ANNUAL
REPORT
SEPTEMBER 30, 2000
[GRAPHIC OMITTED]
1-800-224-6312
[GRAPHIC OMITTED]
<PAGE>
CONTENTS
--------------------------------------------------------------------------------
2 Letter to Shareholders
3 Management's Discussion of Performance
5 Financial Statements
13 Notes to Financial Statements
16 Report of Independent Auditors
17 Notice to Shareholders
TIP FUNDS
--------------------------------------------------------------------------------
The TIP Funds offer a series of 19 no-load mutual funds to retail and
institutional investors. The minimum initial investment in the Penn Capital
Strategic High Yield Bond 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 $700 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 monthly
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 219805, Kansas City, Missouri 64121-9805.
<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 net assets of $32.6
million as of September 30, 2000. Since its inception, the Fund posted an
annualized total return of 0.21% compared to 0.46% for the Credit Suisse First
Boston Index. For the year ended September 30, 2000, the Fund posted a total
return of 0.56% compared to 1.95% for the Credit Suisse First Boston Index.
I want to personally thank all of 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
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
For the fiscal year ending September 30, 2000, the Penn Capital Strategic High
Yield Bond Fund returned 0.56% versus the Credit Suisse First Boston High Yield
Index return of 1.95%.
Continued interest rate volatility, concern over rising defaults, and an
extended correction in the equity markets adversely impacted the high yield bond
market for almost the entire year. The interest rate volatility was caused by
the rate adjustments by the Federal Open Market Committee. Defaults increased
due to the tightening of credit standards by banks that have become less willing
to support weak companies. All these issues have led to extremely wide yield
spreads between corporate bonds and treasuries. In our view, these wide spreads
create tremendous opportunity for strong return potential.
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 the
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.
IN SUMMARY
In our view, the high yield bond market is presently discounted to reflect the
worst news. The spread between yields on corporate bonds and treasuries has
widened to almost the same level seen during the last recession of 1990-1991.
Currently, high yield bonds are yielding over 8 percentage points over
treasuries. History has shown us that the rebound in high yield returns comes
well before the peak in default rates. This is based on the fact that the
default rate is a 12 month lagging indicator.
Secondly, an important note to make is that access to credit for corporations is
not a problem. The U.S. banking system is very healthy based on the tremendous
profitability they have experienced. In addition, the balance sheets for
corporations remain very strong. Profits are up and cash on hand is far stronger
than before the recession of 1990-1991. These issues bring us to the current
environment and we believe it to be an unprecedented opportunity. Although there
still may be some residual pain, we believe the worst is behind us.
Our investment strategy is designed to add value over the long term through
active management and astute credit research. We are confident our investors
will be rewarded over the long term.
3
<PAGE>
PENN CAPITAL FUNDS
September 30, 2000
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]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
One Annualized
Year Inception to
Return Date(1)
------ ------------
0.56% 0.21%
Penn Cap CS Boston
-------- ---------
2/28/98 10000 10000
Sep 98 9278 9552
Sep 99 10080 9929
Sep 00 10137 10122
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.
