ 0.76%/2/ 0.91%/3/ 0.76%
===== ===== ===== ===== ===== =====
</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 would be 0.23% 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 would be 0.21% 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 Fees would be 0.15% and Other Expenses would be
0.26% for the Investment Shares and Other Expenses would be 0.26% for the
Institutional Shares. You will be notified if either of these waivers is
discontinued after that date.
4 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.
Example: This Example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The Example as-
sumes:
. $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
Although your actual costs may be higher or lower, based upon these assump-
tions, your costs would be:
<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 $ 110 $ 85 $ 103 $ 78 $ 93 $ 78
Three Years
After Purchase $ 346 $ 267 $ 324 $245 $ 314 $245
Five Years
After Purchase $ 600 $ 465 $ 562 $427 $ 553 $427
Ten Years After Purchase $1,328 $1,036 $1,247 $953 $1,238 $953
</TABLE>
17
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income that is exempt from federal income tax
PRINCIPAL INVESTMENT The Fund normally invests at least 80% of its net as-
STRATEGIES sets 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 prefer-
ence item under the federal alternative minimum tax
will be considered taxable for purposes of this poli-
cy. 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.
While maturity and credit quality are the most impor-
tant 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.
- --------------------------------------------------------------------------------
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 Municipal Bond Index is an
unmanaged index generally representative of general obligation municipal debt
instruments with long-term maturities greater than two years.
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.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1996 1997 1998
---- ---- ----
3.92% 8.59% 5.71%
Best quarter: Q2 1997 3.44%
Worst quarter: Q1 1996 -0.89%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Shares 3/31/95 5.43% 6.82%
- --------------------------------------------------------------------------------
Institutional Shares 3/20/95 5.71% 7.07%
- --------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index 3/31/95 6.48% 7.94%
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT INTERMEDIATE TAX-FREE FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income that is exempt from federal income tax
PRINCIPAL INVESTMENT The Fund normally invests at least 80% of its net
STRATEGIES 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.
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.
- --------------------------------------------------------------------------------
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 in dex. The Lehman Brothers Three-Year General Obliga-
tion Municipal Bond Index and the Lehman Brothers Five-Year General Obliga tion
Municipal Bond Index 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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
8.51% -3.00% 12.90% 3.41% 7.07% 5.37%
Best quarter: Q1 1995 5.42%
Worst quarter: Q1 1994 -3.95%
Past performance does not indicate how the
Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 12/18/92 5.09% 4.83% 5.44%
- -------------------------------------------------------------------------------------
Institutional Shares 12/16/92 5.37% 5.04% 5.64%
- -------------------------------------------------------------------------------------
Lehman Brothers Three-Year
General Obligation Municipal
Bond Index 12/31/92 5.17% 4.93% 5.12%
- -------------------------------------------------------------------------------------
Lehman Brothers Five-Year
General Obligation Municipal
Bond Index 12/31/92 5.84% 5.36% 5.88%
- -------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT MICHIGAN MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income that is exempt from federal income tax
and Michigan personal income tax
PRINCIPAL INVESTMENT The Fund normally invests at least 80% of its net
STRATEGIES 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.
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.
- --------------------------------------------------------------------------------
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 Three-Year General Obligation
Municipal Bond Index is an unmanaged index of debt obligations 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 distribu-
tions.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
0.36% 8.20% 3.51% 5.52% 4.75%
Best quarter: Q1 1995 3.01%
Worst quarter: Q1 1994 -1.48%
Past performance does not indicate
how the Fund will perform in the future.
Average Annual Total Returns (for the periods ending December 31, 1998)
<TABLE>
<CAPTION>
Inception Date Past Year Past 5 Years Since Inception
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Shares 5/11/93 4.60% 4.27% 4.29%
- -----------------------------------------------------------------------------------
Institutional Shares 5/3/93 4.75% 4.43% 4.46%
- -----------------------------------------------------------------------------------
Lehman Brothers Three-Year
General Obligation
Municipal Bond Index 4/30/93 5.17% 4.93% 4.96%
- -----------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS
- --------------------------------------------------------------------------------
Principal Investing in the Municipal Bond Funds involves the
Investment Risks - risks common to any investment in securities. By it-
All Municipal Bond self, no Fund constitutes a balanced investment pro-
Funds gram.
The Municipal Bond Funds will invest primarily in
fixed income securities, which provide income and a
level of protection of capital, but present a lower
potential for capital appreciation than equity secu-
rities.
There is no guarantee that the Funds will meet their
goals. When you sell your shares in the Funds, they
may be worth more or less than you paid for them. It
is possible to lose money by investing in the Funds.
An investment in a Municipal Bond Fund is not a bank
deposit and is not insured or guaranteed by the Fed-
eral Deposit Insurance Corporation or any other gov-
ernment agency.
Two principal risks of fixed income (bond) investing
are market risk and selection risk. Market risk means
that the bond market in general has ups and downs,
which may affect the performance of any individual
fixed income security. Selection risk means that the
particular bonds that are selected for a Fund may
underperform the market or other Funds with similar
objectives.
Interest rate risk
All bonds fluctuate in value as interest rates fluc-
tuate. 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 Bond Funds can acquire bonds that carry invest-
ment grade credit ratings, which are bonds rated by a
Rating Agency in the four highest rating categories.
Obligations rated in the fourth highest rating cate-
gory are considered to have speculative characteris-
tics. In addition, interest and principal payments on
these securities may not be insured or guaranteed.
An issuer of fixed income securities could default on
its obligations to pay interest and repay principal.
A bond's credit rating could be downgraded. Both of
these events could cause a Fund to lose money.
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 munici-
pality
. revenue bonds, which are backed only by revenues
from a particular facility or revenue source
. private activity bonds issued by industrial devel-
opment authorities, which are used to finance pri-
vately owned facilities and which are backed by
private entities. The credit quality of these bonds
is a function of the creditworthiness of the pri-
vate entity.
21
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS, Continued
- --------------------------------------------------------------------------------
. 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.
Additional Principal Concentration (State) Risk - Michigan Municipal Bond
Investment Risks Fund
Due to the level of investment in municipal obliga-
tions issued by the State of Michigan and its politi-
cal subdivisions, the performance of the Fund will be
closely tied to the economic and political conditions
in the State of Michigan, and, therefore, an invest-
ment in the Fund may be riskier than an investment in
other types of municipal bond funds. The State's
economy is principally dependent upon manufacturing
(particularly automobiles, office equipment and other
durable goods), tourism and agriculture and histori-
cally has been highly cyclical. When a Fund's assets
are concentrated in obligations from revenues of sim-
ilar projects issued by issuers located in the same
state or in industrial development bonds, the Fund
will be subject to the particular risks (including
legal and economic conditions) related to such secu-
rities to a greater extent than if its assets were
not so concentrated.
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
22
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<CAPTION>
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 directly from
your investment)
Maximum Sales (Load) Charge Imposed on Purchases None None None None None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets) 0.55% 0.55% 0.50% 0.50% 0.45% 0.45%
Management Fees
Distribution (12b-1) Fees/4/ 0.25% None 0.25% None 0.25%/3/ None
Other Expenses 0.27%/1/ 0.27%/1/ 0.24%/2/ 0.24%/2/ 0.25%/3/ 0.25%/3/
----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses 1.07%/1/ 0.82%/1/ 0.99%/2/ 0.74%/2/ 0.95%/3/ 0.70%/3/
Fee Waiver 0.01%/1/ 0.01%/1/ 0.01%/2/ 0.01%/2/ 0.11%/3/ 0.01%/3/
----- ----- ----- ----- ----- -----
Net Annual Fund Operating Expenses 1.06%/1/ 0.81%/1/ 0.98%/2/ 0.73%/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 would be 0.26% 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 would be 0.23% 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 Fees would be 0.15% for the Investment Shares,
and Other Expenses would be 0.24%, for the Investment Shares and
Institutional Shares. You will be notified if either of these waivers is
discontinued after that date.
4 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.
Example: This Example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The Example as-
sumes:
. $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
Although your actual costs may be higher or lower, based upon these assump-
tions, your cost would be:
<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 $ 108 $ 83 $ 100 $ 75 $ 86 $ 70
Three Years
After Purchase $ 339 $ 261 $ 314 $236 $ 292 $223
Five Years
After Purchase $ 589 $ 454 $ 546 $410 $ 515 $389
Ten Years
After Purchase $1,305 $1,013 $1,212 $917 $1,156 $870
</TABLE>
23
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income.
PRINCIPAL INVESTMENT The Fund invests in a broad range of U.S. Gov-
STRATEGIES ernment, bank and commercial obligations which
are considered to be of high credit quality and
easily sold in the secondary market. These se-
curities will have short term debt ratings in
the two highest rating categories of at least
two Rating Agencies or will be unrated securi-
ties of comparable quality. The Fund's dollar-
weighted average portfolio maturity will not
exceed 90 days. The Fund will not purchase any
security which matures in more than 397 days.
The Fund seeks to maintain a stable net asset
value of $1.00 per share, although there is no
guarantee that the net asset value will not
vary.
- --------------------------------------------------------------------------------
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.
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.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ----
5.65% 3.40% 2.68% 3.75% 5.58% 5.06% 5.23% 5.13%
Best quarter: Q1 1991 1.56%
Worst quarter: Q4 1993 0.55%
Past performance does not indicate how the Fund
will perform in the future.
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 12/9/92 5.13% 4.94% 4.48%
- ------------------------------------------------------------------------------
Institutional Shares 12/3/90 5.13% 4.95% 4.58%
- ------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT GOVERNMENT MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income.
PRINCIPAL INVESTMENT The Fund invests in a broad range of U.S. Treasury
STRATEGIES bills and notes and other obligations issued by the
U.S. Government and its agencies, repurchase agree-
ments based on these securities and shares of regis-
tered money market investment companies that invest
exclusively in these securities. The Fund's dollar-
weighted average portfolio maturity will not exceed
90 days. The Fund will not purchase any security
which matures in more than 397 days. The Fund seeks
to maintain a stable net asset value of $1.00 per
share, although there is no guarantee that the net
asset value per share will not vary.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
The bar chart and table provide an indication of the risks of an investment in
the Fund by showing its performance for its first full fiscal 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.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1998
----
5.17%
Best quarter: Q3 1998 1.30%
Worst quarter: Q4 1998 1.21%
Past performance does not indicate how the Fund
will perform in the future.
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 6/2/97 5.17% 5.23%
- -------------------------------------------------------------------------------------
Institutional Shares 6/2/97 5.17% 5.25%
- -------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
KENT MICHIGAN MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE Current income that is exempt from federal income tax
and Michigan personal income tax.
PRINCIPAL INVESTMENT The Fund normally invests at least 80% of its net as-
STRATEGIES sets in federally tax-exempt obligations, which con-
sist of municipal bonds, notes and commercial paper
issued by states and local governments that are ex-
empt from federal taxes. The 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. Normally,
the Fund will invest at least 65% of its total assets
in municipal obligations issued by the State of Mich-
igan and its localities. The Fund's dollar-weighted
average portfolio maturity will not exceed 90 days.
The Fund will not purchase any security which matures
in more than 397 days. The Fund seeks to maintain a
stable net asset value of $1.00 per share, although
there is no guarantee that the net asset value will
not vary.
- --------------------------------------------------------------------------------
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.
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.)
The returns for Investment Shares will be lower than the Institutional Shares'
returns shown in the bar chart because expenses of the classes differ.
[BAR CHART APPEARS HERE]
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
2.63% 2.00% 2.40% 3.50% 3.11% 3.31% 3.06%
Best quarter: Q4 1995 0.90%
Worst quarter: Q4 1993 0.40%
Past performance does not indicate how the
Fund will perform in the future.
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 12/15/92 3.06% 3.07% 2.83%
- ------------------------------------------------------------------------------
Institutional Shares 6/3/91 3.06% 3.07% 2.94%
- ------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS
- --------------------------------------------------------------------------------
Principal Investment Investing in the Money Market Funds involves the
Risks - risks common to any investing in securities. By it-
All Money Market Funds self, no Fund constitutes a balanced investment pro-
gram.
An investment in a Money Market Fund is not a bank
deposit and is not insured or guaranteed by the Fed-
eral Deposit Insurance Corporation or any other gov-
ernment agency.
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 ba-
sis.
There can be no assurance that the investment objec-
tives of each Money Market Fund will be achieved.
Market Risk and Selection Risk
The Funds' performance per share will change daily
based on many factors, including fluctuation in in-
terest rates, the quality of the instruments in each
Fund's investment portfolio, national and interna-
tional economic conditions and general market condi-
tions.
Credit Risk
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 obliga-
tions.
Additional Principal Concentration (State) Risk - Michigan Municipal Money
Investment Risks Market Fund
Due to the level of investment in municipal obliga-
tions issued by the State of Michigan and its local
governments, the performance of the Michigan Munici-
pal 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 State's economy is princi-
pally dependent upon manufacturing (particularly au-
tomobiles, office equipment and other durable goods),
tourism and agriculture and historically has been
highly cyclical. The Michigan Municipal Money Market
Fund may also be subject to credit risks of municipal
issuers which may have historically experienced peri-
ods of financial difficulties. When a Fund's assets
are concentrated in obligations from revenues of sim-
ilar projects issued by issuers located in the same
state or in industrial development bonds, the Fund
will be subject to the particular risks (including
legal and economic conditions) related to such secu-
rities to a greater extent than if its assets were
not so concentrated.
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
.(in the case of the Michigan Municipal Money Market
Fund) are seeking current income exempt from federal
income taxes and Michigan state personal income
taxes
27
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
PRINCIPAL RISKS, Continued
- --------------------------------------------------------------------------------
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 Municipal 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
.residents of states other than Michigan that are
unable to benefit from the receipt of dividends
exempt from Michigan personal income taxes
28
<PAGE>
RISK/RETURN SUMMARY AND FUND EXPENSES
FEES AND EXPENSES
- --------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
<TABLE>
<CAPTION>
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 directly from your
investment)
Maximum Sales (Load) Charge Imposed on Purchases None None None None None None
Annual Fund Operating Expenses (expenses that
are deducted from Fund assets)
Management Fees 0.40% 0.40% 0.40%/2/ 0.40%/2/ 0.40% 0.40%
Distribution (12b-1) Fees/4/ None None None None None None
Other Expenses 0.24%/1/ 0.24%/1/ 0.29%/2/ 0.29%/2/ 0.24%/3/ 0.24%/3/
----- ----- ----- ----- ----- -----
Total Annual Fund Operating Expenses 0.64%/1/ 0.64%/1/ 0.69%/2/ 0.69%/2/ 0.64%/3/ 0.64%/3/
Fee Waiver 0.09%/1/ 0.09%/1/ 0.31%/2/ 0.31%/2/ 0.10%/3/ 0.10%/3/
----- ----- ----- ----- ----- -----
Net Annual Fund Operating Expenses 0.55%/1/ 0.55%/1/ 0.38%/2/ 0.38%/2/ 0.54%/3/ 0.54%/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 would be 0.15% 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 would
be 0.20% and Other Expenses would be 0.18% 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 would be 0.14% for both classes. You will be notified if the
waiver is discontinued after that date.
4 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.
Example: This Example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The Example as-
sumes:
. $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
Although your actual costs may be higher or lower, based upon these assump-
tions, your costs would be:
<TABLE>
<CAPTION>
MONEY GOVERNMENT MICHIGAN MUNICIPAL
MARKET FUND MONEY 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 $ 56 $ 56 $ 39 $ 39 $ 55 $ 55
Three Years
After Purchase $196 $196 $190 $190 $195 $195
Five Years
After Purchase $348 $348 $353 $353 $347 $347
Ten Years
After Purchase $790 $790 $829 $829 $789 $789
</TABLE>
29
<PAGE>
ADDITIONAL INFORMATION
Investing for
Defensive Purposes When Lyon Street determines that market conditions
are appropriate, each of the Equity, Bond and Munici-
pal Bond Funds may, for temporary defensive purposes,
invest up to 100% of its assets in money market in-
struments. Each of the Bond and Municipal Bond Funds
may also shorten its dollar-weighted average maturity
below its normal range if such action is deemed ap-
propriate by Lyon Street for temporary defensive pur-
poses. In addition, the Michigan Municipal Bond Fund
may invest up to 100% of its total assets for tempo-
rary defensive purposes in municipal bonds the income
on which is exempt from federal income tax but not
exempt from Michigan personal income taxes. The Mich-
igan 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 war-
rant. If a Fund is investing defensively, it will not
be pursuing its investment objective.
Year 2000 and the Like other funds and business organizations around
Kent Funds the world, the Fund could be adversely affected if
the computer systems used by the Adviser and the
Fund's other service providers do not properly proc-
ess and calculate date-related information for the
year 2000 and beyond. In addition, year 2000 issues
may adversely affect companies in which the Funds in-
vest where, for example, such companies incur sub-
stantial costs to address year 2000 issues or suffer
losses caused by the failure to adequately or timely
do so.
The Funds have been assured that the Adviser and
other service providers have developed and are imple-
menting clearly defined and documented plans intended
to minimize risks to services critical to the Funds'
operations associated with year 2000 issues. Internal
efforts include a commitment to dedicate adequate
staff and funding to identify and remedy year 2000
issues, and specific actions such as inventorying
software systems, determining inventory items that
may not function properly after December 31, 1999,
reprogramming or replacing such systems, and retest-
ing for year 2000 readiness. The Adviser and the
Funds' service providers are likewise seeking assur-
ances from their respective vendors and suppliers
that such entities are addressing any year 2000 is-
sues, and each provider intends to engage, where ap-
propriate, in private and/or industry interface test-
ing of systems for year 2000 readiness.
In the event that any systems upon which the Funds
are dependent are not year 2000 ready by December 31,
1999, administrative errors and account maintenance
failure would like occur.
While the ultimate costs or consequences of incom-
plete or untimely resolution of year 2000 issues by
the Adviser or the Funds' service providers cannot be
accurately assessed at this time, the Fund currently
has no reason to believe that the year 2000 plans of
the Adviser and the Funds' service providers will not
be completed by December 31, 1999, or that the antic-
ipated costs associated with full implementation of
their plans will have a material adverse impact on
either their business operations or financial condi-
tions or those of the Funds. The Funds and the Ad-
viser will continue to closely monitor developments
relating to this issue, including development by the
Adviser and the Funds' service providers of contin-
gency plans for providing back-up computer services
in the event of a systems failure or the inability of
any provider to achieve year 2000 readiness. Sepa-
rately, the Adviser will monitor potential investment
risk related to year 2000 issues.
30
<PAGE>
FUND MANAGEMENT
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, Mich-
igan 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 De-
cember 31, 1998 of approximately $16.6 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 for
over 100 years. Lyon Street employs an experienced staff of professional in-
vestment 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 0.70%
- -----------------------------------------------------------
Index Equity Fund 0.25%*
- -----------------------------------------------------------
Large Company Growth Fund N/A**
- -----------------------------------------------------------
Small Company Growth Fund 0.70%
- -----------------------------------------------------------
International Growth Fund 0.75%
- -----------------------------------------------------------
Income Fund 0.60%
- -----------------------------------------------------------
Intermediate Bond Fund 0.55%
- -----------------------------------------------------------
Short Term Bond Fund 0.50%
- -----------------------------------------------------------
Tax-Free Income Fund 0.55%
- -----------------------------------------------------------
Intermediate Tax-Free Fund 0.50%
- -----------------------------------------------------------
Michigan Municipal Bond Fund 0.45%
- -----------------------------------------------------------
Money Market Fund 0.40%
- -----------------------------------------------------------
Government Money Market Fund 0.20%*
- -----------------------------------------------------------
Michigan Municipal Money Market Fund 0.40%
</TABLE>
*Lyon Street waived a portion of its contractual fees for these Funds for the
most recent fiscal year. Contractual fees (without waivers) are 0.30% for the
Index Equity Fund and 0.40% for the Government Money Market Fund.
**The Large Company Growth Fund was not operational during the fiscal year
ended December 31, 1998. Contractual investment advisory fees for the Fund are
0.70%.
31
<PAGE>
FUND MANAGEMENT
PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
Lyon Street has several portfolio managers committed to the day-to-day manage-
ment of the Funds:
<TABLE>
<CAPTION>
Manager Fund Experience
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Joseph T. Keating, Mr. Keating is responsible for . Mr. Keating has over twenty-two
President and Chief developing and implementing the years of portfolio management
Investment Officer Funds' investment policies. experience, including eleven years
at Lyon Street with IMG
- ---------------------------------------------------------------------------------------------------
Allan J. Meyers, CFA, Mr. Meyers is portfolio manager for . Mr. Meyers has over twenty-three
Chief Equity Officer the Growth and Income Fund and the years of portfolio management
at Lyon Street Large Company Growth Fund. Mr. Meyers experience, including fourteen
has been portfolio manager for the years with IMG.
Growth and Income Fund since November
10, 1997.
- ---------------------------------------------------------------------------------------------------
David C. Eder, Mr. Eder has been co-portfolio . Mr. Eder has over six years of
Director of manager of the Index Equity Fund and portfolio management experience
Structured Equity International Growth Fund since with IMG.
Management at Lyon January 1995.
Street
- ---------------------------------------------------------------------------------------------------
Brian J. Smolinski, Mr. Smolinski has been co-portfolio . Prior to joining IMG in June 1998,
Investment Officer manager for the Index Equity Fund, Mr. Smolinski worked as an
and International Growth Funds since Applications Business Analyst at
June 1998. 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.
