<PAGE>
Annual
Report
SEPTEMBER 30, 1999
[PENN CAPITAL MANAGEMENT LOGO OMITTED]
[PENN CAPITAL FUNDS LOGO OMITTED]
[Portfolios of The TIP Funds LOGO OMITTED]
- --------------------------------------------------------------------------------
Penn Capital Select Financial Services Fund
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<PAGE>
CONTENTS
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2 Letter to Shareholders
3 Management's Discussion of Performance
5 Financial Statements
10 Notes to Financial Statements
13 Report of Independent Auditors
14 Notice to Shareholders
TIP FUNDS
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The TIP Funds offers a series of 19 no-load mutual funds to institutional
investors. The minimum initial investment in a TIP Fund is $2,500.
Penn Capital Management, Inc., based in Cherry Hill, N.J., serves as the
investment advisor to two and Sub-Advisor to one of the TIP Funds. The firm,
founded in 1987, invests more that $400 million in fixed-income and equity
portfolios on behalf of individuals and institutions. Penn Capital Management
manages the Penn Capital Select Financial Services 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
Strategic High Yield Bond 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 Select Financial Services Fund seeks to generate long term
capital appreciation. The Fund invests primarily in common stocks and other
equity securities of U.S. financial services companies that the Fund believes
have above average growth potential or that are undervalued. The Fund also
invests in financial services companies that are potential merger or acquisition
targets.
The Fund commenced operations on October 20, 1997 and has total net assets
of approximately $305 thousand as of September 30, 1999. Since its inception,
the Fund posted an annualized total return of 8.41% compared to a negative 6.53%
for the NASDAQ Bank Index. For the year ended September 30, 1999, the Fund
posted a total return of 9.62% compared to negative 2.81% for the NASDAQ Bank
Index.
I want to personally thank our shareholders for their confidence in us.
While I am disappointed with the total assets of the Fund, I am confident that
our investment style and experience will continue to justify your decision to
entrust your assets to us, and encourage others to do the same.
Sincerely,
/s/ signature omitted
- ---------------------
Richard A. Hocker
Chief Investment Officer
Penn Capital Management Company, Inc.
2
<PAGE>
MANAGEMENT'S DISCUSSION OF PERFORMANCE
Penn Capital Select Financial Services Fund
- --------------------------------------------------------------------------------
Market Review
We are pleased to report that the Penn Capital Select Financial Services Fund
has performed quite well when compared to the NASDAQ Bank Index for the fiscal
year ended September 30, 1999. When analyzing the performance of the financial
services sector, however, it is evident that the last twelve months have been
difficult for the stocks of most financial services companies, specifically
banks.
There are a number of factors that characterize the underperformance of bank
stocks over the past twelve months. Merger and acquisition activity slowed
considerably in 1999. This non-event led performance hungry investors away from
the sector in favor of internet related and large cap growth stocks. The
interest rate environment has also proven to be unfavorable for the sector, as
fears over strong economic growth has led to a sustained increase in interest
rates in 1999. Finally, disappointing earnings announcements from a number of
well-known financial institutions, such as First Union Corporation and Bank One
Corporation, have also contributed to a lack of investor momentum.
Our Investment Approach
The Fund invests primarily in common stocks and other equity securities of U.S.
financial services companies, including banks, brokerage houses, insurance
companies and investment advisory companies, that the Fund believes have above
average growth potential or that are undervalued.
The Fund will hold a diversified portfolio of financial services companies with
strong fundamentals, many of which the Fund believes hold the potential to be
acquired at a premium to their trading prices, measures at the time of their
original acquisition by the Fund. 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. Securities rated below investment grade will not constitute more
than 15% of the Fund's total assets.
Factors Relating to Fiscal 1999 Performance
A number of factors contributed to the strong relative performance of the Penn
Capital Select Financial Services Fund in fiscal year 1999. The Fund benefited
from its positions in New England based banks, a strategy that proved successful
due to the merger of Fleet and BankBoston. Higher concentrations in both
insurance companies and brokerage firms, two sectors that performed well over
the last twelve months also propelled the Fund to outperform the broader
markets. Most importantly, in what
3
<PAGE>
was a slow period for merger and acquisition activity, the Fund did participate
in certain fiscal year 1999 takeovers, such as Norfolk Savings Bank, BankBoston,
and Crestar, which were acquired by Summit Bank, Fleet, and SunTrust,
respectively.
