N-30D 1 penncap.txt PENN CAPITAL STRATEGIC HIGH YIELD SAR MARCH 2002 SEMIANNUAL REPORT March 31, 2002 (Unaudited) [Penn Capital Management Logo Omitted] Penn Capital Funds ------------------------------------------- Penn Capital Strategic High Yield Bond Fund ------------------------------------------- CONTENTS -------------------------------------------------------------------------------- 2 Letter to Shareholders 3 Financial Statements 11 Notes to Financial Statements TURNER FUNDS -------------------------------------------------------------------------------- The Turner Funds offer a series of 22 no-load mutual funds to retail and institutional investors. The minimum initial investment in the Penn Capital Strategic High Yield Bond Fund is $100,000. Penn Capital Management Company, Inc., based in Cherry Hill, N.J., serves as the investment adviser to the Penn Capital Strategic High Yield Bond Fund. A separate investment firm manages the other mutual funds in the Turner Funds family. The firm, founded in 1987, invests more than $508 million in fixed-income and equity portfolios on behalf of individuals and institutions. SHAREHOLDER SERVICES -------------------------------------------------------------------------------- Shareholders receive annual and semiannual reports and monthly account statements. Shareholders who have questions about their accounts may call a toll-free telephone number, 1-800-224-6312. Or they may write to Turner Funds, Box 219805, Kansas City, Missouri 64121-9805. INVESTMENT REVIEW PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND--FIRST QUARTER 2002 -------------------------------------------------------------------------------- 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 The high yield bond market continued its recovery in Q1 of 2002 due to evidence of a strengthening economy, strong inflows into the high yield sector, and two consecutive monthly declines in the 12-month trailing default rate. The Fund has outperformed the CSFB High Yield Index in four out of the last six months due to greater confidence in the credit-worthiness of high yield issues rated B and below. This confidence has firmed up prices, allowing investors to realize the full yield potential, as well as capital appreciation. The cash pay portion of the Active high yield portfolio outperformed slightly over the quarter ended March 31, 2002. Non-cash pay securities still proved volatile as they took their cues from equity market performance. Penn's defaulted positions outperformed the benchmark as Chiquita Brands, Inc. emerged from bankruptcy protection. Penn believes the Fund will take advantage of tremendous yield opportunity within the B and CCC rated sectors of the high yield bond market as the default rate declines and the economy slowly improves. Current yields in these sectors range from 15% to 30%, compared to 7% to 10% yields in the BB sector. In general, the high yield bond market has acted as a leading indicator of economic shifts over the last 20 years and has been pricing the current recession since the end of 1999. Overall, we believe high yield spreads will contract over 250 basis points in 2002 as the high yield market continues to price in the economic recovery. Sincerely, /s/Richard A. Hocker Richard A. Hocker CHIEF INVESTMENT OFFICER 2 STATEMENT OF NET ASSETS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) Face PENN CAPITAL STRATEGIC Amount Value HIGH YIELD BOND FUND (000) (000) -------------------------------------------------------------------------------- CORPORATE BONDS (84.1%) AIRLINES (1.4%) Airtran Airways, Ser 99-1 10.410%, 04/01/17 $ 230 $ 173 -------- APPAREL/TEXTILES (1.2%) Coyne International Enterprises 11.250%, 06/01/08 20 4 Dan River 10.125%, 12/15/03 115 63 Perry Ellis International, Ser B 12.250%, 04/01/06 80 81 -------- 148 -------- AUTOMOTIVE & TRUCK PARTS (2.7%) Accuride, Ser B 9.250%, 02/01/08 55 41 Hayes Lemmerz (A) (B) 15.913%, 06/15/06 130 68 Navistar International, Ser B 8.000%, 02/01/08 160 158 Universal Compression (C) 