TIP FUNDS
Investment Adviser:
CLOVER CAPITAL MANAGEMENT, 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 fund (the "Fund"), which is a separate series of
the Trust:
CLOVER MAX CAP VALUE FUND
This Prospectus concisely sets forth the information about the Trust and the
Fund 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 31, 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.
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 31, 1997
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TABLE OF CONTENTS
Summary..................................................... 3
Expense Summary............................................. 5
The Trust and the Fund...................................... 6
Investment Objective........................................ 6
Investment Policies......................................... 6
Risk Factors................................................ 6
Investment Limitations...................................... 7
The Adviser................................................. 7
The Administrator........................................... 8
The Transfer Agent.......................................... 8
The Distributor............................................. 8
Portfolio Transactions...................................... 8
Purchase and Redemption of Shares........................... 9
Performance................................................. 11
Taxes....................................................... 12
General Information......................................... 13
Description of Permitted Investments and Risk Factors....... 14
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SUMMARY
The following provides basic information about the Clover Max Cap Value Fund
(the "Max Cap Value Fund" or the "Fund"). The Fund is one of thirteen mutual
funds comprising the TIP Funds (the "Trust"). The other portfolios of the TIP
Funds are described in separate prospectuses, which are available by calling
1-800-224-6312. 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 is the Fund's investment objective and its primary policies? The Max
Cap Value Fund seeks long-term total return. It invests primarily in undervalued
large capitalization equities with low valuations on measures such as book value
and cash flow. The Fund's adviser will attempt to acquire securities that have
attractive dividend yields relative to the market average and/or their own
trading history.
What are the risks involved with investing in the Fund? The investment
policies of the Fund entail certain risks and considerations of which investors
should be aware. The Fund invests in securities that fluctuate in value, and
investors should expect the Fund's 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 Fund may invest up to 25% of its net assets in non-convertible debt
securities, which also may include securities rated below investment grade
("junk bonds"); these high risk securities carry increased risks of, among other
things, default and market price volatility. The Fund may enter into futures and
options transactions, although it has no present intention to do so, and may
purchase zero coupon securities. The Fund also may purchase securities of
foreign issuers and asset- and mortgage-backed securities. Investments in these
securities involve certain other risks.
For more information about the Fund, see "Investment Objective," "Investment
Policies," "Risk Factors," and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? Clover Capital Management, Inc. (the "Adviser"), serves
as the investment adviser to the Fund. 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 Fund. See "Expense
Summary" and "The Administrator."
Who is the Distributor? CCM Securities, Inc., (the "Distributor"), serves
as the distributor of the Fund's 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 Fund are offered on a no-load
basis.
Is there a minimum investment? The Fund requires a minimum initial
investment of $2,500 ($2,000 for IRAs), which the Distributor may waive at its
discretion. Subsequent purchases must be at least $500.
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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 (a "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 Fund distributes substantially all of its
net investment income (exclusive of capital gains) in the form of quarterly
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
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MAX CAP
VALUE FUND
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Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fees(1).......................................... None
Exchange Fees............................................... None
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(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)
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MAX CAP
VALUE FUND
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Advisory Fees(1)............................................ .74%
12b-1 Fees.................................................. None
Other Expenses (after expense reimbursements)(2)............ .21%
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Total Operating Expenses (after expense
reimbursements)(2)........................................ .95%
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(1) The Adviser has, on a voluntary basis, agreed to waive a portion of its fee
for the Fund and to reimburse certain Fund expenses in order to limit total
operating expenses of the Fund to an annual rate of not more than .95%, of
average daily net assets for the current fiscal year. The Adviser reserves
the right, in its sole discretion, to terminate its voluntary fee waivers
and reimbursements at any time. See "The Adviser."
(2) Absent expense reimbursements by the Adviser, estimated Other Expenses and
Total Operating Expenses for the current year for the Fund would be 1.17%
and 1.91%, respectively.
EXAMPLE
- ------------------------------------------------------------------------------
1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment
in the Fund assuming (1) a 5% annual return and
(2) redemption at the end of each time period.
Max Cap Value Fund...................................... $10 $30
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THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF THE FUND AFTER WAIVERS AND
REIMBURSEMENTS, IF ANY, 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 Fund. 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 thirteen 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 Clover Max Cap Value Fund (the "Max
Cap Value Fund" or the "Fund").
INVESTMENT OBJECTIVE
MAX CAP VALUE FUND -- The Max Cap Value Fund seeks long-term total return.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
MAX CAP VALUE FUND
The Fund invests primarily in undervalued large capitalization equities with low
valuations based on measures such as book value and cash flow. The Fund's
adviser will attempt to acquire securities that have attractive dividend yields
relative to the market average and/or their own trading history.
The Fund invests at least 75% of its assets in a diversified portfolio chosen
from the 500 largest capitalization equities (currently $5 billion and above)
where the stock price is low relative to book value and cash flow as compared to
the average large capitalization stock. The Adviser evaluates these large
capitalization domestic companies and searches for stocks valued in the lowest
third based on book value and cash flow. From these candidates, the companies
with adequate financial strength and higher dividend yields are chosen for
investment. The Adviser may also choose stocks whose primary attractive feature
is a current dividend yield which is high relative to the stocks' historic yield
range.
Up to 25% of the Fund's assets may be invested in attractively valued companies
whose market capitalizations fall below the top 500 (i.e., below $5 billion). In
addition, up to 10% of the Fund may be invested in American Depository Receipts
("ADRs") whose market capitalizations fall among the top 100 in available ADRs.
During periods when, or under circumstances where, the Adviser believes that the
return on non-convertible fixed income securities may equal or exceed the return
on equity securities, the Fund may invest up to 25% of its net assets in
non-convertible fixed income securities consisting of corporate debt securities
and obligations issued or guaranteed as to principal and interest by the U.S.
Government or its agencies or instrumentalities. The Fund may invest in such
securities without regard to their term or rating and may, from time to time,
invest in corporate debt securities rated below investment grade, i.e., rated
lower than BBB by Standard & Poor's Corporation ("S&P"), and/or Baa by Moody's
Investor Service, Inc. ("Moody's"), or in unrated securities of comparable
quality as determined by the Adviser. Such high-yield, high-risk securities are
also known as "junk bonds." The Fund's exposure to junk bonds, including
convertible securities rated below investment grade, will not exceed 25% of its
total assets.