- ---------------------------------------------------------------------------------------------------
Robert Cummisford, Mr. Cummisford is portfolio manager . Mr. Cummisford has over six years
CFA, Director of for the Small Company Growth Fund. of portfolio management
Small Company Stock experience, including over two
Management years with IMG.
at Lyon Street .Prior to joining Old Kent, he was
a Senior Consultant with Ibbotson
Associates.
- ---------------------------------------------------------------------------------------------------
Mitchell L. Stapley, Mr. Stapley is the portfolio manager . He has over fifteen years of
CFA, Chief Fixed of the Income Fund and Intermediate portfolio management experience,
Income Officer Bond Fund, which he has managed since including eleven years with IMG.
at Lyon Street their inception, and the Short Term
Bond Fund, which he has managed since
November 1996.
- ---------------------------------------------------------------------------------------------------
Michael J. Martin, Mr. Martin is co-portfolio manager . Mr. Martin has over seven years of
CFA, Director of Tax- for each of the Municipal Bond Funds experience at Old Kent, including
Free Fixed Income and is responsible for their day-to- four years of portfolio management
Management day management. Mr. Martin has experience with IMG.
at Lyon Street managed the Tax-Free Income Fund and .Prior to IMG, Mr. Martin was an
Intermediate Tax-Free Fund since Analyst of Special Assets at Old
November 10, 1997. He has been co- Kent.
portfolio manager for the Michigan
Municipal Bond Fund since January
1995.
- ---------------------------------------------------------------------------------------------------
Sarah M. Quirk, Ms. Quirk has been co-portfolio . Prior to joining Lyon Street, she
Investment Officer 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.
- --------------------------------------------------------------------------------
DISTRIBUTOR, ADMINISTRATOR AND SUB-ADMINISTRATOR
BISYS Fund Services ("BISYS") provides management and administrative services
to the Funds, including providing office space, equipment and clerical
personnel to the Funds and supervising custodial, auditing, valuation,
bookkeeping and legal services. BISYS is also the distributor of the Funds'
shares. BISYS Fund Services, Inc., an affiliate of BISYS, acts as the fund
accountant, transfer agent and dividend paying agent of the Funds. BISYS and
BISYS Fund Services, Inc. are each located at 3435 Stelzer Road, Columbus, Ohio
43219.
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 fees
and are not an additional charge to the Funds.
32
<PAGE>
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
How NAV is Money Market Funds
Calculated
The NAV is Each Money Market Fund's net asset value, or NAV, is
calculated by adding expected to be constant at $1.00 per share, although
the total value of a this value is not guaranteed. The NAV is determined
Fund's invest- ments at 12 noon Eastern time for the Michigan Municipal
and other assets, Money Market Fund and at 2:00 p.m. Eastern time for
subtracting its the Money Market Fund and Government Money Market
liabilities and then Fund on days the New York Stock Exchange is open.
dividing that figure The Money Market Funds value their securities at
by the number of their amortized cost. The amortized cost method in-
outstanding shares volves valuing a portfolio security initially at its
of the Fund: cost on the date of the purchase and thereafter as-
suming a constant amortization to maturity of the
difference between the principal amount due at matu-
rity and initial cost.
- ----------------------------
NAV =
Total Assets - Liabilities
--------------------------
Number of Shares
Outstanding
- ----------------------------
Other Funds
1. NAV is calculated The per share NAV for each non-Money Market Fund is
separately for determined and its shares are priced at the close of
the Investment regular trading on the New York Stock Exchange, nor-
Shares and the mally at 4:00 p.m. Eastern time, on days the Ex-
Institutional change is open.
Shares.
2. You can find most
Funds' NAV daily Your order for purchase, sale or exchange of shares
in The Wall is priced at the next NAV calculated after your or-
Street Journal der is received in good order by the Fund on any day
and in that both the New York Stock Exchange and the Funds'
other newspapers. 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 calcu-
lated on the next day at 4:00 p.m. Eastern time.
The non-Money Market 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 val-
ued 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 acquisi-
tion cost.
33
<PAGE>
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 addi-
tional fees and may require higher minimum investments or impose other limita-
tions on buying and selling shares. If you purchase shares through an invest-
ment representative, that party is responsible for transmitting orders by close
of business and may have an earlier cut-off time for purchase and sale re-
quests. Consult your investment representative or institution for specific in-
formation.
- --------------------------------------------------------------------------------
Minimum Minimum
Account type Initial Investment* Subsequent Investment
.Non-retirement accounts 1,000 None
.Retirement accounts $ 100 None
.Automatic investment plans $ 1,000 $50
- --------------------------------------------------------------------------------
. 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.
A Fund may waive its minimum investment requirements and 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 dis-
tributions 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.
- --------------------------------------------------------------------------------
34
<PAGE>
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 broker, simply tell your ad-
viser 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. Send by regular mail to: Kent Funds, P.O. 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, P.O. 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.
35
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND SELLING YOUR INVESTMENT SHARES
- --------------------------------------------------------------------------------
------------------------------------------------------------
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) for a confirmation number
and instructions for returning your completed application.
For Initial and Subsequent Investments:
Instruct your bank to wire transfer your investment to:
Name of Bank: The Bank of New York
Routing Number: ABA #021000018
DDA# 8900375507
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.
- --------------------------------------------------------------------------------
36
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND SELLING YOUR INVESTMENT SHARES
- --------------------------------------------------------------------------------
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. Make sure you note:
To invest regularly from your bank account:
. Complete the Automatic Investment Plan portion on your Account Application.
.Your bank name, address and account number
.The amount you wish to invest automatically (minimum $50)
.How often you want to invest (every month, 4 times a year, twice a year
or once a year)
. Attach a voided personal check.
To invest regularly from your paycheck or government check:
Call 1-800-633-KENT (5368) for an enrollment form.
- --------------------------------------------------------------------------------
Directed Dividend Option
(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 re-
quest 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 In-
vestment 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.
37
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND SELLING YOUR INVESTMENT SHARES
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 on the following page.
38
<PAGE>
SHAREHOLDER INFORMATION
WITHDRAWING MONEY FROM YOUR FUND ACCOUNT
- --------------------------------------------------------------------------------
By telephone You can redeem up to $50,000 worth of Investment Shares
(unless you by calling 1-800-633-KENT (5368). If the amount redeemed
have declined is less than $2,500, then a check will be mailed to you
telephone sales and if equal to or greater than $2,500, then the
privileges) proceeds will be mailed or sent by wire or electronic
funds transfer to the bank listed on your account
application.
- --------------------------------------------------------------------------------
By mail 1.Call 1-800-633-KENT (5368) to request redemption forms
or write a letter of instruction indicating:
(See "General .your Fund and your account number
Policies on .amount you wish to redeem
Selling .address where your check should be sent
Shares - When .account owner signature
Written Redemp- If you have a stock certificate, you must sign on the
tion Requests back and send it to the Kent Funds.*
are Required"
below.)
2.Mail to:
*Signatures on Kent Funds
stock
certificates P.O. Box 182201
must be Columbus, OH 43218-2201
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.
- --------------------------------------------------------------------------------
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 a wire transfer.
You must If you call by 4 p.m. Eastern time, your payment will
indicate this normally be wired to your bank on the next business day.
option on your
application.
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
Your bank must redemption.
participate in
the Automated If you call by 4 p.m. Eastern time, the NAV of your
Clearing House shares will normally be determined on the same day and
(ACH) and must the proceeds will be credited within 8 days.
be a U.S. bank.
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.
39
<PAGE>
SHAREHOLDER INFORMATION
PURCHASING AND SELLING YOUR INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
Instructions for Accounts To Sell Shares
Choose from which Fund you wish to sell
your shares.
To Open An Account
To open an account, call 1- You can sell Institutional Shares by mail, by
800-633-KENT (5368) to telephone or through a broker by following
obtain an account or wire the procedures described for Investment
identification number and Shares. We will send your Institutional Share
to place an order.* proceeds by wire in federal funds to your
commercial bank. To change the bank account,
Each Fund's minimum initial you should call the Funds at 1-800-633-KENT
investment amount for (5368).
Institutional Shares is
$100,000. Subsequent
investments may be made in
any amount.
- --------------------------------------------------------------------------------
*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 Me-
dallion Program) or is approved by the Kent Funds.
Verifying Telephone Redemptions
The Funds make every effort to ensure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protec-
tion 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.
40
<PAGE>
SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
- --------------------------------------------------------------------------------
Refusal of Redemption Request
The Funds may postpone payment for shares at times when the New York Stock Ex-
change is closed or under any emergency circumstances as determined by the U.S.
Securities and Exchange Commission. If you experience difficulty making a tele-
phone redemption during periods of drastic economic or market change, you can
send the Funds your request by regular or express mail. Follow the instructions
above under "Withdrawing Money From Your Fund Account--By Mail" in this sec-
tion.
Redemption In Kind
The Funds reserve the right to make payment in securities rather than cash,
known as a "redemption in kind." This could occur under extraordinary circum-
stances, such as a very large redemption that could affect Fund operations (for
example, more than 1% of a Fund's net assets). If the Funds deem it advisable
for the benefit of all shareholders, a redemption in kind will consist of secu-
rities 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, a Fund may ask you to increase
your balance. If it is still below the minimum level after 60 days, the Fund
may close your account and send you the proceeds at the current NAV.
Undeliverable Redemption Checks
For any shareholder who chooses to receive distributions in cash: If distribu-
tion 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.
- --------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE FEES
12b-1 fees compensate the Distributor and other dealers and investment repre-
sentatives for services and expenses relating to the sale and distribution of
Investment Shares and for providing shareholder services to purchasers of In-
vestment 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Investment Shares Institutional Shares
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Distribution (12b-1) Subject to annual distribution and shareholder N/A
Fees* servicing fees of up to 0.25% of the average
daily net assets of each Fund's Investment Shares
- -----------------------------------------------------------------------------------------------------------------------
Fund Expenses Higher annual expenses than Institutional shares. Lower annual expenses than Investment shares.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*For Non-Money Market Funds Only.
41
<PAGE>
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
- --------------------------------------------------------------------------------
---------------------------------------
Instructions for exchanging shares You can exchange your
shares in one Fund
for shares of the
Exchanges may be made by sending a same class of another
written request to Kent Funds, Kent Fund. No trans-
P.O. Box 182201, Columbus OH action fees are
43218-2201, or by calling 1-800- charged for ex-
633-KENT (5368). Please provide changes.
the following information:
You must meet the
. Your name and telephone number minimum investment
requirements for the
Fund into which you
. The exact name on your account are exchanging. Ex-
and account number changes from one Fund
to another are tax-
. Taxpayer identification number able.
(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 "General Policies on Selling your Shares" above for important information
about telephone transactions.
To prevent disruption in the management of the Funds, due to market timing
strategies, exchange activity may be limited to five exchanges within a year,
or no more than three exchanges in a calendar quarter. 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 elimi-
nated at any time.
Be sure to read the Prospectus carefully of any Fund into which you wish to ex-
change 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 ac-
counts, 401(k) plans, fiduciary or agency accounts, they can be in the form of
Investment Shares.
42
<PAGE>
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 dis-
tribution and service fees than Institutional Shares, the dividends paid to
shareholders owning Investment Shares will be lower than those paid to share-
holders 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 rein-
vested 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 tax-
able 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 dis-
tribution, the purchase price will reflect the amount of the upcoming distribu-
tion, but you will be taxable on the entire amount of the distribution re-
ceived, 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 dur-
ing 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-quali-
fied 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 con-
stituting a distribution to each shareholder, which would allow each share-
holder either (1) to credit such proportionate amount of taxes against U.S.
federal income tax liability or (2) to take such amount as an itemized deduc-
tion.
The Michigan Municipal Money Market Fund 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 se-
curities, 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.
43
<PAGE>
SHAREHOLDER INFORMATION
TAXATION
- --------------------------------------------------------------------------------
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Michigan Municipal Money Market Fund and the Municipal Bond Funds gener-
ally 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 consti-
tute 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 tax-
es.
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 se-
curities or interest on securities of the particular state or an agency there-
of.
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.
44
<PAGE>
FINANCIAL HIGHLIGHTS
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 each
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 KPMG
LLP, whose report, along with the Funds' financial statements, are included in
the Funds' annual report, which is available upon request.
45
<PAGE>
FINANCIAL HIGHLIGHTS
EQUITY FUNDS
INSTITUTIONAL SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from
Investment Operations Less Dividends and Distributions from
---------------------------- -------------------------------------------
Net Realized and
Unrealized Gains Net Realized
(Losses) on Gains on
Investments, Total Investments, In
Net Asset Futures Contracts Income In Excess Futures Excess Net
Value, Net and Foreign (Loss) from Net of Net Contracts of Net Total Change in
Beginning Investment Currency Investment Investment Investment and Foreign Realized Dividends and Net Asset
of Period Income Translations Operations Income Income Currency Gains Distributions Value
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
Ticker Symbol: KNVEX
1994 $10.91 0.31 (0.26) 0.05 (0.31) ** (0.15) -- (0.46) (0.41)
1995 $10.50 0.33 3.28 3.61 (0.33) -- (0.53) -- (0.86) 2.75
1996 $13.25 0.30 2.16 2.46 (0.30) -- (1.51) -- (1.81) 0.65
1997 $13.90 0.25 3.04 3.29 (0.25) -- (1.39) -- (1.64) 1.65
1998 $15.55 0.13 4.03 4.16 (0.13) (0.01) (1.54) -- (1.68) 2.48
---------------------------------------------------------------------------------------------------------------------------
INDEX EQUITY FUND
Ticker Symbol: KNIEX
1994 $11.04 0.25 (0.15) 0.10 (0.26) -- (0.20) -- (0.46) (0.36)
1995 $10.68 0.26 3.44 3.70 (0.25) -- (1.57) -- (1.82) 1.88
1996 $12.56 0.26 2.47 2.73 (0.26) -- (0.28) (0.04) (0.58) 2.15
1997 $14.71 0.25 4.50 4.75 (0.25) -- (0.05) (0.02) (0.32) 4.43
1998 $19.14 0.24 5.14 5.38 (0.24) -- (0.04) -- (0.28) 5.10
---------------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND
Ticker Symbol: KNEEX
1994 $12.50 0.10 (0.10) -- (0.09) (0.01) (0.41) -- (0.51) (0.51)
1995 $11.99 0.10 2.64 2.74 (0.10) -- (0.81) -- (0.91) 1.83
1996 $13.82 0.12 2.55 2.67 (0.12) -- (0.72) -- (0.84) 1.83
1997 $15.65 0.04 4.19 4.23 (0.04) (0.02) (1.43) -- (1.49) 2.74
1998 $18.39 0.03 (1.08) (1.05) (0.03) -- (1.85) -- (1.88) (2.93)
---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
Ticker Symbol: KNINX
1994 $12.84 0.12 0.61 0.73 (0.07) (0.03) (0.41) -- (0.51) 0.22
1995 $13.06 0.13 1.54 1.67 (0.13) (0.11) (0.31) -- (0.55) 1.12
1996 $14.18 0.13 0.70 0.83 (0.10) (0.02) (0.13) (0.01) (0.26) 0.57
1997 $14.75 0.11 0.26 0.37 (0.09) (0.06) (0.07) (0.01) (0.23) 0.14
1998 $14.89 0.14 2.48 2.62 (0.07) (0.12) (1.41) -- (1.60) 1.02
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data:
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets, Ratio of Investment Ratio of
Value, End of Expenses Income to Expenses Portfolio
End of Total Period to Average Average to Average Turnover
Period Return (000's) Net Assets Net Assets Net Assets* Rate(1)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
Ticker Symbol: KNVEX
1994 $10.50 0.51% $308,825 0.98% 3.04% *** 28%
1995 $13.25 34.91% $401,371 0.94% 2.73% *** 58%
1996 $13.90 19.47% $500,857 0.95% 2.18% 0.95% 39%
1997 $15.55 24.14% $697,973 0.92% 1.61% 0.93% 88%
1998 $18.03 28.07% $827,828 0.93% 0.77% 0.94% 20%
------------------------------------------------------------------------------
INDEX EQUITY FUND
Ticker Symbol: KNIEX
1994 $10.68 0.86% $245,550 0.58% 2.32% 0.58% 50%
1995 $12.56 36.23% $183,877 0.56% 2.14% 0.56% 3%
1996 $14.71 22.18% $243,438 0.49% 1.91% 0.59% 2%
1997 $19.14 32.55% $590,241 0.43% 1.44% 0.54% 1%
1998 $24.24 28.26% $771,147 0.42% 1.10% 0.55% 12%
------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND
Ticker Symbol: KNEEX
1994 $11.99 (0.06%) $304,179 0.98% 0.79% *** 20%
1995 $13.82 23.75% $450,072 0.97% 0.83% *** 30%
1996 $15.65 19.56% $544,081 0.96% 0.78% 0.96% 16%
1997 $18.39 27.94% $719,998 0.93% 0.24% 0.94% 32%
1998 $15.46 (6.15%) $760,335 0.94% 0.18% 0.95% 41%
------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
Ticker Symbol: KNINX
1994 $13.06 5.73% $178,186 1.22% 0.87% *** 20%
1995 $14.18 13.00% $286,545 1.17% 1.35% *** 6%
1996 $14.75 5.87% $387,799 1.09% 0.97% 1.09% 13%
1997 $14.89 2.54% $492,598 1.05% 0.80% 1.06% 3%
1998 $15.91 17.92% $528,500 1.05% 0.87% 1.06% 22%
------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Amount is less than $0.005.
*** During the period, there were no waivers and/or reimbursements.
(1) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
46
<PAGE>
FINANCIAL HIGHLIGHTS
EQUITY FUNDS
INVESTMENT SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from
Investment Operations Less Dividends and Distributions from
---------------------------- -------------------------------------------
Net Realized and
Unrealized Gains Net Realized
(Losses) on Gains on
Investments, Total Investments, In
Net Asset Net Futures Contracts Income In Excess Futures Excess Net
Value, Investment and Foreign (Loss) from Net of Net Contracts of Net Total Change in
Beginning Income Currency Investment Investment Investment and Foreign Realized Dividends and Net Asset
of Period (Loss) Translations Operations Income Income Currency Gains Distributions Value
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
Ticker Symbol: KNVIX
1994 $10.87 0.32 (0.27) 0.05 (0.31) ** (0.15) -- (0.46) (0.41)
1995 $10.46 0.30 3.26 3.56 (0.30) -- (0.53) -- (0.83) 2.73
1996 $13.19 0.26 2.15 2.41 (0.26) (0.02) (1.51) -- (1.79) 0.62
1997 $13.81 0.21 3.02 3.23 (0.21) -- (1.39) -- (1.60) 1.63
1998 $15.44 0.08 4.00 4.08 (0.08) (0.02) (1.54) -- (1.64) 2.44
---------------------------------------------------------------------------------------------------------------------------
INDEX EQUITY FUND
Ticker Symbol: KNIOX
1994 $11.07 0.26 (0.17) 0.09 (0.26) -- (0.20) -- (0.46) (0.37)
1995 $10.70 0.23 3.44 3.67 (0.23) -- (1.57) -- (1.80) 1.87
1996 $12.57 0.22 2.48 2.70 (0.22) (0.01) (0.32) -- (0.55) 2.15
1997 $14.72 0.20 4.51 4.71 (0.20) (0.01) (0.06) (0.01) (0.28) 4.43
1998 $19.15 0.18 5.14 5.32 (0.18) -- (0.04) -- (0.22) 5.10
---------------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND
Ticker Symbol: KNEMX
1994 $12.49 0.10 (0.11) (0.01) (0.08) (0.01) (0.41) -- (0.50) (0.51)
1995 $11.98 0.07 2.64 2.71 (0.07) -- (0.81) -- (0.88) 1.83
1996 $13.81 0.07 2.54 2.61 (0.08) (0.01) (0.72) -- (0.81) 1.80
1997 $15.61 -- 4.19 4.19 -- (0.04) (1.43) -- (1.47) 2.72
1998 $18.33 (0.01) (1.08) (1.09) -- -- (1.85) -- (1.85) (2.94)
---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
Ticker Symbol: KNIVX
1994 $12.81 0.14 0.56 0.70 (0.07) (0.03) (0.41) -- (0.51) 0.19
1995 $13.00 0.14 1.50 1.64 (0.09) (0.11) (0.31) -- (0.51) 1.13
1996 $14.13 0.12 0.66 0.78 (0.08) -- (0.14) -- (0.22) 0.56
1997 $14.69 0.08 0.25 0.33 (0.06) (0.09) (0.07) (0.01) (0.23) 0.10
1998 $14.79 0.10 2.46 2.56 -- (0.19) (1.41) -- (1.60) 0.96
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data:
-------------------------------------------------------
Ratio of
Net
Investment
Net Asset Net Assets, Ratio of Income Ratio of
Value, End of Expenses (Loss) to Expenses Portfolio
End of Total Period to Average Average to Average Turnover
Period Return(1) (000's) Net Assets Net Assets Net Assets* Rate(2)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND INCOME FUND
Ticker Symbol: KNVIX
1994 $10.46 0.50% $ 8,005 0.98% 3.03% *** 28%
1995 $13.19 34.61% $11,079 1.18% 2.48% *** 58%
1996 $13.81 19.14% $15,063 1.09% 1.77% 1.09% 39%
1997 $15.44 23.89% $35,343 1.17% 1.31% 1.18% 88%
1998 $17.88 27.68% $50,458 1.18% 0.50% 1.19% 20%
--------------------------------------------------------------------------------
INDEX EQUITY FUND
Ticker Symbol: KNIOX
1994 $10.70 0.75% $ 4,736 0.60% 2.30% 0.60% 50%
1995 $12.57 35.81% $ 6,612 0.80% 1.86% 0.81% 3%
1996 $14.72 21.92% $ 9,925 0.74% 1.67% 0.84% 2%
1997 $19.15 32.24% $27,922 0.68% 1.20% 0.79% 1%
1998 $24.25 27.93% $38,205 0.67% 0.85% 0.80% 12%
--------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND
Ticker Symbol: KNEMX
1994 $11.98 (0.08%) $ 8,433 0.98% 0.79% *** 20%
1995 $13.81 23.47% $10,955 1.20% 0.59% *** 30%
1996 $15.61 19.16% $14,436 1.21% 0.53% 1.21% 16%
1997 $18.33 27.71% $22,784 1.18% (0.01%) 1.19% 32%
1998 $15.39 (6.40%) $23,455 1.19% (0.07%) 1.20% 41%
--------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
Ticker Symbol: KNIVX
1994 $13.00 5.51% $ 6,539 1.25% 0.81% *** 20%
1995 $14.13 12.86% $ 7,548 1.40% 1.11% *** 6%
1996 $14.69 5.57% $ 8,799 1.34% 0.74% 1.34% 13%
1997 $14.79 2.25% $ 9,780 1.30% 0.53% 1.31% 3%
1998 $15.75 17.60% $12,390 1.30% 0.59% 1.31% 22%
--------------------------------------------------------------------------------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Amount is less than $0.005.