4.720%, 02/15/08 75 72 -------- 339 -------- BANKS (0.3%) Riggs National 9.650%, 06/15/09 35 35 -------- BROADCASTING, NEWSPAPERS & ADVERTISING (5.7%) Cumulus Media 10.375%, 07/01/08 55 59 Lin Holdings (C) 10.000%, 03/01/08 200 178 Paxson Communication 10.750%, 07/15/08 70 76 Paxson Communication (A) (C) 12.250%, 01/15/09 125 90 Penton Media 10.375%, 06/15/11 65 54 Penton Media, (A) 11.875%, 10/01/07 105 107 Face Amount Value (000) (000) -------------------------------------------------------------------------------- Sirius Satellite Radio 14.500%, 05/15/09 $ 182 $ 98 Young Broadcasting, Ser B 8.750%, 06/15/07 55 55 -------- 717 -------- CABLE (2.2%) Charter Commercial Holdings, LLC 8.625%, 04/01/09 110 99 Granite Broadcasting 8.875%, 05/15/08 75 64 Lodgenet Entertainment 10.250%, 12/15/06 40 41 Scott Cable Communications, Ser B (B) 16.000%, 07/18/02 165 25 Telewest Communications 11.000%, 10/01/07 105 53 -------- 282 -------- COSMETICS & TOILETRIES (1.7%) Elizabeth Arden, Ser B 11.750%, 02/01/11 185 185 10.375%, 05/15/07 40 36 -------- 221 -------- ELECTRONIC COMPONENTS (1.1%) Solectron 9.625%, 02/15/09 35 33 Solectron, (C) 3.194%, 05/05/20 180 102 -------- 135 -------- ELECTRONIC GENERATION (1.6%) Calpine 10.500%, 05/15/06 60 53 Calpine Canada Energy 8.500%, 05/01/08 185 147 -------- 200 -------- 3 STATEMENT OF NET ASSETS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) Face PENN CAPITAL STRATEGIC Amount Value HIGH YIELD BOND FUND (000) (000) -------------------------------------------------------------------------------- ENTERTAINMENT (5.1%) Aladdin Gaming, Ser B (C) 13.500%, 03/01/10 $1,735 $ 54 AMC Entertainment 9.500%, 03/15/09 140 139 Autotote, Ser B 12.500%, 08/15/10 75 84 Imax 7.875%, 12/01/05 145 104 Mikohn Gaming, Ser B 11.875%, 08/15/08 140 138 Pinnacle Entertainment, Ser B 9.250%, 02/15/07 130 124 -------- 643 -------- ENVIRONMENTAL SERVICES (1.4%) Allied Waste of North America, Ser B 10.000%, 08/01/09 95 96 Waste Management 8.750%, 05/01/18 80 81 -------- 177 -------- FINANCIAL SERVICES (0.9%) DVI 9.875%, 02/01/04 115 113 -------- FOOD, BEVERAGE & TOBACCO (4.3%) Chiquita Brands International 10.560%, 03/15/09 263 275 Dean Foods 6.900%, 10/15/17 30 26 North Atlantic Trading, Ser B 11.000%, 06/15/04 130 120 Tom's Foods 10.500%, 11/01/04 155 123 -------- 544 -------- FUNERAL SERVICES & RELATED ITEMS (2.7%) Service International 6.000%, 12/15/05 265 243 Stewart Enterprises 10.750%, 07/01/08 95 104 -------- 347 -------- Face Amount Value (000) (000) -------------------------------------------------------------------------------- HOME FURNISHINGS (0.5%) Sleepmaster, Ser B (B) 11.000%, 05/15/09 $ 55 $ 13 Winsloew Furniture, Ser B 12.750%, 08/15/07 50 46 -------- 59 -------- HOTELS & LODGING (3.4%) HMH Properties, Ser C 8.450%, 12/01/08 170 172 Hollywood Casino of Shreveport 13.000%, 08/01/06 175 188 Majestic Star LLC, Ser B 10.875%, 07/01/06 75 76 -------- 436 -------- MACHINERY (0.5%) Armstrong Holdings (B) 9.074%, 04/15/08 105 61 -------- MANUFACTURING (3.3%) Advanced Lighting 8.000%, 03/15/08 390 250 Sun World International, Ser B 11.250%, 04/15/04 170 168 -------- 418 -------- MEDICAL PRODUCTS & SERVICES (6.1%) Per-Se Technologies, Ser B 9.500%, 02/15/05 170 166 Pacificare Health Systems 7.000%, 09/15/03 140 129 Radiologix (A) 10.500%, 12/15/08 100 101 Team Health, Ser B 12.000%, 03/15/09 240 269 Universal Hospital 10.250%, 03/01/08 110 107 -------- 772 -------- MISCELLANEOUS MANUFACTURING (4.0%) Blount 13.000%, 08/01/09 80 51 Hexcel 9.750%, 01/15/09 80 58 4 STATEMENT OF NET ASSETS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) Face PENN CAPITAL STRATEGIC Amount Value HIGH YIELD BOND FUND (000) (000) -------------------------------------------------------------------------------- MISCELLANEOUS MANUFACTURING (CONTINUED) Pen Holdings, Ser B (B) 9.875%, 06/15/08 $ 105 $ 32 Polymer Group, Ser B (B) 9.000%, 07/01/07 250 75 Tekni-Plex, Ser B (A) 12.750%, 06/15/10 100 104 Tyco International Group 5.800%, 08/01/06 90 80 Venture Holdings Trust, Ser B 9.500%, 07/01/05 