CONTENTS
- --------------------------------------------------------------------------------
2 Letter to Shareholders
3 Management's Discussion of Performance
6 Financial Statements
14 Notes to Financial Statements
17 Report of Independent Auditors
18 Notice to Shareholders
TIP FUNDS
- --------------------------------------------------------------------------------
The TIP Funds offer a series of 19 no-load mutual funds to institutional
investors. The minimum initial investment in a TIP Fund is $100,000.
Penn Capital Management Company, Inc., based in Cherry Hill, N.J., serves
as the investment adviser to two and Sub-Adviser to one of the TIP Funds. The
firm, founded in 1987, invests more than $400 million in fixed-income and equity
portfolios on behalf of individuals and institutions. Penn Capital Management
manages the Penn Capital Strategic High Yield Bond Fund. A separate investment
firm manages the other mutual funds in the TIP Funds family.
Penn Capital Management Company, Inc. also manages the Penn Capital Select
Financial Services Fund, a mutual fund in the TIP Funds family.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
TIP Funds shareholders receive annual and semiannual reports and quarterly
account statements. Shareholders who have questions about their accounts may
call a toll-free telephone number, 1-888-TIP-7654. Or they may write to TIP
Funds, Box 419805, Kansas City, Missouri 64141.
<PAGE>
TO OUR SHAREHOLDERS:
- --------------------------------------------------------------------------------
The Penn Capital Strategic High Yield Bond 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 instruments.
The Fund commenced operations on March 1, 1998 and has total assets of $41.7
million as of September 30, 1999. Since its inception, the Fund posted an
annualized total return of 0.50% compared to a negative 0.45% for the Credit
Suisse First Boston High Yield Index. For the period October 1, 1998 through
September 30, 1999, the Fund posted a total return of 8.65% compared to 3.95%
for the Credit Suisse First Boston Index.
I want to personally thank all our shareholders for their continued support.
Penn will continue to rely upon its strong credit research capabilities, and are
confident that our high yield investment style and experience will justify your
decision to entrust your assets to us.
Sincerely,
/s/ signature omitted
- -------------------------------------
Richard A. Hocker
Chief Investment Officer
Penn Capital Management Company, Inc.
2
<PAGE>
MANAGEMENT'S DISCUSSION OF PERFORMANCE
Penn Capital Strategic High Yield Bond Fund
- --------------------------------------------------------------------------------
Market Review
Penn is pleased to report that the twelve months ended September 30, 1999
performance of the Penn Capital Strategic High Yield Bond Fund represents to our
investors value-added versus the performance of the broader high yield bond
market. This was achieved in a market, however, that can be characterized as
disappointing relative to the long-term performance record of high yield bonds.
Fiscal year 1999 began with global financial markets rebounding, spurred-on by
the Federal Reserve's lowering of the federal funds rate three times. This
action was in response to the global fixed income crisis that occurred in the
third quarter of 1998 and injected much needed liquidity into world financial
markets. High yield bonds performed well through this recovery period while
high-grade bonds were trounced by increasing concern over rising interest rates.
Positive performance continued through the second calendar quarter of 1999, but
turned negative during the quarter ended September 30, 1999. Factors
contributing to the market's performance during the third calendar quarter was
the market's concerns over credit quality, liquidity, and Y2K. This resulted in
high yield mutual fund outflows and the resistance of high yield market makers
to ensure market liquidity.
Our Investment Approach
The Fund's High Yield Style is a total return style emphasizing current income
and capital appreciation. The Fund seeks securities that are undervalued due to
market inefficiencies and equity like market rotation. The Fund divides a
portfolio into core and non-core holdings. The core of the portfolio is managed
to achieve consistent interest income while minimizing principal loss. This is
done by investing in single B-rated cash pay securities. Diversification is a
key tenet, with 1%-2% company positions taken.
The non-core portion of the portfolio is managed with the primary goal being to
achieve above market returns via interest income and capital appreciation. This
portion is managed with higher concentrations in undervalued issues in the
middle tier, lower tier and special situation universe. Security selection is a
key tenet, with 2%-5% company positions taken.
