SEMIANNUAL
REPORT
MARCH 31, 2000
(Unaudited)
[Penn Cap High Yield Logo Omitted]
[Penn Cap High Yield Logo Omitted]
- -------------------------------------------
Penn Capital Strategic High Yield Bond Fund
- -------------------------------------------
<PAGE>
INVESTMENT REVIEW
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND--FIRST QUARTER 2000
- ---------------------------------------------------------------
PORTFOLIO OBJECTIVE
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.
MARKET REVIEW
In a quarter characterized by a clear lack of investor interest in the taxable
bond market, the Penn Capital Strategic High Yield Bond Fund once again
outperformed its benchmark, the Credit Suisse First Boston High Yield index, in
the first quarter of 2000. For the period January 1, 2000, through March 31,
2000, the Fund posted a total return of 5.44% compared to (1.29%) for the Credit
Suisse First Boston Index.
The Funds outperformance is clearly a function of executing the process:
maintaining a well-diversified portfolio (currently over 90 companies), active
management, continuous credit research, and strategic weightings in key
industries. Of the four elements mentioned, we believe our credit research
process is the most important. Our portfolio team is in constant communication
with company management and operations. This focus on continuous contact
provides us with the necessary tools to execute the remaining elements of the
process. Whether it be identifying an opportunity to overweight or averting a
potential default, our credit research is the basis for achieving a well
balanced, strategically weighted portfolio.
From a broad market perspective, high yield bond performance continues to be
driven by a lack of demand, as well as, concerns over rising interest rates.
Outflows from high yield mutual funds continue, albeit at a slower pace than
earlier in the year. The flow of bond fund money into equity funds has waned
recently, which could be an encouraging sign for high yield. If this trend
continues, technicals will once again begin to favor the high yield bond market.
The most encouraging news for high yield investors is that the current oversold
situation has created one of the most attractive yield premium opportunities in
the history of the asset class. On a percentage basis, high yield investors are
currently receiving a 100% yield premium over treasury bonds of similar
maturity. Although spreads are historically wide across all sectors, the
single-B and split single-B sectors are especially attractive, offering
investors current yields of 12% to 17%.
1
<PAGE>
Most market strategists agree that, given current valuations, the return
potential of a domestic high yield portfolio far outweigh the risks; which are
principally the economy, individual company performance, and monetary
conditions. Simply put, now is currently an excellent time to be investing in
high yield bonds: the market is cheap, most of the risk has been extracted, and
today's investors would garner a 12% yield while they wait for a rally.
Sincerely,
/s/RICHARD A. HOCKER
Richard A. Hocker
CHIEF INVESTMENT OFFICER
2
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 2000 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------
