SEMIANNUAL
REPORT
March 31, 1999
(Unaudited)
[LOGO OMITTED]
Penn Capital Management
Penn Capital Funds
-----------------------------------------------
Portfolios of The TIP Funds [Graphic omitted]
-----------------------------------------------
Penn Capital Strategic High Yield Bond Fund
-----------------------------------------------
<PAGE>
INVESTMENT REVIEW
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND--FIRST QUARTER 1999
- --------------------------------------------------------------------------------
PORTFOLIO OBJECTIVE
The 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.
MARKET REVIEW
The high yield market's performance for the first quarter of 1999 reflected a
positive but cautious tone, as investors searched for higher yields and primary
market makers re-deploy their capital. The CS First Boston High Yield Bond Index
and Merrill Lynch High Yield Bond Index returned 1.65% and 1.08%, respectively,
both again outperforming the ten-year Treasury, which declined 3.23% for the
quarter. We believe this activity reinforces our view that the high yield market
is undervalued and should continue to attract more investment assets. Why Penn
remains positive about the high yield market:
[bullet] The high yield market has matured and grown. Today it represents close
to 25% of the U.S. corporate bond market.
[bullet] Credit quality is acceptable. Lower rated issuances (B- or lower) are
less than half of what they were in the 1980's.
[bullet] The Moody's trailing twelve month domestic default rate for 1998 was
1.7%, up from 1.4% in 1997, but below the 4.2% Moody's average annual
default rate for the last ten years.
[bullet] The CS First Boston High Yield Index spread-to-treasury at March 31,
1999, was 605 basis points, or an index premium to Treasuries of 116%.
As noted last quarter, from an historical perspective, the index
premium has not been at these levels since 1990, a year highlighted by
the collapse of high yield's primary market maker Drexel Burnham
Lambert, and a 10% annual default rate. Current wide spreads will tend
to "cushion" losses in the event of future market disruption.
[bullet] High yield continues to be one of the best ways to diversify a fixed
income allocation. It is not highly correlated to other fixed income
instruments.
[bullet] Finally, high yield returns have significantly outperformed investment
grade bonds over long term (5 and 10 year) horizons. The CS First
Boston High Yield Index has generated returns of 8.8% and 10.7%,
respectively, compared to 7.8% and 9.1% for the Lehman Aggregate
Bond Index. Penn's Active and Defensive Styles have significantly
outperformed the CS First Boston High Yield Index and Merrill Lynch
High Yield Index, respectively, over the same period.
<PAGE>
PERFORMANCE REVIEW
Month 2.21%
Quarter 3.35%
Six-Month Period 5.06%
Inception-to-Date
Annualized (3/1/98) (2.34)%
Technical factors continued to play a role in dictating the performance of the
high yield market during the first quarter. High yield mutual funds experienced
net inflows of $4.0 billion, the second consecutive quarterly increase compared
to $1.2 billion net outflows in the third quarter of 1998. Core holdings in
Penn's High Yield styles contributed significantly to performance. Industries
such as cable, telecommunications and consumer manufacturing provided investors
with the strong returns. The cable and telecommunications industries continue to
benefit from the expectations of greatly enhanced revenue capabilities, derived
in part from digital capabilities, internet services, programming on demand, and
inevitably consolidation. Manufacturers of domestic consumer goods performed
strongly as consumers continued to drive solid U.S. economic growth.
As stated before, a key to Penn's high yield value approach is ... its high
coupon or yield! As opposed to equities, our holdings allow us to "get paid
while we wait." Penn's active and defensive high yield portfolios are
undervalued relative to the fundamentals of the respective companies. We believe
that, as the year progresses, the valuations of these total return opportunities
will be realized, translating into superior performance over the long term.
Sincerely,
/s/ signature omitted
Richard A. Hocker
CHIEF INVESTMENT OFFICER
PENN CAPITAL MANAGEMENT COMPANY, INC.