4
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
September 30, 2000
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (72.2%)
AIRLINES (1.6%)
Airtran Airways, Ser 99-1
10.410%, 04/01/17 $ 241 $ 225
US Airways, Ser 93A2
9.625%, 09/01/03 40 39
Valujet
10.250%, 04/15/01 270 254
------
518
------
APPAREL/TEXTILES (2.1%)
Coyne International Enterprises
11.250%, 06/01/08 420 336
Dan River
10.125%, 12/15/03 90 87
Tropical Sportswear
International, Ser A
11.000%, 06/15/08 280 263
------
686
------
AUTOMOTIVE & TRUCK PARTS (2.5%)
Exide
10.000%, 04/15/05 350 266
Exide (A), Cv
2.900%, 12/15/05 890 414
Haefner Tire Group, Ser D
10.000%, 05/15/08 245 91
Lear, Ser B
7.960%, 05/15/05 30 29
------
800
------
BROADCASTING, NEWSPAPERS & ADVERTISING (5.3%)
Garden State Newspapers, Ser B
8.750%, 10/01/09 85 79
Jones International Networks
11.750%, 07/01/05 1,195 1,182
Sinclair Broadcast Group
10.000%, 09/30/05 130 129
Sirius Satellite Radio
14.500%, 05/15/09 105 93
Spectrasite Holdings (D)
11.250%, 04/15/09 235 128
XM Satellite Radio (A)
14.000%, 03/15/10 200 140
------
1,751
------
Face
Amount Value
(000) (000)
--------------------------------------------------------------------------------
BUILDING MAINTENANCE & SERVICE (0.8%)
Unicco Service, Ser B
9.875%, 10/15/07 $ 287 $ 273
------
CABLE (0.9%)
Scott Cable Communications,
Ser B (B)
16.000%, 07/18/02 165 46
Telewest Communications
9.625%, 10/01/06 130 120
United Pan-Europe, Ser B
11.500%, 02/01/10 140 121
------
287
------
COMMERCIAL SERVICES (1.1%)
Aircraft Service International
Group
11.000%, 08/15/05 265 209
Flag
8.250%, 01/30/08 170 148
------
357
------
COMMUNICATIONS (2.9%)
Crown Castle International
Group (D)
10.625%, 11/15/07 90 70
Global Crossing Holdings
9.625%, 05/15/08 235 235
Level 3 Communications, Cv
6.000%, 03/15/10 85 72
Microcell Telecommunications (D)
12.000%, 06/01/09 185 133
Microcell Telecommunications
Ser B (D)
14.000%, 06/01/06 275 264
US Unwired, Ser B (D)
13.375%, 11/01/09 295 158
------
932
------
COMMUNICATIONS EQUIPMENT & SOFTWARE (0.8%)
Lernout & Hauspie Speech
11.750%, 08/01/05 100 94
Williams Communications Group
10.875%, 10/01/09 175 160
------
254
------
5
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
September 30, 2000
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
--------------------------------------------------------------------------------
CONTAINERS PAPER & PLASTIC (0.6%)
Packaged Ice, Ser B
9.750%, 02/01/05 $ 235 $ 204
------
COSMETICS & TOILETRIES (1.3%)
Chattem, Ser B
8.875%, 04/01/08 95 75
Drypers, Ser B (E)
10.250%, 06/15/07 1,720 275
French Fragrances, Ser B
10.375%, 05/15/07 65 64
------
414
------
ELECTRICAL SERVICES (0.8%)
Aes
9.500%, 06/01/09 265 270
------
ENTERTAINMENT (6.6%)
Aladdin Gaming (D)
13.500%, 03/01/10 2,265 1,223
Argosy Gaming
10.750%, 06/01/09 290 303
International Game Technology
8.375%, 05/15/09 235 230
Isle of Capri Casinos
8.750%, 04/15/09 195 181
Mohegan Tribal Gaming
8.750%, 01/01/09 115 114
Pinnacle Entertainment, Ser B
9.250%, 02/15/07 15 15
Yanknets LLC (A)
12.750%, 03/01/07 100 98
------
2,164
------
ENVIRONMENTAL SERVICES (2.6%)
Allied Waste of North America,
Ser B
10.000%, 08/01/09 185 161
7.625%, 01/01/06 250 224
USA Waste Services
7.125%, 10/01/07 175 163
Waste Management
8.750%, 05/01/18 80 75
Waste Systems International, Ser B
11.500%, 01/15/06 355 231
------
854
------
Face
Amount Value
(000) (000)
--------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.4%)
Agrilink Foods
