penn capital management company, inc. form adv … capital management company, inc. form adv part 2a...

Penn Capital Management Company, Inc. Form ADV Part 2A

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Item 1 - Cover Page

Penn Capital Management Company, Inc. Navy Yard Corporate Center

1200 Intrepid Avenue, Suite 400 Philadelphia, PA 19112

215-302-1500 www.penncapital.com

March 31, 2017

This Brochure provides information about the qualifications and business practices of Penn Capital Management Company, Inc. (“Penn Capital”). If you have any questions about the contents of this Brochure, please contact us at (215) 302-1500. The information in this Brochure has not been approved or verified by the United States Securities and Exchange Commission (“SEC”) or by any state securities authority. Additional information about Penn Capital is also available on the SEC’s website at www.adviserinfo.sec.gov. Penn Capital is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

http://www.adviserinfo.sec.gov/


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Item 2 - Material Changes Since the Last Annual Update There have been no material changes to this document since the last annual update on March 31, 2016. Penn Capital will provide you with other interim disclosures about material changes as required. Upon written request, Penn Capital will provide a copy of this Brochure.


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Item 3 - Table of Contents

Item 1 - Cover Page ....................................................................................................................................... 1

Item 2 - Material Changes ............................................................................................................................. 2

Item 3 - Table of Contents ............................................................................................................................ 3

Item 4 - Advisory Business ............................................................................................................................ 4

Item 5 - Fees and Compensation .................................................................................................................. 7

Item 6 - Performance Fees & Side-by-Side Management............................................................................. 9

Item 7 - Types of Clients ................................................................................................................................ 9

Item 8 - Methods of Analysis, Investment Strategies and Risk of Loss ....................................................... 10

Item 9 - Disciplinary Information ................................................................................................................ 17

Item 10 - Other Financial Industry Activities and Affiliations ..................................................................... 17

Item 11 - Code of Ethics, Participation or Interest in Client Transactions, and Personal Trading .............. 17

Item 12 - Brokerage Practices ..................................................................................................................... 18

Item 13 - Review of Accounts ..................................................................................................................... 22

Item 14 - Client Referrals and Other Compensation .................................................................................. 22

Item 15 - Custody ........................................................................................................................................ 22

Item 16 - Investment Discretion ................................................................................................................. 23

Item 17 - Voting Client Securities................................................................................................................ 23

Item 18 - Financial Information .................................................................................................................. 24


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Item 4 - Advisory Business Penn Capital Management Company, Inc. (“Penn Capital” or “we” or “our”), is an independent boutique investment management firm based in Philadelphia, Pennsylvania. Penn Capital was founded by Richard A. Hocker in 1987 with a primary focus on capital structure investing through proprietary research and high quality client service. Penn Capital has remained 100% employee-owned since its inception and is dedicated to employee development and community service. For almost thirty years, Penn Capital has followed its core belief that understanding a company’s entire capital structure is the best way to identify investment opportunities with the most value. In fact, the investment team has found that managing fixed income portfolios makes us a better equity manager, and managing equity portfolios makes us a better fixed income manager. Integrating credit and equity research allows Penn Capital’s team to construct a more comprehensive mosaic and identify inefficient security pricing. The process is called Complete Capital Structure Analysis®. Through Complete Capital Structure Analysis, Penn Capital’s investment professionals are capital structure generalists, meaning they are responsible for understanding the entire capital structure of the companies they follow. All ideas are vetted through Penn Capital’s investment process and investment decisions are made by senior investment professionals. Stocks or high yield debt securities are selected with the greatest potential to provide the risk-adjusted returns that clients expect. As of December 31, 2016, Penn Capital managed approximately $5.5 billion, of which approximately 93% was held in discretionary investment accounts and approximately 7% was held in non-discretionary accounts.

Investment Strategies: Penn Capital’s investment strategies focus on micro-to mid-cap equity securities, high yield securities, and bank loans. Penn Capital’s primary investment strategies are:

Micro Cap Equity Micro to Small Cap Equity Small Cap Equity Small Cap Value Equity Small to Mid Cap Equity Mid Cap Equity Bank Loans Defensive High Yield Fixed Income Opportunistic High Yield Fixed Income

Short Duration High Yield Fixed Income Double B High Yield Fixed Income Distressed Total Return Fixed Income Convertible Securities Focused Credit Fixed Income Spectrum Corporate Income Spectrum Energy Opportunities (Credit and Equity) Ultra Equity High Yield

Penn Capital provides investment advisory services primarily through the following product vehicles: registered mutual funds, separately managed accounts, private investment funds, and broker/dealer sponsored investment advisory programs offered through WRAP or Model accounts Registered Mutual Funds: Penn Capital serves as either the adviser or sub-adviser to mutual funds registered under the Investment Company Act of 1940. As adviser or sub-adviser, Penn Capital’s responsibility is to manage fund assets according to the investment strategy described in each fund’s prospectus and statement of additional


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information. For the funds Penn Capital sub-advises, Penn Capital does not perform any sales, custodial, or administrative functions on behalf of the funds. Penn Capital is the investment adviser to the PENN Capital Funds Trust (the “Trust”), an affiliated investment company registered under the Investment Company Act of 1940. Separately Managed Accounts (“SMAs”): SMAs are primarily marketed to private and public pension plans, foundations, endowments, banks, insurance companies and high net-worth individuals. Penn Capital is an approved SMA manager on a number of banking and brokerage platforms. The minimum account size for Penn Capital strategies, typically, is $1 million for equity portfolios and $10 million for fixed income/bond, and bank loan portfolios. Penn Capital reserves the right to waive the account size minimums. SMA management may be modified or revised based on individual client investment guidelines or directives. If agreed to in advance, some clients also may impose allocation or security-specific restrictions to either individual securities, asset classes, industries, or types of securities. Certain SMA clients also may engage Penn Capital to provide non-discretionary investment advisory services. Private Investment Funds: Penn Capital serves as the general partner and investment adviser for private investment funds that are organized as limited partnerships. Penn Capital’s private investment funds are available to accredited or qualified investors, and other persons as allowable by SEC rules. The minimum size of a limited partnership interest varies, as noted in the below chart, and Penn Capital reserves the right to waive these minimums. As of March 31, 2017 Penn Capital offered the following private investment funds:

Fund Investment Minimum Penn Capital Energy Credit Opportunities Fund, L.P. $1,000,000 Penn Capital Liberty Fund, L.P. $1,000,000 Penn Capital Pioneer Energy Fund, L.P. $1,000,000 Penn Convertible Fund, L.P. $1,000,000 Penn Core High Yield Bond Fund, L.P. $ 100,000 Penn Core High Yield Bond Fund II, L.P. $1,000,000 Penn Distressed Fund, L.P. $ 100,000 Penn Diversified Micro Cap Equity Fund, L.P. $ 500,000 Penn Capital Fixed Income Spectrum Fund, L.P. $1,000,000 Penn Institutional Loan Common Master Fund, L.P. $5,000,000 Penn Mid Cap Equity Fund, L.P. $ 100,000 Penn Short Duration High Yield Fund, L.P.* $1,000,000

*Penn Capital is the investment adviser and its affiliate, Penn Capital Funds Group, LLC, acts as general partner.

Sub-Advisory Business for Certain Advisory Programs: Penn Capital is an investment sub-adviser to broker/dealer-sponsored investment advisory programs which offer their underlying clients access to Penn Capital investment strategies through different methods, including SMA, unified management accounts (“Model Accounts”), registered mutual funds, and WRAP accounts. Penn Capital has entered into agreements with these program sponsors pursuant to


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either a direct contract with the program sponsor, or a tri-party contract with both the underlying client and the program sponsor. The broker/dealer sponsors of these programs include: Brinker Capital; Charles Schwab; DA Davidson; Deutsche Bank; Envestnet; FolioDynamix; Lockwood Advisors, Inc.; LPL Financial; Merrill Lynch; Morgan Stanley Wealth Management; Oppenheimer & Co.; Prudential Investments, LLC; RBC Wealth Management; Raymond James; Robert W. Baird & Co.; Strategic Financial Alliance; UBS Financial Services; Prudential Investments, LLC; and Wells Fargo.

WRAP Accounts:

Penn Capital serves as the investment adviser to WRAP programs that are sponsored by third parties (usually, broker-dealers). WRAP programs are advisory programs in which the underlying clients pay a single fee to the WRAP program sponsor for access to the investment advisory services of multiple investment advisers, of which Penn Capital may be one option. The sponsors of WRAP programs have the primary responsibility for the underlying clients’ servicing, communications, custody, and conduct some, (or all, depending upon the program) of the trading for client accounts. Typically, underlying program clients do not pay Penn Capital for advisory services. Instead, Penn Capital receives a (separately negotiated) portion of the WRAP sponsor’s fee for managing those WRAP account assets that are invested in a Penn Capital investment strategy. Penn Capital makes no determination of the suitability of the sponsor’s WRAP product for such sponsor’s underlying clients. Penn Capital is responsible only for managing the WRAP account’s assets in the specified investment strategy. Unless specific program or account restrictions are imposed, Penn Capital manages WRAP accounts in a similar manner as Penn Capital’s other SMAs in the same investment strategy. On a limited basis, Penn Capital allows WRAP account underlying clients or the program sponsor to impose restrictions or limits on certain individual securities or types of securities. Any restrictions or limits imposed would likely affect the performance of those accounts so that such account’s performance may be higher or lower than the performance obtained by Penn Capital’s other clients investing in the same strategy.

Model Accounts: Penn Capital provides non-discretionary investment services to certain clients (sponsors) who in turn offer investment strategies to their underlying clients (“Model Accounts”). Penn Capital provides sponsors with a model portfolio for the applicable investment strategy, subject to negotiated fees. Each model portfolio is constructed once the model portfolio’s allocations, investments and weightings have been established, which typically occurs at the end of the trading day. Once completed, the model portfolio is provided to a Model Account sponsor prior to the next day’s market open. For Model Accounts, Penn Capital provides the sponsor only with the model portfolio, but does not assume responsibility for executing trades, performing recordkeeping, having access to performance data, or providing underlying client reporting. A Model Account sponsor, in its sole discretion, may or may not choose to act upon any or all of Penn Capital’s model portfolio recommendations. The recommendations in the model portfolios may reflect the same or similar recommendations being made to Penn Capital’s discretionary accounts and since Penn Capital provides Model Account sponsors with the relevant model portfolios prior to market open, Penn Capital may have already traded on the recommendations during the prior day, which trading was used to establish the model portfolio’s weightings and holdings that are then communicated to the Model Account sponsors. In the instances where the Model Account sponsor chooses to act upon the recommendations, Penn Capital may also be trading in the same securities for other discretionary client accounts before, concurrently, or after the Model Account sponsor determines to act on Penn Capital’s recommendations. In this way, and because of intra-day price movements, particularly with large orders


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or thinly traded securities, trades done by a Model Account sponsor could result in the Model Account clients receiving prices that are less favorable than the prices obtained by Penn Capital for its discretionary client accounts. Penn Capital cannot control the market impact of such transactions to the same extent that it seeks to control market impact for its discretionary client accounts. Since Model Account sponsors generally exercise investment and trading discretion, the investment performance experienced by the underlying Model Account clients will not reflect the investment performance experienced by Penn Capital’s discretionary clients. Penn Capital has no direct advisory relationship with any Model Account program underlying client. Penn Capital is not responsible for the underlying client accounts as part of the Model Account programs for which it provides model portfolios and cannot assess or guarantee the quality of those services or the performance experienced by such underlying clients. Item 5 - Fees and Compensation Different fee schedules may apply to SMA accounts or private fund investments. These fees are individually negotiated and generally reflect, among other considerations, a client’s: specific investment mandate(s), service needs, history with Penn Capital, and/or account size. Generally, SMA fees are calculated and paid quarterly in arrears and are prorated, if necessary, based on the period the assets were under management, including adjustments for significant additions or partial withdraws. Penn Capital typically invoices clients on a quarterly basis and does not require pre-payment of fees. Generally, fees are based upon the market value of the account at the end of each calendar quarter, calculated on a 360-day year; although clients may request other arrangements. If the account uses margin (borrowed assets), the fee is charged on the total assets. SMA Fee Schedule: The SMA fee schedules indicated below are the maximum charged for the stated investment strategy. As indicated above, SMA fees are negotiable based upon a number of factors.