105 100 -------- 500 -------- OIL & GAS DRILLING (6.9%) Abraxas Petroleum, Ser A 11.500%, 11/01/04 170 127 Chesepeake Energy 8.125%, 04/01/11 70 70 Comstock Resources 11.250%, 05/01/07 45 47 Comstock Resources (A) 11.250%, 05/01/07 25 26 Grant Prideco, Ser B 9.625%, 12/01/07 40 42 Hanover Compressor, Cv 4.750%, 03/15/08 50 41 ICO, Ser B 10.375%, 06/01/07 70 55 Ocean Rig Norway 10.250%, 06/01/08 350 308 Parker Drilling, Ser D 9.750%, 11/15/06 60 62 Plains Resources, Ser B 10.250%, 03/15/06 95 98 -------- 876 -------- PETROLEUM REFINING (0.7%) Great Lakes Carbon, Ser B, PIK 8.516%, 05/15/08 31 18 Orion Refining 10.000%, 11/15/04 417 75 -------- 93 -------- Face Amount Value (000) (000) -------------------------------------------------------------------------------- PHARMACEUTICALS (1.1%) NBTY, Ser B 8.625%, 09/15/07 $ 145 $ 141 -------- REAL ESTATE INVESTMENT TRUSTS (0.9%) Corrections of America 12.000%, 06/01/06 55 57 Host Marriott, Ser E 8.375%, 02/15/06 55 55 -------- 112 -------- RETAIL (2.6%) Cole National Group 9.875%, 12/31/06 80 81 Mothers Work 12.625%, 08/01/05 70 71 Rite Aid 7.625%, 04/15/05 125 99 Rite Aid, Cv 5.250%, 09/15/02 40 39 ShopKo Stores 6.500%, 08/15/03 45 44 -------- 334 -------- RETAIL - FOOD (1.7%) CKE Restaurant 9.125%, 05/01/09 120 117 CKE Restaurant, Cv 4.250%, 03/15/04 105 93 -------- 210 -------- RUBBER & PLASTIC (1.1%) Fonda Group, Ser B 9.500%, 03/01/07 20 16 Packaged Ice, Ser B 9.750%, 02/01/05 160 122 -------- 138 -------- SATELLITE TELECOMMUNICATIONS (5.1%) Echostar Communications (A) 5.750%, 05/15/08 425 395 Pegasus Satellite (C) 13.500%, 03/01/07 525 231 5 STATEMENT OF NET ASSETS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) Face PENN CAPITAL STRATEGIC Amount Value HIGH YIELD BOND FUND (000) (000) -------------------------------------------------------------------------------- SATELLITE TELECOMMUNICATIONS (CONTINUED) Sirius Satellite Radio (C) 15.902%, 12/01/07 $ 45 $ 19 -------- 645 -------- SPECIAL PURPOSE ENTITY (1.6%) Heileman Acquisition (B) 9.625%, 01/31/04 20 -- Majestic Invester (A) 11.653%, 11/30/07 105 100 Murrin Murrin Holdings 9.375%, 08/31/07 135 26 Riggs Capital Trust II, Ser C 8.875%, 03/15/27 100 78 -------- 204 -------- TELEPHONES & TELECOMMUNICATIONS (6.4%) Lucent Technologies 7.250%, 07/15/06 85 70 McCaw International (C) 13.000%, 04/15/07 420 21 Microcell Telecommunications, Ser B (C) 14.000%, 06/01/06 145 101 Nextel Communications 9.500%, 02/01/11 325 210 Nextel Communications, Cv 4.750%, 07/01/07 220 126 NTL, Ser B (C) 11.500%, 02/01/06 205 73 Rogers Cantel 9.375%, 06/01/08 100 92 Ubiquitel Operating (C) 14.000%, 04/15/10 140 50 US Unwired, Ser B (C) 13.375%, 11/01/09 95 63 -------- 806 -------- TRANSPORTATION (6.0%) Allied Holdings, Ser B 8.625%, 10/01/07 425 312 Laidlaw (B) 7.050%, 05/15/03 105 64 Shares/Face Amount Value (000) (000) -------------------------------------------------------------------------------- Laidlaw, Ser B 11.500%, 04/15/07 $ 120 $ 112 Pacer International, Ser B 11.750%, 06/01/07 50 49 Tfm SA de, Cv 10.250%, 06/15/07 80 76 Tfm SA de, Cv (C) 11.750%, 06/15/09 160 149 -------- 762 -------- TOTAL CORPORATE BONDS (Cost $12,120) 10,641 -------- PREFERRED STOCK (8.6%) BANKS (0.8%) Astoria Financial, Ser B 4,175 104 -------- BROADCASTING, NEWSPAPERS & ADVERTISING (2.9%) Pegasus Satellite, Ser B, PIK* 5,373 296 Sinclair Broadcast, Ser D 2,005 74 -------- 370 -------- COMMUNICATIONS EQUIPMENT (2.0%) Cumulus Media, Ser A, PIK* 236,873 252 -------- FINANCIAL SERVICES (0.3%) North Atlantic Trading, PIK* 2,059 32 -------- MACHINERY (0.0%) Clark Material Handling, PIK* 53 -- -------- REAL ESTATE INVESTMENT TRUSTS (0.8%) Host Marriott, Cv 2,275 99 -------- TELEPHONES & TELECOMMUNICATIONS (1.8%) Adelphia Business Solutions, Ser B, PIK* 3 -- Crown Castle International, PIK* 51 3 Nextel Communications, Ser D, PIK* 2,100 86 Sprint, Cv* 9,600 134 -------- 223 -------- TOTAL PREFERRED STOCK (Cost $1,234) 1,080 -------- 6 STATEMENT OF NET ASSETS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) Shares/Face