Looking ahead to the next year, we remain bullish on banks given their excess
capital, strong reserves for loan losses and non-interest income initiatives.
Non-interest income continues to be the key driver of revenue growth for most
banks. As we move into the new year, Penn believes the market will again take
notice of financial services stocks, from both a technical and fundamental
perspective. In addition, we expect merger activity to resume once the Y2K
challenge has passed and acquirers take advantage of their target bank's
attractive valuations.
Comparison of Change in the Value of a $10,000 Investment in the
Penn Capital Select Financial Services Fund, versus the NASDAQ Bank Index
In the printed version of the document, a line graph
appears which depicts the following plot points:
Penn Cap NASDAQ
10/31/97 10,000 10,000
Sep 98 10,302 9,138
Sep 99 11,293 9,059
One Annualized
Year Inception to
Return Date
9.62% 8.41%(1)
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 Select Financial Services Fund began operations on October
20, 1997.
4
<PAGE>
Schedule of Investments Penn Capital Funds
September 30, 1999
PENN CAPITAL SELECT Value
FINANCIAL SERVICES FUND Shares (000)
- -------------------------------------------------------
Common Stocks (80.7%)
Banks (65.9%)
Astoria Financial 181 $ 5
Bank of America 100 6
Bank United, Cl A 355 11
BankBoston 205 9
BankUnited Financial, Cl A* 1,000 8
CCBT Bancorp 435 7
Chase Manhattan 130 10
Coastal Bancorp 660 11
First Tennessee National 95 3
Mellon Bank 260 9
National Penn Bancshares 890 24
North Fork Bancorporation 520 10
Peoples Bank Bridgeport 145 3
PNC Bank 190 10
Premier National Bancorp 395 7
Provident Bankshares 459 10
Regions Financial 165 5
Seacoast Banking of Florida, Cl A 525 15
Sovereign Bancorp 325 3
Summit Bancorp 225 7
SunTrust Banks 117 8
U.S. Bancorp 325 10
United Bankshares 410 10
----
201
----
Financial Services (11.5%)
Alliance Capital Management 185 5
American Express 50 7
Citigroup 167 7
Mech Financial 250 8
Raymond James Financial 195 4
T. Rowe Price 130 4
----
35
----
Insurance (3.3%)
American International Group 56 5
Mony Group 165 5
----
10
----
Total Common Stocks
(Cost $254) 246
----
Preferred Stocks (7.9%)
Banks (7.9%)
Astoria Financial 925 24
----
Total Preferred Stocks
(Cost $24) 24
----
Mutual Funds (7.2%)
SEI Daily Income Trust Money
Market Portfolio 11 11
SEI Daily Income Trust Prime
Obligation Portfolio 11 11
----
Total Mutual Funds
(Cost $22) 22
----
Total Investments (95.8%)
(Cost $300) 292
----
Other Assets and Liabilities, Net (4.2%) 13
----
Total Net Assets (100.0%) $305
====
* Non-income producing security
Cl -- Class
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Statement of Assets and Liabilities (000) Penn Capital Funds
September 30, 1999
<TABLE>
<CAPTION>
Penn Capital Select
Financial Services Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investment Securities at Value (Cost $300).................................. $ 292
Receivable for Investment Securities Sold .................................. 4
Other Assets ............................................................... 32
- ----------------------------------------------------------------------------------------------------------
Total Assets ............................................................ 328
- ----------------------------------------------------------------------------------------------------------
Liabilities:
Accrued Expenses .......................................................... 23
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Total Liabilities ....................................................... 23
- ----------------------------------------------------------------------------------------------------------
Net Assets:
Portfolio shares (unlimited authorization--no par value) based on
28,355 outstanding shares of beneficial interest ........................ 312
Undistributed Net Investment Income........................................ 6
Accumulated Net Realized Loss on Investments .............................. (5)
Net Unrealized Depreciation of Investments ................................ (8)
- ----------------------------------------------------------------------------------------------------------
Total Net Assets ........................................................ $ 305
==========================================================================================================
Net Asset Value, Offering Price, and Redemption Price Per Share .............. $10.74
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Statement of Operations (000) Penn Capital Funds
September 30, 1999
<TABLE>
<CAPTION>
Penn Capital Select
Financial Services Fund
- ---------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends................................................................ $ 16
Interest ................................................................ 1
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Total Investment Income................................................ 17
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Expenses:
Investment Advisory Fees ................................................ 7
Investment Advisory Fee Waiver .......................................... (7)
Administrator Fees ...................................................... 67
Custodian Fees .......................................................... --
Transfer Agent Fees ..................................................... 14
Professional Fees ....................................................... --
Trustee Fees ............................................................ 3