CORPORATE BONDS (68.3%)
AIRLINES (3.3%)
Aircraft Service International Group
11.000%, 08/15/05 $ 265 $ 231
Airtran Airways (A)
10.410%, 04/01/17 250 237
Constellation Finance (A)
9.800%, 12/14/02 455 419
US Air
9.625%, 09/01/03 40 37
Valujet
10.250%, 04/15/01 520 467
--------
1,391
--------
APPAREL/TEXTILES (2.4%)
Coyne International Enterprises
11.250%, 06/01/08 420 341
Tropical Sportswear
International, Ser A
11.000%, 06/15/08 730 677
--------
1,018
--------
AUTOMOTIVE & TRUCK PARTS (3.5%)
Exide
10.000%, 04/15/05 350 334
Exide Cv (A)
2.900%, 12/15/05 1,365 785
Hayes Wheels International
11.000%, 07/15/06 125 127
JH Haefner
10.000%, 05/15/08 245 199
Lear (A)
7.960%, 05/15/05 30 28
--------
1,473
--------
BROADCASTING, NEWSPAPERS & ADVERTISING (4.0%)
Cd Radio/Sirrus Satellite Radio
14.500%, 05/15/09 195 180
Garden State Newspapers, Ser B
8.750%, 10/01/09 185 167
Jones International Network
11.750%, 07/01/05 1,195 1,204
XM Satellite Radio
14.000%, 03/15/10 150 144
--------
1,695
--------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
CABLE (1.1%)
Northland Cable Television
10.250%, 11/15/07 $ 355 $ 343
Scott Cable Communications,
Ser B (C)
07/18/02 165 46
Telewest Communications
9.625%, 10/01/06 90 87
--------
476
--------
COMMUNICATIONS EQUIPMENT (0.5%)
Dictaphone
11.750%, 08/01/05 190 188
Williams Communications Group
10.875%, 10/01/09 10 10
--------
198
--------
CONTAINERS PAPER & PLASTIC (0.2%)
Packaged Ice
9.750%, 02/01/05 135 112
--------
COSMETICS & TOILETRIES (2.5%)
Chattem, Ser B
8.875%, 04/01/08 130 110
Drypers, Ser B
10.250%, 06/15/07 1,220 961
--------
1,071
--------
ENVIRONMENTAL SERVICES (1.0%)
Waste Management
8.750%, 05/01/18 80 72
Waste Systems
11.500%, 01/15/06 355 341
--------
413
--------
FINANCIAL SERVICES (0.2%)
RBF Finance (A)
11.000%, 03/15/06 35 37
Trump Castle Funding
11.750%, 11/15/03 50 40
--------
77
--------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 2000 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (1.8%)
Chiquita Brands International
9.125%, 03/01/04 $ 140 $ 116
Heileman Acquisition (C)*
01/31/04 20 --
Pantry
10.250%, 10/15/07 325 287
Tom's Foods
10.500%, 11/01/04 410 348
------
751
------
GAMING (3.3%)
Aladdin Gaming (D)
17.968%, 03/01/10 1,650 825
Autotote, Ser B
10.875%, 08/01/04 220 219
Hollywood Park, Ser B
9.250%, 02/15/07 15 15
Mohegan Tribal Gaming
8.750%, 01/01/09 215 206
Penn National Gaming
10.625%, 12/15/04 125 126
------
1,391
------
HOTELS & LODGING (0.3%)
Hollywood Casinos
11.250%, 05/01/07 125 126
------
INSTRUMENTS SCIENTIFIC (0.2%)
Fisher Scientific International
9.000%, 02/01/08 85 78
------
INTERNET SOFTWARE (0.4%)
Psinet (A)
10.500%, 12/01/06 175 168
------
MACHINERY (0.7%)
Thermadyne Manufacturing
9.875%, 06/01/08 340 285
------
MANUFACTURING (2.7%)
Di Industries (A)
8.875%, 07/01/07 315 285
Sun World International, Ser B
11.250%, 04/15/04 460 470
- --------------------------------------------------------------------------------
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
Unicco Service, Ser B
9.875%, 10/15/07 $ 387 $ 366
------
1,121
------
MEDICAL PRODUCTS & SERVICES (1.8%)
Global Health Services
11.000%, 05/01/08 1,400 640
Quorum Health
8.750%, 11/01/05 135 125
------
765
------
METAL / MINING OTHER (1.0%)