Under normal circumstances up to 25% of the Fund's assets may be invested in the
Money Market Instruments described below in order to maintain liquidity, or if
the Adviser determines that securities meeting the Fund's investment objective
and policies are not otherwise reasonably available for purchase. For temporary
defensive purposes during periods when the Adviser determines that market
conditions warrant, the Fund may invest up to 100% of its assets in Money Market
Instruments and in cash.
The Fund may purchase securities on a when-issued basis and purchase variable
and floating rate securities, and may enter into futures and options
transactions, purchase securities of foreign issuers, invest in shares of other
investment companies, invest up to 15% of its net assets in illiquid securities,
and purchase convertible securities.
For a further description of these types of instruments see "Description of
Permitted Investments and Risk Factors" in the Statement of Additional
Information.
RISK FACTORS
EQUITY SECURITIES -- Equity securities include common stocks, preferred stocks,
warrants, rights to acquire common or preferred stocks, and securities
convertible into or exchangeable for common stocks. Investments in equity
securities in general are subject
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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 the fund invests will cause the net asset value of the 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.
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. Changes in the value of these securities
will not necessarily affect cash income derived from these securities, but will
affect the Fund's net asset value.
Securities rated below investment grade are high risk, high yield securities
(often known as "junk bonds"). Such securities involve greater risk of default
or price declines than investments in investment grade securities due to changes
in the issuer's creditworthiness and the outlook for economic growth. The market
for these securities may be thinner and less active, causing market price
volatility and limited liquidity in the secondary market. These factors may
limit the Fund's ability to sell such securities at their fair market value.
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. Bonds rated BBB lack outstanding investment
characteristics and in fact have speculative characteristics as well. Corporate
bonds rated B generally lack characteristics of desirable investment, and
assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. The Fund may purchase
securities rated as low as B by S&P and/or Moody's.
PORTFOLIO TURNOVER -- The Fund's annual portfolio turnover rate is not expected
to exceed 100%. An annual portfolio turnover rate in excess of 100% may result
from the Adviser's investment strategy of focusing attractive valuations and
disposing of securities when the Adviser believes that their total return
potential has diminished. Portfolio turnover rates in excess of 100% may result
in higher transaction costs, including increased brokerage commissions, and
higher levels of taxable capital gain.
INVESTMENT LIMITATIONS
The investment objective of the Fund and certain of the investment limitations
set forth here and in the Statement of Additional Information are fundamental
policies of the Fund. Fundamental policies cannot be changed with respect to the
Fund without the consent of the holders of a majority of the Fund's outstanding
shares.
1. The Fund may not (i) purchase securities of any issuer (except securities
issued or 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 the
Fund's total assets.
2. The Fund may not purchase any securities which would cause 25% or more of the
total assets of the 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 investments in obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
Clover Capital Management, Inc. (the "Adviser"), is a professional investment
management firm founded in 1984 by Michael Edward Jones, CFA, and Geoffrey
Harold Rosenberger, CFA, who are Managing Directors of the Adviser and who
control all of the Adviser's outstanding voting stock. As of June 30, 1997, the
Adviser had discretionary management authority with respect to approximately
$2.03 billion of assets. In addition to advising the Clover Funds, the Adviser
provides advisory services to pension plans, religious and educational
endowments, corporations, 401(k) plans, profit sharing plans, individual
investors
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and trusts and estates. The principal business address of the Adviser is 11
Tobey Village Office Park, Pittsford, New York 14534.
The Adviser serves as the Fund's investment adviser under an investment advisory
agreement (the "Advisory Agreement") with the Fund. Under the Advisory
Agreement, the Adviser makes the investment decisions for the assets of the Fund
and continuously reviews, supervises and administers the Fund's investment
program, subject to the supervision of, and policies established by, the
Trustees of the Fund.
The Max Cap Value Fund will be managed by a committee led by Lawrence Creatura
and Paul W. Spindler. Mr. Creatura has been a Vice President of Investments for
the Adviser for the past two years. For the three previous years, Mr. Creatura
was a laser systems Engineer/Researcher for Laser Surge, Inc. For the past five
years Mr. Spindler has been a Vice President of Investments for the Adviser.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .74% of the average daily net assets of
the Fund. The Adviser has voluntarily agreed to waive all or a portion of its
fees and/or to reimburse Fund expenses in order to limit total operating
expenses of the Fund to an annual rate of not more than .95% of average daily
net assets. The Adviser reserves the right, in its sole discretion, to terminate
its voluntary fee waiver and any reimbursement at any time.
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 fee from
the Fund, which is calculated daily and paid monthly, at an annual rate of .12%
of the 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 Fund is subject to a minimum annual administration fee of $75,000.
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 Avenue, 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
CCM Securities, Inc. (the "Distributor"), a wholly-owned subsidiary of the
Adviser, 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.
PORTFOLIO TRANSACTIONS
The Adviser will select brokers on the basis of the research, statistical and
pricing services they provide to the Fund. A commission paid to such brokers may
be higher than that which another qualified broker would have charged for
effecting the same transaction, 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 Fund and the
Adviser's other clients.
Since shares of the Fund are not marketed through intermediary broker-dealers,
the Fund does 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 Fund with
qualified broker-dealers who refer clients to the Fund.
Some securities considered for investment by the Fund may also be appropriate
for other accounts and/or clients served by that Adviser. If the purchase or
sale of securities consistent with the investment policies of the 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.
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PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent (or its
authorized agent) on each day that the New York Stock Exchange is open for
business (a "Business Day"). Investors may purchase and redeem shares of the
Fund 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 Fund
may be made on any Business Day. Certain brokers assist their clients in the
purchase or redemption of shares and charge a fee for this service in addition
to the Fund's public offering price.
The minimum initial investment in the 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.
PURCHASES BY MAIL
An account may be opened by mailing a check or other negotiable bank draft
(payable to the Fund) for $2,500 ($2,000 or more for IRAs) or more, 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 the 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: [Clover Max Cap
Value 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 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 any 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 the 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 Fund calculated to three decimal places. The
Trust will not issue certificates representing shares of the Fund.
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.