Equity Strategies Micro Cap Equity 1.10% of Account Assets

Micro to Small Cap Equity 1.00% of Account Assets

Small Cap Equity 1.00% of Account Assets

Small Cap Value Equity 0.80% of Account Assets

Small to Mid Cap Equity 0.95% of Account Assets

Mid Cap Equity 0.90% of Account Assets

High Yield Fixed Income Strategies

Short Duration

0.55%- Up to $10 million 0.45%- $10 million and above

Double B Rated 0.65%- Up to $10 million 0.55%- $10 million and above


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Defensive

0.75%- Up to $10 million, and 0.60%- $10 million to $50 million, and 0.50%- $50 million and above

Opportunistic

0.85%- Up to $10 million, and 0.70%- $10 million to $50 million, and 0.55%- $50 million and above

Distressed Total Return

1.25% of Account Assets

Focused Credit

1.00% of Account Assets

Convertible Securities 0.85% of Account Assets

Ultra Equity High Yield

0.75% of Account Assets; plus 20% of profit over preferred rate of return

Bank Loans 1.00% of Account Assets Private Investment Funds Fee Schedule: Fees are deducted from private investment funds monthly. Fund fees are based upon the market value of the private investment fund at the end of each month. Penn Capital does not require the prepayment of fees. The fee schedule below shows the annual fee for private investment funds that do not charge a performance-based fee. For private investment funds that charge a performance-based fee, please refer to Item 6 below. Fees on investments in private investment funds are negotiable based upon the size of investment and other factors:

Penn Capital Fixed Income Spectrum Fund, L.P. 0.70% of the gross market value Penn Convertible Fund, L.P. 1.50% of the gross market value Penn Core High Yield Bond Fund, L.P. 1.25% of the gross market value Penn Core High Yield Bond Fund, II L.P. 1.25% of the gross market value Penn Diversified Micro Cap Equity Fund, L.P. 2.00% of the gross market value Penn Mid Cap Equity Fund, L.P. 1.25% of the gross market value Penn Short Duration High Yield Fund, L.P. 1.50% of the gross market value

Registered Mutual Funds, Model Accounts, and WRAP Accounts: Penn Capital does not determine the fee that investors pay to Model Accounts, WRAP program sponsors or to unaffiliated registered mutual funds. Penn Capital separately negotiates fees for its sub-advisory services. Typically, the Model Account or WRAP program sponsor or mutual fund investment adviser pays Penn Capital from the sponsor’s own management fees. Trading and Other Costs: All accounts incur ongoing expenses, including custodial and other administrative expenses. Clients also may incur trading costs such as brokerage or transaction fees for services provided by entities other than


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Penn Capital and which are not reflected in Penn Capital’s advisory fee. For more information regarding brokerage practices and related costs, please refer to Item 12 below. On a limited basis, Penn Capital may invest in exchange traded funds or closed-end investment companies. Our advisory fee is in addition to, and does not include the internal management, operating, or distribution fees or other expenses incurred by these products. Item 6 - Performance Fees & Side-by-Side Management Penn Capital has entered into performance fee arrangements with certain private investment funds and qualified clients. Performance fees are subject to individualized negotiations. Penn Capital will structure a performance or incentive fee arrangement in accordance with applicable laws and related exemptions. The base fee is calculated based upon the market value of the account, while the incentive fees generally are paid annually, or upon a client’s liquidation. Fees on investments in private investment funds are negotiable based upon the size of investment and other factors. Following are the fees charged by those private investment funds that contain a performance based fee:

Penn Capital Energy Credit Opportunities Fund, L.P.

1.00% of the total market value; plus 10% participation in profits over a preferred return of 5%.

Penn Capital Liberty Fund, L.P. 1.50% of the total market value; plus 20% of the Fund’s total profit subject to high watermark.

Penn Capital Pioneer Energy Fund, L.P. 1.25% of the total market value; plus 20% of the Fund’s total profit subject to high watermark.

Penn Distressed Fund, L.P. 1.00% of the total market value; plus 20% of the Fund’s total profit subject to high watermark.

Performance based fee arrangements have the potential to create an incentive to recommend investments that may be riskier or more speculative than those which would be recommended under a different fee arrangement. Performance based fee arrangements also have the potential to create an incentive to favor accounts paying higher fees over other accounts in the allocation of investment opportunities. Penn Capital has implemented controls to manage the inherent risks associated with incentive fees. As part of the Compliance Program, Penn Capital adopted policies designed to ensure that investment opportunities are allocated to clients fairly and equitably. Penn Capital does not consider an account’s fee structure during any part of the investment process. Investment opportunities are allocated on either a pro rata basis or rotation across the clients in each respective investment strategy. Item 7 - Types of Clients Penn Capital offers investment advisory services to: corporate pension and profit-sharing plans; Taft-Hartley plans; insurance companies; charitable institutions; foundations; endowments; municipalities; registered mutual funds; private investment funds; foreign funds; and other U.S. and international institutions, individuals, and high net worth individuals.