Registration Fees ....................................................... (8)
Pricing Fees ............................................................ --
Printing Fees ........................................................... 13
Amortization of Deferred Organizational Costs............................ 3
Insurance and Other Fees ................................................ --
- ----------------------------------------------------------------------------------------------------
Total Expenses ........................................................ 92
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Less: Reimbursements by Adviser.......................................... (83)
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Total Net Expenses .................................................... 9
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Net Investment Income ............................................. 8
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Net Realized Loss From Securities Sold .................................. (5)
Net Unrealized Appreciation
of Investment Securities .............................................. 114
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Net Realized and Unrealized Gain
on Investments ................................................. 109
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Net Increase in Net Assets Resulting
From Operations ...................................................... $117
- ----------------------------------------------------------------------------------------------------
Amounts designated as "--" are either $0 or have been rounded to $0.
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Statement of Changes in Net Assets (000) Penn Capital Funds
<TABLE>
<CAPTION>
Penn Capital Select
Financial Services Fund
-------------------------
10/1/98 10/20/97
thru 9/30/99 thru 9/30/98(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Activities:
Net Investment Income ................................................... $ 8 $ 4
Net Realized Gain (Loss) on Securities Sold.............................. (5) 53
Net Unrealized Appreciation (Depreciation) of
Investment Securities ................................................. 114 (122)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations ..................................................... 117 (65)
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ................................................... (6) --
Realized Capital Gain ................................................... (47) (6)
- ---------------------------------------------------------------------------------------------------------
Total Distributions ................................................... (53) (6)
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Capital Share Transactions:
Proceeds from Shares Issued ............................................. 18 870
Proceeds from Shares Issued in Lieu of Cash Distributions................ 53 6
Cost of Shares Redeemed.................................................. (533) (102)
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Capital Share Transactions............................................. (462) 774
- ---------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets ............................... (398) 703
- ---------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.................................................... 703 --
- ---------------------------------------------------------------------------------------------------------
End of Period(2)....................................................... $305 $703
=========================================================================================================
Shares Issued and Redeemed:
Issued .................................................................. 1 74
Issued in Lieu of Cash Distributions..................................... 5 1
Redeemed................................................................. (45) (8)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions............................ (39) 67
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commenced operations on October 20, 1997.
(2) Includes undistributed net investment income of $6 and $4 as of September
30, 1999, and September 30, 1998, respectively.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Financial Highlights Penn Capital Funds
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Net Net Net Ratio of Net
Asset Realized and Distributions Distributions Asset Assets Ratio Investment
Value Net Unrealized from Net from Value End of Expenses Income
Beginning Investment Gains on Investment Capital End Total of Period to Average to Average
of Period Income Investments Income Gains of Period Return(1) (000) Net Assets Net Assets
--------- ---------- ------------ ------------- ------------- --------- --------------- --------- ----------- -----------
- --------------------------------------------
Penn Capital Select Financial Services Fund
- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $10.50 0.23 0.79 (0.09) (0.69) $10.74 9.62% $305 1.40% 1.17%
1998(2) $10.00 0.07 0.64 (0.01) (0.20) $10.50 6.81% $703 1.40%* 0.68%*
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income (Loss)
to Average to Average
Net Assets Net Assets
(Excluding (Excluding Portfolio
Waivers and Waivers and Turnover
Reimbursements Reimbursements Rate
-------------- -------------- ---------
<S> <C> <C> <C>
1999 14.54% (11.97)% 114.1%
1998(2) 29.22%* (27.14)%* 174.8%
</TABLE>
* Annualized
(1) Returns are for the period indicated and have not been annualized.
