TIP FUNDS
Investment Adviser:
TURNER INVESTMENT PARTNERS, INC.
TIP Funds (the "Trust") provides a convenient and economical means of investing
in professionally managed portfolios of securities. This Prospectus offers
shares of the following mutual funds (each a "Fund" and, together, the "Funds"),
each of which is a separate series of the Trust:
TURNER ULTRA LARGE CAP GROWTH FUND
TURNER GROWTH EQUITY FUND
TURNER MIDCAP GROWTH FUND
TURNER SMALL CAP GROWTH FUND
This Prospectus concisely sets forth the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated January 31, 1998, 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.
EFFECTIVE ON AUGUST 30, 1997, THE SMALL CAP GROWTH FUND CLOSED TO MOST NEW
INVESTORS. SHAREHOLDERS OF THE SMALL CAP GROWTH FUND AS OF THAT DATE MAY
CONTINUE TO MAKE INVESTMENTS IN THE FUND, AND MAY OPEN ADDITIONAL ACCOUNTS WITH
THE FUND, PROVIDED THE NEW ACCOUNT IS REGISTERED IN THE SAME NAME OR HAS THE
SAME TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER ASSIGNED TO IT. IN
ADDITION, CERTAIN LIMITED CLASSES OF NEW INVESTORS MAY ALSO PURCHASE SHARES. SEE
"PURCHASE AND REDEMPTION OF SHARES."
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.
January 31, 1998
<PAGE>
TABLE OF CONTENTS
Summary..................................................... 3
Expense Summary............................................. 5
Financial Highlights........................................ 7
The Trust and the Funds..................................... 12
Investment Objectives....................................... 12
Investment Policies......................................... 12
Risk Factors................................................ 13
Investment Limitations...................................... 14
The Adviser................................................. 14
The Administrator........................................... 15
The Transfer Agent.......................................... 15
The Distributor............................................. 15
Portfolio Transactions...................................... 15
Purchase and Redemption of Shares........................... 16
Performance................................................. 18
Taxes....................................................... 19
General Information......................................... 20
Description of Permitted Investments and Risk Factors....... 21
2
<PAGE>
SUMMARY
The following provides basic information about the Turner Ultra Large Cap
Growth Fund (the "Ultra Large Cap Fund"), Turner Growth Equity Fund (the "Growth
Equity Fund"), Turner Midcap Growth Fund (the "Midcap Fund"), and Turner Small
Cap Growth Fund (the "Small Cap Fund") (each a "Fund" and, collectively, the
"Funds"). The Funds are four of the thirteen mutual funds comprising the TIP
Funds (the "Trust"). This summary is qualified in its entirety by reference to
the more detailed information provided elsewhere in this Prospectus and in the
Statement of Additional Information.
What is each Fund's goal and its primary policies?
The Ultra Large Cap Fund seeks capital appreciation. It invests primarily in
a diversified portfolio of common stocks of issuers with, at the time of
purchase, market capitalizations in excess of $10 billion that the Adviser
believes offer strong earnings growth potential.
The Growth Equity Fund seeks capital appreciation. It invests primarily in a
diversified portfolio of common stocks that, in the Adviser's opinion, have
strong earnings growth potential.
The Midcap Fund seeks capital appreciation. It invests primarily in a
diversified portfolio of common stocks of issuers with, at the time of purchase,
market capitalizations between $500 million and $6 billion that the Adviser
believes offer strong earnings growth potential.
The Small Cap Fund seeks capital appreciation. It invests primarily in a
diversified portfolio of common stocks of issuers with market capitalizations of
not more than $1 billion that the Adviser believes offer strong earnings growth
potential.
What are the risks involved with investing in the Funds? The investment
policies of each Fund entail certain risks and considerations of which investors
should be aware. Each Fund invests in securities that fluctuate in value, and
investors should expect each 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 Funds may enter into futures and options transactions and may
purchase zero coupon securities. Each of the Funds, other than the Ultra Large
Cap Fund and the Midcap Fund, may purchase mortgage-backed securities, and
certain of the Funds may purchase securities of foreign issuers. Investments in
these securities involve certain other risks.
For more information about each Fund, see "Investment Objectives,"
"Investment Policies," "Risk Factors," and "Description of Permitted Investments
and Risk Factors."
Who is the Adviser? Turner Investment Partners, Inc. (the "Adviser"),
serves as the investment adviser to each 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 Funds. See "Expense
Summary" and "The Administrator."
Who is the Distributor? SEI Investments Distribution Co. (the
"Distributor") serves as the distributor of the Funds' shares. See "The
Distributor."
Who is the Transfer Agent? DST Systems, Inc., serves as the transfer agent
and dividend disbursing agent for the Trust. See "The Transfer Agent."
3
<PAGE>
Is there a sales load? No, shares of each Fund are offered on a no-load
basis.
Is there a minimum investment? The Funds require a minimum initial
investment of $2,500 ($2,000 for IRAs), which the Distributor may waive at its
discretion. Subsequent purchases must be at least $500.
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. See "Purchase and Redemption of Shares."
How are distributions paid? Each Fund distributes substantially all of its
net investment income (exclusive of capital gains) in the form of periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
4
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fees(1).......................................... None
Exchange Fees............................................... None
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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)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
GROWTH
ULTRA LARGE EQUITY MIDCAP SMALL CAP
CAP FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory Fees (after fee waivers or reimbursements,
if applicable)(1)......................................... .75% .75% .75% 1.00%
12b-1 Fees.................................................. None None None None
Other Expenses(2)........................................... .25% .25% .50% .25%
- -------------------------------------------------------------------------------------------------------
Total Operating Expenses (after fee waivers or
reimbursements)(3)........................................ 1.00% 1.00% 1.25% 1.25%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Adviser has agreed, on a voluntary basis, to waive its advisory fee for
the Ultra Large Cap, Growth Equity, Midcap, and Small Cap Funds to the
extent necessary to keep the "Total Operating Expenses" of the Funds during
the current fiscal year from exceeding 1.00%, 1.00%, 1.25%, and 1.25%,
respectively. The Adviser reserves the right to terminate its waivers at any
time in its sole discretion.
(2) "Other Expenses" for the current fiscal year do not reflect the value of
arrangements whereby certain broker-dealers have agreed to pay certain
expenses of the Ultra Large Cap, Growth Equity, Midcap and Small Cap Funds
in return for the direction of a percentage of the Funds' brokerage
transactions. As a result of these arrangements, the amount of "Other
Expenses" and "Total Operating Expenses" deducted from the Ultra Large Cap
Fund's assets is expected to be .15% and 1.00%, respectively. As a result of
these arrangements, the amount of "Other Expenses" and "Total Operating
Expenses" deducted from the Growth Equity Fund's assets is expected to be
.13% and .93%, respectively, the amount of "Other Expenses" and "Total
Operating Expenses" expected to be deducted from Midcap Fund's assets is
.46% and 1.25%, respectively, and the amount of "Other Expenses" and "Total
Operating Expenses" expected to be deducted from the Small Cap Fund's assets
are anticipated to be .21% and 1.25%, respectively.
(3) Absent fee waivers, expense reimbursements, and assuming that certain
expenses were not paid for by certain broker-dealers in return for the
direction to them of brokerage transactions, "Total Operating Expenses" for
the Ultra Large Cap, Growth Equity, Midcap and Small Cap Funds would be
26.45%,1.05%, 7.96%,and 1.33%, respectively. The amounts for Ultra Large Cap
and Midcap Funds have been estimated based on current expectations and
assumptions.
5
<PAGE>
EXAMPLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment
in a Fund assuming (1) a 5% annual return and (2)
redemption at the end of each time period.
<S> <C> <C> <C> <C>
Ultra Large Cap Growth Fund............................. $10 $32 $55 $122
Growth Equity Fund...................................... $10 $32 $55 $122
Midcap Growth Fund...................................... $13 $40 $69 $151
Small Cap Growth Fund................................... $13 $40 $69 $151
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF EACH 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 Funds.
Additional information may be found under "The Adviser" and "The Administrator."
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997 with
respect to the Ultra Large Cap Fund has been derived from the financial
statements audited by Ernst & Young LLP, the Fund's independent auditors, whose
report dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. The following table should be read in conjunction with
the Fund's financial statements and the notes thereto. Additional performance
information is set forth in the Trust's 1997 Annual Report to Shareholders,
which is available upon request and without charge by calling 1-800-224-6312.
For a Share Outstanding Throughout the Period:
ULTRA LARGE CAP
GROWTH FUND(1)
- -----------------------------------------------------------------------------
2/01/97
TO
09/30/97
- -----------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
- -----------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income (Loss).............................. 0.01
Net Realized and Unrealized
Gain (Loss) on Investments.............................. 2.27
- -----------------------------------------------------------------------------
Total From Investment Operations............................ $ 2.28
- -----------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment Income........................ --
Distributions from Capital Gains............................ --
Total Distributions................................... --
- -----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 12.28
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TOTAL RETURN................................................ 22.80%
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RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000)............................. $ 701
Ratios Of Expenses To Average Net Assets.................... 1.00%*
Ratio Of Net Investment Income To Average Net Assets........ 0.20%*
Ratio Of Expenses To Average Net Assets (Excluding Waivers
and Contributions)........................................ 26.45%*
Ratio Of Net Investment Income to Average Net Assets
(Excluding Waivers and Contributions)..................... (25.25)%
Portfolio Turnover Rate..................................... 346.47%
Average Commission(2)....................................... $ 0.0600
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- -----------------------------------------------------------------------------
* Annualized
(1) Commenced operations February 1, 1997.
(2) Average commission rate paid per share for the security purchases and sales
during the period.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997 with
respect to the Growth Equity Fund has been derived from the financial statements
audited by Ernst & Young LLP, the Fund's independent auditors, whose report
dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. On April 30, 1996, the Growth Equity Fund acquired all
of the assets and liabilities of the Turner Growth Equity Portfolio of The
Advisors' Inner Circle Fund. The information prior to that date relates to the
Turner Growth Equity Portfolio. The financial statements of the Turner Growth
Equity Portfolio of The Advisors' Inner Circle Fund were audited by Arthur
Andersen LLP. The following table should be read in conjunction with the Fund's
financial statements and the notes thereto. Additional performance information
is set forth in the Trust's 1997 Annual Report to Shareholders, which is
available upon request and without charge by calling 1-800-224-6312. All
references herein to the Growth Equity Fund shall be deemed to include the
Turner Growth Equity Portfolio.
For a Share Outstanding Throughout the Period:
<TABLE>
<CAPTION>
GROWTH EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------
10/01/96 11/01/95 11/01/94 11/01/93 11/01/92 03/11/92(1)
TO TO TO TO TO TO
09/30/97 09/30/96 10/31/95 10/31/94 10/31/93 10/31/92
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 17.03 $ 14.97 $ 12.46 $ 13.12 $ 10.40 $10.00
- ------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations:
Net Investment Income
(Loss)..................... (0.03) 0.02 0.10 0.10 0.09 0.03
Net Realized and Unrealized
Gain (Loss) on
Investments................ 4.23 2.91 2.52 (0.66) 2.72 0.40
- ------------------------------------------------------------------------------------------------------------------
Total From Investment
Operations................... 4.20 2.93 2.62 (0.56) 2.81 0.43
- ------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment
Income....................... -- (0.02) (0.11) (0.10) (0.09) (0.03)
Distributions from Capital
Gains........................ (4.59) (0.85) -- -- -- --
Total Distributions...... (4.59) (0.87) (0.11) (0.10) (0.09) (0.03)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD....................... $ 16.64 $ 17.03 $ 14.97 $ 12.46 $ 13.12 $10.40
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................... 32.61% 20.61% 21.15% (4.28)% 27.08% 6.95%*
- ------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period
(000)........................ $99,590 $96,164 $115,819 $112,959 $53,327 $7,781
Ratios Of Expenses To Average
Net Assets................... 1.02%(2)* 1.06%(2)* 1.03%(2) 0.95% 1.00% 1.44%*
Ratio Of Expenses To Average
Net Assets Excluding Fee
Waivers...................... 1.05%(2) 1.06%(2)* 1.03%(2) 1.08% 1.52% 2.55%*
Ratio Of Net Investment Income
(Loss) To Average Net
Assets....................... (0.25)%(2) 0.03%(2)* 0.69%(2) 0.86% 0.80% 0.73%*
Ratio Of Net Investment Income
(Loss) to Average Net Assets
(Excluding Fee Waivers)...... (0.28)%(2) 0.03%(2)* 0.69%(2) 0.73% 0.28% (0.38)%*
Portfolio Turnover Rate........ 178.21% 147.79% 177.86% 164.81% 88.35% 205.00%
Average Commission(3).......... $ 0.06 $ 0.06 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
8
<PAGE>
(1) The Turner Growth Equity Portfolio commenced operations on March 11, 1992.
(2) The Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets do not reflect the Adviser's use of arrangements whereby
certain broker-dealers have agreed to pay certain expenses of the Turner
Growth Equity Fund in return for the direction of a percentage of the Fund's
brokerage transactions. These arrangements reduced the Ratio of Expenses to
Average Net Assets to 0.96% (0.99% excluding waivers) for the year ended
9/30/97, 0.94% for the eleven month period ended 9/30/96 and 0.94% for the
year ended 10/31/95 and the Ratios of Net Investment Income (Loss) to
Average Net Assets to (0.19%) ((0.22%) excluding waivers) and 0.15% and
0.78% for the same periods described.
(3) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is required for fiscal years
beginning after September 1, 1995.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997 with
respect to the Midcap Fund has been derived from the financial statements
audited by Ernst & Young LLP, the Fund's independent auditors, whose report
dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. The following table should be read in conjunction with
the Fund's financial statements and the notes thereto. Additional performance
information is set forth in the Trust's 1997 Annual Report to Shareholders,
which is available upon request and without charge by calling 1-800-224-6312.
For a Share Outstanding Throughout the Period:
MIDCAP
GROWTH FUND(1)
- ----------------------------------------------------------------------------
10/01/96
TO
09/30/97
- ----------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
- ----------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income (Loss).............................. (0.03)
Net Realized and Unrealized Gain (Loss) on Investments.... 4.36
- ----------------------------------------------------------------------------
Total From Investment Operations............................ $ 4.33
- ----------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment Income........................ --
Distributions from Capital Gains............................ $ (0.11)
Total Distributions................................... $ (0.11)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 14.22
- ----------------------------------------------------------------------------
TOTAL RETURN................................................ 43.77%
- ----------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000)............................. $ 5,145
Ratios Of Expenses To Average Net Assets.................... 1.25%
Ratio Of Expenses To Average Net Assets Excluding Fee
Waivers................................................... 7.96%
Ratio Of Net Investment Loss To Average Net Assets.......... (0.62)%
Ratio Of Net Investment Loss to Average Net Assets
(Excluding Fee Waivers and Contributions)................. (7.33)%
Portfolio Turnover Rate..................................... 348.29%
Average Commission(2)....................................... $ 0.06
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
* Annualized
(1) Commenced operations October 1, 1996.
(2) Average commission rate paid per share for security purchases and sales
during the period.
10
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997 with
respect to the Small Cap Growth Fund has been derived from the financial
statements audited by Ernst & Young LLP, the Fund's independent auditors, whose
report dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. On April 30, 1996, the Small Cap Growth Fund acquired
all of the assets and liabilities of the Turner Small Cap Portfolio of The
Advisors' Inner Circle Fund. The information prior to that date relates to the
Turner Small Cap Portfolio. The financial statements of the Turner Small Cap
Portfolio of The Advisors' Inner Circle Fund were audited by Arthur Andersen
LLP. The following table should be read in conjunction with the Fund's financial
statements and the notes thereto. Additional performance information is set
forth in the Trust's 1997 Annual Report to Shareholders, which is available upon
request and without charge by calling 1-800-224-6312. All references herein to
the Small Cap Growth Fund shall be deemed to include the Turner Small Cap
Portfolio.
For a Share Outstanding Throughout the Period:
<TABLE>
<CAPTION>
SMALL CAP
GROWTH FUND
- ------------------------------------------------------------------------------------------------------------
10/01/96 11/01/95 11/01/94 02/07/94(1)
TO TO TO TO
09/30/97 09/30/96 10/31/95 10/31/94
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 23.13 $ 16.08 $ 10.90 $ 10.00
- ------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income (Loss)........................ (0.07) (0.08) (0.06) (0.02)
Net Realized and Unrealized Gain (Loss) on
Investments....................................... 3.80 8.17 5.24 0.92
- ------------------------------------------------------------------------------------------------------------
Total From Investment Operations...................... 3.73 8.09 $ 5.18 .90
- ------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends From Net Investment Income.................. -- -- -- --
Distributions from Capital Gains...................... (0.51) (1.04) -- --
Total Distributions............................. (0.51) (1.04) -- --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ $ 26.35 $ 23.13 $ 16.08 $ 10.90
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................... 16.64% 52.90% 47.52% 12.35%*
- ------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000)....................... $153,462 $67,425 $13,072 $ 4,806
Ratios Of Expenses To Average Net Assets.............. 1.24% 1.25%* 1.25% 1.09%*
Ratio Of Expenses To Average Net Assets Excluding Fee
Waivers............................................. 1.33% 1.54%* 2.39% 4.32%*
Ratio Of Net Investment Income (Loss) To Average Net
Assets.............................................. (0.84)% (0.88)%* (0.68)% (0.27)%*
Ratio Of Net Investment Income (Loss) to Average Net
Assets (Excluding Fee Waivers)...................... (0.93)% (1.17)%* (1.82)% (3.50)%*
Portfolio Turnover Rate............................... 130.68% 149.00% 183.49% 173.92%
Average Commission(2)................................. $ 0.06 $ 0.06 -- --
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
(1) The Turner Small Cap Portfolio commenced operations on February 7, 1994.
(2) Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is required for fiscal years
beginning after September 1, 1995.
11
<PAGE>
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 Turner Ultra Large Cap Growth Fund
(the "Ultra Large Cap Fund"), Turner Growth Equity Fund (the "Growth Equity
Fund"), Turner Midcap Growth Fund (the "Midcap Fund"), and Turner Small Cap
Growth Fund (the "Small Cap Fund") (each a "Fund" and, together, the "Funds").
INVESTMENT OBJECTIVES
ULTRA LARGE CAP GROWTH FUND -- The Ultra Large Cap Fund seeks capital
appreciation.
GROWTH EQUITY FUND -- The Growth Equity Fund seeks capital appreciation.
MIDCAP GROWTH FUND -- The Midcap Fund seeks capital appreciation.
SMALL CAP GROWTH FUND -- The Small Cap Fund seeks capital appreciation.
There can be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES
ULTRA LARGE CAP GROWTH FUND
The Ultra Large Cap Fund invests primarily (and, under normal conditions, at
least 65% of its total assets) in a diversified portfolio of common stocks of
issuers that, at the time of purchase, have market capitalizations in excess of
$10 billion that Turner Investment Partners, Inc. (the "Adviser"), believes to
have strong earnings growth potential. The Fund seeks to purchase securities
that are well diversified across economic sectors and to maintain sector
concentrations that approximate the economic sector weightings comprising the
Russell 200 Growth Index (or such other appropriate index selected by the
Adviser). Any remaining assets may be invested in securities issued by smaller
capitalization companies, warrants and rights to purchase common stocks, and
they may invest up to 10% of its total assets in American Depository Receipts
("ADRs"). The Fund only will purchase securities that are traded on registered
exchanges or the over-the-counter market in the United States. The Fund may
purchase shares of other investment companies and foreign securities.
GROWTH EQUITY FUND
The Growth Equity Fund invests as fully as practicable (and, under normal
conditions, at least 65% of its total assets) in a portfolio of common stocks
that the Adviser believes to have potential for strong growth in earnings and to
be reasonably valued at the time of purchase. The Fund seeks to purchase
securities that are well diversified across economic sectors and to maintain
sector concentrations that approximate the economic sector weightings of the
Russell 1000 Growth Index (or such other appropriate index selected by the
Adviser). The Fund may invest in warrants and rights to purchase common stocks,
and may invest up to 10% of its total assets in ADRs. The Fund only will
purchase securities that are traded on registered exchanges or the
over-the-counter market in the United States.
MIDCAP GROWTH FUND
The Midcap Fund invests primarily (and, under normal conditions, at least 65% of
its total assets) in a diversified portfolio of common stocks of issuers that,
at the time of purchase, have market capitalizations between $500 million and $6
billion that the Adviser believes to have strong earnings growth potential. The
Fund seeks to purchase securities that are well diversified across economic
sectors and to maintain sector concentrations that approximate the economic
sector weightings comprising the Russell Midcap Growth Index (or such other
appropriate index selected by the Adviser). Any remaining assets may be invested
in securities issued by smaller capitalization companies and larger
capitalization companies, warrants and rights to purchase common stocks, and it
may invest up to 10% of its total assets in ADRs. The Fund only will purchase
securities that are traded on registered exchanges or the over-the-counter
market in the United States. The Fund may purchase shares of other investment
companies.
SMALL CAP GROWTH FUND
The Small Cap Fund invests primarily (and, under normal conditions, at least 65%
of its total assets) in a diversified portfolio of common stocks of issuers with
12
<PAGE>
market capitalizations of not more than $1 billion that the Adviser believes to
have strong earnings growth potential. Under normal market conditions, the Fund
will maintain a weighted average market capitalization of less than $1 billion.
The Fund seeks to purchase securities that are well diversified across economic
sectors and to maintain sector concentrations that approximate the economic
sector weightings comprising the Russell 2500 Index (or such other appropriate
index selected by the Adviser), the Fund may invest in warrants and rights to
purchase common stocks, and may invest up to 10% of its total assets in ADRs.
The Fund only will purchase securities that are traded on registered exchanges
or the over-the-counter market in the United States.
ALL FUNDS
Each Fund may purchase securities on a when-issued basis and borrow money.
Each Fund may enter into futures and options transactions.
Each Fund may invest up to 15% of its net assets in illiquid securities.
Each Fund, except the Ultra Large Cap Fund and Midcap Fund, may purchase
convertible securities.
Each Fund may purchase fixed income securities.
Each Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including U.S. Government securities, bank
obligations, commercial paper rated in the highest rating category by an NRSRO,
repurchase agreements involving the foregoing securities), shares of money
market investment companies and cash.
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 -- Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
securities convertible into equity securities, such as warrants or convertible
debt, is also affected by prevailing interest rates, the credit quality of the
issuer and any call provision. Fluctuations in the value of equity securities in
which a fund invests will cause the net asset value of that fund to fluctuate.
An investment in such funds may be more suitable for long-term investors who can
bear the risk of short-term principal fluctuations.
The Small Cap Fund invests to a significant degree, and the Midcap Fund may
invest to a lesser degree, in equity securities of smaller companies. In
addition, the Ultra Large Cap Fund may invest in the securities of medium
capitalization companies. Any investment in smaller or medium capitalization
companies involves greater risk than that customarily associated with
investments in larger, more established companies. This increased risk may be
due to the greater business risks of smaller size, limited markets and financial
resources, narrow product lines and lack of depth of management. The securities
of smaller companies are often traded in the over-the-counter market and if
listed on a national securities exchange may not be traded in volumes typical
for that exchange. Thus, the securities of smaller-sized companies are likely to
be less liquid, and subject to more abrupt or erratic market movements than
securities of larger, more established growth companies.
SECURITIES OF FOREIGN ISSUERS -- Investments in the securities of foreign
issuers may subject a 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.
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PORTFOLIO TURNOVER -- Under normal circumstances, the portfolio turnover rate
for the Ultra Large Cap, Midcap, Growth Equity and Small Cap Funds is not
expected to exceed 200%, 200%, 175% and 175%, respectively. An annual portfolio
turnover rate in excess of 100% may result from the Adviser's investment
strategy of focusing on earnings potential and disposing of securities when the
Adviser believes that their earnings potential has diminished, or may result
from the Adviser's maintenance of appropriate issuer diversification. 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 each Fund and certain of the investment limitations
set forth here and in the Statement of Additional Information are fundamental
policies of that Fund. Fundamental policies cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares.
1. No Fund may (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 each Fund's total assets.
2. No Fund may 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.
3. No Fund may 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 the Fund to purchase securities or require the
Fund to segregate assets are not considered to be borrowings. Asset coverage of
at 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.
Each Fund will not purchase securities while its borrowings exceed 5% of its
total assets.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
Turner Investment Partners, Inc., is a professional investment management firm
founded in March, 1990. Robert E. Turner is the Chairman and controlling
shareholder of the Adviser. As of September, 1997, the Adviser had discretionary
management authority with respect to approximately $2.3 billion of assets. The
Adviser has provided investment advisory services to investment companies since
1992. The principal business address of the Adviser is 1235 Westlakes Drive,
Suite 350, Berwyn, Pennsylvania 19312.
The Adviser serves as the investment adviser for each Fund under an investment
advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Adviser makes the investment decisions for the assets of each Fund and
continuously reviews, supervises and administers each Fund's investment program,
subject to the supervision of, and policies established by, the Trustees of the
Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .75% of the average daily net assets of
the Ultra Large Cap, Growth Equity and Midcap Funds, and 1.00% of those of the
Small Cap Fund. The Adviser has voluntarily agreed to waive all or a portion of
its fee and to reimburse expenses of the Ultra Large Cap, Growth Equity, Midcap,
and Small Cap Funds in order to limit their total operating expenses (as a
percentage of average daily net assets on an annualized basis) to not more than
1.00%, 1.00%, 1.25%, and 1.25%, respectively. The Adviser received .00% for the
Ultra Large Cap Fund, .00% for the Midcap Fund, .72% for the Growth Equity Fund
and .92% for the Small Cap Fund for its advisory services during the fiscal year
ended September 30, 1997. The Adviser reserves the right, in its sole
discretion, to terminate these voluntary fee waivers and reimbursements at any
time.
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Robert E. Turner, CFA, Chairman and Chief Investment Officer of the Adviser, has
managed the Growth Equity Fund since its inception, and is co-manager of the
Ultra Large Cap Fund. Mr. Turner founded Turner Investment Partners, Inc. in
1990. Prior to 1990, he was Senior Investment Manager with Meridian Investment
Company. He has 16 years of investment experience.
John Hammerschmidt, Senior Equity Portfolio Manager, is a co-manager of the
Ultra Large Cap Fund. Mr. Hammerschmidt joined the Adviser in 1992. Prior to
1992, he was a Vice President in Government Securities Trading at S.G. Warburg.
He has 14 years of investment experience.
Christopher K. McHugh, Equity Portfolio Manager, is a co-manager of the Midcap
Fund. Mr. McHugh joined the Adviser in 1990. Prior to 1990, he was a Performance
Specialist with Provident Capital Management. He has 11 years of investment
experience.
William H. Chenoweth, CFA, Senior Equity Portfolio Manager of the Adviser, has
managed the Small Cap Fund since its inception, and is co-manager of the Midcap
Fund. Mr. Chenoweth joined Turner Investment Partners, Inc. in 1993. Prior to
1993, he was Second Vice President with Jefferson-Pilot Corporation. He has 12
years of investment experience.
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
each Fund, which is calculated daily and paid monthly, at an annual rate of .12%
of that 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. Each Fund is subject to a $75,000 minimum annual administration fee.
Once each of the Ultra Large Cap and the Midcap Funds reach $62.5 million in net
assets, the Administrator will receive asset-based fees in accordance with the
schedule set forth above. The Administrator may, at its sole discretion, waive
all or a portion of its fees.
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
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
PORTFOLIO TRANSACTIONS
Each Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation. The Adviser may direct commission business for the Ultra Large
Cap, Growth Equity, Midcap and Small Cap Funds to designated broker-dealers
(including the Distributor) in connection with such broker-dealers' payment of
certain Ultra Large Cap, Growth Equity, Midcap and Small Cap Fund expenses.
Since shares of the Funds are not marketed through intermediary broker-dealers,
no Fund has 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 any Fund with
qualified broker-dealers who refer clients to that Fund.
Some securities considered for investment by a Fund may also be appropriate for
other accounts and/or clients served by the Adviser. If the purchase or sale of
securities consistent with the investment policies of a Fund and another of the
Adviser's accounts and/or clients are considered at or about the same time,
transactions in such securities will be allocated among the Fund and the other
accounts and/or clients in a manner deemed equitable by the Adviser.
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PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of each 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.
The minimum initial investment in the Funds is $2,500 ($2,000 for IRAs), and
subsequent purchases must be at least $500. The Distributor may waive these
minimums at its discretion. No minimum applies to subsequent purchases effected
by dividend reinvestment.
MINIMUM ACCOUNT SIZE -- Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any account if, as the
result of redemptions, the value of that account drops below $2,500. You will be
allowed at least 60 days, after notice by the Fund, to make an additional
investment to bring your account value up to at least $2,500 before the
redemption is processed.
Certain brokers assist their clients in the purchase or redemption of shares and
charge a fee for this service in addition to a Fund's public offering price.
PURCHASES BY MAIL
An account may be opened by mailing a check or other negotiable bank draft
(payable to the name of the appropriate Fund) for $2,500 or more ($2,000 for
IRAs) together with a completed Account Application to: TIP Funds, P.O. Box
419805, Kansas City, Missouri 64141-6805. Third-Party checks, credit cards,
credit card checks and cash will not be accepted. When purchases are made by
check (including certified or cashier's checks), redemption proceeds will not be
forwarded until the check providing for the investment being redeemed has
cleared (which may take up to 15 days). Subsequent investments may also be
mailed directly to the Transfer Agent.