Factors Relating to Fiscal 1998 Performance
The Penn Capital Strategic High Yield Bond Fund outperformed its benchmark, the
Credit Suisse First Boston High Yield Index. For the period October 1, 1998
through September 30, 1999, the Fund posted a total return of 8.65% compared to
3.95% for the Index. Strategic overweightings in key industries such as Mobile
Telecommunications, Energy and Media played a large role in the Fund's
outperformance. Most importantly, Penn's credit research capabilities have
allowed the Fund to avoid defaulted issues and other major credit
disappointments that can have an adverse impact on a Fund's total return.
3
<PAGE>
In Summary
Penn believes current market conditions represent an opportunity, again, to
provide above average returns in the Year 2000. Factors to consider include:
o The Moody's high yield bond default rate has trended upward throughout
1999. This is not a surprise to Penn given the stress placed on commodity
based industries in the second half of 1998. Default rates are essentially
a lagging indicator. Historically, the high yield bond market has performed
well in the year in which default rates have exceeded historical averages,
having moved into recovery mode.
o Increases in the Producer Price Index in 1994 inspired inflation fears and
rising rates. The high yield bond market followed up the interest rate
volatility of 1994 with very strong returns in 1995.
o The current Credit Suisse First Boston High Yield Index spread to treasury
is very attractive from an historical perspective. Analytical measures
indicate that investors are still being overly compensated for the inherent
level of risk, based on current economic and market conditions.
o Y2K concerns have caused high yield mutual fund managers to raise cash
positions in order to meet the redemptions of nervous retail investors.
These funds, along with the reinvestment of income, will be redeployed into
the market in December and January, creating a strong technical boost as we
move into Year 2000.
4
<PAGE>
Comparison of Change in the Value of a $10,000 Investment in the
Penn Capital Strategic High Yield Bond Fund, versus
the C.S. First Boston High Yield Index
[GRAPHIC OMITTED]
In the printed version of the document, a line graph appears which depicts the
following plot points:
2/28/98 10,000 10,000
9/30/98 9,278 9,552
9/30/99 10,080 9,929
Penn Capital Strategic High Yield Bond Fund
C.S. First Boston High Yield Index
These figures represent past performance. Past performance is no guarantee of
future results. The investment return and principal value of an investment will
fluctuate, so an investor's shares, when redeemed, may be worth more or less
than their original cost.
(1) The Penn Capital Strategic High Yield Bond Fund commenced operations on
March 1, 1998.
5
<PAGE>
Statement of Net Assets Penn Capital Funds
September 30, 1999
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Corporate Bonds (67.8%)
Aerospace & Defense (0.4%)
Compass Aerospace (A)
10.125%, 04/15/05 $ 185 $ 173
------
Airlines (2.5%)
Aircraft Service International
Group
11.000%, 08/15/05 250 247
Constellation Finance (A)
9.800%, 12/14/02 455 426
Valujet
10.250%, 04/15/01 435 384
------
1,057
------
Apparel/Textiles (1.4%)
Tropical Sportswear
International, Ser A
11.000%, 06/15/08 630 565
------
Automotive & Truck Parts (3.4%)
Exide
10.000%, 04/15/05 350 347
Exide Cv (A)
2.900%, 12/15/05 1,295 733
Hayes Wheels International
11.000%, 07/15/06 75 77
JH Haefner
10.000%, 05/15/08 245 237
------
1,394
------
Broadcasting, Newspapers &
Advertising (2.4%)
Garden State Newspapers, Ser B
8.750%, 10/01/09 185 173
Jones International Network
11.750%, 07/01/05 845 767
Perry-Judd
10.625%, 12/15/07 75 68
------
1,008
------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
Cable (1.1%)
Northland Cable Television
10.250%, 11/15/07 $ 355 $ 355
Scott Cable Communications,
Ser B (B)
07/18/02 165 33
Telewest Communications
9.625%, 10/01/06 90 91
------
479
------
Communications Equipment (0.5%)
Williams Communications Group
10.875%, 10/01/09 200 198
------
Containers Paper & Plastic (1.5%)
Packaged Ice
9.750%, 02/01/05 235 207
Sweetheart Cup
9.625%, 09/01/00 425 418
