ANNUAL
REPORT
SEPTEMBER 30, 1998
[LOG0 OMITTED]
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Penn Capital
Strategic High Yield Bond Fund
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<PAGE>
CONTENTS
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2 Letter to Shareholders
3 Management's Discussion of Performance
6 Financial Statements
17 Report of Independent Auditors
18 Notice to Shareholders
TIP
INSTITUTIONAL FUNDS
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The TIP Institutional Funds offer a series of four no-load mutual funds to
institutional investors. The minimum initial investment in a TIP Institutional
Fund is $100,000.
Penn Capital Management, Inc., based in Haddonfield, N.J., serves as the
investment adviser to one of the TIP Institutional Funds. The firm, founded in
1987, invests more than $325 million in fixed-income and equity portfolios on
behalf of individuals and institutions. Penn Capital Management manages the
Penn Capital High Yield Bond Fund. A separate investment firm manages the other
mutual funds in the TIP Institutional Funds family.
Penn Capital Management, Inc. also manages the Penn Capital Select
Financial Services Fund a mutual fund in the TIP Funds family.
SHAREHOLDER SERVICES
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TIP Institutional 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 Institutional Funds, Box 419805, Kansas City, Missouri 64141.
<PAGE>
TO OUR SHAREHOLDERS:
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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 $17.8
million as of September 30, 1998. The Fund posted a total return of -7.23%
compared to -4.48% for the CS First Boston Index for the period from inception
through September 30, 1998.
I want to personally thank all of our shareholders for their patience during
this challenging start-up period. Every challenge presents an opportunity, and I
feel that the current high yield market represents an unprecedented investment
opportunity. I am 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, INC.
2
<PAGE>
MANAGEMENT'S DISCUSSION OF PERFORMANCE
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
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THE MARKET ENVIRONMENT
Investor sentiment regarding the direction of the U.S. economy shifted
dramatically during the third quarter of 1998. The devaluation and subsequent
default of government issued Russian debt, increasing concern over the economic
recessions in many Asian countries, and weakness in Latin America, impacted
investors' expectations about the future growth in corporate earnings. These
events led to a global movement away from certain fixed income and most equity
related asset classes into the safe harbor of U.S. Treasury securities. All
broad market averages suffered losses during the 3rd quarter not seen since 1990
(Dow Jones Industrial Average -11.98%, S&P 500 -9.92%, Russell 2000 -20.15%,
Credit Suisse First Boston High Yield Index -6.15%).
The high yield bond market was adversely impacted by this global flight to
quality in the third quarter. The high yield bond risk premium, or
spread-to-treasury, increased over 250 basis points to approximately 700 basis
points during the quarter. Although market fundamentals remain stable (Moody's
trailing 12 month default rate remained below 3% through September 30, 1998,
which is below the 1971-1977 mean of 3.36%), liquidity risk was evident. Many of
the market's largest dealers curbed their commitment of capital to the market
due to losses incurred by their international debt operations. This caused the
high yield bond market to be quoted down, in addition to pricing pressure from
mutual fund portfolio managers who were forced to sell in order to meet fund
redemptions. To that end, we see unique opportunities in what we feel is an
under-valued high yield market.
OUR INVESTMENT APPROACH
The 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 the upper tier (B/B) of the high yield bond market.
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 Fund underperformed the CS First Boston Index since inception due to the
impact of underperformance during the third quarter of calendar year 1998. The
Fund's overweighting of the energy sector, a value opportunity, relative to the
index was a contributor. Secondly, exposure to small-cap
3
<PAGE>
equity of high yield issuers and post restructuring equity within the special
situations portion of the portfolio also lagged the performance of the benchmark
for the quarter.