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Item 8 - Methods of Analysis, Investment Strategies and Risk of Loss This item provides an overview of Penn Capital’s investment advisory methods, strategies, and risks. Fixed Income Investment Process

Bottom-Up Focused Investment Process

Penn Capital executes a team driven investment process that is anchored by daily investment team

meetings and, outside of that meeting structure, the process is led by the portfolio managers of a

particular strategy. The initial universe includes all domestic, corporate, US dollar denominated debt

issues that have spread-to-treasury and yield characteristics that represent value relative to company

fundamentals and credit metrics. Penn Capital’s bottom up fundamental research is a critical tool used

to identify improving credit situations that are not yet reflected in a company’s security prices. Penn

Capital invests only in credit securities that trade at a discount to our proprietary assessment of an

investment’s intrinsic value.

Identification of Relative Value

Quantitative Screening

The research team runs quantitative screens to identify companies with higher spreads relative to

comparable companies, industry averages, and historical averages.

Proprietary Sources of Research and Idea Generation

The presence and reputation of Penn Capital’s research team in the institutional marketplace allows

the analysts and portfolio managers to source ideas by leveraging direct access to company

management and road shows, institutional equity relationships, conferences, IPO and competitive

intelligence, industry experts, and former government officials.

Macroeconomic Outlook

Penn Capital focuses on the economic cycle and business environment, analyzes sector

performance, and evaluates interest rates and macroeconomic conditions to determine industries

with potential relative value.

Confirmation of Relative Value

Improving Fundamentals

Companies are further screened for improving fundamental metrics.

Liquidity Outlook

Companies are also screened for liquidity issues, emphasizing potential weaknesses in an issuer’s

liquidity profile. Analysts also research and consider an issuer’s covenant compliance, ability to incur

additional debt, and asset value analysis.


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Qualitative Research

Penn Capital’s qualitative research process encompasses meetings with company management,

discussions with company stakeholders, and industry experts. The research team is looking to

support its assessment of strong fundamentals and to identify positive catalysts.

Investment Recommendation

Penn Risk Rating (“PRR”)

Every security in a company’s capital structure is assigned a proprietary risk rating that encompasses

forward looking estimates of credit quality, quantitative and qualitative factors, and rating agencies.

A PRR is used to identify the appropriate discount rate to assign to a security and thereby arrive at

its intrinsic value.

Review and Formal Recommendation

Daily research meetings are primary forums for discussion. A consensus at team level is required

prior to moving a recommendation on the Credit Strategy Committee.

Credit Strategy Committee Approval

The Committee is presented with the comprehensive analysis, investment thesis, and PRR rationale.

The portfolio manager considers the impact of a new investment on portfolio construction and

determines where funds will be sourced to fund the recommendation. The recommendation is

either approved for portfolio inclusion or dismissed to the company watch list.

Investment Decisions and Implementation

Once a name is approved for the portfolio, the Credit Strategy Committee sets a maximum weighting

based upon capital at risk downside assessment. The portfolio manager is responsible for sizing the

initial investment and timing the purchase and sale of the security within the maximum range.

Equity Investment Process Penn Capital’s equity investment philosophy is based on the belief that credit leads equity at both a micro and macro level, and independent, fundamental bottom-up research can add significant value in inefficient markets. Penn Capital believes that long-term sustainable alpha is generated from uncovering capital structure catalysts, where deleveraging opportunities can enhance enterprise value. Penn Capital’s investment process is designed to uncover a company’s optimal capital structure. Participating in both credit and equity markets, along with an integrated research process, provides Penn Capital’s investment team with an informational advantage in the equity markets. The investment team seeks to find companies that trade at attractive valuations, primarily focused on enterprise value/EBITDA, have proven management teams, and sound prospects for growth. Through Penn Capital’s fully integrated, proprietary research process, the investment team attempts to identify companies with “capital structure catalysts” and strategies intended to lower overall cost of capital, thus creating equity value. Penn Capital believes the credit markets provide early identification of these opportunities.


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The investment team follows a six-step process for approval of a stock to be considered for purchase in the portfolio. The initial universe is narrowed by screening for companies that have the potential to create equity value through both traditional and non-traditional sources.

Step 1 – Fundamental Financial Analysis Penn Capital’s analysts and portfolio managers screen for companies with improving financial metrics to determine relative value. Step 2 – Qualitative Research Penn Capital’s analysts and portfolio managers perform qualitative research to confirm relative value. Step 3 – Liquidity Outlook/Covenant Analysis Penn Capital’s analysts and portfolio managers screen for liquidity issues and perform covenant analysis, bank loan availability and asset value analysis. Step 4 – Recommendation Researchers present the best new ideas to the investment team for evaluation and consideration. Step 5 – Decision Making A two-step approval process requires approval first by the style portfolio manager, and second by either the Director of Research or the Chief Investment Officer. Step 6 – Portfolio Construction The Equity Strategy Committee meets weekly to discuss macro-view and to determine sector allocations.

Investment Decisions and Implementation After the decision to buy a new security has been made, it is the responsibility of the strategy’s lead portfolio manager and the primary analyst to determine the appropriate sizing, or weighting, in the portfolio. Penn Capital’s portfolio managers work closely with the analysts and their counterparts on the Equity Strategy Committee to execute on these factors. On a weekly basis, the analyst formally recommends any changes to the weighting (add, hold, trim and price target). The portfolio manager takes into consideration all analyst recommendations and is ultimately responsible for guiding the weighting of a security in the portfolio. Risks of Investing Investing in securities involves risk of loss that clients should be prepared to bear, including loss of principal. Penn Capital makes no assurances that our investment strategies will meet any particular investment return and Penn Capital does not guarantee any level of investment performance. Clients are responsible for investing based on their risk tolerance. The primary risks of investing will vary depending on the individual investment objectives, strategy and investment product. Investors should carefully review the relevant private placement memorandum, prospectus, or their own investment guidelines for additional risks specific to their investments.