*** During the period, there were no waivers and/or reimbursements.
(1) Calculation does not include sales charge. Effective May 1, 1997, the
Investment Shares were not assessed a sales charge.
(2) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
47
<PAGE>
FINANCIAL HIGHLIGHTS
BOND FUNDS
INSTITUTIONAL SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from Less Dividends and
Investment Operations Distributions from
--------------------------- ----------------------------------
Total
Net Asset Net Realized and Income In Excess Net Net Asset
Value, Net Unrealized Gains (Loss) from Net of Net Net Realized Total Change in Value,
Beginning Investment (Losses) on Investment Investment Investment Gains on Dividends and Net Asset End of
of Period Income Investments Operations Income Income Investments Distributions Value Period
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FUND
Ticker Symbol: KNIIX
1995(2) $10.00 0.55 0.92 1.47 (0.54) -- (0.09) (0.63) 0.84 $10.84
1996 $10.84 0.66 (0.56) 0.10 (0.65) (0.10) (0.03) (0.78) (0.68) $10.16
1997 $10.16 0.68 0.34 1.02 (0.68) -- (0.20) (0.88) 0.14 $10.30
1998 $10.30 0.65 0.27 0.92 (0.65) -- (0.24) (0.89) 0.03 $10.33
------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE BOND FUND
Ticker Symbol: KNFIX
1994 $10.18 0.56 (0.88) (0.32) (0.54) (0.01) (0.02) (0.57) (0.89) $ 9.29
1995 $ 9.29 0.65 0.81 1.46 (0.63) -- -- (0.63) 0.83 $10.12
1996 $10.12 0.60 (0.32) 0.28 (0.61) (0.03) -- (0.64) (0.36) $ 9.76
1997 $ 9.76 0.59 0.14 0.73 (0.59) -- -- (0.59) 0.14 $ 9.90
1998 $ 9.90 0.58 0.16 0.74 (0.58) -- -- (0.58) 0.16 $10.06
------------------------------------------------------------------------------------------------------------------------------
SHORT TERM BOND FUND
Ticker Symbol: KNLMX
1994 $ 9.91 0.48 (0.38) 0.10 (0.49) ** -- (0.49) (0.39) $ 9.52
1995 $ 9.52 0.55 0.43 0.98 (0.54) -- -- (0.54) 0.44 $ 9.96
1996 $ 9.96 0.61 (0.21) 0.40 (0.61) -- -- (0.61) (0.21) $ 9.75
1997 $ 9.75 0.61 -- 0.61 (0.61) -- -- (0.61) -- $ 9.75
1998 $ 9.75 0.56 0.02 0.58 (0.56) -- -- (0.56) 0.02 $ 9.77
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Assets, Ratio of Investment Ratio of
End of Expenses Income to Expenses Portfolio
Total Period to Average Average to Average Turnover
Return (000's) Net Assets Net Assets Net Assets* Rate(1)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME FUND
Ticker Symbol: KNIIX
1995(2) 15.05%++ $126,056 0.91%+ 6.65%+ *** 50%
1996 1.19% $240,060 0.83% 6.57% 0.83% 102%
1997 10.55% $229,778 0.82% 6.65% 0.83% 84%
1998 9.29% $231,017 0.83% 6.25% 0.84% 108%
-------------------------------------------------------------------------
INTERMEDIATE BOND FUND
Ticker Symbol: KNFIX
1994 (3.19%) $977,865 0.80% 6.03% *** 124%
1995 16.18% $854,801 0.77% 6.50% *** 166%
1996 3.01% $769,395 0.77% 6.18% 0.78% 135%
1997 7.80% $762,740 0.75% 6.03% 0.76% 114%
1998 7.65% $885,580 0.76% 5.77% 0.77% 106%
-------------------------------------------------------------------------
SHORT TERM BOND FUND
Ticker Symbol: KNLMX
1994 1.03% $176,765 0.73% 4.75% *** 56%
1995 10.53% $310,680 0.77% 5.60% *** 75%
1996 4.22% $235,430 0.70% 6.17% 0.70% 32%
1997 6.42% $139,739 0.72% 6.04% 0.73% 89%
1998 6.14% $139,229 0.76% 5.74% 0.77% 72%
-------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Amount is less than $0.005.
*** During the period, there were no waivers and/or reimbursements.
(1) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2) The Institutional Class of the Income Fund commenced operations on March
20, 1995.
48
<PAGE>
FINANCIAL HIGHLIGHTS
BOND FUNDS
INVESTMENT SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from Less Dividends and
Investment Operations Distributions from
--------------------------- ----------------------------------
Total
Net Asset Net Realized and Income In Excess Net Net Asset
Value, Net Unrealized Gains (Loss) from Net of Net Net Realized Total Change in Value,
Beginning Investment (Losses) on Investment Investment investment Gains on Dividends and Net Asset End of
of Period Income Investments Operations Income Income Investments Distributions Value Period
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME FUND
Ticker Symbol: N/A
1995(3) $10.00 0.52 0.91 1.43 (0.52) -- (0.09) (0.61) 0.82 $10.82
1996 $10.82 0.66 (0.56) 0.10 (0.64) (0.09) (0.03) (0.76) (0.66) $10.16
1997 $10.16 0.63 0.35 0.98 (0.65) -- (0.20) (0.85) 0.13 $10.29
1998 $10.29 0.62 0.28 0.90 (0.60) (0.03) (0.24) (0.87) 0.03 $10.32
------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE BOND FUND
Ticker Symbol: KNFVX
1994 $10.19 0.57 (0.87) (0.30) (0.54) (0.01) (0.02) (0.57) (0.87) $ 9.32
1995 $ 9.32 0.61 0.82 1.43 (0.61) -- -- (0.61) 0.82 $10.14
1996 $10.14 0.58 (0.32) 0.26 (0.57) (0.05) -- (0.62) (0.36) $ 9.78
1997 $ 9.78 0.57 0.15 0.72 (0.57) -- -- (0.57) 0.15 $ 9.93
1998 $ 9.93 0.54 0.16 0.70 (0.55) -- -- (0.55) 0.15 $10.08
------------------------------------------------------------------------------------------------------------------------------
SHORT TERM BOND FUND
Ticker Symbol: KNLIX
1994 $ 9.91 0.47 (0.37) 0.10 (0.48) (0.01) -- (0.49) (0.39) $ 9.52
1995 $ 9.52 0.52 0.44 0.96 (0.53) -- -- (0.53) 0.43 $ 9.95
1996 $ 9.95 0.59 (0.20) 0.39 (0.54) (0.06) -- (0.60) (0.21) $ 9.74
1997 $ 9.74 0.57 0.02 0.59 (0.59) -- -- (0.59) -- $ 9.74
1998 $ 9.74 0.55 0.02 0.57 (0.52) (0.03) -- (0.55) 0.02 $ 9.76
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data:
-------------------------------------------------------
Ratio of
Net
Net Assets, Ratio of Investment Ratio of
End of Expenses Income to Expenses Portfolio
Total Period to Average Average to Average Turnover
Return(1) (000's) Net Assets Net Assets Net Assets* Rate(2)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME FUND
Ticker Symbol: N/A
1995(3) 14.63%++ $ 1,961 1.14%+ 6.40%+ ** 50%
1996 1.16% $ 2,722 1.08% 6.31% 1.08% 102%
1997 10.19% $ 5,611 1.07% 6.38% 1.08% 84%
1998 9.04% $10,629 1.08% 5.97% 1.09% 108%
--------------------------------------------------------------------------
INTERMEDIATE BOND FUND
Ticker Symbol: KNFVX
1994 (3.01%) $ 9,196 0.81% 5.94% ** 124%
1995 15.76% $ 6,862 1.01% 6.24% ** 166%
1996 2.76% $ 7,327 1.02% 5.92% 1.03% 135%
1997 7.62% $ 6,972 1.00% 5.79% 1.01% 114%
1998 7.26% $12,313 1.01% 5.51% 1.02% 106%
--------------------------------------------------------------------------
SHORT TERM BOND FUND
Ticker Symbol: KNLIX
1994 1.01% $ 1,649 0.74% 4.79% ** 56%
1995 10.30% $ 1,634 0.91% 5.40% ** 75%
1996 4.06% $ 1,667 0.85% 6.02% 0.96% 32%
1997 6.26% $ 7,433 0.88% 5.75% 0.99% 89%
1998 6.00% $ 6,126 0.91% 5.60% 1.02% 72%
--------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** During the period, there were no waivers and/or reimbursements.
(1) Calculation does not include sales charge. Effective May 1, 1997, the
Investment Shares were not assessed a sales charge.
(2) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(3) The date of initial public investment of the Investment Class of the
Income Fund was March 22, 1995.
49
<PAGE>
FINANCIAL HIGHLIGHTS
MUNICIPAL BOND FUNDS
INSTITUTIONAL SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from Less Dividends and
Investment Operations Distributions from
--------------------------- ----------------------------------
Net Realized and
Unrealized Gains Total Net Realized
Net Asset (Losses) on Income In Excess Gains on Net Net Asset
Value, Net Investments and (Loss) from Net of Net Investments Total Change in Value,
Beginning Investment Futures Investment Investment Investment and Futures Dividends and Net Asset End of
of Period Income Contracts Operations Income Income Contracts Distributions Value Period
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX-FREE INCOME FUND
Ticker Symbol: KNTIX
1995(2) $10.00 0.36 0.49 0.85 (0.36) -- -- (0.36) 0.49 $10.49
1996 $10.49 0.46 (0.06) 0.40 (0.46) -- (0.16) (0.62) (0.22) $10.27
1997 $10.27 0.45 0.41 0.86 (0.45) -- (0.03) (0.48) 0.38 $10.65
1998 $10.65 0.44 0.15 0.59 (0.44) -- (0.05) (0.49) 0.10 $10.75
------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE TAX-FREE FUND
Ticker Symbol: KNMTX
1994 $10.45 0.40 (0.71) (0.31) (0.39) (0.01) -- (0.40) (0.71) $ 9.74
1995 $ 9.74 0.45 0.79 1.24 (0.45) (0.01) -- (0.46) 0.78 $10.52
1996 $10.52 0.44 (0.08) 0.36 (0.46) ** -- (0.46) (0.10) $10.42
1997 $10.42 0.45 0.26 0.71 (0.45) -- -- (0.45) 0.26 $10.68
1998 $10.68 0.45 0.11 0.56 (0.45) -- (0.03) (0.48) 0.08 $10.76
------------------------------------------------------------------------------------------------------------------------------
MICHIGAN MUNICIPAL BOND FUND
Ticker Symbol: KNMIX
1994 $10.06 0.37 (0.34) 0.03 (0.36) (0.01) -- (0.37) (0.34) $ 9.72
1995 $ 9.72 0.39 0.39 0.78 (0.37) (0.01) -- (0.38) 0.40 $10.12
1996 $10.12 0.39 (0.04) 0.35 (0.39) -- -- (0.39) (0.04) $10.08
1997 $10.08 0.41 0.13 0.54 (0.41) -- -- (0.41) 0.13 $10.21
1998 $10.21 0.40 0.08 0.48 (0.41) -- (0.01) (0.42) 0.06 $10.27
------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data:
-------------------------------------------------------
Ratio of
Net
Net Assets, Ratio of Investment Ratio of
End of Expenses Income to Expenses Portfolio
Total Period to Average Average to Average Turnover
Return (000's) Net Assets Net Assets Net Assets* Rate(1)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TAX-FREE INCOME FUND
Ticker Symbol: KNTIX
1995(2) 8.64%++ $121,855 0.73%+ 4.44%+ 0.91%+ 10%
1996 3.92% $109,948 0.82% 4.38% 0.82% 40%
1997 8.59% $116,652 0.79% 4.32% 0.80% 16%
1998 5.71% $128,232 0.81% 4.16% 0.82% 53%
-------------------------------------------------------------------------
INTERMEDIATE TAX-FREE FUND
Ticker Symbol: KNMTX
1994 (3.00%) $380,715 0.78% 4.07% 0.78% 36%
1995 12.90% $283,733 0.72% 4.39% 0.72% 6%
1996 3.41% $285,674 0.73% 4.34% 0.73% 35%
1997 7.07% $275,641 0.72% 4.31% 0.73% 23%
1998 5.37% $296,484 0.73% 4.22% 0.74% 40%
-------------------------------------------------------------------------
MICHIGAN MUNICIPAL BOND FUND
Ticker Symbol: KNMIX
1994 0.36% $118,485 0.49% 3.74% 0.74% 27%
1995 8.20% $185,466 0.69% 3.81% 0.70% 42%
1996 3.51% $152,623 0.70% 3.83% 0.70% 24%
1997 5.52% $111,735 0.69% 4.04% 0.70% 13%
1998 4.75% $117,957 0.69% 3.97% 0.70% 51%
-------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
** Amount is less than $0.005.
(1) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2) The Institutional Class of the Tax-Free Income Fund commenced operations
on March 20, 1995.
50
<PAGE>
FINANCIAL HIGHLIGHTS
MUNICIPAL BOND FUNDS
INVESTMENT SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Income (Loss) from
Investment Operations Less Dividends and Distributions from
--------------------------- -------------------------------------------
Net Realized and
Unrealized Gains Total Net Realized In
Net Asset (Losses) on Income In Excess Gains on Excess Net
Value, Net Investments (Loss) from Net of Net Investments of Net Total Change in
Beginning Investment and Futures Investment Investment Investment and Futures Realized Dividends and Net Asset
of Period Income Contracts Operations Income Income Contracts Gains Distributions Value
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX-FREE INCOME FUND
Ticker Symbol: N/A
1995(3) $10.00 0.31 0.51 0.82 (0.30) -- -- -- (0.30) 0.52
1996 $10.52 0.41 (0.05) 0.36 (0.43) -- (0.12) (0.04) (0.59) (0.23)
1997 $10.29 0.42 0.42 0.84 (0.42) (0.01) (0.03) -- (0.46) 0.38
1998 $10.67 0.42 0.15 0.57 (0.42) -- (0.05) -- (0.47) 0.10
-----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE TAX-FREE FUND
Ticker Symbol: KNMBX
1994 $10.45 0.40 (0.71) (0.31) (0.39) (0.01) -- -- (0.40) (0.71)
1995 $ 9.74 0.42 0.79 1.21 (0.42) (0.01) -- -- (0.43) 0.78
1996 $10.52 0.42 (0.09) 0.33 (0.41) (0.02) -- -- (0.43) (0.10)
1997 $10.42 0.43 0.26 0.69 (0.43) -- -- -- (0.43) 0.26
1998 $10.68 0.42 0.11 0.53 (0.42) -- (0.03) -- (0.45) 0.08
-----------------------------------------------------------------------------------------------------------------------------
MICHIGAN MUNICIPAL BOND FUND
Ticker Symbol: KNMVX
1994 $10.08 0.35 (0.34) 0.01 (0.34) (0.03) -- -- (0.37) (0.36)
1995 $ 9.72 0.37 0.40 0.77 (0.37) (0.01) -- -- (0.38) 0.39
1996 $10.11 0.38 (0.05) 0.33 (0.35) (0.02) -- -- (0.37) (0.04)
1997 $10.07 0.39 0.14 0.53 (0.40) -- -- -- (0.40) 0.13
1998 $10.20 0.39 0.07 0.46 (0.39) -- (0.01) -- (0.40) 0.06
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets, Ratio of Investment Ratio of
Value, End of Expenses Income to Expenses Portfolio
End of Total Period to Average Average to Average Turnover
Period Return(1) (000's) Net Assets Net Assets Net Assets* Rate(2)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TAX-FREE INCOME FUND
Ticker Symbol: N/A
1995(3) $10.52 8.34%++ $ 529 0.95%+ 4.25%+ 1.17%+ 10%
1996 $10.29 3.53% $ 936 1.07% 4.14% 1.07% 40%
1997 $10.67 8.32% $1,712 1.04% 4.05% 1.05% 16%
1998 $10.77 5.43% $1,938 1.06% 3.91% 1.07% 53%
------------------------------------------------------------------------------------
INTERMEDIATE TAX-FREE FUND
Ticker Symbol: KNMBX
1994 $ 9.74 (3.03%) $4,505 0.79% 3.99% 0.79% 36%
1995 $10.52 12.66% $3,807 0.97% 4.13% 0.97% 6%
1996 $10.42 3.17% $3,368 0.98% 4.09% 0.98% 35%
1997 $10.68 6.80% $3,534 0.97% 4.06% 0.98% 23%
1998 $10.76 5.09% $4,038 0.98% 3.97% 0.99% 40%
------------------------------------------------------------------------------------
MICHIGAN MUNICIPAL BOND FUND
Ticker Symbol: KNMVX
1994 $ 9.72 0.16% $1,980 0.49% 3.80% 0.84% 27%
1995 $10.11 8.01% $1,900 0.83% 3.68% 0.85% 42%
1996 $10.07 3.36% $2,422 0.85% 3.68% 0.95% 24%
1997 $10.20 5.38% $4,413 0.84% 3.88% 0.95% 13%
1998 $10.26 4.60% $5,946 0.84% 3.82% 0.95% 51%
------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(1) Calculation does not include sales charge. Effective May 1, 1997, the
Investment Shares were not assessed a sales charge.
(2) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(3) The date of initial public investment of the Investment Class of the Tax-
Free Income Fund was March 31, 1995.
51
<PAGE>
FINANCIAL HIGHLIGHTS
MONEY MARKET FUNDS
INSTITUTIONAL SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Ratios/Supplemental Data:
Income ---------------------------------------------
(Loss) from Ratio of
Investment Less Net
Net Asset Operations: Dividends Net Net Asset Net Assets, Ratio of Investment Ratio of
Value, Net from Net Change in Value, End of Expenses Income to Expenses
Beginning Investment Investment Net Asset End of Total Period to Average Average to Average
of Period Income Income Value Period Return (000's) Net Assets Net Assets Net Assets*
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Ticker Symbol: KIMXX
1994 $1.000 0.040 (0.040) -- $1.000 3.75% $323,539 0.60% 3.65% 0.65%
1995 $1.000 0.050 (0.050) -- $1.000 5.58% $424,815 0.55% 5.45% 0.63%
1996 $1.000 0.050 (0.050) -- $1.000 5.06% $483,919 0.52% 4.95% 0.62%
1997 $1.000 0.051 (0.051) -- $1.000 5.23% $474,378 0.52% 5.11% 0.62%
1998 $1.000 0.050 (0.050) -- $1.000 5.13% $693,399 0.55% 5.00% 0.64%
---------------------------------------------------------------------------------------------------------------------
GOVERNMENT MONEY MARKET FUND
Ticker Symbol: KGIXX
1997(1) $1.000 0.031 (0.031) -- $1.000 3.10%++ $ 94,624 0.35%+ 5.23%+ 0.69%+
1998 $1.000 0.051 (0.051) -- $1.000 5.17% $166,922 0.38% 5.03% 0.69%
---------------------------------------------------------------------------------------------------------------------
MICHIGAN MUNICIPAL MONEY MARKET FUND
Ticker Symbol: KMIXX
1994 $1.000 0.020 (0.020) -- $1.000 2.40% $128,164 0.60% 2.33% 0.70%
1995 $1.000 0.030 (0.030) -- $1.000 3.50% $145,215 0.56% 3.45% 0.65%
1996 $1.000 0.030 (0.030) -- $1.000 3.11% $155,424 0.54% 3.06% 0.64%
1997 $1.000 0.033 (0.033) -- $1.000 3.31% $211,682 0.52% 3.27% 0.63%
1998 $1.000 0.030 (0.030) -- $1.000 3.06% $323,272 0.54% 3.00% 0.64%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(1) The Government Money Market Fund commenced operations on June 2, 1997.