PURCHASES BY WIRE TRANSFER
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of 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: [___________
Fund]. The shareholder's name and account number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
GENERAL INFORMATION REGARDING PURCHASES
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the next
Business Day. A purchase request is in good order if it is complete and
accompanied by the appropriate documentation, including an Account Application
and additional documentation required. Payment may be made by check or readily
available funds. The purchase price of shares of any Fund is that 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 each Fund calculated to
three decimal places. The Trust will not issue certificates representing shares
of any 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 a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
WHO IS ELIGIBLE TO INVEST IN THE SMALL CAP GROWTH FUND NOW THAT THE FUND IS
CLOSED TO NEW INVESTORS?
Effective on August 30, 1997, the Board of Trustees closed the Small Cap Fund to
new investors. If you were a shareholder of the Small Cap Fund when it closed,
you will still be able to make additional investments in the Fund and reinvest
your dividends and capital gain distributions. Since the Fund is closed, you may
open a new account only if:
o your business or other organization is already a shareholder of the Fund and
you are opening an account for an employee benefit plan sponsored by that
organization or an affiliated organization;
o you are a current Fund trustee or officer, or an employee of Turner
Investment Partners, Inc., or a member of the immediate family of any of
those people;
o you are an existing advisory client of Turner Investment Partners, Inc.; or
o you are a client of a financial adviser or planner who has client assets
invested in the TIP Funds as of the date of any proposed new investment in
the Fund.
In addition, an employee benefit plan which is a Fund shareholder may continue
to buy shares in the ordinary course of the plan's operations, even for new plan
participants.
EXCHANGES
Shareholders of each Fund may exchange their shares for shares of the other
Funds that are then offering their shares to the public. Exchanges are made at
net asset value. An exchange is considered a sale of shares and may result in
capital gain or loss for federal income tax purposes. The shareholder must have
received a current prospectus for the new Fund before any exchange will be
effected, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order prior to the calculation of net asset value 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 the calculation of net asset value on any Business
Day will be effective that day. To redeem shares of the Fund, shareholders must
place their redemption orders with
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the Transfer Agent (or its authorized agent) prior to the calculation of net
asset value on any Business Day. Otherwise, the redemption order will be
effective on the next Business Day. The redemption price of shares of any Fund
is the net asset value per share of that 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.
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 restricting wire transfers. 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
transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are genuine.
Such procedures may include the taping of telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
A signature guarantee is a widely accepted way to protect shareholders by
verifying the signature on certain redemption requests. The Trust requires
signature guarantees to be provided in the following circumstances: (1) written
requests for redemptions in excess of $50,000; (2) all written requests to wire
redemption proceeds to a bank other than the bank previously designated on the
account application; and (3) redemption requests that provide that the
redemption proceeds should be sent to an address other than the address of
record or to a person other than the registered shareholder(s) for the account.
Signature guarantees can be obtained from any of the following institutions: a
national or state bank, a trust company, a federal savings and loan association,
or a broker-dealer that is a member of a national securities exchange. The Trust
does not accept guarantees from notaries public or from organizations that do
not provide reimbursement in the case of fraud.
SYSTEMATIC WITHDRAWAL PLAN -- Each Fund offers a Systematic Withdrawal Plan
("SWP") for shareholders who wish to receive regular distributions from their
account. Upon commencement of the SWP, the account must have a current value of
$2,500 or more. Shareholders may elect to receive automatic payments via ACH
wire transfers of $100 or more on a monthly, quarterly, semi-annual or annual
basis. An application form for SWP may be obtained by calling 1-800-224-6312.
Shareholders should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending on the
frequency and amounts of the withdrawal payments and/or any fluctuations in the
net asset value per share, their original investment could be exhausted
entirely. To participate in the SWP, shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any time,
upon written notice to the Transfer Agent.
VALUATION OF SHARES
The net asset value per share of each Fund is determined by dividing the total
market value of that Fund's investments and other assets, less any liabilities,
by the total number of outstanding shares of that Fund. Net asset value per
share is determined daily as of the close of regular trading on the New York
Stock Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
PERFORMANCE
From time to time, each 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 a
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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 a Fund refers to the average compounded rate of return on a
hypothetical investment, for designated time periods (including but not limited
to the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
A 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. A 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. A 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 attributes of a 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.
A 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 a Fund or its shareholders.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes. Further information
concerning taxes is set forth in the Statement of Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other portfolios. Each 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 a Fund qualifies for this special tax treatment,
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) which it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS:
Each Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Distributions from net investment
income will qualify for the dividends-received deduction for corporate
shareholders only to the extent such distributions are derived from dividends
paid by domestic corporations; however, such distributions which do qualify for
the dividends-received deduction may be subject to the corporate alternative
minimum tax. Any net capital gains will be distributed annually and will be
taxed to shareholders as gains from the sale or exchange of a capital asset held
for more than one year or for more than 18 months, as the case may be,
regardless of how long
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the shareholder has held shares. Each 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 a Fund are sold with original issue discount and
thus do not make periodic cash interest payments. Each 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 each Fund distributes all of its net investment
income to its shareholders, a 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 a 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. Each 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 a Fund and may be exempt, depending on the
state, when received by a shareholder from a Fund provided certain
state-specific conditions are satisfied. The Funds will inform shareholders
annually of the percentage of income and distributions derived from direct U.S.
obligations. Shareholders should consult their tax advisers to determine whether
any portion of the income dividends received from a Fund is considered tax
exempt in their particular state. Income derived by a Fund from securities of
foreign issuers may be subject to foreign withholding taxes. The Funds will not
be able to elect to treat shareholders as having paid their proportionate share
of such foreign taxes.
Each sale, exchange or redemption of a Fund's shares is a taxable event to the
shareholder.
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, and amended on February 21, 1997. The Declaration of Trust permits the
Trust to offer separate series ("portfolios") of shares. All consideration
received by the Trust for shares of any portfolio and all assets of such
portfolio belong to that portfolio and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of additional
portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value of the shares held on the record date for the
meeting. Shareholders of each Fund will vote separately on matters pertaining
solely to that Fund. As a Massachusetts business trust, the Trust is not
required to hold annual meetings of Shareholders, but approval will be sought
for certain changes in the operation of the Trust and for the election of
Trustees under certain circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by
Shareholders at a special meeting called upon written request of Shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
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information to the Shareholders requesting the meeting.
As of January 5, 1998, Saul & Company owned a controlling interest (as defined
in the Investment Company Act of 1940) of the Turner Growth Equity Fund, and
Charles Schwab & Company, Inc., owned a controlling interest in the Turner Ultra
Large Cap Growth and Turner Small Cap Growth Funds.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually for each 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 by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income (excluding capital gains) of the
Growth Equity Fund is distributed in the form of quarterly dividends, and that
of the Ultra Large Cap Fund, Midcap Fund and the Small Cap Fund are distributed
in the form of dividends at least annually. Shareholders of record of the Growth
Equity Fund on the second to last Business Day of each quarter or month,
respectively, will be entitled to receive the quarterly or monthly dividend
distribution. If any capital gain is realized, substantially all of it will be
distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of each 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 AUDITORS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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 one or more of the
Funds:
AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs may be 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.
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
21
<PAGE>
Investments and Risk Factors" and in the Statement of Additional Information for
discussions of these various instruments.
FIXED INCOME SECURITIES -- The market value of fixed income investments will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes in the value of these securities will not
necessarily affect cash income derived from these securities, but will affect
the investing Fund's net asset value. When the mortgage-backed securities held
by a Fund are pre-paid, the Fund must reinvest the proceeds in securities the
yield of which reflects prevailing interest rates, which may be lower than the
yield of the pre-paid security.
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 repurchase agreements with
durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. Repurchase
agreements are considered loans under the 1940 Act.
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").
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. Delivery of and payment for these securities may
occur a month or more after the date of the purchase commitment. The Funds 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.
22
<PAGE>
Trust:
TIP Funds
P.O. Box 419805
Kansas City, MO 64141-6805
Investment Advisor:
Turner Investment Partners, Inc.
Distributor:
SEI Investments Distribution Co.
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
TUR-F-024-01
PROSPECTUS
JANUARY 31, 1998
TIP FUNDS LOGO
- ----------------------------------
TURNER ULTRA LARGE CAP GROWTH FUND
- ----------------------------------
TURNER GROWTH EQUITY FUND
- ----------------------------------
TURNER MIDCAP GROWTH FUND
- ----------------------------------
TURNER SMALL CAP GROWTH FUND
- ----------------------------------
<PAGE>
TIP FUNDS
Investment Adviser:
TURNER INVESTMENT PARTNERS, INC.
The 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:
TURNER FIXED INCOME 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 January 31, 1998, 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.
January 31, 1998
<PAGE>
TABLE OF CONTENTS
Summary ................................................................. 3
Expense Summary........................................................... 5
The Trust and the Fund.................................................... 6
Investment Objective...................................................... 6
Investment Policies....................................................... 6
Risk Factors............................................................... 7
Investment Limitations..................................................... 8
The Adviser................................................................ 9
The Administrator......................................................... 10
The Transfer Agent........................................................ 10
The Distributor........................................................... 10
Portfolio Transactions.................................................... 10
Purchase and Redemption of Shares......................................... 11
Performance............................................................... 15
Taxes ................................................................. 15
General Information....................................................... 17
Description of Permitted Investments and Risk Factors..................... 19
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<PAGE>
SUMMARY
The following provides basic information about the Turner Fixed Income Fund (the
"Fund"). The Fund is one of the twelve mutual funds comprising TIP Funds
(formerly, Turner Funds) (the "Trust"). This summary is qualified in its
entirety by reference to the more detailed information provided elsewhere in
this Prospectus and in the Statement of Additional Information.
What is the Fund's goal and its primary policies?
The Fixed Income Fund seeks total return through both current income and capital
appreciation. It invests primarily in fixed income securities of varying
maturities.
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
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 Fixed Income Fund may invest in fixed income
securities that have speculative characteristics. The Fund may enter into
futures and options transactions and may purchase zero coupon securities,
mortgage-backed securities, and securities of foreign issuers. 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? Turner Investment Partners, 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? SEI Investments Distribution Co. (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.
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<PAGE>
Is there a minimum investment? The Funds require a minimum initial investment of
$2,500 ($2,000 for IRAs), which the Distributor may waive at its discretion.
Subsequent purchases must be at least $500.
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. See "Purchase and Redemption of Shares."
How are distributions paid? Each Fund distributes substantially all of its net
investment income (exclusive of capital gains) in the form of periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
-4-
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases......................................None
Sales Load Imposed on Reinvested Dividends...........................None
Deferred Sales Load..................................................None
Redemption Fees(1)...................................................None
Exchange Fees........................................................None
- --------------------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Fixed Income
Fund
- --------------------------------------------------------------------------------
Advisory Fees (after fee waivers or
reimbursements if applicable)(1) .05%
12b-1 Fees None
Other Expenses(2) .70%
- --------------------------------------------------------------------------------
Total Operating Expenses (after fee
waivers or reimbursements)(3) .75%
- --------------------------------------------------------------------------------
(1) The Adviser has agreed, on a voluntary basis, to waive its advisory fee
for the Fixed Income Fund to the extent necessary to keep the "Total
Operating Expenses" of the Fund during the current fiscal year from
exceeding .75%. The Adviser reserves the right to terminate its
waivers at any time in its sole discretion. Absent such waivers,
Advisory Fees for the Fixed Income Fund would be .50%.
(2) "Other Expenses" for the Fixed Income Fund are estimated for the
current fiscal year.
(3) Absent fee waivers, expense reimbursements, "Total Operating Expenses"
for the Fixed Income Fund would be 1.20% based on current expectations
and assumptions.
EXAMPLE
- --------------------------------------------------------------------------------
Your would pay the following expenses on a $1,000
investment in the Fund assuming (1) a 5% annual return 1 Year 3 years
and (2) redemption at the end of each time period.
Fixed Income Fund $ 8 $24
- --------------------------------------------------------------------------------
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."
-5-
<PAGE>
THE TRUST AND THE FUND
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 Turner Fixed Income Fund (the
"Fund").
INVESTMENT OBJECTIVE
Fixed Income Fund -- The Fixed Income Fund seeks total return through current
income and capital appreciation.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
Fixed Income Fund
The Fixed Income Fund invests as fully as practicable (and, under normal
conditions, at least 65% of its total assets) in a portfolio of fixed income
securities of varying levels of quality and maturity, that, in the Adviser's
opinion, are undervalued in the market. To determine a security's fair market
value, the Adviser will focus on the yield and credit quality of particular
securities based upon third-party evaluations of quality as well as the
Adviser's own research and analysis of the issuer. The Adviser will attempt to
diversify the Fund's holdings across the yield curve by holding short,
intermediate and long-term securities. Normally, the Fund will maintain a
dollar-weighted average portfolio duration that approximates the average
duration range of the Fund's benchmark index, the Lehman Brothers Aggregate Bond
Index (currently 4.6 years). Duration is a measure of the expected life of a
fixed income security on a cash flow basis.
For example, assuming a portfolio duration of eight years, an increase in
interest rates of 1%, a parallel shift in the yield curve, and no change in the
spread relationships among securities, the value of the portfolio would decline
8%. Using the same assumptions, if interest rates decrease 1%, the value of the
portfolio would increase 8%. The Adviser considers duration an accurate measure
of a security's expected life and sensitivity to interest rate changes. The
Adviser may increase or decrease this average weighted duration when, in the
Adviser's opinion, market conditions warrant.
The Fund will purchase the following types of securities if, at the time of
purchase, such securities either have been classified as investment grade by a
nationally recognized statistical rating organization ("NRSRO") or are
determined by the Adviser to be of comparable quality: (i) obligations issued or
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities ("U.S. Government securities"); (ii) corporate bonds and
-6-
<PAGE>
debentures of U.S. and foreign issuers rated in one of the four highest rating
categories; (iii) privately issued mortgage-backed securities rated in the
highest rating category; (iv) asset-backed securities rated in the two highest
rating categories; (v) receipts evidencing separately traded interest and
principal component parts of U.S. Government obligations ("Receipts"); (vi)
commercial paper rated in one of the two highest rating categories; (vii)
obligations of U.S. commercial banks and savings and loan institutions that have
net assets of at least $500 million as of the end of their most recent fiscal
year ("bank obligations"); (viii) obligations issued or guaranteed by the
government of Canada; (ix) obligations of supranational entities rated in one of
the four highest rating categories; (x) loan participations; (xi) repurchase
agreements involving any of the foregoing securities; and (xii) shares of other
investment companies. Investment grade bonds include securities rated BBB by
Standard and Poor's Corporation ("S&P") or Baa by Moody's Investors Service,
Inc. ("Moody's"), which may be regarded as having speculative characteristics as
to repayment of principal. If a security is downgraded to below investment
grade, the Adviser will review the situation and take appropriate action.
Securities rated below investment grade will not constitute more than 5% of the
Fund's total assets.
The Fund may invest in variable and floating rate obligations and in convertible
debt securities that meet the ratings criteria set forth above.
The Fund may purchase securities on a when-issued basis and borrow money.
The Fund may enter into futures and options transactions.
The Fund may invest up to 15% of its net assets in illiquid securities.
The Fund may purchase convertible securities.
The Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including U.S. Government securities, bank
obligations, commercial paper rated in the highest rating category by an NRSRO,
repurchase agreements involving the foregoing securities), shares of money
market investment companies and cash.
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
Fixed Income Securities -- The market value of fixed income investments will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities
-7-
<PAGE>
are also subject to greater market fluctuations as a result of changes in
interest rates. Changes by recognized agencies in the rating of any fixed income
security and in the ability of an issuer to make payments of interest and
principal also affect the value of these investments. Changes in the value of
these securities will not necessarily affect cash income derived from these
securities, but will affect the Fund's net asset value. Mortgage-backed and
asset-backed securities purchased by the Fixed Income Fund may be subject to
prepayment, which may result in capital gains or losses, and which make it
difficult to determine such securities' average life and yield. When the
mortgage-backed securities held by the Fund are pre-paid, the Fund must reinvest
the proceeds in securities the yield of which reflects prevailing interest
rates, which may be lower than the yield of the pre-paid security.
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.
Portfolio Turnover -- Under normal circumstances, the portfolio turnover rate
for the Fixed Income Fund is not expected to exceed 150%. An annual portfolio
turnover rate in excess of 100% may result from the Adviser's investment
strategy, or may result from the Adviser's maintenance of appropriate issuer
diversification. Portfolio turnover rates in excess of 100% may result in higher
transaction costs, including increased brokerage commissions, and higher levels
of taxable capital gain. See "Taxes."
INVESTMENT LIMITATIONS
The investment 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
-8-
<PAGE>
Fund would be invested in the securities of such issuer; or (ii) acquire more
than 10% of the outstanding voting securities of any one issuer. This
restriction applies to 75% of each Fund's total assets.
2. The 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.
3. The Fund may not borrow money in an amount exceeding 33 1/3% of the value of
its total assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or require the
Fund to segregate assets are not considered to be borrowings. Asset coverage of
at 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.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
Turner Investment Partners, Inc., is a professional investment management firm
founded in March, 1990. Robert E. Turner is the Chairman and controlling
shareholder of the Adviser. As of September 30, 1997, the Adviser had
discretionary management authority with respect to approximately $2.3 billion of
assets. The Adviser has provided investment advisory services to investment
companies since 1992. The principal business address of the Adviser is 1235
Westlakes Drive, Suite 350, Berwyn, Pennsylvania 19312.
The Adviser serves as the investment adviser for the Fund under an investment
advisory agreement (the "Advisory Agreement"). 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
Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .50% of the average daily net assets of
the Fixed Income Fund. The Adviser has voluntarily agreed to waive all or a
portion of its fee and to reimburse expenses of the Fund in order to limit their
total operating expenses (as a percentage of average daily net assets on an
annualized basis) to not more than 0.75%. The Fund had not commenced operations
as of September 30, 1997. The Adviser reserves the right, in its sole
discretion, to terminate these voluntary fee waivers and reimbursements at any
time.
-9-
<PAGE>
Mark D. Turner, President and Director of Fixed Income Management of the
Adviser, is the manager of the Fixed Income Fund. Mr. Turner joined Turner
Investment Partners, Inc. in 1990. Prior to 1990, he was Vice President and
Senior Portfolio Manager with First Maryland Asset Management. He has 15 years
of investment experience.
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 $75,000 minimum annual administration fee.
The Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer agent and dividend disbursing agent for
the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
PORTFOLIO TRANSACTIONS
Each Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation.
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
-10-
<PAGE>
Adviser may place orders for the Fund with qualified broker-dealers who refer
clients to the Fund.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of the 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. Shares of the Fund are offered only to residents of states in
which such shares are eligible for purchase.
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.
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.
Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft
(payable to the name of the appropriate Fund) for $2,500 or more ($2,000 for
IRAs), together with a completed Account Application to: TIP Funds, P.O. Box
419805, Kansas City, Missouri 64141-6805. Third-Party checks, credit cards,
credit card checks and cash will not be accepted. When purchases are made by
check (including certified or cashier's checks), redemption proceeds will not be
forwarded until the check providing for the investment being redeemed has
cleared (which may take up to 15 days). Subsequent investments may also be
mailed directly to the Transfer Agent.
Purchases by Wire Transfer
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds
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<PAGE>
by wire to: United Missouri Bank of Kansas, N.A.; ABA #10-10-00695; for Account
Number 98-7060-116-8; Further Credit: [Turner Fixed Income Fund]. The
shareholder's name and account number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
General Information Regarding Purchases
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the next
Business Day. A purchase request is in good order if it is complete and
accompanied by the appropriate documentation, including an Account Application
and additional documentation required. Payment may be made by check or readily
available funds. The purchase price of shares of the Fund is the 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.
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.
Systematic Investment Plan: A shareholder may also arrange for periodic
additional investments in a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
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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, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order prior to the calculation of net asset value 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 the calculation of net asset value 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 the calculation of net asset value on any Business Day. Otherwise, the
redemption oder will be effective on the next 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.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH wire transfer. There is no charge for having a check for
redemption proceeds mailed. The Custodian will deduct a wire charge, currently
$10.00, from the amount of a Federal Reserve wire redemption payment made at the
request of a shareholder. Shareholders cannot redeem shares of the Fund by
Federal Reserve wire on Federal holidays restricting wire transfers. 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 transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are genuine.
Such procedures may include the taping of telephone conversations.
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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 regular trading on the New York Stock
Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
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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 attributes of a 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
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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 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. It can be expected that none of the dividends paid by the Fund will
qualify for that deduction. Any net capital gains will be distributed annually
and will be taxed to shareholders as gains from the sale or exchange of a
capital asset held for more than one year or for more than 18 months, as the
case may be, 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
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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 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, and amended on February 21, 1997. The Declaration of Trust permits the
Trust to offer separate series ("portfolios") of shares. All consideration
received by the Trust for shares of any portfolio and all assets of such
portfolio belong to that portfolio and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of additional
portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
Voting Rights
Each share held entitles the Shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value
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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 by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
Dividends and Distributions
Substantially all of the net investment income (excluding capital gains) of the
Fund is distributed in the form of monthly dividends. Shareholders of record of
the Fund on the second to last Business Day of each quarter or month,
respectively, will be entitled to receive the quarterly or monthly dividend
distribution. If any capital gain is realized, substantially all of it will be
distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of the 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.
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Counsel and Independent Auditors
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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:
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.
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 repurchase agreements with
durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality, dollar-
denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the
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agencies and instrumentalities of the U.S. Government; (iii) high-quality
commercial paper issued by U.S. and foreign corporations; (iv) debt obligations
with a maturity of one year or less issued by corporations with outstanding
high-quality commercial paper ratings; and (v) repurchase agreements involving
any of the foregoing obligations entered into with highly-rated banks and
broker-dealers.
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. 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
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
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represent beneficial ownership interests in a REMIC trust consisting principally
or 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.
OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Obligations of supranational entities
are obligations of entities established through the joint participation of
several governments, such as the Asian Development Bank, the Inter-American
Development Bank, International Bank of Reconstruction and Development (World
Bank), African Development Bank, European Economic Community, European
Investment Bank and the Nordic Investment Bank.
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.
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
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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.
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. 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
accredit. 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
Fund:
TURNER FIXED INCOME FUND
Adviser:
TURNER INVESTMENT PARTNERS, INC.
Distributor:
SEI INVESTMENTS DISTRIBUTION CO.
Administrator:
SEI FUND RESOURCES
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Auditors:
ERNST & YOUNG LLP
January 31, 1998
<PAGE>
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 funds (each a "Fund" and, together, the "Funds"),
each of which is a separate series of the Trust:
CLOVER EQUITY VALUE FUND
CLOVER SMALL CAP VALUE FUND
CLOVER MAX CAP VALUE FUND
CLOVER FIXED INCOME FUND
This Prospectus concisely sets forth the information about the Trust and the
Funds that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated January 31, 1998, 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.
January 31, 1998
<PAGE>
TABLE OF CONTENTS
Summary..................................................... 3
Expense Summary............................................. 5
Financial Highlights........................................ 6
The Trust and the Funds..................................... 9
Investment Objectives....................................... 9
Investment Policies......................................... 9
Risk Factors................................................ 11
Investment Limitations...................................... 13
The Adviser................................................. 13
The Administrator........................................... 14
The Transfer Agent.......................................... 14
The Distributor............................................. 14
Portfolio Transactions...................................... 14
Purchase and Redemption of Shares........................... 14
Performance................................................. 17
Taxes....................................................... 18
General Information......................................... 19
Description of Permitted Investments and Risk Factors....... 20
2
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SUMMARY
The following provides basic information about the Clover Equity Value Fund
(the "Equity Value Fund"), Clover Small Cap Value Fund (the "Small Cap Value
Fund"), Clover Max Cap Value Fund (the "Max Cap Value Fund"), and Clover Fixed
Income Fund (the "Fixed Income Fund") (each a "Fund" and, collectively, the
"Funds"). The Funds are four of the 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 each Fund's goal and its primary policies?
The Equity Value Fund seeks long-term total return. It invests primarily in
a diversified portfolio of equity securities that, in the Adviser's opinion, are
undervalued relative to the market or the historic valuation of such securities.
The Small Cap Value Fund seeks long-term total return. It invests primarily
in a diversified portfolio of equity securities of domestic issuers with market
capitalizations of $750 million or less that the Adviser believes are
undervalued relative to the market or the historic valuations of such
securities.
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.
The Fixed Income Fund seeks a high level of income consistent with
reasonable risk to capital. It invests primarily in a diversified portfolio of
fixed income securities.
What are the risks involved with investing in the Funds? The investment
policies of each Fund entail certain risks and considerations of which investors
should be aware. Each Fund invests in securities that fluctuate in value, and
investors should expect each 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. In addition, the Equity Value and Max Cap Value Funds each 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 Fixed Income Fund may invest in investment grade fixed
income securities that have speculative characteristics, and may also invest up
to 15% of its net assets in fixed income securities that are junk bonds. The
Small Cap Value Fund invests in equity securities of smaller companies, which
involves greater risk than is customarily associated with equity investments in
larger, more established companies. The Funds may enter into futures and options
transactions, although they have no present intention to do so, and may purchase
zero coupon securities. Certain of the Funds may purchase securities of foreign
issuers and asset- or mortgage-backed securities. Investments in these
securities involve certain other risks.
For more information about each Fund, see "Investment Objectives,"
"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 each Fund. See "Expense Summary" and "The Adviser."
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<PAGE>
Who is the Administrator? SEI Fund Resources (the "Administrator"), serves
as the administrator and shareholder servicing agent for the Funds. See "Expense
Summary" and "The Administrator."
Who is the Distributor? CCM Securities, Inc. (the "Distributor"), serves as
the distributor of the Funds' shares. See "The Distributor."
Who is the Transfer Agent? DST Systems, Inc., serves as the transfer agent
and dividend disbursing agent for the Trust. See "The Transfer Agent."
Is there a sales load? No, shares of each Fund are offered on a no-load
basis.
Is there a minimum investment? The Funds require a minimum initial
investment of $2,500 ($2,000 for IRAs), which the Distributor may waive at its
discretion. Subsequent purchases must be at least $500.
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 the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. See "Purchase and Redemption of Shares."
How are distributions paid? The Max Cap Value, Equity Value, and Small Cap
Value Funds distribute substantially all of their net investment income
(exclusive of capital gains) in the form of quarterly dividends. The Fixed
Income Fund distributes substantially all of its net investment income
(exclusive of capital gains) monthly. 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."
4
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Deferred Sales Load......................................... None
Redemption Fees(1).......................................... None
Exchange Fees............................................... None
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount of a
Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
EQUITY VALUE SMALL CAP MAX CAP FIXED INCOME
FUND VALUE FUND VALUE FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisory Fees(1)................................. .74% .85% .74% .45%
12b-1 Fees....................................... None None None None
Other Expenses (after fee waivers or
reimbursements, if applicable)................. .36% .55% .21% .30%
- --------------------------------------------------------------------------------------------------------
Total Operating Expenses (after fee waivers or
reimbursements)(2)............................. 1.10% 1.40% .95% .75%
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Adviser has, on a voluntary basis, waived a portion of its fee for each
Fund and agreed to reimburse certain Fund expenses in order to limit total
operating expenses of the Equity Value and Fixed Income Funds to an annual
rate of not more than 1.20% and .80%, respectively, of average daily net
assets when net assets are below $20 million and to not more than 1.10% and
.75%, respectively, when net assets are $20 million or more, and to limit
total operating expenses of the Small Cap Value and Max Cap Value Funds to
1.40% and 0.95%, respectively, of the Portfolio's average daily net assets.
The Adviser reserves the right, in its sole discretion, to terminate its
voluntary fee waiver and any reimbursements at any time. See "The Adviser."
(2) Absent fee waivers and expense reimbursements, "Other Expenses" and "Total
Operating Expenses" for the Max Cap Value Fund would be 1.16% and 1.90%,
respectively, for the Equity Value Fund they would be .41% and 1.15%,
respectively, for the Small Cap Value Fund they would be 1.58% and 2.43%,
respectively, and for the Fixed Income Fund they would be .57% and 1.02%,
respectively.
EXAMPLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment
in a Fund assuming (1) a 5% annual return and (2)
redemption at the end of each time period.
<S> <C> <C> <C> <C>
Equity Value Fund....................................... $11 $35 $61 $134
Small Cap Value Fund.................................... $14 $44 $77 $168
Max Cap Value Fund...................................... $10 $30 $53 $117
Fixed Income Fund....................................... $ 8 $24 $42 $ 93
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF EACH 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 Funds.
Additional information may be found under "The Adviser" and "The Administrator."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997, with
respect to the Clover Equity Value Fund has been derived from the financial
statements audited by Ernst & Young LLP, the Fund's independent auditors, whose
report dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. On June 25, 1997, the Equity Value Fund acquired all of
the assets and liabilities of the Clover Capital Equity Value Portfolio of The
Advisors' Inner Circle Fund. The information prior to that date relates to the
Clover Capital Equity Value Portfolio. The financial statements of the Clover
Capital Equity Value Portfolio of The Advisors' Inner Circle Fund were audited
by Arthur Andersen LLP. The following table should be read in conjunction with
the Fund's financial statements and the notes thereto. Additional performance
information is set forth in the Trust's 1997 Annual Report to Shareholders,
which is avialable upon request and without charge by calling 1-800-224-6312.