------
625
------
Cosmetics & Toiletries (3.3%)
Chattem, Ser B
8.875%, 04/01/08 60 57
Drypers, Ser B
10.250%, 06/15/07 1,160 971
Revlon Consumer Products
8.125%, 02/01/06 370 333
------
1,361
------
Electronics Connectors (0.8%)
HCC Industries
10.750%, 05/15/07 405 343
------
Environmental Services (2.5%)
Allied Waste North America, Ser B
7.375%, 01/01/04 470 432
Safety-Kleen Services
9.250%, 06/01/08 270 267
Safety-Kleen Services (A)
9.250%, 05/15/09 55 54
Waste Systems
11.500%, 01/15/06 305 303
------
1,056
------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Statement of Net Assets Penn Capital Funds
September 30, 1999
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Food, Beverage & Tobacco (1.6%)
Heileman Acquisition (C)
01/31/04 $ 20 --
Pantry
10.250%, 10/15/07 325 $ 321
Tom's Foods
10.500%, 11/01/04 410 357
------
678
------
Food/Wholesale Distribution (1.3%)
Ameriserve Food
8.875%, 10/15/06 125 98
10.125%, 07/15/07 475 322
Ameriserve Financial (A)
12.000%, 09/15/06 125 122
------
542
------
Gaming (5.4%)
Alliance Gaming, Ser B
10.000%, 08/01/07 520 378
Argosy Gaming (A)
10.750%, 06/01/09 750 769
Autotote, Ser B
10.875%, 08/01/04 185 193
Hollywood Park/Operating, Ser B
9.500%, 08/01/07 280 274
Majestic Star Casino (A)
10.875%, 07/01/06 100 97
Mohegan Tribal Gaming
8.750%, 01/01/09 140 137
Venetian Casino/Lv Sands (D)
10.000%, 11/15/05 525 403
------
2,251
------
Hotels & Lodging (0.1%)
Red Roof Inns
9.625%, 12/15/03 50 51
------
Instruments Scientific (0.2%)
Fisher Scientific International
9.000%, 02/01/08 85 79
------
Machinery (0.5%)
Thermadyne Manufacturing
9.875%, 06/01/08 280 229
------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
Manufacturing (2.5%)
Decora Industries, Ser B
11.000%, 05/01/05 $ 325 $ 307
Prestolite Electric
9.625%, 02/01/08 85 76
Sun World International, Ser B
11.250%, 04/15/04 260 270
Unicco Service, Ser B
9.875%, 10/15/07 435 395
------
1,048
------
Medical Products & Services (4.4%)
Global Health Services
11.000%, 05/01/08 1,415 1,029
Medpartners
6.875%, 09/01/00 395 374
Quorum Health
8.750%, 11/01/05 135 123
Unilab
11.000%, 04/01/06 300 335
------
1,861
------
Metal/Mining Other (0.6%)
TVX Gold Cv
5.000%, 03/28/02 330 262
------
Oil Field Services (0.3%)
Key Energy Services, Ser B
14.000%, 01/15/09 125 131
------
Petroleum & Fuel Products (3.5%)
Derlan Manufacturing
10.000%, 01/15/07 61 58
Houston Exploration, Ser B
8.625%, 01/01/08 375 362
Ocean Rig Norway
10.250%, 06/01/08 750 553
Parker Drilling Cv
5.500%, 08/01/04 150 116
Parker Drilling, Ser D
9.750%, 11/15/06 340 328
Pride International (D)
6.003%, 04/24/18 135 45
------
1,462
------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Statement of Net Assets Penn Capital Funds
September 30, 1999
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Petroleum Refining (3.3%)
Great Lakes Carbon, Ser B
10.250%, 05/15/08 $ 335 $ 314
Petro Stopping Ctr/Finl
10.500%, 02/01/07 225 223
Plains Resources, Ser B
10.250%, 03/15/06 225 227
RBF Finance
11.375%, 03/15/09 295 311
Transamerican Refining (A)
15.000%, 12/01/03 321 313
------
1,388
------
Propane Distribution (0.1%)
Ferrellgas Partners, Ser B
9.375%, 06/15/06 45 45
------
Real Estate/Building (1.1%)
BF Saul REIT, Ser B
9.750%, 04/01/08 225 213
Fortress Group
13.750%, 05/15/03 340 250
------
463
------
Restaurants (0.0%)
Advantica Restaurant Group
11.250%, 01/15/08 1 1
------
Retail (2.6%)
Finlay Enterprises
9.000%, 05/01/08 465 436
K-Mart, Ser K-1
8.990%, 07/05/10 185 187
Phar-Mor
11.720%, 09/11/02 465 478
------
1,101
------
Telephones &
Telecommunication (15.4%)
Clearnet Communications (D)
12.315%, 12/15/05 315 296
E.Spire Communications (D)
19.165%, 07/01/08 335 124
21.488%, 11/01/05 340 204
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
Golden Sky (A) (D)
13.035%, 03/01/07 $1,585 $ 917
Hyperion Telecommunication,
Ser B (D)
12.234%, 04/15/03 250 211
ICG Services (D)
12.909%, 05/01/08 160 91
ICG Holdings (D)
14.113%, 05/01/06 175 133
Level 3 Communications
9.125%, 05/01/08 100 91
Level 3 Communications (D)
12.455%, 12/01/08 275 154
McCaw International (D)
16.268%, 04/15/07 1,380 826
Microcell Telecommunications,
Ser B (D)
11.848%, 06/01/06 735 615