IN SUMMARY
Due to the strong underlying fundamentals, we believe the high yield market has
been severely oversold and should incur a quicker recovery relative to the
equity markets as a result of the high current yield available versus the need
for capital gains in the equity market. Even if investors are perceiving an
increased risk of default, it does not necessarily follow that the market has
priced that risk appropriately. Actual high yield bond prices, or current
spread-to-treasury, are compensating investors for default rates which would
have to increase by at least threefold from present levels, to in excess of 10%
annual default rates. Few investors would admit to expecting a double-digit
increase in default rates in 1998 or 1999 given the present economic outlook of
moderate growth and lower short-term interest rates. Finally, any increase in
defaults will probably be distributed over several years. This very high-implied
default rate of today's spread-to-treasury strongly suggest that the high yield
market represents a good long-term value. This unique value is reflected in the
high current returns which compensate investors while waiting for future capital
gain opportunities, as spreads return to normal levels.
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
Cumulative Inception
To Date (1)
-7.23%
[LINE GRAPH OMITTED]
PLOT POINTS ARE AS FOLLOWS:
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND C.S. FIRST BOSTON HIGH YIELD INDEX
2/28 10,000 10,000
9/98 9,277 9,552
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 TIP INSTITUTIONAL FUNDS
September 30, 1998
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
CORPORATE BONDS (77.7%)
CABLE (2.0%)
Adelphia Communication
Ser B PIK
9.500%, 02/15/04 $ 104 $ 108
Charter Communications (B)
0.000%, 03/15/07 60 51
Charter Communications South East
11.250%, 03/15/06 95 103
Scott Cable Communications
16.000%, 07/18/02 95 49
Telewest Communications (B)
0.000%, 10/01/07 50 41
--------
352
--------
COMMUNICATIONS (11.1%)
Clearnet Communications (B)
0.000%, 12/15/05 325 270
E.spire Communications (B)
0.000%, 11/01/05 175 141
Econophone
13.500%, 07/15/07 175 190
Hyperion Telecommunication (B)
0.000%, 04/15/03 225 155
McCaw International
13.000%, 04/15/07 705 352
MGC Communications
13.000%, 10/01/04 260 195
Microcell Telecommunication (B)
0.000%, 06/01/06 395 282
Omnipoint
11.625%, 08/15/06 240 172
Primus Telecommunications
11.750%, 08/01/04 175 168
Satelites Mexicanos (A)
10.125%, 11/01/04 15 10
Talton Holdings, Ser B
11.000%, 06/30/07 45 45
--------
1,980
--------
ENTERTAINMENT (0.6%)
Premier Parks
9.250%, 04/01/06 125 123
--------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
FINANCIAL (3.1%)
Chevy Chase Savings Bank
9.250%, 12/01/05 $ 75 $ 74
Hawthorne Financial
12.500%, 12/31/04 300 300
Wilshire Financial Services
13.000%, 01/01/04 90 83
13.000%, 08/15/04 100 92
--------
549
--------
FOOD & BEVERAGE (3.7%)
Ameriserv Food
8.875%, 10/15/06 165 150
Chiquita Brands
9.625%, 01/15/04 20 20
Envirodyne Industries
12.000%, 06/15/00 15 15
Fleming
10.500%, 12/01/04 75 72
Sun World International
11.250%, 04/15/04 160 168
Tom's Foods
10.500%, 11/01/04 240 228
--------
653
--------
GAMING (8.0%)
Alliance Gaming
10.000%, 08/01/07 545 514
Argosy Gaming Convertible
12.000%, 06/06/01 525 488
Hollywood Casino
12.750%, 11/01/03 175 181
Penn National Gaming
10.625%, 12/15/04 235 239
--------
1,422