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Risks generally may include, but are not limited to, one or more of the following: ADR risk, agent insolvency risk, bank loan risk, convertible securities risk, credit risk, debt/fixed income securities risk, diversification risk, ETF risk, foreign securities risk, high yield securities risk, interest rate risk, investment in other investment companies risk, leveraged companies risk, liquidity risk, management risk, market risk, maturity risk, micro, small and mid-capitalization company risk, portfolio turnover risk, payment-in-kind securities risk, prepayment risk, preferred stock risk, private placement risk, rating agencies risk, REIT risk, and short selling risk.

ADR Risk. ADRs may be subject to some of the same risks as direct investment in foreign companies, which includes international trade, currency, political, regulatory and diplomatic risks. In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay some or all of the depositary’s transaction fees. Under an unsponsored ADR arrangement, the foreign issuer assumes no obligations and the depositary’s transaction fees are paid directly by the ADR holders. Because unsponsored ADR arrangements are organized independently and without the cooperation of the issuer of the underlying securities, available information concerning the foreign issuer may not be as current as for sponsored ADRs and voting rights with respect to the deposited securities are not passed through. Agent Insolvency Risk. In a syndicated loan, the agent bank is the bank in the syndicate that undertakes the bulk of the administrative duties involved in the day-to-day administration of the loan. In the event of the insolvency of an agent bank, a loan could be subject to settlement risk as well as the risk of interruptions in the administrative duties performed in the day to day administration of the loan. Bank Loan Risk. There are a number of risks associated with an investment in bank loans, including credit risk, interest rate risk, liquidity risk and prepayment risk. Lack of an active trading market, restrictions on resale, irregular trading activity, and wide bid/ask spreads and extended trade settlement periods may impair the ability to sell bank loans within its desired time frame or at an acceptable price and its ability to accurately value existing and prospective investments. Extended trade settlement periods may result in cash not being immediately available to the portfolio. As a result of such illiquidity, the portfolio may have to sell other investments or engage in borrowing transactions to raise cash to meet its obligations. Bank loans have similar risks to below investment grade fixed income securities. Changes in the financial condition of the borrower or economic conditions or other circumstances may reduce the capacity of the borrower to make principal and interest payments on such instruments and may lead to defaults. Senior secured bank loans are supported by collateral; however, the value of the collateral may be insufficient to cover the amount owed to the portfolio. If the portfolio relies on a third party to administer a loan, the portfolio is subject to the risk that the third party will fail to perform its obligations. In addition, if the portfolio holds only a participation interest in a loan made by a third party, the portfolio’s receipt of payments on the loan will be dependent on the third party’s willingness and ability to make those payments. Loans generally are subject to legal or contractual restrictions on resale. The liquidity of loans, including the volume and frequency of secondary market trading in such loans, varies significantly over time and among individual loans. For example, if the credit quality of a loan unexpectedly declines significantly, secondary market trading in that loan can also decline for a period of time. During periods of infrequent trading, valuing a loan can be more difficult and buying and selling


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a loan at an acceptable price can be more difficult and delayed. Difficulty in selling a loan can result in a loss. Due to their subordination in the borrower’s capital structure, subordinated loans involve a higher degree of overall risk than senior bank loans of the same borrower. Convertible Securities Risk. The value of convertible securities tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market value of the underlying securities. Convertible securities are subject to the risks of stocks when the underlying stock price is high relative to the conversion price (because more of the security’s value resides in the conversion feature) and fixed income securities when the underlying stock price is low relative to the conversion price (because the conversion feature is less valuable). A convertible security is not as sensitive to interest rate changes as a similar non-convertible fixed income security, and generally has less potential for gain or loss than the underlying stock. Credit risk. Credit risk relates to the continuing ability of the bond issuer to pay the stated interest and ultimately to repay principal upon maturity. Concern over a company’s ability to pay their interest expense can create volatility in a bond’s price. Discontinuation of such payments can adversely affect the market price of the bond. Debt/Fixed Income Securities Risk. The values of fixed income securities typically will decline during periods of rising interest rates, and can also decline in response to changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral assets, or changes in market, economic, industry, political, and regulatory conditions affecting a particular type of security or issuer or fixed income securities generally. Fixed income securities are generally subject to interest rate risk, prepayment/extension risk, and credit risk. Diversification Risk. Diversification risk relates to investments in non-diversified investment portfolios or for portfolios that have no minimum diversification requirements. The diversification policies of the portfolios may differ and vary from time to time, and intentionally overweight its portfolio in a single theme or industry, issuer, or class of security. Due to the concentrated nature of the portfolio there is at times, disproportionate volatility relative to other sectors driven by unforeseen and sudden global macro events. ETF Risk. ETFs may trade at a discount to the aggregate value of the underlying securities and although expense ratios for ETFs are generally low, frequent trading of ETFs can generate brokerage expenses.

Foreign Securities Risk. Investing in foreign securities typically involves more risks than investing in U.S. securities, including risks related to currency exchange rates and policies, country or government specific issues, less favorable trading practices or regulation and greater price volatility. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. High Yield Securities Risk. High yield securities and unrated securities of similar credit quality, commonly known as “junk” bonds, have speculative characteristics and involve greater volatility of price and yield, greater risk of loss of principal and interest, a greater level of liquidity risk, and generally reflect a greater possibility of an adverse change in financial condition that could affect an issuer’s ability to honor its obligations.