TVX Gold Cv
5.000%, 03/28/02 625 441
------
OIL FIELD SERVICES (0.3%)
Key Energy Services, Ser B
14.000%, 01/15/09 130 142
------
PETROLEUM & FUEL PRODUCTS (4.7%)
Derlan Manufacturing
10.000%, 01/15/07 61 59
Houston Exploration, Ser B
8.625%, 01/01/08 375 351
Ocean Rig Norway
10.250%, 06/01/08 890 748
Parker Drilling Cv
5.500%, 08/01/04 240 180
Parker Drilling, Ser D
9.750%, 11/15/06 340 328
Pride International (D)
5.410%, 04/24/18 870 332
------
1,998
------
PETROLEUM REFINING (2.7%)
Great Lakes Carbon, Ser B
10.250%, 05/15/08 335 314
Orion Refining
10.000%, 11/15/04 343 309
Plains Resources, Ser B
10.250%, 03/15/06 225 216
RBF Finance
11.375%, 03/15/09 295 313
------
1,152
------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 2000 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
PROPANE DISTRIBUTION (0.1%)
Ferrellgas Partners, Ser B
9.375%, 06/15/06 $ 45 $ 44
------
REAL ESTATE / BUILDING (0.5%)
Fortress Group
13.750%, 05/15/03 340 203
------
RETAIL (2.5%)
Finlay Enterprises
9.000%, 05/01/08 440 395
K-Mart, Ser K-1
8.990%, 07/05/10 260 258
Phar-Mor
11.720%, 09/11/02 465 398
------
1,051
------
STEEL & STEEL WORKS (0.1%)
Ak Steel
9.125%, 12/15/06 50 49
------
TELEPHONES & TELECOMMUNICATIONS (21.7%)
Clearnet Communications (D)
12.306%, 12/15/05 315 315
Gilat Satellite
6.500%, 06/03/04 60 169
Golden Sky DBS (D)
11.708%, 03/01/07 1,785 1,194
Hyperion Telecommunication,
Ser B (D)
11.494%, 04/15/03 250 228
ICG Holding (D)
13.393%, 09/15/05 130 123
ICG Holdings (D)
14.151%, 05/01/06 175 142
ICG Services (D)
14.540%, 05/01/08 160 87
ITC Deltacom
4.500%, 05/15/06 280 420
9.750%, 11/15/08 75 74
Level 3 Communications
9.125%, 05/01/08 100 86
Level 3 Communications (D)
13.650%, 12/01/08 275 151
Face
Amount Value
(000) (000)
- --------------------------------------------------------------------------------
McCaw International (D)
14.341%, 04/15/07 $ 1,380 $ 992
Microcell Telecommunications,
Ser B (D)
11.786%, 06/01/06 755 671
Nextel Communication (A)
4.750%, 07/01/07 95 307
Nextel Communications (D)
11.381%, 02/15/08 120 83
Nextel Partners (D)
13.038%, 02/01/09 440 280
Nextlink Communications (A)
10.500%, 12/01/09 365 349
NTL Communications
7.000%, 12/15/08 430 1,056
NTL Communications, Ser B
11.500%, 10/01/08 70 72
Omnipoint
11.625%, 08/15/06 490 522
Omnipoint, Ser A
11.625%, 08/15/06 195 208
Pegasus Media and
Communications, Ser B
12.500%, 07/01/05 85 91
Powertel (D)
12.030%, 02/01/06 250 227
Primus Telecommunications
11.750%, 08/01/04 315 303
Satellites Mexicanos, Ser B
10.125%, 11/01/04 475 399
Talton Holdings, Ser B
11.000%, 06/30/07 495 444
Viatel
11.250%, 04/15/08 190 175
------
9,168
------
TRANSPORTATION/NON-AIR (4.8%)
Atlantic Express
10.750%, 02/01/04 410 386
Global Ocean Carriers (B)
10.250%, 07/15/07 105 47
Holt Group Sr Nts
9.750%, 01/15/06 1,305 809
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 2000 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
Sea Containers
7.875%, 02/15/08 $ 375 $ 263
TFM SA DE Cv
10.250%, 06/15/07 515 509
------
2,014
------
TOTAL CORPORATE BONDS
(Cost $29,678) 28,871
------
PREFERRED STOCKS (22.0%)
BANKS (0.3%)
Astoria Financial* 5,275 137
Fidelity Federal Bank 30 --
------
137
------
CABLE (0.2%)
CSC Holdings PIK* 808 87
------