--------
HEALTHCARE (3.3%)
Fisher Scientific International
9.000%, 02/01/08 70 67
Fisher Scientific International 144A
9.000%, 02/01/08 15 14
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF NET ASSETS TIP INSTITUTIONAL FUNDS
September 30, 1998
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
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CORPORATE BONDS (continued)
HEALTHCARE (continued)
Sun Healthcare Group (A)
9.375%, 05/01/08 $155 $ 140
Unilab
11.000%, 04/01/06 365 364
--------
585
--------
MEDIA (1.9%)
Gray Communications System
10.625%, 10/01/06 90 95
Source Media
12.000%, 11/01/04 250 251
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346
--------
SUPERMARKETS (2.8%)
Duane Reade
9.250%, 02/15/08 90 90
Jitney-Jungle Stores
10.375%, 09/15/07 240 243
Phar-Mor
11.720%, 09/11/02 135 141
Pueblo Xtra International
9.500%, 08/01/03 35 34
--------
508
--------
AEROSPACE (1.5%)
Burke Industries
10.000%, 08/15/07 100 100
Compass Aerospace (A)
10.125%, 04/15/05 80 78
Derlan Manufacturing
10.000%, 01/15/07 95 90
--------
268
--------
AIRLINES (1.7%)
Constellation Finance (A)
9.800%, 12/14/02 255 254
US Air
9.625%, 09/01/03 45 48
--------
302
--------
Face
Amount Value
(000) (000)
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CHEMICALS (0.3%)
ICO
10.375%, 06/01/07 $ 60 $ 57
--------
CONSUMER/MANUFACTURING (4.9%)
Chattem
8.875%, 04/01/08 100 93
Drypers (A)
10.250%, 06/15/07 505 471
JH Haefner Sr. Note (A)
10.000%, 05/15/08 75 70
Revlon Consumer Products
8.125%, 02/01/06 25 25
Sweetheart Cup
9.625%, 09/01/00 235 214
--------
873
--------
GENERAL INDUSTRIAL (4.7%)
American Pad & Paper
13.000%, 11/15/05 135 74
Anthony Crane Rentals (A)
10.375%, 08/01/08 230 218
Exide
10.000%, 04/15/05 30 28
Exide Convertible (A)
2.900%, 12/15/05 760 361
Perry-Judd (A)
10.625%, 12/15/07 75 75
Prestolite Electric
9.625%, 02/01/08 85 80
--------
836
--------
HOTELS/LODGING (0.3%)
Red Roof Inns
9.625%, 12/15/03 50 50
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METAL/MINING STEEL (1.0%)
Great Lakes Carbon (A)
10.250%, 05/15/08 175 171
--------
METAL/MINING OTHER (1.1%)
TVX Gold Cv
5.000%, 03/28/02 385 195
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The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF NET ASSETS TIP INSTITUTIONAL FUNDS
September 30, 1998
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
REAL ESTATE/BUILDING (0.9%)
Fortress Group
13.750%, 05/15/03 $145 $ 160
--------
RESTAURANTS (1.5%)
Advantica Restaurant Group
11.250%, 01/15/08 279 268
--------
RETAIL (3.2%)
Hills Stores
12.500%, 07/01/03 350 142
K-Mart
13.500%, 01/01/09 185 185
8.990%, 07/05/10 90 97
Pantry
10.250%, 10/15/07 150 145
--------
569
--------
TRANSPORTATION / NON-AIR (7.1%)
Atlantic Express
10.750%, 02/01/04 210 212
Coach USA
9.375%, 07/01/07 80 80
Greyhound Lines (A)
11.500%, 04/15/07 295 313
Hayes Wheels International
11.000%, 07/15/06 110 121
HCC Industries
10.750%, 05/15/07 195 183
Holt Group (A)
9.750%, 01/15/06 185 177
Sea Containers
7.875%, 02/15/08 50 48
Statia Terminals, Ser B
11.750%, 11/15/03 135 140
--------
1,274
--------
CONGLOMERATE (0.9%)
Thermadyne Manufacturing
9.875%, 06/01/08 110 100
Unicco Service
9.875%, 10/15/07 75 69
--------
169
--------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
ENERGY (11.4%)
Abraxas Petroleum/CN Abraxas
11.500%, 11/01/04 $ 45 $ 36
Bayard Drilling
11.000%, 06/30/05 90 80
Costilla Energy