2
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- -----------------------------------------------------------
CORPORATE BONDS (81.8%)
AEROSPACE (1.0%)
Burke Industries
10.000%, 08/15/07 $ 135 $ 125
Compass Aerospace (A)
10.125%, 04/15/05 185 180
Derlan Manufacturing
10.000%, 01/15/07 105 94
--------
399
--------
AIRLINES (1.7%)
Aircraft Service International
Group
11.000%, 08/15/05 250 253
Constellation Finance (A)
9.800%, 12/14/02 445 428
--------
681
--------
AUTOMOTIVE (0.8%)
Hayes Wheels International
11.000%, 07/15/06 75 83
Jh Heafner
10.000%, 05/15/08 245 250
--------
333
--------
CABLE (4.0%)
Charter Communication
Holdings (A)
8.625%, 04/01/09 435 446
International Cabletel
10.000%, 02/15/07 265 281
Northland Cable Television
10.250%, 11/15/07 355 376
NTL Incorporated (A)
11.500%, 10/01/08 70 79
Rifkin Acquisition Partners
11.125%, 01/15/06 295 336
Scott Cable Communications (B)
07/18/02 164 25
Telewest Communications
9.625%, 10/01/06 90 95
--------
1,638
--------
Face
Amount Value
(000) (000)
- ----------------------------------------------------------
COMMUNICATIONS (8.2%)
Clearnet Communications (D)
11.660% 12/15/05 $ 315 $ 289
E.spire Communications (D)
15.535%, 11/01/05 640 462
14.394%, 07/01/08 335 161
Hyperion Telecommunication (D)
11.356%, 04/15/03 250 205
Level 3 Communications
9.125%, 05/01/08 100 100
McCaw International (D)
16.974%, 04/15/07 1,340 710
Microcell Telecommunication (D)
11.180%, 06/01/06 735 604
Primus Telecommunications
11.750%, 08/01/04 415 430
Satellites Mexicanos, Ser B
10.125%, 11/01/04 30 24
Talton Holdings, Ser B
11.000%, 06/30/07 445 399
--------
3,384
--------
COMPUTERS & SERVICES (0.5%)
Autotote Corporation
10.875%, 08/01/04 185 191
--------
CONGLOMERATE (0.6%)
Thermadyne Manufacturing
9.875%, 06/01/08 280 262
--------
CONSUMER / MANUFACTURING (5.0%)
Chattem
8.875%, 04/01/08 550 553
Decora Industries
11.000%, 05/01/05 325 306
Drypers
10.250%, 06/15/07 455 436
Ekco Group
9.250%, 04/01/06 75 75
Revlon Consumer Products
8.125%, 02/01/06 370 356
Sweetheart Cup
9.625%, 09/01/00 340 323
--------
2,049
--------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- ----------------------------------------------------------
ENERGY (1.8%)
Ferrellgas Partners
9.375%, 06/15/06 $ 45 $ 45
Ocean Rig Norway
10.250%, 06/01/08 170 115
R&B Falcon (A)
9.500%, 12/15/08 200 180
Transamerican Energy, Ser B
11.500%, 06/15/02 430 116
Transamerican Refining
15.000%, 12/01/03 300 297
--------
753
--------
FINANCIAL (1.9%)
Bf Saul REIT
9.750%, 04/01/08 225 214
Hawthorne Financial
12.500%, 12/31/04 600 583
--------
797
--------
FOOD & BEVERAGE (7.8%)
Ameriserv Food
8.875%, 10/15/06 435 382
Archibald Candy
10.250%, 07/01/04 50 51
10.250%, 07/01/04 305 313
Cfp Holdings, Ser B
11.625%, 01/15/04 720 601
Chiquita Brands International
10.250%, 11/01/06 120 124
Di Giorgio
10.000%, 06/15/07 385 380
Envirodyne Industries
12.000%, 06/15/00 15 15
Fleming
10.500%, 12/01/04 420 394
Heileman Acquisition (C)
01/31/04 20 --
Imperial Sugar
9.750%, 12/15/07 155 156
Mrs. Fields Holding (D)
17.076%, 12/01/05 155 79
Mrs. Fields Original, Ser B
10.125%, 12/01/04 75 72
Face
Amount Value
(000) (000)
- ----------------------------------------------------------
Sun World International
11.250%, 04/15/04 $ 260 $ 275
Tom's Foods
10.500%, 11/01/04 400 384
--------
3,226
--------
GAMING (10.3%)
Alliance Gaming
10.000%, 08/01/07 655 445
Argosy Gaming Cv
12.000%, 06/01/01 875 883
Aztar
11.000%, 10/01/02 130 132