52
<PAGE>
FINANCIAL HIGHLIGHTS
MONEY MARKET FUNDS
INVESTMENT SHARES
------------------------------------------------------------------------------
Year ended December 31
<TABLE>
<CAPTION>
Ratios/Supplemental Data:
---------------------------------------------
Income from Ratio of
Investment Less Net
Net Asset Operations: Dividends Net Net Asset Net Assets, Ratio of Investment Ratio of
Value, Net from Net Change in Value, End of Expenses Income to Expenses
Beginning Investment Investment Net Asset End of Total Period to Average Average to Average
of Period Income Income Value Period Return (000's) Net Assets Net Assets Net Assets*
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Ticker Symbol: N/A
1994 $1.000 0.040 (0.040) -- $1.000 3.71% $ 369 0.63% 3.58% 0.68%
1995 $1.000 0.050 (0.050) -- $1.000 5.56% $1,227 0.55% 5.41% 0.62%
1996 $1.000 0.050 (0.050) -- $1.000 5.06% $ 804 0.52% 4.94% 0.62%
1997 $1.000 0.051 (0.051) -- $1.000 5.23% $1,179 0.52% 5.11% 0.62%
1998 $1.000 0.050 (0.050) -- $1.000 5.13% $3,728 0.55% 5.00% 0.64%
---------------------------------------------------------------------------------------------------------------------
GOVERNMENT MONEY MARKET FUND
Ticker Symbol: N/A
1997(1) $1.000 0.030 (0.030) -- $1.000 3.06%++ $ 2 0.43%+ 5.17%+ 0.77%+
1998 $1.000 0.051 (0.051) -- $1.000 5.17% $ 93 0.38% 4.92% 0.69%
---------------------------------------------------------------------------------------------------------------------
MICHIGAN MUNICIPAL MONEY MARKET FUND
Ticker Symbol: N/A
1994 $1.000 0.020 (0.020) -- $1.000 2.38% $ 379 0.63% 2.47% 0.73%
1995 $1.000 0.030 (0.030) -- $1.000 3.48% $1,603 0.54% 3.48% 0.62%
1996 $1.000 0.030 (0.030) -- $1.000 3.11% $ 782 0.54% 3.06% 0.64%
1997 $1.000 0.033 (0.033) -- $1.000 3.31% $ 289 0.52% 3.22% 0.63%
1998 $1.000 0.030 (0.030) -- $1.000 3.06% $ 346 0.54% 3.02% 0.64%
---------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
++ Not Annualized.
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratio would have been as indicated.
(1) The Government Money Market Fund commenced operations on June 2, 1997.
53
<PAGE>
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<PAGE>
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<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
[KENT FUNDS RIGHT ON THE MONEY LOGO APPEARS HERE]
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 the Funds by contacting a
broker or other financial institution that sells the Funds. In addition, you
may contact the Funds at Kent Funds, P.O. Box 182201, Columbus, Ohio 43218-2201
or:
-------------------------------------
Telephone: 1-800-633-KENT (5368)
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 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 Funds' website is not part of this Prospectus.
Investment Company Act file no. 811-4824.
KKF-0390 (5/99)
<PAGE>
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 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Trust............................................................. 3
Investment Objectives and Policies.................................... 3
Investment Restrictions............................................... 24
Securities Transactions............................................... 26
Valuation Of Securities............................................... 28
Trustees And Officers................................................. 31
Investment Adviser.................................................... 32
Administrator......................................................... 35
Distributor........................................................... 36
Transfer Agent........................................................ 36
Custodian, Auditors And Counsel....................................... 37
Distribution Plan..................................................... 37
Additional Purchase And Redemption Information........................ 38
Dividends And Taxes................................................... 39
Declaration Of Trust.................................................. 40
Standardized Total Return And Yield Quotations........................ 41
Advertising Information............................................... 47
Financial Statements.................................................. 48
Additional Information................................................ 48
Appendix A............................................................A-1
Appendix B............................................................B-1
Appendix C............................................................C-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS SAI, OR IN THE PROSPECTUS RELATED HERETO,
IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR. THIS SAI AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFERING BY THE TRUST OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
THE TRUST
The Kent Funds (the "Trust") is an open-end management investment
company, commonly known as a mutual fund, which was organized on May 9, 1986 as
a Massachusetts business trust. The original name of the Trust was "Master
Municipal Trust." The Trust 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 an additional investment portfolio in a single class of
shares, the Lyon Street Institutional Money Market Fund, which is described in a
separate prospectus and statement of additional information.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the description of each Fund's
investment objective and strategies as set forth in the prospectus.
EQUITY FUNDS
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 New York Stock Exchange 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.
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.
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 ADRs. A portion of
the Fund's assets may also be invested in preferred stock or bonds that are
convertible into common stock.
3
<PAGE>
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 $2
billion. The Fund may also purchase stocks which are listed on other U.S.
securities exchanges or which are traded over the counter.
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
invests in countries represented in the Morgan Stanley Europe, Australia and Far
East Index (the "EAFE Index"). Although the International Growth Fund seeks to
equal or exceed the return of the EAFE Index, the Fund may invest its asset in
proportions that differ from this index. The Fund is not, therefore, an "index"
fund, which typically holds securities in approximately the same proportion as
the index it attempts to replicate. 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 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.
BOND FUNDS
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
4
<PAGE>
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, generally 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.
MUNICIPAL BOND FUNDS
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.
In calculating the 80% limitation for the Michigan Municipal Bond Fund,
securities whose interest is treated as a specific tax preference item under the
federal alternative minimum tax and is treated as exempt from Michigan personal
income tax are considered non-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.
5
<PAGE>
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.
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 Securities and Exchange 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
6
<PAGE>
or less. The Fund may also invest in short-term obligations guaranteed by the
U.S. Government, its agencies or instrumentalities.
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.
In calculating the 80% limitation for the Michigan Municipal Money Market Fund,
securities whose interest is treated as a specific tax preference item under the
federal alternative minimum tax and is treated as exempt from Michigan personal
income tax are considered non-taxable.
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 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
7
<PAGE>
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 the 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 the 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
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 Fund will segregate cash or liquid securities having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments. In the case of a forward commitment to sell portfolio securities,
the custodian will hold the portfolio securities themselves in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Fund will maintain sufficient assets at all times to cover its
obligations under when-issued and forward commitment transactions. Because a
Fund sets aside liquid assets to satisfy its purchase commitments in the manner
described, its liquidity and ability to manage its portfolio might be affected
in the event its purchase commitments exceed 25% of the value of its assets. 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. Zero coupon obligations do not make interest payments; instead,
they are sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon obligations do not pay current
income, their prices can be volatile when interest rates change. The Funds will
accrue income on such investments for tax and accounting purposes, as required,
and such income must be distributed to shareholders. A Fund may be required to
liquidate other portfolio securities to satisfy its distribution obligations
because no cash is received at the time of such income accruals. The return on a
zero coupon obligation, when held to maturity, equals the difference between the
par-value and the original purchase price.
STRIPPED OBLIGATIONS (The Bond Funds and Money Market Funds only)
The Bond and Money Market Funds may purchase U.S. Treasury obligations
and their unmatured interest coupons that have been separated ("stripped") by
their holder, typically a custodian bank or other institutuon. These "stripped"
U.S. Treasury obligations are offered under the Separate Trading of Registered
Interest and Principal Securities ("STRIPS") program or Coupon Under Bank-Entry
Safekeeping ("CUBES") program. These Funds may also purchase 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. 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 securities 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 responsibilities 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 up to 5% 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. ADRs traded in the over-the-counter market which do not have an
active or substantial secondary market will be considered illiquid and therefore
will be subject to the Funds' respective limitations with respect to such
securities. Investments in ADRs involve risks similar to those accompanying
direct investments in foreign securities.
Some Institutions issuing ADRs may not be sponsored by the issuer. If a
Fund invests in an unsponsored ADR, there may be less information available to
the Fund concerning the issuer of the securities underlying the unsponsored ADR
than is available for an issuer of securities underlying a sponsored ADR. A
non-sponsored depository may not provide the same shareholder information that a
sponsored depository is required to provide under its contractual arrangement
with the issuer. Certain of these risks are described above under "Detailed
Description of Investment Vehicles and Potential Risks--Foreign Securities."
FOREIGN CURRENCY TRANSACTIONS (The International Growth Fund only)
In order to protect against a possible loss on investments resulting
from a decline in the value of a particular foreign currency against the U.S.
dollar or another foreign currency, the 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 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 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 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 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 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 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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<PAGE>
(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
26
<PAGE>
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
27
<PAGE>
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 $324,798, respectively, for the Growth and Income Fund; $34,687, $235,105
and $124,194, respectively, for the Index Equity Fund; $453,811, $710,902 and
$1,349,232, respectively, for the Small Company Growth Fund; and $211,929,
$234,749 and $419,688, respectively, for the International Growth Fund. The
increase in the amount of brokerage commissions paid by the Small Company Growth
Fund and the International Growth Fund is attributable to an increase in the
size of each Fund and an increase in each 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
28
<PAGE>
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 Merrill Lynch & Co. in the amount of $2,483,000 and equity securities of
Morgan Stanley, Dean Witter & Co. in the amount of $4,686,000; Index Equity Fund
owned equity securities of Merrill Lynch & Co. in the amount of $1,889,000,
equity securities of Morgan Stanley, Dean Witter & Co. in the amount of
$3,324,000, equity securities of Bear Stearns Co., Inc in the amount of
$344,000, and equity securities of Lehman Brothers, Inc. in the amount of
$423,000; International Growth Fund owned equity securities of HSBC Group in
the amount of $4,633,000; Short Term Bond Fund owned debt securities of Merrill
Lynch & Co. in the amount of $5,156,000 and debt securities of Morgan Stanley,
Dean Witter & Co. in the amount of $6,128,000; Intermediate Bond Fund owned debt
securities of Bear Stearns Co. in the amount of $5,644,000 and debt securities
of HSBC Group in the amount of $8,150,000; and the Income Fund owned debt
securities of HSBC Group in the amount of $2,038,000 and debt securities of
Lehman Brothers, Inc. in the amount of $2,215,000. 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
29
<PAGE>
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;
30
<PAGE>
(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 NASDAQ 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 NASDAQ and for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked prices for such securities;
(6) Non-U.S. common stock, preferred stock and other equity securities
which are not listed or are listed and subject to restrictions on sale are
valued at prices supplied by a dealer selected by Lyon Street 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.
31
<PAGE>
TRUSTEES AND OFFICERS
The Trust is governed by a Board of Trustees. The Trustees are
responsible for the overall management of the Trust and retain and supervise the
Funds' Adviser, Administrator, Distributor, Transfer Agent and Custodian.
The names, 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 - Administration Services
for BISYS Fund Services; and formerly employed by KPMG LLP.
ROBERT L. TUCH, Secretary, 47; Vice President - Legal Services for
BISYS Fund Services.
W. BRUCE MCCONNEL, III, Assistant Secretary, 56; Partner in the law
firm of Drinker Biddle & Reath LLP.
ALAINA V. METZ, Assistant Secretary, 32; Chief Administrator of the
Blue Sky Department for BISYS Fund Services; and formerly employed by Alliance
Capital Management.
- - -----------------------------------
* This Trustee is an interested person of the Trust as defined under the 1940
Act.
During the fiscal year ended December 31, 1998, no officer, director or
employee of the Trust's service contractors, or any of their parents or
subsidiaries, received any direct remuneration from the Trust for serving as a
Trustee or officer of the Trust, although BISYS and its affiliates, of which
Messrs. Grimm, Young, Dean, and Tuch and Ms. Metz are also employees, receives
fees from the Trust for administrative, fund accounting and transfer agency
services. Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Trust. Each Trustee earns an annual fee of
$8,000 and additional fees of $1,750 for each regular meeting attended, $1,000
for each special
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<PAGE>
meeting attended and $500 for each telephonic meeting, plus reimbursement of
expenses incurred as a Trustee.
Listed below is the compensation paid to each Trustee by the Trust for
the fiscal year ended December 31, 1998. The Board of Trustees has established
The Kent Funds Deferred Compensation Plan (the "Deferred Compensation Plan")
pursuant to which the Trustees may elect to defer receipt of the compensation
payable to them by the Trust. Under the terms of the Deferred Compensation Plan,
amounts deferred by the Trustees are credited with the earnings on certain
investment options which may include one or more of the Funds. Trustees receive
payment of their deferred compensation and any related earnings upon ceasing to
be a Trustee of the Trust. Such payment is made at the election of the Trustee,
either in a lump sum or in annual installments over two to fifteen years. The
Trust's obligation to pay the Trustee's deferred compensation is a general
unsecured obligation.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM THE TRUST AND
NAME OF PERSON AGGREGATE COMPENSATION FUND COMPLEX PAID
AND POSITION FROM THE TRUST TO TRUSTEES
------------ -------------- -----------
<S> <C> <C>
Joseph F. Damore, Trustee $ 15,000 * $ 15,000
Walter B. Grimm, Trustee $ 0 $ 0
James F. Rainey, Trustee $ 15,000 * $ 15,000
Ronald F. VanSteeland, Trustee $ 15,000 $ 15,000
- - -------------------
* During the fiscal year ended December 31, 1998, Mr. Damore deferred
$15,000 of his compensation and Mr. Rainey deferred
$7,500 of his compensation pursuant to the Deferred
Compensation Plan.
</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 $6.1 billion. The Trust is the first
registered investment company for which Lyon Street has
33
<PAGE>
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
$16.6 billion in total consolidated assets as of December 31, 1998. Through
offices in numerous states, Old Kent Financial Corporation and its subsidiaries
provide a broad range of financial services to individuals and businesses.
Lyon Street employs an experienced staff of professional investment
analysts, portfolio managers and traders and uses several proprietary
computer-based systems in conjunction with fundamental analysis to identify
investment opportunities.
INVESTMENT ADVISORY AGREEMENT
The overall supervision and management of the 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 the trust accounts of 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 $5,462,664,
respectively, for the Growth and Income Fund; $654,709, $1,278,392 and
$2,128,823, respectively, for the Index Equity Fund; $3,613,394, $4,597,213 and
$5,258,368, respectively, for the Small Company Growth Fund; $2,465,291,
$3,529,317, and $3,990,372, respectively, for the International Growth Fund;
$4,537,199, $4,262,333, and $4,345,604, respectively, for the Intermediate Bond
Fund; $1,421,272, $857,575, and $696,368, respectively, for the Short Term Bond
Fund; $1,458,010, $1,424,578, and $1,431,252, respectively, for the Intermediate
Tax-Free Fund; $772,339, $563,275, and $561,713, respectively, for the Michigan
Municipal Bond Fund; $1,747,159, $2,092,414, and $2,260,092, respectively, for
the Money Market Fund; $653,417, $781,668, and $1,279,122, respectively, for the
Michigan Municipal Money Market Fund; $1,209,526, $1,489,950, and $1,481,491,
respectively, for the Income Fund and $595,616, $642,997 and $687,774,
respectively, for the Tax-Free Income Fund. For the fiscal
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<PAGE>
period ended December 31, 1997, and the fiscal year ended December 31, 1998, Old
Kent and Lyon Street earned $226,041 and $466,055, 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 $1,774,016,
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 $233,030, 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>
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>
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 $1,411,202, respectively, for the
Growth and Income Fund; $212,487, $464,741, and $857,078, respectively, for the
Index Equity Fund; $1,011,600, $1,176,682, and $1,358,690, respectively, for the
Small Company Growth Fund; $643,425, $842,845, and $962,462, respectively, for
the International Growth Fund; $1,618,455, $1,386,330 and $1,429,015,
respectively, for the Intermediate Bond Fund; $558,367, $306,274 and $251,895,
respectively, for the Short Term Bond Fund; $571,869,$509,532 and $517,725,
respectively, for the Intermediate Tax-Free Fund; $337,467, $223,672 and
$225,753, respectively, for the Michigan Municipal Bond Fund; $425,618, $504,642
and $624,863, respectively, for the Money Market Fund; $159,777, $178,917 and
$321,507, respectively, for the Michigan Municipal Money Market Fund; $393,938,
$444,179 and $446,634, respectively for the Income Fund; and $227,178, $209,139
and $226,159, 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 $95,865, respectively, in
administration fees.
The amounts listed above as paid are net of the following waivers. For
the fiscal period ended December 31, 1998, the administration fees waived by
BISYS were $425,483 for the Index Equity Fund, $394,533 for the Money Market
Fund, $255,083 for the Michigan Municipal Money Market Fund, and $114,295 for
the Government Money Market Fund.
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 $0, 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, 90 Washington Street, New York, New York 10286 is
custodian of all securities and cash of the Trust.
KPMG LLP, Two Nationwide Plaza, Suite 1600, Columbus, Ohio 43215,
Certified Public Accountants, are the independent auditors for the Trust.
Drinker Biddle & Reath LLP, 1345 Chestnut Street, Philadelphia, PA
19107, serves as counsel to the Trust.
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<PAGE>
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. Under the Plan, the
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid monthly, of up to 0.25%. The Plan obligates a Fund,
during the period it is in effect, to accrue and pay to the Distributor on
behalf of a Fund the fee agreed to under the Distribution Plan. Payments under
the Plan are not tied exclusively to expenses actually incurred by the
Distributor, and the payments may exceed distribution expenses actually
incurred.
All persons authorized to direct the disposition of monies paid or
payable by a Fund pursuant to the Plan or any related agreement must provide to
the Trust's Board of Trustees at least quarterly a written report of the amounts
so expended and the purposes for which such expenditures were made.
Representatives, brokers, dealers or others receiving payments pursuant to the
Plan must determine that such payments and the services provided in connection
with such payments are appropriate for such persons and are not in violation of
regulatory limitations applicable to such persons.
The services under the Plan may include assistance in advertising and
marketing of 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 Trustees concluded that the Plan could enhance the retail
distribution of the Funds, thereby resulting in growth of the Funds' assets and
a wider shareholder base. This could help the Funds to remain competitive with
other funds by, among other things, lessening the impact on shareholders of
redemptions, attracting talented investment managers and providing flexibility
to portfolio managers in the execution of Fund orders. The Plan may not be
amended in order to increase materially the amount of distribution expenses
permitted under the Plan without such amendment being approved by a majority
vote of the outstanding 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, $109,568; Index Equity
Fund, $84,973; Small Company Growth Fund, $59,520; International Growth
Fund, $27,994; Income Fund, $21,966; Intermediate Bond Fund, $24,241;
Short Term Bond Fund, $10,270; Tax-Free Income Fund, $4,710;
Intermediate Tax-Free Fund, $9,397; and Michigan Municipal Bond Fund,
38
<PAGE>
$7,003. 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>
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>
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.
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<PAGE>
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
4.78%, 4.73% and 3.17%, 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 4.78%, 4.72% and 3.17%, 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>
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 4.89%, 4.84% and
3.22%, 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 4.89%, 4.83% and 3.22%, 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.
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<PAGE>
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 27.68% 20.58% 18.90%
Index Equity Fund 11/25/92 27.93% 23.05% 20.60%
Small Company Growth Fund 12/04/92 -6.40% 11.94% 12.94%
International Growth Fund 12/04/92 17.60% 8.62% 11.77%
Income Fund 03/22/95 9.04% N/A 9.14%
Intermediate Bond Fund 11/25/92 7.26% 5.89% 6.22%
Short Term Bond Fund 12/04/92 6.00% 5.48% 5.06%
Tax-Free Income Fund 03/31/95 5.43% N/A 6.82%
Intermediate Tax-Free Fund 12/18/92 5.09% 4.83% 5.44%
Michigan Municipal Bond Fund 05/11/93 4.60% 4.27% 4.29%
Money Market Fund 12/09/92 5.13% 4.94% 4.48%
Government Money Market Fund 06/02/97 5.17% N/A 5.23%
Michigan Municipal Money Market Fund 12/15/92 3.06% 3.07% 2.83%
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 11/02/92 28.07% 20.83% 19.46%
Index Equity Fund 11/02/92 28.26% 23.33% 21.08%
Small Company Growth Fund 11/02/92 -6.15% 12.17% 14.15%
International Growth Fund 12/04/92 17.92% 8.87% 12.07%
Income Fund 03/20/95 9.29% N/A 9.41%
Intermediate Bond Fund 11/02/92 7.65% 6.09% 6.45%
Short Term Bond Fund 11/02/92 6.14% 5.62% 5.20%
Tax-Free Income Fund 03/20/95 5.71% N/A 7.07%
Intermediate Tax-Free Fund 12/16/92 5.37% 5.04% 5.64%
Michigan Municipal Bond Fund 05/03/93 4.75% 4.43% 4.46%
Money Market Fund 12/03/90 5.13% 4.95% 4.58%
Government Money Market Fund 06/02/97 5.17% N/A 5.25%
Michigan Municipal Money Market Fund 06/03/91 3.06% 3.07% 2.94%
</TABLE>
45
<PAGE>
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 27.68% 154.89% 186.66%
Index Equity Fund 11/25/92 27.93% 182.12% 213.47%
Small Company Growth Fund 12/04/92 -6.40% 75.74% 109.37%
International Growth Fund 12/04/92 17.60% 51.17% 96.61%
Income Fund 03/22/95 9.04% N/A 39.33%
Intermediate Bond Fund 11/25/92 7.26% 33.15% 44.48%
Short Term Bond Fund 12/04/92 6.00% 30.57% 34.95%
Tax-Free Income Fund 03/31/95 5.43% N/A 28.09%
Intermediate Tax-Free Fund 12/18/92 5.09% 26.61% 37.65%
Michigan Municipal Bond Fund 05/11/93 4.60% 23.25% 26.76%
Money Market Fund 12/09/92 5.13% 27.25% 30.46%
Government Money Market Fund 06/02/97 5.17% N/A 8.39%
Michigan Municipal Money Market Fund 12/15/92 3.06% 16.30% 18.39%
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
Inception Since
Date One Year Five Years Inception
---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Growth and Income Fund 11/02/92 28.07% 157.57% 199.07%
Index Equity Fund 11/02/92 28.26% 185.33% 225.03%
Small Company Growth Fund 11/02/92 -6.15% 77.57% 126.00%
International Growth Fund 12/04/92 17.92% 52.97% 99.76%
Income Fund 03/20/95 9.29% N/A 40.63%
Intermediate Bond Fund 11/02/92 7.65% 34.42% 46.99%
Short Term Bond Fund 11/02/92 6.14% 31.44% 36.63%
Tax-Free Income Fund 03/20/95 5.71% N/A 29.57%
Intermediate Tax-Free Fund 12/16/92 5.37% 27.86% 39.29%
Michigan Municipal Bond Fund 05/03/93 4.75% 24.23% 28.02%
Money Market Fund 12/03/90 5.13% 27.32% 43.56%
Government Money Market Fund 06/02/97 5.17% N/A 8.43%
Michigan Municipal Money Market Fund 06/03/91 3.06% 16.34% 24.53%
</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>
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, 4.71%; Intermediate Bond
Fund, 4.34%; Short Term Bond Fund, 4.44%; Tax-Free Income Fund, 3.31%;
Intermediate Tax-Free Fund, 3.18%; and Michigan Municipal Bond Fund, 3.57%. For
the same period, the yields on the Institutional Shares of the Bond Funds and
Municipal Bond Funds were as follows: Income Fund, 4.97%; Intermediate Bond
Fund, 4.57%; Short Term Bond Fund, 4.59%; Tax-Free Income Fund, 3.56%;
Intermediate Tax-Free Fund, 3.43%; and Michigan Municipal Bond Fund, 3.72%.