FINANCE (0.0%)
Crown Castle Intl Corp* 4 4
------
MACHINERY (0.0%)
Clark Material Handling* 53 --
------
MEDICAL PRODUCTS & SERVICES (2.2%)
Laboratory of America* 5,770 450
MedPartners 72,970 483
------
933
------
PETROLEUM REFINING (0.1%)
Chesapeake Energy* 1,370 51
------
TELEPHONES & TELECOMMUNICATIONS
Adelphia Business Solution* 933 924
Echostar Communications 2,990 3,863
Global Crossing Holdings (A) 3,325 358
Global Crossing Holdings 2,000 195
Nextel Communications
PIK* 02/15/10 9,330 891
Omipoint 2,190 408
Pegasus Media and
Communications* 8,335 1,018
Pegasus Media and
Communications* 4,195 438
------
8,095
------
TOTAL PREFERRED STOCKS
(Cost $5,182) 9,307
------
Value
Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (7.6%)
AEROSPACE & DEFENSE (0.4%)
BE Aerospace* $29,990 $ 176
------
APPAREL/TEXTILES (0.6%)
Dan River, Cl A* 40,960 264
------
BROADCASTING, NEWSPAPERS & ADVERTISING (0.5%)
Jones International Networks
Ltd* 15,500 194
------
COMESTRICS & TOILETRIES (0.0%)
Drypers* 725 1
------
ENVIRONMENTAL SERVICES (0.2%)
Waste Systems International,
Cl B* 25,800 74
------
GAMING (0.6%)
Argosy Gaming* 18,550 264
------
INDUSTRIAL (0.0%)
Haynes Holdings (A)* 34,960 17
------
PETROLEUM & FUEL PRODUCTS (0.9%)
Nabors Industries* 9,281 360
------
TELEPHONES & TELECOMMUNICATIONS (4.4%)
Clearnet, Cl A* 14,710 606
ICG Communications* 7,045 255
Microcell Telecommunications* 19,425 862
Pegasus Media and
Communications* 111 16
Powertel* 1,530 106
------
1,845
------
TOTAL COMMON STOCKS
(Cost $2,374) 3,195
------
WARRANTS (0.0%)
Allegiance Telecom* 35 4
------
TOTAL WARRANTS
(Cost $0) 4
------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF NET ASSETS PENN CAPITAL FUNDS
March 31, 2000 (Unaudited)
Face
PENN CAPITAL STRATEGIC Amount Value
HIGH YIELD BOND FUND (000) (000)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (0.2%)
Morgan Stanley,
5.80%, dated 3/31/00, matures
4/03/00, repurchase price
$69,123 (collateralized by
U.S. Treasury Notes, par
value $67,190 7.50%,
matures 02/15/05: market
value $70,839) $ 69 $ 69
-------
TOTAL REPURCHASE AGREEMENTS
(Cost $69) 69
-------
TOTAL INVESTMENTS (98.1%)
(Cost $37,303) 41,446
-------
OTHER ASSETS AND LIABILITIES, NET (1.9%) 788
-------
NET ASSETS:
Portfolio Capital (unlimited
authorization -- no par value)
based on 4,415,910 outstanding
shares of beneficial interest 42,346
Undistributed Net Investment Income 3
Accumulated net realized loss
on investments (4,258)
Net unrealized appreciation
on investments 4,143
-------
TOTAL NET ASSETS (100.0%) $42,234
=======
Net Asset Value, Offering and
Redemption Price Per Share $9.56
=======
* 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.
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
(C) SECURITY IN DEFAULT ON INTEREST AND PRINCIPAL PAYMENTS.
(D) DELAYED INTEREST (STEP-BONDS) -- REPRESENTS SECURITIES THAT REMAIN
ZERO-COUPON SECURITIES UNTIL A PREDETERMINED DATE AT WHICH TIME THE STATED
COUPON RATE BECOMES EFFECTIVE AND INTEREST BECOMES PAYABLE AT REGULAR INTERVALS.
THE INTEREST RATE DISCLOSED REPRESENT YIELDS AT MARCH 31, 2000, BASED UPON THE
ESTIMATED TIMING AND AMOUNT OF FUTURES INTEREST AND PRINCIPAL PAYMENTS.
CL -- CLASS
CV -- CONVERTIBLE
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.