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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 the Fund may be purchased in exchange for securities to be included in
the Fund, subject to the Adviser's or Administrator's determination that these
securities are acceptable. 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 the Fund and must be delivered by the
shareholder to the 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 the Fund 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 Fund 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. 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 Fund 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 Fund, 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
the Fund is the net asset value per share of the 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 may take
up to 15 days. Shareholders may not close their accounts by telephone.
Redemption requests from IRA accounts must be made in writing.
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 a Fund by Federal
Reserve wire on Federal holidays on which wire transfers are restricted. The
Fund does 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 release of redemption proceeds.
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
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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 -- The 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 notice to the Transfer Agent.
VALUATION OF SHARES
The net asset value per share of the Fund is determined by dividing the total
market value of the 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 Fund may advertise its 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 the Fund refers to the annualized income generated by
an investment in the 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 the 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 Fund may periodically compare its 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 Fund 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 Fund 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
11
<PAGE>
attributes of the Fund's portfolio. The Fund 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 Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund 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 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 FUND:
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other portfolios. The Fund intends 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 the 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 Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gain) to shareholders. Dividends from the Fund's
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 gain from the sale or exchange of a capital asset held
for more than one year, regardless of how long the shareholder has held shares.
The Fund 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 Fund are sold with original issue discount
and thus do not make periodic cash interest payments. The Fund will be required
to include as part of its current income the accrued discount on such
obligations even though the Fund has not received any interest payments on such
obligations during that period. Because the Fund distributes all of its net
investment income to its shareholders, the Fund 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.
Dividends declared by the Fund 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 Fund and received by the shareholders on
December 31 in the year declared, if paid by the Fund at any time during the
following January. The Fund intends 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 Fund and may be exempt, depending
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<PAGE>
on the state, when received by a shareholder from the Fund provided certain
state-specific conditions are satisfied. The Fund 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 the Fund is considered tax
exempt in their particular state. Income derived by the Fund from securities of
foreign issuers may be subject to foreign withholding taxes. The Fund 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 the Fund's shares is a taxable event to the
shareholder.
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, as amended on February 21, 1997. The Declaration of Trust permits the
Trust to offer separate series ("Funds") of shares. All consideration received
by the Trust for shares of any Fund and all assets of such Fund belong to that
Fund and would be subject to liabilities related thereto. The Trust reserves the
right to create and issue shares of additional Funds.
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 Fund. The Trust also furnishes periodic
reports and, as necessary, proxy statements to shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to TIP Funds, P.O. Box 419805, Kansas
City, Missouri 64141-6805, or to 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 gain) of the
Fund is distributed in the form of dividends to shareholders of record on the
second to last Business Day of each quarter. Capital gains, if any, are
distributed to shareholders 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
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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 Fund 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 Fund:
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 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.
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.
DERIVATIVES -- Derivatives are securities that derive their value from other
securities, financial instruments or indices. The following are considered
derivative securities: options on futures, futures, options (e.g., puts and
calls), swap agreements, mortgage-backed securities (e.g., CMOs, REMICs, IOs and
POs), when issued securities and forward commitments, floating and variable rate
securities, convertible securities, "stripped" U.S. Treasury securities (e.g.,
Receipts and STRIPs), privately issued stripped securities (e.g., TGRs, TRs, and
CATs). See elsewhere in the "Description of Permitted Investments and Risk
Factors" and in the Statement of Additional Information for discussions of these
various instruments.
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 the 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
14
<PAGE>
repurchase agreements with durations or maturities over 7 days in length.
JUNK BONDS -- Bonds rated below investment grade are often referred to as "junk
bonds." Such securities involve greater risk of default or price declines than
investment grade securities due to changes in the issuer's creditworthiness and
the outlook for economic growth. The market for these securities may be less
active, causing market price volatility and limited liquidity in the secondary
market. This may limit a Fund's ability to sell such securities at their market
value. In addition, the market for these securities may also be adversely
affected by legislative and regulatory developments. 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.
MONEY MARKET INSTRUMENTS -- Money Market Instruments 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 that issue high-quality commercial paper; and (v)
repurchase agreements involving any of the foregoing obligations entered into
with highly-rated banks and broker-dealers; and (vi) to the extent permitted by
applicable law, shares of other investment companies investing solely in money
market instruments.
MORTGAGE BACKED SECURITIES -- Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional fifteen- and thirty-year fixed rate mortgages, graduated
payment mortgages, adjustable rate mortgages, and balloon mortgages. During
periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. As a result, the fund
may have to reinvest the proceeds of such repayments at lower interest rates.
Prepayment of mortgages which underlie securities purchased at a premium often
results in capital losses, while prepayment of mortgages purchased at a discount
often results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average life
or realized yield of a particular issue.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Fannie Mae
and the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC
obligations are not backed by the full faith and credit of the U.S. Government
as GNMA certificates are, but Fannie Mae and FHLMC securities are supported by
the instrumentalities' right to borrow from the U.S. Treasury. GNMA, Fannie Mae
and FHLMC each guarantee timely distributions of interest to certificate
holders. GNMA and Fannie Mae also each guarantee timely distributions of
scheduled principal.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. While they are generally structured
with one or more types of credit enhancement, private pass-through securities
typically lack a guarantee by an entity having the credit status of a
governmental agency or instrumentality.
CMOS: CMOs are debt obligations of multiclass pass-through certificates issued
by agencies or instrumentalities of the U.S. Government or by private
originators or investors in mortgage loans. In a CMO, series of bonds or
certificates are usually issued in multiple classes. Principal and interest paid
on the underlying mortgage assets may be allocated among the several classes of
a series of a CMO in a variety of ways. Each class of a CMO is issued with a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date.
REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Code
and invests in certain mortgages principally secured by interests in real
property. Guaranteed REMIC pass-through certificates ("REMIC Certificates")
issued by Fannie Mae or FHLMC represent beneficial ownership interests in a
15
<PAGE>
REMIC trust consisting principally of mortgage loans or Fannie Mae, FHLMC or
GNMA-guaranteed mortgage pass-through certificates.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments, while the other class may receive all of the principal
payments. SMBs are extremely sensitive to changes in interest rates because of
the impact thereon of prepayment of principal on the underlying mortgage
securities. The market for SMBs is not as fully developed as other markets; SMBs
therefore may be illiquid.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which the 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 OF FOREIGN ISSUERS -- Investments in the securities of foreign
issuers may subject the Fund 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 Fund's assets measured in U.S. dollars may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and the Fund may incur costs in connection with conversions between various
currencies.