Nextel Partners (D)
13.333%, 02/01/09 340 199
Nextel Communications (D)
10.385%, 02/15/08 310 217
NTL Communications, Ser B
10.000%, 02/15/07 265 271
11.500%, 10/01/08 70 76
Omnipoint
11.625%, 08/15/06 490 506
Omnipoint, Ser A
11.625%, 08/15/06 195 201
Powertel (D)
11.755%, 02/01/06 200 173
Primus Telecommunications
11.750%, 08/01/04 215 211
Satellites Mexicanos, Ser B
10.125%, 11/01/04 445 333
Talton Holdings, Ser B
11.000%, 06/30/07 445 409
Viatel
11.500%, 03/15/09 210 202
------
6,460
------
Transportation/Non-Air (5.1%)
Atlantic Express
10.750%, 02/01/04 410 399
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Statement of Net Assets Penn Capital Funds
September 30, 1999
Shares/Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Global Ocean Carriers (B)
10.250%, 07/15/07 $ 105 $ 29
Holt Group Sr Nts
9.750%, 01/15/06 1,200 830
Sea Containers
7.875%, 02/15/08 375 334
Stage Coach Holdings, Ser B
9.375%, 07/01/07 80 85
TFM SA DE Cv
10.250%, 06/15/07 515 449
------
2,126
------
Total Corporate Bonds
(Cost $29,813) 28,437
------
Preferred Stocks (11.9%)
Aerospace & Defense (0.1%)
GPA Cv* 46 46
------
Banks (0.3%)
Astoria Financial 5,275 136
Fidelity Federal Bank 30 --
------
136
------
Broadcasting, Newspapers &
Advertising (0.9%)
Pegasus Communications* 3,700 370
------
Cable (1.4%)
CSC Holdings 4,725 512
CSC Holdings PIK* 766 83
------
595
------
Diversified Operations (0.5%)
Nebco Evans Holding PIK* 5,180 192
------
Finance (0.0%)
Crown Castle Intl Corp* 3 4
------
Machinery (0.2%)
Clark Material Handling* 1,165 90
------
Value
Shares (000)
- --------------------------------------------------------------------------------
Medical Products &
Services (1.2%)
Laboratory of America* 3,895 $ 218
MedPartners 34,070 287
------
505
------
Retail (0.0%)
Jitney-Jungle* 750 8
------
Telephones &
Telecommunications (7.3%)
Echostar Communications 3,355 1,301
Hyperion Telecom* 973 866
Nextel Communications PIK* 8,840 866
------
3,033
------
Total Preferred Stocks
(Cost $3,708) 4,979
------
Common Stocks (9.4%)
Aerospace & Defense (0.6%)
BE Aerospace* 21,475 256
------
Apparel/Textiles (1.2%)
Dan River, Cl A* 46,570 303
Pillowtex 26,115 196
------
499
------
Automotive & Truck Parts (0.5%)
Exide 21,270 203
------
Broadcasting, Newspapers &
Advertising (0.9%)
Pegasus Communications* 8,061 364
------
Comestrics & Toiletries (0.5%)
Drypers* 73,705 219
------
Environmental Services (0.4%)
Waste Systems International,
Cl B* 25,800 148
------
Food, Beverage & Tobacco (2.4%)
Dr. Pepper Bottling Holdings,
Cl A* 33,300 999
------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Statement of Net Assets Penn Capital Funds
September 30, 1999
Shares/Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Gaming (0.1%)
Players International* 7,600 $ 56
------
Industrial (0.1%)
Haynes Holdings* (A) 6,960 35
------
Medical Products & Services (0.9%)
Unilab* 67,925 386
------
Petroleum & Fuel Products (0.6%)
Nabors Industries* 10,411 260
------
Telephones &
Telecommunication (1.2%)
Clearnet, Cl A* 27,950 505
------
Total Common Stocks
(Cost $4,012) 3,930
------
Warrants (0.0%)
Allegiance Telecom* 35 --
------
Total Warrants
(Cost $0) --
------
Repurchase Agreement (10.4%)
Morgan Stanley,
5.25%, dated 09/30/99, matures
10/01/99, repurchase price
$4,353,693, (collateralized by
U.S. Treasury Notes,
par value $4,322,000, 6.50%,
matures 08/15/05: market
value $4,441,242) $ 4,354 $4,354
------
Total Repurchase Agreement
(Cost $4,354) 4,354
------
Total Investments (99.5%)
(Cost $41,887) 41,700
------
Other Assets and Liabilities, Net (0.5%) 222
------
Value
(000)
- --------------------------------------------------------------------------------
Net Assets:
Portfolio Shares (unlimited
authorization -- no par value)
based on 4,754,987 outstanding
shares of beneficial interest $ 45,372
Accumulated net realized loss
on investments (3,263)
Net unrealized depreciation on
investments (187)
--------
Total Net Assets (100.0%) $ 41,922
========
Net Asset Value, Offering and
Redemption Price Per Share $8.82
========
*Non-income producing security
(A) Security sold with in the terms of a private placement memorandum, exempt