PENN CAPITAL STRATEGIC Amount Value HIGH YIELD BOND FUND (000) (000) -------------------------------------------------------------------------------- COMMON STOCK (2.4%) BROADCASTING, NEWSPAPERS & ADVERTISING (0.2%) Jones International Networks* 15,500 31 -------- ENVIRONMENTAL SERVICES (0.0%) Waste Systems International* 25,800 -- -------- FOOD, BEVERAGE & TOBACCO (2.1%) Chiquita Brands International* 16,443 271 -------- TELEPHONES & TELECOMMUNICATIONS (0.0%) Pegasus Communications* 221 1 -------- TOTAL COMMON STOCK (Cost $577) 303 -------- WARRANTS (0.0%) Mikohn Gaming*, Expires 8/15/2008 (B) 140 1 -------- TOTAL WARRANTS (Cost $0) 1 -------- REPURCHASE AGREEMENT (3.8%) Morgan Stanley, 1.550%, dated 03/28/02, matures 04/01/02, repurchase price $483,878 (collateralized by U.S. Treasury Note, par value $490,367: market value $495,925) $ 484 484 -------- TOTAL REPURCHASE AGREEMENT (Cost $484) 484 -------- TOTAL INVESTMENTS (98.9%) (Cost $14,415) 12,509 -------- OTHER ASSETS AND LIABILITIES, NET (1.1%) 141 -------- Value (000) -------------------------------------------------------------------------------- NET ASSETS: Portfolio Shares (unlimited authorization -- no par value) based on 2,449,440 outstanding shares of beneficial interest $ 27,300 Distribution in excess of net investment income (2) Accumulated net realized loss on investments (12,742) Net unrealized depreciation on investments (1,906) -------- TOTAL NET ASSETS (100.0%) $12,650 ======== Net Asset Value, Offering and Redemption Price Per Share $5.16 ======== *NON-INCOME PRODUCING SECURITY (A) SECURITY SOLD WITHIN THE TERMS OF A PRIVATE PLACEMENT MEMORANDUM, EXEMPT FROM REGISTRATION UNDER SECTION 144A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE SOLD ONLY TO DEALERS IN THE PROGRAM OR OTHER "ACCREDITED INVESTORS". (B) SECURITY IN DEFAULT ON INTEREST PAYMENTS. (C) DELAYED INTEREST (STEP-BONDS) -- REPRESENTS SECURITIES THAT REMAIN ZERO-COUPON SECURITIES UNTIL A PREDETERMINED DATE AT WHICH TIME THE STATED COUPON RATE BECOMES EFFECTIVE AND INTEREST BECOMES PAYABLE AT REGULAR INTERVALS. THE INTEREST RATE DISCLOSED REPRESENTS THE YIELD AT MARCH 31, 2002, BASED UPON THE ESTIMATED TIMING AND AMOUNT OF FUTURES INTEREST AND PRINCIPAL PAYMENTS. CV -- CONVERTIBLE LLC -- LIMITED LIABILITY CORPORATION PIK -- PAYMENT-IN-KIND SER -- SERIES AMOUNTS DESIGNATED AS "-" ARE EITHER $0 OR HAVE BEEN ROUNDED TO $0. 7 STATEMENT OF OPERATIONS (000) PENN CAPITAL FUNDS (Unaudited) PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND ---------------------- 10/1/01 THRU 3/31/02 -------------------------------------------------------------------------------- Investment Income: Interest .............................................. $ 969 Dividends.............................................. 22 -------------------------------------------------------------------------------- Total Investment Income.............................. 991 -------------------------------------------------------------------------------- Expenses: Investment Advisory Fees .............................. 36 Administrator Fees .................................... 33 Custodian Fees ........................................ 3 Transfer Agent Fees ................................... 11 Professional Fees ..................................... 2 Registration Fees ..................................... 9 Pricing Fees .......................................... 3 Amortization of Deferred Organizational Costs.......... 9 -------------------------------------------------------------------------------- Total Expenses ...................................... 106 -------------------------------------------------------------------------------- Less: Waiver of Investment Advisory Fees................... (36) Reimbursement by Investment Advisor.................. (25) -------------------------------------------------------------------------------- Net Expenses......................................... 45 -------------------------------------------------------------------------------- Net Investment Income ........................... 