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 Interested and Principal Securities ("STRIPS") and Coupon
Under Book Entry Safekeeping ("CUBES").
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 delivery
transactions involve the purchase of an instrument with payment and delivery
taking place in the future.
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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 the Fund before settlement.
ZERO COUPON 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. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
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Trust:
TIP Funds
P.O. Box 419805
Kansas City, MO 64141-6805
Investment Advisor:
Clover Capital Management, Inc.
Distributor:
CCM Securities Inc.
Administrator:
SEI Fund Resources
Legal Counsel:
Morgan, Lewis & Bockius LLP
Independent Public Accountants:
Ernst & Young LLP
To open an account,
receive account information,
make inquiries or
request literature:
1-800-224-6312
PROSPECTUS
OCTOBER 31, 1997
TIP Funds
- ------------------------------
Trusted Institutional Partners
- ------------------------------
CLOVER MAX CAP VALUE FUND
<PAGE>
TIP FUNDS
CLOVER MAX CAP VALUE FUND
Investment Adviser:
CLOVER CAPITAL MANAGEMENT, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Clover Max Cap Value Fund (the "Max Cap Value Fund"). It is intended to
provide additional information regarding the activities and operations of the
TIP Funds (formerly, Turner Funds) (the "Trust"), and should be read in
conjunction with the Fund's Prospectus dated October 31, 1997. The Prospectus
may be obtained without charge by calling 1-800-224-6312.
TABLE OF CONTENTS
THE TRUST................................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS.....................................S-2
INVESTMENT LIMITATIONS...................................................S-9
THE ADVISER.............................................................S-10
THE ADMINISTRATOR.......................................................S-11
THE DISTRIBUTOR.........................................................S-12
TRUSTEES AND OFFICERS OF THE TRUST......................................S-12
COMPUTATION OF YIELD AND TOTAL RETURN...................................S-15
PURCHASE AND REDEMPTION OF SHARES.......................................S-16
DETERMINATION OF NET ASSET VALUE........................................S-16
TAXES ...............................................................S-16
PORTFOLIO TRANSACTIONS..................................................S-18
DESCRIPTION OF SHARES...................................................S-20
SHAREHOLDER LIABILITY...................................................S-20
LIMITATION OF TRUSTEES' LIABILITY.......................................S-20
FINANCIAL INFORMATION...................................................S-21
APPENDIX ................................................................A-1
October 31, 1997
<PAGE>
THE TRUST
This Statement of Additional Information relates only to the Clover Max Cap
Value Fund (the "Fund"). The Fund is a separate series of the TIP Funds
(formerly, Turner Funds) (the "Trust"), a diversified, open-end management
investment company established as a Massachusetts business trust under a
Declaration of Trust dated January 26, 1996, as amended on February 21, 1997.
The Declaration of Trust permits the Trust to offer separate series
("portfolios") of shares of beneficial interest ("shares"). The fund is a
separate mutual fund, and each share of the fund represents an equal
proportionate interest in the fund. See "Description of Shares." Capitalized
terms not defined herein are defined in the Prospectus offering shares of the
Fund.
DESCRIPTION OF PERMITTED INVESTMENTS
Futures Contracts and Options on Futures Contracts
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option.
The Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. The Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges. In
addition, the Fund will only sell covered futures contracts and options on
futures contracts.
Stock and bond index futures are futures contracts for various stock and bond
indices that are traded on registered securities exchanges. Stock and bond index
futures contracts obligate the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock or bond index at the close of the last trading day
of the contract and the price at which the agreement is made.
Stock and bond index futures contracts are bilateral agreements pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock or bond index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks or bonds
comprising the Index is made; generally contracts are closed out prior to the
expiration date of the contracts.
No price is paid upon entering into futures contracts. Instead, the Fund would
be required to deposit an amount of cash or U.S. Treasury securities known as
"initial margin." Subsequent payments, called "variation margin," to and from
the broker, would be made on a daily basis as the value of the futures position
varies (a process known
S-2
<PAGE>
as "marking to market"). The margin is in the nature of a performance bond or
good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
The Fund may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), as long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of the Fund's net assets. The Fund may buy and sell futures contracts
and related options to manage its exposure to changing interest rates and
securities prices. Some strategies reduce the Fund's exposure to price
fluctuations, while others tend to increase its market exposure. Futures and
options on futures can be volatile instruments and involve certain risks that
could negatively impact the Fund's return.
In order to avoid leveraging and related risks, when the Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash or
liquid securities, equal to the market value of the futures positions held, less
margin deposits, in a segregated account with its custodian. Collateral equal to
the current market value of the futures position will be marked to market on a
daily basis.
GNMA Securities
The Fund may invest in securities issued by the Government National Mortgage
Association ("GNMA"), a wholly-owned U.S. Government corporation which
guarantees the timely payment of principal and interest. The market value and
interest yield of these instruments can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages. These securities
represent ownership in a pool of federally insured mortgage loans. GNMA
certificates consist of underlying mortgages with a maximum maturity of 30
years. However, due to scheduled and unscheduled principal payments, GNMA
certificates have a shorter average maturity and, therefore, less principal
volatility than a comparable 30-year bond. Since prepayment rates vary widely,
it is not possible to accurately predict the average maturity of a particular
GNMA pool. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, there
will be monthly scheduled payments of principal and interest. In addition, there
may be unscheduled principal payments representing prepayments on the underlying
S-3
<PAGE>
mortgages. Although GNMA certificates may offer yields higher than those
available from other types of U.S. Government securities, GNMA certificates may
be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance, when
interest rates decline, the value of a GNMA certificate likely will not rise as
much as comparable debt securities due to the prepayment feature. In addition,
these prepayments can cause the price of a GNMA certificate originally purchased
at a premium to decline in price to its par value, which may result in a loss.
Investment Company Shares
The Fund may invest in shares of other investment companies, to the extent
permitted by applicable law and subject to certain restrictions. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Fund. The Fund's purchase of such investment company
securities results in the layering of expenses, such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying Fund
expenses. Under applicable regulations, the Fund is prohibited from acquiring
the securities of another investment company if, as a result of such
acquisition: (1) the Fund owns more than 3% of the total voting stock of the
other company; (2) securities issued by any one investment company represent
more than 5% of the Fund's total assets; or (3) securities (other than treasury
stock) issued by all investment companies represent more than 10% of the total
assets of the Fund. See also "Investment Limitations."