10.250%, 10/01/06 95 83
Eagle Geophysical (A)
10.750%, 07/15/08 125 111
Ferrellgas Partners
9.375%, 06/15/06 45 42
Key Energy Group Cv (A)
5.000%, 09/15/04 65 41
Key Energy Group Cv
5.000%, 09/15/04 585 370
Mariner Energy
10.500%, 08/01/06 190 173
Ocean Rig Norway ASA (A)
10.250%, 06/01/08 125 89
Panaco
10.625%, 10/01/04 140 118
Parker Drilling
9.750%, 11/15/06 170 158
Plains Resources Ser B
10.250%, 03/15/06 5 5
Plains Resources Ser D
10.250%, 03/15/06 165 158
Queens Sand Resources (A)
12.500%, 07/01/08 65 52
Transamerican Energy, Ser B
11.500%, 06/15/02 850 509
--------
2,025
--------
VETERINARY SERVICES (0.7%)
Veterinary Centers of America Cv
5.250%, 05/01/06 150 122
--------
TOTAL CORPORATE BONDS
(Cost $15,253) 13,857
--------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF NET ASSETS TIP INSTITUTIONAL FUNDS
September 30, 1998
PENN CAPITAL STRATEGIC Value
HIGH YIELD BOND FUND Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (10.8%)
AUTOMOTIVE (1.7%)
Exide 26,325 $ 303
--------
HOUSING RELATED (1.6%)
Bibb* 19,055 236
International Comfort Products* 6,950 57
--------
293
--------
FOODS/BEVERAGES (1.3%)
Dr. Pepper Bottling
Holdings, Cl A* 10,025 231
--------
NON FOODS (1.5%)
Drypers* 90,812 272
--------
HEALTHCARE (1.1%)
Unilab 94,650 195
--------
MEDIA & INFORMATION (0.0%)
Pegasus Communications* 111 2
--------
ENTERTAINMENT/GAMING (0.7%)
Alliance Gaming* 6,100 16
Players International* 21,200 101
--------
117
--------
INDUSTRIAL (0.5%)
Haynes Holdings* (A) 6,960 83
--------
TELECOMMUNICATIONS (0.4%)
Clearnet, Cl A* 8,775 69
Nextel Communications, Cl A* 80 2
--------
71
--------
OIL SERVICES (2.0%)
Bayard Drilling Technologies* 78,475 363
--------
TOTAL COMMON STOCKS
(Cost $2,881) 1,930
--------
Value
Shares (000)
- --------------------------------------------------------------------------------
PREFERRED STOCKS (9.2%)
CABLE (2.9%)
CSC Holdings 3,975 $ 262
CSC Holdings PIK 655 72
Echostar Communications 3,450 185
--------
519
--------
COMMUNICATIONS (3.7%)
Hyperion Telecomm* 410 476
Nextel Communications PIK 207 186
--------
662
--------
FINANCIAL (0.6%)
Astoria Financial* 3,725 112
Fidelity Federal Bank Cv 30 1
--------
113
--------
SUPERMARKETS (0.7%)
Jitney-Jungle 750 121
--------
AEROSPACE (0.3%)
GPA Cv* 46 45
--------
TELECOMMUNICATIONS (1.0%)
Scott Cable Communications* 144,150 177
--------
TOTAL PREFERRED STOCKS
(Cost $1,567) 1,637
--------
WARRANT (0.0%)
Allegiance Telecom* 35 --
--------
TOTAL WARRANT
(Cost $0) --
--------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATEMENT OF NET ASSETS TIP INSTITUTIONAL FUNDS
September 30, 1998
PENN CAPITAL STRATEGIC Value
HIGH YIELD BOND FUND (000)
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(Cost $19,701) $ 17,424
--------
OTHER ASSETS AND LIABILITIES, NET (2.3%) 418
--------
NET ASSETS:
Portfolio Shares (unlimited
authorization--no par value)
based on 2,000,885 outstanding
shares of beneficial interest $ 20,869
Undistributed net investment income 7
Accumulated net realized loss
on investments (757)
Net unrealized depreciation
on investments (2,277)
--------
TOTAL NET ASSETS (100.0%) $ 17,842
========
Net Asset Value, Offering and
Redemption Price Per Share $8.91
========
* 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 THAT PROGRAM OR OTHER
"ACCREDITED INVESTORS."
(B) STEP-UP BOND -- THE RATE SHOWN IS THE RATE IN EFFECT AT 9/30/98 AND WILL
RESET AT A FUTURE DATE.