7
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (000) PENN CAPITAL FUNDS
(Unaudited)
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
----------------------
10/1/99 THRU
3/31/00
- ------------------------------------------------------------------------------------------------------------------
Investment Income:
<S> <C>
Interest .................................................................. $1,774
Dividends.................................................................. 97
- ------------------------------------------------------------------------------------------------------------------
Total Investment Income.................................................. 1,871
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees .................................................. 114
Investment Advisory Fee Waiver ............................................ (64)
Administrator Fees ........................................................ 33
Custodian Fees ............................................................ 5
Transfer Agent Fees ....................................................... 14
Professional Fees ......................................................... 9
Trustee Fees .............................................................. --
Registration Fees ......................................................... 9
Pricing Fees .............................................................. 2
Printing Fees ............................................................. 16
Amortization of Deferred Organizational Costs............................... 2
Insurance and Other Fees.................................................... 1
- ------------------------------------------------------------------------------------------------------------------
Total Expenses .......................................................... 141
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income ............................................... 1,730
- ------------------------------------------------------------------------------------------------------------------
Net Realized Loss From Securities Sold .................................... (995)
Net Unrealized Appreciation
of Investment Securities ................................................ 4,330
- ------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
on Investments ........................................................ 3,335
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ........................................................ $5,065
- ------------------------------------------------------------------------------------------------------------------
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
</TABLE>
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (000) PENN CAPITAL FUNDS
<TABLE>
<CAPTION>
(Unaudited)
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
-----------------------------
10/1/99 THRU 10/1/98 THRU
3/31/00 9/30/99
- --------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C> <C>
Net Investment Income ................................................... $ 1,730 $ 3,357
Net Realized Loss on Securities Sold..................................... (995) (2,506)
Net Unrealized Appreciation of
Investment Securities ................................................. 4,330 2,090
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations ..................................................... 5,065 2,941
- --------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ................................................... (1,727) (3,364)
- --------------------------------------------------------------------------------------------------------------
Total Distributions ................................................... (1,727) (3,364)
- --------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ............................................. 5,276 35,705
Proceeds from Shares Issued in Lieu of Cash Distributions................ 924 2,157
Cost of Shares Redeemed................................................... (9,226) (13,359)
- --------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Capital Share Transactions............................................. (3,026) 24,503
- --------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets .......................................... 312 24,080
- --------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period.................................................... 41,922 17,842
- --------------------------------------------------------------------------------------------------------------
End of Period(1) ...................................................... $42,234 $41,922
==============================================================================================================
Shares Issued and Redeemed:
Issued .................................................................. 583 3,991
Issued in Lieu of Cash Distributions..................................... 101 241
Redeemed.................................................................. (1,023) (1,478)
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Share Transactions............................ (339) 2,754
- --------------------------------------------------------------------------------------------------------------
(1) Includes undistributed net investment income of $3 as of March 31, 2000.
The accompanying notes are an integral part of the financial statements.
</TABLE>
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
Value Net Gain (Loss) from Net from Value End
Beginning Investment on Investment Capital End Total of Period
of Period Income Investments Income Gains of Period Return+ (000)
--------- --------- ------------ ---------- ------------ --------- ----------- --------
- -------------------------------------------
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000* $ 8.82 0.38 0.74 (0.38) -- $9.56 13.64% $42,234
1999(2) $ 8.91 0.83 (0.09) (0.83) -- $8.82 8.65% $41,922
1998(1) $10.00 0.37 (1.09) (0.37) -- $8.91 (7.23)% $17,842
Ratio of Net
Ratio of Investment
Expenses Income to
Ratio of Net to Average Average
Ratio Investment Net Assets Net Assets
of Expenses Income (Excluding (Excluding Portfolio
to Average to Average Waivers and Waivers and Turnover
Net Assets Net Assets Reimbursements) Reimbursements) Rate
----------- ----------- --------------- --------------- --------
0.68% 8.38% 0.99% 8.07% 36.27%
0.68% 9.11% 1.14% 8.65% 96.98%
0.68% 10.04% 2.09% 8.63% 29.19%
<FN>
* For the six-month period ended March 31. All ratios are for the period and have been annualized.
+ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on March 1, 1998. All ratios are for the period and have been annualized.
(2) On January 25, 1999, shareholders of the Alpha Select Penn Capital High
Yield Bond Fund (the "Fund") approved a tax-free reorganization under which all
assets and liabilities of the Fund were transferred to the TIP Penn Capital High
Yield Bond Fund.