Mortgage- and Asset-Backed Securities
The Fund may invest in mortgage-backed securities and asset-backed securities.
Two principal types of mortgage-backed securities are collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"),
which are rated in one of the top two categories by Standard & Poor's
Corporation ("S&P") or Moody's Investors Services, Inc. ("Moody's"). CMOs are
securities collateralized by mortgages, mortgage pass-throughs, mortgage
pay-through bonds (bonds representing an interest in a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of single family detached properties). CMOs typically are issued
with a number of classes or series which have different maturities and which are
retired using cash flow from underlying collateral according to a specified
plan.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the
S-4
<PAGE>
mortgages underlying CMOs may be supported by various types of insurance, and
some CMOs may be backed by GNMA certificates or other mortgage pass-throughs
issued or guaranteed by U.S. Government agencies or instrumentalities, the CMOs
themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
In addition to mortgage-backed securities, the Fund may invest in securities
secured by asset-backed securities including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the paydown characteristics of the underlying financial assets
which are passed through to the security holder.
Asset-backed securities are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; however, the payment of principal and interest on
such obligations may be guaranteed up to certain amounts and for a certain
period by a letter of credit issued by a financial institution (such as a bank
or insurance company) unaffiliated with the issuers of such securities. The
purchase of asset-backed securities raises risk considerations peculiar to the
financing of the instruments underlying such securities. For example, there is a
risk that another party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. There also is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities. Asset-backed securities
entail prepayment risk, which may vary depending on the type of asset, but is
generally less than the prepayment risk associated with mortgage-backed
securities. In addition, credit card receivables are unsecured obligations of
the card holder.
Obligations of Supranational Agencies
The Fund may purchase obligations of supranational agencies. Currently, the Fund
only intends to invest in obligations issued or guaranteed by the Asian
Development Bank, Inter-American Development Bank, International Bank for
Reconstruction and Development (World Bank), African Development Bank, European
Coal and Steel Community, European Economic Community, European Investment Bank
or Nordic Investment Bank.
S-5
<PAGE>
Options
A put option on a security gives the purchaser of the option the right to sell,
and the writer of the option the obligation to buy, the underlying security at
any time during the option period. A call option on a security gives the
purchaser of the option the right to buy, and the writer of the option the
obligation to sell, the underlying security at any time during the option
period. The premium paid to the writer is the consideration for undertaking the
obligations under the option contract. The initial purchase (sale) of an option
contract is an "opening transaction." In order to close out an option position,
the Fund may enter into a "closing transaction," which is simply the sale
(purchase) of an option contract on the same security with the same exercise
price and expiration date as the option contract originally opened. If the Fund
is unable to effect a closing purchase transaction with respect to an option it
has written, it will not be able to sell the underlying security until the
option expires or the Fund delivers the security upon exercise.
The Fund may purchase put and call options to protect against a decline in the
market value of the securities in its portfolio or to anticipate an increase in
the market value of securities that the Fund may seek to purchase in the future.
The Fund purchasing put and call options pays a premium therefor. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, loss of the premium paid may be offset by
an increase in the value of the Fund's securities or by a decrease in the cost
of acquisition of securities by the Fund.
The Fund may write covered call options as a means of increasing the yield on
its portfolio and as a means of providing limited protection against decreases
in its market value. When the fund sells an option, if the underlying securities
do not increase or decrease to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Fund will realize as profit the premium
received for such option. When a call option written by the Fund is exercised,
the Fund will be required to sell the underlying securities to the option holder
at the strike price, and will not participate in any increase in the price of
such securities above the strike price. When a put option written by the Fund is
exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
The Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are generally illiquid.
S-6
<PAGE>
The Fund may purchase and write put and call options on foreign currencies
(traded on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by the Fund
will be "covered," which means that the Fund will own an equal amount of the
underlying foreign currency. With respect to put options on foreign currency
written by the Fund, the Fund will establish a segregated account with its
Custodian consisting of cash or liquid securities in an amount equal to the
amount the Fund would be required to pay upon exercise of the put.
The Fund may purchase and write put and call options on indices and enter into
related closing transactions. Put and call options on indices are similar to
options on securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing level
of the underlying index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike options on
individual securities, all settlements are in cash, and gain or loss depends on
price movements in the particular market represented by the index generally,
rather than the price movements in individual securities. The Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of the Fund to enter into closing transactions depends upon the existence of a
liquid secondary market for such transactions.
All options written on securities or indices must be covered. When the Fund
writes an option on an index or a security, it will establish a segregated
account containing cash or liquid securities with its custodian in an amount at
least equal to the market value of the option and will maintain the account
while the option is open or will otherwise cover the transaction.
Risk Factors: Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while the Fund will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
Repurchase Agreements
Repurchase agreements are agreements by which the Fund obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the Federal Reserve System or primary securities dealer as recognized by the
Federal Reserve Bank of New York) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to
S-7
<PAGE>
pay the agreed upon price, which obligation is in effect secured by the value of
the underlying security.
Repurchase agreements are considered to be loans by the Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by the Fund, the Trust's Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale, including accrued interest, are less than the resale price provided in the
agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, the Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and is required to
return the underlying security to the seller's estate.
Variable or Floating Rate Instruments
The Fund may invest in variable or floating rate instruments which may involve a
demand feature and may include variable amount master demand notes which may or
may not be backed by bank letters of credit. The holder of an instrument with a
demand feature may tender the instrument back to the issuer at par prior to
maturity. A variable amount master demand note is issued pursuant to a written
agreement between the issuer and the holder, its amount may be increased by the
holder or decreased by the holder or issuer, it is payable on demand, and the
rate of interest varies based upon an agreed formula. The quality of the
underlying credit must, in the opinion of the Adviser, be equivalent to the
long-term bond or commercial paper ratings applicable to permitted investments
for the Fund. The Adviser will monitor on an ongoing basis the earnings power,
cash flow and liquidity ratios of the issuers of such instruments and will
similarly monitor the ability of an issuer of a demand instrument to pay
principal and interest on demand.
