The information contained herein is subject to completion of amendment. A
registration statement relating to, among other things, this prospectus has been
filed with the Securities and Exchange Commission. Securities of the Funds
referenced in this prospectus may not be sold nor may offers to buy such
securities be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities
referenced herein in any State in which such offer, solicitation or sale would
be unlawful prior to such registration or qualification under the securities
laws of any such State.
PRELIMINARY PROSPECTUS
DATED AUGUST 18, 1997
SUBJECT TO COMPLETION
TIP FUNDS
Investment Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
TIP Funds (the "Trust") provides a convenient and economical means of investing
in professionally managed portfolios of securities. This Prospectus offers
shares of the following mutual funds (each a "Fund" and, together, the "Funds"),
which are separate series of the Trust:
PENN CAPITAL SELECT FINANCIAL SERVICES FUND
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
PENN CAPITAL VALUE PLUS FUND
This Prospectus concisely sets forth the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated October 1, 1997 has been filed with the
Securities and Exchange Commission, and is available without charge by calling
1-800-224-6312. The Statement of Additional Information is incorporated into
this Prospectus by reference.
The Strategic High Yield Fund invests primarily, and may invest all of its
assets, and the Value Plus Fund invests a significant portion of its assets, in
lower rated bonds, commonly referred to as "junk bonds." These securities are
speculative and are subject to greater risk of loss of principal and interest
than investments in higher rated bonds. Because investment in such securities
entails greater risks, including risk of default, an investment in the Strategic
High Yield Fund or Value Plus Fund should not constitute a complete investment
program and may not be appropriate for all investors. Investors should carefully
consider the risks posed by an investment in the Strategic High Yield Fund or
the Value Plus Fund before investing. See "Investment Objectives and Policies,"
"Risk Factors" and the "Appendix."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
October 1, 1997
<PAGE>
TABLE OF CONTENTS
Summary................................................................... 3
Expense Summary........................................................... 5
Financial Highlights...................................................... 7
The Trust and the Funds................................................... 11
Investment Objectives..................................................... 11
Investment Policies....................................................... 11
Risk Factors.............................................................. 13
Investment Limitations.................................................... 15
The Adviser............................................................... 15
The Administrator......................................................... 16
The Transfer Agent........................................................ 17
The Distributor........................................................... 17
Portfolio Transactions.................................................... 17
Purchase and Redemption of Shares......................................... 17
Performance............................................................... 21
Taxes..................................................................... 21
General Information....................................................... 23
Description of Permitted Investments and Risk Factors..................... 25
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SUMMARY
The following provides basic information about the Penn Capital Select Financial
Services Fund (the "Select Financial Services Fund"), the Penn Capital Strategic
High Yield Bond Fund (the "Strategic High Yield Fund"), and the Penn Capital
Value Plus Fund (the "Value Plus Fund") (collectively, the "Funds"). The Funds
are three of the eleven mutual funds comprising TIP Funds (the "Trust"). This
summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in this Prospectus and in the Statement of
Additional Information.
What are the Funds' investment objectives and primary policies?
Penn Capital Select Financial Services Fund
The Select Financial Services Fund seeks to generate long term capital
appreciation. The Fund invests primarily in equity securities of companies
principally engaged in the banking and financial services industries. The
banking industry includes commercial and industrial banks, savings and loan
associations and their holding companies. The financial services industry
includes consumer and industrial finance companies, diversified financial
service companies, investment banking, securities brokerage and investment
advisory companies, leasing companies and insurance companies and other
financial services companies.
Penn Capital Strategic High Yield Bond Fund
The Strategic High Yield Fund seeks to maximize income through high current
yield and, as a secondary objective, to produce above average capital
appreciation. The Fund invests primarily in a diversified portfolio of high
yield bonds and other high yield securities.
Penn Capital Value Plus Fund
The Value Plus Fund seeks to achieve capital appreciation and above average
income with less risk than the average risk of the Standard & Poor's S&P 500
Index ("S&P 500 Index"). Generally, one third of the Fund's assets will be
invested in large cap value equity securities, one third invested in small
cap value equity securities and one third invested in bonds (primarily high
yield securities) in order to generate interest income.
What are the risks involved with investing in the Funds? The investment policies
of the Funds entail certain risks and considerations of which investors should
be aware. The Value Plus Fund will be exposed to the risks of investing in
equity securities. The Select Financial Services Fund will focus its investments
in the U.S. banking and financial services industries. Although diversified
throughout the industry, to the extent that it invests a significant portion of
its assets in the banking and financial services industries, it is subject to
the risks associated with investing in issuers in those industries. The
Strategic High Yield Fund invests in non-investment grade fixed income
securities that have speculative characteristics. In addition, to varying
degrees, the Funds may
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borrow money and utilize leveraging techniques. The Funds may invest in
securities that fluctuate in value, and the investors should expect the Funds'
net asset value per share to fluctuate in value. The value of equity securities
may be affected by the financial markets as well as by developments impacting
specific issuers. The values of fixed income securities tend to vary inversely
with interest rates and may be affected by market and economic factors as well
as by developments impacting specific issuers. The Funds' high yield securities
may be volatile and are subject to greater amounts of credit risk than
investment grade issuers.
For more information about the Fund, see "Investment Objectives," "Investment
Policies," "Risk Factors," and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? Penn Capital Management Company, Inc. (the "Adviser") serves
as the investment adviser to the Funds. See "Expense Summary" and "The Adviser."
Who is the Administrator? SEI Fund Resources (the "Administrator") serves as the
administrator and shareholder servicing agent for the Funds. See "Expense
Summary" and "The Administrator."
Who is the Distributor? SEI Investments Distribution Co. (the "Distributor")
serves as the distributor of the Funds' shares. See "The Distributor."
Who is the Transfer Agent? DST Systems, Inc. serves as the transfer agent and
dividend disbursing agent for the Trust. See "The Transfer Agent."
Is there a sales load? No, shares of the Funds are offered on a no-load basis.
Is there a minimum investment? The Funds require a minimum initial investment of
$2,500 ($2,000 for IRAs), which the Distributor may waive at its discretion.
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to 4:00 p.m. Eastern time. Redemption orders received by
the Transfer Agent prior to 4:00 p.m. Eastern time on any Business Day will be
effective that day. The purchase and redemption price for shares is the net
asset value per share determined as of the end of the day the order is
effective. See "Purchase and Redemption of Shares."
How are distributions paid? The Funds distribute substantially all of their net
investment income (exclusive of capital gains) in the form of periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Deferred Sales Load.................................................... None
Redemption Fees (1).................................................... None
Exchange Fees.......................................................... None
- ----------------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- ----------------------------------------------------------------------------
Select Financial Strategic
Services High Yield Value Plus
Fund Fund Fund
- ----------------------------------------------------------------------------
Advisory Fees (after
fee waivers)(1) .99% .75% .99%
12b-1 Fees None None None
Other Expenses
(after expense
reimbursements, if
applicable)(2) .41% .25% .41%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Total Operating Expenses
(after fee
waivers or expense
reimbursements)(3) 1.40% 1.00% 1.40%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(1) The Adviser has agreed, on a voluntary basis, to waive its advisory fee to
the extent necessary to keep the "Total Operating Expenses" of the Select
Financial Services, Strategic High Yield and Value Plus Funds during the
current fiscal year from exceeding 1.40%, 1.00% and 1.40%, respectively.
Absent these fee waivers, Advisory Fees would be 1.00%, .75% and 1.00%,
respectively. The Adviser reserves the right to terminate its waivers at
any time in its sole discretion.
(2) Absent expense reimbursements by the Adviser, "Other Expenses" for the
Strategic High Yield Fund would be .41%. "Other Expenses" are estimated for
the current fiscal year.