11.875%, 11/01/08 $ 130 $ 96
Chiquita Brands International
9.125%, 03/01/04 75 46
Pantry
10.250%, 10/15/07 150 145
Tom's Foods
10.500%, 11/01/04 260 177
------
464
------
HOTELS & LODGING (2.1%)
Hollywood Casino
11.250%, 05/01/07 225 233
Hollywood Casino of Shreveport
13.000%, 08/01/06 100 107
Park Place Entertainment
7.875%, 12/15/05 190 183
Station Casinos (A)
9.875%, 07/01/10 165 165
------
688
------
MACHINERY (1.4%)
Thermadyne Manufacturing
9.875%, 06/01/08 340 262
Transportation Manufacturing (A)
11.250%, 05/01/09 250 183
------
445
------
MANUFACTURING (2.6%)
Grey Wolf
8.875%, 07/01/07 315 305
Polymer Group, Ser B
9.000%, 07/01/07 120 92
Sun World International, Ser B
11.250%, 04/15/04 460 439
------
836
------
MEDICAL PRODUCTS & SERVICES (3.8%)
Express Scripts
9.625%, 06/15/09 225 228
Global Health Sciences
11.000%, 05/01/08 1,650 165
HCA
7.250%, 05/20/08 185 172
6
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
September 30, 2000
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
--------------------------------------------------------------------------------
Kelso
12.750%, 10/01/09 $ 215 $ 232
Quorum Health Group
8.750%, 11/01/05 135 134
Team Health, Ser B
12.000%, 03/15/09 175 161
Tenet Healthcare
8.000%, 01/15/05 155 153
------
1,245
------
METAL / MINING OTHER (1.6%)
TVX Gold, Cv
5.000%, 03/28/02 625 506
------
OIL & GAS DRILLING (9.3%)
Chesapeake Energy, Ser B
9.625%, 05/01/05 425 428
7.875%, 03/15/04 200 189
Houston Exploration, Ser B
8.625%, 01/01/08 150 146
Key Energy Services, Cv
5.000%, 09/15/04 150 123
Key Energy Services, Ser B
14.000%, 01/15/09 130 148
Ocean Rig Norway
10.250%, 06/01/08 690 621
Parker Drilling, Cv
5.500%, 08/01/04 795 674
Parker Drilling, Ser D
9.750%, 11/15/06 340 339
Pride International, Cv
0.000%, 04/24/18 745 346
------
3,014
------
PETROLEUM REFINING (0.8%)
Orion Refining
10.000%, 11/15/04 360 245
------
REAL ESTATE / BUILDING (2.1%)
Fortress Group
13.750%, 05/15/03 125 53
MDC Holdings
8.375%, 02/01/08 135 128
Face
Amount Value
(000) (000)
--------------------------------------------------------------------------------
NVR
8.000%, 06/01/05 $ 105 $ 102
Plains Resources, Ser B
10.250%, 03/15/06 395 401
------
684
------
RETAIL (1.2%)
Finlay Enterprises
9.000%, 05/01/08 440 400
------
SCIENTIFIC INSTRUMENTS (0.2%)
Fisher Scientific International
9.000%, 02/01/08 85 78
------
SOFTWARE (0.4%)
Psinet
11.000%, 08/01/09 210 137
------
SPECIAL PURPOSE ENTITY (1.4%)
Heileman Acquisition (C)
9.625%, 01/31/04 20 --
Nextel Partners (D)
14.000%, 02/01/09 250 176
RBF Finance
11.375%, 03/15/09 195 224
11.000%, 03/15/06 35 40
------
440
------
TELEPHONES & TELECOMMUNICATIONS (12.4%)
Clearnet Communications (D)
14.750%, 12/15/05 150 158
Golden Sky DBS, Ser B (D)
13.500%, 03/01/07 1,185 830
Level 3 Communications
9.125%, 05/01/08 170 147
McCaw International (D)
13.000%, 04/15/07 875 661
Nextel Communications, Cv
4.750%, 07/01/07 150 311
Nextel Communications, Cv (A)
4.750%, 07/01/07 95 197
Nextel International (A)
12.750%, 08/01/10 150 147
7
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
September 30, 2000
Shares/Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
--------------------------------------------------------------------------------
NTL Communications, Ser B
11.500%, 10/01/08 $ 70 $ 68
10.000%, 02/15/07 400 366
Pegasus Media and
Communications, Ser B
12.500%, 07/01/05 85 90
Powertel (D)
12.000%, 02/01/06 120 121
Satellites Mexicanos, Ser B
10.125%, 11/01/04 475 299