from registration under section 144A of the Securities Act of 1933, as
amended, and may be sold only to dealers in the program or other
"accredited investors".
(B) Security in default on interest payments.
(C) Security in default on interest and principal payments.
(D) Delayed Interest (Step-Bonds) -- Represents securities that remain
zero-coupon securities until a predetermined date at which time the stated
coupon rate becomes effective and interest becomes payable at regular
intervals. The interest rate disclosed represent yields at September 30,
1999, based upon the estimated timing and amount of futures interest and
principal payments.
Cl -- Class
Cv -- Convertible
PIK -- Payment-in-Kind
REIT -- Real Estate Investment Trust
Ser -- Series
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Statement of Operations (000) Penn Capital Funds
September 30, 1999
Penn Capital Strategic
High Yield Bond Fund
----------------------
Investment Income:
Interest ..................................................... $3,513
Dividends..................................................... 95
- --------------------------------------------------------------------------------
Total Investment Income..................................... 3,608
- --------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees ..................................... 203
Investment Advisory Fee Waiver ............................... (170)
Administrator Fees ........................................... 68
Custodian Fees ............................................... 10
Transfer Agent Fees .......................................... 24
Professional Fees ............................................ 25
Trustee Fees ................................................. 4
Registration Fees ............................................ 35
Pricing Fees ................................................. 4
Printing Fees ................................................ 43
Amortization of Deferred Organizational Costs................. 4
Insurance and Other Fees...................................... 1
- --------------------------------------------------------------------------------
Total Expenses ............................................. 251
- --------------------------------------------------------------------------------
Net Investment Income .................................. 3,357
- --------------------------------------------------------------------------------
Net Realized Loss From Securities Sold ....................... (2,506)
Net Unrealized Appreciation
of Investment Securities ................................... 2,090
- --------------------------------------------------------------------------------
Net Realized and Unrealized Loss
on Investments ............................................. (416)
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ............................................ $2,941
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets (000) Penn Capital Funds
Penn Capital Strategic
High Yield Bond Fund
----------------------------
10/1/98 thru 3/1/98 thru
9/30/99 9/30/98 (1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Activities:
Net Investment Income ........................................... $ 3,357 $ 728
Net Realized Loss on Securities Sold............................. (2,506) (757)
Net Unrealized Appreciation (Depreciation) of
Investment Securities ......................................... 2,090 (2,277)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations ............................................. 2,941 (2,306)
- --------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ........................................... (3,364) (721)
- --------------------------------------------------------------------------------------------------
Total Distributions ........................................... (3,364) (721)
- --------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ..................................... 35,705 9,446
Proceeds from Shares Issued in Lieu of Cash Distributions........ 2,157 395
Increase from In-Kind Transfers.................................. -- 11,169
Cost of Shares Redeemed.......................................... (13,359) (141)