946 -------------------------------------------------------------------------------- Net Realized Loss From Securities Sold ................ (2,042) Net Unrealized Appreciation of Investment Securities ............................ 1,240 -------------------------------------------------------------------------------- Net Realized and Unrealized Loss on Investments ...................................... (802) -------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations ..................................... $ 144 -------------------------------------------------------------------------------- The accompanying notes are an integral part of the financial statements. 8 STATEMENT OF CHANGES IN NET ASSETS (000) PENN CAPITAL FUNDS (Unaudited)
PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND --------------------------------- 10/1/01 THRU 10/1/00 THRU 3/31/02 9/30/01 ------------------------------------------------------------------------------------------- Investment Activities: Net Investment Income ................................. $ 946 $ 2,025 Net Realized Loss on Securities Sold................... (2,042) (4,997) Net Unrealized Appreciation (Depreciation) of Investment Securities ............................... 1,240 (2,864) ------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations ................................... 144 (5,836) ------------------------------------------------------------------------------------------- Distributions to Shareholders: Net Investment Income ................................. (948) (2,024) ------------------------------------------------------------------------------------------- Total Distributions ................................. (948) (2,024) ------------------------------------------------------------------------------------------- Capital Share Transactions: Proceeds from Shares Issued ........................... 474 3,230 Shares Issued in Lieu of Cash Distributions............ 278 668 Cost of Shares Redeemed................................ (1,222) (14,621) ------------------------------------------------------------------------------------------- Decrease in Net Assets From Capital Share Transactions........................... (470) (10,723) ------------------------------------------------------------------------------------------- Total Decrease in Net Assets ........................ (1,274) (18,583) ------------------------------------------------------------------------------------------- Net Assets: Beginning of Period.................................. 13,924 32,560 ------------------------------------------------------------------------------------------- End of Period(1)..................................... $ 12,650 $ 13,977 =========================================================================================== Shares Issued and Redeemed: Issued ................................................ 89 484 Issued in Lieu of Cash Distributions................... 53 100 Redeemed............................................... (230) (2,058) ------------------------------------------------------------------------------------------- Net Decrease in Shares................................. (88) (1,474) ------------------------------------------------------------------------------------------- (1) Includes undistributed net investment income (loss) and/or distributions in excess of net investment income (000) of $(2) and $0, as of March 31, 2002, and September 30, 2001, respectively.
The accompanying notes are an integral part of the financial statements. 9 FINANCIAL HIGHLIGHTS PENN CAPITAL FUNDS For a share outstanding throughout the period
Net Realized and Net Asset Unrealized Distributions Asset Value Net Loss from Net Value Beginning Investment on Investment End Total of Period Income Investments Income of Period Return+ ------------------------------------------------------------------------------------------- ------------------------------------------- PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND ------------------------------------------- 2002* $ 5.49 $0.77 $(0.33) $(0.77) $5.16 (11.48)% 2001 8.10 0.78 (2.61) (0.78) 5.49 (23.66) 2000 8.82 0.79 (0.72) (0.79) 8.10 0.56 1999(2) 8.91 0.83 (0.09) (0.83) 8.82 8.65 1998(1) 10.00 0.37 (1.09) (0.37) 8.91 (7.23)