Talton Holdings, Ser B
11.000%, 06/30/07 325 270
Voicestream Wire Holding
10.375%, 11/15/09 285 308
Voicestream Wire Holding (D)
11.875%, 11/15/09 110 79
-------
4,052
-------
TRANSPORTATION/NON-AIR (1.6%)
Atlantic Express
10.750%, 02/01/04 160 142
TFM SA DE, Cv
10.250%, 06/15/07 415 390
-------
532
-------
TOTAL CORPORATE BONDS
(Cost $26,199) 23,530
-------
PREFERRED STOCKS (13.5%)
BANKS (0.4%)
Astoria Financial* 5,275 135
-------
FINANCE (0.0%)
Crown Castle International, PIK* 4 4
-------
MACHINERY (0.0%)
Clark Material Handling, PIK* 53 --
-------
PETROLEUM REFINING (0.3%)
Chesapeake Energy, Cv* 1,370 82
-------
TELEPHONES & TELECOMMUNICATIONS (12.8%)
Adelphia Business Solutions, PIK* 3 2
Echostar Communications, Cv 2,665 2,185
Global Crossing Holdings, PIK* 1,450 148
Nextel Communications, PIK* 288 276
Value
Shares (000)
--------------------------------------------------------------------------------
Omnipoint, Cv* $ 2,115 $ 353
Pegasus Communications, Cv 900 85
Pegasus Communications, Cv* 6,935 652
Pegasus Communications, PIK 446 469
-------
4,170
-------
TOTAL PREFERRED STOCKS
(Cost $2,392) 4,391
-------
COMMON STOCKS (8.5%)
APPAREL/TEXTILES (0.5%)
Dan River, Cl A* 33,960 146
-------
BROADCASTING, NEWSPAPERS &
ADVERTISING (0.6%)
Jones International Networks* 15,500 194
-------
COMMUNICATIONS EQUIPMENT (0.3%)
Gilat Satellite Networks* 1,428 110
-------
ENVIRONMENTAL SERVICES (0.1%)
Waste Systems International,
Cl B* 25,800 29
-------
GAMING (0.9%)
Argosy Gaming* 16,575 300
-------
MEDICAL PRODUCTS & SERVICES (2.2%)
Caremark Rx* 39,519 445
Laboratory Corporation Of
America Holdings* 2,273 272
-------
717
-------
OIL & GAS DRILLING (1.1%)
Chesapeake Energy* 26,450 190
Key Energy Services* 16,000 157
-------
347
-------
TELEPHONES & TELECOMMUNICATIONS (2.8%)
Microcell Telecommunications* 18,610 541
Pegasus Communications* 715 35
Powertel* 4,470 340
-------
916
-------
TOTAL COMMON STOCKS
(Cost $2,381) 2,759
-------
8
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
September 30, 2000
Shares/Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
--------------------------------------------------------------------------------
WARRANTS (0.0%)
Allegiance Telecom
0.000%, 02/03/08 35 $ 3
XM Satellite Radio Holdings (B)
0.000%, 03/15/10 55 8
-------
TOTAL WARRANTS
(Cost $0) 11
-------
REPURCHASE AGREEMENT (3.2%)
Morgan Stanley Dean Witter
6.30%, dated 09/29/00,
matures 10/02/00, repurchase
price $1,032,842 (collateralized
by U.S. Treasury Note, par
value $1,030,769, 9.875%,
matures 11/15/15: market
value $1,058,526) $1,033 1,033
-------
TOTAL REPURCHASE AGREEMENT
(Cost $1,033) 1,033
-------
TOTAL INVESTMENTS (97.4%)
(Cost $32,005) 31,724
-------
OTHER ASSETS AND LIABILITIES, NET (2.6%) 836
-------
Value
(000)
--------------------------------------------------------------------------------
NET ASSETS:
Portfolio Shares (unlimited
authorization-- no par value)
based on 4,020,240 outstanding
shares of beneficial interest $38,545
Distributions in excess of net
investment income (1)
Accumulated net realized loss
on investments (5,703)
Net unrealized depreciation
on investments (281)
-------
TOTAL NET ASSETS (100.0%) $32,560
=======
Net Asset Value, Offering and
Redemption Price Per Share $ 8.10
=======
*NON-INCOME PRODUCING SECURITY
(A) SECURITY SOLD WITHIN 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 REPRESENTS THE YIELD AT SEPTEMBER
30, 2000, BASED UPON THE ESTIMATED TIMING AND AMOUNT OF FUTURE INTEREST AND
PRINCIPAL PAYMENTS.