Hollywood Casino
12.750%, 11/01/03 375 410
Hollywood Park, Ser B
9.500%, 08/01/07 380 389
Mohegan Tribal (A)
8.750%, 01/01/09 140 146
Penn National Gaming
10.625%, 12/15/04 465 470
Venetian Casino/Lv Sands
12.250%, 11/15/04 790 816
10.000%, 11/15/05 625 561
--------
4,252
--------
GENERAL INDUSTRIAL (5.4%)
American Pad & Paper
13.000%, 11/15/05 635 392
Clark Material Handling
10.750%, 11/15/06 65 66
Exide
10.000%, 04/15/05 350 345
Exide Cv (A)
2.900%, 12/15/05 1,295 730
Haynes International
11.625%, 09/01/04 500 404
Perry-Judd
10.625%, 12/15/07 75 77
Prestolite Electric
9.625%, 02/01/08 85 84
Safety-Kleen Services
9.250%, 06/01/08 135 141
--------
2,239
--------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- ----------------------------------------------------------
HEALTHCARE (5.9%)
Fisher Scientific International
9.000%, 02/01/08 $ 85 $ 86
Fountain View
11.250%, 04/15/08 320 281
Genesis Health Ventures
9.250%, 10/01/06 310 266
Global Health Services
11.000%, 05/01/08 390 245
Oxford Health Plans (A)
11.000%, 05/15/05 175 180
Pediatric Services
10.000%, 04/15/08 520 364
Quorum Health
8.750%, 11/01/05 135 130
Sun Healthcare Group (A)
6.000%, 03/01/04 230 33
Unilab
11.000%, 04/01/06 795 841
--------
2,426
--------
HOTELS/LODGING (0.1%)
Red Roof Inns
9.625%, 12/15/03 50 50
--------
MEDIA (2.3%)
Garden State Newspapers
8.750%, 10/01/09 310 317
Gray Communications System
10.625%, 10/01/06 425 450
Tri-State Outdoor Media
11.000%, 05/15/08 170 177
--------
944
--------
METAL/MINING OTHER (1.7%)
TVX Gold Cv
5.000%, 03/28/02 1,005 714
--------
METAL/MINING STEEL (0.8%)
Great Lakes Carbon
10.250%, 05/15/08 335 346
--------
RAILROADS (0.7%)
TFM SA de Cv
10.250%, 06/15/07 330 290
--------
Face
Amount Value
(000) (000)
- ----------------------------------------------------------
REAL ESTATE/BUILDING (0.9%)
Fortress Group
13.750%, 05/15/03 $ 340 $ 372
--------
RESTAURANTS (1.9%)
Advantica Restaurant Group
11.250%, 01/15/08 558 573
Avado Brands
9.750%, 06/01/06 205 201
--------
774
--------
RETAIL (4.3%)
K-Mart
13.500%, 01/01/09 185 191
8.990%, 07/05/10 615 609
Pamida
11.750%, 03/15/03 115 104
Pantry
10.250%, 10/15/07 475 499
Petro Stopping Ctr/Finl
10.500%, 02/01/07 225 241
Tropical Sportswear International
11.000%, 06/15/08 110 115
--------
1,759
--------
SERVICES (1.8%)
Loewen Group Inc.
6.700%, 10/01/99 340 207
Loewen Group International, Ser 7
7.600%, 06/01/08 225 118
Unicco Service
9.875%, 10/15/07 435 436
--------
761
--------
STEEL & STEEL WORKS (2.2%)
Ak Steel
9.125%, 12/15/06 610 646
Simcala
9.625%, 04/15/06 335 247
--------
893
--------
SUPERMARKETS (2.8%)
Duane Reade
9.250%, 02/15/08 335 348
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- ----------------------------------------------------------
Jitney-Jungle Stores
10.375%, 09/15/07 440 $ 448
Phar-Mor
11.720%, 09/11/02 365 381
--------
1,177
--------
TELEPHONES &
TELECOMMUNICATION (3.3%)
Dobson/Sygnet Communications
12.250%, 12/15/08 155 166
ICG Services (D)
12.063%, 05/01/08 160 91
Intelcom Group (D)
11.537%, 05/01/06 175 143
Omnipoint
11.625%, 08/15/06 490 426
11.625%, 08/15/06 195 170
Nextel Communications (D)
9.554%, 02/15/08 310 219
Viatel
11.500%, 03/15/09 160 166
--------
1,381
--------
TRANSPORTATION/NON-AIR (3.7%)
Atlantic Express
10.750%, 02/01/04 410 421
Coach USA
9.375%, 07/01/07 80 84
HCC Industries
10.750%, 05/15/07 405 392
Holt Group
9.750%, 01/15/06 380 262
Sea Containers
7.875%, 02/15/08 375 361