</FN>
</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>
NOTES TO FINANCIAL STATEMENTS PENN CAPITAL FUNDS
March 31, 2000 (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 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 March 31, 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. 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, 2000 (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 daily and paid monthly to Shareholders. Any net realized
capital gains on sales of securities are distributed to Shareholders at
least annually.
Dividends from net investment income and distributions from net realized
capital gains are determined in accordance with U.S. Federal income tax
regulations. Certain book/tax differences are either temporary or permanent
in nature. To the extent these differences are permanent, they are charged
or credited to paid-in-capital or accumulated net realized gain, as
appropriate, in the period that the differences arise.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of income and
expenses during the reported period. Actual results could differ from those
estimates.
3. ORGANIZATION COSTS AND TRANSACTIONS WITH AFFILIATES:
Organization costs have been capitalized by the Fund and are being amortized
over a period of sixty months. In the event any of the initial shares of the
Fund are redeemed by any holder thereof during the period that such Fund is
amortizing its organizational costs, the redemption proceeds payable to the
holder thereof by the Fund will be reduced by the unamortized organizational
costs in the same ratio as the number of initial shares outstanding at the time
of redemption.
Certain officers of the Trust are also officers of SEI Investments Mutual Funds
Services (the "Administrator") and/or SEI Investments Distribution Co. (the
"Distributor"). Such officers are paid no fees by the Trust for serving as
officers and trustees of the Trust.
4. ADMINISTRATION, SHAREHOLDER SERVICING, AND DISTRIBUTION AGREEMENTS:
The Trust and the Administrator are parties to an agreement under which the
Administrator provides management and administrative services for an annual fee.
For these administrative services, the Administrator is entitled to a fee from
the Fund, which is calculated daily and paid monthly, at an annual rate of .09%
of the Trust's average daily net assets up to $250 million, .07% on the next
$250 million, .06% on the next $250 million, .05% on the next $1.25 billion and
.04% of such assets in excess of $2 billion. The Fund is subject to a minimum
annual fee of $65,000 for the first class of shares and $15,000 for each
additional class of shares, which may be reduced at the sole discretion of the
Administrator.
DST Systems, Inc., (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Fund under a transfer agency agreement with
the Trust.
The Trust and the Distributor are parties to a Distribution Agreement dated
April 28, 1996. The Distributor receives no fees for its distribution services
under this agreement.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Concluded) PENN CAPITAL FUNDS
March 31, 2000 (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 other than
short-term investments for the period ended March 31, 2000, are as follows
(000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
--------------------
Purchases ............... $13,991
Sales ................... $13,860
At March 31, 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 March 31, 2000, are as follows (000):
PENN CAPITAL STRATEGIC
HIGH YIELD BOND FUND
--------------------
Aggregate gross unrealized
appreciation ................. $ 7,042
Aggregate gross unrealized
depreciation ................. (2,899)
-------
Net unrealized depreciation ..... $ 4,143
=======
For Federal income tax purposes the fund had a capital loss carryforward of
$1,140,491 at March 31, 2000 which may be carried forward and applied against
future capital gains. The capital loss carryforward expires in 2007.
7. IN KIND TRANSFERS OF SECURITIES (000)
During the period ended September 30, 1998, Strategic High Yield Bond Fund
issued 1,047 shares of beneficial interest in exchange for portfolio securities
from certain accounts managed by Penn Capital at their current value of $11,169,
which includes $243 of net unrealized loss.
8. CONCENTRATION OF CREDIT RISK
The Strategic High Yield Bond Fund invests primarily in fixed income securities
that are not rated or that are rated below investment grade (I.E., Ba1 or lower
rating by Moody's and/or BB+ or lower by S&P), including securities of issuers
subject to proceedings under the Federal Bankruptcy Code. The market for such
securities is relatively inefficient due to its complexity and the limited
availability of information on such securities.
13
<PAGE>
NOTES
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[BLANK PAGE]
<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-009-02