(E) SECURITY DEFAULTED ON INTEREST PAYMENTS SUBSEQUENT TO YEAR END.
CL -- CLASS
CV -- CONVERTIBLE
LLC -- LIMITED LIABILITY CORPORATION
PIK -- PAYMENT-IN-KIND
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.
9
<PAGE>
STATEMENT OF OPERATIONS (000) PENN CAPITAL FUNDS
September 30, 2000
<TABLE>
<CAPTION>
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------
<S> <C>
Investment Income:
Interest .................................................................. $ 238
Dividends.................................................................. 3,305
-------------------------------------------------------------------------------------------------------------
Total Investment Income.................................................. 3,543
-------------------------------------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees .................................................. 203
Investment Advisory Fee Waiver ............................................ (132)
Administrator Fees ........................................................ 65
Custodian Fees ............................................................ 9
Transfer Agent Fees ....................................................... 26
Professional Fees ......................................................... 19
Trustee Fees .............................................................. --
Registration Fees ......................................................... 5
Pricing Fees .............................................................. 4
Printing Fees ............................................................. 25
Amortization of Deferred Organizational Costs............................... 26
Insurance and Other Fees.................................................... 1
-------------------------------------------------------------------------------------------------------------
Total Net Expenses ...................................................... 251
-------------------------------------------------------------------------------------------------------------
Net Investment Income ............................................... 3,292
-------------------------------------------------------------------------------------------------------------
Net Realized Loss From Securities Sold .................................... (2,440)
Net Unrealized Depreciation
of Investment Securities ................................................ (94)
-------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Loss
on Investments ........................................................ (2,534)
-------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ........................................................ $ 758
-------------------------------------------------------------------------------------------------------------
</TABLE>
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 CHANGES IN NET ASSETS (000) PENN CAPITAL FUNDS
For the Years Ended September 30,
<TABLE>
<CAPTION>
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------
2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Activities:
Net Investment Income ................................................... $ 3,292 $ 3,357
Net Realized Loss on Securities Sold..................................... (2,440) (2,506)
Net Unrealized Appreciation (Depreciation) of
Investment Securities ................................................. (94) 2,090
-------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ..................................................... 758 2,941
-------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ................................................... (3,293) (3,364)
-------------------------------------------------------------------------------------------------------------
Total Distributions ................................................... (3,293) (3,364)
-------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ............................................. 10,079 35,705
Shares Issued in Lieu of Cash Distributions.............................. 1,531 2,157
Cost of Shares Redeemed................................................... (18,437) (13,359)
-------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Capital Share Transactions............................................. (6,827) 24,503
-------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets ............................... (9,362) 24,080
-------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.................................................... 41,922 17,842
-------------------------------------------------------------------------------------------------------------
End of Period(1)....................................................... $32,560 $41,922
=============================================================================================================
Shares Issued and Redeemed:
Issued .................................................................. 1,159 3,991
Issued in Lieu of Cash Distributions..................................... 174 241
Redeemed.................................................................. (2,068) (1,478)
-------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions............................ (735) 2,754