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,
5.48%; Intermediate Tax-Free Fund, 5.26%; Michigan Municipal Bond Fund, 5.91%;
and Michigan Municipal Money Market Fund, 4.75%. For the same period, the yields
on the Institutional Shares of the Municipal Funds were as follows: Tax-Free
Income Fund, 5.89%; Intermediate Tax-Free Fund, 5.68%; Michigan Municipal Bond
Fund, 6.16%; and Michigan Municipal Money Market Fund, 4.75%.
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>
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. The
Financial Statements included in the Annual Report have been audited by the
Trust's independent auditors, KPMG LLP, whose report thereon also appears in the
Annual Report and are incorporated herein by reference. The Financial Statements
in such Annual report have been incorporated herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing. 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 April 5, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
- ----------------- ---- ----- -------------
<S> <C> <C> <C>
Trent & Co. Growth and Income Institutional 93.55%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Growth and Income Investment 43.47%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Growth and Income Investment 12.49%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Index Equity Institutional 85.19%
4420 44th Street Suite A
Kentwood, MI 49512
BISYS Brokerage Services Index Equity Institutional 14.24%
P.O. Box 4054
Concord, CA 94524
BHC Securities, Inc. Index Equity Investment 54.55%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Trent & Co. Small Company Growth Institutional 93.73%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Small Company Growth Investment 24.64%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Small Company Growth Investment 14.99%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. International Growth Institutional 95.35%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address Fund Class Ownership
- ----------------- ---- ----- -------------
<S> <C> <C> <C>
BHC Securities, Inc. International Growth Investment 22.93%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company International Growth Investment 22.31%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Income Institutional 94.95%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Income Investment 41.12%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Income Investment 36.46%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Intermediate Bond Institutional 96.70%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Intermediate Bond Investment 14.10%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Intermediate Bond Investment 47.54%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Short Term Bond Institutional 97.44%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Short Term Bond Investment 65.92%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
---------------- ---- ----- -------------
<S> <C> <C> <C>
Trent & Co. Tax-Free Income Institutional 96.60%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Tax-Free Income Investment 39.00%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Tax-Free Income Investment 26.64%
One Freedom Valley Drive
Oaks, PA 19456
Fotru Co. Tax-Free Income Investment 5.76%
Evelyn G. Varner Trust
P.O. Box 1828
Grand Rapids, MI 49501-1828
Trent & Co. Intermediate Tax-Free Institutional 97.17%
4420 44th Street Suite A
Kentwood, MI 49512
BHC Securities, Inc. Intermediate Tax-Free Investment 20.18%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Intermediate Tax-Free Investment 20.16%
One Freedom Valley Drive
Oaks, PA 19456
Northern Trust Company Intermediate Tax-Free Investment 6.47%
Richard U. Light Irrev. S Trust
P.O. Box 92956
Chicago, IL 60675
Northern Trust Company Intermediate Tax-Free Investment 9.52%
Richard U. Light Rev. S Trust
P.O. Box 92956
Chicago, IL 60675
Trent & Co. Michigan Municipal Bond Institutional 98.16%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address Fund Class Ownership
---------------- ---- ----- -------------
<S> <C> <C> <C>
BHC Securities, Inc. Michigan Municipal Bond Investment 25.60%
Trade House Account
2005 Market Street, Suite 1200
Philadelphia, PA 19103
SEI Trust Company Michigan Municipal Bond Investment 5.06%
One Freedom Valley Drive
Oaks, PA 19456
Trent & Co. Michigan Municipal Bond Investment 33.62%
4420 44th Street Suite A
Kentwood, MI 49512
Northern Trust Company Michigan Municipal Bond Investment 7.83%
Richard U. Light Irrev. S Trust
P.O. Box 92956
Chicago, IL 60675
Northern Trust Company Michigan Municipal Bond Investment 11.39%
Christopher U. Light Rev. Tr
P.O. Box 92956
Chicago, IL 60675
Trent & Co. Money Market Institutional 92.13%
4420 44th Street Suite A
Kentwood, MI 49512
V. Donna Berg Money Market Investment 8.71%
403 Midlakes Boulevard
Plainwell, MI 49080
SEI Trust Company Money Market Investment 14.30%
One Freedom Valley Drive
Oaks, PA 19456
BHC Securities, Inc. Money Market Investment 44.79%
Twelve Hundred
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Old Kent Bank Government Money Market Institutional 56.22%
111 Lyon Street, NW
Grand Rapids, MI 49503
Trent & Co. Government Money Market Institutional 43.78%
4420 44th Street Suite A
Kentwood, MI 49512
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS FUND CLASS OWNERSHIP
- ------------------ ---- ----- -------------
<S> <C> <C> <C>
Daniel P. Kreuz Government Money Market Investment 39.92%
139 Horseshoe Lane
Marlton, NJ 08053
Helen Glynn Government Money Market Investment 21.68%
Margaret A. McGovern Trust
11050 Valley Drive
Fountain Hills, AZ 85268
Mary E. Jones Government Money Market Investment 17.95%
125 Walnut
Schoolcroft, MI 49087
Allan C. Caldmeyer Government Money Market Investment 5.61%
Matthew S. Caldmeyer
977 Gladstone SE
Grand Rapids, MI 49506
Frederick C. Lake Government Money Market Investment 5.53%
Amy Z. Lake
2210 Edgewood SE
Grand Rapids, MI 49546
Trent & Co. Michigan Municipal Money Institutional 96.36%
4420 44th Street Suite A Market
Kentwood, MI 49512
BHC Securities, Inc. Michigan Municipal Money Investment 84.05%
Twelve Hundred Market
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
SEI Trust Company Michigan Municipal Investment 5.41%
One Freedom Valley Drive Money Market
Oaks, Pa 19456
</TABLE>
Any persons or organizations listed above as owning 25% or more of the
outstanding shares of a Fund may be presumed to "control" (as that term is
defined in the 1940 Act) the Fund. As a result, those persons or organizations
could have the ability to vote a majority of the shares of the Fund on any
matter requiring the approval of shareholders of the Fund.
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>
APPENDIX A
DESCRIPTION OF SECURITIES
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by 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 Standard & Poor's
believes such payments will be made during such grace period. The "D" rating
will also be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"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>
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>
"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 Financial BankWatch short-term ratings assess the
likelihood of an untimely payment of principal and interest of debt instruments
with original maturities of one year or less. The following summarizes the
ratings used by Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
BankWatch's highest category and indicates a very high likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial
BankWatch's second-highest category and indicates that while the degree of
safety regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson Financial
BankWatch's lowest investment-grade category and indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial
BankWatch's lowest rating category and indicates that the obligation is regarded
as non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by S&P for corporate
and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by S&P. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - 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.
A-3
<PAGE>
"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 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 Standard &
Poor's 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:
A-4
<PAGE>
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: 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. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "O" the lowest recovery potential, i.e. below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson Financial BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term to maturity of long
term debt and preferred stock which are issued by United States commercial
banks, thrifts and non-bank banks; non-United States banks; and 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 Standard & Poor's rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a
very strong capacity to pay debt service 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
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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>
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>
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>
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 Bank of New York is filed
herewith.
(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.
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-
-2-
<PAGE>
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.
(j)(1) Consent of KPMG LLP is filed herewith as Exhibit (j)(1).
(j)(2) Consent of Drinker Biddle & Reath LLP is filed herewith as Exhibit
(j)(2).
-3-
<PAGE>
(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) Financial Data Schedules are filed herewith.
(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>
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
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
Puget Sound Alternative Investment Series Trust
Republic Funds Trust
The Republic Advisors Funds Trust
Sefton Funds Trust
SSgA International Liquidity Fund
Summit Investment Trust
Variable Insurance Funds
The Victory Portfolios
The Victory Variable Insurance Funds
Vintage Mutual Funds, Inc.
-5-
<PAGE>
(b) Partners of BISYS Fund Services Limited Partnership are as follows:
Name and Principal Positions and Offices Positions and Offices
Business Addresses with BISYS Fund Services with Registrant
- ------------------ ------------------------ ---------------------
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
(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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirement for effectiveness of this registration statement under Rule 485(b)
under the Securities Act and 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
29 th day of April, 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.
SIGNATURES TITLE DATE
- ---------- ----- ----
*/ s/ James F. Duca, II President April 29, 1999
- -----------------------------
James F. Duca, II
*/s/ Martin R. Dean Treasurer (Principal Accounting April 29, 1999
- ----------------------------- and Financial Officer)
Martin R. Dean
*/ s/ Walter B. Grimm Chairman and Trustee April 29, 1999
- -----------------------------
Walter B. Grimm
*/ s/ Joseph F. Damore Trustee April 29, 1999
- -----------------------------
Joseph F. Damore
*/ s/ James F. Rainey Trustee April 29, 1999
- -----------------------------
James F. Rainey
*/ s/ Ronald F. VanSteeland Trustee April 29, 1999
- -----------------------------
Ronald F. VanSteeland
*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>
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 S. Duca, II
------------------------
James F. Duca, II
Date: March 29, 1999
<PAGE>
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: March 29, 1999
<PAGE>
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: March 29, 1999
<PAGE>
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: March 29, 1999
<PAGE>
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: March 29, 1999
<PAGE>
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: March 29, 1999
<PAGE>
EXHIBIT INDEX
Exhibit (g) Custody Agreement
Exhibit (j)(1) Consent of KPMG LLP
Exhibit (j)(2) Consent of Drinker Biddle & Reath LLP.
Exhibit (n) Financial Data Schedules
<PAGE>
Exhibit (g)
CUSTODY AGREEMENT
-----------------
Agreement made as of this 16/th/ day of April, 1998, between THE KENT
FUNDS, a Massachusetts business trust organized and existing under the laws of
the Commonwealth of Massachusetts, having its principal office and place of
business at 3435 Stelzer Road, Columbus, Ohio 43219 (hereinafter called the
"Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a
banking business, having its principal office and place of business at One Wall
Street, New York, New York 10286 (hereinafter called the "Custodian").
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth, the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Authorized Persons" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund, duly
authorized by the Board of Trustees of the Fund to execute any Certificate,
instruction, notice or other instrument on behalf of the Fund and listed in the
Certificate annexed hereto as Appendix A or such other Certificate as may be
received by the Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-
entry system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
3. "Call Option" shall mean an exchange traded option with respect
to Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is
<PAGE>
actually received by the Custodian and signed on behalf of the Fund by any two
Authorized Persons, and the term Certificate shall also include Instructions.
5. "Clearing Member" shall mean a registered broker-dealer which is
a clearing member under the rules of O.C.C. and a member of a national
securities exchange qualified to act as a custodian for an investment company,
or any broker-dealer reasonably believed by the Custodian to be such a clearing
member.
6. "Collateral Account" shall mean a segregated account so
denominated which is specifically allocated to a Series and pledged to the
Custodian as security for, and in consideration of, the Custodian's issuance of
(a) any Put Option guarantee letter or similar document described in paragraph 8
of Article V herein, or (b) any receipt described in Article V or VIII herein.
7. "Composite Currency Unit" shall mean the European Currency Unit
or any other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "Covered Call Option" shall mean an exchange traded option
entitling the holder, upon timely exercise and payment of the exercise price, as
specified therein, to purchase from the writer thereof the specified underlying
Securities (excluding Futures Contracts) which are owned by the writer thereof
and subject to appropriate restrictions.
9. "Currency" shall mean money denominated in a lawful currency of
any country or the European Currency Unit.
10. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository"
shall further mean and include any other person authorized to act as a
depository under the Investment Company Act of 1940, its successor or successors
and its nominee or nominees, specifically identified in a certified copy of a
resolution of the Fund's Board of Trustees specifically approving deposits
therein by the Custodian.
11. "Financial Futures Contract" shall mean the firm commitment to
buy or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
12. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
-2-
<PAGE>
14. "FX Transaction" shall mean any transaction for the purchase by
one party of an agreed amount in one Currency against the sale by it to the
other party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted
by electronic or telecommunications media including S.W.I.F.T., computer-to-
computer interface, dedicated transmission line, facsimile transmission signed
by an Authorized Person and tested telex.
16. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
17. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
18. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
19. "Option" shall mean a Call Option, Covered Call Option, Stock
Index Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Authorized Person or from a person reasonably
believed by the Custodian to be an Authorized Person.
21. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract
-3-
<PAGE>
Options entitling the holder, upon timely exercise and tender of the specified
underlying Securities, to sell such Securities to the writer thereof for the
exercise price.
22. "Reverse Repurchase Agreement" shall mean an agreement pursuant
to which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
23. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
24. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
25. "Series" shall mean the various portfolios, if any, of the Fund
listed on Appendix B hereto as amended from time to time.
26. "Shares" shall mean the shares of beneficial interest of the
Fund, each of which is, in the case of a Fund having Series, allocated to a
particular Series.
27. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
28. "Stock Index Option" shall mean an exchange traded option
entitling the holder, upon timely exercise, to receive an amount of cash
determined by reference to the difference between the exercise price and the
value of the index on the date of exercise.
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ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as
custodian of the Securities and money at any time owned by the Fund during the
period of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as, otherwise provided in paragraph 7 of this Article and
in Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all money owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and money not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and money is not
finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Trustees of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of Securities collateral. Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the Custodian a certified resolution of the Board of
Trustees of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize the Depository to the
extent possible with respect to such Securities in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities and money deposited
in either the Book-Entry System or the Depository will be represented in
accounts which include only assets held by the Custodian for customers,
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including, but not limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically allocated on the
Custodian's books to the separate account for the applicable Series. Prior to
the Custodian's accepting, utilizing and acting with respect to Clearing Member
confirmations for Options and transactions in Options for a Series as provided
in this Agreement, the Custodian shall have received a certified resolution of
the Fund's Board of Trustees, substantially in the form of Exhibit C hereto,
approving, authorizing and instructing the Custodian on a continuous and on-
going basis, until instructed to the contrary by a Certificate actually received
by the Custodian, to accept, utilize and act in accordance with such
confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in
the name of each Series, and shall credit to the separate account for each
Series all money received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) as hereinafter provided;
(b) pursuant to Certificates setting forth the name and address
of the person to whom the payment is to be made, the Series account from which
payment is to be made and the purpose for which payment is to be made; or
(c) in payment of the fees and in reimbursement of the expenses
and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series basis,
of all offers to or from the account of the Fund for a Series, either hereunder
or with any co-custodian or sub-custodian appointed in accordance with this
Agreement during said day. Where Securities are transferred to the account of
the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
money held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and
in Article VIII, all Securities held by the Custodian hereunder, which are
issued or issuable only in bearer form, except such Securities as are held in
the Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry
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System or the Depository or their successor or successors, or their nominee or
nominees. The Fund agrees to furnish to the Custodian appropriate instruments to
enable the Custodian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee or in the name of the Book-Entry
System or the Depository any Securities which it may hold hereunder and which
may from time to time be registered in the name of the Fund. The Custodian shall
hold all such Securities specifically allocated to a Series which are not held
in the Book-Entry System or in the Depository in a separate account in the name
of such Series physically segregated at all times from those of any other person
or persons.
5. Except as otherwise provided in this Agreement and unless
otherwise instructed to the contrary by a Certificate, the Custodian by itself,
or through the use of the Book-Entry System or the Depository with respect to
Securities held hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with preceding paragraph 4:
(a) collect all income, dividends and distributions due or
payable;
(b) give notice to the Fund and present for payment and collect
the amount payable upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or (ii) notice of such
call appears in one or more of the publications listed in Appendix C annexed
hereto, which may be amended at any time by the Custodian (and the Custodian
shall promptly send a copy of such Appendix as amended to the Fund) without the
prior notification or consent of the Fund;
(c) present for payment and collect the amount payable upon all
Securities which mature;
(d) surrender Securities in temporary form for definitive
Securities;
(e) execute, as custodian, any necessary declarations or
certificates of ownership under the Internal Revenue Code of 1986, as amended or
the laws or regulations of any other taxing authority now or hereafter in
effect;
(f) hold directly, or through the Book-Entry System or the
Depository with respect to Securities therein deposited, for the account of a
Series, all rights and similar securities issued with respect to any Securities
held by the Custodian for such Series hereunder; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received
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by the Custodian, such proxies and other similar materials to be executed by the
registered owner (if Securities are registered otherwise than in the name of the
Fund), but without indicating the manner in which proxies or consents are to be
voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) execute and deliver to such persons as may be designated in
such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;
(b) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege and receive and hold hereunder
specifically allocated to such Series any cash or other Securities received in
exchange;
(c) deliver any Securities held by the Custodian hereunder for
the Series specified in such Certificate to any protective committee,
reorganization committee or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically allocated to such
Series such certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(d) make such transfers or exchanges of the assets of the
Series specified in such Certificate, and take such other steps as shall be
stated in such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) present for payment and collect the amount payable upon
Securities not described in preceding paragraph 5(b) of this Article which may
be called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates are
available. The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply with
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Section 17(f) of the Investment Company Act of 1940, as amended, in connection
with the purchase, sale, settlement, closing-out or writing of Futures
Contracts, Options, or Futures Contract Options by making payments or deliveries
specified in Certificates received by the Custodian in connection with any such
purchase, sale, writing, settlement or closing-out upon its receipt from a
broker, dealer, or futures commission merchant of a statement or confirmation
reasonably believed by the Custodian to be in the form customarily used by
brokers, dealers, or futures commission merchants with respect to such Futures
Contracts, Options, or Futures Contract Options, as the case may be, confirming
that such Security is held by such broker, dealer or futures commission
merchant, in book-entry form or otherwise, in the name of the Custodian (or any
nominee of the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other
than a purchase of an Option, a Futures Contract, or a Futures Contract Option,
the Fund shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund,
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<PAGE>
pay to the broker specified in the Certificate out of the money held for the
account of such Series the total amount payable upon such purchase, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; the number of shares or principal amount sold,
and accrued interest, if any; (c) the date of sale; (d) the sale price per unit;
(e) the total amount payable to the Fund upon such sale; (f) the name of the
broker through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (g) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities specifically
allocated to such Series to the broker specified in the Certificate against
payment of the total amount payable to the Fund upon such sale, provided that
the same conforms to the total amount payable as set forth in such Certificate
or Oral Instructions.
ARTICLE V
OPTIONS
Promptly after the purchase of any Option by the Fund, the Fund shall deliver to
the Custodian a Certificate specifying with respect to each Option purchased:
(a) the Series to which such Option is specifically allocated; (b) the type of
Option (put or call); (c) the name of the issuer and the title and number of
shares subject to such Option or, in the case of a Stock Index Option, the stock
index to which such Option relates and the number of Stock Index Options
purchased; (d) the expiration date; (e) the exercise price; (f) the dates of
purchase and settlement; (g) the total amount payable by the Fund in connection
with such purchase; (h) the name of the Clearing Member through whom such Option
was purchased; and the name of the broker to whom payment is to be made. The
Custodian shall pay, upon receipt of a Clearing Member's statement confirming
the purchase of such Option held by such Clearing Member for the account of the
Custodian (or any duly appointed and registered nominee of the Custodian) as
custodian for the Fund, out of money held for the account of the Series to which
such Option is to be specifically allocated, the total amount payable upon such
purchase to the Clearing Member through whom the purchase was made, provided
that the same conforms to the total amount payable as set forth in such
Certificate.