Ratio of Net Ratio of Total Investment Expenses Income to Net Ratio of Net to Average Average Assets Ratio Investment Net Assets Net Assets End of Net Expenses Income (Excluding (Excluding Portfolio of Period to Average to Average Waivers and Waivers and Turnover (000) Net Assets Net Assets Reimbursements) Reimbursements) Rate ------------------------------------------------------------------------------------------------------ ------------------------------------------- PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND ------------------------------------------- 2002* $12,650 0.68% 14.36% 1.60% 13.44% 74.63% 2001 13,977 0.68 11.18 1.38 10.48 85.80 2000 32,560 0.68 8.94 1.04 8.58 76.00 1999(2) 41,922 0.68 9.11 1.14 8.65 96.98 1998(1) 17,842 0.68 10.04 2.09 8.63 29.19 * For the six month period ended March 31, 2002 (Unaudited). All ratios for the period have been annualized. + Total return is for the period indicated and has not been annualized. (1) Commenced operations on February 27, 1998. All ratios for the period have been annualized. (2) On January 25, 1999, shareholders of the Alpha Select Penn Capital Strategic High Yield Bond Fund approved a tax-free reorganization under which all assets and liabilities of the Fund were transferred to the TIP Penn Capital Strategic High Yield Bond Fund.
The accompanying notes are an integral part of the financial statements. 10 NOTES TO FINANCIAL STATEMENTS PENN CAPITAL FUNDS March 31, 2002 (Unaudited) 1. ORGANIZATION: TURNER FUNDS (formerly 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 22 portfolios. The financial statements included herein are for the Penn Capital Strategic High Yield Bond Fund, (the "Fund"). The financial statements of the remaining portfolios are presented separately. The Fund is registered to offer two classes of shares, Institutional Shares and Adviser Shares. As of March 31, 2002, the Adviser Shares had not yet commenced operations. 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. Subject to the foregoing, other securities for which quotations are not readily available or securities whose market quotations do not reflect market value, are valued at fair value as determined in good faith by the Board of Trustees. As of March 31, 2002, Jones International Networks (Common Stock) is being valued under this method. FEDERAL INCOME TAXES -- It is the Fund's intention to continue to qualify as a regulated investment company by complying with the appropriate provisions of the Internal Revenue Code of 1986, as amended. Accordingly, no provision for Federal income taxes is required. SECURITY TRANSACTIONS AND RELATED INCOME -- Security transactions are accounted for on the date the security is purchased or sold (trade date). Dividend income is recognized on the ex-dividend date, and interest income is recognized on the accrual basis. Income from payment-in-kind and step-up bonds is recorded based on the effective interest method. The cost of these securities has been adjusted to reflect in-kind interest income. Costs used in determining realized gains and losses on the sales of investment securities are those of the specific securities sold during the respective holding period. NET ASSET VALUE PER SHARE -- The net asset value per share of the Fund is calculated on each business day, by dividing the total value of the Fund's assets, less liabilities, by the number of shares outstanding. 11 NOTES TO FINANCIAL STATEMENTS (Continued) PENN CAPITAL FUNDS March 31, 2002 (Unaudited) 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 at least 102%. In the event of default of the counterparty 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. EXPENSES -- Expenses that are directly related to a Fund are charged to that Fund. Other operating expenses of the Trust are prorated to the Fund on the basis of relative daily net assets. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are declared daily and paid monthly to Shareholders. Any net realized capital gains on sales of securities are distributed to Shareholders at least annually. Distributions from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations. Certain book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. USE OF ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS -- The Funds implemented the provisions of the American Institute of Certified Public Accountants Audit and Accounting Guide "Audit of Investment Companies" (the "Guide") as required on October 1, 2001. The implementation did not have any material impact on the results of operations or financial condition of the Funds upon adoption of the provisions of the Guide. 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. 12 NOTES TO FINANCIAL STATEMENTS (Continued) PENN CAPITAL FUNDS March 31, 2002 (Unaudited) 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., serves as the transfer agent and dividend disbursing agent for the Fund under a transfer agency agreement with the Trust. The Trust and the Distributor are parties to a Distribution Agreement dated April 28, 1996. The Distributor receives no fees for its distribution services under this agreement. 5. INVESTMENT ADVISORY AGREEMENT: 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. The Adviser 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%. The Adviser 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, 2002, are as follows: PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND (000) ---------------------- Purchases ........................... $ 9,337 Sales ............................... 12,125 At March 31, 2002, 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, 2002, are as follows: PENN CAPITAL STRATEGIC HIGH YIELD BOND FUND (000) ---------------------- Aggregate gross unrealized appreciation ..................... $ 740 Aggregate gross unrealized depreciation ..................... (2,646) ------- Net unrealized depreciation $(1,906) ======= For Federal income tax purposes the Fund had capital loss carryforwards of $1,140,491, $2,915,701 and $2,590,273 at September 30, 2001 which may be carried forward and applied against future capital gains. The capital loss carryforwards expire in 2007, 2008 and 2009, respectively. 13 NOTES TO FINANCIAL STATEMENTS (Concluded) PENN CAPITAL FUNDS March 31, 2002 (Unaudited) 7. CONCENTRATION OF CREDIT RISK The Strategic High Yield Bond Fund invests primarily in fixed income securities that are not rated or that are rated below investment grade (I.E., Ba1 or lower rating by Moody's and/or BB+ or lower by S&P), including securities of issuers subject to proceedings under the Federal Bankruptcy Code. The market for such securities is relatively inefficient due to its complexity and the limited availability of information on such securities. 8. SUBSEQUENT EVENT The investment advisory agreement between the Turner Funds, on behalf of the Penn Capital Strategic High Yield Fund (the "Fund"), and Penn Capital Management Company, Inc., will expire by its terms at the close of business on April 30, 2002. The Board has scheduled a meeting to consider a temporary appointment of Turner Investment Partners, Inc. as the Fund's new adviser, pending shareholder approval. 14 NOTES TRUST Turner Funds P.O. Box 219805 Kansas City, MO 64121-9805 INVESTMENT ADVISER Penn Capital Management Company, Inc. DISTRIBUTOR SEI Investments Distribution Co. ADMINISTRATOR SEI Investments Mutual Funds Services LEGAL COUNSEL Morgan, Lewis & Bockius LLP INDEPENDENT AUDITORS Ernst & Young LLP To open an account, receive account information, make inquiries, or request literature: 1-800-224-6312 THIS REPORT WAS PREPARED FOR SHAREHOLDERS IN THE PENN CAPITAL FUNDS. IT MAY BE DISTRIBUTED TO OTHERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH CONTAINS DETAILED INFORMATION. PEN-SA-001-0100