(2) Commenced operations on October 20, 1997.
The accompanying notes are an integral part of the financial statements.
9
<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 Select Financial Services Fund, (the "Fund"). 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.
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. 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.
10
<PAGE>
Notes to Financial Statements (Continued) Penn Capital Funds
September 30, 1999
Expenses -- Expenses that are directly related to the Fund are charged to
the 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 and paid to Shareholders at least annually. 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 a 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
of 0.09% of the average daily net assets of the Trust up to $250 million, 0.07%
on the next $250 million, 0.06% on the next $250 million, 0.05% on the next
$1.25 billion, and 0.04% of such assets in excess on $2 billion. There is a
minimum annual fee of $65,000 payable to the Administrator for services rendered
to the Fund under the Administration Agreement. The administrator may, at its
sole discretion waive all or a portion of its fees.
11
<PAGE>
Notes to Financial Statements (Concluded) Penn Capital Funds
September 30, 1999
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.
5. Investment Advisory Agreement:
The Trust and Penn Capital Management Company, Inc. (the "Adviser") are parties
to an Investment Advisory Agreement, under which the Adviser receives an annual
fee equal to 1.00% of the average daily net assets of the Fund. The Adviser has
voluntarily agreed to waive all or a portion of its fees and to reimburse
expenses of the 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%. Fee waivers and expense reimbursements are voluntary and may be
terminated at any time.
6. Investment Transactions:
The total 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 Select
Financial Services Fund
-----------------------
Purchases .................... $ 758
Sales ........................ $1,332
At September 30, 1999, the total cost of securities for Federal income tax
purposes was $319,653. The aggregate gross unrealized appreciation and
depreciation for securities held by the Fund at September 30, 1999, are as
follows (000):
Penn Capital Select
Financial Services Fund
-----------------------
Aggregate gross unrealized
appreciation ............ $18
Aggregate gross unrealized
depreciation ............ (45)
----
Net unrealized depreciation $(27)
====
12
<PAGE>
Report of Independent Auditors Penn Capital Funds
To the Shareholders and Board of Trustees
TIP Funds -- Penn Capital Select Financial Services Fund
We have audited the accompanying statement of assets and liabilities of the
TIP Funds - Penn Capital Select Financial Services Fund, including the schedule
of investments, as of September 30, 1999, and the related statement of
operations and the statements of changes in net assets and the financial
highlights for each of 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 Select Financial Services 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/ signature omitted
- ---------------------
Ernst & Young
Philadelphia, Pennsylvania
November 8, 1999
13
<PAGE>
Notice to Shareholders
of
TIP Penn Cap Select Fund
(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 Select
Financial Services Fund ............. 0.00% 100.00% 0.00%
</TABLE>
Total Qualifying
Portfolio Distributions Dividends(1)
--------- ------------- ------------
TIP Funds - Penn Capital Select
Financial Services Fund ............. 100.00% 16.36%
- -------------
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction and is reflected as a percentage of "Ordinary
Income Distributors".
14
<PAGE>
Trust
TIP Funds
P.O. Box 419805
Kansas City, MO 64141-6805
Investment Adviser
Penn Capital Management Company, Inc.
Distributor
SEI Investments Distribution Co.
Administrator
SEI Investments Mutual Funds Services
Legal Counsel
Morgan, Lewis & Bockius LLP
Independent Auditors
Ernst & Young LLP
To open an account, receive account information, make inquiries, or request
literature:
1-800-224-6312
This report was prepared for shareholders in the Penn Capital Funds. It may be
distributed to others only if preceded or accompanied by a Prospectus, which
contains detailed information.
PEN-F-005-02