- --------------------------------------------------------------------------------------------------
Increase in Net Assets From
Capital Share Transactions..................................... 24,503 20,869
- --------------------------------------------------------------------------------------------------
Total Increase in Net Assets .................................. 24,080 17,842
- --------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period............................................ 17,842 --
- --------------------------------------------------------------------------------------------------
End of Period(2) .............................................. $41,922 $17,842
==================================================================================================
Shares Issued and Redeemed:
Issued .......................................................... 3,991 923
Issued in Lieu of Cash Distributions............................. 241 44
Issued in connection with In-Kind Transfers...................... -- 1,047
Redeemed......................................................... (1,478) (13)
- --------------------------------------------------------------------------------------------------
Net Increase in Share Transactions............................... 2,754 2,001
- --------------------------------------------------------------------------------------------------
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commenced operations on March 1, 1998.
(2) Includes undistributed net investment income of $7 as of September 30, 1998.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights Penn Capital Funds
For a Share Outstanding Throughout the Period
Net Realized and Net Net
Asset Unrealized Distributions Distributions Asset Assets Ratio
Value Net Loss from Net from Value End of Expenses
Beginning Investment on Investment Capital End of Total Period to Average
of Period Income Investments Income Gains Period Return(1) (000) Net Assets
--------- ---------- ------------ ------------- ------------- ------ --------- ------ ----------
- -------------------------------------------
Penn Capital Strategic High Yield Bond Fund
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(3) $ 8.91 0.83 (0.09) (0.83) -- $8.82 8.65% $41,922 0.68%
1998(2) $10.00 0.37 (1.09) (0.37) -- $8.91 (7.23)% $17,842 0.68%*
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income to
Ratio of Net to Average Average
Investment Net Assets Net Assets
Income (Excluding (Excluding Portfolio
to Average Waivers and Waivers and Turnover
Net Assets Reimbursements) Reimbursements) Rate
------------ --------------- --------------- ---------
<S> <C> <C> <C> <C>
1999(3) 9.11% 1.14% 8.65% 96.98%
1998(2) 10.04%* 2.09%* 8.63%* 29.19%
</TABLE>
* Annualized
(1) Returns are for the period indicated and have not been annualized.
(2) Commenced operations on March 1, 1998.
(3) On January 25, 1999, shareholders of the Alpha Select Penn Capital High
Yield Bond Fund (the "Fund") approved a tax-free reorganization under which
all assets and liabilities of the Fund were transferred to the TIP Penn
Capital High Yield Bond Fund.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Notes to Financial Statements Penn Capital Funds
September 30, 1999
1. Organization:
TIP Funds (the "Trust") a Massachusetts business trust, is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end management
investment company with 19 portfolios. The financial statements included herein
are for the Penn Capital Strategic High Yield Bond Fund, (the "Fund"). The Fund
is registered to offer two classes of shares, Institutional Shares and Adviser
Shares. As of September 30, 1999, the advisory shares had not yet commenced
operations. The financial statements of the remaining portfolios are presented
separately. The assets of the Fund are segregated, and a shareholder's interest
is limited to the fund in which shares are held. The Fund's prospectus provides
a description of the Fund's investment objectives, policies, and strategies.
2. Significant Accounting Policies:
The following is a summary of the significant accounting policies followed by
the Fund.