(3) Absent fee waivers or expense reimbursements. "Total Operating Expenses"
for the Select Financial Services, Strategic High Yield and Value Plus
Funds would be 1.41%, 1.16% and 1.41%, respectively, based on current
expectations and assumptions.
EXAMPLE
- ----------------------------------------------------------------------------
You would pay the following expenses on a $1,000 1 year 3 years
investment in the Fund assuming (1) a 5% annual ------ -------
return and (2) redemption at the end of each time
period.
Select Financial Services Fund $14 $44
Strategic High Yield Fund $10 $32
Value Plus Fund $14 $44
- ----------------------------------------------------------------------------
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The example is based upon total operating expenses of the Funds after waivers,
as shown in the expense table. The example should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. The purpose of the expense table and example is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by shareholders of the Funds. Additional
information may be found under "The Adviser" and "The Administrator."
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THE TRUST AND THE FUNDS
TIP Funds (the "Trust") offers shares in eleven separately-managed mutual funds,
each of which is a separate series of the Trust. Each share of each mutual fund
represents an undivided, proportionate interest in that mutual fund. This
Prospectus offers shares of the Trust's Penn Capital Select Financial Services
Fund (the "Select Financial Services Fund"), the Penn Capital Strategic High
Yield Bond Fund (the "Strategic High Yield Fund"), and the Penn Capital Value
Plus Fund (the "Value Plus Fund") (collectively, the "Funds").
INVESTMENT OBJECTIVE
Penn Capital Select Financial Services Fund -- The Select Financial Services
Fund seeks to generate long term capital appreciation.
Penn Capital Strategic High Yield Bond Fund --The Strategic High Yield Fund
seeks to maximize income through high current yield and, as a secondary
objective, to produce above average capital appreciation.
Penn Capital Value Plus Fund -- The Value Plus Fund seeks to achieve capital
appreciation and above average income with less risk than the average risk of
the S&P 500 Index.
There can be no assurance that the Funds will achieve their investment
objective.
INVESTMENT POLICIES
Penn Capital Select Financial Services Fund
The Select Financial Services Fund invests primarily (and, under normal
conditions, at least 65% of its total assets) in the equity securities of
companies principally engaged in the banking and financial services industries.
Examples of these companies in the financial services sector include commercial
banks, savings and loan associations, brokerage companies, insurance companies,
real estate and leasing companies and companies that span across these segments.
Generally speaking, the Fund will hold a diversified portfolio of companies with
strong fundamentals, many of which the "Adviser believes hold the potential to
be acquired at a premium to their trading prices, measured at the time of their
original acquisition by the Fund (takeover candidates).
Any remaining assets may be invested in equity securities and fixed income
securities, warrants and rights to purchase common stocks, and in ADRs. The Fund
may also purchase shares of other investment companies and foreign securities,
and may purchase high yield securities (otherwise known as "junk bonds") as a
means of seeking to generate current income.
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The Fund may invest in non-rated securities or in securities rated in the lowest
ratings categories established by the Standard & Poor's Corporation ("S&P")
and/or Moody's Investors Service, Inc. ("Moody's"). Securities rated below
investment grade will not constitute more than 15% of the Select Financial
Services Fund's total assets. See Appendix A for a discussion of these ratings.
Penn Capital Strategic High Yield Bond Fund -- The Strategic High Yield Fund
invests primarily (and, under normal conditions, at least 65% of its total
assets) in a diversified portfolio of high yield securities (otherwise known as
"junk bonds"). Securities and other financial instruments of issuers that may or
may not be paying interest on a current basis and that are currently
experiencing financial difficulties including, potentially, companies which are
undergoing or are likely to undergo financial restructuring or liquidation, both
under and outside of Federal Bankruptcy Code proceedings, are also included in
the high yield universe and may be acquired by the Fund. The Fund invests
primarily in publicly traded securities, and, to a lesser extent, privately
placed restricted securities and other financial instruments for which there is
a more limited trading market.
The Adviser believes that the market for high yield securities is relatively
inefficient compared to other securities due to the limited availability of
information on such securities, the lack of extensive institutional research
coverage of and market making activity with respect to many issuers of such
securities, the complexity and difficulty of evaluation of such securities and
the limited liquidity, at times, of such securities. The Adviser intends to
exploit these inefficiencies using its knowledge and experience in the high
yield market. The Adviser seeks to reduce risk through diversification, credit
analysis and attention to current developments and trends in both the economy
and financial markets.
The Fund may invest in non-rated securities or in securities rated in the lowest
ratings categories established by S&P and/or Moody's. See Appendix A for a
discussion of these ratings.
Any remaining assets may be invested in equity securities and investment grade
fixed income securities. In addition, to a limited extent, the Fund will
selectively utilize leverage in order to seek to further increase the Fund's
yield, and may borrow money in connection with interest rate arbitrage
transactions.
Penn Capital Value Plus Fund -- The Value Plus Fund invests primarily (and,
under normal conditions, at least 65% of its total assets) in a diversified
portfolio of equity securities that may or may not pay dividends but whose main
contribution to total return is intended from capital appreciation. The Fund
will invest any remaining assets in fixed-income securities, cash and money
market instruments, and may invest up to 35% of its assets in high yield
securities.
The Fund seeks to provide, through a combination of income and capital
appreciation, a total return consistent with a reasonable level of risk by
investing in value equity securities and in fixed income obligations, including
high yield securities. The Fund strives to secure a current yield appreciably
higher than the average dividend yield of the companies comprising the S&P 500
Index. Typically, portfolios with high current income also exhibit less
volatility and superior returns in down markets. The Fund actively seeks
opportunity and value in all parts of a company's capital structure, including
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<PAGE>
common and preferred stocks, as well as investment grade and high yield
corporate and convertible bonds. Typically, one-third of the Fund's assets will
be invested in large cap value equity securities, one third in small cap value
equity securities and one third in bonds (primarily high yield securities) in
order to generate interest income.
The Fund will invest primarily in publicly-traded securities, yet will maintain
the right to purchase private securities for which there is a more limited
trading market. The Fund generally seeks diversity both in terms of industries
and issuers, but may invest relatively high proportions of its assets in a
single industry or issuer. The Fund will also from time to time invest in the
securities of companies engaged in an initial public offering.
The fixed income investments of the Fund consist primarily, but not exclusively,
of cash paying, high yield corporate bonds. The Fund may invest in non-rated
securities or in securities rated in the lowest ratings categories established
by S&P and/or Moody's. See Appendix A for a discussion of the these ratings.
For a further description of these types of instruments see "Description of
Permitted Investments and Risk Factors" in the Statement of Additional
Information.
ALL FUNDS
Each Fund may invest in repurchase agreements, which entail a risk of loss
should the seller default on its obligation to repurchase the security which is
the subject of the transaction.
Each Fund may participate in a securities lending program which entails a risk
of loss should a borrower fail financially.
Each Fund may, although they have no present intention to do so, invest a
portion of its assets in derivatives, including futures, options, forwards and
swaps. Futures contracts, options, options on futures contracts, forwards and
swaps entail certain costs and risks, including imperfect correlation between
the value of the securities held by a Fund and the value of the particular
derivative instrument, and the risk that the Fund could not close out a futures
or options position when it would be most advantageous to do so.
Each Fund may invest in certain instruments such as certain types of mortgage
securities and when-issued securities, and may, to a limited extent, borrow
money and utilize leveraging techniques. In addition, the Strategic High Yield
Fund will utilize leverage and borrow money in order to achieve its investment
objective. These investments and techniques, along with certain transactions
involving futures, options, forwards and swaps, require a Fund to segregate some
or all of its cash or liquid securities to cover its obligations pursuant to
such instruments or techniques. As asset segregation reaches certain levels, a
Fund may lose flexibility in managing its investments properly, responding to
shareholder redemption request, or meeting other obligations and may be forced
to sell other securities that it wanted to retain or to realize unintended gains
or losses.