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<PAGE>
1. Promptly after the sale of any Option purchased by the Fund
pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a
Certificate specifying with respect to each such sale: (a) the Series to which
such Option was specifically allocated; (b) the type of Option (put or call);
(c) the name of the issuer and the title and number of shares subject to such
Option or, in the case of a Stock Index Option, the stock index to which such
Option relates and the number of Stock Index Options sold; (d) the date of sale;
(e) the sale price; (f) the date of settlement; (g) the total amount payable to
the Fund upon such sale; and the name of the Clearing Member through whom the
sale was made. The Custodian shall consent to the delivery of the Option sold
by the Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the exercise by the Fund of any Call Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the money held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Put Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Option was exercised.
The Custodian shall, upon receipt of the amount payable upon the exercise of the
Put Option, deliver or direct the Depository to deliver the Securities
specifically allocated to such Series, provided the same conforms to the amount
payable to the Fund as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated;
(b) the type of Stock Index
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Option (put or call); (c) the number of Options being exercised; (d) the stock
index to which such Option relates; (e) the expiration date; (f) the exercise
price; (g) the total amount to be received by the Fund in connection with such
exercise; and (h) the Clearing Member from whom such payment is to be received.
5. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
6. Whenever a Covered Call Option written by the Fund and described
in the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
7. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (d) the premium to be received by the Fund; (e) the date such Put Option
is written; (f) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered;
(g) the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series;
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<PAGE>
and the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited into the Collateral Account for such
Series. The Custodian shall, after making the deposits into the Collateral
Account specified in the Certificate, issue a Put Option guarantee letter
substantially in the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Certificate against
receipt of the premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of the
representations contained therein.
8. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery;
(e) the amount of cash and/or the amount and kind. of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the money held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
9. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among
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Clearing Members in Stock Index Options and make the deposits into the
Collateral Account specified in the Certificate, or (2) make the deposits into
the Margin Account specified in the Certificate.
10. Whenever a Stock Index Option written by the Fund and described
in the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;
(b) such information as may be necessary to identify the Stock Index Option
being exercised; (c) the Clearing Member through whom such Stock Index Option is
being exercised; (d) the total amount payable upon such exercise, and whether
such amount is to be paid by or to the Fund; (e) the amount of cash and/or
amount and kind of Securities, if any, to be withdrawn from the Margin Account;
and (f) the amount of cash and/or amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series; and the amount of
cash and/or the amount and kind of Securities, if any, to be withdrawn from the
Collateral Account for such Series. Upon the return and/or cancellation of the
receipt, if any, delivered pursuant to the preceding paragraph of this Article,
the Custodian shall pay out of the money held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
Whenever the Fund purchases any Option identical to a previously written Option
described in paragraphs, 6, 8 or 10 of this Article in a transaction expressly
designated as a "Closing Purchase Transaction" in order to liquidate its
position as a writer of an Option, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to the Option being purchased:
(a) that the transaction is a Closing Purchase Transaction; (b) the Series for
which the Option was written; (c) the name of the issuer and the title and
number of shares subject to the Option, or, in the case of a Stock Index Option,
the stock index to which such Option relates and the number of Options held;
(d) the exercise price; the premium to be paid by the Fund; the expiration date;
(e) the type of Option (put or call); (f) the date of such purchase; (g) the
name of the Clearing Member to whom the premium is to be paid; and (h) the
amount of cash and/or the amount and kind of Securities, if any, to be withdrawn
from the Collateral Account, a specified Margin Account, or the Senior Security
Account for such Series. Upon the Custodian's payment of the premium and the
return and/or cancellation of any receipt issued pursuant to paragraphs 6, 8 or
10 of this Article with respect to the Option being liquidated through the
Closing Purchase Transaction, the Custodian shall remove, or direct the
Depository to remove, the previously imposed restrictions on the Securities
underlying the Call Option.
11. Upon the expiration, exercise or consummation of a Closing
Purchase Transaction with respect to any Option purchased or written by the Fund
and described in this Article, the Custodian shall delete such Option from the
statements delivered to the
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Fund pursuant to paragraph 3 of Article III herein, and upon the return and/or
cancellation of any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin Account and/or the
Senior Security Account as may be specified in a Certificate received in
connection with such expiration, exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identical Futures Contracts entered
into; (d) the delivery or settlement date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date;
(f) whether the Fund is buying (going long) or selling (going short) on such
Futures Contract(s); (g) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series; (h) the name of the broker, dealer, or futures commission merchant
through whom the Futures Contract was entered into; and (i) the amount of fee or
commission, if any, to be paid and the name of the broker, dealer, or fixtures
commission merchant to whom such amount is to be paid. The Custodian shall make
the deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the money specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to
be made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a
broker, dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying:
(a) the Futures Contract and the Series
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to which the same relates; (b) with respect to a Stock Index Futures Contract,
the total cash settlement amount to be paid or received, and with respect to a
Financial Futures Contract, the Securities and/or amount of cash to be delivered
or received; (c) the broker, dealer, or futures commission merchant to or from
whom payment or delivery is to be made or received; and (d) the amount of cash
and/or Securities to be withdrawn from the Senior Security Account for such
Series. The Custodian shall make the payment or delivery specified in the
Certificate, and delete such Futures Contract from the statements delivered to
the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
5. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying:
(a) the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each
delivery of such a Certificate by the Fund shall constitute (x) a representation
and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized,
executed and delivered by the Fund and the futures commission merchant and
complies with Rule 17f-6, and (y) an agreement by the Fund that the Custodian
shall not be liable for the acts or omissions of any such futures commission
merchant.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract
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underlying the Futures Contract Option purchased; (d) the expiration date;
(e) the exercise price; (f) the dates of purchase and settlement; (g) the amount
of premium to be paid by the Fund upon such purchase; (h) the name of the broker
or futures commission merchant through whom such option was purchased; and
(i) the name of the broker, or futures commission merchant, to whom payment is
to be made. The Custodian shall pay out of the money specifically allocated to
such Series, the total amount to be paid upon such purchase to the broker or
futures commissions merchant through whom the purchase was made, provided that
the same conforms to the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such sale: (a)
Series to which such Futures Contract Option was specifically allocated; (b) the
type of Futures Contract Option (put or call); (c) the type of Futures Contract
and such other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker or futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant
to paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund;
(g) the amount, if any, to be received by the Fund; and the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the money and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
such Futures Contract Option: (a) the Series for which such Futures Contract
Option was written; (b) the type of Futures Contract Option (put or call);
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Contract Option; (d) the
expiration date; the exercise price; (e) the premium
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to be received by the Fund; (f) the name of the broker or futures commission
merchant through whom the premium is to be received; and the amount of cash
and/or the amount and kind of Securities, if any, to be deposited in the Senior
Security Account for such Series. The Custodian shall, upon receipt of the
premium specified in the Certificate, make out of the money and Securities
specifically allocated to such Series the deposits into the Senior Security
Account, if any, as specified in the Certificate. The deposits, if any, to be
made to the Margin Account shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund
and which is a put is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying such Futures Contract Option;
(d) the name of the broker or futures commission merchant through whom such
Futures Contract Option is exercised; (e) the net total amount, if any, payable
to the Fund upon such exercise; (f) the net total amount, if any, payable by the
Fund upon such exercise; and (g) the amount and kind of Securities and/or cash
to be withdrawn from or deposited in, the Senior Security Account for such
Series, if any. The Custodian shall, upon its receipt of the net total amount
payable to the Fund, if any, specified in the Certificate, make out of the money
and Securities specifically allocated to such Series, the payments, if any, and
the deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits to and/or withdrawals from the Margin Account, if any,
shall be made by the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical
to a previously written Futures Contract Option described in this Article in
order to liquidate its position as a writer of such Futures Contract Option, the
Fund shall promptly deliver
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to the Custodian a Certificate specifying with respect to the Futures Contract
option being purchased: (a) the Series to which such Option is specifically
allocated; (b) that the transaction is a closing transaction; (c) the type of
Futures Contract and such other information as may be necessary to identify the
Futures Contract underlying the Futures Option Contract; the exercise price;
(d) the premium to be paid by the Fund; (e) the expiration date; (f) the name of
the broker or futures commission merchant to whom the premium is to be paid; and
(g) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account for such Series. The Custodian shall
effect the withdrawals from the Senior Security Account specified in the
Certificate. The withdrawals, if any, to be made from the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article VI
hereof.
10. Notwithstanding any other provision in this Agreement to the
contrary, the Custodian shall deliver cash and Securities to a futures
commission merchant upon receipt of a Certificate from the Fund specifying:
(a) the name of the futures commission merchant; (b) the specific cash and
Securities to be delivered; (c) the date of such delivery; and (d) the date of
the agreement between the Fund and such futures commission merchant entered
pursuant to Rule 17f-6 under the Investment Company Act 1940, as amended. Each
delivery of such a Certificate by the Fund shall constitute (x) a representation
and warranty by the Fund that the Rule 17f-6 agreement has been duly authorized,
executed and delivered by the Fund and the futures commission merchant and
complies with Rule 17f-6, and (y) an agreement by the Fund that the Custodian
shall not be liable for the acts or omissions of any such futures commission
merchant.
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ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the
Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the
Series for which such short sale was made; (b) the name of the issuer and the
title of the Security; (c) the number of shares or principal amount sold, and
accrued interest or dividends, if any; (d) the dates of the sale and settlement;
(e) the sale price per unit; (f) the total amount credited to the Fund upon such
sale, if any, (g) the amount of cash and/or the amount and kind of Securities,
if any, which are to be deposited in a Margin Account and the name in which such
Margin Account has been or is to be established; (h) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
each such closing-out: (a) the Series for which such transaction is being made;
(b) the name of the issuer and the title of the Security; (c) the number of
shares or the principal amount, and accrued interest or dividends, if any,
required to effect such closing-out to be delivered to the broker; (d) the dates
of closing-out and settlement; (e) the purchase price per unit; (f) the net
total amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the money held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
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ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement
with respect to Securities and money held by the Custodian hereunder, the Fund
shall deliver to the Custodian a Certificate, or in the event such Reverse
Repurchase Agreement is a Money Market Security, a Certificate or Oral
Instructions specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund in connection
with such Reverse Repurchase Agreement and specifically allocated to such
Series; (c) the broker or dealer through or with whom the Reverse Repurchase
Agreement is entered; (d) the amount and kind of Securities to be delivered by
the Fund to such broker or dealer; (e) the date of such Reverse Repurchase
Agreement; and (f) the amount of cash and/or the amount and kind of Securities,
if any, specifically allocated to such Series to be deposited in a Senior
Security Account for such Series in connection with such Reverse Repurchase
Agreement. The Custodian shall, upon receipt of the total amount payable to the
Fund specified in the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior Security Account,
specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described
in preceding paragraph I of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying:
(a) the Reverse Repurchase Agreement being terminated and the Series for which
same was entered; (b) the total amount payable by the Fund in connection with
such termination; (c) the amount and kind of Securities to be received by the
Fund and specifically allocated to such Series in connection with such
termination; the date of termination; (d) the name of the broker or dealer with
or through whom the Reverse Repurchase Agreement is to be terminated; and (e)
the amount of cash and/or the amount and kind of Securities to be withdrawn from
the Senior Securities Account for such Series. The Custodian shall, upon receipt
of the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan for which The Bank of New York is not a
securities lending agent of portfolio Securities specifically allocated to a
Series held by the Custodian hereunder, the Fund shall deliver or cause to be
delivered to the Custodian
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a Certificate specifying with respect to each such loan: (a) the Series to which
the loaned Securities are specifically allocated; (b) the name of the issuer and
the title of the Securities, (c) the number of shares or the principal amount
loaned, (d) the date of loan and delivery, (e) the total amount to be delivered
to the Custodian against the loan of the Securities, including the amount of
cash collateral and the premium, if any, separately identified, and (f) the name
of the broker, dealer, or financial institution to which the loan was made. The
Custodian shall deliver the Securities thus designated to the broker, dealer or
financial institution to which the loan was made upon receipt of the total
amount designated as to be delivered against the loan of Securities. The
Custodian may accept payment in connection with a delivery otherwise than
through the Book-Entry System or Depository only in the form of a certified or
bank cashier's check payable to the order of the Fund or the Custodian drawn on
New York Clearing House funds and may deliver Securities in accordance with the
customs prevailing among dealers in securities.
2. Promptly after each termination of a loan of Securities by the
Fund for which The Bank of New York is not a securities lending agent, the Fund
shall deliver or cause to be delivered to the Custodian a Certificate specifying
with respect to each such loan termination and return of Securities: (a) the
Series to which the loaned Securities are specifically allocated; (b) the name
of the issuer and the title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date of termination,
(e) the total amount to be delivered by the Custodian (including the cash
collateral for such Securities minus any offsetting credits as described in said
Certificate), and (f) the name of the broker, dealer, or financial institution
from which the Securities will be returned. The Custodian shall receive all
Securities returned from the broker, dealer, or financial institution to which
such Securities were loaned and upon receipt thereof shall pay, out of the money
held for the account of the Fund, the total amount payable upon such return of
Securities as set forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or
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withdrawn from, a Senior Securities Account, the Custodian shall be under no
obligation to make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions
with respect to Securities deposited in any Margin Account shall be dealt with
in accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest
in and to any property at any time held by the Custodian in any Collateral
Account described herein. In accordance with applicable law the Custodian may
enforce its lien and realize on any such property whenever the Custodian has
made payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodians obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: the
name of the Margin Account; the amount and kind of Securities held therein; and
the amount of money held therein. The Custodian shall make available upon
request to any broker, dealer, or futures commission merchant specified in the
name of a Margin Account a copy of the statement furnished the Fund with respect
to such Margin Account.
6. Promptly after the close of business on each business day in
which cash and/or Securities are maintained in a Collateral Account for any
Series, the Custodian shall furnish the Fund with a statement with respect to
such Collateral Account specifying the amount of cash and/or the amount and kind
of Securities held therein. No later than the close of business next succeeding
the delivery to the Fund of such statement, the Fund shall furnish to the
Custodian a Certificate specifying the then market value of the Securities
described in such statement. In the event such then market value is indicated to
be less than the Custodian's obligation with respect to any outstanding Put
Option guarantee letter or similar document, the Fund shall promptly specify in
a Certificate the additional cash and/or Securities to be deposited in such
Collateral Account to eliminate such deficiency.
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ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution
of the Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, either (i) setting forth with respect to the Series
specified therein the date of the declaration of a dividend or distribution, the
date of payment thereof, the record date as of which shareholders entitled to
payment shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on
the payment date, or (ii) authorizing with respect to the Series specified
therein the declaration of dividends and distributions on a daily basis and
authorizing the Custodian to rely on Oral Instructions or a Certificate setting
forth the date of the declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders entitled to payment
shall be determined, the amount payable per Share of such Series to the
shareholders of record as of that date and the total amount payable to the
Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral
Instructions or Certificate, as the case may be, the Custodian shall pay out of
the money held for the account of each Series the total amount payable to the
Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and
price; and
(b) the amount of money to be received by the Custodian for the
sale of such Shares and specifically allocated to the separate account in the
name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian
shall credit such money to the separate account in the name of the Series for
which such money was received.
3. Upon issuance of any Shares of any Series described in the
foregoing provisions of this Article, the Custodian shall pay, out of the money
held for the account
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of such Series, all original issue or other taxes required to be paid by the
Fund in connection with such issuance upon the receipt of a Certificate
specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the
Custodian to make payment out of the money held by the Custodian hereunder in
connection with a redemption of any Shares, it shall furnish to the Custodian a
Certificate specifying:
(a) the number and Series of Shares redeemed; and
(b) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth
the Series and number of Shares received by the Transfer Agent for redemption
and that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the money held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of
any Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the money held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the money held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the
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Custodian to the Fund for such Series payable on demand and shall bear interest
from the date incurred at a rate per annum (based on a 360-day year for the
actual number of days involved) equal to 1/2% over Custodian's prime commercial
lending rate in effect from time to time, such rate to be adjusted on the
effective date of any change in such prime commercial lending rate but in no
event to be less than 6% per annum. In addition, the Fund hereby agrees that the
Custodian shall have a continuing lien, security interest, and security
entitlement in and to any property including any investment property or any
financial asset specifically allocated to such Series at any time held by it for
the benefit of such Series or in which the Fund may have an interest which is
then in the Custodian's possession or control or in possession or control of any
third party acting in the Custodian's behalf. Notwithstanding Section 9 of
Article XVIII hereof, the Fund authorizes the Custodian, in its sole discretion,
at any time to charge any such overdraft or indebtedness together with interest
due thereon against any balance of account standing to such Series' credit on
the Custodian's books. En addition, the Fund hereby covenants that on each
Business Day on which either it intends to enter a Reverse Repurchase Agreement
and/or otherwise borrow from a third party, or which next succeeds a Business
Day on which at the close of business the Fund had outstanding a Reverse
Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York
City time, advise the Custodian, in writing, of each such borrowing, shall
specify the Series to which the same relates, and shall not incur any
indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing:
(a) the Series to which such borrowing relates; (b) the name of the bank,
(c) the amount and terms of the borrowing, which may be set forth by
incorporating by reference an attached promissory note, duly endorsed by the
Fund, or other loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan becomes due and
payable, (f) the total amount payable to the Fund on the borrowing date, (g) the
market value of Securities to be delivered as collateral for such loan,
including the name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a statement specifying
whether such loan is for investment purposes or for temporary or emergency
purposes and that such loan is in conformance with the Investment Company Act of
1940 and the Fund's prospectus. The Custodian shall deliver on the borrowing
date specified in a Certificate the specified collateral and the executed
promissory note, if any, against delivery by the lending bank of the total
amount of the loan payable, provided that the same conforms to
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the total amount payable as set forth in the Certificate. The Custodian may, at
the option of the lending bank, keep such collateral in its possession, but such
collateral shall be subject to all rights therein given the lending bank by
virtue of any promissory note or loan agreement. The Custodian shall deliver
such Securities as additional collateral as may be specified in a Certificate to
collateralize further any transaction described in this paragraph. The Fund
shall cause all Securities released from collateral status to be returned
directly to the Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the event that the Fund
fails to specify in a Certificate the Series, the name of the issuer, the title
and number of shares or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall not be under any
obligation to deliver any Securities.
ARTICLE XV
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund
in order for the Fund to transmit Instructions to the Custodian (the
"Software"), the Custodian grants to such Fund a personal, nontransferable and
nonexclusive license to use the Software solely for the purpose of transmitting
Instructions to, and receiving communications from, the Custodian in connection
with its account(s). The Fund shall use the Software solely for its own
internal and proper business purposes, and not in the operation of a service
bureau, and agrees not to sell, reproduce, lease or otherwise provide, directly
or indirectly, the Software or any portion thereof to any third party other than
the Fund's designated Fund Accounting Agent without the prior written consent of
the Custodian. The Fund acknowledges that the Custodian and its suppliers have
title and exclusive proprietary rights to the Software, including any trade
secrets or other ideas, concepts, know how, methodologies, or information
incorporated therein and the exclusive rights to any copyrights, trademarks and
patents (including registrations and applications for registration of either) or
statutory or legal protections available with respect thereof. The Fund further
acknowledges that all or a part of the Software may be copyrighted or
trademarked (or a registration or claim made therefor) by the Custodian or its
suppliers. The Fund shall not take any action with respect to the Software
inconsistent with the foregoing acknowledgments, nor shall the Fund attempt to
decompile, reverse engineer or modify the Software. The Fund may not copy,
sell, lease or provide, directly or indirectly, any of the Software or any
portion thereof to any other person or entity without the Custodian's prior
written consent. The Fund may not remove any statutory copyright notice, or
other notice included in the Software or on any media containing the Software.
The Fund shall reproduce any such notice on any reproduction of the Software and
shall add statutory copyright notice or other notice to the Software or media
containing the Software upon the Bank's request. Custodian agrees to provide
reasonable training, instruction manuals and access to Custodian's "help desk"
in connection with the
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Fund's user support necessary to use of the Software. At the Fund's request,
Custodian agrees to permit reasonable testing of the Software by the Fund.
2. The Fund shall obtain and maintain at its own cost and expense
all equipment and services, including but not limited to communications
services, necessary for it to utilize the Software and transmit Instructions to
the Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made
available to the Fund by utilizing the Software (other than data bases relating
solely to the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses with
respect to its own confidential property and trade secrets and shall neither
make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Fund shall return to the Custodian all copies of
the Information which are in its possession or under its control or which the
Fund distributed to third parties. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all Information whether or not copyrighted.
4. The Custodian reserves the right to modify, at its own expense,
the Software from time to time upon reasonable prior notice and the Fund shall
install new releases of the Software as the Custodian may direct. The Fund
agrees not to modify or attempt to modify the Software without the Custodian's
prior written consent. The Fund acknowledges that any modifications to the
Software, whether by the Fund or the Custodian and whether with or without the
Custodian's consent, shall become the property of the Custodian.
5. The Custodian and its manufacturers and suppliers make no
warranties or representations of any kind with regard to the Software or the
method(s) by which the Fund may transmit Instructions to the Custodian, express
or implied, including but not limited to any implied warranties of
merchantability or fitness for a particular purpose.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY
-------------------
UNITED STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES
RESELL, DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY
FORM) IN
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OR TO ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND
OUTSIDE THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION CONTRARY TO U.S.
LAWS PROHIBITED. The Fund hereby authorizes Custodian to report its name and
address to government agencies to which Custodian is required to provide such
information by law.