Security Valuation -- Investments in equity securities which are traded on
a national exchange (or reported on the NASDAQ national market system) are
stated at the last quoted sales price if readily available for such equity
securities on each business day; other equity securities traded in the
over-the-counter market and listed equity securities for which no sale was
reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity for which market quotations are
readily available are valued at the most recently quoted bid price. Debt
obligations with 60 days or less remaining until maturity may be valued at
their amortized cost, which approximates market value. Fixed income
securities for which market prices are not readily available may be valued
pursuant to guidelines established by the Board of Trustees.
Federal Income Taxes -- It is the Fund's intention to qualify as a
regulated investment company by complying with the appropriate provisions
of the Internal Revenue Code of 1986, as amended. Accordingly, no provision
for Federal income taxes is required.
Security Transactions and Related Income -- Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Dividend income is recognized on the ex-dividend date, and interest income
is recognized on the accrual basis. Income from payment-in-kind and step-up
bonds is recorded based on the effective interest method. The cost of these
securities has been adjusted to reflect in-kind interest income. Costs used
in determining realized gains and losses on the sales of investment
securities are those of the specific securities sold during the respective
holding period.
Net Asset Value Per Share -- The net asset value per share of the Fund is
calculated on each business day, by dividing the total value of the Fund's
assets, less liabilities, by the number of shares outstanding.
Repurchase Agreements -- Securities pledged as collateral for repurchase
agreements are held by the custodian bank until the respective agreements
mature. Provisions of the repurchase agreements ensure that the market
value of the collateral, including accrued interest thereon, is sufficient
in the event of default of the counterparty. If the counterparty defaults
and the value of the collateral declines or if the counterparty enters an
insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.
14
<PAGE>
Notes to Financial Statements (Concluded) Penn Capital Funds
September 30, 1999
Expenses -- Expenses that are directly related to the Fund are charged to
that Fund. Other operating expenses of the Trust are prorated to the Funds
on the basis of relative daily net assets.
Distributions to Shareholders -- Distributions from net investment income
are declared daily and paid monthly to Shareholders. Any net realized
capital gains on sales of securities are distributed to Shareholders at
least annually.
Dividends from net investment income and distributions from net realized
capital gains are determined in accordance with U.S. Federal income tax
regulations. Certain book/tax differences are either temporary or permanent
in nature. To the extent these differences are permanent, they are charged
or credited to paid-in-capital or accumulated net realized gain, as
appropriate, in the period that the differences arise.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of income and
expenses during the reported period. Actual results could differ from those
estimates.
3. Organization Costs and Transactions with Affiliates:
Organization costs have been capitalized by the Fund and are being amortized
over a period of sixty months. In the event any of the initial shares of the
Fund are redeemed by any holder thereof during the period that such Fund is
amortizing its organizational costs, the redemption proceeds payable to the
holder thereof by the Fund will be reduced by the unamortized organizational
costs in the same ratio as the number of initial shares outstanding at the time
of redemption.
Certain officers of the Trust are also officers of SEI Investments Mutual Funds
Services (the "Administrator") and/or SEI Investments Distribution Co. (the
"Distributor"). Such officers are paid no fees by the Trust for serving as
officers and trustees of the Trust.
4. Administration, Shareholder Servicing, and Distribution Agreements:
The Trust and the Administrator are parties to an agreement under which the
Administrator provides management and administrative services for an annual fee.
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 .09%
of the Trust's average daily net assets up to $250 million, .07% on the next
$250 million, .06% on the next $250 million, .05% on the next $1.25 billion and
.04% of such assets in excess of $2 billion. The Fund is subject to a minimum
annual fee of $65,000 for the first class of shares and $15,000 for each
additional class of shares, which may be reduced at the sole discretion of the
Administrator.
DST Systems, Inc., (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Fund under a transfer agency agreement with
the Trust.
The Trust and the Distributor are parties to a Distribution Agreement dated
April 28, 1996. The Distributor receives no fees for its distribution services
under this agreement.
15
<PAGE>
Notes to Financial Statements (Concluded) Penn Capital Funds
September 30, 1999
5. Investment Advisory Agreement:
For its services, Penn Capital Management Company, Inc. (the "Adviser") is
entitled to a fee, which is calculated daily and paid monthly, at an annual rate
of .55% of the average daily net assets of the Strategic High Yield Bond Fund.