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<PAGE>
Investments in floating rate securities (floaters) and inverse floating rate
securities (inverse floaters) and mortgage-backed securities (mortgage
securities), including principal-only and interest-only stripped mortgage-backed
securities (SMBs), may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on underlying
mortgage assets).
Each Fund may also invest in federal, state and municipal government
obligations, investment grade corporate bonds, foreign securities, including
emerging market securities, zero coupon, pay-in-kind and deferred payment bonds,
variable and floating rate securities, money market instruments, shares of other
investment companies and cash equivalents, and may invest up to 20% of its
assets in American Depository Receipts (ADRs).
Each Fund may invest up to 15% of its net assets in illiquid securities, and for
temporary defensive purposes, may invest up to 100% of its total assets in money
market instruments (including U.S. Government securities, bank obligations,
commercial paper rated in the highest rating category by an NRSRO) and shares of
money market investment companies and may hold a portion of its assets in cash.
RISK FACTORS
Prospective investors in the Funds should consider the following
factors as they apply to each Fund's allowable investments and policies.
Equity Securities -- The Funds may invest in public and privately issued equity
securities, including common and preferred stocks, warrants, rights to subscribe
to common stock and convertible securities. Investments in equity securities in
general are subject to market risks that may cause their prices to fluctuate
over time. The value of securities convertible into equity securities, such as
warrants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision. Fluctuations in the value
of equity securities in which a Fund invests will cause the net asset value of
that Fund to fluctuate. An investment in such funds may be more suitable for
long-term investors who can bear the risk of short-term principal fluctuations.
The Funds may invest to a significant degree in equity securities of smaller
institutions, including, but not limited to, those within the banking and
financial services industries. Any investment in smaller or medium
capitalization companies involves greater risk than that customarily associated
with investments in larger, more established companies. This increased risk may
be due to the greater business risks of smaller size, limited markets and
financial resources, narrow product lines and lack of depth of management. The
securities of smaller companies are often traded in the over-the-counter market
and if listed on a national securities exchange may not be traded in volumes
typical for that exchange. Thus, the securities of smaller-sized companies are
likely to be less liquid, and subject to more abrupt or erratic market movements
than securities of larger, more established companies.
Financial Services Industry -- To the extent that the Select Financial Services
Fund invests a significant percentage of its assets in the banking and financial
services industries, it is subject to
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<PAGE>
risks associated with those industries. The companies within the banking and
financial services industries are subject to extensive regulation, rapid
business changes, volatile performance dependent upon the availability and cost
of capital and prevailing interest rates and significant competition. General
economic conditions significantly affect these companies. Credit and other
losses resulting from the financial difficulty of borrowers or other third
parties have a potentially adverse effect on companies in this industry.
Investment banking, securities brokerage and investment advisory companies are
particularly subject to government regulation and the risks inherent in
securities trading and underwriting activities. Insurance companies are
particularly subject to government regulation and rate setting, potential
anti-trust and tax law changes, and industry-wide pricing and competition
cycles. Property and casualty insurance companies may also be affected by
weather and other catastrophes. Life and health insurance companies may be
affected by mortality and morbidity rates, including the effects of epidemics.
Individual insurance companies may be exposed to reserve inadequacies, problems
in investment portfolios and failures to reinsurance carriers.
Fixed Income Securities -- The market value of fixed income investments will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes by recognized agencies in the rating of any
fixed income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of these securities will not necessarily affect cash income derived
from these securities, but will affect the investing Fund's net asset value.
Investment grade bonds include securities rated BBB by S&P or Baa by Moody's,
which may be regarded as having speculative characteristics as to repayment of
principal. If a security is downgraded, the Adviser will review the situation
and take appropriate action.
High Yield Securities -- High yield securities include, but are not limited to,
bonds and preferred stock paying current cash coupons or dividends,
payment-in-kind bonds and preferred stock, zero coupon bonds, interests in term
loans and in revolving credit facilities (or combinations thereof), convertible
securities, units of bonds and warrants or stock, and other securities and
financial instruments, including those on which the issuer is unable to pay
stated dividends or interest payments on a current basis. Investments in high
yield securities involve market risks, credit risks and call risks. Market risks
relate to general interest rate fluctuations. As the general level of interest
rates rise, the market price of medium and long-term securities to general
interest rates fluctuates. High yield securities are generally medium
term bonds and therefore are less sensitive than long-term securities to general
interest rate fluctuations. Credit risks relate to the continuing ability of the
issuer of a security to pay the stated interest or dividends and ultimately to
repay principal upon maturity. Discontinuation of such payments could
substantially adversely affect the market price of the security. Call risks
arise from early
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<PAGE>
call features that many high-yield securities contain. In addition, the Funds
may invest in securities on which the issuer is not currently paying the full
amount, or any, of the stated interest or dividends.
The high yield market consists primarily of fixed income securities that are not
rated or that are rated below investment grade (i.e., Ba1 or lower rating by
Moody's and BB+ or lower by S&P), including securities of issuers subject to
proceedings under the Federal Bankruptcy Code. The market for such securities is
relatively inefficient due to its complexity and the limited availability of
information on such securities. Most of these securities pay high current yield,
which provides a cushion against potential price volatility so long as current
payments are continued.
Securities of Foreign Issuers -- Investments in the securities of foreign
issuers may subject the Funds to investment risks that differ in some respects
from those related to investments in securities of U.S. issuers. Such risks
include future adverse political and economic developments, possible imposition
of withholding taxes on income, possible seizure, nationalization or
expropriation of foreign deposits, possible establishment of exchange controls
or taxation at the source or greater fluctuation in value due to changes in
exchange rates. Foreign issuers of securities often engage in business practices
different from those of domestic issuers of similar securities, and there may be
less information publicly available about foreign issuers. In addition, foreign
issuers are, generally speaking, subject to less government supervision and
regulation than are those in the United States. Investments in securities of
foreign issuers are frequently denominated in foreign currencies and the value
of the Funds' assets measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and the Funds may incur costs in connection with conversions between various
currencies. Moreover, investments in emerging market nations may be considered
speculative, and there may be a greater potential for nationalization,
expropriation or adverse diplomatic developments (including war) or other events
which could adversely effect the economies of such countries or investments in
such countries.
Portfolio Turnover -- The annual portfolio turnover rate for the Select
Financial Services Fund, under normal circumstances, is not expected to exceed
200%. The annual turnover rate for the Strategic High Yield Fund, under normal
circumstances, is not expected to exceed 200%. Under normal circumstances, the
annual turnover rate for the Value Plus Fund is not expected to exceed 200%. An
annual portfolio turnover rate in excess of 100% may result from the Adviser's
investment strategy or from prevailing market conditions. Portfolio turnover
rates in excess of 100% may result in higher transaction costs, including
increased brokerage commissions, and higher levels of taxable capital gain. See
"Taxes."
INVESTMENT LIMITATIONS
The investment objectives of the Funds and certain of the investment limitations
set forth here and in the Statement of Additional Information are fundamental
policies of the Funds. Fundamental policies cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares.
1. Each Fund may not: (i) purchase securities of any issuer (except securities
issued or
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guaranteed by the United States Government, its agencies or instrumentalities
and repurchase agreements involving such securities) if, as a result, more than
5% of the total assets of the Fund would be invested in the securities of such
issuer; or (ii) acquire more than 10% of the outstanding voting securities of
any one issuer. This restriction applies to 75% of each Fund's total assets.