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Interest Rate Risk. An increase in interest rates may cause a fall in the value of the fixed income securities. The risks associated with rising interest rates may be more pronounced in the near future due to the current period of historically low rates. Investments in Other Investment Companies Risk. Investments in other investment companies are indirectly subject to the fees and expenses of the other investment companies and these fees and expenses are in addition to the fees and expenses that a portfolio may bear directly. In addition, these investments are indirectly subject to the investment risks of those other investment companies. Leveraged Companies Risk. Securities of leveraged companies tend to be more sensitive to issuer, political, market and economic developments than the market as a whole and the securities of other types of companies. A decrease in the credit quality of a leveraged company can lead to a significant decrease in the value of the company’s securities. In the event of liquidation or bankruptcy, a company’s creditors take precedence over the company’s stockholders. Leveraged companies can have limited access to additional capital.

Liquidity Risk. Certain securities may be difficult (or impossible) to sell at the time and at the price Penn Capital would like. As a result, the portfolio may have to hold these securities longer than it would like and may forego other investment opportunities. There is the possibility that the portfolio may lose money or be prevented from realizing capital gains if it cannot sell a security at a particular time and price. Liquid portfolio investments may become illiquid or less liquid after purchase by the portfolio due to low trading volume, adverse investor perceptions and/or other market developments. Liquidity risk includes the risk that the portfolio will experience significant net redemptions at a time when it cannot find willing buyers for its portfolio securities or can only sell its portfolio securities at a material loss. Liquidity risk can be more pronounced in periods of market turmoil. Management Risk. The portfolio may not meet its investment objective based on Penn Capital’s success or failure to implement investment strategies.

Market Risk. The value of portfolio securities may decline, at times sharply and unpredictably, as a result of unfavorable market-induced changes affecting particular industries, sectors, or issuers. Portfolios are subject to risks affecting issuers, such as management performance, financial leverage, industry problems, and reduced demand for goods or services. Maturity Risk. Generally, a bond with a longer maturity will entail greater interest rate risk but have a higher yield. Conversely, a bond with a shorter maturity will entail less interest rate risk but have a lower yield. Micro, Small, and Mid Capitalization Company Risk. Micro, small and mid-capitalization companies may not have the size, resources and other assets of large capitalization companies. As a result, the securities of micro, small and mid-capitalization companies may be subject to greater market risks and fluctuations in value than large capitalization companies or may not correspond to changes in the stock market in general. Payment-In-Kind Securities Risk. The value, interest rates, and liquidity of non-cash paying instruments, such as payment-in-kind securities, are subject to greater fluctuation than other types


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of securities. The higher yields and interest rates on payment-in-kind securities reflect the payment deferral and increased credit risk associated with such instruments and that such investments may represent a higher credit risk than coupon loans. Payment-in-kind securities may have a potential variability in valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. Portfolio Turnover Risk. A tactical investment process is expected to result in a high portfolio turnover rate. Frequent trading increases portfolio turnover rate and may increase transaction costs, such as brokerage commissions, dealer mark-ups and taxes. Increased transaction costs could detract from performance. Preferred Stock Risk. Preferred stocks are subject to the risks associated with other types of equity securities, as well as additional risks, such as potentially greater volatility and risks related to deferral, non-cumulative dividends, subordination, liquidity, limited voting rights, and special redemption rights. Prepayment Risk. Prepayment risk occurs when a debt security can be repaid in whole or in part prior to the security’s maturity and the portfolio must reinvest the proceeds it receives, during periods of declining interest rates, in securities that pay a lower rate of interest. Private Placement Risk. The portfolio may invest in privately issued securities, including those which may be resold only in accordance with Rule 144A under the Securities Act of 1933, as amended. Privately issued securities are restricted securities that are not registered with the Securities and Exchange Commission. Accordingly, the liquidity of the market for specific privately issued securities may vary. Delay or difficulty in selling such securities may result in a loss to the portfolio. Rating Agencies Risk. The value of your investment may change in response to changes in the credit ratings of the portfolio securities. Generally, investment risk and price volatility increase as a security’s credit rating declines. Ratings are not an absolute standard of quality, but rather general indicators that reflect only the view of the originating rating agencies from which an explanation of the significance of such ratings may be obtained. There is no assurance that a particular rating will continue for any given period of time or that any such rating will not be revised downward or withdrawn entirely if, in the judgment of the agency establishing the rating, circumstances so warrant. A downward revision or withdrawal of such ratings, or either of them, may have an effect on the liquidity or market price of the securities in which the portfolio invests. The ratings of securitized assets may not adequately reflect the credit risk of those assets due to their structure. Redemption Risk. A portfolio may need to sell securities at times it would not otherwise do so in order to meet redemption requests. Selling securities to meet such redemptions may cause the portfolio to experience a loss, increase transaction costs or have tax consequences. To the extent that a large shareholder invests, a pooled investment vehicle may experience relatively large redemptions as such shareholder reallocates its assets.

REIT Risk. A REIT’s performance depends on the types, values and locations of the properties it owns and how well those properties are managed. Because a REIT may be invested in a limited number of projects or in a particular market segment, it may be more susceptible to adverse developments


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affecting a single project or market segment than more broadly diversified investments. Loss of status as a qualified REIT under the U.S. federal tax laws could adversely affect the value of a particular REIT or the market for REITs as a whole. Short Selling Risk. Short selling risk involves selling securities which may or may not be owned and instead borrowing the same securities for delivery to the counterparty, with an obligation to replace the borrowed securities at a later date. Short selling allows the investor to profit from declines in market prices to the extent such declines exceed the transaction costs, and the costs of borrowing the securities and the cost of replacing the securities sold. A short sale creates the risk of an unlimited loss, in that the price of the underlying security could theoretically increase without limit.