-------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes undistributed net investment income (loss) and/or distributions in
excess of net investment income (000) of $(1) and $0, as of September 30,
2000, and September 30, 1999, respectively.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS PENN CAPITAL FUNDS
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
Net Realized and Net Net Ratio of Net
Asset Unrealized Distributions Asset Assets Ratio Investment
Value Net Gains ------------------- Value End of Expenses Income
Beginning Investment on Investment Capital End Total of Period to Average to Average
of Period Income Investments Income Gains of Period Return+ (000) Net Assets Net Assets
-------------------------------------------------------------------------------------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000 $ 8.82 $0.79 $(0.72) $(0.79) $ -- $8.10 0.56% $32,560 0.68% 8.94%
1999(2) 8.91 0.83 (0.09) (0.83) -- 8.82 8.65 41,922 0.68 9.11
1998(1) 10.00 0.37 (1.09) (0.37) -- 8.91 (7.23) 17,842 0.68 10.04
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income (Loss) to
to Average Average
Net Assets Net Assets
(Excluding (Excluding Portfolio
Waivers and Waivers and Turnover
Reimbursements) Reimbursements) Rate
-------------------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
<S> <C> <C> <C>
2000 1.04% 8.58% 76.00%
1999(2) 1.14 8.65 96.98
1998(1) 2.09 8.63 29.19
</TABLE>
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on March 1, 1998. All ratios for the period have been
annualized.
(2) On January 25, 1999, shareholders of the Alpha Select Penn Capital
Strategic High Yield Bond Fund approved a tax-free reorganization under
which all assets and liabilities of the Fund were transferred to the TIP
Penn Capital Strategic 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS PENN CAPITAL FUNDS
September 30, 2000
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, 2000, 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. 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 continue 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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued) PENN CAPITAL FUNDS
September 30, 2000
EXPENSES -- Expenses that are directly related to a Fund are charged to
that Fund. Other operating expenses of the Trust are prorated to the Fund
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.
Distributions 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 accounting principles generally accepted in the United States 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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Concluded) PENN CAPITAL FUNDS
September 30, 2000
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, 2000, are as follows:
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
(000)
----------------------
Purchases $25,733
Sales $30,708
At September 30, 2000, 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, 2000, are as follows:
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
(000)
----------------------
Aggregate gross unrealized
appreciation $ 3,518
Aggregate gross unrealized
depreciation (3,799)
-------
Net unrealized depreciation $ (281)
=======
For Federal income tax purposes the fund had capital loss carryforwards of
$1,140,491 and $2,915,701 at September 30, 2000 which may be carried forward and
applied against future capital gains. The capital loss carryforwards expire in
2007 and 2008, respectively.
7. 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.
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS PENN CAPITAL FUNDS
September 30, 2000
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, 2000,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended 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 auditing standards generally accepted
in the United States. 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, 2000, 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, 2000,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and its financial
highlights for each of the periods indicated therein, in conformity with
accounting principles generally accepted in the United States.
/S/ Signature Omitted
Philadelphia, Pennsylvania
November 10, 2000
16
<PAGE>
NOTICE TO SHAREHOLDERS
OF
PENN CAPITAL FUNDS
(UNAUDITED)
For shareholders that do not have a September 30, 2000 tax year end, this notice
is for informational purposes only. For shareholders with a September 30, 2000
taxable year end, please consult your tax advisor as to the pertinence of this
notice. For the fiscal year ended September 30, 2000, 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%
</TABLE>
<TABLE>
<CAPTION>
TOTAL QUALIFYING
PORTFOLIO DISTRIBUTIONS DIVIDENDS (1)
--------- ------------- -------------
<S> <C> <C>
TIP Funds - Penn Capital Strategic
High Yield Bond 100.00% 3.98%
</TABLE>
-----------
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction and are reflected as a percentage of "Ordinary
Income Distributions".
17
<PAGE>
NOTES
<PAGE>
TRUST
TIP Funds
P.O. Box 219805
Kansas City, MO 64121-9805
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-006-0300