2. The Funds may not purchase any securities which would cause 25% or more of
the total assets of such Fund to be invested in the securities of one or more
issuers conducting their principal business activities in the same industry,
provided that this limitation does not apply to obligations issued or guaranteed
by the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities.
3. Each Fund may not borrow money in an amount exceeding 33 1/3% of the value of
its total assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or require a Fund
to segregate assets are not considered to be borrowings. Asset coverage of at
least 300% is required for all borrowings, except where a Fund has borrowed
money for temporary purposes in amounts not exceeding 5% of its total assets. A
Fund will not purchase securities while its borrowings exceed 5% of its total
assets.
The foregoing percentages (except the limitation on borrowing) will apply at the
time of the purchase of a security.
THE ADVISER
Penn Capital Management Company, Inc. ("Penn Capital" or the "Adviser"), 52
Haddonfield-Berlin Road, Suite 1000, Cherry Hill, New Jersey 08034, is a
professional investment management firm founded in 1987 and registered as an
investment adviser under the Investment Advisers Act. Richard A. Hocker is a
founding partner and Chief Investment Officer of the Adviser, an investment
management firm that manages the investment portfolios of institutions and high
net worth individuals and which currently has assets under management of
approximately $____ million. The Adviser employs a staff of 17 and manages
monies in a variety of investment styles through either separate account
management or one of its private investment funds.
The Adviser serves as the investment adviser for the Funds under an investment
advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Adviser makes the investment decisions for the assets of the Funds and
continuously reviews, supervises and administers the Funds' investment programs,
subject to the supervision of, and policies established by, the Trustees of the
Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the average daily net assets of
the Select Financial Services Fund, .75% of the average daily net assets of the
Strategic High Yield Fund, and 1.00% of the average daily net assets of the
Value Plus Fund. The Adviser has voluntarily agreed to waive all or a portion
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of its fee and to reimburse expenses of the Select Financial Services, Strategic
High Yield and Value Plus Funds in order to limit their total operating expenses
(as a percentage of average daily net assets on an annualized basis) to not more
than 1.40%, 1.00% and 1.40%, respectively. The Adviser reserves the right, in
its sole discretion, to terminate these voluntary fee waivers and reimbursements
at any time.
The Funds are managed by a team consisting of certain principals of the Adviser.
The Select Financial Services and Value Plus Funds are managed by Richard A.
Hocker. Scott D. Schumacher, a Senior Analyst, assists Mr. Hocker in managing
the Select Financial Services and Value Plus Funds. The Strategic High Yield
Fund is co-managed by Richard A. Hocker and Kathleen A. News.
Prior to founding the Adviser, Mr. Hocker was a shareholder and Senior Portfolio
Manager of Delaware Management Co., an investment management firm which, during
Mr. Hocker's tenure, increased its assets under management from $300 million to
$21 billion. At Delaware Management Co., Mr. Hocker was instrumental in
developing and managing a variety of mutual funds, including Delchester Bond
Fund and Delaware Cash Reserve, and where he personally managed, at its height,
approximately $2 billion of assets. Additionally, Mr. Hocker is the founder and
Chairman of the Board of Covenant Bank, a community bank based in Haddonfield,
N.J., with approximately $435 million in assets. As Chairman of Covenant Bank,
Mr. Hocker has been the senior negotiator for acquisitions of three financial
institutions, as well as the purchases of individual branches of regional banks
that Covenant Bank has completed since 1992.
Kathleen A. News, a co-founder of the Adviser, serves as the Managing Director
of the Adviser and co-portfolio manager of the Strategic High Yield Fund. Ms.
News has over 20 years of investment experience at both the Adviser and Delaware
Management Co., including over ___ years managing high yield portfolios. While
at Delaware, Ms. News served as a portfolio manager for Delaware Cash Reserve,
as well as managing fixed income accounts for various Fortune 500 institutions.
Scott D. Schumacher, a Senior Analyst of the Adviser, assists Mr. Hocker in
managing the Select Financial Services and Value Plus Funds. He has been
employed by the Adviser since 1987. Mr. Schumacher began working with the
investment team in 1992. As the Adviser's senior analyst, Mr. Schumacher is
directly responsible for researching the financial services sector and
monitoring credit positions of existing accounts.
Penn Capital's Financial Services Industry Performance Information: The Adviser,
and Mr. Hocker in particular, have extensive experience in the banking and
financial services industries. In addition to his experience as founder of a
regional bank with over $435 million in assets, since 1995, Mr. Hocker has been
the lead portfolio manager of a partnership (the "Penn Capital Bank
Partnership") which seeks to capitalize on the returns available due to the
consolidation trends in the banking and financial services industries. The
following table presents historical performance data for that partnership. This
data compares the performance of that partnership against the NASDAQ Combined
Bank Index. The computed total rates of return include the impact of capital
appreciation as well as the
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reinvestment of interest and dividends. This does not indicate how the Select
Financial Services Fund may perform in the future.
Penn Capital NASDAQ Combined
Time Period Bank Partnership Bank Index(1)
One year ended 3/31/97: 43.36%* 30.91%*
Since Inception (3/27/95): 35.66%* 33.81%*
* Annualized.
(1) The NASDAQ Combined Bank Index (the "Bank Index") is a capitalization-
weighted index designed to measure the performance of all NASDAQ stocks
in the banking sector, which consists of 344 stocks. The Bank Index is
unmanaged and reflects the reinvestment of dividends.
The performance figures for the partnership are net of advisory fees
and net of the effect of leverage on the partnership, but do not
reflect a performance allocation payable to the Adviser by the
partnership. The effect of deducting operating expenses on the Fund's
annualized performance, including the compounding effect over time, may
be substantial.
Penn Capital's High Yield Performance Information: In November 1987, the Adviser
instituted a managed "defensive" high yield investment philosophy for its
clients which concentrates in first- and second-tier high yield securities. In
December 1989, the Adviser instituted a managed "active" high yield investment
philosophy which concentrates in riskier, third- and fourth-tier high yield
securities and financial instruments, and which may overweight investments in a
single industry, issuer or class of security. These "defensive" and "active"
philosophies were developed over a lengthy period of time by the Adviser's
portfolio managers, beginning while they were at Delaware Management Co. The
Strategic High Yield Fund combines elements of both of the Adviser's high yield
investment philosophies.
The following table presents historical performance data that is a composite of
all discretionary high yield accounts greater than $1 million under management
for at least one full quarter. This data compares the performance of these
accounts against the CS First Boston High Yield Index and the Merrill Lynch High
Yield Index. The computed total rates of return include the impact of capital
appreciation as well as the reinvestment of interest and dividends. This data
does not indicate how the Strategic High Yield Fund may perform in the future.
Penn Capital CS First Boston Merrill Lynch High
Time Period High Yield Composite High Yield Index(1) Yield Index(2)
One year ended
3/31/97: 12.13%* 11.66%* 10.82%*
Three years ended
3/31/97: 12.99%* 10.26%* 10.73%*
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Five years ended
3/31/97: 13.87%* 11.20%* 11.70%*
Since Inception
(10/31/87): 14.66%* 12.40%* 12.05%*
* Annualized.
(1) The CS First Boston High Yield Index (the "CS First Boston Index") is
an unmanaged, trader-priced portfolio constructed to mirror the public
high yield debt market. Revisions to the Index are effected weekly. The
CS First Boston Index has several modules representing different
sectors of the high yield market, including cash paying, zerofix,
pay-in-kind, and defaulted modules. The Index is unmanaged and reflects
the reinvestment of dividends.