Item 9 - Disciplinary Information Penn Capital has no material legal or disciplinary information or events to disclose. Item 10 - Other Financial Industry Activities and Affiliations Penn Capital’s affiliate, Penn Capital Funds Group, LLC, acts as General Partner for a private investment fund. Certain Penn Capital owners and employees have formed two private entities, TH Partners LLC (“TH”) and TH II Partners LLC (“TH II”), for the purpose of making joint personal investments. There are no Penn Capital clients invested in either entity, nor has either entity invested in any issuer of securities held by clients of Penn Capital. Penn Capital serves as the investment adviser to the PENN Capital Funds Trust (the “Trust”), which offers a series of mutual funds registered under the Investment Company Act of 1940. A number of Penn Capital employees are Registered Representatives of Foreside Fund Services, LLC. (“Foreside”), an unaffiliated FINRA registered broker-dealer. Penn Capital, at its expense, pays Foreside, a fee for certain distribution related services for certain mutual funds and privately placed funds. Penn Capital employees may serve as registered representatives of Foreside to facilitate the distribution or marketing of fund shares. Foreside, a limited purpose broker-dealer, supervises registered representative marketing activities related to fund shares pursuant to its policies and procedures and applicable FINRA rules and securities laws. Item 11 - Code of Ethics, Participation or Interest in Client Transactions, and Personal Trading Code of Ethics: Penn Capital has adopted a written Code of Ethics (“Code”) and procedures designed to comply with applicable regulations. The Code is designed to ensure the activities of Penn Capital and its employees are conducted in a manner that is consistent with their fiduciary obligations as a registered investment adviser under the Advisers Act. The Code contains procedures reasonably designed to prevent Penn Capital’s employees from engaging in fraudulent, manipulative or deceptive conduct. Under the Code, Penn Capital has a duty to exercise its authority and responsibility for the benefit of its clients, to place the interests of its clients first, and to refrain from activities that conflict with the interests of its clients. Our Code is available free of charge upon written request to the following address


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Compliance Department Penn Capital Management Company, Inc. Navy Yard Corporate Center 1200 Intrepid Avenue, Suite 400 Philadelphia, PA 19112

Participation in Client Transactions: Penn Capital may recommend that clients purchase or sell interests in the registered mutual funds or private investment funds described in this brochure and in which Penn Capital has a financial interest. As with all investments, Penn Capital selects investments for clients primarily based on the aforementioned investment analysis process and agreed upon investment style and client-specific guidelines, if applicable. In addition, our financial interest in each such registered mutual fund or private investment fund is disclosed in each fund’s prospectus, statement of additional information, private placement memorandum, or other related offering materials. Penn Capital may purchase securities of an issuer which has retained Penn Capital as its financial adviser. These purchases are solely based on the investment merits of the security and our relationship will have no impact on the investment decision. Penn Capital does not invest in the securities of an issuer for the issuer’s account, but may buy them for other accounts. Personal Trading: Penn Capital has adopted a Personal Trading Policy that applies to all employees. All employees must obtain written approval prior to placing any personal transactions conducted by them or their immediate family members. Purchases or sales of registered mutual funds do not require prior approval unless the fund is advised or sub-advised by Penn Capital. An “Authorizing Person” must approve the requested transaction before the transaction may be executed. The personal transaction will be approved if the personal trade and a client portfolio trade will not occur within seven (7) days of each other. If a security is held in an employee’s account and also in a client account, the employee may not sell any portion of the position within sixty (60) days of the purchase. If Penn Capital sells the entire position for its clients, the 60-day rule no longer applies to the employee’s holding(s). Item 12 - Brokerage Practices Penn Capital provides investment advisory services to clients with full discretionary authority, subject to overall review by the client or named fiduciaries of the client. This authority may be subject to specific investment restrictions and other requirements for certain accounts. Penn Capital has adopted policies and procedures designed to seek best execution for all of our clients. Penn Capital selects broker/dealers to execute transactions based upon our assessment of their capability to provide the service. Our primary consideration is to seek best execution. Best execution refers to favorable price, commissions, promptness and reliability of execution, confidentiality, and placement accorded the trade order. Penn Capital considers the following factors in reviewing brokers for best execution: the broker’s capability to execute the order, the broker’s financial condition, the broker’s responsiveness, the bid/ask spreads, the market price impact, and low transaction opportunity cost. Our determination of what is a reasonable commission rate is based upon our Trading Department’s knowledge regarding competitive rates paid and charged for similar transactions. In conducting our analysis Penn Capital consults comparative trading cost data and analytics provided by third-parties.


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Directed Brokerage: Although Penn Capital generally has full discretion to place orders, some clients may direct us to use specific brokers. These client-directed brokerage requests must be in writing and indicate that the request is properly authorized. Penn Capital may be unable to obtain best execution when clients direct their account’s brokerage and clients who direct brokerage may pay higher commissions and spreads and may receive less favorable net prices on transactions than would be the case if they did not direct brokerage In certain SMAs, Penn Capital may be directed to place all or certain trades with specified brokers. If these SMAs have commission sharing arrangements with these specified brokers, and Penn Capital combines their orders with other orders for execution by these specified brokers, only the portion of the commission generated for the directed SMA account is credited to the SMA. “Trading Away” Transactions: When permitted by WRAP program sponsors, Penn Capital will generally execute large trades with selected brokers other than the program sponsor or its affiliates to the extent that “trading away” from the sponsor will, in our opinion, achieve best execution over time. Trading away from the sponsor permits Penn Capital to aggregate WRAP client trades in large blocks with trades in the same securities being made for other clients. Penn Capital believes this will generally result in the best overall execution for accounts across multiple product lines. Best overall execution includes favorable pricing, promptness and reliability of execution, confidentiality, and placement accorded the trade order as well as the amount of the commission charged. Large block trading may thus benefit all clients involved. However, trading away will typically result in clients in so-called “bundled” WRAP programs incurring transaction and other costs that are in addition to their WRAP fees and which would not have been incurred if the trades were instead executed with the relevant sponsor. This is because, in a “bundled” WRAP program, the typical sponsor’s fee is agreed to cover any commissions on trades executed by the sponsor, but not commissions charged by other broker/dealers. It is the responsibility of the investment manager, however, to determine for itself whether, notwithstanding the absence of an incremental commission, the sponsor can provide best overall execution of any given trade, considering all of the factors described above. Penn Capital generally determines that client specific or “account maintenance” trades (i.e., trades effected to invest a new WRAP account, or divest a closing WRAP account or to address account contributions or withdrawals or tax loss harvesting) can be best executed by the WRAP sponsor. By contrast, Penn Capital believes that trades executed for WRAP clients as a result of investment decisions, and which are also being implemented for other Penn Capital clients in the same strategy, are in most cases best executed in large blocks with a single broker. The commissions paid on trades executed away from the sponsors are reflected in the transaction price at which the securities are bought or sold (rather than being separately stated or charged). Penn Capital provides to WRAP sponsors the names of the brokers who execute trades at Penn Capital’s direction for such sponsor’s clients as well as the specific commissions paid to such brokers. Each WRAP sponsor in turn is responsible for the content of the trade confirmations sent to its customers, including the extent of trading information (e.g., brokers used and commissions charged). To the extent trading away may reduce WRAP sponsor trading costs, a WRAP sponsor may have an incentive to recommend Penn Capital over a manager that does not trade away. Certain WRAP sponsors require their accounts to be traded on the WRAP sponsor’s proprietary trading system. The availability of a sponsor’s proprietary system is beyond Penn Capital’s control or oversight.