7. Where the method for transmitting Instructions by the Fund
involves an automatic systems acknowledgment by the Custodian of its receipt of
such Instructions, then in the absence of such acknowledgment the Custodian
shall not be liable for any failure to act pursuant to such Instructions, the
Fund may not claim that such Instructions were received by the Custodian, and
the Fund shall deliver a Certificate by some other means.
8. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Funds sole responsibility to ensure that
only persons duty authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees that it
is fully informed of the protections and risks associated with the various
methods of transmitting Instructions to the Custodian and that there may be more
secure methods of transmitting instructions to the Custodian than the method(s)
selected by the Fund. The Fund hereby agrees that the security procedures (if
any) to be followed in connection with the Funds transmission of Instructions
provide to it a commercially reasonable degree of protection in light of its
particular needs and circumstances.
9. The Fund hereby represents, wan-ants and covenants to the
Custodian that this Agreement has been duly approved by a resolution of its
Board of Trustees, and that its transmission of Instructions pursuant hereto
shall at all times comply with the Investment Company Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a Business Day. The Custodian shall promptly advise the Fund
whenever
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the Custodian learns of any efforts, omissions or interruption in, or delay or
unavailability of, the Fund's ability to send Instructions.
11. The Custodian will indemnify and hold harmless the Fund with
respect to any liabilities, damages, expenses, losses or claims incurred by or
brought against the Fund by reason any claim of infringement against any patent,
copyright, license or other property right arising out or by reason of the
Fund's use of the Software in the form provided under this Section. The
Custodian at its own expense will defend such action or claim brought against
the Fund to the extent that it is based on a claim that the Software in the form
provided by the Custodian infringes any patents, copyrights, license or other
property right, provided that the Custodian is provided with reasonable written
--------
notice of such claim, provided that the Fund has not settled, compromised or
confessed any such claim without the Custodians written consent, in which event
the Custodian shall have no liability or obligation hereunder, and provided the
Fund cooperates with and assists the Custodian in the defense of such claim.
The Custodian shall be entitled to participate in the defense of any such claim
and, unless the Custodian is also a party to such claim and the Custodian
determines in good faith that joint representation would be inappropriate, to
assume the defense of such claim with counsel reasonably satisfactory to the
Fund. After the Custodian notifies the Fund of its election to assume the
defense of any such claim, the Fund shall not be entitled to be indemnified for
fees of counsel or any other expenses with respect to the defense of such claim
incurred subsequent to the Fund's receipt of such notice, provided that the
Custodian diligently conducts such defense. If, as a result of any claim of
infringement against any patent, copyright, license or other property right, the
Custodian is enjoined from using the Software, or if the Custodian believes that
the Software is likely to become the subject of a claim of infringement, the
Custodian at its option may in its sole discretion either (a) at its expenses
procure the right for the Fund to continue to use the Software, or (b), replace
or modify the Software so as to make it non-infringing, or (c) may discontinue
the license granted herein upon written notice to the Fund.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-
custodian for each Series' Securities for which the primary market is outside
the United States ("Foreign Securities") and other assets, the foreign banking
institutions and foreign securities depositories and clearing agencies
designated on Schedule I hereto ("Foreign Sub-Custodians"). The Fund may
designate any additional foreign sub-custodian with which the Custodian has an
agreement for such entity to act as the Custodian's agent, as its sub-custodian
and any such additional foreign sub-custodian shall be deemed added to Schedule
I. Upon receipt of a Certificate from the Fund, the Custodian shall cease the
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employment of any one or more Foreign Sub-Custodians for maintaining custody of
the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted from
Schedule I.
2. Each delivery of a Certificate to the Custodian in connection
with a transaction involving the use of a Foreign Sub-Custodian shall constitute
a representation and warranty by the Fund that its Board of Trustees, or its
third party foreign custody manager as defined in Rule 17f-5 under the
Investment Company Act of 1940, as amended, if any, has determined that use of
such Foreign Sub-Custodian satisfies the requirements of such Investment Company
Act of 1940 and such Rule 17f-5 thereunder.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub-Custodian agreement, use reasonable efforts
to arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as
mutually agreed upon, statements in respect of the securities and other assets
of each Series held by Foreign Sub-Custodians, including but not limited to an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
6. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
7. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor
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(or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such purchaser
or dealer.
8. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the Fund's
expense to recover such loss or damage from the Foreign Sub-Custodian. It is
expressly understood and agreed that the Custodian's sole responsibility and
liability shall be limited to amounts so recovered from the Foreign Sub-
Custodian.
ARTICLE XVII
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund
shall promptly deliver to the Custodian a Certificate or Oral Instructions
specifying with respect to such FX Transaction: (a) the Series to which such FX
Transaction is specifically allocated; (b) the type and amount of Currency to be
purchased by the Fund; (c) the type and amount of Currency to be sold by the
Fund; (d) the date on which the Currency to be purchased is to be delivered;
(e) the date on which the Currency to be sold is to be delivered; and (f) the
name of the person from whom or through whom such currencies are to be purchased
and sold. Unless otherwise instructed by a Certificate or Oral Instructions, the
Custodian shall deliver, or shall instruct a Foreign Sub-Custodian to deliver,
the Currency to be sold on the date on which such delivery is to be made, as set
forth in the Certificate, and shall receive, or instruct a Foreign Sub-Custodian
to receive, the Currency to be purchased on the date as set forth in the
Certificate.
2. Where the Currency to be sold is to be delivered on the same day
as the Currency to be purchased, as specified in the Certificate or Oral
Instructions, the Custodian or a Foreign Sub-Custodian may arrange for such
deliveries and receipts to be made in accordance with the customs prevailing
from time to time among brokers or dealers in Currencies, and such receipt and
delivery may not be completed simultaneously. The Fund assumes all
responsibility and liability for all credit risks involved in connection with
such receipts and deliveries, which responsibility and liability shall continue
until the Currency to be received by the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with
this Agreement may be entered with the Custodian, any office, branch or
subsidiary of The Bank of New York Company, Inc., or any Foreign Sub-Custodian
acting as principal or otherwise through customary banking channels. The Fund
may issue a standing
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Certificate with respect to FX Transaction but the Custodian may establish rules
or limitations concerning any foreign exchange facility made available to the
Fund. The Fund shall bear all risks of investing in Securities or holding
Currency. Without limiting the foregoing, the Fund shall bear the risks that
rules or procedures imposed by a Foreign Sub-Custodian or foreign depositories,
exchange controls, asset freezes or other laws, rules, regulations or orders
shall prohibit or impose burdens or costs on the transfer to, by or for the
account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home jurisdiction or the
conversion of cash from one Currency into another currency. The Custodian shall
not be obligated to substitute another Currency for a Currency (including a
Currency that is a component of a Composite Currency Unit) whose
transferability, convertibility or availability has been affected by such law,
regulation, rule or procedure. Neither the Custodian nor any Foreign Sub-
Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
ARTICLE XVIII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI,
neither the Custodian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omission to act or
otherwise, either hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or willful misconduct.
In no event shall the Custodian be liable to the Fund or any third party for
special, indirect or consequential damages or lost profits or loss of business,
arising under or in connection with this Agreement, even if previously informed
of the possibility of such damages and regardless of the form of action. The
Custodian may, with respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and opinion of counsel
to the Fund, at the expense of the Fund, or of its own counsel at its own
expense, and shall be fully protected with respect to anything done or omitted
by it in good faith in conformity with such advice or opinion. The Custodian
shall be liable to the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any negligence or
willful misconduct on the part of the Custodian or any of its employees or
agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) the validity of the issue of any Securities purchased,
sold, or written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received therefor;
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(b) the legality of the sale or redemption of any Shares, or
the propriety of the amount to be received or paid therefor;
(c) the legality of the declaration or payment of any dividend
by the Fund;
(d) the legality of any borrowing by the Fund using Securities
as collateral;
(e) the legality of any loan of portfolio Securities, nor shall
the Custodian be under any duty or obligation to see to it that any cash
collateral delivered to it by a broker, dealer, or financial institution or held
by it at any time as a result of such loan of portfolio Securities of the Fund
is adequate collateral for the Fund against any loss it might sustain as a
result of such loan. The Custodian specifically, but not by way of limitation,
shall not be under any duty or obligation periodically to check or notify the
Fund that the amount of such cash collateral held by it for the Fund is
sufficient collateral for the Fund, but such duty or obligation shall be the
sole responsibility of the Fund. In addition, the Custodian shall be under no
duty or obligation to see that any broker, dealer or financial institution to
which portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
(f) the sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or Collateral
Account in connection with transactions by the Fund. In addition, the Custodian
shall be under no duty or obligation to see that any broker, dealer, futures
commission merchant or Clearing Member makes payment to the Fund of any
variation margin payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission merchant or Clearing
Member, to see that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the amount the Fund is
entitled to receive, or to notify the Fund of the Custodian's receipt or non-
receipt of any such payment, provided that the Custodian shall be responsible
for reconciling any payment specified in a Certificate with the payment
received.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by the
final crediting of the account representing the Fund's interest at the Book-
Entry System or the Depository.
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4. The Custodian shall have no responsibility and shall not be
liable for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held in
the Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action, suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the Transfer
Agent of the Fund nor to take any action to effect payment or distribution by
the Transfer Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign Sub-
Custodians pursuant to Article XVI appoint one or more banking institutions as
Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-
Custodian or Co-Custodians including, but not limited to, banking institutions
located in foreign countries, of Securities and money at any time owned by the
Fund, upon such terms and conditions as may be approved in a Certificate or
contained in an agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or to ascertain
whether any transactions by the Fund, whether or not involving the Custodian,
are such transactions as may properly be engaged in by the Fund.
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9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Custodian
may charge such compensation and any expenses with respect to a Series incurred
by the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series, provided that the
Custodian has issued an invoice for such compensation and expenses to the Fund
or other party designated by the Fund. The Fund agrees that the Custodian may
charge such compensation and expenses against any money specifically allocated
to the appropriate Series ten days after receipt of an invoice for such charges
by the Fund or its designee, provided that the Fund or its designee has not
disputed such charge. The Custodian agrees that, provided it has received
timely notice of a dispute of such charges, it will not charge the disputed
compensation and/or expenses until the Fund or its designee notifies the
Custodian in writing that the dispute has been resolved.. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series, net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions of this
Agreement. The expenses for which the Custodian shall be entitled to
reimbursement hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase and sale of
Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral Instructions
are given to the Custodian. The Fund agrees that the fact that such confirming
instructions are not received, or that contrary instructions are received, by
the Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund in acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions
provided such instructions reasonably appear to have been received from an
Authorized Person.
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11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Funds authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII the Custodian may
deliver and receive Securities, and receipts with respect to such Securities,
and arrange for payments to be made and received by the Custodian in accordance
with the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all
-37-
<PAGE>
responsibility and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instructions of the Fund,
which responsibility and liability shall continue until final payment in full
has been received by the Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XIX
TERMINATION
1. Any party hereto may terminate this Agreement by giving to the
other parties a notice in writing specifying the date of such termination, which
shall be not less than ninety (90) days after the date of giving of such notice
provided that the Fund may terminate upon ten (10) days notice if (a) Custodian
pursuant to Section 11 of Article XV has elected to discontinue the software
license, or (b) any time after June 1, 1999 the Fund reasonably believes that
the Systems, Third Party Software, or Third Party Services (as defined in this
Agreement) may not be 2000 Compliant by December 31, 1999. In the event such
notice is given by the Fund, it shall be accompanied by a copy of a resolution
of the Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and designating a
successor custodian or custodians, each of which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and undivided
profits. In the event such notice is given by the Custodian, the Fund shall, on
or before the termination date, deliver to the Custodian a copy of a resolution
of the Board of Trustees of the Fund, certified by the Secretary or any
Assistant Secretary, designating a successor custodian or custodians. In the
absence of such designation by the Fund the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian shall upon receipt
of a notice of acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and money then owned by the
Fund and held by it as Custodian, after deducting all fees, expenses and other
amounts for the payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and money then owned by
the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities
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<PAGE>
pursuant to this Agreement, other than the duty with respect to Securities held
in the Book Entry System which cannot be delivered to the Fund to hold such
Securities hereunder in accordance with this Agreement.
ARTICLE XX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of
the present Authorized Persons of the Fund under its seal, setting forth the
names and the signatures of the present Authorized Persons. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event that any
such present Authorized Person ceases to be an Authorized Person or in the event
that other or additional Authorized Persons are elected or appointed. Until such
new Certificate shall be received, the Custodian shall be fully protected in
acting under the provisions of this Agreement upon Oral Instructions or
signatures of the Authorized Persons as set forth in the last delivered
Certificate.
2. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Fund shall be sufficiently given if
addressed to the Fund and mailed or delivered to it at its office at the address
for the Fund first above written, or at such other place as the Fund may from
time to time designate in writing.
4. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the same formality
as this Agreement and approved by a resolution of the Board of Trustees of the
Fund.
5. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by the Fund without the written
consent of the Custodian, or by the Custodian without the written consent of the
Fund, authorized or approved by a resolution of the Fund's Board of Trustees.
6. This Agreement shall be construed in accordance with the laws of
the State of New York without giving effect to conflict of laws principles
thereof. Each party hereby consents to the jurisdiction of a state or federal
court situated in New York City,
-39-
<PAGE>
New York in connection with any dispute arising hereunder and hereby waives its
right to trial by jury.
7. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
8. Year 2000 Compliance. The Custodian hereby warrants that it will
--------------------
use commercially reasonable efforts to ensure that the computer software and
hardware (as used in this subsection, the "Systems") that are owned by the
Custodian and used to provide the services to be provided by the Custodian under
this Agreement (as used in this subsection "Services") are 2000 Compliant or
will be made 2000 Compliant before December 31, 1999. With respect to software
that the Custodian licenses from third parties and uses in providing the
Services ("Third Party Software"), the Custodian warrants that it has used or
will use commercially reasonable efforts to test the same by September 30, 1999
to certify, in accordance with the Custodian's standard practices, that the
Third Party Software is 2000 Compliant. If the Custodian cannot certify any
Third Party Software as 2000 Compliant, the Custodian will use commercially
reasonable efforts to replace such Third Party Software with software that is
warranted or certified by its vendor as 2000 Compliant, if such replacement is
available, compatible with the Custodian's Systems and deemed by the Custodian
as appropriate under the circumstances. In the event that the Custodian uses
third party service providers to provide the Services or any portion thereof
("Third Party Services"), the Custodian warrants that it has in place a program
under which it will use commercially reasonable efforts to contact such service
providers and obtain from them assurances that the Systems use in providing
Third Party Services are 2000 Compliant. As used herein, the term "2000
Compliant" means that the Systems will function without material error caused by
the introduction of dates falling on or after January 1, 2000. Notwithstanding
the foregoing, the parties hereto acknowledge and agree that the Custodian
cannot and does not warrant that the Systems, Third Party Software or Third
Party Services will continue to interface with the hardware, firmware, software
(including operating systems), records or data used by the Fund or third
parties, nor does the Custodian make any warranties hereunder with respect to
any public utility, communications service provider, securities or commodities
exchange, or funds transfer network.
9. A copy of the Declaration of Trust of the Fund is on file with
the Secretary of The Commonwealth of Massachusetts, and notice is hereby given
that this instrument is executed on behalf of the Board of Trustees of the Fund
as Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of the Fund; provided, however, that
the Declaration of Trust of the Fund provides that the assets of a particular
Series of the Fund shall under no circumstances be charged with liabilities
attributable to any other Series of the Fund and that all persons extending
credit
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<PAGE>
to, or contracting with or having any claim against a particular Series of the
Fund shall look only to the assets of that particular Series for payment of such
credit, contract or claim.
-41-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
THE KENT FUNDS
[SEAL] By: /s/ JAMES F. DUCA
-----------------
Attest:
/s/ R. Jeffery Young
- -------------------------
THE BANK OF NEW YORK
[SEAL] By: /s/ JORGE E. RAMOS
------------------
Name: Jorge E. Ramos
Title: Vice President
Attest:
- -------------------------
<PAGE>
APPENDIX A
I, , President and I, , of THE KENT FUNDS, a
Massachusetts business trust (the "Fund"), do hereby certify that:
The following persons have been duty authorized in conformity with the
Fund's Declaration of Trust and By-Laws to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
- --------------------- ---------------------- ---------------------------
<PAGE>
APPENDIX B
SERIES
The Kent Money Market Fund
The Kent Government Money Market Fund
The Kent Michigan Municipal Money Market Fund
The Kent Short Term Bond Fund
The Kent Intermediate Bond Fund
The Kent Income Fund
The Kent Limited Term Tax-Free Fund
The Kent Intermediate Tax-Free Fund
The Kent Tax-Free Income Fund
The Kent Michigan Municipal Bond Fund
The Kent Large Company Growth Fund
The Kent Growth and Income Fund
The Kent Small Company Growth Fund
The Kent International Growth Fund
The Kent Index Equity Fund
<PAGE>
APPENDIX C
I,__________________, a Vice President with THE BANK OF NEW YORK, do hereby
designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, , hereby certifies that he or she is the
duly elected and acting of THE KENT FUNDS, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on , 1998, at
which a quorum was at all times present and that such resolution has not been
modified or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis to deposit in the Book-Entry System, as
defined in the Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Book-Entry System to the extent possible in
connection with its performance thereunder, including, without limitation,
in connection with settlements of purchases and sales of securities, loans
of securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE KENT
FUNDS, as of the day of , 1998.
--------------------------------------
[SEAL]
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly elected
and acting of THE KENT FUNDS, a Massachusetts business trust (the
"Fund"), and further certifies that the following resolution was adopted by the
Board of Trustees of the Fund at a meeting duly held on , 1998, at which a
quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998, (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis until such time as it receives a Certificate,
as defined in the Custody Agreement, to the contrary to deposit in the
Depository, as defined in the Custody Agreement, all securities eligible
for deposit therein, regardless of the Series to which the same are
specifically allocated, and to utilize the Depository to the extent
possible in connection with its performance thereunder, including, without
limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of securities
collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE KENT
FUNDS, as of the day of , 1998.
--------------------------------------
[SEAL]
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, , hereby certifies that he or she is the
duly elected and acting of THE KENT FUNDS, a Massachusetts business trust
(the "Fund"), and further certifies that the following resolution was adopted by
the Board of Trustees of the Fund at a meeting duly held on 1998, at which
a quorum was at all times present and that such resolution has not been modified
or rescinded and is in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of ,
1998, (the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Participants Trust Company
as Depository, as defined in the Custody Agreement, all securities eligible for
deposit therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent possible
in connection with its performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE KENT
FUNDS, as of the day of , 1998.
-----------------------------------
[SEAL]
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, , hereby certifies that he or she is the duly
elected and acting of , of THE KENT FUNDS, a Massachusetts business
trust (the "Fund"), and further certifies that the following resolution was
adopted by the Board of Trustees of the Fund at a meeting duly held on
, 1998, at which a quorum was at all times present and that such
resolution has not been modified or rescinded and is in full force and effect
as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it receives
a Certificate, as defined in the Custody Agreement, to the contrary, to
accept, utilize and act with respect to Clearing Member confirmations for
Options and transaction in Options, regardless of the Series to which the
same are specifically allocated, as such terms are defined in the Custody
Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE KENT
FUNDS, as of the day of , 1998.
--------------------------------------
[SEAL]
<PAGE>
EXHIBIT D
The undersigned, , hereby certifies that he or she is the duly elected
and acting of THE KENT FUNDS, a Massachusetts business trust (the "Fund"),
further certifies that the following resolutions were adopted by the Board of
Trustees of the Fund at a meeting duly held on , 1998, at which a quorum
was at all times present and that such resolutions have not been modified or
rescinded and are in full force and effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the
Custody Agreement between The Bank of New York and the Fund dated as of
, 1998 (the "Custody Agreement") is authorized and instructed on a
continuous and ongoing basis to act in accordance with, and to rely on
Instructions (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant use of
such access codes only to Authorized Persons of the Fund as defined in the
Custody Agreement, shall establish internal safekeeping procedures to
safeguard and protect the confidentiality and availability of user and
access codes, passwords and authentication keys, and shall use Instructions
only in a manner that does not contravene the Investment Company Act of
1940, as amended, or the rules and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE KENT
FUNDS, as of the day of , 1998.
-----------------------------------
[SEAL]
<PAGE>
FOREIGN CUSTODY MANAGER AGREEMENT
AGREEMENT made as of_____________________, between each mutual fund
identified on Schedule I attached hereto (each, a "Fund," collectively, the
"Funds" and The Bank of New York ("BNY").
WITNESSETH:
WHEREAS, each Fund desires to appoint BNY as a Foreign Custody Manager on
the terms and conditions contained herein;
WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform the
duties set forth herein on the terms and condition contained herein;
NOW THEREFORE, in consideration of the mutual promises hereinafter
contained in this Agreement, each Fund and BNY hereby agrees as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "Board" shall mean the board of directors or board of trustees, as the
case may be, of each Fund.
2. "Eligible Foreign Custodian" shall have the meaning provided in the
Rule.
3. "Monitoring System" shall mean a system established by BNY to fulfill
the Responsibilities specified in clauses 1 (d) and 1 (e) of Article III of this
Agreement.
4. "Qualified Foreign Bank" shall have the meaning provided in the Rule.
5. "Responsibilities" shall mean the responsibilities delegated to BNY as
a Foreign Custody Manager with respect to each Specified Country and each
Eligible Foreign Custodian selected by BNY, as such responsibilities are more
fully described in Article III of this Agreement.