(2) The Merrill Lynch High Yield Index (the "Merrill High Yield Index")
consists of below investment grade corporate securities. High yield
bonds contain higher credit risks than investment grade securities,
thereby increasing the possibility that some issues will not be able to
make timely interest payments and may be in default. The Index is
unmanaged and reflects the reinvestment of dividends.
The performance figures for the Adviser's accounts described above are
net of advisory fees. Some of the accounts comprising the Adviser's
composite utilize leverage and are subject to performance fees. The
Adviser's high yield composite reflects the effect of leverage, but
does not reflect the deduction of a performance allocation for any
account. Prior to December 1989, the Adviser managed only defensive
high yield accounts. Starting in December 1989, the Adviser's high
yield composite reflects both active and defensive high yield accounts.
The effect of deducting operating expenses on the Fund's annualized
performance, including the compounding effect over time, may be
substantial.
Penn Capital's Value/Income Performance Information: The Adviser has
considerable experience investing in value-oriented equity securities. The
Adviser's value/income style, which typically involves a two-thirds allocation
to equity securities (50% of which are dividend-paying, large cap equity
securities and 50% of which are small cap value equity securities) and a
one-third allocation to fixed income securities (including high yield
securities), seeks to augment its value style by capitalizing on the Adviser's
high yield expertise. The Adviser utilizes a contrarian investment style, with
attention directed toward those companies offering the best combination of such
quality criteria as strong market share, solid management and high normalized
return on capital. The Adviser has been managing a value/income partnership (the
"Penn Capital Value/Income Partnership") using this approach since February
1993. The following table presents historical performance data for that
partnership. This data compares the performance of the partnership to that of
the Russell 2000 Index and the S&P 500 Index. The computed total rates of return
include the impact of capital appreciation as well as the reinvestment of
interest and dividends. This data does not indicate how the Value Plus Fund may
perform in the future.
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Penn Capital
Value/Income Russell 2000 S&P 500
Time Period Partnership Index(1) Index(2)
One year ended 3/31/97: 13.75%* 3.56%* 19.82%*
Two years ended 3/31/97: 18.61%* 14.61%* 25.78%*
Three years ended 3/31/97: 16.71%* 10.91%* 22.29%*
Since Inception (2/28/93): 19.88%* 11.16%* 16.94%*
* Annualized.
(1) The Russell 2000 Index (the "Russell 2000 Index") is comprised of the
smallest 2000 companies in the Russell 3000 Index, representing
approximately 11% of the total market capitalization of the Russell
3000 Index. The Russell 2000 Index is unmanaged and reflects the
reinvestment of dividends.
(2) The Standard & Poor's 500 Composite Index (the "S&P 500 Index") is a
broad-based measure of the change in the aggregate market value of 500
common stocks (primarily, but not entirely, stocks traded on the New
York Stock Exchange), which include 400 industrial stocks, 40 financial
stocks, 40 utility stocks, and 20 transportation stocks. It represents
roughly 70% of the total U.S. equity market capitalization with
slightly less than 10% of the stock population represented.
The performance figures for the partnership are net of advisory fees
and net of the effect of leverage on the partnership. The effect of
deducting operating expenses on the Fund's annualized performance,
including the compounding effect over time, may be substantial.
The Penn Capital Bank Partnership had approximately $3 million in assets as of
March 31, 1997. Penn Capital's High Yield Composite results are a dollar
weighted composite of fully discretionary, separately managed accounts that are
over $1 million in size under the Adviser's management for at least one full
quarter. The Penn Capital High Yield Composite consists of 17 accounts with
approximately $132 million in assets (9% "defensive" high yield accounts and 91%
"active" high yield accounts). The Penn Capital Value/Income Partnership had
approximately $12 million in assets as of March 31, 1997.
The modified Bank Administration Institute (BAI) method is used to compute a
time weighted rate of return in accordance with standards set by the Association
of Investment Management and Research (AIMR). The information above does not
reflect all of Penn Capital's assets under management, and may not accurately
reflect the performance of all accounts it manages.
ALL INFORMATION PRESENTED RELIES ON DATA SUPPLIED BY THE ADVISER AND STATISTICAL
SERVICES, REPORTS OR OTHER SOURCES BELIEVED BY THE TRUST TO BE RELIABLE. IT HAS
NOT BEEN VERIFIED OR AUDITED.
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THE ADMINISTRATOR
SEI Fund Resources (the "Administrator") provides the Trust with administrative
services, including regulatory reporting and all necessary office space,
equipment, personnel, and facilities.
For these administrative services, the Administrator is entitled to a minimum
fee from each Fund of $75,000. Once a Fund's assets reach $62.5 million, it will
be charged its asset-based fee, which is calculated daily and paid monthly, at
an annual rate of .12% of each Fund's average daily net assets up to $75
million, .10% on the next $75 million of such assets, .09% on the next $150
million of such assets, .08% of the next $300 million of such assets, and .075%
of such assets in excess of $600 million.
The Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer agent and dividend disbursing agent for
the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
Certain broker-dealers assist their clients in the purchase of shares from the
Distributor and charge a fee for this service in addition to the Funds' public
offering price.
PORTFOLIO TRANSACTIONS
The Funds may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation. The Adviser obtains its research information from a number of
sources, including large brokerage houses, trade and financial journals and
publications, corporate reports, rating service manuals, and interviews with
corporate executives and other industry sources. The Adviser may select brokers
on the basis of the research, statistical and pricing services they provide to a
Fund, as well as on the basis of the Adviser's business relationship with the
brokers. A commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same transactions,
provided that such commissions are in compliance with the Securities Exchange
Act of 1934, as amended, and that the Adviser determines in good faith that the
commission is reasonable in terms of either the transaction or the overall
responsibility of the Adviser to the Funds and the Adviser's other clients. The
Adviser may direct commission business for the Funds to designated
broker-dealers
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(including the Distributor) in connection with such broker-dealers' payment of
certain Fund expenses.
Since shares of the Funds are not marketed through intermediary broker-dealers,
the Funds do not have a practice of allocating brokerage or effecting principal
transactions with broker-dealers on the basis of sales of shares which may be
made through such firms. However, the Adviser may place orders for the Funds
with qualified broker-dealers who refer clients to the Funds.
Some securities considered for investment by a Fund may also be appropriate for
other accounts and/or clients served by the Adviser. If the purchase or sale of
securities consistent with the investment policies of a Fund and another of the
Adviser's accounts and/or clients are considered at or about the same time,
transactions in such securities will be allocated among the Fund and the other
accounts and/or clients in a manner deemed equitable by the Adviser.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of the Funds directly through the
Transfer Agent at: TIP Funds, P.O. Box 419805, Kansas City, Missouri 64141-6805,
by mail or wire transfer. All shareholders may place orders by telephone; when
market conditions are extremely busy, it is possible that investors may
experience difficulties placing orders by telephone and may wish to place orders
by mail. Purchases and redemptions of shares of the Funds may be made on any
Business Day.
The minimum initial investment in each Fund is $2,500 ($2,000 for IRAs), and
subsequent purchases must be at least $500. The Distributor may waive these
minimums at its discretion. No minimum applies to subsequent purchases effected
by dividend reinvestment.
Minimum Account Size - Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any account if, as the
result of redemptions, the value of that account drops below $2,500. You will be
allowed at least 60 days, after notice by the Fund, to make an additional
investment to bring your account value up to at least $2,500 before the
redemption is processed.
Certain brokers assist their clients in the purchase or redemption of shares and
charge a fee for this service in addition to the Funds' public offering price.
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Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft
(payable to the Funds) for $2,500 or more ($2,000 for IRAs), together with a
completed Account Application to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805. Third-Party checks, credit cards, credit card checks and
cash will not be accepted. When purchases are made by check (including certified
or cashier's checks), redemption proceeds will not be forwarded until the check
providing for the investment being redeemed has cleared (which may take up to 15
days). Subsequent investments may also be mailed directly to the Transfer Agent.