When-Issued and Delayed Delivery Securities
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although the Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its investment portfolio, the
Fund may dispose of a when-issued security or forward commitment prior to
settlement if it deems appropriate.
S-8
<PAGE>
INVESTMENT LIMITATIONS
Fundamental Policies
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of the Fund which cannot be changed with respect to the
Fund without the consent of the holders of a majority of the Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of the Fund's shares present at a meeting, if more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
1. 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 fund to purchase securities or require
the Fund to segregate assets are not considered to be borrowings. Asset
coverage of a least 300% is required for all borrowings, except where
the Fund has borrowed money for temporary purposes in amounts not
exceeding 5% of its total assets. The Fund will not purchase securities
while its borrowings exceed 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would
be lent to other parties, except that the Fund may (i) purchase or hold
debt instruments in accordance with its investment objective and
policies; (ii) enter into repurchase agreements; and (iii) lend its
securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that the Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.
4. Issue senior securities (as defined in the Investment Company Act of
1940 (the "1940 Act")) except as permitted by rule, regulation or order
of the Securities and Exchange Commission (the "SEC").
5. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
6. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
The foregoing percentages (except with respect to the limitation on borrowing)
will apply at the time of the purchase of a security and shall not be considered
violated
S-9
<PAGE>
unless an excess or deficiency occurs immediately after or as a result of a
purchase of such security.
Non-Fundamental Policies
The following investment limitations are non-fundamental policies of the Fund
and may be changed with respect to the Fund by the Board of Trustees.
The Fund may not:
1. Pledge, mortgage or hypothecate assets except to secure borrowings
permitted by the Fund's fundamental limitation on borrowing.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that the
Fund may (i) obtain short-term credits as necessary for the clearance
of security transactions; (ii) provide initial and variation margin
payments in connection with transactions involving futures contracts
and options on such contracts; and (iii) make short sales "against the
box" or in compliance with the SEC's position regarding the asset
segregation requirements imposed by Section 18 of the 1940 Act.
4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act.
5. Purchase or hold illiquid securities, i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing
in more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
In addition, the Fund will invest no more than 5% of its net assets in short
sales, unregistered securities, futures contracts, options and investment
company securities. Unregistered securities sold in reliance on the exemption
from registration in Section 4(2) of the 1933 Act and securities exempt from
registration on re-sale pursuant to Rule 144A of the 1933 Act may be treated as
liquid securities under procedures adopted by the Board of Trustees.
THE ADVISER
The Trust and Clover Capital Management, Inc. (the "Adviser") have entered into
an advisory agreement (the "Advisory Agreement"). The Advisory Agreement
provides that the Adviser shall not be protected against any liability to the
Trust or its shareholders by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
S-10
<PAGE>
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of the Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds limitations established by any state in which the shares of the Fund are
registered, the Adviser will bear the amount of such excess. The Adviser will
not be required to bear expenses of the Fund to an extent which would result in
the Fund's inability to qualify as a regulated investment company under
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
The continuance of the Advisory Agreement as to the Fund after the first two
years must be specifically approved at least annually (i) by the vote of the
Trustees or by a vote of the shareholders of the Fund, and (ii) by the vote of a
majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at any
time without penalty by the Trustees of the Trust or, with respect to the Fund,
by a majority of the outstanding shares of the Fund, on not less than 30 days'
nor more than 60 days' written notice to the Adviser, or by the Adviser on 90
days' written notice to the Trust.
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") have entered into an
administration agreement (the "Administration Agreement"). The Administration
Agreement provides that the Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the matters to which the Administration Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Administrator in the performance of its duties or from reckless disregard by
it of its duties and obligations thereunder. The Administration Agreement shall
remain in effect for a period of three (3) years after the effective date of the
agreement and shall continue in effect for successive periods of one (1) year
unless terminated by either party on not less than 90 days' prior written notice
to the other party.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SEI Investments Management Corporation, a
wholly-owned subsidiary of SEI Investments Company ("SEI"), is the owner of all
beneficial interests in the Administrator. SEI and its affiliates, including the
Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors and money managers. The Administrator and
its affiliates also serve as administrator to the following other mutual funds:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, The Arbor Fund,
ARK Funds, Bishop Street Funds, CoreFunds, Inc., CrestFunds, Inc., CUFUND, The
Expedition Funds, FMB Funds, First American Funds, Inc., First American
Investment Funds, Inc., First American Strategy Funds, Inc., Marquis Funds(R),
Monitor Funds, Morgan Grenfell Investment Trust, The PBHG Funds, Inc., The
Pillar Funds, Profit Funds Investment Trust, Rembrandt Funds(R), Santa
S-11
<PAGE>
Barbara Group of Mutual Funds, Inc., 1784 Funds(R), SEI Asset Allocation Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional Investments Trust,
SEI Institutional Managed Trust, SEI International Trust, SEI Liquid Asset
Trust, SEI Tax Exempt Trust, STI Classic Funds and STI Classic Variable Trust.
THE DISTRIBUTOR
CCM Securities, Inc. (the "Distributor"), a wholly-owned subsidiary of CCM, and
the Trust are parties to a distribution agreement (the "Distribution
Agreement"). The Distributor receives no compensation for distribution of shares
of the Fund.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and is renewable annually. The
Distribution Agreement may be terminated by the Distributor or by the Trust, by
a majority vote of the Trustees who are not interested persons and have no
financial interest in the Distribution Agreement or by a majority vote of the
outstanding securities of the Trust upon not more than 60 days' written notice
by either party or upon assignment by the Distributor.
TRUSTEES AND OFFICERS 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 and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each may have held other positions with the named companies during
that period. The Trust pays the fees for unaffiliated Trustees.
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain
officers of the Trust also serve as officers of some or all of the following:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, The Arbor Fund,
ARK Funds, Bishop Street Funds, Boston 1784 Funds(R), CoreFunds, Inc.,
CrestFunds, Inc., CUFUND, The Expedition Funds, FMB Funds, Inc., First American
Funds, Inc., First American Investment Funds, Inc., First American Strategy
Funds, Inc, HighMark Funds, Marquis Funds(R), Monitor Funds, Morgan Grenfell
Investment Trust, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The
Pillar Funds, Profit Funds Investment Trust, Rembrandt Funds(R), Santa Barbara
Group of Mutual Funds, Inc., SEI Asset Allocation Trust, SEI Daily Income Trust,
SEI Index Funds, SEI Institutional Investments Trust, SEI Institutional Managed
Trust, SEI International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
STI Classic Funds, and STI Classic Variable Trust, each of which is an open-end
management investment company managed by SEI Fund Resources or its affiliates
and, except for Profit Funds Investment Trust, Rembrandt Funds(R), and Santa
Barbara Group of Mutual Funds, Inc., are distributed by SEI Investments
Distribution Co.