--------
1,520
--------
VETERINARY SERVICES (0.4%)
Veterinary Centers of America Cv
5.250%, 05/01/06 200 154
--------
TOTAL CORPORATE BONDS
(Cost $34,594) 33,765
--------
Value
Shares (000)
- ----------------------------------------------------------
PREFERRED STOCKS (8.5%)
AEROSPACE (0.1%)
GPA Cv* 46 $ 46
--------
BANKS (0.3%)
Astoria Financial* 5,275 137
Fidelity Federal Bank 30 1
--------
138
--------
CABLE (3.4%)
CSC Holdings 4,725 527
CSC Holdings PIK* 707 81
Echostar Communications 4,825 794
--------
1,402
--------
COMMUNICATIONS (4.1%)
Crown Castle International* (A) 3 4
Hyperion Telecom* 884 813
Nextel Communications PIK* 8,380 855
--------
1,672
--------
METAL/MINING OTHER (0.3%)
Clark Material Handling* 1,393 137
--------
SUPERMARKETS (0.3%)
Jitney-Jungle* 750 105
--------
TOTAL PREFERRED STOCKS
(Cost $2,620) 3,500
--------
COMMON STOCKS (7.3%)
AIRCRAFT (0.2%)
BE Aerospace* 6,750 100
--------
APPAREL/TEXTILES (1.0%)
Dan River, Cl A* 29,070 247
Pillowtex 12,500 177
--------
424
--------
BROADCASTING, NEWSPAPERS
& ADVERTISING (0.0%)
Pegasus Communications* 111 3
--------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
Shares/Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- ----------------------------------------------------------
BUILDING & CONSTRUCTION
SUPPLIES (0.8%)
International Comfort
Products* 43,150 $ 340
--------
ENTERTAINMENT (0.3%)
Players International* 17,200 107
--------
FOOD & BEVERAGE (2.0%)
Dr. Pepper Bottling Holdings,
Cl A* 27,150 815
--------
INDUSTRIAL (0.1%)
Haynes Holdings* (A) 6,960 64
--------
MEDICAL PRODUCTS &
SERVICES (1.0%)
Unilab* 127,950 408
--------
NON-FOODS (0.4%)
Drypers* 81,275 175
--------
OIL SERVICES (0.5%)
Bayard Drilling Technologies* 30,850 193
--------
TELEPHONES &
TELECOMMUNICATION (1.0%)
Clearnet, Cl A* 29,775 393
Nextel Communications, Cl A* 80 3
--------
396
--------
TOTAL COMMON STOCKS
(Cost $3,228) 3,025
--------
WARRANT (0.0%)
Allegiance Telecom* 35 --
--------
TOTAL WARRANT
(Cost $0) --
--------
REPURCHASE AGREEMENT (0.5%)
Lehman Brothers
4.95%, dated 03/31/99, matures
04/01/99, repurchase price
$201,405 (collateralized by
U.S. Treasury Note, par value
$200,770, 5.625%, matures
10/31/99 market value
$206,440) $ 201 $ 201
--------
PENN CAPITAL STRATEGIC Value
HIGH YIELD BOND FUND (000)
- ----------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $201) $ 201
--------
TOTAL INVESTMENTS (98.1%)
(Cost $40,643) 40,491
--------
OTHER ASSETS AND LIABILITIES, NET (1.9%) 771
--------
NET ASSETS:
Portfolio Shares (unlimited
authorization--no par value)
based on 4,631,471 outstanding
shares of beneficial interest 44,211
Distributions in excess of net
investment income (72)
Accumulated net realized loss
on investments (2,725)
Net unrealized depreciation
on investments (152)
--------
TOTAL NET ASSETS (100.0%) $ 41,262
========
Net Asset Value, Offering and
Redemption Price Per Share $8.91
========
*NON-INCOME PRODUCING SECURITY
(A) SECURITY SOLD WITH IN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT
FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THE PROGRAM OR OTHER "ACCREDITED
INVESTORS".
(B) SECURITY IN DEFAULT ON INTEREST PAYMENTS.
(C) SECURITY IN DEFAULT ON INTEREST AND PRINCIPAL PAYMENTS.
(D) DELAYED INTEREST (STEP-BONDS) -- REPRESENTS SECURITIES THAT REMAIN ZERO-
COUPON SECURITIES UNTIL A PREDETERMINED DATE AT WHICH TIME THE STATED COUPON
RATE BECOMES EFFECTIVE AND INTEREST BECOMES PAYABLE AT REGULAR INTERVALS.