Purchases by Wire Transfer
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of a Fund by requesting their bank to
transmit funds by wire to: United Missouri Bank of Kansas, N.A.; ABA
#10-10-00695; for Account Number 98-7060-116-8; Further Credit:
[______________________Fund]. The shareholder's name and account number must be
specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
General Information Regarding Purchases
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment before 4:00 p.m., Eastern time. A purchase
request is in good order if it is complete and accompanied by the appropriate
documentation, including an Account Application and additional documentation
required. Purchase requests in good order received after 4:00 p.m., Eastern
time, will be effective the next Business Day. Payment may be made by check or
readily available funds. The purchase price of shares of each Fund is the Fund's
net asset value per share next determined after a purchase order is effective.
Purchases will be made in full and fractional shares of the Funds calculated to
three decimal places. The Trust will not issue certificates representing shares
of the Funds.
If a check received for the purchase of shares does not clear, the purchase will
be canceled, and the investor could be liable for any losses or fees incurred.
The Trust reserves the right to reject a purchase order when the Trust
determines that it is not in the best interest of the Trust or its shareholders
to accept such order.
Shares of each Fund may be purchased in exchange for securities to be included
in that Fund, subject to the Adviser's or Administrator's determination that
these securities are acceptable.
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Securities accepted in such an exchange will be valued at their market value.
All accrued interest and subscription or other rights that are reflected in the
market price of accepted securities at the time of valuation become the property
of that Fund and must be delivered by the shareholder to that Fund upon receipt
from the issuer.
The Adviser or Administrator will not accept securities in exchange for Fund
shares unless (1) such securities are appropriate for the Fund at the time of
the exchange; (2) the shareholder represents and agrees that all securities
offered to the Fund are not subject to any restrictions upon their sale by the
Fund under the Securities Act of 1933, as amended, or otherwise; and (3) prices
are available from an independent pricing service approved by the Trust's Board
of Trustees.
Systematic Investment Plan - A shareholder may also arrange for periodic
additional investments in a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
Exchanges
Shareholders of the Funds may exchange their shares for shares of the other TIP
Funds that are then offering their shares to the public. Exchanges are made at
net asset value. An exchange is considered a sale of shares and may result in
capital gain or loss for federal income tax purposes. The shareholder must have
received a current prospectus for the new Fund before any exchange will be
effected, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order by 4:00 p.m., Eastern time, on any Business
Day, the exchange will be effected that day. The liability of the Funds or the
Transfer Agent for fraudulent or unauthorized telephone instructions may be
limited as described below. The Trust reserves the right to modify or terminate
this exchange offer on 60 days' notice.
Redemptions
Redemption requests in good order received by the Transfer Agent (or its
authorized agent) prior to 4:00 p.m., Eastern time on any Business Day will be
effective that day. To redeem shares of the Funds, shareholders must place their
redemption orders with the Transfer Agent (or its authorized agent) prior to
4:00 p.m., Eastern time, on any Business Day. The redemption price of shares of
each Fund is the net asset value per share of such Fund next determined after
the redemption order is effective. Payment of redemption proceeds will be made
as promptly as possible and, in any event, within seven days after the
redemption order is received, provided, however, that redemption proceeds for
shares purchased by check (including certified or cashier's checks) will be
forwarded only upon collection of payment for such shares; collection of payment
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may take up to 15 days. Shareholders may not close their accounts by telephone.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH wire transfer. There is no charge for having a check for
redemption proceeds mailed. The Custodian will deduct a wire charge, currently
$10.00, from the amount of a Federal Reserve wire redemption payment made at the
request of a shareholder. Shareholders cannot redeem shares of the Funds by
Federal Reserve wire on Federal holidays restricting wire transfers. The Funds
do not charge for ACH wire transactions; however, such transactions will not be
posted to a shareholder's bank account until the second Business Day following
the transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are genuine.
Such procedures may include the taping of telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
A signature guarantee is a widely accepted way to protect shareholders by
verifying the signature on certain redemption requests. The Trust requires
signature guarantees to be provided in the following circumstances: (1) written
requests for redemptions in excess of $50,000; (2) all written requests to wire
redemption proceeds to a bank other than the bank previously designated on the
account application; and (3) redemption requests that provide that the
redemption proceeds should be sent to an address other than the address of
record or to a person other than the registered shareholder(s) for the account.
Signature guarantees can be obtained from any of the following institutions: a
national or state bank, a trust company, a federal savings and loan association,
or a broker-dealer that is a member of a national securities exchange. The Trust
does not accept guarantees from notaries public or from organizations that do
not provide reimbursement in the case of fraud.
Systematic Withdrawal Plan - Each Fund offers a Systematic Withdrawal Plan
("SWP") for shareholders who wish to receive regular distributions from their
account. Upon commencement of the SWP, the account must have a current value of
$2,500 or more. Shareholders may elect to receive automatic payments via ACH
wire transfers of $100 or more on a monthly, quarterly, semi-annual or annual
basis. An application form for SWP may be obtained by calling 1-800-224-6312.
Shareholders should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending on the
frequency and amounts of the withdrawal payments and/or any fluctuations in the
net asset value per share, their original investment could be exhausted
entirely. To participate in the SWP, shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any time,
upon written
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notice to the Transfer Agent.
Valuation of Shares
The net asset value per share of each Fund is determined by dividing the total
market value of that Fund's investments and other assets, less any liabilities,
by the total number of outstanding shares of the Fund. Net asset value per share
is determined daily as of the close of business of the New York Stock Exchange
(currently, 4:00 p.m., Eastern time) on any Business Day.
PERFORMANCE
From time to time, the Funds may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. No representation can be made regarding actual future yields or
returns. The yield of a Fund refers to the annualized income generated by an
investment in that Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
that period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of a Fund refers to the average compounded rate of return on a
hypothetical investment, for designated time periods (including but not limited
to the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The Funds may periodically compare their performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.), financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices, which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs, or other investment alternatives. The Funds
may quote Morningstar, Inc., a service that ranks mutual funds on the basis of
risk-adjusted performance, and Ibbotson Associates of Chicago, Illinois, which
provides historical returns of the capital markets in the U.S. The Funds may
also quote the Frank Russell Company or Wilshire Associates, consulting firms
that compile financial characteristics of common stocks and fixed income
securities, regarding non-performance-related attributes of the Funds'
portfolios. The Funds may use long term performance of these capital markets to
demonstrate general long-term risk versus reward scenarios and could include the
value of a hypothetical investment in any of the capital markets. The Funds may
also quote financial and business publications and periodicals as they relate to
fund management, investment philosophy, and investment techniques.
The Funds may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark
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correlation indicate how valid a comparative benchmark might be. Measures of
volatility and correlation are calculated using averages of historical data and
cannot be calculated precisely.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal income tax treatment of the Fund or its shareholders.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes. Further information
concerning taxes is set forth in the Statement of Additional Information.
Tax Status of the Funds:
The Funds are treated as a separate entity for federal income tax purposes and
is not combined with the Trust's other portfolios. The Funds intend to qualify
or to continue to qualify for the special tax treatment afforded regulated
investment companies as defined under Subchapter M of the Internal Revenue Code
of 1986, as amended. So long as a Fund qualifies for this special tax treatment,
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) which it distributes to shareholders.