6. "Rule" shall mean Rule 17f-5 under the Investment Company Act of 1940,
as amended from time to time.
7. "Securities Depository" shall mean any securities depository or
clearing agency within the meaning of Section (a)(1)(ii) or (a)(1)(iii) of the
Rule.
<PAGE>
8. "Specified Country" shall mean each country listed on Schedule 2
attached hereto and each country, other than the United States, constituting the
primary market for a security with respect to which the relevant Fund has given
settlement instructions to The Bank of New York as custodian (the "Custodian")
under its Custody Agreement with such Fund.
ARTICLE II
BNY AS A FOREIGN CUSTODY MANAGER
1. Each Fund on behalf of its Board hereby delegates to BNY with respect
to each Specified Country the Responsibilities.
2. BNY accepts each Fund's Board's delegation of Responsibilities with
respect to each Specified Country and agrees in performing the Responsibilities
as a Foreign Custody Manager to exercise reasonable care, prudence and diligence
such as a person having responsibility for the safekeeping of the Fund's assets
would exercise.
3. BNY shall provide to each Board at such times as the Board deems
reasonable and appropriate based on the circumstances of the relevant Fund's
foreign custody arrangements written reports notifying the Board of the
placement of assets of the Fund with a particular Eligible Foreign Custodian
within a Specified Country and of any material change in the arrangements
(including, in the case of Qualified Foreign Banks, any material change in any
contract governing such arrangements and in the case of Securities Depositories,
any material change in the established practices or procedures of such
Securities Depositories) with respect to assets of the Fund with any such
Eligible Foreign Custodian.
ARTICLE III
RESPONSIBILITIES
1. Subject to the provisions of this Agreement, BNY shall with respect to
each Specified Country select an Eligible Foreign Custodian. In connection
therewith, BNY shall: (a) determine that assets of the Funds held by such
Eligible Foreign Custodian will be subject to reasonable care, based on the
standards applicable to custodians in the relevant market in which such Eligible
Foreign Custodian operates, after considering all factors relevant to the
safekeeping of such assets, including, without limitation, those contained in
paragraph (c)(1) of the Rule; (b) determine that the Funds' foreign custody
arrangements with each Qualified Foreign Bank are governed by a written contract
with the Custodian (or, in the case of a Securities Depository, by such a
contract, by the rules or established practices or procedures of the Securities
Depository, or by any combination of the foregoing) which will provide
reasonable care for the Funds' assets based on the standards specified in
paragraph (c)(1) of the Rule; (c) determine that each contract with a Qualified
Foreign Bank shall include the provisions specified in paragraph (c)(2)(i)(A)
through (F) of the Rule or, alternatively, in lieu of any or all of such
(c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines
will provide, in their entirety, the same or a greater level of care and
protection for the assets of the Funds as such specified provisions; (d) monitor
pursuant to the Monitoring System the appropriateness of maintaining the assets
of the Funds with a particular Eligible Foreign Custodian pursuant to paragraph
(c)(1) of the Rule and
2
<PAGE>
in the case of a Qualified Foreign Bank, any material change in the contract
governing such arrangement and in the case of a Securities Depository, any
material change in the established practices or procedures of such Securities
Depository; and (e) advise the Funds whenever an arrangement (including, in the
case of a Qualified Foreign Bank, any material change in the contract governing
such arrangement and in the case of a Securities Depository, any material change
in the established practices or procedures of such Securities Depository)
described in preceding clause (d) no longer meets the requirements of the Rule.
Anything in this Agreement to the contrary notwithstanding, BNY shall in no
event be deemed to have selected any Securities Depository the use of which is
mandatory by law or regulation or because securities cannot be withdrawn from
such Securities Depository, or because maintaining securities outside the
Securities Depository is not consistent with prevailing custodial practices in
the relevant market (each, a "Compulsory Depository"); it being understood
however, that for each Compulsory Depository utilized or intended to be utilized
by the Funds, BNY shall provide the Funds from time to time with information
addressing the factors set forth in Section (c)(1) of the Rule and BNY's
opinions with respect thereto so that the Funds may determine the
appropriateness of placing Fund assets therein.
2. (a) For purposes of Clauses (a) and (b) of preceding Section 1 of this
Article, with respect to Securities Depositories, it is understood that such
determination shall be made on the basis of, and limited by, publicly available
information with respect to each such Securities Depository.
(b) For purposes of clause (d) of preceding Section 1 of this Article,
BNY's determination of appropriateness shall not include, nor be deemed to
include, any evaluation of Country Risks associated with investment in a
particular country. For purposes hereof, "Country Risks" shall mean systemic
risks of holding assets in a particular country including, but not limited to,
(a) the use of Compulsory Depositories, (b) such country's financial structure,
(c) such country's prevailing custody and settlement practices, (d)
nationalization, expropriation or other governmental actions, (e) regulation of
the banking or securities industry, (f) currency controls, restrictions,
devaluations or fluctuations, and (g) market conditions which affect the orderly
execution of securities transactions or affect the value of securities.
ARTICLE IV
REPRESENTATIONS
1. Each Fund hereby represents that: (a) this Agreement has been duly
authorized, executed and delivered by the Fund, constitutes a valid and legally
binding obligation of the Fund enforceable in accordance with its terms, and no
statute, regulation, rule, order, judgment or contract binding on the Fund
prohibits the Fund's execution or performance of this Agreement; (b) this
Agreement has been approved and ratified by the Fund's Board at a meeting duly
called and at which a quorum was at all times present; and (c) the Fund's Board
or its investment advisor has considered the Country Risks associated with
investment in each Specified Country and will have considered such risks prior
to any settlement instructions being given to the Custodian with respect to any
other Specified Country.
3
<PAGE>
2. BNY hereby represents that: (a) BNY is duly organized and existing
under the laws of the State of New York, with full power to carry on its
businesses as now conducted, and to enter into this Agreement and to perform its
obligations hereunder; (b) this Agreement has been duly authorized, executed and
delivered by BNY, constitutes a valid and legally binding obligation of BNY
enforceable in accordance with its terms, and no statute, regulation, rule,
order, judgment or contract binding on BNY prohibits BNY's execution or
performance of this Agreement; and (c) BNY has established the Monitoring
System.
ARTICLE V
CONCERNING BNY
1. BNY shall not be liable for any costs, expenses, damages, liabilities
or claims, including attorneys' and accountants' fees, sustained or incurred by,
or asserted against, any Fund except to the extent the same arises out of the
failure of BNY to exercise the care, prudence and diligence required by Section
2 of Article II hereof In no event shall BNY be liable to any Fund, such Fund's
Board, or any third party for special, indirect or consequential damages, or for
lost profits or loss of business, arising in connection with this Agreement.
2. Each Fund shall indemnify BNY and hold it harmless from and against
any and all costs, expenses, damages, liabilities or claims, including
attorneys' and accountants' fees, sustained or incurred by, or asserted against,
BNY by reason or as a result of any action or inaction, or arising out of BNY's
performance hereunder, provided that no Fund shall indemnify BNY to the extent
any such costs, expenses, damages, liabilities or claims arises out of BNY's
failure to exercise the reasonable care, prudence and diligence required by
Section 2 of Article II hereof.
3. For its services hereunder, each Fund agrees to pay to BNY such
compensation and out-of-pocket expenses as shall be mutually agreed.
4. BNY shall have only such duties as are expressly set forth herein. In
no event shall BNY be liable for any Country Risks associated with investments
in a particular country.
ARTICLE VI
MISCELLANEOUS
1. This Agreement constitutes the entire agreement between each Fund and
BNY, and no provision in the Custody Agreement between such Fund and the
Custodian shall affect the duties and obligations of BNY hereunder, nor shall
any provision in this Agreement affect the duties or obligations of the
Custodian under the Custody Agreement.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to BNY, shall be sufficiently given if received by it
at its offices at 90 Washington Street, New York, New York 10286, or at such
other place as BNY may from time to time designate in writing.
4
<PAGE>
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to a Fund shall be sufficiently given if received by
it at its offices at __________________________________or at such other place as
the Fund may from time to time designate in writing.
4. In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This Agreement may not be amended or modified in any manner except by
a written agreement executed by the relevant Fund and BNY. This Agreement shall
extend to and shall be binding upon the parties hereto, and their respective
successors and assigns; provided however, that this Agreement shall not be
assignable by any Fund or BNY without the written consent of BNY or the relevant
Fund.
5. This Agreement shall be construed in accordance with the substantive
laws of the State of New York, without regard to conflicts of laws principles
thereof. Each Fund and BNY hereby consents to the jurisdiction of a state or
federal court situated in New York City, New York in connection with any dispute
arising hereunder. Each Fund hereby irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. Each Fund and BNY each hereby irrevocably waives any and all rights to
trial by jury in any legal proceeding arising out of or relating to this
Agreement.
6. The parties hereto agree that in performing hereunder, BNY is acting
solely on behalf of the relevant Fund and no contractual or service relationship
shall be deemed to be established hereby between BNY and any other person.
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
8. This Agreement shall terminate with respect to any Fund simultaneously
with the termination of the Custody Agreement between such Fund and the
Custodian, and may otherwise be terminated by a Fund (as to such Fund) or BNY
upon not less than thirty (30) days prior written notice.
5
<PAGE>
IN WITNESS WHEREOF, each Fund and BNY has caused this Agreement to be
executed by their respective officers, thereunto duly authorized, of the date
first above written.
/s/ James F. Duca
--------------------------------------
on behalf of each Fund identified on
Schedule 1 attached hereto
THE BANK OF NEW YORK
By:
Title:
6
<PAGE>
SCHEDULE 1
Kent International Growth Fund
Kent Growth and Income Fund
<PAGE>
FOREIGN CUSTODY MANAGER AGREEMENT
SCHEDULE I
Argentina Malaysia
Australia Mauritius
Austria Mexico
Bangladesh Morocco
Belgium Namibia
Bermuda Netherlands
Botswana New Zealand
Brazil Nigeria
Bulgaria Norway
Canada Pakistan
Chile Peru
China Philippines
Columbia Poland
Cyprus Portugal
Czech Republic Russia
Denmark Singapore
Easdaq Slovenia
Ecuador South Africa
Egypt Spain
Estonia Sri Lanka
Finland Swaziland
France Sweden
Germany Switzerland
Ghana Taiwan
Greece Thailand
Hong Kong Tunisia
Hungary Turkey
India Ukraine
Indonesia United Kingdom
Ireland United States
Israel Uruguay
Italy Venezuela
Ivory Coast Zambia
Japan Zimbabwe
Jordan
Kenya
Korea
Latvia
Lebanon
Lithuania
Luxembourg
<PAGE>
Exhibit (j)(1)
Independent Auditors' Consent
The Board of Trustees of
the Kent Funds:
We consent to use of our report dated February 18, 1999 for the Kent Funds as
incorporated by reference herein and to the reference to our firm under the
headings "Financial Highlights" in the Prospectus and "Custodian, Auditors and
Counsel" and "Financial Statements" in the Statement of Additional Information
included herein.
Columbus, Ohio
April 28, 1999
/s/ KPMG LLP
<PAGE>
EXHIBIT (j)(2)
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. 31 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
-------------------------------------
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania
Date: April 29, 1999
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<INVESTMENTS-AT-VALUE> 693,946,545
<RECEIVABLES> 6,316,231
<ASSETS-OTHER> 3,340
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<TOTAL-ASSETS> 700,266,116
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,138,497
<TOTAL-LIABILITIES> 3,138,497
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 697,119,620
<SHARES-COMMON-STOCK> 693,397,466<F1>
<SHARES-COMMON-PRIOR> 474,371,951<F1>
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<OVERDISTRIBUTION-GAINS> 5,073
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<NET-ASSETS> 697,127,619
<DIVIDEND-INCOME> 1,363,628
<INTEREST-INCOME> 30,020,373
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<EXPENSES-NET> 3,129,087
<NET-INVESTMENT-INCOME> 28,254,914
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<FN>
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<INVESTMENTS-AT-VALUE> 693,946,545
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<EXPENSES-NET> 3,129,087
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<DISTRIBUTIONS-OF-INCOME> 149,073<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
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<FN>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 322,725,803
<INVESTMENTS-AT-VALUE> 322,725,803
<RECEIVABLES> 1,813,435
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<TOTAL-ASSETS> 324,593,722
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<OTHER-ITEMS-LIABILITIES> 976,229
<TOTAL-LIABILITIES> 976,229
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<SHARES-COMMON-PRIOR> 211,671,569<F1>
<ACCUMULATED-NII-CURRENT> 781
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<DIVIDEND-INCOME> 275,682
<INTEREST-INCOME> 11,067,121
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<EXPENSES-NET> 1,735,660
<NET-INVESTMENT-INCOME> 9,607,143
<REALIZED-GAINS-CURRENT> 1,873
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<NET-CHANGE-FROM-OPS> 9,609,016
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<DISTRIBUTIONS-OF-INCOME> 9,596,573<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
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<NUMBER-OF-SHARES-REDEEMED> 448,191,138<F1>
<SHARES-REINVESTED> 358,257<F1>
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<FN>
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<INVESTMENTS-AT-VALUE> 322,725,803
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<FN>
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<PAGE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
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<NUMBER> 031
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<PERIOD-START> JAN-01-1998
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<PAID-IN-CAPITAL-COMMON> 572,364,316
<SHARES-COMMON-STOCK> 45,923,297<F1>
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<FN>
<F1>Institutional Class
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<NAME> THE KENT FUNDS
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<PER-SHARE-NAV-BEGIN> 15.44<F1>
<PER-SHARE-NII> 0.08<F1>
<PER-SHARE-GAIN-APPREC> 4.00<F1>
<PER-SHARE-DIVIDEND> 0.10<F1>
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Class
</FN>
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<PAGE>
<ARTICLE> 6
<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 041
<NAME> KENT INDEX EQUITY FUND
<S> <C>
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<OVERDISTRIB-NII-PRIOR> 4,723
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<GROSS-EXPENSE> 3,966,374
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<PER-SHARE-NAV-BEGIN> 19.14<F1>
<PER-SHARE-NII> 0.24<F1>
<PER-SHARE-GAIN-APPREC> 5.14<F1>
<PER-SHARE-DIVIDEND> 0.24<F1>
<PER-SHARE-DISTRIBUTIONS> 0.04<F1>
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<PER-SHARE-NAV-END> 24.24<F1>
<EXPENSE-RATIO> 0.42<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
</TABLE>
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<PAGE>
<ARTICLE> 6
<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 042
<NAME> KENT INDEX EQUITY FUND
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
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<FN>
<F1>Investor Class
</FN>
</TABLE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 051
<NAME> KENT INTERNATIONAL GROWTH FUND
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<FN>
<F1>Institutional Class
</FN>
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<PAGE>
<ARTICLE> 6
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 052
<NAME> KENT INTERNATIONAL GROWTH FUND
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<FN>
<F1>Investor Class
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<PAGE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 061
<NAME> KENT SMALL COMPANY GROWTH FUND
<S> <C>
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<FN>
<F1>Institutional Class
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<PAGE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 062
<NAME> KENT SMALL COMPANY GROWTH FUND
<S> <C>
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<FN>
<F1>Investor Class
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<PAGE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 071
<NAME> KENT SHORT TERM BOND FUND
<S> <C>
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<FN>
<F1>Institutional Class
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<PAGE>
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 072
<NAME> KENT SHORT TERM BOND FUND
<S> <C>
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<FN>
<F1>Investor Class
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</TABLE>
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<PAGE>
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<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 081
<NAME> KENT INTERMEDIATE TAX-FREE FUND
<S> <C>
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<PER-SHARE-NII> 0.45<F1>
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<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
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<PAGE>
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 082
<NAME> KENT INTERMEDIATE TAX-FREE FUND
<S> <C>
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<FN>
<F1>Investor Class
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<PAGE>
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<NUMBER> 091
<NAME> KENT INTERMEDIATE BOND FUND
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<FN>
<F1>Institutional Class
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 092
<NAME> KENT INTERMEDIATE BOND FUND
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<FN>
<F1>Investor Class
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 101
<NAME> KENT MICHIGAN MUNICIPAL BOND FUND
<S> <C>
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<FN>
<F1>Institutional Class
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<PAGE>
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<NAME> THE KENT FUNDS
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<NAME> KENT MICHIGAN MUNICIPAL BOND FUND
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<FN>
<F1>Investor Class
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<NAME> THE KENT FUNDS
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<NUMBER> 121
<NAME> KENT INCOME FUND
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<FN>
<F1>Institutional Class
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<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 122
<NAME> KENT INCOME FUND
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<FN>
<F1>Investor Class
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<PAGE>
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<NAME> THE KENT FUNDS
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<NUMBER> 131
<NAME> KENT TAX-FREE INCOME FUND
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<DISTRIBUTIONS-OF-GAINS> 600,924<F1>
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<NUMBER-OF-SHARES-REDEEMED> 2,072,941<F1>
<SHARES-REINVESTED> 10,424<F1>
<NET-CHANGE-IN-ASSETS> 11,806,071
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 92,440
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<GROSS-EXPENSE> 1,025,573
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<PER-SHARE-NAV-BEGIN> 10.65<F1>
<PER-SHARE-NII> 0.44<F1>
<PER-SHARE-GAIN-APPREC> 0.15<F1>
<PER-SHARE-DIVIDEND> 0.44<F1>
<PER-SHARE-DISTRIBUTIONS> 0.05<F1>
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<PER-SHARE-NAV-END> 10.75<F1>
<EXPENSE-RATIO> 0.81<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 132
<NAME> KENT TAX-FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 121,488,675
<INVESTMENTS-AT-VALUE> 130,032,357
<RECEIVABLES> 1,754,690
<ASSETS-OTHER> 9,624
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,796,671
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<OTHER-ITEMS-LIABILITIES> 72,111
<TOTAL-LIABILITIES> 1,626,441
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<PAID-IN-CAPITAL-COMMON> 121,514,637
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<SHARES-COMMON-PRIOR> 160,364<F1>
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<ACCUMULATED-NET-GAINS> 111,497
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,543,682
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<DIVIDEND-INCOME> 97,885
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<DISTRIBUTIONS-OF-INCOME> 73,875<F1>
<DISTRIBUTIONS-OF-GAINS> 8,888<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 130,884<F1>
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<SHARES-REINVESTED> 7,256<F1>
<NET-CHANGE-IN-ASSETS> 11,806,071
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 1,025,573
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<PER-SHARE-NAV-BEGIN> 10.67<F1>
<PER-SHARE-NII> 0.42<F1>
<PER-SHARE-GAIN-APPREC> 0.15<F1>
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<PER-SHARE-NAV-END> 10.77<F1>
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Investor Class
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 141
<NAME> KENT GOVERNMENT MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 151,354,751
<INVESTMENTS-AT-VALUE> 167,354,751
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<TOTAL-LIABILITIES> 646,076
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<SHARES-COMMON-PRIOR> 94,624,444<F1>
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<OVERDISTRIBUTION-GAINS> 766
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<DIVIDEND-INCOME> 422,930
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<EXPENSES-NET> 437,552
<NET-INVESTMENT-INCOME> 5,863,503
<REALIZED-GAINS-CURRENT> (766)
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<DISTRIBUTIONS-OF-INCOME> 5,861,605<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
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<SHARES-REINVESTED> 5,375,385<F1>
<NET-CHANGE-IN-ASSETS> 72,389,083
<ACCUMULATED-NII-PRIOR> 2,214
<ACCUMULATED-GAINS-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<AVERAGE-NET-ASSETS> 116,475,281<F1>
<PER-SHARE-NAV-BEGIN> 1.00<F1>
<PER-SHARE-NII> 0.51<F1>
<PER-SHARE-GAIN-APPREC> 0<F1>
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<PER-SHARE-NAV-END> 1.00<F1>
<EXPENSE-RATIO> 0.38<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000799700
<NAME> THE KENT FUNDS
<SERIES>
<NUMBER> 142
<NAME> KENT GOVERNMENT MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 151,354,751
<INVESTMENTS-AT-VALUE> 167,354,751
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<SHARES-COMMON-STOCK> 93,088<F1>
<SHARES-COMMON-PRIOR> 2,013<F1>
<ACCUMULATED-NII-CURRENT> 2,214
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<OVERDISTRIBUTION-GAINS> 766
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<NET-ASSETS> 167,015,544
<DIVIDEND-INCOME> 422,930
<INTEREST-INCOME> 5,878,125
<OTHER-INCOME> 0
<EXPENSES-NET> 437,552
<NET-INVESTMENT-INCOME> 5,863,503
<REALIZED-GAINS-CURRENT> (766)
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<NET-CHANGE-FROM-OPS> 5,862,737
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,898<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 124,496<F1>
<NUMBER-OF-SHARES-REDEEMED> 34,968<F1>
<SHARES-REINVESTED> 1,547<F1>
<NET-CHANGE-IN-ASSETS> 72,389,083
<ACCUMULATED-NII-PRIOR> 2,214
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 466,055
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 802,349
<AVERAGE-NET-ASSETS> 38,552<F1>
<PER-SHARE-NAV-BEGIN> 1.00<F1>
<PER-SHARE-NII> 0.51<F1>
<PER-SHARE-GAIN-APPREC> 0<F1>
<PER-SHARE-DIVIDEND> 0.51<F1>
<PER-SHARE-DISTRIBUTIONS> 0<F1>
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00<F1>
<EXPENSE-RATIO> 0.38<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Institutional Class
</FN>
</TABLE>