THE INTEREST RATES DISCLOSED REPRESENT YIELDS AT MARCH 31, 1999, BASED UPON
THE ESTIMATED TIMING AND AMOUNT OF FUTURE INTEREST AND PRINCIPAL PAYMENTS.
CL--CLASS
CV--CONVERTIBLE
PIK--PAYMENT-IN-KIND
REIT--REAL ESTATE INVESTMENT TRUST
SER--SERIES
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS (000) PENN CAPITAL FUNDS
(Unaudited)
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------------
10/1/98 THRU
3/31/99
- ------------------------------------------------------------------------------
Investment Income:
Interest ...................................... $ 1,670
Dividends...................................... 38
- ------------------------------------------------------------------------------
Total Investment Income...................... 1,708
- ------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees ...................... 94
Investment Advisory Fee Waiver ................ (78)
Administrator Fees ............................ 36
Custodian Fees ................................ 3
Transfer Agent Fees ........................... 12
Professional Fees ............................. 12
Trustee Fees .................................. 2
Registration Fees ............................. 28
Pricing Fees .................................. 1
Printing Fees ................................. 4
Amortization of Deferred Organizational Costs.. 2
- ------------------------------------------------------------------------------
Total Net Expenses ...................... 116
- ------------------------------------------------------------------------------
Net Investment Income ................... 1,592
- ------------------------------------------------------------------------------
Net Realized Loss From Securities Sold ........ (1,968)
Net Unrealized Appreciation
of Investment Securities .................... 2,125
- ------------------------------------------------------------------------------
Net Realized and Unrealized Gain
on Investments ............................ 157
- ------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ............................ $1,749
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (000) PENN CAPITAL FUNDS
(Unaudited)
<TABLE>
<CAPTION>
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
--------------------------
10/1/98 THRU 3/1/98 THRU
3/31/99 9/30/98 (1)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Activities:
Net Investment Income ...................................... $ 1,592 $ 728
Net Realized Loss on Securities Sold........................ (1,968) (757)
Net Unrealized Appreciation (Depreciation) of
Investment Securities .................................... 2,125 (2,277)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations ........................................ 1,749 (2,306)
- --------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ...................................... (1,671) (721)
- --------------------------------------------------------------------------------------------
Total Distributions ...................................... (1,671) (721)
- --------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ................................ 23,866 9,446
Proceeds from Shares Issued in Lieu of Cash Distributions... 1,125 395
Increase from In-Kind Transfers............................. -- 11,169
Cost of Shares Redeemed..................................... (1,649) (141)
- --------------------------------------------------------------------------------------------
Increase in Net Assets From
Capital Share Transactions................................ 23,342 20,869
- --------------------------------------------------------------------------------------------
Total Increase in Net Assets ............................. 23,420 17,842
- --------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period....................................... 17,842 --
- --------------------------------------------------------------------------------------------
End of Period(2) ......................................... $41,262 $17,842
============================================================================================
Shares Issued and Redeemed:
Issued ..................................................... 2,688 923
Issued in Lieu of Cash Distributions........................ 127 44
Issued in connection with In-Kind Transfers................. -- 1,047
Redeemed.................................................... (185) (13)
- --------------------------------------------------------------------------------------------
Net Increase in Share Transactions.......................... 2,630 2,001
- --------------------------------------------------------------------------------------------
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commenced operations on March 1, 1998.
(2) Includes undistributed net investment income and/or distributions in excess
of net investment income (000) of $(72) and $7 as of March 31, 1999, and
September 30, 1998, respectively.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS PENN CAPITAL FUNDS
(Unaudited)
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
Net Realized and Net Net
Asset Unrealized Distributions Distributions Asset Assets Ratio
Value Net Gain (Loss) from Net from Value End of Expenses
Beginning Investment on Investment Capital End Total of Period to Average
of Period Income Investments Income Gains of Period Return(1) (000) Net Assets
--------- ---------- ------------- ------------- ------------- --------- --------- --------- -----------
- -------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(3)+ $ 8.91 0.42 0.02 (0.44) -- $8.91 5.06% $41,262 0.68%*
1998(2) $10.00 0.37 (1.09) (0.37) -- $8.91 (7.23)% $17,842 0.68%*
</TABLE>
<TABLE>
<CAPTION>
Ratio of Net
Ratio of Investment
Expenses Income to
Ratio of Net to Average Average
Investment Net Assets Net Assets
Income (Excluding (Excluding Portfolio
to Average Waivers and Waivers and Turnover
Net Assets Reimbursements) Reimbursements) Rate
------------ --------------- --------------- ---------
- -------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
- -------------------------------------------
<S> <C> <C> <C> <C>
1999(3)+ 9.34%* 1.14%* 8.88%* 38.38%
1998(2) 10.04%* 2.09%* 8.63%* 29.19%
</TABLE>
* Annualized
+ For the six-month period ended March 31.