All references herein to the Equity Value Fund shall be deemed to include the
Clover Capital Equity Value Portfolio.
For a Share Outstanding Throughout the Period:
<TABLE>
<CAPTION>
CLOVER EQUITY
VALUE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
11/01/96 11/01/95 11/01/94 11/01/93 11/01/92 12/06/91(1)
TO TO TO TO TO TO
09/30/97 10/31/96 10/31/95 10/31/94 10/31/93 10/31/92
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $ 16.20 $ 15.29 $ 13.74 $ 11.94 $ 10.45 $10.00
- ----------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income............ 0.18 0.19 0.24 0.08 0.10 0.10
Realized and Unrealized Gains on
Securities..................... 3.54 2.15 2.46 2.01 1.54 0.44
- ----------------------------------------------------------------------------------------------------------
Total From Investment
Operations..................... 3.72 2.34 2.70 2.09 1.64 0.54
- ----------------------------------------------------------------------------------------------------------
Less Distributions:
Distributions From Net Investment
Income......................... (0.18) (0.22) (0.22) (0.08) (0.10) (0.09)
Distributions From Capital
Gains.......................... (0.75) (1.21) (0.93) (0.21) (0.05) 0.00
- ----------------------------------------------------------------------------------------------------------
Total Distributions.............. (0.93) (1.43) (1.15) (0.29) (0.15) (0.09)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $ 18.99 $ 16.20 $ 15.29 $ 13.74 $ 11.94 $10.45
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 2223.86%+ 16.47% 21.25% 17.80% 15.83% 5.94%*
- ----------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000).... $117,859 $85,050 $51,647 $25,249 $15,070 $9,005
Ratio Of Expenses To Average Net
Assets........................... 1.10%* 1.10% 1.10% 1.14% 1.18% 1.20%*
Ratio Of Expenses To Average Net
Assets (Excluding Fee Waiver and
Contributions)................... 1.15%* 1.21% 1.20% 1.30% 1.51% 2.09%*
Ratio Of Net Income To Average Net
Assets........................... 1.18%* 1.32% 1.82% 0.71% 0.89% 1.15%*
Ratio Of Net Income To Average Net
Assets (Excluding Fee Waiver and
Contributions)................... 1.13%* 1.21% 1.72% 0.55% 0.56% 0.26%*
Portfolio Turnover Rate............ 51.64% 51.36% 84.76% 58.44% 82.51% 31.00%
Average Commission(2).............. $ 0.0551 $0.0577 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Clover Capital Equity Value Portfolio commenced operations on
December 6, 1991.
(2) Average Commission rate paid per share for the security purchases and sales
made during the period. Presentation of the rate is only required for
fiscal years beginning after September 1, 1995.
* Annualized
+ Returns are for the period indicated and have not been
annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997, with
respect to the Clover Small Cap Value Fund has been derived from the financial
statements audited by Ernst & Young LLP, the Fund's independent auditors, whose
report dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. On June 25, 1997, the Small Cap Value Fund acquired all
of the assets and liabilities of the Clover Capital Small Cap Value Portfolio of
The Advisors' Inner Circle Fund. The information prior to that date relates to
the Clover Capital Small Cap Value Portfolio. The financial statements of the
Clover Capital Small Cap Value Portfolio of The Advisors' Inner Circle Fund were
audited by Arthur Andersen LLP. The following table should be read in
conjunction with the Fund's financial statements and the notes thereto.
Additional performance information is set forth in the Trust's 1997 Annual
Report to Shareholders, which is available upon request and without charge by
calling 1-800-224-6312. All references herein to the Small Cap Value Fund shall
be deemed to include the Clover Capital Small Cap Value Portfolio.
For a Share Outstanding Throughout the Period:
<TABLE>
<CAPTION>
CLOVER SMALL
CAP VALUE FUND
- --------------------------------------------------------------------------------------
11/01/96 2/28/96(1)
TO TO
09/30/97 10/31/96
- --------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.87 $ 10.00
- --------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income..................................... (0.04) 0.02
Realized and Unrealized Gains on Securities............... 5.24 0.88
- --------------------------------------------------------------------------------------
Total From Investment Operations............................ $ 5.20 $ 0.90
- --------------------------------------------------------------------------------------
Less Distributions:
Distributions From Net Investment Income.................... -- (0.03)
Distributions from Capital Gains............................ (0.13) --
- --------------------------------------------------------------------------------------
Total Distributions................................... (0.13) (0.03)
- --------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 15.94 $ 10.87
- --------------------------------------------------------------------------------------
TOTAL RETURN................................................ 48.23 %+ 8.97 %
- --------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000)............................. $15,279 $ 4,495
Ratio Of Expenses To Average Net Assets..................... 1.40 %* 1.40 %*
Ratio Of Expenses To Average Net Assets (Excluding Fee
Waivers and Contributions)................................ 2.43 %* 5.29 %*
Ratio Of Net Income To Average Net Assets................... (0.64)%* (0.03)%*
Ratio Of Net Income (Loss) To Average Net Assets
(Excluding Fee Waivers and Contributions)................. (1.67)%* (3.92)%*
Portfolio Turnover Rate..................................... 59.03 % 14.17 %
Average Commission(2)....................................... $0.0461 $0.0470
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
(1) The Clover Small Cap Value Portfolio commenced operations on
February 28, 1996.
(2) Average commission rate paid per share for security purchases and sales
made during the period.
* Annualized
+ Returns are for the period indicated and have not been annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended September 30, 1997, with
respect to the Clover Fixed Income Fund has been derived from the financial
statements audited by Ernst & Young LLP, the Fund's independent auditors, whose
report dated October 31, 1997, is incorporated by reference in the Statement of
Additional Information. On June 25, 1997, the Fixed Income Fund acquired all of
the assets and liabilities of the Clover Capital Fixed Income Portfolio of The
Advisors' Inner Circle Fund. The information prior to that date relates to the
Clover Capital Fixed Income Portfolio. The financial statements of the Clover
Capital Fixed Income Portfolio of The Advisors' Inner Circle Fund were audited
by Arthur Andersen LLP. The following table should be read in conjunction with
the Fund's financial statements and the notes thereto. Additional performance
information is set forth in the Trust's 1997 Annual Report to Shareholders,
which is available upon request and without charge by calling 1-800-224-6312.
All references herein to the Fixed Income Fund shall be deemed to include the
Clover Capital Fixed Income Portfolio.
For a Share Outstanding Throughout the Period:
<TABLE>
<CAPTION>
CLOVER FIXED
INCOME FUND
- ----------------------------------------------------------------------------------------------------------------------
11/01/96 11/01/95 11/01/94 11/01/93 11/01/92 12/06/91(1)
TO TO TO TO TO TO
09/30/97 10/31/96 10/31/95 10/31/94 10/31/93 10/31/92
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.. $ 9.85 $ 9.89 $ 9.14 $10.85 $10.23 $10.00
- ----------------------------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net Investment Income............... 0.54 0.59 0.58 0.57 0.61 0.56
Realized and Unrealized Gain (or
Losses) on Securities............. 0.16 0.01 0.77 (0.92) 0.72 0.23
- ----------------------------------------------------------------------------------------------------------------------
Total From Investment Operations...... 0.70 0.60 1.35 (0.35) 1.33 0.79
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions:
Distributions From Net Investment
Income.............................. (0.54) (0.59) (0.58) (0.57) (0.61) (0.56)
Distributions from Capital Gains...... (0.09) (0.05) (0.02) (0.79) (0.10) 0.00
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions............. (0.63) (0.64) (0.60) (1.36) (0.71) (0.56)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........ $ 9.92 $ 9.85 $ 9.89 $ 9.14 $10.85 $10.23
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................... 7.43%+ 6.26% 15.27% (3.54)% 13.40% 9.05%*
- ----------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End Of Period (000)....... $23,677 $19,731 $14,685 $9,762 $7,966 $8,982
Ratio Of Expenses To Average Net
Assets.............................. 0.75%* 0.80% 0.80% 0.80% 0.78% 0.80%*
Ratio Of Expenses To Average Net
Assets (Excluding Fee Waivers and
Contributions)...................... 1.02%* 1.11% 1.40% 1.46% 1.29% 1.76%*
Ratio Of Net Income To Average Net
Assets.............................. 6.03%* 6.00% 6.13% 5.88% 5.62% 6.28%*
Ratio Of Net Income To Average Net
Assets (Excluding Fee Waivers and
Contributions)...................... 5.76%* 5.69% 5.53% 5.22% 5.11% 5.32%*
Portfolio Turnover Rate............... 11.83% 24.52% 35.84% 11.11% 68.61% 113.00%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Clover Capital Fixed Income Portfolio commenced operations on
December 6, 1991.
* Annualized
+ Returns are for the period indicated and have not been annualized.
8
<PAGE>
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 Equity Value Fund (the
"Equity Value Fund"), Clover Small Cap Value Fund (the "Small Cap Value Fund"),
Clover Max Cap Value Fund (the "Max Cap Value Fund"), and Clover Fixed Income
Fund (the "Fixed Income Fund") (each a "Fund" and, together, the "Funds").
INVESTMENT OBJECTIVES
EQUITY VALUE FUND -- The Equity Value Fund seeks long-term total return.
SMALL CAP VALUE FUND -- The Small Cap Value Fund seeks long-term total return.
MAX CAP VALUE FUND -- The Max Cap Value Fund seeks long-term total return.
FIXED INCOME FUND -- The Fixed Income Fund seeks a high level of income
consistent with reasonable risk to capital.
There can be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES
EQUITY VALUE FUND
The Equity Value Fund will invest primarily in equity securities that Adviser
believes to be undervalued relative to the market or their historic valuation.
The Adviser uses several valuation criteria to determine if a security is
undervalued, including price-to-earnings ratios, price-to-cash flow ratios,
price-to-sales ratios, and price-to-book value ratios. In addition, the Adviser
examines "hidden values" that are not obvious in a company's financial reports,
focusing on finding the current asset values or current transfer values of
assets held by the company.
Under normal market conditions, the Equity Value Fund invests at least 70% and
up to 100% of its net assets in a diversified portfolio of equity securities,
including common stocks, both debt securities and preferred stocks convertible
into common stocks, and ADRs (up to 20% of the Equity Value Fund's net assets).
In addition to these equity securities, the Fund may also invest up to 5% of its
net assets in each of warrants and rights to purchase common stocks, and up to
10% of its net assets in real estate investment trusts ("REITs"). Assets of the
Fund not invested in the equity securities described above may be invested in
non-convertible fixed income securities and money market instruments as
described below.
All of the equity securities (including ADRs) in which the Fund invests are
traded on registered exchanges or the over-the-counter market in the United
States.
During periods when, or under circumstances where, the Adviser believes that the
return on such 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"), Baa by Moody's Investor Service, Inc. ("Moody's"),
or unrated securities of comparable quality as determined by the Adviser.
Under normal circumstances, up to 30% of the Equity Value 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.
SMALL CAP VALUE FUND
Under normal market conditions, the Small Cap Value Fund invests at least 75%
and up to 100% of its total assets in a diversified portfolio of equity
securities of U.S. issuers that have market capitalizations of $750 million or
less at the time of purchase, including common stocks, warrants and rights to
subscribe to common stocks, equity interests issued by REITs, and both debt
securities and preferred stocks convertible into common stocks. The Small Cap
Value Fund may invest in such convertible debt securities without regard to
their term or rating and may, from time to time, invest in corporate debt
securities rated below
9
<PAGE>
investment grade, i.e., rated lower than BBB by S&P, Baa by Moody's, or unrated
securities of comparable quality as determined by the Adviser.
The Adviser employs database screening techniques to search the universe of
domestic public companies for stocks trading in the bottom 20% of valuation
parameters such as stock price-to-book value, price-to-cash flow,
price-to-earnings and price-to-sales. From these stocks the Adviser selects a
diversified group of securities for investment by utilizing additional screening
and selection strategies to identify the companies that the Adviser believes are
more financially stable. In addition, the Fund may include holdings in issuers
that may not have been identified during the initial screening process but that
the Adviser has identified using its value-oriented fundamental research
techniques. In addition, the Fund may invest up to 10% of its net assets in
ADRs.
All of the equity securities (including ADRs) in which the Fund invests are
traded on registered exchanges or the over-the-counter market in the United
States.
Any remaining assets may be invested in (i) the equity securities described
above of U.S. issuers that have market capitalizations exceeding $750 million at
the time of purchase, and (ii) Money Market Instruments.
MAX CAP VALUE FUND
The Max Cap Value Fund invests primarily in undervalued large capitalization
equities with low valuations based on measures such as book value and cash flow.
Clover Capital Management, Inc. (the "Adviser"), will attempt to acquire
securities that have attractive dividend yields relative to the market average
and/or their own trading history.
The Max Cap Value 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 Max Cap Value 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 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 S&P and/or Baa by 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 Max Cap Value 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.
FIXED INCOME FUND
Under normal market conditions, the Fixed Income Fund invests at least 70% of
its net assets in the following fixed income securities: (i) obligations issued
or guaranteed as to principal and interest by the U.S. Government, its agencies
or instrumentalities ("U.S. Government Securities"); (ii) corporate bonds and
debentures rated in one of the four highest rating categories; and (iii)
mortgage-backed securities that
10
<PAGE>
are collateralized mortgage obligations ("CMOs") or real estate mortgage
investment conduits ("REMICs") rated in one of the two highest rating
categories. The Fund will invest in such corporate bonds and debentures, CMOs or
REMICs only if, at the time of purchase, the security either has the requisite
rating from S&P or Moody's or is unrated but of comparable quality as determined
by the Adviser. Governmental private guarantees do not extend to the securities'
value, which is likely to vary inversely with fluctuations in interest rates.
The Fund may invest its remaining assets in the following securities: (i) Money
Market Instruments, (ii) asset-backed securities rated A or higher by S&P or
Moody's; (iii) debt securities rated below investment grade, but not lower than
B- by S&P or B3 by Moody's, or if unrated, determined by the Adviser to be of
comparable quality at the time of purchase (up to 15% of the Fund's net assets,
including downgraded securities); (iv) debt securities convertible into common
stocks (up to 10% of the Fund's net assets); (v) U.S. dollar denominated fixed
income securities issued by foreign corporations or issued or guaranteed by
foreign governments, their political subdivisions, agencies or
instrumentalities; and (vi) U.S. dollar denominated obligations of supranational
entities traded in the United States. For additional information on corporate
bond ratings, see the Appendix to the Statement of Additional Information.
The relative proportions of the Fund's net assets invested in the different
types of permissible investments will vary from time to time depending upon the
Adviser's assessment of the relative market value of the sectors in which the
Fund invests. In addition, the Fund may purchase securities that are trading at
a discount from par when the Adviser believes there is a potential for capital
appreciation. The Adviser does not seek to achieve the Fund's investment
objective by forecasting changes in the interest rate environment.
In the event any security owned by the Fund is downgraded below the rating
categories set forth above, the Adviser will review the situation and determine
whether to retain or dispose of the security.
The Fund may enter into forward commitments or purchase securities on a
when-issued basis, and may invest in variable or floating rate obligations.
The Fund expects to maintain a dollar-weighted average portfolio maturity of
five to ten years.
ALL FUNDS
Each Fund may purchase securities on a when-issued basis.
Each Fund may enter into futures and options transactions.
Each Fund may invest up to 15% of its net assets in illiquid securities.
Each Fund may purchase convertible securities.
For temporary defensive purposes during periods when the Adviser determines that
market conditions warrant, each Fund may invest up to 100% of its assets in
Money Market Instruments and in cash.
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 -- Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
securities convertible into equity securities, such as warrants or convertible
debt, is also affected by prevailing interest rates, the credit quality of the
issuer and any call provision. Fluctuations in the value of equity securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in such Funds may be more suitable for long-term investors who can
bear the risk of short-term principal fluctuations.
The Small Cap Value Fund invests in equity securities of smaller companies. Any
investment in smaller capitalization companies involves greater risk than that
customarily associated with investments in larger, more established companies.
This increased risk may be due to the greater business risks of smaller size,
limited markets and financial resources, narrow product lines and lack of depth
of management. The securities of smaller companies are often traded in the
over-the-counter market and if listed on a national securities exchange may not
be traded in volumes typical for that exchange. Thus, the securities of
smaller-sized companies are likely to be less liquid, and subject to more abrupt
or erratic market
11
<PAGE>
movements than securities of larger, more established companies.
FIXED INCOME SECURITIES -- The market value of fixed income investments will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes by recognized agencies in the rating of any
fixed income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of these securities will not necessarily affect cash income derived
from these securities, but will affect the investing Fund's net asset value.
Mortgage-backed and asset-backed securities purchased by the Fixed Income Fund
may be subject to prepayment, which may result in capital gains or losses, and
which make it difficult to determine such securities' average life and yield.
When the mortgage-backed securities held by a Fund are pre-paid, the Fund must
reinvest the proceeds in securities the yield of which reflects prevailing
interest rates, which may be lower than the yield of the pre-paid security.
Securities rated below investment grade are high risk, high yield securities and
may be labeled "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 a 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.
SECURITIES OF FOREIGN ISSUERS -- Investments in the securities of foreign
issuers may subject a 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.
MORTGAGE-BACKED SECURITIES -- The mortgage-backed securities ("MBSs") in which
the Fixed Income Fund may invest are subject to prepayment of the underlying
mortgages. During periods of declining interest rates, prepayment of mortgages
underlying MBSs can be expected to accelerate. When the MBSs held by the Fixed
Income Fund are prepaid, the Fixed Income Fund must reinvest the proceeds in
securities the yield of which reflects prevailing interest rates, which may be
lower than the yield on prepaid MBSs.
REITS -- The value of interests in REITs may be affected by changes in (i) the
value of the property owned, (ii) the quality of the mortgages held by the
trust, and (iii) interest rates.
PORTFOLIO TURNOVER -- Each 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 on earnings potential and
disposing of securities when the Adviser believes that their earnings potential
has diminished, or may result from the Adviser's maintenance of appropriate
issuer diversification. Portfolio turnover rates in excess of
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100% may result in higher transaction costs, including increased brokerage
commissions, and higher levels of taxable capital gain.
INVESTMENT LIMITATIONS
The investment objective of each Fund and certain of the investment limitations
set forth here and in the Statement of Additional Information are fundamental
policies of that Fund. Fundamental policies cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares.
1. No Fund may (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 each Fund's total assets.
2. No Fund may 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 September 30, 1997
the Adviser had discretionary management authority with respect to approximately
$2.2 billion of assets. In addition to advising the Funds, the Adviser provides
advisory services to pension plans, religious and educational endowments,
corporations, 401(k) plans, profit sharing plans, individual investors 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 each 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 each
Fund and continuously reviews, supervises and administers each Fund's investment
program, subject to the supervision of, and policies established by, the
Trustees of the Fund.
The Clover Equity Value Fund has, since its inception, been managed by a
committee of research professionals led by Michael E. Jones, CFA, and Paul W.
Spindler, CFA. Mr. Jones is a co-founder of the Adviser and for the past five
years has been the Managing Director of the Adviser. For the past five years Mr.
Spindler has been a Vice President of Investments for the Adviser.
The Clover Small Cap Value Fund has, since its inception, been managed by a
committee of research professionals led by Michael E. Jones, CFA, and Lawrence
Creatura, CFA. Mr. Creatura has been a Vice President of Investments for the
Adviser for the past three years. For the two previous years, Mr. Creatura was a
laser systems Engineer/Researcher for Laser Surge, Inc.
The Max Cap Value Fund is managed by a committee of research professionals led
by Lawrence Creatura, CFA and Paul W. Spindler, CFA.
The Clover Fixed Income Fund has, since its inception, been managed by a
committee of research professionals led by Richard J. Huxley and Paul W.
Spindler, CFA. For the past five years Richard Huxley has been the Executive
Vice President and Fixed Income Manager 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%, .74%, .45% and .85% of the average
daily net assets of the Max Cap Value, Equity Value, Fixed Income and Small Cap
Value Funds, respectively. 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 Equity Value and Fixed Income Funds to an annual rate
of not more than 1.20% and .80%, respectively, of average daily net assets when
net assets are below $20 million and
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to not more than 1.10% and .75%, respectively, when net assets are $20 million
or more, and to limit total operating expenses of the Max Cap Value and Small
Cap Value Funds to .95% and 1.40%, respectively, of the Fund's 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. For the fiscal year
ended September 30, 1997, the Adviser received advisory fees of .69%, .00% and
.18%, respectively, of the average daily net assets of the Equity Value, Small
Cap Value and Fixed Income Funds. The Max Cap Value Fund had not commenced
operations as of September 30, 1997.
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
each Fund, which is calculated daily and paid monthly, at an annual rate of .12%
of that 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. Each Fund is subject to a minimum annual administration fee of $75,000.
Once each of the Small Cap Value Fund, Max Cap Value Fund, and the Fixed Income
Fund reach $62.5 million in net assets, the Administrator will receive asset-
based fees in accordance with the schedule set forth above. The Administrator
may, at its sole discretion, waive all or a portion of its fees.
The Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer agent and dividend disbursing agent for
the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
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 may select brokers on the basis of the research, statistical and
pricing services they provide to the Funds. 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 and that the Adviser determines in good
faith that the commission is reasonable in terms of either the transaction or
the overall responsibility of the Adviser to the Funds and the Adviser's other
clients.
Since shares of the Funds are not marketed through intermediary broker-dealers,
no Fund has 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 any Fund with
qualified broker-dealers who refer clients to that Fund.
Some securities considered for investment by a 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.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business (a "Business Day").
Investors may purchase and redeem shares of each 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
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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 a Fund's public offering price.
The minimum initial investment in the Funds 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 name of the appropriate Fund) for $2,500 or more ($2,000 for
IRAs), together with a completed Account Application to: TIP Funds, P.O. Box
419805, Kansas City, Missouri 64141-6805. Third-party checks, credit cards,
credit card checks and cash will not be accepted. When purchases are made by
check (including certified or cashier's checks), redemption proceeds will not be
forwarded until the check providing for the investment being redeemed has
cleared (which may take up to 15 days). Subsequent investments may also be
mailed directly to the Transfer Agent.
PURCHASES BY WIRE TRANSFER
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of 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: [___________
Fund]. The shareholder's name and account number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
GENERAL INFORMATION REGARDING PURCHASES
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the next
Business Day. 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. Payment may be made by check or
readily available funds. The purchase price of shares of any Fund is that 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 each Fund calculated to
three decimal places. The Trust will not issue certificates representing shares
of any 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.
The Trust reserves the right to reject a purchase order when the Trust
determines that it is not in the best interest of the Trust or its shareholders
to accept such order.
Shares of each Fund may be purchased in exchange for securities to be included
in that Fund, subject to the Adviser's or Administrator's determination that
these securities are acceptable. 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
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at the time of valuation become the property of that Fund and must be delivered
by the shareholder to that Fund upon receipt from the issuer.
The Adviser or Administrator will not accept securities in exchange for Fund
shares unless (1) such securities are appropriate for the Fund at the time of
the exchange; (2) the shareholder represents and agrees that all securities
offered to the Fund are not subject to any restrictions upon their sale by the
Fund under the Securities Act of 1933, as amended, or otherwise; and (3) prices
are available from an independent pricing service approved by the Trust's Board
of Trustees.
Systematic Investment Plan -- A shareholder may also arrange for periodic
additional investments in a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
EXCHANGES
Shareholders of each 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
prior to the calculation of net asset value 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 the calculation of net asset value 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 the calculation of net asset value on any Business Day. Otherwise, the
redemption order will be effective on the next Business Day. The redemption
price of shares of any Fund is the net asset value per share of that 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 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
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circumstances: (1) written requests for redemptions in excess of $50,000; (2)
all written requests to wire redemption proceeds to a bank other than the bank
previously designated on the account application; and (3) redemption requests
that provide that the redemption proceeds should be sent to an address other
than the address of record or to a person other than the registered
shareholder(s) for the account. Signature guarantees can be obtained from any of
the following institutions: a national or state bank, a trust company, a federal
savings and loan association, or a broker-dealer that is a member of a national
securities exchange. The Trust does not accept guarantees from notaries public
or from organizations that do not provide reimbursement in the case of fraud.
Systematic Withdrawal Plan -- Each Fund offers a Systematic Withdrawal Plan
("SWP") for shareholders who wish to receive regular distributions from their
account. Upon commencement of the SWP, the account must have a current value of
$2,500 or more. Shareholders may elect to receive automatic payments via ACH
wire transfers of $100 or more on a monthly, quarterly, semi-annual or annual
basis. An application form for SWP may be obtained by calling 1-800-224-6312.
Shareholders should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending on the
frequency and amounts of the withdrawal payments and/or any fluctuations in the
net asset value per share, their original investment could be exhausted
entirely. To participate in the SWP, shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any time,
upon written notice to the Transfer Agent.
VALUATION OF SHARES
The net asset value per share of each Fund is determined by dividing the total
market value of that Fund's investments and other assets, less any liabilities,
by the total number of outstanding shares of that Fund. Net asset value per
share is determined daily as of the close of regular trading on the New York
Stock Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
PERFORMANCE
From time to time, each 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 a 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 a Fund refers to the average compounded rate of return on a
hypothetical investment, for designated time periods (including but not limited
to the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
A 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. A 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. A 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 attributes of a Fund's portfolio. A 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. A Fund may also quote
financial and business publications and periodicals as they relate to fund
management, investment philosophy, and investment techniques.
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A 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 a Fund or its shareholders.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes. Further information
concerning taxes is set forth in the Statement of Additional Information.
TAX STATUS OF THE FUNDS:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other portfolios. Each 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 a Fund qualifies for this special tax treatment,
it will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) which it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS:
Each Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Distributions from net investment
income will qualify for the dividends-received deduction for corporate
shareholders only to the extent such distributions are derived from dividends
paid by domestic corporations; however, such distributions which do qualify for
the dividends-received deduction may be subject to the corporate alternative
minimum tax. It can be expected that none of the dividends paid by the Fixed
Income Fund will qualify for that deduction. Any net capital gains will be
distributed annually and will be taxed to shareholders as gains from the sale or
exchange of a capital asset held for more than one year or for more than 18
months, as the case may be, regardless of how long the shareholder has held
shares. Each 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 a Fund are sold with original issue discount and
thus do not make periodic cash interest payments. Each 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 each Fund distributes all of its net investment
income to its shareholders, a 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 a 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. Each 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 a Fund and may be exempt, depending on the
state, when received by a shareholder from a Fund provided certain
state-specific conditions are satisfied. The Funds will inform shareholders
annually of the percentage of income and distributions derived from direct U.S.
obligations. Shareholders should consult their tax advisers to determine whether
any portion of the income dividends received from a Fund is considered tax
exempt in their particular state. Income
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derived by a Fund from securities of foreign issuers may be subject to foreign
withholding taxes. The Funds will not be able to elect to treat shareholders as
having paid their proportionate share of such foreign taxes.
Each sale, exchange or redemption of a Fund's shares is a taxable event to the
shareholder.
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.
As of January 5, 1998, the Clover Capital Management, Inc. Employee 401K Savings
& Deferred Profit Sharing Plan, owned a controlling interest (as defined in the
Investment Company Act of 1940) of the Clover Max Cap Value Fund.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually for each 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
Equity Value, Max Cap Value, and Small Cap Value Funds is distributed in the
form of dividends to shareholders of record on the second to last Business Day
of each quarter. The Fixed Income Fund declares dividends of substantially all
of its net investment income (exclusive of capital gain) daily and distributes
such dividends on the first Business Day of each month. Shares of the Fixed
Income Fund purchased begin earning dividends on the Business Day following
receipt of payment by the Transfer Agent. If any capital gain is realized for a
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Fund, substantially all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of each 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 AUDITORS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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 one or more of the
Funds:
AMERICAN DEPOSITARY RECEIPTS -- ("ADRs") ADRs are securities, typically issued
by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer and
deposited with the depositary. ADRs may be 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.
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
card holders.
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
20
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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 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 with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers; 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. 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.
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<PAGE>
FHLMC has in the past guaranteed only the ultimate collection of principal of
the underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions. Government and private guarantees do not extend to the
securities' value, which is likely to vary inversely with fluctuations in
interest rates.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. These securities include CMOs and
REMICs that are rated in one of the top two rating categories. 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, often referred to
as a "tranche," is issued with a specific fixed or floating coupon rate and has
a stated maturity or final distribution date. Principal payments on the
underlying mortgage assets may cause CMOs to be retired substantially earlier
than their stated maturities or final distribution dates, resulting in a loss of
all or part of any premium paid.
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. Investors may purchase beneficial interests in REMICs, which are known
as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through
certificates ("REMIC Certificates") issued by Fannie Mae or FHLMC represent
beneficial ownership interests in a REMIC trust consisting principally of
mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed mortgage pass-through
certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment
of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae.
PARALLEL PAY SECURITIES; PAC BONDS: Parallel pay CMOs and REMICs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which must be retired by
its stated maturity date or final distribution date, but may be retired earlier.
Planned Amortization Class CMOs ("PAC Bonds") generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
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 and is thus termed an interest-only class ("IO"), while
the other class may receive all of the principal payments and is thus termed the
principal-only class ("PO"). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. 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.