CL CLASS
CV CONVERTIBLE
PIK PAYMENT-IN-KIND
SER SERIES
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (000) TIP INSTITUTIONAL FUNDS
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
---------------------
FOR THE PERIOD
3/1/98 THRU
9/30/98 (1)
- ---------------------------------------------------------------------------------------------------------------------------
Investment Income:
<S> <C>
Dividends.................................................................. $ 20
Interest .................................................................. 758
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income.................................................. 778
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees .................................................. 40
Investment Advisory Fee Waiver ............................................ (40)
Administrator Fees ........................................................ 43
Custodian Fees ............................................................ 3
Transfer Agent Fees ....................................................... 14
Professional Fees ......................................................... 14
Trustee Fees .............................................................. 3
Registration Fees ......................................................... 27
Pricing Fees .............................................................. 1
Printing Fees ............................................................. 5
Amortization of Deferred Organizational Costs.............................. 2
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses .......................................................... 112
- ---------------------------------------------------------------------------------------------------------------------------
Less: Reimbursements by Advisor.......................................... (62)
- ---------------------------------------------------------------------------------------------------------------------------
Total Net Expenses .................................................. 50
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income ............................................... 728
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Loss From Securities Sold .................................... (757)
Net Unrealized Depreciation
of Investment Securities ................................................ (2,277)
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Loss
on Investments ........................................................ (3,034)
- ---------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting
from Operations ........................................................ $ (2,306)
===========================================================================================================================
<FN>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) The Penn Capital Strategic High Yield Bond Fund commenced operations on March 1, 1998.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (000) TIP INSTITUTIONAL FUNDS
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
------------------
FOR THE PERIOD
3/1/98 THRU
9/30/98 (1)
- ---------------------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C>
Net Investment Income ................................................... $ 728
Net Realized Loss on Securities Sold..................................... (757)
Net Unrealized Depreciation of
Investment Securities ................................................. (2,277)
- ---------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting
from Operations ..................................................... (2,306)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ................................................... (721)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions ................................................... (721)
- ---------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ............................................. 9,446
Proceeds from Shares Issued in Lieu of Cash Distributions................ 395
Increase from In-Kind Transfers.......................................... 11,169
Cost of Shares Redeemed.................................................. (141)
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Capital Share Transactions............................................. 20,869
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets .......................................... 17,842
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.................................................... --
- ---------------------------------------------------------------------------------------------------------------------------
End of Period ......................................................... $17,842 (2)
===========================================================================================================================
Shares Issued and Redeemed:
Issued .................................................................. 923
Issued in Lieu of Cash Distributions..................................... 44
Issued in connection with In-Kind Transfers.............................. 1,047
Redeemed................................................................. (13)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions....................................... 2,001
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) The Penn Capital Strategic High Yield Bond Fund commenced operations on March 1, 1998.
(2) Includes $7 of undistributed net investment income.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
FINANCIAL HIGHLIGHTS TIP INSTITUTIONAL FUNDS
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
Net Realized and Net Net Ratio of Net
Asset Unrealized Distributions Distributions Asset Assets Ratio Investment
Value Net Loss from Net from 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(1) (000) Net Assets Net Assets
--------- ---------- ----------- ------------- ------------- --------- --------- --------- ----------- ----------
- -------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(2) $10.00 0.37 (1.09) (0.37) -- $8.91 (7.23)% $17,842 0.68%* 10.04%*
Ratio of Net
Ratio of Investment
Expenses Income 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>
1998(2) 2.09%* 8.63%* 29.19%
<FN>
* Annualized
(1) Returns are for the period indicated and have not been annualized.
(2) The Penn Capital Strategic High Yield Bond Fund commenced operations on March 1, 1998.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS TIP INSTITUTIONAL FUNDS
September 30, 1998
1. ORGANIZATION:
TIP INSTITUTIONAL FUNDS (the "Trust") a Delaware business trust, is registered
under the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company with four funds. The financial statements included
herein are for the Penn Capital Strategic High Yield Bond Fund, (the "Fund").