S-12
<PAGE>
ROBERT E. TURNER (DOB 11/26/56) - Trustee* - Chairman and Chief Investment
Officer of Turner Investment Partners, Inc. (the Adviser) since 1990.
RICHARD A. HOCKER (DOB 07/21/46) - Trustee* - CEO and Chairman of the Board of
Covenant Bank, 1988-1997. Director of Bedminister Bioconversion Corporation,
since 1988. Chief Investment Officer and Senior Vice President of Penn Capital
Management Co., Inc., since 1987.
MICHAEL E. JONES (DOB 12/24/54) - Trustee* - Managing Director, Co-Founder,
Investment Adviser and Portfolio Manager with Clover Capital Management Inc.,
since 1984. Principal of CCM Securities Inc.
ALFRED C. SALVATO (DOB 01/09/58) - Trustee** - Treasurer, Thomas Jefferson
University Health Care Pension Fund, since 1995, and Assistant Treasurer,
1988-1995.
JOHN T. WHOLIHAN (DOB 12/12/37) - Trustee** - Professor, Loyola Marymount
University, since 1984.
JANET F. SANSONE (DOB 08/11/45) - Trustee** - Corporate Vice President of Human
Resources of Frontier Corporation (telecommunications company), since 1993.
Director of Education at General Electric Corporation, 1982-1993.
STEPHEN J. KNEELEY (DOB 02/09/63) - President and Chief Executive Officer -
Chief Operating Officer of Turner Investment Partners, Inc., since 1990.
JANET RADER ROTE (DOB 08/24/60) - Vice President and Assistant Secretary -
Director of Compliance of Turner Investment Partners, Inc., since 1992.
TODD B. CIPPERMAN (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the administrator and distributor
since 1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate,
Winston and Strawn (law firm), 1991-1994.
SANDRA K. ORLOW (DOB 10/18/53) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of the Administrator and Distributor since
1988.
KEVIN P. ROBINS (DOB 04/15/61) - Vice President, Assistant Secretary - Senior
Vice President, General Counsel and Assistant Secretary of SEI, Senior Vice
President, General Counsel and Secretary of the Administrator and Distributor
since 1994. Vice President and Assistant Secretary of SEI, the Administrator and
Distributor 1992-1994. Associate, Morgan, Lewis & Bockius LLP (law firm),
1988-1992.
KATHRYN L. STANTON (DOB 11/19/58) - Vice President and Assistant Secretary -
Deputy General Counsel, Vice President and Assistant Secretary of SEI, Vice
President and Assistant Secretary of the Administrator and Distributor, since
1994. Associate, Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
S-13
<PAGE>
ROBERT DELLACROCE (DOB 12/17/63) - Controller and Chief Accounting Officer -
Director, Funds Administration and Accounting of SEI since 1994. Senior Audit
Manager, Arthur Andersen LLP, 1986-1994.
BARBARA A. NUGENT (DOB 06/18/56) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1996. Associate, Drinker, Biddle & Reath (law firm) (1994-1996). Assistant
Vice President - Operations of Delaware Service Company, Inc. (1988-1993).
MARC H. CAHN (DOB 06/19/57) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1996. Associate General Counsel, Barclays Bank PLC (1995-1996). ERISA
counsel, First Fidelity Bancorporation (1994-1995), Associate, Morgan, Lewis &
Bockius LLP (1989-1994).
JAMES W. JENNINGS (DOB 01/15/37) - Secretary - Partner, Morgan, Lewis & Bockius
LLP (law firm), counsel to the Trust, the Adviser, the Administrator and
Distributor.
JOHN H. GRADY, JR. (DOB 06/01/61) - Assistant Secretary - 1800 M Street, N.W.,
Washington, D.C. 20036, Partner, Morgan, Lewis & Bockius LLP, Counsel to the
Trust, Adviser, Administrator and Distributor.
EDWARD B. BAER (DOB 09/27/68) - Assistant Secretary - 1800 M Street, N.W.,
Washington, D.C. 20036, Associate, Morgan, Lewis & Bockius LLP, Counsel to the
Trust, Adviser, Administrator and Distributor, since 1995. Attorney, Aquila
Management Corporation, 1994. Rutgers University School of Law - Newark, 1991-
1994.
------------------------
The following table exhibits Trustee compensation for the fiscal year ended
September 30, 1997.
<TABLE>
<CAPTION>
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Benefits Compensation
From Registrant Benefits Accrued Upon From Registrant
for the Fiscal as Part of Fund Retirement and Fund
Year Ended Expenses Complex Paid to
September 30, Trustees for the
1997 Fiscal Year
Ended
September 30,
1997
<S> <C> <C> <C> <C>
Robert Turner* $0 N/A N/A $0
Richard A. Hocker(1)* $0 N/A N/A $0
Michael E. Jones(1)* $0 N/A N/A $0
Janet F. Sansone(1)** $0 N/A N/A $0
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Joan Lamm-Tennant(2) $2,000 N/A N/A $2,000
Alfred C. Salvato** $8,000 N/A N/A $8,000
John T. Wholihan** $8,000 N/A N/A $8,000
</TABLE>
(1) Elected to the Board on August 21, 1997.
(2) Resigned from the Board on March 17, 1997.
* Messrs. Robert Turner, Richard Hocker and Michael Jones are Trustees who may
be deemed to be "interested persons" of the Trust as the term is defined in the
1940 Act. The Trust pays fees only to the Trustees who are not interested
persons of the Trust. Compensation of Officers and interested persons of the
Trust is paid by the adviser or the manager.
** Member of the Audit Committee.
The Trustees and Officers of the Trust own less than 1% of the outstanding
shares of the Trust.