ADDITIONAL RISK FACTORS: Due to the possibility of prepayments of the underlying
mortgage instruments, mortgage-backed securities generally do not have a known
maturity. In the absence of a known maturity, market participants generally
refer to an estimated average life. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns, based upon current
interest rates, current conditions in the relevant housing markets and other
factors. The assumption is necessarily subjective, and thus different market
participants can produce different average life estimates with regard to the
same security. There can be no assurance that estimated average life will be a
security's actual average life.
22
<PAGE>
REITs -- REITs pool investors' funds for investment primarily in income
producing real estate or real estate related loans or interests. A REIT is not
taxed on income distributed to its shareholders or unitholders if it complies
with regulatory requirements. Equity REITs invest the majority of their assets
directly in real property and derive their income primarily from rents and
capital gains from appreciation realized through property sales. A shareholder
in a Fund should realize that by investing in REITs indirectly through the Fund,
he or she will bear not only his or her proportionate share of the expenses of
the Fund, but also indirectly, similar expenses of underlying REITs. REITs may
be affected by changes in the value of their underlying properties and by
defaults by borrowers or tenants.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. Repurchase
agreements are considered loans under the 1940 Act.
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. Delivery of and payment for these securities may
occur a month or more after the date of the purchase commitment. The Funds 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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<PAGE>
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
JANUARY 31, 1998
TIP FUNDS LOGO
- ----------------------------------
CLOVER EQUITY VALUE FUND
- ----------------------------------
CLOVER SMALL CAP VALUE FUND
- ----------------------------------
CLOVER MAX CAP VALUE FUND
- ----------------------------------
CLOVER FIXED INCOME FUND
- ----------------------------------
<PAGE>
TIP FUNDS
Investment Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
TIP Funds (the "Trust") provides a convenient and economical means of investing
in professionally managed portfolios of securities. This Prospectus offers
shares of the following mutual fund (the "Fund"), which is a separate series of
the Trust:
PENN CAPITAL SELECT FINANCIAL SERVICES 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 January 31, 1998, 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.
January 31, 1998
<PAGE>
TABLE OF CONTENTS
Summary..................................................... 3
Expense Summary............................................. 5
The Trust and the Fund...................................... 6
Investment Objective........................................ 6
Investment Policies......................................... 6
Risk Factors................................................ 7
Investment Limitations...................................... 8
The Adviser................................................. 9
The Administrator........................................... 10
The Transfer Agent.......................................... 10
The Distributor............................................. 10
Portfolio Transactions...................................... 10
Purchase and Redemption of Shares........................... 11
Performance................................................. 13
Taxes....................................................... 14
General Information......................................... 15
Description of Permitted Investments and Risk Factors....... 16
2
<PAGE>
SUMMARY
The following provides basic information about the Penn Capital Select
Financial Services Fund (the "Select Financial Services Fund" or the "Fund").
The Fund is one of the thirteen mutual funds comprising TIP Funds (the "Trust").
This summary is qualified in its entirety by reference to the more detailed
information provided elsewhere in this Prospectus and in the Statement of
Additional Information.
What is the Fund's goal and its primary policies?
PENN CAPITAL SELECT FINANCIAL SERVICES FUND
The Select Financial Services Fund seeks to generate long term capital
appreciation. The Fund invests primarily in equity securities of companies
principally engaged in the banking industry and the financial services sector,
and will concentrate its investments in the banking industry. The banking
industry includes commercial and industrial banks, savings and loan associations
and their holding companies. The financial services sector includes consumer and
industrial finance companies, diversified financial service companies,
investment banking, securities brokerage and investment advisory companies,
leasing companies and insurance companies and other financial services
companies.
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 Select Financial Services Fund will be exposed to the risks
of investing in equity securities, including equity securities of small cap
issuers (i.e., issuers with market capitalizations of less than $1 billion).
Investments in smaller companies involve greater risks than investments in
larger, more established companies. The Select Financial Services Fund will
focus its investments in the U.S. banking industry and the financial services
sector, and will be concentrated in the banking industry (i.e., at least 25%
(and up to 100%) of its total assets will be invested in the banking industry).
Although diversified throughout the industry, to the extent that it invests a
significant portion of its assets in the banking industry and the financial
services sector, it is subject to the risks associated with investing in banking
and financial services issuers. The Fund may also, to a limited extent, borrow
money and utilize leveraging techniques. The Fund may invest 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's high yield securities, if any, may be
volatile and are subject to greater amounts of credit risk than investment grade
issuers.
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? Penn Capital Management Company, 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? SEI Investments Distribution Co. (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.
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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.
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. 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 periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
4
<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------
SALES LOAD IMPOSED ON PURCHASES............................. NONE
SALES LOAD IMPOSED ON REINVESTED DIVIDENDS.................. NONE
DEFERRED SALES LOAD......................................... NONE
REDEMPTION FEES(1).......................................... NONE
EXCHANGE FEES............................................... NONE
- ------------------------------------------------------------------
- ------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount of a
Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- ------------------------------------------------------------------------------
SELECT FINANCIAL
SERVICES FUND
- ------------------------------------------------------------------------------
Advisory Fees (after fee waivers)(1)........................ .99%
12b-1 Fees.................................................. None
Other Expenses (after expense reimbursements, if
applicable)(2)............................................ .41%
- ------------------------------------------------------------------------------
Total Operating Expenses (after fee waivers or expense
reimbursements)(3)........................................ 1.40%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(1) The Adviser has agreed, on a voluntary basis, to waive its advisory fee to
the extent necessary to keep the "Total Operating Expenses" of the Select
Financial Services Fund during the current fiscal year from exceeding 1.40%.
Absent these fee waivers, Advisory Fees would be 1.00%. The Adviser reserves
the right to terminate its waiver at any time in its sole discretion.
(2) "Other Expenses" for the Fund are estimated for the current fiscal year.
(3) Absent fee waivers or expense reimbursements, "Total Operating Expenses" for
the Select Financial Services Fund would be 1.41%, based on current
expectations and assumptions.
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.
Select Financial Services Fund.......................... $14 $44
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF THE FUND AFTER WAIVERS, AS
SHOWN IN THE EXPENSE TABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the expense table and example is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by shareholders of the Fund. Additional information
may be found under "The Adviser" and "The Administrator."
5
<PAGE>
THE TRUST AND THE FUND
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 Penn Capital Select Financial
Services Fund (the "Select Financial Services Fund" or the "Fund").
INVESTMENT OBJECTIVE
PENN CAPITAL SELECT FINANCIAL SERVICES FUND -- The Select Financial Services
Fund seeks to generate long term capital appreciation.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
PENN CAPITAL SELECT FINANCIAL SERVICES FUND
The Select Financial Services Fund invests primarily (and, under normal
conditions, at least 65% of its total assets) in the equity securities of
companies principally engaged in the banking industry and the financial services
sector. At least 25% (and up to 100%) of the Fund's total assets will be
invested in issuers in the banking industry. To the extent its investments are
concentrated in the banking industry, the Fund is subject to the risks
associated with that industry, including sensitivity to interest rate changes
and potentially adverse legislative and regulatory changes. Examples of
companies in the banking industry include commercial and industrial banks,
savings and loan associations and their holding companies. Examples of companies
in the financial services sector include investment advisers, brokerage
companies, insurance companies, real estate and leasing companies, and companies
that span across these segments.
Generally speaking, the Fund will hold a diversified portfolio of companies with
strong fundamentals, many of which the Adviser believes hold the potential to be
acquired at a premium to their trading prices, measured at the time of their
original acquisition by the Fund (takeover candidates). Any remaining assets may
be invested in equity securities and fixed income securities, warrants and
rights to purchase common stocks, and in American Depository Receipts ("ADRs").
The Fund may also purchase shares of other investment companies and foreign
securities, and may purchase high yield securities (otherwise known as "junk
bonds") as a means of seeking to generate current income.
The Fund may invest in non-rated securities or in securities rated in the lowest
ratings categories established by the Standard & Poor's Corporation ("S&P")
and/or Moody's Investors Service, Inc. ("Moody's"). Securities rated below
investment grade will not constitute more than 15% of the Select Financial
Services Fund's total assets. See the Statement of Additional Information for a
discussion of these ratings.
The Fund may invest in repurchase agreements, which entail a risk of loss should
the seller default on its obligation to repurchase the security which is the
subject of the transaction.
The Fund may participate in a securities lending program, which entails a risk
of loss should a borrower fail financially.
The Fund may purchase Rule 144A securities.
The Fund may invest in certain instruments such as certain types of mortgage
securities and when-issued securities, and may, to a limited extent, borrow
money and utilize leveraging techniques. These investments and techniques, along
with certain transactions involving futures, options, forwards and swaps,
require the Fund to segregate some or all of its cash or liquid securities to
cover its obligations pursuant to such instruments or techniques. As asset
segregation reaches certain levels, the Fund may lose flexibility in managing
its investments properly, responding to shareholder redemption request, or
meeting other obligations and may be forced to sell other securities that it
wanted to retain or to realize unintended gains or losses.
The Fund may also invest in federal, state and municipal government obligations,
investment grade corporate bonds, foreign securities, including emerging market
securities, zero coupon, pay-in-kind and deferred payment bonds, variable and
floating rate securities, money market instruments, shares of other investment
companies and cash equivalents, and may invest up to 20% of its assets in ADRs.
6
<PAGE>
The Fund may, although it has no present intention to do so, invest a portion of
its assets in derivatives, including futures, options, forwards and swaps.
Futures contracts, options, options on futures contracts, forwards and swaps
entail certain costs and risks, including imperfect correlation between the
value of the securities held by the Fund and the value of the particular
derivative instrument, and the risk that the Fund could not close out a futures
or options position when it would be most advantageous to do so.
The Fund may invest up to 15% of its net assets in illiquid securities, and for
temporary defensive purposes, may invest up to 100% of its total assets in money
market instruments (including U.S. Government securities, bank obligations,
commercial paper rated in the highest rating category by a nationally recognized
statistical rating organization ("NRSRO")) and shares of money market investment
companies and may hold a portion of its assets in cash.
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
Prospective investors in the Fund should consider the following factors as they
apply to the Fund's allowable investments and policies.
BANKING INDUSTRY AND FINANCIAL SERVICES SECTOR -- To the extent that the Select
Financial Services Fund invests a significant percentage of its assets in the
banking industry and the financial services sector, it is subject to risks
associated with banking and financial services companies. The companies within
the banking industry and the financial services sector are subject to extensive
regulation, rapid business changes, volatile performance dependent upon the
availability and cost of capital and prevailing interest rates, and significant
competition. General economic conditions significantly affect these companies.
Credit and other losses resulting from the financial difficulty of borrowers or
other third parties have a potentially adverse effect on companies in this
industry. Investment banking, securities brokerage and investment advisory
companies are particularly subject to government regulation and the risks
inherent in securities trading and underwriting activities. Insurance companies
are particularly subject to government regulation and rate setting, potential
anti-trust and tax law changes, and industry-wide pricing and competition
cycles. Property and casualty insurance companies may also be affected by
weather and other catastrophes. Life and health insurance companies may be
affected by mortality and morbidity rates, including the effects of epidemics.
Individual insurance companies may be exposed to reserve inadequacies, problems
in investment portfolios and failures to reinsurance carriers.
EQUITY SECURITIES -- The Fund may invest in public and privately issued equity
securities, including common and preferred stocks, warrants, rights to subscribe
to common stock and convertible securities. Investments in equity securities in
general are subject to market risks that may cause their prices to fluctuate
over time. The value of securities convertible into equity securities, such as
warrants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision. Fluctuations in the value
of equity securities in which the Fund invests will cause the net asset value of
the Fund to fluctuate. An investment in the Fund may be more suitable for
long-term investors who can bear the risk of short-term principal fluctuations.
The Fund may invest to a significant degree in equity securities of smaller
institutions, including, but not limited to, those within the banking industry
and the financial services sector. Any investment in smaller or medium
capitalization companies involves greater risk than that customarily associated
with investments in larger, more established companies. This increased risk may
be due to the greater business risks of smaller size, limited markets and
financial resources, narrow product lines and lack of depth of management. The
securities of smaller companies are often traded in the over-the-counter market
and if listed on a national securities exchange may not be traded in volumes
typical for that exchange. Thus, the securities of smaller-sized companies are
likely to be less liquid, and subject to more abrupt or erratic market movements
than securities of larger, more established companies.
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
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income securities generally rise. Conversely, during periods of rising interest
rates, the values of such securities generally decline. Moreover, while
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Changes by recognized agencies in the
rating of any fixed income security and in the ability of an issuer to make
payments of interest and principal also affect the value of these investments.
Changes in the value of these securities will not necessarily affect cash income
derived from these securities, but will affect the investing Fund's net asset
value.
Investment grade bonds include securities rated BBB by S&P or Baa by Moody's,
which may be regarded as having speculative characteristics as to repayment of
principal. If a security is downgraded, the Adviser will review the situation
and take appropriate action.
HIGH YIELD, HIGH RISK SECURITIES -- The high yield market consists primarily of
fixed income securities that are not rated or that are rated below investment
grade (i.e., Ba1 or lower rating by Moody's and/or BB+ or lower by S&P),
including securities of issuers subject to proceedings under the Federal
Bankruptcy Code. High yield securities (also known as "junk bonds") include, but
are not limited to, bonds and preferred stock, interests in term loans and in
revolving credit facilities (or combinations thereof), convertible securities,
units of bonds and warrants or stock, and other securities and financial
instruments, including those on which the issuer is unable to pay stated
dividends or interest payments on a current basis. Investments in these
securities involve market risks, credit risks and call risks. High yield
securities are generally medium term bonds and are more sensitive than
short-term and less sensitive than long-term securities to general interest rate
fluctuations. Credit risks relate to the continuing ability of the issuer of a
security to pay the stated interest or dividends and ultimately to repay
principal upon maturity. Discontinuation of such payments could substantially
adversely affect the market price of the security. Call risks arise from early
call features that many high yield securities contain. In general, the market
for such securities is relatively inefficient due to its complexity and the
limited availability of information on such securities.
SECURITIES OF FOREIGN ISSUERS -- The Fund may invest in securities of foreign
issuers with a strong U.S. trading presence and in sponsored and unsponsored
ADRs. 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. Moreover, investments
in emerging market nations may be considered speculative, and there may be a
greater potential for nationalization, expropriation or adverse diplomatic
developments (including war) or other events which could adversely effect the
economies of such countries or investments in such countries.
PORTFOLIO TURNOVER -- The annual portfolio turnover rate for the Select
Financial Services Fund, under normal circumstances, is not expected to exceed
200%. An annual portfolio turnover rate in excess of 100% may result from the
Adviser's investment strategy or from prevailing market conditions. Portfolio
turnover rates in excess of 100% may result in higher transaction costs,
including increased brokerage commissions, and higher levels of taxable capital
gain. See "Taxes."
INVESTMENT LIMITATIONS
The investment objectives of the 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
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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 the Select Financial Services Fund will invest at least 25% of its total
assets in the banking industry. This limitation does not apply to obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements involving such securities.
3. The Fund may not borrow money in an amount exceeding 33 1/3% of the value of
its total assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or require the
Fund to segregate assets are not considered to be borrowings. Asset coverage of
at 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.
The foregoing percentages (except the limitation on borrowing) will apply at the
time of the purchase of a security.
THE ADVISER
Penn Capital Management Company, Inc. ("Penn Capital" or the "Adviser"), 52
Haddonfield-Berlin Road, Suite 1000, Cherry Hill, New Jersey 08034, is a
professional investment management firm founded in 1987 and registered as an
investment adviser under the Investment Advisers Act. Richard A. Hocker is a
founding partner and Chief Investment Officer of the Adviser, an investment
management firm that manages the investment portfolios of institutions and high
net worth individuals and which currently has assets under management of
approximately $500 million. The Adviser employs a staff of 17 and manages monies
in a variety of investment styles through either separate account management or
one of its private investment funds.
The Adviser serves as the investment adviser for the Fund under an investment
advisory agreement (the "Advisory Agreement"). 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
Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the average daily net assets of
the Select Financial Services Fund. The Adviser has voluntarily agreed to waive
all or a portion of its fee and to reimburse expenses of the Select Financial
Services Fund in order to limit its total operating expenses (as a percentage of
average daily net assets on an annualized basis) to not more than 1.40%. The
Adviser reserves the right, in its sole discretion, to terminate these voluntary
fee waivers and reimbursements at any time.
The Fund is managed by a team consisting of certain principals of the Adviser.
The Select Financial Services Fund is managed by Richard A. Hocker. Scott D.
Schumacher, a Senior Analyst, assists Mr. Hocker in managing the Fund.
Prior to founding the Adviser, Mr. Hocker was a shareholder and Senior Portfolio
Manager of Delaware Management Co., an investment management firm which, during
Mr. Hocker's tenure, increased its assets under management from $300 million to
$21 billion. At Delaware Management Co., Mr. Hocker was instrumental in
developing and managing a variety of mutual funds, including Delchester Bond
Fund and Delaware Cash Reserve, and where he personally managed, at its height,
approximately $2 billion of assets. Additionally, Mr. Hocker was the founder,
CEO and Chairman of the Board of Covenant Bank, a community bank based in
Haddonfield, N.J., with approximately $435 million in assets. As Chairman of
Covenant Bank,
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Mr. Hocker was the senior negotiator for acquisitions of three financial
institutions, as well as the purchases of individual branches of regional banks
that Covenant Bank has completed since 1992. In addition, Mr. Hocker negotiated
the sale of Covenant Bank to First Union Corp., pending settlement in the first
quarter of 1998.
Scott D. Schumacher, a Senior Analyst of the Adviser, assists Mr. Hocker in
managing the Select Financial Services Fund. He has been employed by the Adviser
since 1987. Mr. Schumacher began working with the investment team in 1992. As
the Adviser's senior analyst, Mr. Schumacher is directly responsible for
researching the financial services sector and monitoring credit positions of
existing accounts.
Kathleen A. News, a co-founder and principal of the Adviser, serves as the
Managing Director of the Adviser and co-portfolio manager of the Penn Capital
Strategic High Yield Bond Fund. Ms. News has over 20 years of investment
experience at both the Adviser and Delaware Management Co., including over 10
years managing high yield portfolios. While at Delaware, Ms. News served as a
portfolio manager for Delaware Cash Reserve, as well as managing fixed income
accounts for various Fortune 500 institutions.
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator") provides the Trust with administrative
services, including regulatory reporting and all necessary office space,
equipment, personnel, and facilities.
For these administrative services, the Administrator is entitled to a minimum
fee from the Fund of $75,000. Once the Fund's assets reach $62.5 million, it
will be charged its asset-based fee, which is calculated daily and paid monthly,
at an annual rate of .12% of each Fund's average daily net assets up to $75
million, .10% on the next $75 million of such assets, .09% on the next $150
million of such assets, .08% of the next $300 million of such assets, and .075%
of such assets in excess of $600 million. The Administrator may, at its sole
discretion, waive all or a portion of its fees.
The Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent"), serves as the transfer agent and dividend disbursing agent
for the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
Certain broker-dealers assist their clients in the purchase of shares from the
Distributor and charge a fee for this service in addition to the Fund's public
offering price.
PORTFOLIO TRANSACTIONS
The Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation. The Adviser obtains its research information from a number of
sources, including large brokerage houses, trade and financial journals and
publications, corporate reports, rating service manuals, and interviews with
corporate executives and other industry sources. The Adviser may select brokers
on the basis of the research, statistical and pricing services they provide to
the Fund, as well as on the basis of the Adviser's business relationship with
the brokers. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transactions,
provided that such commissions are in compliance with the Securities Exchange
Act of 1934, as amended, and that the Adviser determines in good faith that the
commission is reasonable in terms of either the transaction or the overall
responsibility of the Adviser to the Fund and the Adviser's other clients. The
Adviser may direct commission business for the Fund to designated broker-dealers
(including the Distributor) in connection with such broker-dealers' payment of
certain Fund expenses.
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
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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 the 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.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of the 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.
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.
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.
PURCHASES BY MAIL
An account may be opened by mailing a check or other negotiable bank draft
(payable to the Fund) for $2,500 or more ($2,000 for IRAs), together with a
completed Account Application to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805. Third-Party checks, credit cards, credit card checks and
cash will not be accepted. When purchases are made by check (including certified
or cashier's checks), redemption proceeds will not be forwarded until the check
providing for the investment being redeemed has cleared (which may take up to 15
days). Subsequent investments may also be mailed directly to the Transfer Agent.
PURCHASES BY WIRE TRANSFER
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of 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: Select Financial
Services Fund. The shareholder's name and account number must be specified in
the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
GENERAL INFORMATION REGARDING PURCHASES
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the
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next Business Day. A purchase request is in good order if it is complete and
accompanied by the appropriate documentation, including an Account Application
and additional documentation required. 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.
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 a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
EXCHANGES
Shareholders of the 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, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order prior to the calculation of net asset value 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 the calculation of net asset value 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 the calculation of net asset value on any Business Day. Otherwise, the
redemption order will be effective on the next 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.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH
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wire transfer. There is no charge for having a check for redemption proceeds
mailed. The Custodian will deduct a wire charge, currently $10.00, from the
amount of a Federal Reserve wire redemption payment made at the request of a
shareholder. Shareholders cannot redeem shares of the Fund by Federal Reserve
wire on Federal holidays restricting wire transfers. 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
transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are genuine.
Such procedures may include the taping of telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
A signature guarantee is a widely accepted way to protect shareholders by
verifying the signature on certain redemption requests. The Trust requires
signature guarantees to be provided in the following circumstances: (1) written
requests for redemptions in excess of $50,000; (2) all written requests to wire
redemption proceeds to a bank other than the bank previously designated on the
account application; and (3) redemption requests that provide that the
redemption proceeds should be sent to an address other than the address of
record or to a person other than the registered shareholder(s) for the account.
Signature guarantees can be obtained from any of the following institutions: a
national or state bank, a trust company, a federal savings and loan association,
or a broker-dealer that is a member of a national securities exchange. The Trust
does not accept guarantees from notaries public or from organizations that do
not provide reimbursement in the case of fraud.
Systematic Withdrawal Plan -- The Trust 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 regular trading on the New York Stock
Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. No representation can be made regarding actual future yields or
returns. The yield of 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.
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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 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 gains from the sale or exchange of a capital asset held
for more than one year or for more than 18 months, as the case may be,
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 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
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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 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 ("portfolios") of shares. All consideration
received by the Trust for shares of any portfolio and all assets of such
portfolio belong to that portfolio and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of additional
portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
TRUSTEES OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
VOTING RIGHTS
Each share held entitles the Shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value of the shares held on the record date for the
meeting. Shareholders of the Fund will vote separately on matters pertaining
solely to the 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.
As of January 5, 1998, Penn Capital Management, Inc., and the Carolyn
Turner/Robert Turner Jr. Trust, owned a controlling interest (as defined in the
Investment Company Act of 1940) of the Penn Capital Select Financial Services
Fund.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually for the Fund. The Trust also furnishes periodic
reports
15
<PAGE>
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 by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income (excluding capital gains) of the
Fund is distributed in the form of dividends at least annually. If any capital
gain is realized, substantially all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of the 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 AUDITORS
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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.
BORROWING -- The Fund may borrow money equal to 5% of its total assets for
temporary purposes to meet redemptions or to pay dividends. Borrowing may
exaggerate changes in the net asset value of the Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. The Fund may be required to liquidate portfolio securities at a
time when it would be disadvantageous to do so in order to make payments with
respect to any borrowing. The Fund may be required to segregate liquid assets in
an amount sufficient to meet its obligations in connection with such borrowings.
16
<PAGE>
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics of both fixed income and
equity securities. Because of the conversion feature, the market value of a
convertible security tends to move with the market value of the underlying
stock. The value of a convertible security is also affected by prevailing
interest rates, the credit quality of the issuer and any call provisions.
FORWARD FOREIGN CURRENCY CONTRACTS -- A forward contract involves an obligation
to purchase or sell a specific currency amount at a future date, agreed upon by
the parties, at a price set at the time of the contract. The Fund may also enter
into a contract to sell, for a fixed amount of U.S. dollars or other appropriate
currency, the amount of foreign currency approximating the value of some or all
of the Fund's securities denominated in such foreign currency.
HIGH YIELD, HIGH RISK SECURITIES -- Securities rated below investment grade are
often referred to as "junk bonds." Fixed income securities are subject to the
risk of an issuer's ability to meet principal and interest payments on the
obligation (credit risk), and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated (i.e., high yield) securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which primarily react to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of high yield securities
will fluctuate over time, reflecting not only changing interest rates but the
market's perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Investors should carefully consider the relative
risks of investing in high yield securities and understand that such securities
are not generally meant for short-term investing.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. Adverse economic developments can disrupt the market
for high yield securities, and severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity which may lead to a higher incidence of
default on such securities. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. As a result,
the Fund's adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Furthermore the Trust may experience difficulty in valuing
certain securities at certain times. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market value for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
Credit quality in the junk bond market can change suddenly and unexpectedly, and
even recently issued credit ratings may not fully reflect the actual risks
imposed by a particular security.
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
17
<PAGE>
repurchase agreements with durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality,
dollar-denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which 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.
RULE 144A SECURITIES -- Rule 144A securities are securities exempt from
registration on resale pursuant to Rule 144A under the 1933 Act. Rule 144A
securities are traded in the institutional market pursuant to this registration
exemption, and, as a result, may not be as liquid as exchange-traded securities
since they may only be resold to certain qualified institutional investors. Due
to the relatively limited size of this institutional market, these securities
may affect the Fund's liquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities.
Nevertheless, Rule 144A securities may be treated as liquid securities pursuant
to guidelines adopted by the Trust's Board of Trustees.
SECURITIES LENDING -- In order to generate additional income, the Fund may lend
its securities pursuant to agreements requiring that the loan be continuously
secured by collateral consisting of cash or securities of the U.S. Government or
its agencies equal to at least 100% of the market value of the loaned
securities. The Fund continues to receive interest on the loaned securities
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
SHORT SALES -- A short sale is "against the box" if at all times during which
the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities that are sold
short.
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").
U.S. TREASURY RECEIPTS -- U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury obligations into a special account at a custodian bank. The custodian
holds the interest and principal payments for the benefit of the registered
owners of the certificates of receipts. The custodian arranges for the issuance
of the certificates or receipts evidencing ownership and maintains the register.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable
or floating
18
<PAGE>
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. 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, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
obligations are debt securities that do not bear any interest, but instead are
issued at a deep discount from par. The value of a zero coupon obligation
increases over time to reflect the interest accreted. Upon maturity, the holder
is entitled to receive the par value of the security. While interest payments
are not made on such securities, holders of such securities are deemed to have
received "phantom income" annually. Because the Fund will distribute its
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Fund will have fewer assets with which to purchase income producing
securities. In the event of adverse market conditions, zero coupon, pay-in-kind
and deferred payment securities may be subject to greater fluctuations in value
and may be less liquid than comparably rated securities paying cash interest at
regular interest payment periods.
19
<PAGE>
Trust:
TIP Funds
P.O. Box 419805
Kansas City, MO 64141-6805
Investment Advisor:
Penn Capital Management Company, Inc.
Distributor:
SEI Investments Distribution Co.
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
PENN-F-001-01
PROSPECTUS
JANUARY 31, 1998
TIP FUNDS LOGO
- ----------------------------------
PENN CAPITAL SELECT
FINANCIAL SERVICES FUND
<PAGE>
TIP FUNDS
Investment Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
TIP Funds (the "Trust") provides a convenient and economical means of investing
in professionally managed portfolios of securities. This Prospectus offers
shares of the following mutual fund (the "Fund"), which is a separate series of
the Trust:
PENN CAPITAL STRATEGIC HIGH YIELD BOND 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 January 31, 1998, has been filed with the
Securities and Exchange Commission, and is available without charge by calling
1-800-224-6312. The Statement of Additional Information is incorporated into
this Prospectus by reference.
THE STRATEGIC HIGH YIELD FUND INVESTS PRIMARILY, AND MAY INVEST ALL OF ITS
ASSETS, IN LOWER RATED BONDS COMMONLY REFERRED TO AS "JUNK BONDS." THESE
SECURITIES ARE SPECULATIVE AND ARE SUBJECT TO GREATER RISK OF LOSS OF PRINCIPAL
AND INTEREST THAN INVESTMENTS IN HIGHER RATED BONDS. BECAUSE INVESTMENT IN SUCH
SECURITIES ENTAILS GREATER RISKS, INCLUDING RISK OF DEFAULT, AN INVESTMENT IN
THE STRATEGIC HIGH YIELD FUND SHOULD NOT CONSTITUTE A COMPLETE INVESTMENT
PROGRAM AND MAY NOT BE APPROPRIATE FOR ALL INVESTORS. INVESTORS SHOULD CAREFULLY
CONSIDER THE RISKS POSED BY AN INVESTMENT IN THE STRATEGIC HIGH YIELD FUND
BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES," "RISK FACTORS" AND
THE "APPENDIX."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
January 31, 1998
-1-
<PAGE>
TABLE OF CONTENTS
Summary ................................................................... 3
Expense Summary............................................................. 5
The Trust and the Fund...................................................... 6
Investment Objective........................................................ 6
Investment Policies......................................................... 6
Risk Factors................................................................ 8
Investment Limitations...................................................... 10
The Adviser................................................................. 10
The Administrator........................................................... 11
The Transfer Agent.......................................................... 12
The Distributor............................................................. 12
Portfolio Transactions...................................................... 12
Purchase and Redemption of Shares........................................... 13
Performance................................................................. 17
Taxes ................................................................... 17
General Information......................................................... 19
Description of Permitted Investments and Risk Factors....................... 21
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<PAGE>
SUMMARY
The following provides basic information about the Penn Capital Strategic High
Yield Bond Fund (the "Strategic High Yield Fund" or the "Fund"). The Fund is one
of the thirteen mutual funds comprising TIP Funds (the "Trust"). This summary is
qualified in its entirety by reference to the more detailed information provided
elsewhere in this Prospectus and in the Statement of Additional Information.