Penn Capital has voluntarily agreed to waive all or a portion of its fee and to
reimburse expenses of the Strategic High Yield Bond 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 .68%. Penn Capital reserves the right, in its
sole discretion, to terminate these voluntary fee waivers and reimbursements at
any time.
6. Investment Transactions:
The cost of security purchases and the proceeds from security sales other than
short-term investments for the period ended September 30, 1999, are as follows
(000):
Penn Capital Strategic
High Yield Bond Fund
----------------------
Purchases ................ $52,401
Sales .................... $32,834
At September 30, 1999, the total cost of securities and the net realized gains
or losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation for securities held by the Fund
at September 30, 1999, are as follows (000):
Penn Capital Strategic
High Yield Bond Fund
----------------------
Aggregate gross unrealized
appreciation ................ $ 2,734
Aggregate gross unrealized
depreciation ................ (2,921)
-------
Net unrealized depreciation $ (187)
=======
For Federal income tax purposes the fund had a capital loss carryforward of
$1,140,491 at September 30, 1999 which may be carried forward and applied
against future capital gains. The capital loss carryforward expires in 2007.
7. In Kind Transfers of Securities (000)
During the period ended September 30, 1998, Strategic High Yield Bond Fund
issued 1,047 shares of beneficial interest in exchange for portfolio securities
from certain accounts managed by Penn Capital at their current value of $11,169,
which includes $243 of net unrealized loss.
8. Concentration of Credit Risk
The Strategic High Yield Bond Fund invests primarily in 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.
16
<PAGE>
Report of Independent Auditors Penn Capital Funds
September 30, 1999
To the Shareholders and Board of Trustees
TIP Funds -- Penn Capital Strategic High Yield Bond Fund
We have audited the accompanying statement of net assets of the TIP Funds -
Penn Capital Strategic High Yield Bond Fund (the "Fund") as of September 30,
1999, and the related statement of operations, and the statements of changes in
net assets and the financial highlights for the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
TIP Funds - Penn Capital Strategic High Yield Bond Fund at September 30, 1999,
the results of its operations, and the changes in its net assets and its
financial highlights for each of the periods indicated therein, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 8, 1999
17
<PAGE>
Notice to Shareholders
of
Penn Capital Funds
(Unaudited)
For shareholders that do not have a September 30, 1999 tax year end, this notice
is for informational purposes only. For shareholders with a September 30, 1999,
please consult your tax advisor as to the pertinence of this notice. For the
fiscal year ended September 30, 1999, each portfolio is designating the
following items with regard to distributions paid during the year.
<TABLE>
<CAPTION>
Long Term
(20% Rate) Ordinary
Capital Gain Income Tax Exempt
Portfolio Distributions Distributions Interest
--------- ------------- ------------- ----------
<S> <C> <C> <C>
TIP Funds - Penn Capital Strategic
High Yield Bond .................. 0.00% 100.00% 0.00%
Total Qualifying
Portfolio Distributions Dividends (1)
---------- ------------- -------------
TIP Funds - Penn Capital Strategic
High Yield Bond .................. 100.00% 1.66%
</TABLE>
- ----------
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction and is reflected as a percentage of "Ordinary
Income Distributors".
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<TABLE>
<S> <C>
Trust
TIP Funds
P.O. Box 419805
Kansas City, MO 64141-6805
Investment Adviser Annual
Penn Capital Management Company, Inc. Report
SEPTEMBER 30, 1999
Distributor
SEI Investments Distribution Co.
Administrator
SEI Investments Mutual Funds Services
Legal Counsel
Morgan, Lewis & Bockius LLP
Independent Auditors [LOGO OMITTED]
Ernst & Young LLP
To open an account, receive account information,
make inquiries, or request literature:
1-800-224-6312 Penn Capital Funds
-------------------------------------------
This report was prepared for shareholders in the Portfolios of the TIP Funds {LOGO]
Penn Capital Funds. It may be distributed to -------------------------------------------
others only if preceded or accompanied by a Penn Capital Strategic High Yield Bond Fund
Prospectus, which contains detailed information. -------------------------------------------
</TABLE>
PEN-F-006-02