Tax Status of Distributions:
The Funds will distribute all of their net investment income (including, for
this purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Distributions from net investment
income will qualify for the dividends-received deduction for corporate
shareholders only to the extent such distributions are derived from dividends
paid by domestic corporations; however, such distributions which do qualify for
the dividends-received deduction may be subject to the corporate alternative
minimum tax. Any net capital gains will be distributed annually and will be
taxed to shareholders as long-term capital gains, regardless of how long the
shareholder has held shares. The Funds will make annual reports to shareholders
of the federal income tax status of all distributions, including the amount of
dividends eligible for the dividends-received deduction.
Certain securities purchased by the Funds are sold with original issue discount
and thus do not make periodic cash interest payments. The Funds will be required
to include as part of their current income the accrued discount on such
obligations even though the Funds have not received any interest payments on
such obligations during that period. Because the Funds distribute all of their
net investment income to shareholders, the Funds may have to sell portfolio
securities to distribute such accrued income, which may occur at a time when the
Adviser would not have chosen to sell such securities and which may result in a
taxable gain or loss.
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The Funds may, in certain circumstances involving tax-free reorganizations,
accept securities that are appropriate investments as payment for Fund shares
(an "In-Kind Purchase"). An In-Kind Purchase may result in adverse tax
consequences under certain circumstances to either the investors transferring
securities for shares ("In-Kind Investors") or to investors who acquire
shares of a Fund after a transfer ("new shareholders"). As a result of an
In-Kind Purchase, a Fund may acquire securities that have appreciated in value
or depreciated in value from the date they were acquired. If appreciated
securities were to be sold after an In-Kind Purchase, the amount of the gain
would be taxable to new shareholders as well as to In-Kind Investors. The effect
of this for new shareholders would be to tax them on a distribution that
represents a return of the purchase price of their shares rather than an
increase in the value of their investment. The effect on In-Kind Investors would
be to reduce their potential liability for tax on capital gains by spreading it
over a larger asset base. The opposite may occur if a Fund acquires securities
having an unrealized capital loss. In that case, In-Kind Investors will be
unable to utilize the loss to offset gains, but, because an In-Kind Purchase
will not result in any gains, the inability of In-Kind Investors to utilize
unrealized losses will have no immediate tax effect. For new shareholders, to
the extent that unrealized losses are realized by a Fund, new shareholders may
benefit by any reduction in net tax liability attributable to the losses. The
Adviser cannot predict whether securities acquired in any In-Kind Purchase will
have unrealized gains or losses on the date of the In-Kind Purchase. Consistent
with its duties as investment adviser, the Adviser will, however, take tax
consequences to investors into account when making decisions to sell portfolio
assets, including the impact of realized capital gains on shareholders of a
Fund.
Dividends declared by the Funds in October, November or December of any year and
payable to shareholders of record on a date in one of those months will be
deemed to have been paid by the Funds and received by the shareholders on
December 31 in the year declared, if paid by the Funds at any time during the
following January. The Funds intend to make sufficient distributions prior to
the end of each calendar year to avoid liability for the federal excise tax
applicable to regulated investment companies.
Income received on direct U.S. obligations is exempt from income tax at the
state level when received directly by the Funds and may be exempt, depending on
the state, when received by a shareholder from a Fund provided certain
state-specific conditions are satisfied. The Funds will inform shareholders
annually of the percentage of income and distributions derived from direct U.S.
obligations. Shareholders should consult their tax advisers to determine whether
any portion of the income dividends received from a Fund is considered tax
exempt in their particular state. Income derived by a Fund from securities of
foreign issuers may be subject to foreign withholding taxes. The Funds will not
be able to elect to treat shareholders as having paid their proportionate share
of such foreign taxes.
Each sale, exchange or redemption of a Fund's shares is a taxable event to the
shareholder.
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GENERAL INFORMATION
The Trust
The Trust, an open-end management investment company, was organized under
Massachusetts law as a business trust under a Declaration of Trust dated January
26, 1996. The Declaration of Trust permits the Trust to offer separate series
("portfolios") of shares. All consideration received by the Trust for shares of
any portfolio and all assets of such portfolio belong to that portfolio and
would be subject to liabilities related thereto. The Trust reserves the right to
create and issue shares of additional portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
Voting Rights
Each share held entitles the Shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value of the shares held on the record date for the
meeting. Shareholders of each Fund will vote separately on matters pertaining
solely to that Fund. As a Massachusetts business trust, the Trust is not
required to hold annual meetings of Shareholders, but approval will be sought
for certain changes in the operation of the Trust and for the election of
Trustees under certain circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by
Shareholders at a special meeting called upon written request of Shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the Shareholders requesting the meeting.
Reporting
The Trust issues unaudited financial information semiannually and audited
financial statements annually for the Funds. The Trust also furnishes periodic
reports and, as necessary, proxy statements to shareholders of record.
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Shareholder Inquiries
Shareholder inquiries should be directed to TIP Funds, P.O. Box 419805, Kansas
City, Missouri 64141-6805, or by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
Dividends and Distributions
Substantially all of the net investment income (excluding capital gains) of each
Fund is distributed in the form of dividends at least annually. If any capital
gain is realized, substantially all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of the Funds are paid on a per share basis.
The value of each share will be reduced by the amount of the payment. If shares
are purchased shortly before the record date for a distribution of ordinary
income or capital gains, a shareholder will pay the full price for the shares
and receive some portion of the price back as a taxable distribution or
dividend.
Counsel and Independent Public Accountants
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent public accountants for the Trust.
Custodian
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 acts as the custodian (the "Custodian") of the Trust. The
Custodian holds cash, securities and other assets of the Trust as required by
the Investment Company Act of 1940, as amended (the "1940 Act").
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
The following is a description of permitted investments for the Funds:
AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs may be
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available through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the underlying security. Holders of
unsponsored depositary receipts generally bear all the costs of the unsponsored
facility. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through, to the holders of the receipts,
voting rights with respect to the deposited securities.
ASSET-BACKED SECURITIES -- Asset-backed securities are secured by non-mortgage
assets such as company receivables, truck and auto loans, leases and credit card
receivables. Such securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying pools
of assets. Such securities also may be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt.
BORROWING -- The Funds may borrow money for temporary purposes to meet
redemptions or to pay dividends. Borrowing may exaggerate changes in the net
asset value of a Fund's shares and in the return on the Fund's portfolio.
Although the principal of any borrowing will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. A Fund may be
required to liquidate portfolio securities at a time when it would be
disadvantageous to do so in order to make payments with respect to any
borrowing. The Funds may be required to segregate liquid assets in an amount
sufficient to meet their obligations in connection with such borrowings. In
addition, the Strategic High Yield Fund may borrow to leverage its portfolio.
Such borrowings may take the form of a margin account or a conventional bank
borrowing in connection with securities purchases or interest rate arbitrage
transactions.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics of both fixed income and
equity securities. Because of the conversion feature, the market value of a
convertible security tends to move with the market value of the underlying
stock. The value of a convertible security is also affected by prevailing
interest rates, the credit quality of the issuer and any call provisions.
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward contract involves an obligation
to purchase or sell a specific currency amount at a future date, agreed upon by
the parties, at a price set at the time of the contract. A Fund may also enter
into a contract to sell, for a fixed amount of U.S. dollars or other appropriate
currency, the amount of foreign currency approximating the value of some or all
of a Fund's securities denominated in such foreign currency.