What is the Fund's goal and its primary policies? The Strategic High Yield Fund
seeks to maximize income through high current yield and, as a secondary
objective, to produce above average capital appreciation. The Fund invests
primarily in a diversified portfolio of high yield bonds and other high yield
securities.
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 Strategic High Yield Fund invests in non-investment grade fixed
income securities that have speculative characteristics. In addition, to varying
degrees, the Fund may borrow money and utilize leveraging techniques. The Fund
may invest 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's high
yield securities may be volatile and are subject to greater amounts of credit
risk than investment grade issuers.
For more information about the Fund, see "Investment Objective," "Investment
Policies," "Risk Factors," and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? Penn Capital Management Company, Inc. (the "Adviser"),
serves as the investment adviser to the 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? SEI Investments Distribution Co. (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 require a minimum initial investment of
$2,500 ($2,000 for IRAs), which the Distributor may waive at its discretion.
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<PAGE>
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. 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 periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
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<PAGE>
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................................None
Sales Load Imposed on Reinvested Dividends.................................None
Deferred Sales Load........................................................None
Redemption Fees (1)........................................................None
Exchange Fees..............................................................None
- --------------------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Strategic
High Yield
Fund
- --------------------------------------------------------------------------------
Advisory Fees
12b-1 Fees .75%
Other Expenses (after expense None
reimbursements, if applicable) (1) .25%
- --------------------------------------------------------------------------------
Total Operating Expenses (after
fee waivers or expense reimbursements) (23) 1.00%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Absent expense reimbursements by the Adviser, "Other Expenses" for the
Strategic High Yield Fund would be .41%. "Other Expenses" for the Fund
are estimated for the current fiscal year.
(2) The Adviser has agreed, on a voluntary basis, to waive its advisory fee
to the extent necessary to keep the "Total Operating Expenses" of the
Strategic High Yield Fund during the current fiscal year from exceeding
1.00%. The Adviser reserves the right to terminate its waivers at any
time in its sole discretion. Absent fee waivers and/or expense
reimbursements, "Total Operating Expenses" for the Strategic High Yield
Fund would be 1.16%, based on current expectations and assumptions.
EXAMPLE
- --------------------------------------------------------------------------------
You would pay the following expenses on a
$1,000 investment in the Fund assuming (1) a 1 years 3 years
5% annual return and (2) redemption at the ------- -------
end of each time period.
Strategic High Yield Fund $10 $32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF THE FUND AFTER WAIVERS, AS
SHOWN IN THE EXPENSE TABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the expense table and example is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by shareholders of the Funds. Additional
information may be found under "The Adviser" and "The Administrator."
-5-
<PAGE>
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 the Penn Capital Strategic High
Yield Bond Fund (the "Strategic High Yield Fund" or the "Fund").
INVESTMENT OBJECTIVE
Penn Capital Strategic High Yield Bond Fund -- The Strategic High Yield Fund
seeks to maximize income through high current yield and, as a secondary
objective, to produce above average capital appreciation.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
Penn Capital Strategic High Yield Bond Fund -- The Strategic High Yield Fund
invests primarily (and, under normal conditions, at least 65% of its total
assets) in a diversified portfolio of high yield securities (otherwise known as
"junk bonds"). Securities and other financial instruments of issuers that may or
may not be paying interest on a current basis and that are currently
experiencing financial difficulties including, potentially, companies which are
undergoing or are likely to undergo financial restructuring or liquidation, both
under and outside of Federal Bankruptcy Code proceedings, are also included in
the high yield universe and may be acquired by the Fund. The Fund invests
primarily in publicly traded securities, and, to a lesser extent, privately
placed restricted securities and other financial instruments for which there is
a more limited trading market.
The Adviser believes that the market for high yield securities is relatively
inefficient compared to other securities due to the limited availability of
information on such securities, the lack of extensive institutional research
coverage of and market making activity with respect to many issuers of such
securities, the complexity and difficulty of evaluation of such securities and
the limited liquidity, at times, of such securities. The Adviser intends to
exploit these inefficiencies using its knowledge and experience in the high
yield market. The Adviser seeks to reduce risk through diversification, credit
analysis and attention to current developments and trends in both the economy
and financial markets.
The Fund will invest in securities rated BB+ or Ba1 or lower by Standard &
Poor's Corporation ("S&P") and/or Moody's Investors Service, Inc. ("Moody's"),
but may invest in non-rated securities or in securities rated as low as D by S&P
and/or C by Moody's. See Appendix A for a discussion of these ratings.
Any remaining assets may be invested in equity securities and investment grade
fixed income securities. In addition, to a limited extent, the Fund will
selectively utilize leverage in order to seek
-6-
<PAGE>
to further increase the Fund's yield, and may borrow money in connection with
interest rate arbitrage transactions.
The Fund may invest in repurchase agreements, which entail a risk of loss should
the seller default on its obligation to repurchase the security which is the
subject of the transaction.
The Fund may participate in a securities lending program, which entails a risk
of loss should a borrower fail financially.
The Fund may purchase Rule 144A securities.
The Fund may invest in certain instruments such as certain types of mortgage
securities and when-issued securities, and may, to a limited extent, borrow
money and utilize leveraging techniques. In addition, the Fund will utilize
leverage and borrow money in order to achieve its investment objective. These
investments and techniques, along with certain transactions involving futures,
options, forwards and swaps, require the Fund to segregate some or all of its
cash or liquid securities to cover its obligations pursuant to such instruments
or techniques. As asset segregation reaches certain levels, the Fund may lose
flexibility in managing its investments properly, responding to shareholder
redemption request, or meeting other obligations and may be forced to sell other
securities that it wanted to retain or to realize unintended gains or losses.
The Fund may also invest in federal, state and municipal government obligations,
investment grade corporate bonds, foreign securities, including emerging market
securities, zero coupon, pay-in-kind and deferred payment bonds, variable and
floating rate securities, money market instruments, shares of other investment
companies and cash equivalents, and may invest up to 20% of its assets in
American Depository Receipts (ADRs).
Investments in floating rate securities (floaters) and inverse floating rate
securities (inverse floaters) and mortgage-backed securities (mortgage
securities), including principal-only and interest-only stripped mortgage-backed
securities (SMBs), may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on underlying
mortgage assets).
The Fund may, although it has no present intention to do so, invest a portion of
its assets in derivatives, including futures, options, forwards and swaps.
Futures contracts, options, options on futures contracts, forwards and swaps
entail certain costs and risks, including imperfect correlation between the
value of the securities held by the Fund and the value of the particular
derivative instrument, and the risk that the Fund could not close out a futures
or options position when it would be most advantageous to do so.
The Fund may invest up to 15% of its net assets in illiquid securities, and for
temporary defensive purposes, may invest up to 100% of its total assets in money
market instruments (including U.S. Government securities, bank obligations,
commercial paper rated in the highest rating category by
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a nationally recognized statistical rating organization ("NRSRO")) and shares of
money market investment companies and may hold a portion of its assets in cash.
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
Prospective investors in the Fund should consider the following factors as they
apply to the Fund's allowable investments and policies.
Equity Securities -- The Fund may invest in public and privately issued equity
securities, including common and preferred stocks, warrants, rights to subscribe
to common stock and convertible securities. Investments in equity securities in
general are subject to market risks that may cause their prices to fluctuate
over time. The value of securities convertible into equity securities, such as
warrants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision. Fluctuations in the value
of equity securities in which 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. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes by recognized agencies in the rating of any
fixed income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of these securities will not necessarily affect cash income derived
from these securities, but will affect the Fund's net asset value.
Investment grade bonds include securities rated BBB by S&P or Baa by Moody's,
which may be regarded as having speculative characteristics as to repayment of
principal. If a security is downgraded, the Adviser will review the situation
and take appropriate action.
High Yield, High Risk Securities -- High yield, high risk securities include,
but are not limited to, bonds and preferred stock paying current cash coupons or
dividends, payment-in-kind bonds and preferred stock, zero coupon bonds,
interests in term loans and in revolving credit facilities (or combinations
thereof), convertible securities, units of bonds and warrants or stock, and
other securities and financial instruments, including those on which the issuer
is unable to pay stated dividends or interest payments on a current basis.
Investments in high yield securities involve market risks, credit risks and call
risks. Market risks relate to general interest rate fluctuations. As the general
level of interest rates rise, the market price of medium and long-term
securities to general
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interest rates fluctuates. High yield securities are generally medium term bonds
and therefore are less sensitive than long-term securities to general interest
rate fluctuations. Credit risks relate to the continuing ability of the issuer
of a security to pay the stated interest or dividends and ultimately to repay
principal upon maturity. Discontinuation of such payments could substantially
adversely affect the market price of the security. Call risks arise from early
call features that many high yield securities contain. In addition, the Fund may
invest in securities on which the issuer is not currently paying the full
amount, or any, of the stated interest or dividends.
The high yield market consists primarily of fixed income securities that are not
rated or that are rated below investment grade (i.e., Ba1 or lower rating by
Moody's and/or BB+ or lower by S&P), including securities of issuers subject to
proceedings under the Federal Bankruptcy Code. The market for such securities is
relatively inefficient due to its complexity and the limited availability of
information on such securities. Most of these securities pay high current yield,
which provides a cushion against potential price volatility so long as current
payments are continued.
Securities of Foreign Issuers -- The Fund may invest in securities of foreign
issuers with a strong U.S. trading presence and in sponsored and unsponsored
ADR's. 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. Moreover, investments
in emerging market nations may be considered speculative, and there may be a
greater potential for nationalization, expropriation or adverse diplomatic
developments (including war) or other events which could adversely effect the
economies of such countries or investments in such countries.
Portfolio Turnover -- The annual portfolio turnover rate for the Strategic High
Yield Fund, under normal circumstances, is not expected to exceed 200%. An
annual portfolio turnover rate in excess of 100% may result from the Adviser's
investment strategy or from prevailing market conditions. Portfolio turnover
rates in excess of 100% may result in higher transaction costs, including
increased brokerage commissions, and higher levels of taxable capital gain.
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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. This
limitation does not apply to obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase agreements
involving such securities.
3. The Fund may not borrow money in an amount exceeding 33 1/3% of the value of
its total assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or require the
Fund to segregate assets are not considered to be borrowings. Asset coverage of
at 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.
The foregoing percentages (except the limitation on borrowing) will apply at the
time of the purchase of a security.
THE ADVISER
Penn Capital Management Company, Inc. ("Penn Capital" or the "Adviser"), 52
Haddonfield-Berlin Road, Suite 1000, Cherry Hill, New Jersey 08034, is a
professional investment management firm founded in 1987 and registered as an
investment adviser under the Investment Advisers Act. Richard A. Hocker is a
founding partner and Chief Investment Officer of the Adviser, an investment
management firm that manages the investment portfolios of institutions and high
net worth individuals and which currently has assets under management of
approximately $500 million. The Adviser employs a staff of 17 and manages monies
in a variety of investment styles through either separate account management or
one of its private investment funds.
The Adviser serves as the investment adviser for the Fund under an investment
advisory agreement (the "Advisory Agreement"). 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
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investment programs, subject to the supervision of, and policies established by,
the Trustees of the Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .75% of the average daily net assets of
the Strategic High Yield Fund. The Adviser has voluntarily agreed to waive all
or a portion of its fee and to reimburse expenses of the Strategic High Yield
Fund in order to limit its total operating expenses (as a percentage of average
daily net assets on an annualized basis) to not more than 1.00%. The Adviser
reserves the right, in its sole discretion, to terminate these voluntary fee
waivers and reimbursements at any time.
The Fund is managed by a team consisting of certain principals of the Adviser.
The Strategic High Yield Fund is co-managed by Richard A. Hocker and Kathleen A.
News.
Prior to founding the Adviser, Mr. Hocker was a shareholder and Senior Portfolio
Manager of Delaware Management Co., an investment management firm which, during
Mr. Hocker's tenure, increased its assets under management from $300 million to
$21 billion. At Delaware Management Co., Mr. Hocker was instrumental in
developing and managing a variety of mutual funds, including Delchester Bond
Fund and Delaware Cash Reserve, and where he personally managed, at its height,
approximately $2 billion of assets. Additionally, Mr. Hocker was the founder,
CEO and Chairman of the Board of Covenant Bank, a community bank based in
Haddonfield, N.J., with approximately $435 million in assets. As Chairman of
Covenant Bank, Mr. Hocker has been the senior negotiator for acquisitions of
three financial institutions, as well as the purchases of individual branches of
regional banks that Covenant Bank has completed since 1992. In addition, Mr.
Hocker negotiated the sale of Covenant Bank to First Union Corp., pending
settlement in the first quarter of 1998.
Kathleen A. News, a co-founder and principal of the Adviser, serves as the
Managing Director of the Adviser and co-portfolio manager of the Trust's Penn
Capital Strategic High Yield Fund. Ms. News has over 20 years of investment
experience at both the Adviser and Delaware Management Co., including over 10
years managing high yield portfolios. While at Delaware, Ms. News served as a
portfolio manager for Delaware Cash Reserve, as well as managing fixed income
accounts for various Fortune 500 institutions.
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator") provides the Trust with administrative
services, including regulatory reporting and all necessary office space,
equipment, personnel, and facilities.
For these administrative services, the Administrator is entitled to a minimum
fee from the Fund of $75,000. Once the Fund's assets reach $62.5 million, it
will be charged its asset-based fee, which is calculated daily and paid monthly,
at an annual rate of .12% of each Fund's average daily net assets up to $75
million, .10% on the next $75 million of such assets, .09% on the next $150
million of such assets, .08% of the next $300 million of such assets, and .075%
of such assets in excess of $600 million.
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The Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent"), serves as the transfer agent and dividend disbursing agent
for the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
Certain broker-dealers may assist their clients in the purchase of shares from
the Distributor and charge a fee for this service in addition to the Fund's
public offering price.
PORTFOLIO TRANSACTIONS
The Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation. The Adviser obtains research information from a number of sources,
including large brokerage houses, trade and financial journals and publications,
corporate reports, rating service manuals, and interviews with corporate
executives and other industry sources. The Adviser may select brokers on the
basis of the research, statistical and pricing services they provide to the
Fund, as well as on the basis of the Adviser's business relationship with the
brokers. A commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same transactions,
provided that such commissions are in compliance with the Securities Exchange
Act of 1934, as amended, and that the Adviser determines in good faith that the
commission is reasonable in terms of either the transaction or the overall
responsibility of the Adviser to the Fund and the Adviser's other clients. The
Adviser may direct commission business for the Fund to designated broker-dealers
(including the Distributor) in connection with such broker-dealers' payment of
certain Fund expenses.
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 the 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
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at or about the same time, transactions in such securities will be allocated
among the Fund and the other accounts and/or clients in a manner deemed
equitable by the Adviser.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of the 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.
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.
Certain brokers may 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.
Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft
(payable to the Fund) for $2,500 or more ($2,000 for IRAs), together with a
completed Account Application to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805. Third-Party checks, credit cards, credit card checks and
cash will not be accepted. When purchases are made by check (including certified
or cashier's checks), redemption proceeds will not be forwarded until the check
providing for the investment being redeemed has cleared (which may take up to 15
days). Subsequent investments may also be mailed directly to the Transfer Agent.
Purchases by Wire Transfer
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of a Fund by requesting their bank to
transmit funds by wire to: United Missouri Bank of Kansas, N.A.; ABA
#10-10-00695; for Account Number 98-7060-116-8; Further Credit: Penn Capital
Strategic High Yield Bond Fund. The shareholder's name and account number must
be specified in the wire.
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Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
General Information Regarding Purchases
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the next
Business Day. A purchase request is in good order if it is complete and
accompanied by the appropriate documentation, including an Account Application
and additional documentation required. 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.
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 a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from
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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, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order prior to the calculation of net asset value 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 the calculation of net asset value 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 the calculation of net asset value on any Business Day. Otherwise, the
redemption order will be effective on the next 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.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH wire transfer. There is no charge for having a check for
redemption proceeds mailed. The Custodian will deduct a wire charge, currently
$10.00, from the amount of a Federal Reserve wire redemption payment made at the
request of a shareholder. Shareholders cannot redeem shares of the Funds by
Federal Reserve wire on Federal holidays restricting wire transfers. The 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 transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the
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Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine. Such procedures may include the taping of telephone
conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
A signature guarantee is a widely accepted way to protect shareholders by
verifying the signature on certain redemption requests. The Trust requires
signature guarantees to be provided in the following circumstances: (1) written
requests for redemptions in excess of $50,000; (2) all written requests to wire
redemption proceeds to a bank other than the bank previously designated on the
account application; and (3) redemption requests that provide that the
redemption proceeds should be sent to an address other than the address of
record or to a person other than the registered shareholder(s) for the account.
Signature guarantees can be obtained from any of the following institutions: a
national or state bank, a trust company, a federal savings and loan association,
or a broker-dealer that is a member of a national securities exchange. The Trust
does not accept guarantees from notaries public or from organizations that do
not provide reimbursement in the case of fraud.
Systematic Withdrawal Plan - The Trust 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 regular trading on the New York Stock
Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
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PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. No representation can be made regarding actual future yields or
returns. The yield of the Fund refers to the annualized income generated by an
investment in that Fund over a specified 30-day period. The yield is calculated
by assuming that the same amount of income generated by the investment during
that period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of 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 their performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.), financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices, which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs, or other investment alternatives. The 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 attributes of the Fund's portfolios. 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
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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 gains from the sale or exchange of a capital asset held
for more than one year or for more than 18 months, as the case may be,
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 their 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 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.
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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 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 ("portfolios") of shares. All consideration
received by the Trust for shares of any portfolio and all assets of such
portfolio belong to that portfolio and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of additional
portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
Voting Rights
Each share held entitles the Shareholder of record to one vote for each dollar
invested. In other words, each shareholder of record is entitled to one vote for
each dollar of net asset value of the shares held on the record date for the
meeting. Shareholders of each Fund will vote separately on matters pertaining
solely to that Fund. As a Massachusetts business trust, the Trust is not
required to hold annual meetings of Shareholders, but approval will be sought
for certain changes in the operation of the Trust and for the election of
Trustees under certain circumstances.
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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 by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
Dividends and Distributions
Substantially all of the net investment income (excluding capital gains) of the
Fund is distributed in the form of dividends at least annually. If any capital
gain is realized, substantially all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of the 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 Auditors
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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
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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.
BORROWING -- The Fund may borrow money equal to 5% of their total assets for
temporary purposes to meet redemptions or to pay dividends. Borrowing may
exaggerate changes in the net asset value of the Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. The Fund may be required to liquidate portfolio securities at a
time when it would be disadvantageous to do so in order to make payments with
respect to any borrowing. The Fund may be required to segregate liquid assets in
an amount sufficient to meet their obligations in connection with such
borrowings. In addition, the Fund may borrow to leverage its portfolio. Such
borrowings may take the form of a margin account or a conventional bank
borrowings in connection with securities purchases or interest rate arbitrage
transactions. In an interest rate arbitrage transaction, the Fund borrows money
at one interest rate and lends the proceeds at another, higher interest rate.
These transactions involve a number of risks, including the risk that the
borrower will fail or otherwise become insolvent or that there will be a
significant change in prevailing interest rates.
CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities
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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.
HIGH YIELD, HIGH RISK SECURITIES -- Securities rated below investment grade are
often referred to as "junk bonds." Fixed income securities are subject to the
risk of an issuer's ability to meet principal and interest payments on the
obligation (credit risk), and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated (i.e., high yield) securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which primarily react to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of high yield securities
will fluctuate over time, reflecting no only changing interest rates but the
market's perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Investors should carefully consider the relative
risks of investing in high yield securities and understand that such securities
are not generally meant for short-term investing.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. Adverse economic developments can disrupt the market
for high yield securities, and severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity which may lead to a higher incidence of
default on such securities. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. As a result,
the Fund's adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Furthermore the Fund may experience difficulty in valuing certain
securities at certain times. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Fund's net asset value.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market value for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to
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the risks of high yield securities. Credit quality in the junk bond market can
change suddenly and unexpectedly, and even recently issued credit ratings may
not fully reflect the actual risks imposed by a particular security.
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 repurchase agreements with
durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality, dollar-
denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which 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.
RULE 144A SECURITIES -- Rule 144A securities are securities exempt from
registration on resale pursuant to Rule 144A under the 1933 Act. Rule 144A
securities are traded in the institutional market pursuant to this registration
exemption, and, as a result, may not be as liquid as exchange-traded securities
since they may only be resold to certain qualified institutional investors. Due
to the relatively limited size of this institutional market, these securities
may affect the Fund's liquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities.
Nevertheless, Rule 144A securities may be treated as liquid securities pursuant
to guidelines adopted by the Trust's Board of Trustees.
SECURITIES LENDING -- In order to generate additional income, the Fund may lend
its securities pursuant to agreements requiring that the loan be continuously
secured by collateral consisting of cash or securities of the U.S. Government or
its agencies equal to at least 100% of the market value of the loaned
securities. The Fund continues to receive interest on the loaned securities
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
SHORT SALES -- A short sale is "against the box" if at all times during which
the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or
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exchangeable without further consideration for, securities of the same issue as
the securities that are sold short.
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").
U.S. TREASURY RECEIPTS -- U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury obligations into a special account at a custodian bank. The custodian
holds the interest and principal payments for the benefit of the registered
owners of the certificates of receipts. The custodian arranges for the issuance
of the certificates or receipts evidencing ownership and maintains the register.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable
or floating rates of interest, and may involve a conditional or unconditional
demand feature. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WARRANTS -- Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery
transactions involve the purchase of an instrument with payment and delivery
taking place in the future. Delivery of and payment for these securities may
occur a month or more after the date of the purchase commitment. The Fund will
maintain with the Custodian a separate account with liquid
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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, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
obligations are debt securities that do not bear any interest, but instead are
issued at a deep discount from par. The value of a zero coupon obligation
increases over time to reflect the interest accreted. Upon maturity, the holder
is entitled to receive the par value of the security. While interest payments
are not made on such securities, holders of such securities are deemed to have
received "phantom income" annually. Because the Fund will distribute its
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Fund will have fewer assets with which to purchase income producing
securities. In the event of adverse market conditions, zero coupon, pay-in-kind
and deferred payment securities may be subject to greater fluctuations in value
and may be less liquid than comparably rated securities paying cash interest at
regular interest payment periods.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba 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.
B 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.
Caa 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.
Ca 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.
C 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.
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DESCRIPTION OF STANDARD & POOR'S LONG-TERM RATINGS
Investment Grade
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated 'BBB' 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.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. '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 or major
risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions would likely impair capacity
or willingness to pay interest and repay principal. The 'B' rating
category also is used for debt subordinated to senior debt that is
assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The 'CCC' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'B' or
'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating.
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C The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI Debt rated 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt is rated 'D' when the issue is in payment default, or the obligor
has filed for bankruptcy. The 'D' rating is used when interest or
principal payments are not made on the date due, even if the applicable
grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
DESCRIPTION OF DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA- may vary slightly from time to time because of economic conditions.
A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during
economic cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF FITCH'S LONG-TERM RATINGS
Investment Grade Bond
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AAA Bonds 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.
AA Bonds 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+'.
A Bonds 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.
BBB Bonds 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.
Speculative grade bond
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD,
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these
bonds, and 'D' represents the lowest potential for recovery.
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DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations for which there is 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
substantially.
AA Obligations for which there is a very low expectation of investment
risk. 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.
A Obligations for which there is a low expectation of investment risk.
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.
BBB Obligations for which there is currently a low expectation of
investment risk. 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 other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC Obligations which are highly speculative or which have a high risk of
default.
C Obligations which are currently in default.
DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS
Investment Grade
AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
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BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Non-Investment Grade
(Issues regarded as having speculative characteristics in the likelihood of
timely repayment of principal and interest.)
BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the
ability to adequately service debt obligations.
B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.
CCC Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
CC "CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy
or reorganization.
D Default
Ratings in the Long-Term Debt categories may include a plus (+) or minus (-)
designation, which indicates where within the respective category the issue is
placed.
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Trust:
TIP FUNDS
Fund:
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
Distributor:
SEI INVESTMENTS DISTRIBUTION CO.
Administrator:
SEI FUND RESOURCES
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Auditors:
ERNST & YOUNG LLP
January 31, 1998
<PAGE>
TIP FUNDS
Investment Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
TIP Funds (the "Trust") provides a convenient and economical means of investing
in professionally managed portfolios of securities. This Prospectus offers
shares of the following mutual fund (the "Fund"), which is separate series of
the Trust:
PENN CAPITAL VALUE PLUS 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 January 31, 1998, has been filed with the
Securities and Exchange Commission, and is available without charge by calling
1-800-224-6312. The Statement of Additional Information is incorporated into
this Prospectus by reference.
THE VALUE PLUS FUND INVESTS A SIGNIFICANT PORTION OF ITS ASSETS IN LOWER RATED
BONDS COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES ARE SPECULATIVE AND
ARE SUBJECT TO GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST THAN INVESTMENTS
IN HIGHER RATED BONDS. BECAUSE INVESTMENT IN SUCH SECURITIES ENTAILS GREATER
RISKS, INCLUDING RISK OF DEFAULT, AN INVESTMENT IN THE VALUE PLUS FUND SHOULD
NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND MAY NOT BE APPROPRIATE FOR ALL
INVESTORS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS POSED BY AN INVESTMENT
IN THE VALUE PLUS FUND BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND
POLICIES," "RISK FACTORS" AND THE "APPENDIX."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
January 31, 1998
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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.............................................................. 8
Investment Limitations................................................... 10
The Adviser.............................................................. 10
The Administrator........................................................ 12
The Transfer Agent....................................................... 12
The Distributor.......................................................... 12
Portfolio Transactions................................................... 12
Purchase and Redemption of Shares........................................ 13
Performance.............................................................. 17
Taxes.................................................................... 18
General Information...................................................... 19
Description of Permitted Investments and Risk Factors.................... 21
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SUMMARY
The following provides basic information about the Penn Capital Value Plus Fund
(the "Value Plus Fund" or the "Fund"). The Fund is one of the thirteen mutual
funds comprising TIP Funds (the "Trust"). This summary is qualified in its
entirety by reference to the more detailed information provided elsewhere in
this Prospectus and in the Statement of Additional Information.
What is the Fund's goal and its primary policies? The Value Plus Fund seeks to
achieve capital appreciation and above average income with less risk than the
average risk of the Standard & Poor's S&P 500 Index ("S&P 500 Index").
Generally, one third of the Fund's assets will be invested in large cap value
equity securities, one third invested in small cap value equity securities and
one third invested in bonds (primarily high yield securities) in order to
generate interest income.
What are the risks involved with investing in the Fund? The investment policies
of the Fund entail certain risks and considerations of which investors should be
aware. The Value Plus Fund will be exposed to the risks of investing in equity
securities, including equity securities of small cap issuers (i.e., issuers with
market capitalizations of less than $1 billion). Investments in smaller
companies involve greater risks than investments in larger, more established
companies. In addition, the Fund may borrow money and, to a limited extent,
utilize leveraging techniques. The Fund may invest 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's high yield securities may be volatile and
are subject to greater amounts of credit risk than investment grade issuers.
For more information about the Fund, see "Investment Objective," "Investment
Policies," "Risk Factors," and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? Penn Capital Management Company, Inc. (the "Adviser"),
serves as the investment adviser to the 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? SEI Investments Distribution Co. (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.
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Is there a minimum investment? The Fund require a minimum initial investment of
$2,500 ($2,000 for IRAs), which the Distributor may waive at its discretion.
How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to the calculation of net asset value. Redemption orders
received by the Transfer Agent prior to the calculation of net asset value 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 close of
regular trading on the New York Stock Exchange (normally, 4:00 p.m., Eastern
time) on any Business Day. 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 periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to take the payment in
cash. See "Dividends and Distributions."
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EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases.............................................None
Sales Load Imposed on Reinvested Dividends..................................None
Deferred Sales Load.........................................................None
Redemption Fees (1).........................................................None
Exchange Fees...............................................................None
- --------------------------------------------------------------------------------
(1) A wire redemption charge, currently $10.00, is deducted from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder.
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------
Value Plus
Fund
- --------------------------------------------------------------------------------
Advisory Fees (after fee waivers)(1)
12b-1 Fees .99%
Other Expenses (after expense None
reimbursements, if applicable)(2) .41%
- --------------------------------------------------------------------------------
Total Operating Expenses (after
fee waivers or expense reimbursements)(3) 1.40%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Adviser has agreed, on a voluntary basis, to waive its advisory fee
to the extent necessary to keep the "Total Operating Expenses" of the
Value Plus Fund during the current fiscal year from exceeding 1.40%.
Absent these fee waivers, Advisory Fees would be 1.00%. The Adviser
reserves the right to terminate its waivers at any time in its sole
discretion.