(1) Returns are for the period indicated and have not been annualized.
(2) Commenced operations on March 1, 1998.
(3) On November 4, 1998, the Board of Trustees of the Alpha Select Funds voted
to approve a tax-free reorganization for the Penn Capital Strategic High
Yield Bond Fund (the "Portfolio") under which all of the assets and
liabilities of the Portfolio were transferred to the TIP Funds.
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>
NOTES TO FINANCIAL STATEMENTS PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
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 14 funds. 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 March 31, 1999, the advisory shares had not yet commenced
operations. The financial statements of the remaining portfolios are presented
separately. The assets of the Fund are segregated, and a shareholder's interest
is limited to the fund in which shares are held. The Fund's prospectus provides
a description of the Fund's investment objectives, policies, and strategies.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the significant accounting policies followed by
the Fund.
SECURITY VALUATION -- Investments in equity securities which are traded on a
national exchange (or reported on the NASDAQ national market system) are
stated at the last quoted sales price if readily available for such equity
securities on each business day; other equity securities traded in the
over-the-counter market and listed equity securities for which no sale was
reported on that date are stated at the last quoted bid price. Debt
obligations exceeding 60 days to maturity for which market quotations are
readily available are valued at the most recently quoted bid price. Debt
obligations with 60 days or less remaining until maturity may be valued at
their amortized cost, which approximates market value. Fixed income
securities for which market prices are not readily available may be valued
pursuant to guidelines established by the Board of Trustees.
FEDERAL INCOME TAXES -- It is the Fund's intention to qualify as a regulated
investment company by complying with the appropriate provisions of the
Internal Revenue Code of 1986, as amended. Accordingly, no provision for
Federal income taxes is required.
SECURITY TRANSACTIONS AND RELATED INCOME -- Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Dividend income is recognized on the ex-dividend date, and interest income
is recognized on the accrual basis. Income from payment-in-kind and step-up
bonds is recorded based on the effective interest method. The cost of these
securities has been adjusted to reflect in-kind interest income. Costs used
in determining realized gains and losses on the sales of investment
securities are those of the specific securities sold during the respective
holding period.
NET ASSET VALUE PER SHARE -- The net asset value per share of the Fund is
calculated on each business day, by dividing the total value of the Fund's
assets, less liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the custodian bank until the respective agreements
mature. Provisions of the repurchase agreements ensure that the market value
of the collateral, including accrued interest thereon, is sufficient in the
event of default of the counterparty. If the counterparty defaults and the
value of the collateral declines or if the counterparty enters an insolvency
proceeding, realization of the collateral by the Fund may be delayed or
limited.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued) PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
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 monthly 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. 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
January 1, 1998. The Distributor receives no fees for its distribution services
under this agreement.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Concluded) PENN CAPITAL FUNDS
March 31, 1999 (Unaudited)
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 for the
period ended March 31, 1999, are as follows (000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
--------------------
Purchases ............... $30,731
Sales ................... $10,498
At March 31, 1999, the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation for securities held by the Fund
at March 31, 1999, are as follows (000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
--------------------
Aggregate gross unrealized
appreciation ............ $ 1,973
Aggregate gross unrealized
depreciation ............ (2,125)
-------
Net unrealized depreciation $ (152)
=======
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.
9. TAX-FREE REORGANIZATION
On November 4, 1998, the Board of Trustees of the Alpha Select Funds approved a
tax-free reorganization for the Penn Capital Strategic High Yield Bond Fund (the
"Portfolio") under which all of the assets and liabilities of the Portfolio were
transferred to the TIP Funds, a Massachusetts business trust. A shareholder
meeting was held on January 25, 1999, at which time this reorganization was
approved by the Portfolio's shareholders.
PENN CAPITAL HIGH YIELD BOND FUND
- ---------------------------------
(Voted on January 25, 1999)
SHARES SHARES
VOTED OUTSTANDING
- ---------------------------------------
For 2,236,173 99.56% 56.47%
Against 0 0.00% 0.00%
Abstain 9,813 0.44% 0.25%
13
<PAGE>
NOTES
<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-009-01