COMPUTATION OF YIELD AND TOTAL RETURN
From time to time the Trust may advertise yield and total return of the Funds.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of the Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The yield
is calculated by assuming that the income generated by the investment during
that 30-day period is generated in each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
Yield = 2[((a-b)/cd + 1)6 - 1] where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
current daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
The total return of the Fund refers to the average compounded rate of return to
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. In particular, total return will be calculated according to the
following formula: P (1 + T)n = ERV, where P = a hypothetical initial payment of
$1,000; T = average annual total return; n = number of years; and ERV = ending
redeemable value, as of the end of the designated time period, of a hypothetical
$1,000 payment made at the beginning of the designated time period.
S-15
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on days when
the New York Stock Exchange is open for business. Currently, the weekdays on
which the Fund is closed for business are: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Shares of the Fund are offered on a
continuous basis.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Shareholders may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of the Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Trust also
reserves the right to suspend sales of shares of the Fund for any period during
which the New York Stock Exchange, the Adviser, the Administrator, the Transfer
Agent and/or the Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The securities of the Fund are valued by the Administrator. The Administrator
may use an independent pricing service to obtain valuations of securities. The
pricing service relies primarily on prices of actual market transactions as well
as on trade quotations obtained from third parties. The procedures of the
pricing service and its valuations are reviewed by the officers of the Trust
under the general supervision of the Trustees.
TAXES
The following is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisors with
specific reference to their own tax situations, including their state and local
tax liabilities.
Federal Income Tax
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
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The Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, the Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which it
may be subject.
In order to qualify for treatment as a RIC under the Code, the Fund must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, or certain other income (including
gains from options, futures or forward contracts); (ii) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount that does not exceed 5% of
the value of the Fund's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which are
engaged in the same, similar or related trades or business if the Fund owns at
least 20% of the voting power of such issuer.
Notwithstanding the Distribution Requirement described above, which requires
only that the Fund distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income (the excess of short- and
long-term capital gains over short-and long-term capital losses) for the
one-year period ending on October 31 of that year, plus certain other amounts.
In certain cases, the Fund will be required to withhold, and remit to the United
States Treasury, 31% of any distributions paid to a shareholder who (1) has
failed to provide a correct taxpayer identification number, (2) is subject to
backup withholding by the Internal Revenue Service, or (3) has not certified to
that Fund that such shareholder is not subject to backup withholding.
If the Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, and such
distributions will generally be eligible for the corporate dividends-received
deduction.
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The Fund 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 (an "In-Kind Investors") or to investors who acquire
shares of the Fund after a transfer (Anew shareholders@). As a result of an
In-Kind Purchase, the 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 the 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 the 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 the
Fund.
State Taxes
The Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by the Fund to
shareholders and the ownership of shares may be subject to state and local
taxes.
PORTFOLIO TRANSACTIONS
The Adviser is authorized to select brokers and dealers to effect securities
transactions for the Fund. The Adviser will seek to obtain the most favorable
net results by taking into account various factors, including price, commission,
if any, size of the transactions and difficulty of executions, the firm's
general execution and operational facilities and the firm's risk in positioning
the securities involved. While the Adviser generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer the Fund best price and execution or other services which are
of benefit to the Fund.
The Fund has no obligation to deal with any broker-dealer or group of
broker-dealers in the execution of transactions in portfolio securities. Subject
to policies established by the Trustees of the Fund, the Adviser is responsible
for placing the orders to execute transactions for the Fund. In placing orders,
it is the policy of the Fund to seek
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to obtain the best net results taking into account such factors as price
(including the applicable dealer spread), the size, type and difficulty of the
transaction involved, the firm's general execution and operational facilities
and the firm's risk in positioning the securities involved. While the Adviser
generally seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available.
The money market instruments in which the Fund invest are traded primarily in
the over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Adviser
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money market
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the Fund will primarily consist of dealer spreads and
underwriting commissions.
The Adviser may, consistent with the interests of the Fund, select brokers on
the basis of the research services they provide to the Adviser. Such services
may include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Information so received by
the Adviser will be in addition to and not in lieu of the services required to
be performed by the Adviser under the Advisory Agreement. If, in the judgment of
the Adviser, the Fund or other accounts managed by the Adviser will be
benefitted by supplemental research services, the Adviser is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer software used in security analyses; and providing portfolio
performance evaluation and technical market analyses. The expenses of the
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information, such services may not be used exclusively, or at all,
with respect to the Fund or account generating the brokerage, and there can be
no guarantee that the Adviser will find all of such services of value in
advising the Fund.
It is not expected that the Fund will execute brokerage or other agency
transactions through the Distributor, which, although a registered
broker-dealer, is limited to the sale of shares of mutual funds, for a
commission in conformity with the 1940 Act, the Securities Exchange Act of 1934
and rules promulgated by the SEC. Commissions paid to the Distributor by the
Fund for exchange transactions must not exceed "usual and customary" brokerage
commissions. The rules define "usual and customary" commissions to include
amounts which are "reasonable and fair compared to the
S-19
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commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." The Trustees, including those who are not "interested persons" of the
Trust, have adopted procedures for evaluating the reasonableness of commissions
paid to the Distributor and will review these procedures periodically.
Because the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the Fund's shares to clients, and may, when a
number of brokers and dealers can provide best net results on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of the fund. Each share of the fund represents an equal
proportionate interest in the fund with each other share. Shares are entitled
upon liquidation to a pro rata share in the net assets of the fund. Shareholders
have no preemptive rights. All consideration received by the Trust for shares of
any portfolio and all assets in which such consideration is invested would
belong to that portfolio and would be subject to the liabilities related
thereto. Share certificates representing shares will not be issued.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the Trust. Even if, however, the Trust were held to be a partnership, the
possibility of the shareholders' incurring financial loss for that reason
appears remote because the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for obligations of the Trust, and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any shareholder held personally liable for the
obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his
own willful defaults and, if reasonable care has been exercised in the selection
of officers, agents, employees or investment advisers, shall not be liable for
any neglect or wrongdoing of any such person. The Declaration of Trust also
provides that the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices
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with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his willful misfeasance, bad faith, gross negligence or reckless disregard
of his duties.
FINANCIAL INFORMATION
Ernst & Young LLP has been selected to serve as the Funds independent public
accountants.
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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.
Debt rated BB, B, CCC, CC and C is regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the least degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties of major risk exposures to adverse conditions.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
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
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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.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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 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.
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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") 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
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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.
A-4