(2) "Other Expenses" for the Fund is estimated for the current fiscal year.
(3) Absent fee waivers or expense reimbursements, "Total Operating
Expenses" for the Value Plus Fund would be 1.41%, based on current
expectations and assumptions.
EXAMPLE
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 1 years 3 years
investment in the Fund assuming (1) a 5% annual return ------- -------
and (2) redemption at the end of each time period.
Value Plus Fund $14 $44
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF THE FUND AFTER WAIVERS, AS
SHOWN IN THE EXPENSE TABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of the expense table and example is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by shareholders of the Fund. Additional information
may be found under "The Adviser" and "The Administrator."
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THE TRUST AND THE FUND
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 the Penn Capital Value Plus Fund
(the "Value Plus Fund" or the "Fund").
INVESTMENT OBJECTIVE
Penn Capital Value Plus Fund -- The Value Plus Fund seeks to achieve capital
appreciation and above average income with less risk than the average risk of
the S&P 500 Index.
There can be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
Penn Capital Value Plus Fund -- The Value Plus Fund invests primarily (and,
under normal conditions, at least 65% of its total assets) in a diversified
portfolio of equity securities that may or may not pay dividends but whose main
contribution to total return is intended from capital appreciation. The "value"
equity securities the Fund will purchase will tend to have a low price to
earnings ratio relative to the securities' market prices. The Fund will invest
any remaining assets in fixed-income securities, cash and money market
instruments, and may invest up to 35% of its assets in high yield securities.
The Fund seeks to provide, through a combination of income and capital
appreciation, a total return consistent with a reasonable level of risk by
investing in value equity securities and in fixed income obligations, including
high yield securities. The Fund strives to secure a current yield appreciably
higher than the average dividend yield of the companies comprising the S&P 500
Index. Typically, portfolios with high current income also exhibit less
volatility and superior returns in down markets. The Fund actively seeks
opportunity and value in all parts of a company's capital structure, including
common and preferred stocks, as well as investment grade and high yield
corporate and convertible bonds. Typically, one-third of the Fund's assets will
be invested in large cap value equity securities (i.e., securities of issuers
with market capitalizations of over $1 billion), one third in small cap value
equity securities (i.e., securities of issuers with market capitalizations of
less than $1 billion) and one third in bonds (primarily high yield securities)
in order to generate interest income. The Fund's exposure to junk bonds will not
exceed 35% of its total assets.
The Fund will invest primarily in publicly-traded securities, yet will maintain
the right to purchase private securities for which there is a more limited
trading market. The Fund generally seeks diversity both in terms of industries
and issuers, but may invest relatively high proportions of its assets in a
single industry or issuer. The Fund will also from time to time invest in the
securities of companies engaged in an initial public offering.
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The fixed income investments of the Fund consist primarily, but not exclusively,
of cash paying, high yield corporate bonds. The Fund may invest in non-rated
securities or in securities rated in the lowest ratings categories established
by Standard & Poor's Corporation ("S&P") and/or Moody's Investor Service, Inc.
("Moody's"). See Appendix A for a discussion of the these ratings.
The Fund may invest in repurchase agreements, which entail a risk of loss should
the seller default on its obligation to repurchase the security which is the
subject of the transaction.
The Fund may participate in a securities lending program, which entails a risk
of loss should a borrower fail financially.
The Fund may purchase Rule 144A securities.
The Fund may invest in certain instruments such as certain types of mortgage
securities and when-issued securities, and may, to a limited extent, borrow
money and utilize leveraging techniques. These investments and techniques, along
with certain transactions involving futures, options, forwards and swaps,
require a Fund to segregate some or all of its cash or liquid securities to
cover its obligations pursuant to such instruments or techniques. As asset
segregation reaches certain levels, the Fund may lose flexibility in managing
its investments properly, responding to shareholder redemption request, or
meeting other obligations and may be forced to sell other securities that it
wanted to retain or to realize unintended gains or losses.
The Fund may also invest in federal, state and municipal government obligations,
investment grade corporate bonds, foreign securities, including emerging market
securities, zero coupon, pay-in-kind and deferred payment bonds, variable and
floating rate securities, money market instruments, shares of other investment
companies and cash equivalents, and may invest up to 20% of its assets in
American Depository Receipts ("ADRs").
Investments in floating rate securities (floaters) and inverse floating rate
securities (inverse floaters) and mortgage-backed securities (mortgage
securities), including principal-only and interest-only stripped mortgage-backed
securities (SMBs), may be highly sensitive to interest rate changes, and highly
sensitive to the rate of principal payments (including prepayments on underlying
mortgage assets).
The Fund may, although it has no present intention to do so, invest a portion of
its assets in derivatives, including futures, options, forwards and swaps.
Futures contracts, options, options on futures contracts, forwards and swaps
entail certain costs and risks, including imperfect correlation between the
value of the securities held by the Fund and the value of the particular
derivative instrument, and the risk that the Fund could not close out a futures
or options position when it would be most advantageous to do so.
The Fund may invest up to 15% of its net assets in illiquid securities, and for
temporary defensive purposes, may invest up to 100% of its total assets in money
market instruments (including U.S.
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Government securities, bank obligations, commercial paper rated in the highest
rating category by a nationally recognized statistical rating organization
("NRSRO")) and shares of money market investment companies and may hold a
portion of its assets in cash.
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
Prospective investors in the Fund should consider the following factors as they
apply to the Fund's allowable investments and policies.
Equity Securities -- The Fund may invest in public and privately issued equity
securities, including common and preferred stocks, warrants, rights to subscribe
to common stock and convertible securities. Investments in equity securities in
general are subject to market risks that may cause their prices to fluctuate
over time. The value of securities convertible into equity securities, such as
warrants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision. Fluctuations in the value
of equity securities in which 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.
The Value Plus Fund may invest to a significant degree in equity securities of
smaller institutions. Any investment in smaller or medium capitalization
companies involves greater risk than that customarily associated with
investments in larger, more established companies. This increased risk may be
due to the greater business risks of smaller size, limited markets and financial
resources, narrow product lines and lack of depth of management. The securities
of smaller companies are often traded in the over-the-counter market and if
listed on a national securities exchange may not be traded in volumes typical
for that exchange. Thus, the securities of smaller-sized companies are likely to
be less liquid, and subject to more abrupt or erratic market movements than
securities of larger, more established companies.
Fixed Income Securities -- The market value of fixed income investments will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income securities
generally rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes by recognized agencies in the rating of any
fixed income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of these securities will not necessarily affect cash income derived
from these securities, but will affect the investing Fund's net asset value.
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<PAGE>
Investment grade bonds include securities rated BBB by S&P or Baa by Moody's,
which may be regarded as having speculative characteristics as to repayment of
principal. If a security is downgraded, the Adviser will review the situation
and take appropriate action.
High Yield, High Risk Securities -- High yield, high risk securities include,
but are not limited to, bonds and preferred stock paying current cash coupons or
dividends, payment-in-kind bonds and preferred stock, zero coupon bonds,
interests in term loans and in revolving credit facilities (or combinations
thereof), convertible securities, units of bonds and warrants or stock, and
other securities and financial instruments, including those on which the issuer
is unable to pay stated dividends or interest payments on a current basis.
Investments in high yield securities involve market risks, credit risks and call
risks. Market risks relate to general interest rate fluctuations. As the general
level of interest rates rise, the market price of medium and long-term
securities to general interest rates fluctuates. High yield securities are
generally medium term bonds and therefore are less sensitive than long-term
securities to general interest rate fluctuations. Credit risks relate to the
continuing ability of the issuer of a security to pay the stated interest or
dividends and ultimately to repay principal upon maturity. Discontinuation of
such payments could substantially adversely affect the market price of the
security. Call risks arise from early call features that many high yield
securities contain. In addition, the Fund may invest in securities on which the
issuer is not currently paying the full amount, or any, of the stated interest
or dividends.
The high yield market consists primarily of fixed income securities that are not
rated or that are rated below investment grade (i.e., Ba1 or lower rating by
Moody's and/or BB+ or lower by S&P), including securities of issuers subject to
proceedings under the Federal Bankruptcy Code. The market for such securities is
relatively inefficient due to its complexity and the limited availability of
information on such securities. Most of these securities pay high current yield,
which provides a cushion against potential price volatility so long as current
payments are continued.
Securities of Foreign Issuers -- The Fund may invest in securities of foreign
issuers with a strong U.S. trading presence and in sponsored and unsponsored
ADRs. 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. Moreover, investments
in emerging market nations may be considered speculative, and there may be a
greater potential for nationalization, expropriation or adverse diplomatic
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<PAGE>
developments (including war) or other events which could adversely effect the
economies of such countries or investments in such countries.
Portfolio Turnover -- Under normal circumstances, the annual portfolio turnover
rate for the Value Plus Fund is not expected to exceed 200%. An annual portfolio
turnover rate in excess of 100% may result from the Adviser's investment
strategy or from prevailing market conditions. Portfolio turnover rates in
excess of 100% may result in higher transaction costs, including increased
brokerage commissions, and higher levels of taxable capital gain.
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 that 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. This
limitation does not apply to obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase agreements
involving such securities.
3. The Fund may not borrow money in an amount exceeding 33 1/3% of the value of
its total assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or require the
Fund to segregate assets are not considered to be borrowings. Asset coverage of
at 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.
The foregoing percentages (except the limitation on borrowing) will apply at the
time of the purchase of a security.
THE ADVISER
Penn Capital Management Company, Inc. ("Penn Capital" or the "Adviser"), 52
Haddonfield-Berlin Road, Suite 1000, Cherry Hill, New Jersey 08034, is a
professional investment management firm founded in 1987 and registered as an
investment adviser under the Investment Advisers Act. Richard
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<PAGE>
A. Hocker is a founding partner and Chief Investment Officer of the Adviser, an
investment management firm that manages the investment portfolios of
institutions and high net worth individuals and which currently has assets under
management of approximately $500 million. The Adviser employs a staff of 17 and
manages monies in a variety of investment styles through either separate account
management or one of its private investment funds.
The Adviser serves as the investment adviser for the Fund under an investment
advisory agreement (the "Advisory Agreement"). 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 programs,
subject to the supervision of, and policies established by, the Trustees of the
Trust.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the average daily net assets of
the Value Plus Fund. The Adviser has voluntarily agreed to waive all or a
portion of its fee and to reimburse expenses of the Value Plus Fund in order to
limit its total operating expenses (as a percentage of average daily net assets
on an annualized basis) to not more than 1.40%. The Adviser reserves the right,
in its sole discretion, to terminate these voluntary fee waivers and
reimbursements at any time.
The Fund is managed by a team consisting of certain principals of the Adviser.
The Value Plus Fund is managed by Richard A. Hocker. Scott D. Schumacher, a
Senior Analyst, assists Mr. Hocker in managing the Value Plus Fund.
Prior to founding the Adviser, Mr. Hocker was a shareholder and Senior Portfolio
Manager of Delaware Management Co., an investment management firm which, during
Mr. Hocker's tenure, increased its assets under management from $300 million to
$21 billion. At Delaware Management Co., Mr. Hocker was instrumental in
developing and managing a variety of mutual funds, including Delchester Bond
Fund and Delaware Cash Reserve, and where he personally managed, at its height,
approximately $2 billion of assets. Additionally, Mr. Hocker was the founder,
CEO and Chairman of the Board of Covenant Bank, a community bank based in
Haddonfield, N.J., with approximately $435 million in assets. As Chairman of
Covenant Bank, Mr. Hocker has been the senior negotiator for acquisitions of
three financial institutions, as well as the purchases of individual branches of
regional banks that Covenant Bank has completed since 1992. In addition, Mr.
Hocker negotiated the sale of Covenant Bank to First Union Corp., pending
settlement in the first quarter of 1998.
Scott D. Schumacher, a Senior Analyst of the Adviser, assists Mr. Hocker in
managing the Value Plus Fund. He has been employed by the Adviser since 1987.
Mr. Schumacher began working with the investment team in 1992. As the Adviser's
senior analyst, Mr. Schumacher is directly responsible for researching the
financial services sector and monitoring credit positions of existing accounts.
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<PAGE>
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator") provides the Trust with administrative
services, including regulatory reporting and all necessary office space,
equipment, personnel, and facilities.
For these administrative services, the Administrator is entitled to a minimum
fee from the Fund of $75,000. Once the Fund's assets reach $62.5 million, it
will be charged its asset-based fee, which is calculated daily and paid monthly,
at an annual rate of .12% of 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 Administrator also serves as shareholder servicing agent for the Trust under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent"), serves as the transfer agent and dividend disbursing agent
for the Trust under a transfer agency agreement with the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania 19456,
a wholly-owned subsidiary of SEI Investments Company, acts as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for its distribution services.
Certain broker-dealers may assist their clients in the purchase of shares from
the Distributor and charge a fee for this service in addition to the Fund's
public offering price.
PORTFOLIO TRANSACTIONS
The Fund may execute brokerage or other agency transactions through the
Distributor for which the Distributor may receive usual and customary
compensation. The Adviser obtains research information from a number of sources,
including large brokerage houses, trade and financial journals and publications,
corporate reports, rating service manuals, and interviews with corporate
executives and other industry sources. The Adviser may select brokers on the
basis of the research, statistical and pricing services they provide to the
Fund, as well as on the basis of the Adviser's business relationship with the
brokers. A commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same transactions,
provided that such commissions are in compliance with the Securities Exchange
Act of 1934, as amended, and that the Adviser determines in good faith that the
commission is reasonable in terms of either the transaction or the overall
responsibility of the Adviser to the Fund and the Adviser's other clients. The
Adviser
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may direct commission business for the Fund to designated broker-dealers
(including the Distributor) in connection with such broker-dealers' payment of
certain Fund expenses.
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 the 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.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of the 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.
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.
Certain brokers may 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.
Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft
(payable to the Fund) for $2,500 or more ($2,000 for IRAs), together with a
completed Account Application to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805. Third-Party checks, credit cards, credit card checks and
cash will not be accepted. When purchases are made by check (including
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<PAGE>
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: Penn Capital
Value Plus Fund. The shareholder's name and account number must be specified in
the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-224-6312 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: TIP Funds, P.O. Box 419805, Kansas City,
Missouri 64141-6805.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Subsequent purchases may also be made by wire through the Automated Clearing
House ("ACH").
General Information Regarding Purchases
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment prior to the calculation of net asset value on
any Business Day. Otherwise, the purchase order will be effective on the next
Business Day. A purchase request is in good order if it is complete and
accompanied by the appropriate documentation, including an Account Application
and additional documentation required. 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.
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
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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 a Portfolio through automatic deductions by Automated
Clearing House ("ACH") transactions from a checking or savings account by
completing the Systematic Investment Plan form. This Systematic Investment Plan
is subject to account minimum initial purchase amounts and a minimum
pre-authorized investment amount of $100 per month. An application form for the
Systematic Investment Plan may be obtained by calling 1-800-224-6312.
Exchanges
Shareholders of the 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, and the exchange privilege may be exercised only in those states where
shares of the new Fund may legally be sold. If the Transfer Agent (or its
authorized agent) receives exchange instructions in writing or by telephone (an
"Exchange Request") in good order prior to the calculation of net asset value 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 the calculation of net asset value 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 the calculation of net asset value on any Business Day. Otherwise, the
redemption order will be effective on the next 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
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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.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH wire transfer. There is no charge for having a check for
redemption proceeds mailed. The Custodian will deduct a wire charge, currently
$10.00, from the amount of a Federal Reserve wire redemption payment made at the
request of a shareholder. Shareholders cannot redeem shares of the Funds by
Federal Reserve wire on Federal holidays restricting wire transfers. The 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 transaction.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Trust and the Transfer Agent will each
employ reasonable procedures to confirm that telephone instructions are genuine.
Such procedures may include the taping of telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
A signature guarantee is a widely accepted way to protect shareholders by
verifying the signature on certain redemption requests. The Trust requires
signature guarantees to be provided in the following circumstances: (1) written
requests for redemptions in excess of $50,000; (2) all written requests to wire
redemption proceeds to a bank other than the bank previously designated on the
account application; and (3) redemption requests that provide that the
redemption proceeds should be sent to an address other than the address of
record or to a person other than the registered shareholder(s) for the account.
Signature guarantees can be obtained from any of the following institutions: a
national or state bank, a trust company, a federal savings and loan association,
or a broker-dealer that is a member of a national securities exchange. The Trust
does not accept guarantees from notaries public or from organizations that do
not provide reimbursement in the case of fraud.
Systematic Withdrawal Plan - The Trust 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.
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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 regular trading on the New York Stock
Exchange (normally, 4:00 p.m., Eastern time) on any Business Day.
PERFORMANCE
From time to time, the Fund may advertise yield and total return. These figures
will be based on historical earnings and are not intended to indicate future
performance. No representation can be made regarding actual future yields or
returns. The yield of 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 their performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.), financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices, which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs, or other investment alternatives. The 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 attributes of the Fund's portfolios. 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.
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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 gains from the sale or exchange of a capital asset held
for more than one year or for more than 18 months, as the case may be,
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 their 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 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
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Fund and received by the shareholders on December 31 in the year declared, if
paid by the Funds at any time during the following January. The 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 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 ("portfolios") of shares. All consideration
received by the Trust for shares of any portfolio and all assets of such
portfolio belong to that portfolio and would be subject to liabilities related
thereto. The Trust reserves the right to create and issue shares of additional
portfolios.
The Trust pays its operating expenses, including fees of its service providers,
audit and legal expenses, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and
registering the shares under federal and state securities laws, pricing and
insurance expenses, and pays additional expenses including litigation and other
extraordinary expenses, brokerage costs, interest charges, taxes and
organization expenses.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
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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 by calling 1-800-224-6312. Purchases, exchanges
and redemptions of shares should be made through the Transfer Agent by calling
1-800-224-6312.
Dividends and Distributions
Substantially all of the net investment income (excluding capital gains) of the
Fund is distributed in the form of dividends at least annually. If any capital
gain is realized, substantially all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, unless the shareholder has elected to take
such payment in cash. Shareholders may change their election by providing
written notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve or ACH wire transfer.
Dividends and other distributions of the 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.
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Counsel and Independent Auditors
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP
serves as the independent auditors 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.
BORROWING -- The Fund may borrow money equal to 5% of their total assets for
temporary purposes to meet redemptions or to pay dividends. Borrowing may
exaggerate changes in the net asset value of the Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. The Fund may be required to liquidate portfolio securities at a
time when it would be disadvantageous to do so in order to make payments with
respect to any borrowing. The Fund may be required to segregate liquid assets in
an amount sufficient to meet their obligations in connection with such
borrowings.
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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.
HIGH YIELD, HIGH RISK SECURITIES -- Securities rated below investment grade are
often referred to as "junk bonds." Fixed income securities are subject to the
risk of an issuer's ability to meet principal and interest payments on the
obligation (credit risk), and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated (i.e., high yield) securities are more likely to react to
developments affecting market and credit risk than are more highly rated
securities, which primarily react to movements in the general level of interest
rates. The market values of fixed-income securities tend to vary inversely with
the level of interest rates. Yields and market values of high yield securities
will fluctuate over time, reflecting no only changing interest rates but the
market's perception of credit quality and the outlook for economic growth. When
economic conditions appear to be deteriorating, medium to lower rated securities
may decline in value due to heightened concern over credit quality, regardless
of prevailing interest rates. Investors should carefully consider the relative
risks of investing in high yield securities and understand that such securities
are not generally meant for short-term investing.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. Adverse economic developments can disrupt the market
for high yield securities, and severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity which may lead to a higher incidence of
default on such securities. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. As a result,
the Fund's adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Furthermore the Fund may experience difficulty in valuing certain
securities at certain times. Prices realized upon the sale of such lower rated
or unrated securities, under these circumstances, may be less than the prices
used in calculating the Fund's net asset value.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect the Fund's net asset value and
investment practices, the secondary market value for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected
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net redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's investment portfolio
and increasing the exposure of the Fund to the risks of high yield securities.
Credit quality in the junk bond market can change suddenly and unexpectedly, and
even recently issued credit ratings may not fully reflect the actual risks
imposed by a particular security.
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 repurchase agreements with
durations or maturities over 7 days in length.
MONEY MARKET INSTRUMENTS -- Money market securities are high-quality, dollar-
denominated, short-term debt instruments. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which 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.
RULE 144A SECURITIES -- Rule 144A securities are securities exempt from
registration on resale pursuant to Rule 144A under the 1933 Act. Rule 144A
securities are traded in the institutional market pursuant to this registration
exemption, and, as a result, may not be as liquid as exchange-traded securities
since they may only be resold to certain qualified institutional investors. Due
to the relatively limited size of this institutional market, these securities
may affect the Fund's liquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities.
Nevertheless, Rule 144A securities may be treated as liquid securities pursuant
to guidelines adopted by the Trust's Board of Trustees.
SECURITIES LENDING -- In order to generate additional income, the Fund may lend
its securities pursuant to agreements requiring that the loan be continuously
secured by collateral consisting of cash or securities of the U.S. Government or
its agencies equal to at least 100% of the market value of the loaned
securities. The Fund continues to receive interest on the loaned securities
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
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SHORT SALES -- A short sale is "against the box" if at all times during which
the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities that are sold
short.
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").
U.S. TREASURY RECEIPTS -- U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury obligations into a special account at a custodian bank. The custodian
holds the interest and principal payments for the benefit of the registered
owners of the certificates of receipts. The custodian arranges for the issuance
of the certificates or receipts evidencing ownership and maintains the register.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable
or floating rates of interest, and may involve a conditional or unconditional
demand feature. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WARRANTS -- Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery
transactions involve the purchase of an instrument with payment and delivery
taking place in the future. Delivery of and payment for these securities may
occur a month or more after the date of the
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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, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES -- Zero coupon
obligations are debt securities that do not bear any interest, but instead are
issued at a deep discount from par. The value of a zero coupon obligation
increases over time to reflect the interest accreted. Upon maturity, the holder
is entitled to receive the par value of the security. While interest payments
are not made on such securities, holders of such securities are deemed to have
received "phantom income" annually. Because the Fund will distribute its
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Fund will have fewer assets with which to purchase income producing
securities. In the event of adverse market conditions, zero coupon, pay-in-kind
and deferred payment securities may be subject to greater fluctuations in value
and may be less liquid than comparably rated securities paying cash interest at
regular interest payment periods.
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba 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.
B 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.
Caa 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.
Ca 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.
C 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.
A-1
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DESCRIPTION OF STANDARD & POOR'S LONG-TERM RATINGS
Investment Grade
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated 'BBB' 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.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. '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 or major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The 'B'
rating category also is used for debt subordinated to senior debt that
is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to
default, and is dependent on favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The 'CCC' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'B'
or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC' rating.
A-2
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C The rating 'C' is typically applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI Debt rated 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt is rated 'D' when the issue is in payment default, or the
obligor has filed for bankruptcy. The 'D' rating is used when interest
or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
DESCRIPTION OF DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest
AA- but may vary slightly from time to time because of economic conditions.
A+ Protection factors are average but adequate. However, risk factors
A- are more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient
BBB- for prudent investment. Considerable variability in risk during
economic cycles.
BB+ Below investment grade but deemed likely to meet obligations when
BB due. Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
DESCRIPTION OF FITCH'S LONG-TERM RATINGS
Investment Grade Bond
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<PAGE>
AAA Bonds 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.
AA Bonds 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+'.
A Bonds 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.
BBB Bonds 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.
Speculative grade bond
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD,
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these
bonds, and 'D' represents the lowest potential for recovery.
Plus (+) Minus
A-4
<PAGE>
(-) Plus and minus signs are used 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', 'DDD', 'DD', or 'D'
categories.
DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations for which there is 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
substantially.
AA Obligations for which there is a very low expectation of investment
risk. 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.
A Obligations for which there is a low expectation of investment risk.
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.
BBB Obligations for which there is currently a low expectation of
investment risk. 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 other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC Obligations which are highly speculative or which have a high risk of
default.
C Obligations which are currently in default.
DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS
Investment Grade
AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
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<PAGE>
A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Non-Investment Grade
(Issues regarded as having speculative characteristics in the likelihood of
timely repayment of principal and interest.)
BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the
ability to adequately service debt obligations.
B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.
CCC Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
CC "CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy
or reorganization.
D Default
Ratings in the Long-Term Debt categories may include a plus (+) or minus (-)
designation, which indicates where within the respective category the issue is
placed.
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<PAGE>
Trust:
TIP FUNDS
Fund:
PENN CAPITAL VALUE PLUS FUND
Adviser:
PENN CAPITAL MANAGEMENT COMPANY, INC.
Distributor:
SEI INVESTMENTS DISTRIBUTION CO.
Administrator:
SEI FUND RESOURCES
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Auditors:
ERNST & YOUNG LLP
January 31, 1998
<PAGE>
TIP FUNDS
TURNER ULTRA LARGE CAP GROWTH FUND
TURNER GROWTH EQUITY FUND
TURNER MIDCAP GROWTH FUND
TURNER SMALL CAP GROWTH FUND
TURNER FIXED INCOME FUND
Investment Adviser:
TURNER INVESTMENT PARTNERS, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Turner Ultra Large Cap Growth Fund (the "Ultra Large Cap Fund"), Turner
Growth Equity Fund (the "Growth Equity Fund"), Turner Midcap Growth Fund (the
"Midcap Fund"), Turner Small Cap Growth Fund (the "Small Cap Fund") and Turner
Fixed Income Fund (the "Fixed Income Fund") (each a "Fund" and, together, the
"Funds"). It is intended to provide additional information regarding the
activities and operations of the TIP Funds (the "Trust") and should be read in
conjunction with the Funds' Prospectuses dated January 31, 1998. The
Prospectuses 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-8
THE ADVISER................................................................S-10
THE ADMINISTRATOR..........................................................S-11
THE DISTRIBUTOR............................................................S-12
TRUSTEES AND OFFICERS OF THE TRUST.........................................S-13
COMPUTATION OF YIELD AND TOTAL RETURN......................................S-16
PURCHASE AND REDEMPTION OF SHARES..........................................S-16
DETERMINATION OF NET ASSET VALUE...........................................S-17
TAXES ..................................................................S-17
PORTFOLIO TRANSACTIONS.....................................................S-20
DESCRIPTION OF SHARES......................................................S-22
SHAREHOLDER LIABILITY......................................................S-22
LIMITATION OF TRUSTEES' LIABILITY..........................................S-23
5% SHAREHOLDERS............................................................S-23
FINANCIAL INFORMATION......................................................S-25
APPENDIX ...................................................................A-1
January 31, 1998
<PAGE>
THE TRUST
This Statement of Additional Information relates only to the Turner Ultra Large
Cap Growth Fund (the "Ultra Large Cap Fund"), Turner Growth Equity Fund (the
"Growth Equity Fund"), Turner Midcap Growth Fund (the "Midcap Fund"), Turner
Small Cap Growth Fund (the "Small Cap Fund") and Turner Fixed Income Fund (the
"Fixed Income Fund") (each a "Fund" and, together, the "Funds"). Each 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, and amended on February 21, 1997. The Declaration of Trust permits the
Trust to offer separate series ("portfolios") of shares of beneficial interest
("shares"). Each portfolio is a separate mutual fund, and each share of each
portfolio represents an equal proportionate interest in that portfolio. See
"Description of Shares." The Trust also offers shares in the TIP Target Select
Equity Fund, Clover Max Cap Value Fund, Clover Equity Value Fund, Clover Small
Cap Value Fund, Clover Fixed Income Fund, Penn Capital Select Financial Services
Fund, Penn Capital Strategic High Yield Bond Fund, and Penn Capital Value Plus
Fund. Capitalized terms not defined herein are defined in the Prospectus
offering shares of the Funds.
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. A
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. A 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, a 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
S-2
<PAGE>
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, a 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 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.
A 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 a Fund's net assets. A Fund may buy and sell futures contracts and related
options to manage its exposure to changing interest rates and securities prices.
Some strategies reduce a 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 a
Fund's return.
In order to avoid leveraging and related risks, when a 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.
Lower-Rated Securities
Lower-rated securities are lower-rated bonds commonly referred to as "junk
bonds" or high-yield securities. These securities are rated lower than "Baa3" by
Moody's Investors Service, Inc. (Moody's) and/or lower than "BBB-" by Standard &
Poor's Corporation ("S&P"). The Funds may invest in securities rated in the
lowest ratings categories established by Moody's or by S&P. These ratings
indicate that the obligations are speculative and may be in default. In
addition, the Funds may invest in
S-3
<PAGE>
unrated securities of comparable quality subject to the restrictions stated in
the Funds' Prospectus.
Certain Risk Factors Relating to High-Yield, High-Risk Securities
The descriptions below are intended to supplement the discussion in the
Prospectus.
Growth of High-Yield, High-Risk Bond Market
The widespread expansion of government, consumer and corporate debt within the
U.S. economy has made the corporate sector more vulnerable to economic downturns
or increased interest rates. Further, an economic downturn could severely
disrupt the market for lower rated bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest. The market for lower-rated securities may be less active, causing
market price volatility and limited liquidity in the secondary market. This may
limit the Funds' ability to sell such securities at their market value. In
addition, the market for these securities may 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.
Sensitivity to Interest Rate and Economic Changes
Lower rated bonds are somewhat sensitive to adverse economic changes and
corporate developments. During an economic down turn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
that would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaulted on its obligations to
pay interest or principal or entered into bankruptcy proceedings, the Funds may
incur losses or expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty and change can be expected to result in
increased volatility of market prices of high-yield bonds and the Funds' net
asset values.