The Fund commenced operations on March 1, 1998. 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 (Continued) TIP INSTITUTIONAL FUNDS
September 30, 1998
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 and paid to Shareholders on a quarterly basis. 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, which may differ from those amounts determined under generally
accepted accounting principles. These 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. TRANSACTIONS WITH AFFILIATES:
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 .10%
of the Fund's average daily net assets up to $250 million, .08% on the next $250
million of such assets, and .07% of such assets in excess of $500 million. The
Fund is subject to a minimum annual fee of $75,000 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
January 1, 1998. The Distributor receives no fees for its distribution services
under this agreement.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Concluded) TIP INSTITUTIONAL FUNDS
September 30, 1998
5. INVESTMENT ADVISORY AGREEMENT:
For its services, Penn Capital Management Company, Inc. (the "Advisor") 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 for the
period ended September 30, 1998 are as follows
(000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------
Purchases ..................... $22,632
Sales ......................... $12,086
At September 30, 1998, the total cost of securities for Federal income tax
purposes was $19,818,000. The aggregate gross unrealized appreciation and
depreciation for securities held by the Fund at September 30, 1998, are as
follows (000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------
Aggregate gross unrealized
appreciation ............... $ 271
Aggregate gross unrealized
depreciation ............... (2,665)
-------
Net unrealized depreciation $(2,394)
=======
7. IN KIND TRANSFERS OF SECURITIES
During the period ended September 30, 1998 Strategic High Yield Bond Fund issued
1,043,117 shares of beneficial interest in exchange for portfolio securities
from certain accounts managed by Penn Capital at their current value of
$11,168,742, which includes $242,642 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 TIP INSTITUTIONAL FUNDS
September 30, 1998
To the Shareholders and Board of Trustees
TIP Institutional Funds
We have audited the accompanying statement of net assets the Penn Capital
Strategic High Yield Bond Fund (one of the funds constituting the TIP
Institutional Funds) as of September 30, 1998, and the related statement of
operations, the statement of changes in net assets, and financial highlights for
the seven months then ended. 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 audit.
We conducted our audit 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, 1998, 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 audit provides 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
Penn Capital Strategic High Yield Bond Fund of the TIP Institutional Funds at
September 30, 1998, the results of its operations, the changes in its net
assets, and financial highlights for the seven months then ended, in conformity
with generally accepted accounting principles.
/s/signature omitted
Philadelphia, Pennsylvania
November 2, 1998
17
<PAGE>
<TABLE>
<CAPTION>
NOTICE TO SHAREHOLDERS
OF
TIP INSTITUTIONAL FUNDS
(UNAUDITED)
For the shareholders that do not have a September 30, 1998 taxable year end,
this notice is for informational purposes only. For shareholders with a
September 30, 1998 taxable year end, please consult your tax advisor as to the
pertinence of this notice. For the fiscal year ended September 30, 1998, each
portfolio is designating the following items with regard to distributions paid
during the year.
LONG TERM MID TERM
(20% RATE) (28% RATE) ORDINARY
CAPITAL GAIN CAPITAL GAIN INCOME
PORTFOLIO DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
--------- --------------- --------------- ---------------
<S> <C> <C> <C>
TIP Institutional Funds - Penn Capital Strategic
High Yield Bond ..................................... 0.00% 0.00% 100.00%
TAX EXEMPT TOTAL QUALIFYING
PORTFOLIO INTEREST DISTRIBUTIONS DIVIDENDS (1)
--------- --------------- --------------- ---------------
TIP Institutional Funds - Penn Capital Strategic
High Yield Bond ..................................... 0.00% 100.00% 0.54%
<FN>
- --------------
(1) Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
</FN>
</TABLE>
18
<PAGE>
TRUST
TIP Institutional 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
- --------------------------------------------------------------------------------
[Logo Omitted]
TURNER
INVESTMENT PARTNERS,
INC.
To open an account, receive account information, make inquiries,
or request literature:
1-888-TIP-7654
THIS REPORT WAS PREPARED FOR SHAREHOLDERS IN THE
TIP INSTITUTIONAL FUNDS. IT MAY BE DISTRIBUTED TO
OTHERS ONLY IF PRECEDED OR ACCOMPANIED BY A TIP FUNDS
PROSPECTUS, WHICH CONTAINS DETAILED INFORMATION.
PEN-F-006-01