<PAGE>
HIGH YIELD SECURITIES -- Securities rated below investment grade are often
referred to as "junk bonds." Fixed income securities are subject to the risk of
an issuer's ability to meet principal
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and interest payments on the obligation (credit risk), and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which primarily react to movements in the general level
of interest rates. The market values of fixed-income securities tend to vary
inversely with the level of interest rates. Yields and market values of high
yield securities will fluctuate over time, reflecting not only changing interest
rates but the market's perception of credit quality and the outlook for economic
growth. When economic conditions appear to be deteriorating, medium to lower
rated securities may decline in value due to heightened concern over credit
quality, regardless of prevailing interest rates. Investors should carefully
consider the relative risks of investing in high yield securities and understand
that such securities are not generally meant for short-term investing.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. Adverse economic developments can disrupt the market
for high yield securities, and severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity which may lead to a higher incidence of
default on such securities. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. As a result,
the Fund's adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Furthermore the Trust may experience difficulty in valuing
certain securities at certain times. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market value for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
Credit quality in the junk bond market can change suddenly and unexpectedly, and
even recently issued credit ratings may not fully reflect the actual risks
imposed by a particular security.
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ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on a Fund's books. Illiquid securities include demand
instruments with demand notice periods exceeding seven days, securities for
which there is no active secondary market, and repurchase agreements with
durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. Repurchase
agreements are considered loans under the 1940 Act.
SECURITIES LENDING -- In order to generate additional income, a Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash or securities of the U.S.
Government or its agencies equal to at least 100% of the market value of the
loaned securities. A Fund continues to receive interest on the loaned securities
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
SHORT SALES -- A short sale is "against the box" if at all times during which
the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities that are sold
short.
SWAPS, CAPS, FLOORS AND COLLARS -- Interest rate swaps, mortgage swaps, currency
swaps and other types of swap agreements such as caps, floors and collars are
designed to permit the purchaser to preserve a return or spread on a particular
investment or portion of its portfolio, and to protect against any increase in
the price of securities a Fund anticipates purchasing at a later date.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investment and their
share price and yield.
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U.S. GOVERNMENT AGENCY OBLIGATIONS -- Certain Federal agencies, such as the
Government National Mortgage Association ("GNMA"), have been established as
instrumentalities of the United States Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the United States Government, are either backed by the full faith
and credit of the United States (e.g., GNMA securities) or supported by the
issuing agencies' right to borrow from the Treasury. The issues of other
agencies are supported by the credit of the instrumentality (e.g., Fannie Mae
securities).
U.S. GOVERNMENT SECURITIES -- Bills, notes and bonds issued by the U.S.
Government and backed by the full faith and credit of the United States.
U.S. TREASURY OBLIGATIONS -- Bills, notes and bonds issued by the U.S. Treasury,
and separately traded interest and principal component parts of such obligations
that are transferable through the Federal book-entry system known as Separately
Traded Registered Interest and Principal Securities ("STRIPS") and Coupon Under
Book Entry Safekeeping ("CUBES").
U.S. TREASURY RECEIPTS -- U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury obligations into a special account at a custodian bank. The custodian
holds the interest and principal payments for the benefit of the registered
owners of the certificates of receipts. The custodian arranges for the issuance
of the certificates or receipts evidencing ownership and maintains the register.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable
or floating rates of interest, and may involve a conditional or unconditional
demand feature. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WARRANTS -- Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed
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delivery transactions involve the purchase of an instrument with payment and
delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The Fund will maintain with the Custodian a separate account with liquid
securities or cash in an amount at least equal to these commitments. The
interest rate realized on these securities is fixed as of the purchase date, and
no interest accrues to a Fund before settlement.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
obligations are debt securities that do not bear any interest, but instead are
issued at a deep discount from par. The value of a zero coupon obligation
increases over time to reflect the interest accreted. Upon maturity, the holder
is entitled to receive the par value of the security. While interest payments
are not made on such securities, holders of such securities are deemed to have
received "phantom income" annually. Because a Fund will distribute its "phantom
income" to shareholders, to the extent that shareholders elect to receive
dividends in cash rather than reinvesting such dividends in additional shares, a
Fund will have fewer assets with which to purchase income producing securities.
In the event of adverse market conditions, zero coupon, pay-in-kind and deferred
payment securities may be subject to greater fluctuations in value and may be
less liquid than comparably rated securities paying cash interest at regular
interest payment periods.
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APPENDIX
The following descriptions are summaries of published ratings.
DESCRIPTION OF CORPORATE BOND RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA by S&P also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from AAA issues only in
small degree. Debt rated A by S&P has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
Bonds rated BBB by S&P 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.
Bonds rated Aaa by Moody's 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 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. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with bonds
rated Aaa, 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 risk appear somewhat larger than in Aaa securities.
Bonds rated A by Moody's 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. Debt rated
Baa by Moody's is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Fitch uses plus and minus signs with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category. Bonds rated AAA by Fitch are considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events. Bonds rated AA by
Fitch are considered to be
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investment grade and of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite as strong as
bonds rated AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated F-1+. Bonds rated A by Fitch are considered to
be investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings. Bonds rated BBB by Fitch are considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Bonds rated AAA by Duff are judged by Duff to be of the highest credit quality,
with negligible risk factors being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA by Duff are judged by Duff to be of high credit
quality with strong protection factors and risk that is modest but that may vary
slightly from time to time because of economic conditions. Bonds rated A by Duff
are judged by Duff to have average but adequate protection factors. However,
risk factors are more variable and greater in periods of economic stress. Bonds
rated BBB by Duff are judged by Duff as having below average protection factors
but still considered sufficient for prudent investment, with considerable
variability in risk during economic cycles.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly. Obligations for which there is a low expectation on investment
risk are rated A by IBCA. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk. Obligations for which there is
currently a low expectation of investment risk are rated BBB by IBCA. Capacity
for timely repayment of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more likely to lead to
increased investment risk than for obligations in higher categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A by Standard & Poor's Corporation ("S&P") is regarded by
S&P as having the greatest capacity for timely payment. Issues rated A are
further refined by use of the numbers 1, 1+, and 2 to indicate the relative
degree of safety. Issues rated A-1+ are those with an "overwhelming degree" of
credit protection. Those rated A-1, the highest rating category, reflect a "very
strong" degree of safety regarding timely payment. Those rated A-2, the second
highest rating category, reflect a satisfactory degree of safety regarding
timely payment but not as high as A-1.
Commercial paper issues rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's")
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are judged by Moody's to be of "superior" quality and "strong" quality
respectively on the basis of relative repayment capacity.
F-1+ (Exceptionally Strong) is the highest commercial paper rating Fitch
assigns; paper rated F-1+ is regarded as having the strongest degree of
assurance for timely payment. Paper rated F-1 (Very Strong) reflects an
assurance of timely payment only slightly less in degree than paper rated F-1+.
The rating F-2 (Good) reflects a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues rated F-1+ or
F-1.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by good fundamental protection
factors. Risk factors are minor. Duff has incorporated gradations of 1+ and 1-
to assist investors in recognizing quality differences within this highest tier.
Paper rated Duff-1+ has the highest certainty of timely payment, with
outstanding short-term liquidity and safety just below risk-free U.S. Treasury
short-term obligations. Paper rated Duff-1- has high certainty of timely payment
with strong liquidity factors which are supported by good fundamental protection
factors. Risk factors are very small. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets (although
ongoing funding may enlarge total financing requirements) and sound liquidity
factors and company fundamentals. Risk factors are small.
The designation A1, the highest rating by IBCA, indicates that the obligation is
supported by a strong capacity for timely repayment. Those obligations rated A1+
are supported by the highest capacity for timely repayment. Obligations rated
A2, the second highest rating, are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
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Trust:
TIP FUNDS
Funds:
PENN CAPITAL SELECT FINANCIAL SERVICES FUND
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
PENN CAPITAL VALUE PLUS FUND
Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
Distributor:
SEI INVESTMENTS DISTRIBUTION CO.
Administrator:
SEI FUND RESOURCES
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Auditors:
ERNST & YOUNG LLP
<PAGE>