Payment Expectations
High-yield, high-risk bonds may contain redemption or call provisions. If an
issuer exercised these provisions in a declining interest rate market, the Funds
would have to replace the securities with a lower yielding security, resulting
in a decreased return for investors. Conversely, a high-yield, high-risk bond's
value will decrease in a rising interest rate market, as will the value of the
Funds' assets. If the Funds experience significant unexpected net redemptions,
this may force them to sell high-yield, high-risk bonds without regard to their
investment merits, thereby decreasing the asset base upon which expenses can be
spread and possibly reducing the Funds' rates of return.
Liquidity and Valuation
S-4
<PAGE>
There may be little trading in the secondary market for particular bonds, which
may affect adversely the Funds' ability to value accurately or dispose of such
bonds. Adverse publicity and investor perception, whether or not based on
fundamental analysis, may decrease the values and liquidity of high-yield,
high-risk bonds, especially in a thin market.
Taxes
The Funds may purchase debt securities (such as zero-coupon, pay-in-kind or
other types of securities) that contain original issue discounts. Original issue
discount that accrues in a taxable year is treated as earned by each Fund and
therefore is subject to the distribution requirements of the tax code even
though the such Fund has not received any interest payments on such obligations
during that period. Because the original issue discount earned by the Funds in a
taxable year may not be represented by cash income, the Funds may have to
dispose of other securities and use the proceeds to make distributions to
shareholders.
Investment Company Shares
Each 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. A 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, a 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."
Options
A put option 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 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, a 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 a Fund is unable to effect a closing purchase
transaction with
S-5
<PAGE>
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.
A 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.
A 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 a 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.
A 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 a 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 realized as profit the premium
received for such option. When a call option written by a 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 a 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.
A 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.
A 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 a 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 a Fund, the Fund will establish a segregated account with its
Custodian consisting of cash or liquid, high grade debt securities in an amount
equal to the amount the Fund would be required to pay upon exercise of the put.
A 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
S-6
<PAGE>
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. A Fund may choose to terminate an option position by
entering into a closing transaction. The ability of a Fund to enter into closing
transactions depends upon the existence of a liquid secondary market for such
transactions.
All options written on indices must be covered. When a Fund writes an option on
an index, 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 a 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 a 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 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 a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a 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 a 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
S-7
<PAGE>
should be involved in bankruptcy or insolvency proceedings, a 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.
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 a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its investment portfolio, a Fund
may dispose of a when-issued security or forward commitment prior to settlement
if it deems appropriate.
INVESTMENT LIMITATIONS
Fundamental Policies
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of each Fund which cannot be changed with respect to a Fund
without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of a Fund are present or represented by proxy, or (ii) more
than 50% of a Fund's outstanding shares, whichever is less.
No Fund may:
1. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that each 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.
2. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each 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.
3. 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").
S-8
<PAGE>
4. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
5. 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 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 each Fund
and may be changed with respect to a Fund by the Board of Trustees.
No Fund may:
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 each 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, each 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.
S-9
<PAGE>
THE ADVISER
The Trust and Turner Investment Partners, 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.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any 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 any 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 any 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 that 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 any Fund,
by a majority of the outstanding shares of that 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.
On April 30, 1996, the Growth Equity Fund, the Small Cap Fund and the Fixed
Income Fund acquired the assets of the Turner Growth Equity, Turner Small Cap
and Turner Fixed Income Portfolios, respectively, of The Advisors' Inner Circle
Fund. For the fiscal years ended October 31, 1995, and September 30, 1996 and
1997, the Funds paid the following advisory fees:
S-10
<PAGE>
<TABLE>
<CAPTION>
Advisory Fees Paid Advisory Fees Waived
-------------------------------------- -----------------------------------
1995 1996 1997 1995 1996 1997
-------- -------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Ultra Large Cap Fund ** ** $0 ** ** $ 2,281+
Growth Equity Fund $897,405 $666,476 $694,046 $ 0 $ 0 $24,250
Midcap Fund ** ** $ 0 ** ** $13,244+
Small Cap Fund $ 0 $197,634 $762,604 $82,485* $82,694 $73,594
Fixed Income Fund ** ** ** ** ** **
</TABLE>
- ----------
* For the fiscal period ending October 1995, the Advisor waived all fees due
it under the Advisory Agreement with respect to the Small Cap Fund and
reimbursed expenses of $11,944.
** Not in operation during the period.
+ Does not include reimbursement fees by the Adviser in the amount of $28,214
and $40,096 with respect to the Ultra Large Cap and Midcap Funds,
respectively, for the fiscal period ended September 30, 1997.
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 ("SIMC"), a
wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the
owner of all beneficial interests in the Administrator. SEI Investments and its
subsidiaries and affiliates, including the Administrator, are leading providers
of funds evaluation services,
S-11
<PAGE>
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 or sub-administrator to the following
other mutual funds: 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,
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, 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.
On April 30, 1996, the Growth Equity Fund, the Small Cap Fund and the Fixed
Income Fund acquired the assets of the Turner Growth Equity, Turner Small Cap
and Turner Fixed Income Portfolios, respectively, of The Advisors' Inner Circle
Fund. For the fiscal years ended October 31, 1995, and September 30, 1996 and
1997, the Funds paid the following administrative fees:
Administrative Fees Paid
----------------------------------------------------
1995 1996 1997
-------- -------- --------
Ultra Large Cap Fund * * $ 3,057
Growth Equity Fund $214,591 $136,587 $110,759
Midcap Fund * * $ 9,404
Small Cap Fund $ 75,000 $68,682 $ 98,104
Fixed Income Fund * * *
- ----------
* Not in operation during the period.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, and the Trust are parties to a distribution agreement (the
"Distribution Agreement") with respect to shares of the Funds. The Distributor
receives no compensation for distribution of shares of the Funds.
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
S-12
<PAGE>
may be terminated by the Distributor, 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, 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 Santa Barbara Group of Mutual
Funds, Inc., are distributed by SEI Investments Distribution Co.
ROBERT E. TURNER (DOB 11/26/56) - Trustee* - Chairman and Chief Investment
Officer of Turner Investment Partners, Inc. ("Turner"), 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* - Senior Vice President, 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.
S-13
<PAGE>
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, 1994-1995. Associate, Winston and
Strawn, 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, 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, 1989-1994.
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.
JAMES W. JENNINGS (DOB 01/15/37) - Secretary - Partner, Morgan, Lewis & Bockius
LLP, counsel to the Trust, Turner, 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, Turner, 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, Turner, Administrator and Distributor, since 1995. Attorney, Aquila
Management Corporation, 1994. Rutgers University School of Law - Newark,
1991-1994.
S-14
<PAGE>
The following table exhibits Trustee compensation for the fiscal year ended
September 30, 1997.
<TABLE>
<CAPTION>
Total
Compensation
From
Aggregate Registrant and
Compensation Fund Complex
From Pension or Paid to
Registrant for Retirement Estimated Trustees for
the Fiscal Benefits Annual the Fiscal
Year Ended Accrued as Benefits Year Ended
Name of Person, September Part of Fund Upon September
Position 30, 1997 Expenses Retirement 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
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.
S-15
<PAGE>
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 a 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.
For the 30-day period ended September 30, 1997, the Ultra Large Cap Fund's yield
was .07% and the Growth Equity, Midcap and Small Cap Funds' yields were 0%. The
Fixed Income Fund was not in operation during this period.
The total return of a 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.
For the fiscal year ended September 30, 1997, and for the period from March 11,
1992 (commencement of operations of the Turner Growth Equity Portfolio of The
Advisors' Inner Circle Fund) through September 30, 1997, the total return for
the Growth Equity Fund was 32.61% and 17.60%, respectively. For the fiscal year
ended September 30, 1997 and the period from February 7, 1994 (commencement of
operations of the Turner Small Cap Portfolio of The Advisors' Inner Circle Fund)
through September 30, 1997, the total return for the Small Cap Fund was 16.64%
and 33.53%, respectively. For the fiscal year ended September 30, 1997, the
total return for the Ultra Large Cap, and Midcap Funds were 22.80% and 43.77%,
respectively. The Fixed Income Fund was not in operation during these periods.
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
S-16
<PAGE>
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 each 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 a 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 a 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 any 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 each 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 Funds and their 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 is only a summary of certain additional federal tax considerations
generally affecting the Funds and their shareholders that are not discussed in
the Funds' Prospectus. No attempt is made to present a detailed explanation of
the federal, state or local tax treatment of the Funds or their shareholders and
the discussion here and in the Funds' Prospectus is not intended as a substitute
for careful tax planning.
S-17
<PAGE>
The discussion of federal income tax consequences is based on the Internal
Revenue Code of 1986 (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.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, each 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, each 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
Funds 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.
Each Fund intends to make sufficient distributions to avoid liability for the
federal excise tax. A Fund may in certain circumstances be required to liquidate
Fund investments in order to make sufficient distributions to avoid federal
excise tax liability at a time when the investment advisor might not otherwise
have chosen to do so, and liquidation of
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<PAGE>
investments in such circumstances may affect the ability of a Fund to satisfy
the requirements for qualification as a RIC.
Any gain or loss recognized on a sale, exchange or redemption of shares of a
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than eighteen months, mid-term capital gain if
the share have been held for more than twelve months but not more than eighteen
months, and otherwise will be treated as short-term capital gain or loss.
However, if shares on which a shareholder has received a net capital gain
distribution are subsequently sold, exchanged or redeemed and such shares have
been held for six months or less, any loss recognized will be treated as a
long-term capital loss to the extent of the net capital gain distribution.
Long-term capital gains are currently taxed at a maximum rate of 20%, mid-term
capital gains are currently taxed at a maximum rate of 28%, and short-term
capital gains are currently taxed at ordinary income tax rates.
In certain cases, a 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 any 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 may generally be eligible for the corporate dividends-received
deduction.
Funds may, in certain circumstances involving tax-free reorganizations, accept
securities that are appropriate investments as payment for Fund shares (an
"In-Kind Purchase"). An In-Kind Purchase may result in adverse tax consequences
under certain circumstances to either the investors transferring securities for
shares (an "In-Kind Investors") or to investors who acquire shares of the Fund
after a transfer ("new shareholders"). As a result of an In-Kind Purchase, the
Funds 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 Funds acquire 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 Funds, new
S-19
<PAGE>
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 Funds.
State Taxes
No Fund is liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by any 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 Funds. 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, a Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
The Adviser may, consistent with the interests of the Funds, 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, a 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 a 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
that Fund.
S-20
<PAGE>
It is expected that the Funds may execute brokerage or other agency transactions
through the Distributor, which is a registered broker-dealer, for a commission
in conformity with the 1940 Act, the Securities Exchange Act of 1934 and rules
promulgated by the SEC. Under these provisions, the Distributor is permitted to
receive and retain compensation for effecting portfolio transactions for a Fund
on an exchange if a written contract is in effect between the Trust and the
Distributor expressly permitting the Distributor to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor by a Fund for exchange transactions 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 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 no Fund markets its shares through intermediary brokers or dealers, it
is not the Funds' 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 a
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.
On April 30, 1996, the Growth Equity Fund, the Small Cap Fund and the Fixed
Income Fund acquired the assets of the Turner Growth Equity, Turner Small Cap
and Turner Fixed Income Portfolios, respectively, of The Advisors' Inner Circle
Fund. For the fiscal years ended October 31, 1995, and September 30, 1996 and
1997, the Funds turnover rates were as follows:
TURNOVER RATE
---------------------------------------------
1995 1996 1997
------ ------ ------
Ultra Large Cap Fund * * 346.47%
Growth Equity Fund 177.86% 147.79% 178.21%
Midcap Fund * * 348.29%
Small Cap Fund 183.49% 149.00% 130.68%
Fixed Income Fund * * *
- ----------
* Not in operation during the period.
S-21
<PAGE>
On April 30, 1996, the Growth Equity Fund, the Small Cap Fund and the Fixed
Income Fund acquired the assets of the Turner Growth Equity, Turner Small Cap
and Turner Fixed Income Portfolios, respectively, of The Advisors' Inner Circle
Fund. The Brokerage Commissions paid for each Fund for the fiscal years ended
October 31, 1995, and September 30, 1996 and 1997, was as follows:
Total Dollar Amount of Brokerage Commissions Paid
-------------------------------------------------
1995 1996 1997
-------- -------- --------
Ultra Large Cap Fund * * $ 2,586
Growth Equity Fund $581,138 $369,573 $335,291
Midcap Fund Fund * * $ 17,029
Small Cap Fund $ 41,882 $128,154 $235,029
Fixed Income Fund * * *
- ----------
* Not in operation during the period.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents an
equal proportion ate interest in that portfolio with each other share. Shares
are entitled upon liquidation to a pro rata share in the net assets of the
portfolio. 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
S-22
<PAGE>
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 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.
5% SHAREHOLDERS
As of January 5,1998, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the shares of the Portfolios. The Trust believes that most of the shares
referred to below were held by the persons indicated in accounts for their
fiduciary, agency, or custodial customers.
Name and Address Number of Shares Percent of Funds
- ---------------- ---------------- ----------------
Ultra Large Cap Growth Fund
Charles Schwab & Co., Inc. 40,333.93 50.08%
Attn: Mutual Funds Team S
4500 Cherry Creek Drive
Denver, CO 80209
Robert E. Turner 18,299.23 22.72%
Carolyn W. Turner
9 Horseshoe Lane
Paoli, PA 19301-1909
Michael R. Thompson 6,099.74 7.57%
1 Springton Pointe Drive
Newton Square, PA 19073-3931
Stephen J. Kneeley & 6,099.74 7.57%
Kathryn A. Kneeley
S-23
<PAGE>
1467 Treeline Drive
Malvern, PA 19355-9706
Growth Equity Fund
Saul & Co. 2,045,282.22 26.84%
FBO Sheet Metal Annuity
c/o First Union National Bank
152 W. Harris Boulevard
Charlotte, NC 28262-3336
Retirement Plan for Employees of 794,593.53 10.43%
Bridgeport Hospital
c/o People's Bank Trust Dept.
850 Main Street
Bridgeport, CT 06604-4917
Citicorp USA Inc. Pledgee 734,461.16 9.64%
McNeil Children's Trust
Loan Collateral Account
c/o Carole McNeil
P.O. Box 803598
Dallas, TX 75380-3598
Starr Commonwealth 542,297.13 7.12%
13725 Starr Commonwealth Road
Albion, MI 49224-9580
Saxon & Co. 403,392.66 5.29%
FBO Duane Morris/Heckshel Trust
P.O. Box 7780-1888
Philadelphia, PA 19182
Two Ten International Footwear 387,936.42 5.09%
Foundation
56 Main Street
Watertown, MA 02172-4413
Small Cap Growth Fund
Charles Schwab & Co., Inc. 2,829,053.12 45.49%
Attn: Mutual Funds Team S
4500 Cherry Creek Drive
Denver, CO 80209
S-24
<PAGE>
Donaldson Lufkin Jenrette 501,520.45 8.06%
Secs. Corp. Pershing Division
P.O. Box 2052
Jersey City, NJ 07399
Midcap Growth Fund
Charles Schwab & Co., Inc. 235,298.50 23.58%
Attn: Mutual Funds Team S
4500 Cherry Creek Drive
Denver, CO 80209
Sheet Metal Workers Local #19 80,973.68 8.11%
Supplemental Unemployment
Benefit Fund
1301 S. Columbus Boulevard
Philadelphia, PA 19147-5505
Donaldson Lufkin Jenrette 75,603.84 7.57%
Secs Corp. Pershing Division
P.O. Box 2052
Jersey City, NJ 07399
Robert E. Turner & 53,555.47 5.37%
Carolyn W. Turner
9 Horseshoe Lane
Paoli, PA 19301-1909
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended September 30, 1997,
including notes thereto and the report of Ernst & Young LLP thereon, are herein
incorporated by reference. A copy of the 1997 Annual Report must accompany the
delivery of this Statement of Additional Information.
S-25
<PAGE>
APPENDIX
The following descriptions are summaries of published ratings.
DESCRIPTION OF CORPORATE BOND RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA by S&P also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from AAA issues only in
small degree. Debt rated A by S&P has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
Bonds rated BBB by S&P are considered as medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated Aaa by Moody's are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large, or an exceptionally stable,
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with bonds
rated Aaa, they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than in Aaa securities.
Bonds rated A by Moody's possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Debt rated
Baa by Moody's is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Fitch uses plus and minus signs with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category. Bonds rated AAA by Fitch are considered to be
investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest
A-1
<PAGE>
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.
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
A-2
<PAGE>
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 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-3
<PAGE>
Trust:
TIP FUNDS
Funds:
CLOVER EQUITY VALUE FUND
CLOVER SMALL CAP VALUE FUND
CLOVER MAX CAP VALUE FUND
CLOVER FIXED INCOME FUND
Investment Adviser:
CLOVER CAPITAL MANAGEMENT, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Clover Equity Value Fund (the "Equity Value Fund"), Clover Small Cap Value
Fund (the "Small Cap Value Fund"), Clover Max Cap Value Fund (the "Max Cap Value
Fund"), and Clover Fixed Income Fund (the "Fixed Income Fund") (each a "Fund"
and, together, the "Funds"). It is intended to provide additional information
regarding the activities and operations of the TIP Funds (the "Trust") and
should be read in conjunction with the Funds' Prospectus dated January 31, 1998.
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-10
THE ADVISER.............................................................S-12
THE ADMINISTRATOR.......................................................S-14
THE DISTRIBUTOR.........................................................S-15
TRUSTEES AND OFFICERS OF THE TRUST......................................S-15
COMPUTATION OF YIELD AND TOTAL RETURN...................................S-19
PURCHASE AND REDEMPTION OF SHARES.......................................S-20
DETERMINATION OF NET ASSET VALUE........................................S-20
TAXES ...............................................................S-20
PORTFOLIO TRANSACTIONS..................................................S-23
DESCRIPTION OF SHARES...................................................S-26
SHAREHOLDER LIABILITY...................................................S-26
LIMITATION OF TRUSTEES' LIABILITY.......................................S-27
5% SHAREHOLDERS.........................................................S-27
FINANCIAL STATEMENTS....................................................S-29
APPENDIX ................................................................A-1
January 31, 1998
S-1
<PAGE>
THE TRUST
This Statement of Additional Information relates only to the Clover Equity Value
Fund (the "Equity Value Fund"), Clover Small Cap Value Fund (the "Small Cap
Value Fund"), Clover Max Cap Value Fund (the "Max Cap Value Fund"), and Clover
Fixed Income Fund (the "Fixed Income Fund") (each a "Fund" and, together, the
"Funds"). Each 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"). Each portfolio is a separate mutual fund, and
each share of each portfolio represents an equal proportionate interest in that
portfolio. On June 25, 1997, the Equity Value, Small Cap Value and Fixed Income
Funds acquired substantially all of the assets and liabilities of the Clover
Capital Equity, Clover Capital Small Cap and Clover Capital Fixed Income
Portfolios (collectively, the "Clover Capital Portfolios") of The Advisors'
Inner Circle Fund. See "Description of Shares." The Trust also offers shares in
the Turner Ultra Large Cap Growth Fund, Turner Growth Equity Fund, Turner Midcap
Growth Fund, Turner Small Cap Growth Fund, Turner Fixed Income Fund, TIP Target
Select Equity Fund, Penn Capital Select Financial Services Fund, Penn Capital
Strategic High Yield Bond Fund, and Penn Capital Value Plus Fund. Capitalized
terms not defined herein are defined in the Prospectus offering shares of the
Funds.
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. A
Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the 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. A 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, a
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 of a specific stock or
S-2
<PAGE>
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 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, a 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 of the futures position varies
(a process known 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 of the securities held by a 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.
A 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 a Fund's net assets. A Fund may buy and sell futures contracts and related
options to manage its exposure to changing interest rates and securities prices.
Some strategies reduce a 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 a
Fund's return.
In order to avoid leveraging and related risks, when a Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash or
liquid securities equal to the market of the futures positions held, less margin
deposits, in a segregated account with its custodian. Collateral equal to the
current market of the futures position will be marked to market on a daily
basis.
S-3
<PAGE>
GNMA Securities
The Fixed Income 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 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 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 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 , which may result in a loss.
Investment Company Shares
Each 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 shareholders of a Fund. A 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, a 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."
S-4
<PAGE>
Mortgage- and Asset-Backed Securities
The Fixed Income 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 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 Fixed Income 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
S-5
<PAGE>
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 Fixed Income 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 and Nordic Investment Bank.
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,
a 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 a 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.
A Fund may purchase put and call options to protect against a decline in the
market of the securities in its portfolio or to anticipate an increase in the
market of securities that the Fund may seek to purchase in the future. A 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 a Fund, loss of the premium paid may be offset by an increase in
the of the Fund's securities or by a decrease in the cost of acquisition of
securities by the Fund.
S-6
<PAGE>
A Fund may write covered call options as a means of increasing the yield on its
fund and as a means of providing limited protection against decreases in its
market. When a 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 realized as profit the premium received for such
option. When a call option written by a 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 a 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 of such securities.
A 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.
A 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 a 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 a Fund, the Fund will establish a segregated account with its
Custodian consisting of cash or liquid, high grade debt securities in an amount
equal to the amount the Fund would be required to pay upon exercise of the put.
A 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. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a Fund to enter into closing
S-7
<PAGE>
transactions depends upon the existence of a liquid secondary market for such
transactions.
All options written on securities or indices must be covered. When a 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 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 a Fund will receive a premium
when it writes covered call options, it may not participate fully in a rise in
the market of the underlying security.
REITS
The Fixed Income and Small Cap Value Funds may invest in real estate investment
trusts ("REITs"), which pool investors' funds for investment in income producing
commercial real estate or real estate related loans or interests.
A REIT is not taxed on income distributed to its shareholders or unitholders if
it complies with regulatory requirements relating to its organization,
ownership, assets and income, and with a regulatory requirement that it
distribute to its shareholders or unitholders at least 95% of its taxable income
for each taxable year. Generally, REITs can be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily from rents
and capital gains from appreciation realized through property sales. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. A shareholder in a Fund
should realize that by investing in REITs indirectly through the Fund, he or she
will bear not only his or her proportionate share of the expenses of the Fund,
but also indirectly, similar expenses of underlying REITs.
A Fund may be subject to certain risks associated with the direct investments of
the REITs. REITs may be affected by changes in the of their underlying
properties and by defaults by borrowers or tenants. Mortgage REITs may be
affected by the quality of the credit extended. Furthermore, REITs are dependent
on specialized management skills. Some REITs may have limited diversification
and may be subject to risks inherent in financing a limited number of
properties. REITs depend generally on their ability to
S-8
<PAGE>
generate cash flow to make distributions to shareholders or unitholders, and may
be subject to defaults by borrowers and to self-liquidations. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-free
pass-through of income under the Code or its failure to maintain exemption from
registration under the 1940 Act.
Repurchase Agreements
Repurchase agreements are agreements by which a 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 pay the agreed upon price, which
obligation is in effect secured by the of the underlying security.
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a Fund will
provide that the underlying security at all times shall have a 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 a Fund, the Trust's Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, a 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, a 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.
Securities of Foreign Issuers
The Fixed Income Fund may invest in U.S. dollar denominated fixed income
securities of foreign issuers which are traded in the United States. In
addition, the Equity Fund may invest in American Depositary Receipts. These
instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
S-9
<PAGE>
possible establishment of exchange controls or taxation at the source, greater
fluctuations in due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
Variable or Floating Rate Instruments
The Fixed Income 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 Fixed Income 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 at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. Although a Fund generally purchases
securities on a when-issued or forward commitment basis with the intention of
actually acquiring securities for its investment portfolio, a Fund may dispose
of a when-issued security or forward commitment prior to settlement if it deems
appropriate.
INVESTMENT LIMITATIONS
Fundamental Policies
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of each Fund which cannot be changed with respect to a Fund
without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's
S-10
<PAGE>
shares present at a meeting, if more than 50% of the outstanding shares of a
Fund are present or represented by proxy, or (ii) more than 50% of a Fund's
outstanding shares, whichever is less.
No Fund may:
1. Borrow money in an amount exceeding 33 1/3% of the of its total assets,
provided that, for purposes of this limitation, investment strategies
which either obligate fund to purchase securities or require a Fund to
segregate assets are not considered to be borrowings. Asset coverage of
a least 300% is required for all borrowings, except where a Fund has
borrowed money for temporary purposes in amounts not exceeding 5% of
its total assets. A Fund will not purchase securities while its
borrowings exceed 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would
be lent to other parties, except that each 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 each 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 unless an excess or deficiency occurs immediately after or as a result
of a purchase of such security.
S-11
<PAGE>
Non-Fundamental Policies
The following investment limitations are non-fundamental policies of each Fund
and may be changed with respect to a Fund by the Board of Trustees.
No Fund may:
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 each
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 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, each 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
S-12
<PAGE>
in the performance of its duties or from reckless disregard of its obligations
or duties thereunder.
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any 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 any 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 any 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 that 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 any Fund,
by a majority of the outstanding shares of that 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.
On June 25, 1997, the Equity Value Fund, the Small Cap Value Fund and the Fixed
Income Fund acquired the assets of the Clover Capital Equity, Clover Capital
Small Cap and Clover Capital Fixed Income Portfolios, respectively, of The
Advisors' Inner Circle Fund.
For the fiscal years ended October 31, 1995 and 1996, and for the fiscal period
ended September 30, 1997, the Funds paid the following advisory fees:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Advisory Fees Paid Advisory Fees Waived
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
1995 1996 1997 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
Equity Value Fund $238,624 $437,862 $642,434 $39,599 $73,383 $47,047
- --------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund N/A $0 $0 N/A $14,442*** $66,598***
- --------------------------------------------------------------------------------------------------------------------------
Max Cap Value Fund * * * * * *
- --------------------------------------------------------------------------------------------------------------------------
Fixed Income Fund $0 $ 23,932 $ 35,551 $68,168** $53,322 $55,083
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
S-13
<PAGE>
**Includes reimbursement of fees by the Adviser in the amount of $16,812 with
respect to the Clover Capital Fixed Income Portfolio for 1995.
***Does not include reimbursement of fees by the Adviser in the amount of
$51,578 and $14,145 with respect to the Clover Capital Small Cap Portfolio for
the fiscal period of 1996 and 1997, respectively.
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 ("SIMC"), a
wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the
owner of all beneficial interests in the Administrator. SEI Investments and its
subsidiaries and 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
or sub-administrator to the following other mutual funds: 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, 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, 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.
On June 25, 1997, the Equity Value Fund, the Small Cap Value Fund and the Fixed
Income Fund acquired the assets of the Clover Capital Equity, Clover Capital
Small
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<PAGE>
Cap and Clover Capital Fixed Income Portfolios, respectively, of The Advisors'
Inner Circle Fund.
For the fiscal years ended October 31, 1995 and 1996, and for the fiscal period
ended September 30, 1997, the Funds paid the following administrative fees:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Administrative Fees Paid
--------------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
- -----------------------------------------------------------------------------------------
Equity Value Fund $73,770 $138,175 $159,591
- -----------------------------------------------------------------------------------------
Small Cap Value Fund * $33,606 $52,438
- -----------------------------------------------------------------------------------------
Max Cap Value Fund * * *
- -----------------------------------------------------------------------------------------
Fixed Income Fund $49,962 $50,022 $52,438
- -----------------------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
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 Funds.
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
S-15
<PAGE>
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, 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 Santa Barbara Group of Mutual Funds, Inc., are distributed by
SEI Investments Distribution Co.
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* - Senior Vice President, 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 Operations and Compliance of Turner Investment Partners, Inc., since
1992.
S-16
<PAGE>
TODD B. CIPPERMAN (DOB 02/14/66) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of SEI, the administrator since 1995.
Associate, Dewey Ballantine (law firm), 1994-1995. Associate, Winston and
Strawn, 1991-1994.
SANDRA K. ORLOW (DOB 10/18/53) - Vice President and Assistant Secretary - Vice
President and Assistant Secretary of the Administrator 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 since 1994. Vice
President and Assistant Secretary of SEI, the Administrator 1992-1994.
Associate, Morgan, Lewis & Bockius LLP, 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 since 1994. Associate,
Morgan, Lewis & Bockius LLP, 1989-1994.
ROBERT DELLACROCE (DOB 12/17/63) - Controller and Chief Accounting Officer -
Director, Funds Administration and Accounting - Director, Funds Administration
and Accounting of SEI since 1994. Senior Audit Manager, Arthur Andersen LLP,
1986- 1994.
JAMES W. JENNINGS (DOB 01/15/37) - Secretary - Partner, Morgan, Lewis & Bockius
LLP, counsel to the Trust, the Adviser, the Administrator.
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.
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 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.
S-17
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Compensation
From Benefits Benefits From
Registrant for Accrued as Upon Registrant and
the Fiscal Part of Fund Retirement Fund Complex
Year Ended Expenses Paid to
September Trustees for
30, 1997 the Fiscal
Year Ended
September
30, 1997
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Robert Turner* $0 N/A N/A $0
- -----------------------------------------------------------------------------------------------------------------
Richard A. $0 N/A N/A $0
Hocker(1)*
- -----------------------------------------------------------------------------------------------------------------
Michael E. $0 N/A N/A $0
Jones(1)*
- -----------------------------------------------------------------------------------------------------------------
Janet F. $0 N/A N/A $0
Sansone(1)**
- -----------------------------------------------------------------------------------------------------------------
Joan Lamm- $2,000 N/A N/A $2,000
Tennant(2)
- -----------------------------------------------------------------------------------------------------------------
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.
S-18
<PAGE>
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 a 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.
For the 30-day period ended September 30, 1997, yields were .61% for the Equity
Value Fund, 5.92% for the Fixed Income Fund, and 0% for the Small Cap Value
Fund.
The total return of a 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 , as of the end of the designated time period, of a hypothetical
$1,000 payment made at the beginning of the designated time period.
For the fiscal year ended September 30, 1997, and for the period from December
6, 1991 (commencement of operations) through September 30, 1997, the total
return was 23.86% and 17.17% for the Equity Value Fund and 7.43% and 7.91% for
the Fixed Income Fund, respectively. For the fiscal year ended September 30,
1997, and for the period from February 28, 1996, (commencement of operations)
through September 30, 1997 the total return of the Small Cap Value Fund was
48.23% and 35.23%, respectively.
S-19
<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 each 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 a 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 a 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 any 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
The securities of each 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 Funds and their 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.
S-20
<PAGE>
Federal Income Tax
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986 (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.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, each 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, each 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 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 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),
each 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.
S-21
<PAGE>
Any gain or loss recognized on a sale, exchange or redemption of shares of a
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than eighteen months, mid-term capital gain if
the share have been held for more than twelve months but not more than eighteen
months, and otherwise will be treated as short-term capital gain or loss.
However, if shares on which a shareholder has received a net capital gain
distribution are subsequently sold, exchanged or redeemed and such shares have
been held for six months or less, any loss recognized will be treated as a
long-term capital loss to the extent of the net capital gain distribution.
Long-term capital gains are currently taxed at a maximum rate of 20%, mid-term
capital gains are currently taxed at a maximum rate of 28%, and short-term
capital gains are currently taxed at ordinary income tax rates.
In certain cases, a 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 any 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.
Funds may, in certain circumstances involving tax-free reorganizations, accept
securities that are appropriate investments as payment for Fund shares (an
"In-Kind Purchase"). An In-Kind Purchase may result in adverse tax consequences
under certain circumstances to either the investors transferring securities for
shares (an "In-Kind Investors") or to investors who acquire shares of the Fund
after a transfer ("new shareholders"). As a result of an In-Kind Purchase, the
Funds 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 Funds acquire 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 Funds, new
S-22
<PAGE>
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 Funds.
State Taxes
No Fund is liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by any 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 Funds. 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, a Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
The Funds have 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 Funds. In placing orders,
it is the policy of the Fund to seek 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 Funds will not necessarily be paying the lowest
spread or commission available.
The money market instruments in which the Funds 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
S-23
<PAGE>
and do not normally involve either brokerage commissions or transfer taxes. The
cost of executing portfolio securities transactions of the Funds will primarily
consist of dealer spreads and underwriting commissions.
The Adviser may, consistent with the interests of the Funds, 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, a 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 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 a Fund or account generating the brokerage, and there can be no guarantee
that the Adviser will find all of such services of in advising that Fund.
Although it is not expected that the Funds will do so, the Funds may 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. Under these provisions, an affiliated
distributor is permitted to receive and retain compensation for effecting
portfolio transactions for a Fund on an exchange if a written contract is in
effect between the Trust and an affiliated distributor expressly permitting the
distributor to receive and retain such compensation. These rules further require
that commissions paid to an affiliated distributor by a Fund for exchange
transactions 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 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
S-24
<PAGE>
commissions paid to an affiliated distributor, and will review these procedures
periodically.
Because no Fund markets its shares through intermediary brokers or dealers, it
is not the Funds' 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 a
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.
For the fiscal year ended October 31, 1996, the Clover Capital Equity Value
Portfolio paid SEI Investments Distribution Co.("SIDCO"), prior Distributor of
the Portfolios, brokerage commissions in the aggregate amount of $2,339.29. For
the fiscal year ended October 31, 1996, the commissions the Equity Value
Portfolio paid to SIDCO represented 2% of the aggregate brokerage commissions
which were paid on transactions that represented 62% of the aggregate dollar
amount of transactions that incurred commissions paid by that Portfolio during
such period. For the fiscal year ended October 31, 1996, the Clover Capital
Fixed Income Portfolio paid SIDCO brokerage commissions in the aggregate amount
of $225.03. For the fiscal year ended October 31, 1996, the commission the Fixed
Income Portfolio paid to SIDCO represented 100% of the aggregate brokerage
commissions which were paid on transactions that represented 100% of the
aggregate dollar amount of transactions that incurred commissions paid by the
Portfolio during such period. For the fiscal years ended October 31, 1995 and
1996, and for the fiscal period ended September 30, 1997, the Funds paid
aggregate brokerage commissions as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Fund 1995 1996 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Equity Value $136,995 $152,253 $189,818
Fund
- --------------------------------------------------------------------------
Small Cap Value Fund * $ 22,829 $ 62,804
- --------------------------------------------------------------------------
Max Cap Value Fund * * *
- --------------------------------------------------------------------------
Fixed Income Fund $0 $0 $0
- --------------------------------------------------------------------------
</TABLE>
* Not in operation during the period.
S-25
<PAGE>
The Funds are required to identify any securities of their "regular brokers or
dealers" (as such term is defined in the 1940 Act), which the Funds have
acquired during their most recent fiscal year. As of September 30, 1997, the
Equity Value, Fixed Income and Small Cap Value Funds held $2,081,376; $209,754;
and $508,162, respectively, of tri- party repurchase agreements with Lehman
Brothers.
For the fiscal year ended October 31, 1996, and the fiscal period ended
September 30, 1997, the Funds' turnover rates were was as follows:
- --------------------------------------------------------------------------------
TURNOVER RATE
---------------------------------------------
FUND
1997 1996
- --------------------------------------------------------------------------------
Equity Value Fund 51.64% 51.36%
- --------------------------------------------------------------------------------
Small Cap Value Fund 59.03% 14.17%
- --------------------------------------------------------------------------------
Max Cap Value Fund * *
- --------------------------------------------------------------------------------
Fixed Income Fund 11.83% 24.52%
- --------------------------------------------------------------------------------
* Not in operation during the period.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents an
equal proportion ate interest in that portfolio with each other share. Shares
are entitled upon liquidation to a pro rata share in the net assets of the
portfolio. 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
S-26
<PAGE>
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 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.
5% SHAREHOLDERS
As of January 5, 1998, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the shares of the Portfolios. The Trust believes that most of the shares
referred to below were held by the persons indicated in accounts for their
fiduciary, agency or custodial customers.
Name and Address Number of Shares Percent of Funds
Small Cap Value Fund
Clover Capital Management Inc. 80,578.88 7.03%
Employee 401K Savings &
Deferred Profit Sharing Plan
11 Tobey Village Office Park
Pittsford, NY 14534-1755
National Financial Services Corp. 71,936.70 6.28%
for the Exclusive Benefit of Our
Customers
Attn: Mutual Funds
200 Liberty Street
S-27
<PAGE>
1 World Financial Center
New York, NY 10283-1003
Max Cap Value Fund
Clover Capital Management, Inc. 31,287.52 44.38%
Employee 401K Savings &
Deferred Profit Sharing Plan
11 Tobey Village Office Park
Pittsford, NY 14534-1755
Geoffrey Rosenberger 10,035.91 14.23%
24 Tuxford Road
Pittsford, NY 14534-1527
Michael E. Jones & 10,035.91 14.23%
Diane E. Jones
8 Hidden Springs Drive
Pittsford, NY 14534-2897
SEI Trust Company Cust. 8,012.71 11.37%
IRA R/O A/C Jacob Krieger
55 Chalet Circle
Rochester, NY 14618-4801
SEI Trust Company Cust. 4,958.45 7.03%
IRA R/O Kathleen M. Greenhouse
106 Cliffside Drive
Canandaigua, NY 14424-8807
Fixed Income Fund
REHO & Co. 397,515.84 14.19%
c/o Manufacturers & Traders Co.
P.O. Box 1377
Buffalo, NY 14240-1377
Clover Capital Management Inc. 172,055.38 6.14%
Employee 401K Savings &
Deferred Profit Sharing Plan
11 Tobey Village Office Park
Pittsford, NY 14534-1755
S-28
<PAGE>
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended September 30, 1997,
including notes thereto and the report of Ernst & Young LLP thereon, are herein
incorporated by reference. A copy of the 1997 Annual Report must accompany the
delivery of this Statement of Additional Information.
S-29
<PAGE>
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
A-1
<PAGE>
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
Bonds rated A by Moody's possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. Debt rated
Baa by Moody's is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
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
A-2
<PAGE>
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Bonds rated AAA by Duff are judged by Duff to be of the highest credit quality,
with negligible risk factors being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA by Duff are judged by Duff to be of high credit
quality with strong protection factors and risk that is modest but that may vary
slightly from time to time because of economic conditions. Bonds rated A by Duff
are judged by Duff to have average but adequate protection factors. However,
risk factors are more variable and greater in periods of economic stress. Bonds
rated BBB by Duff are judged by Duff as having below average protection factors
but still considered sufficient for prudent investment, with considerable
variability in risk during economic cycles.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly. Obligations for which there is a low expectation on investment
risk are rated A by IBCA. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk. Obligations for which there is
currently a low expectation of investment risk are rated BBB by IBCA. Capacity
for timely repayment of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more likely to lead to
increased investment risk than for obligations in higher categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A by Standard & Poor's Corporation ("S&P") is regarded by
S&P as having the greatest capacity for timely payment. Issues rated A are
further refined by use of the numbers 1, 1 +, and 2 to indicate the relative
degree of safety. Issues rated A-1+ are those with an "overwhelming degree" of
credit protection. Those rated A-1, the highest rating category, reflect a "very
strong" degree of safety regarding timely payment. Those rated A-2, the second
highest rating category, reflect a satisfactory degree of safety regarding
timely payment but not as high as A-1.
A-3
<PAGE>
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 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
<PAGE>
TIP FUNDS
Penn Capital Select Financial Services Fund
Penn Capital Strategic High Yield Bond Fund
Penn Capital Value Plus Fund
Investment Adviser:
Penn Capital Management Company, Inc.
This Statement of Additional Information is not a prospectus and relates only to
the Penn Capital Select Financial Services Fund (the "Select Financial Services
Fund"), Penn Capital Strategic High Yield Bond Fund (the "Strategic High Yield
Fund"), and Penn Capital Value Plus Fund (the "Value Plus Fund") (each a "Fund"
and, together, the "Funds"). It is intended to provide additional information
regarding the activities and operations of the TIP Funds (the "Trust"), and
should be read in conjunction with the Funds' Prospectuses dated January 31,
1998. 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-12
THE ADVISER.................................................................S-14
THE ADMINISTRATOR...........................................................S-15
THE DISTRIBUTOR.............................................................S-15
TRUSTEES AND OFFICERS OF THE TRUST..........................................S-16
COMPUTATION OF YIELD AND TOTAL RETURN.......................................S-19
PURCHASE AND REDEMPTION OF SHARES...........................................S-20
DETERMINATION OF NET ASSET VALUE............................................S-20
TAXES ...................................................................S-20
PORTFOLIO TRANSACTIONS......................................................S-23
DESCRIPTION OF SHARES.......................................................S-25
SHAREHOLDER LIABILITY.......................................................S-25
LIMITATION OF TRUSTEES' LIABILITY...........................................S-25
5% SHAREHOLDERS.............................................................S-25
FINANCIAL INFORMATION.......................................................S-26
APPENDIX ....................................................................A-1
January 31, 1998
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THE TRUST
This Statement of Additional Information relates only to the Penn Capital Select
Financial Services Fund (the "Select Financial Services Fund"), Penn Capital
Strategic High Yield Bond Fund (the "Strategic High Yield Fund") and Penn
Capital Value Plus Fund (the "Value Plus Fund") (each a "Fund" and, together,
the "Funds"). Each Fund is a separate, diversified series of the TIP Funds
(formerly, Turner Funds) (the "Trust"), an open-end management investment
company established as a Massachusetts business trust under a Declaration of
Trust dated January 26, 1996, and amended on February 21, 1997. The Declaration
of Trust permits the Trust to offer separate series ("portfolios") of shares of
beneficial interest ("shares"). Each portfolio is a separate mutual fund, and
each share of each portfolio represents an equal proportionate interest in that
portfolio. See "Description of Shares." The Trust also offers shares of the
Turner Ultra Large Cap Growth Fund, Turner Growth Equity Fund, Turner Midcap
Growth Fund, Turner Small Cap Growth Fund, Turner Fixed Income Fund, TIP Target
Select Equity Fund, Clover Max Cap Value Fund, Clover Equity Value Fund, Clover
Small Cap Value Fund, and Clover Fixed Income Fund. Capitalized terms not
defined herein are defined in the Prospectus offering shares of the Funds.
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. A
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. A 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, a 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.
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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, a 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 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 a 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.
A 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 a Fund's net assets. A Fund may buy and sell futures contracts and related
options to manage its exposure to changing interest rates and securities prices.
Some strategies reduce a 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 a
Fund's return.
In order to avoid leveraging and related risks, when a 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.
Investment Company Shares
Each Fund may invest in shares of other investment companies, to the extent
permitted by applicable law. These investment companies typically incur fees
that are separate
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from those fees incurred directly by the Fund. A 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, a 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."
Lower-Rated Securities
Lower-rated securities are lower-rated bonds commonly referred to as "junk
bonds" or high-yield securities. These securities are rated lower than Baa3 by
Moody's Investors Service, Inc. ("Moody's") and/or lower than BBB- by Standard &
Poor's Corporation ("S&P"). The Funds may invest in securities rated in the
lowest ratings categories established by Moody's or by S&P. These ratings
indicate that the obligations are speculative and may be in default. In
addition, the Funds may invest in unrated securities of comparable quality
subject to the restrictions stated in the Funds' Prospectus.
Certain Risk Factors Relating to High-Yield, High-Risk Securities
The descriptions below are intended to supplement the discussion in the
Prospectus.
Growth of High-Yield, High-Risk Bond Market
The widespread expansion of government, consumer and corporate debt within the
U.S. economy has made the corporate sector more vulnerable to economic downturns
or increased interest rates. Further, an economic downturn could severely
disrupt the market for lower rated bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest. The market for lower-rated securities may be less active, causing
market price volatility and limited liquidity in the secondary market. This may
limit the Funds' ability to sell such securities at their market value. In
addition, the market for these securities may 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.
Sensitivity to Interest Rate and Economic Changes
Lower rated bonds are somewhat sensitive to adverse economic changes and
corporate developments. During an economic down turn or substantial period of
rising
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interest rates, highly leveraged issuers may experience financial stress that
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, the Funds may incur losses
or expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and change can be expected to result in increased
volatility of market prices of high-yield bonds and the Funds' net asset values.
Payment Expectations
High-yield, high-risk bonds may contain redemption or call provisions. If an
issuer exercised these provisions in a declining interest rate market, the Funds
would have to replace the securities with a lower yielding security, resulting
in a decreased return for investors. Conversely, a high-yield, high-risk bond's
value will decrease in a rising interest rate market, as will the value of the
Funds' assets. If the Funds experience significant unexpected net redemptions,
this may force them to sell high-yield, high-risk bonds without regard to their
investment merits, thereby decreasing the asset base upon which expenses can be
spread and possibly reducing the Funds' rates of return.
Liquidity and Valuation
There may be little trading in the secondary market for particular bonds, which
may affect adversely the Funds' ability to value accurately or dispose of such
bonds. Adverse publicity and investor perception, whether or not based on
fundamental analysis, may decrease the values and liquidity of high-yield,
high-risk bonds, especially in a thin market.
Taxes
The Funds may purchase debt securities (such as zero-coupon, pay-in-kind or
other types of securities) that contain original issue discounts. Original issue
discount that accrues in a taxable year is treated as earned by each Fund and
therefore is subject to the distribution requirements of the tax code even
though the such Fund has not received any interest payments on such obligations
during that period. Because the original issue discount earned by the Funds in a
taxable year may not be represented by cash income, the Funds may have to
dispose of other securities and use the proceeds to make distributions to
shareholders.
Mortgage- and Asset-Backed Securities
The Funds 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
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one of the top two categories by S&P or 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 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 Funds 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
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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 card holders.
Obligations of Supranational Agencies
The Funds may purchase obligations of supranational agencies. Currently, the
Funds only intend 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
and Nordic Investment Bank.
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,
a 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 a 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.
A 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.
A 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 a 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.
A Fund may write covered call options as a means of increasing the yield on its
fund and as a means of providing limited protection against decreases in its
market value. When a 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 realized as profit the premium received for such
option. When a call option written by a Fund is exercised, the Fund will be
required to sell the underlying securities to the option holder
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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 a 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.
A 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.
A 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 a 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 a 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.
A 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. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a 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 a 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.
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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 a 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.
REITS
The Funds may invest in real estate investment trusts ("REITs"), which pool
investors' funds for investment in income producing commercial real estate or
real estate related loans or interests.
A REIT is not taxed on income distributed to its shareholders or unitholders if
it complies with regulatory requirements relating to its organization,
ownership, assets and income, and with a regulatory requirement that it
distribute to its shareholders or unitholders at least 95% of its taxable income
for each taxable year. Generally, REITs can be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their
assets directly in real property and derive their income primarily from rents
and capital gains from appreciation realized through property sales. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
their income primarily from interest payments. Hybrid REITs combine the
characteristics of both Equity and Mortgage REITs. Shareholders in the Funds
should realize that by investing in REITs indirectly through the Funds, he or
she will bear not only his or her proportionate share of the expenses of the
Fund, but also indirectly, similar expenses of underlying REITs.
A Fund may be subject to certain risks associated with the direct investments of
the REITs. REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. Mortgage REITs may be
affected by the quality of the credit extended. Furthermore, REITs are dependent
on specialized management skills. Some REITs may have limited diversification
and may be subject to risks inherent in financing a limited number of
properties. REITs depend generally on their ability to generate cash flow to
make distributions to shareholders or unitholders, and may be subject to
defaults by borrowers and to self-liquidations. In addition, the performance of
a REIT may be affected by its failure to qualify for tax-free pass-through of
income under the Code or its failure to maintain exemption from registration
under the 1940 Act.
Repurchase Agreements
Repurchase agreements are agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the
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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 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 a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a 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 a Fund, the Trust's Custodian or its agent must take actual or constructive
possession of the underlying collateral. However, if the seller defaults, a 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, a 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.
Securities of Foreign Issuers
The Funds may invest in securities of foreign issuers. In addition, the Funds
may invest in American Depositary Receipts. These instruments may subject a Fund
to investment risks that differ in some respects from those related to
investments in obligations of U.S. domestic issuers. These include risks of
adverse political and economic developments (including possible governmental
seizure or nationalization of assets), the possible imposition of exchange
controls or other governmental restrictions, less uniformity in accounting and
reporting requirements, the possibility that there will be less information on
such securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, and may be less marketable than comparable U.S. securities. The
value of a Fund's investments denominated in foreign currencies will depend on
the relative strengths of those currencies and the U.S. dollars, and the Fund
may be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the U.S. dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and
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net investment income and gains if any, to be distributed to shareholders by a
Fund. Foreign branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements than those applicable to domestic branches of
U.S. banks. Furthermore, emerging market countries may have less stable
political environments than more developed countries. Also, it may be more
difficult to obtain a judgment in a court outside the United States.
Swaps, Caps, Floors and Collars
In a typical interest rate swap, one party agrees to make regular payments equal
to a floating interest rate times a "notional principal amount," in return for
payments equal to a fixed rate times the same amount, for a specific period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, the buyer of an interest rate cap obtains
the right to receive payments to the extent that a specific interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate falls
below an agreed-upon level. An interest rate collar combines elements of buying
a cap and selling a floor. In swap agreements, if a Fund agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investment and their share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risk assumed. As a result,
swaps can be highly volatile and have a considerable impact on a Fund's
performance.
Swap agreements are subject to risks related to the counterparty's ability to
perform, and may decline in value if the counterparty's creditworthiness
deteriorates. A Fund may also suffer losses if it is unable to terminate
outstanding swap agreements or reduce its exposure through offsetting
transactions. Any obligation a Fund may have under these types of arrangements
will be covered by setting aside cash or liquid securities in a segregated
account. A Fund will enter into swaps only with counterparties believed to be
creditworthy.
Variable or Floating Rate Instruments
The Funds 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
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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 Funds. 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 a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its investment portfolio, a Fund
may dispose of a when-issued security or forward commitment prior to settlement
if it deems appropriate.
INVESTMENT LIMITATIONS
Fundamental Policies
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of each Fund which cannot be changed with respect to a Fund
without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a 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.
No Fund may:
1. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that each 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.
2. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment
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trusts), commodities, or commodities contracts; and (ii) commodities
contracts relating to financial instruments, such as financial futures
contracts and options on such contracts.
3. 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").
4. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
5. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated 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 each Fund
and may be changed with respect to a Fund by the Board of Trustees.
No Fund may:
1. Pledge, mortgage or hypothecate assets except to secure borrowings
permitted by the Fund's fundamental limitation on borrowing (set forth in
the Prospectus).
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that each 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. Notwithstanding the
foregoing, the Strategic High Yield Fund may purchase securities on margin
in accordance with the investment policies set forth in the Prospectus.
4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act.
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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.
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. Rule 144A securities are securities
that are traded in the institutional market pursuant to an exemption from
registration. Rule 144A securities may not be as liquid as exchange-traded
securities since they may only be resold to certain qualified institutional
buyers.
THE ADVISER
The Trust and Penn Capital Management Company, Inc. (the "Adviser"), have
entered into an advisory agreement (the "Advisory Agreement") with respect to
the Funds. The Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in carrying out its duties, but 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 (except as provided under provisions of applicable law).
The Advisory Agreement provides that if, for any fiscal year, the ratio of
expenses of any Fund (including amounts payable to the Adviser but excluding
interest, taxes, brokerage, litigation, and other extraordinary expenses)
exceeds applicable limitations, the Adviser will bear the amount of such excess.
The Adviser will not be required to bear expenses of any 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 any 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 that 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 any Fund,
by a majority of the outstanding shares of that 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.
S-14
<PAGE>
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 ("SIMC"), a
wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the
owner of all beneficial interests in the Administrator. SEI Investments and its
subsidiaries and 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
or sub-administrator to the following other mutual funds: 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, 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, 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.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, and the Trust are parties to a distribution agreement (the
"Distribution Agreement"). The Distributor receives no compensation for
distribution of shares of the Funds.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and must be renewed annually
thereafter. 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
S-15
<PAGE>
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, 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 Santa Barbara Group of Mutual
Funds, Inc., are distributed by SEI Investments Distribution Co.
ROBERT E. TURNER (DOB 11/26/56) - Trustee* - Chairman and Chief Investment
Officer of Turner Investment Partners, Inc. ("Turner"), 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* - Senior Vice President, Investment
Adviser and Portfolio Manager with Clover Capital Management Inc., since 1984.
Principal of CCM Securities Inc.
S-16
<PAGE>
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, 1994-1995. Associate, Winston and
Strawn, 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, 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, 1989-1994.
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.
JAMES W. JENNINGS (DOB 01/15/37) - Secretary - Partner, Morgan, Lewis & Bockius
LLP, counsel to the Trust, Turner, 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, Turner, Administrator and Distributor.
S-17
<PAGE>
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, Turner, 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 Compensation
From Benefits Benefits From
Registrant for Accrued as Upon Registrant and
the Fiscal Part of Fund Retirement Fund Complex
Year Ended Expenses Paid to
September Trustees for
30, 1997 the 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
- -----------------------------------------------------------------------------------------------------------------
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>
S-18
<PAGE>
(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 a 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 a 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-19
<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 each 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 a 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 a 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 any 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 each 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, but may utilize a pricing
matrix. 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 Funds and their 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 discussion of federal income tax consequences is based on the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations issued
thereunder as in
S-20
<PAGE>
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.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, each 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, each 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 a
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 a 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),
each Fund will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute 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.
Any gain or loss recognized on a sale, exchange or redemption of shares of a
Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than eighteen months, mid-term capital gain if
the share have been held for more than twelve months but not more than eighteen
months, and otherwise will be treated as short-term capital gain or loss.
However, if shares on which a shareholder has received
S-21
<PAGE>
a net capital gain distribution are subsequently sold, exchanged or redeemed and
such shares have been held for six months or less, any loss recognized will be
treated as a long-term capital loss to the extent of the net capital gain
distribution. Long-term capital gains are currently taxed at a maximum rate of
20%, mid-term capital gains are currently taxed at a maximum rate of 28%, and
short-term capital gains are currently taxed at ordinary income tax rates.
In certain cases, a 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 any 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 a Fund's current and accumulated earnings and profits, and such distributions
will generally be eligible for the corporate dividends-received deduction.
Funds may, in certain circumstances involving tax-free reorganizations, accept
securities that are appropriate investments as payment for Fund shares (an
"In-Kind Purchase"). An In-Kind Purchase may result in adverse tax consequences
under certain circumstances to either the investors transferring securities for
shares (an "In-Kind Investors") or to investors who acquire shares of the Fund
after a transfer ("new shareholders"). As a result of an In-Kind Purchase, the
Funds 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 Funds acquire 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 Funds, 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 Funds.
S-22
<PAGE>
State Taxes
No Fund is liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by any 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 Funds. 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, a Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
The Funds have 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 Funds, the Adviser is responsible
for placing the orders to execute transactions for the Funds. In placing orders,
it is the policy of the Adviser to seek 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 Funds will not necessarily be paying the lowest
spread or commission available.
The money market instruments in which the Funds 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 Funds will primarily consist of dealer spreads
and underwriting commissions.
The Adviser may, consistent with the interests of the Funds, 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
S-23
<PAGE>
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, a 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 that Fund.
Although they are not expected to do so, the Funds may execute brokerage or
other agency transactions through the Distributor for commissions in conformity
with the 1940 Act, the Securities Exchange Act of 1934 and rules promulgated by
the SEC. Under these provisions, the Distributor is permitted to receive and
retain compensation for effecting portfolio transactions for a Fund on an
exchange if a written contract is in effect between the Trust and the
Distributor expressly permitting the Distributor to receive and retain such
compensation. These rules further require that commissions paid to the
Distributor by a Fund for exchange transactions 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 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 no Fund markets its shares through intermediary brokers or dealers, it
is not the Funds' 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 a
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.
S-24
<PAGE>
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents an
equal proportionate interest in that portfolio with each other share. Shares
are entitled upon liquidation to a pro rata share in the net assets of the
portfolio. 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 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.
5% SHAREHOLDERS
As of January 5, 1998, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the shares of the Portfolios. The Trust believes that most of the shares
referred to below
S-25
<PAGE>
were held by the persons indicated in accounts for their fiduciary, agency, or
custodial customers.
Penn Capital Select Financial Services Fund
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Funds
- ---------------- ---------------- ----------------
<S> <C> <C>
Penn Capital Management 10,172.51 33.45%
52 Haddonfield-Berlin Road
Cherry Hill, NJ 08034-3527
Carolyn Turner 8,344.96 27.44%
Robert E. Turner Jr. Trust
9 Horseshoe Lane
Paoli, PA 19301-1909
Rafik Gabriel 4,900.05 16.11%
7268 Franklin Avenue
Los Angeles, CA 90046-3073
John S. Witruk 3,725.12 12.25%
470 Allison Street
Elmhurst, IL 60126-4803
</TABLE>
FINANCIAL INFORMATION
Ernst & Young LLP has served as the Funds independent auditor since inception.
S-26
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba 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.
B 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.
Caa 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.
Ca 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.
C 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.
A-1
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DESCRIPTION OF STANDARD & POOR'S LONG-TERM RATINGS
Investment Grade
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated 'BBB' 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.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. '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 or major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions would likely impair capacity
or willingness to pay interest and repay principal. The 'B' rating
category also is used for debt subordinated to senior debt that is
assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a current identifiable vulnerability to default,
and is dependent on favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The 'CCC' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'B' or
'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating.
A-2
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C The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI Debt rated 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt is rated 'D' when the issue is in payment default, or the obligor
has filed for bankruptcy. The 'D' rating is used when interest or
principal payments are not made on the date due, even if the applicable
grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
DESCRIPTION OF DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA- may vary slightly from time to time because of economic conditions.
A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during economic
cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according
BB- to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be
B met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
A-3
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DESCRIPTION OF FITCH'S LONG-TERM RATINGS
Investment Grade Bond
AAA Bonds 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.
AA Bonds 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+'.
A Bonds 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.
BBB Bonds 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.
Speculative grade bond
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD,
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these
bonds, and 'D' represents the lowest potential for recovery.
A-4
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DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations for which there is 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
substantially.
AA Obligations for which there is a very low expectation of investment
risk. 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.
A Obligations for which there is a low expectation of investment risk.
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.
BBB Obligations for which there is currently a low expectation of
investment risk. 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 other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC Obligations which are highly speculative or which have a high risk of
default.
C Obligations which are currently in default.
DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS
Investment Grade
AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
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BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
Non-Investment Grade
BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the
ability to adequately service debt obligations.
B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.
CCC Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
CC "CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy
or reorganization.
D Default
A-6
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