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To the extent that such a system is unavailable for trading, Penn Capital may be unable to execute orders for such sponsor’s accounts at the time Penn Capital seeks to place the order with the WRAP sponsor. Aggregation: Penn Capital has adopted policies and procedures designed to treat all of our clients fairly and equitably. Where possible, multiple orders are combined to achieve best execution. In some instances, clients may pay a higher transaction cost based upon the degree of difficulty of execution and whether brokers provide either a capital commitment to complete the trade, research or other services. Penn Capital seeks to limit brokerage commissions to no more than six cents per share on equity transactions. Under certain circumstances, an account may pay in excess of six cents per share due to special situations. Fixed income trades are made on a net basis. There is no separate commission charged on a fixed income trade, but there is a bid/ask spread which operates as the equivalent of a commission. Penn Capital may place a combined order for multiple accounts for the same security if, in our judgment, the execution is believed to be in the best interest of each participant and is expected to result in best execution. Transactions involving combined orders are allocated in a manner which Penn Capital believes will be equitable over time to all of our accounts. Block trading can help limit the impact to a security’s market price over the course of a day’s trading. This is in part because block trading reduces the number of buyers (or sellers) in the marketplace due to the fact that fewer orders are placed through block trading compared to the numerous orders that would have to be sent through multiple WRAP sponsor traders. Block trading also provides certain operational efficiencies to Penn Capital’s trading function. Block trading also has the advantage of involving fewer brokers in the market place competing with each other to execute trades in the same securities at the same time, or conversely, avoiding the need to allocate separate orders to multiple brokers in a sequence such that one broker does not receive and commence executing its order until one or more others have already filled theirs, often after the market price has moved adversely. By contrast, a block order allows the executing broker to either find a substantial counterparty or parties to trade the block or to “work” the order for all clients together on a pro rata basis over the course of the trading day as needed and to give all such clients the average price of the day’s order. Block orders can also serve to limit the marketplace’s knowledge of who exactly may be trading in a specific security, which reduces information leakage and the ensuing impact to a security’s price. This is particularly true in the case of the micro to mid cap stocks, which tend to have lower trading volumes. For these reasons Penn Capital believes that block trading, and block trading WRAP accounts in particular, aids in our efforts to achieve best execution for all of our clients, including WRAP clients. Although Penn Capital believes aggregating trades of WRAP clients with larger trades in the same securities being made for our institutional clients generally will result in better overall execution for WRAP clients than separating WRAP trades into smaller units and executing them with the relevant WRAP sponsors on a rotating basis, this aggregation results in those WRAP clients in ‘bundled’ programs paying a commission they would not otherwise incur had their trades been placed with their relevant WRAP sponsor. Rotation of Trades between Institutional, Wrap, and Directed Accounts: The methodology Penn Capital uses to execute for its various clients is a three tier technique based on criteria including but not limited to: stock liquidity, volatility, complexity, volume, best execution, and trader experience. Penn Capital may choose from among the following three processes:


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1. Trader uses a rotation order determined by using a random number generator for different

trading relationships (e.g., an institutional block trade, institutional directed accounts, or certain WRAP sponsors that require directed brokerage);

2. Step Out Trade – Trader sends a block order to one broker-dealer that works the entire order and steps out trades for one average price for WRAP sponsors that permit block trading; or

3. Discretionary Order Placement – Trader has discretion to place orders with brokers in an order that the trader expects to be the most beneficial for overall execution.

Depending on the liquidity of the issue being traded, it may be easier to transact in large block orders. Penn Capital uses market data, among other factors, to assist in making reasonable determinations regarding how to best execute each order via rotation, step-out trade, or discretionary order. Equities with ample liquidity are more likely to be traded on a rotation basis. Traders are permitted to use discretion when seeking best execution and will select the specific order in which certain WRAP sponsors that require directed brokerage are traded. Equities that are less liquid are most likely to be stepped out or traded on a discretionary rotation basis in an effort to achieve best execution for all accounts. The methodology chosen initially is subject to change because the market landscape during the trading day can be inconsistent and Penn Capital seeks to ensure certain account guideline restrictions are met on a daily basis (e.g., cash insufficiencies or limitations). Research and Other Services: Penn Capital has adopted policies and procedures designed to oversee implementation of soft dollar arrangements. Penn Capital may place trades with broker/dealers who provide brokerage and research services. Penn Capital receives an economic benefit because Penn Capital does not have to produce or pay for the research or other services. The commissions generated by these transactions may be used to acquire research or brokerage services for the benefit of all of our clients. These services, which will conform to the safe harbor established under Section 28(e) of the Securities Exchange Act of 1934, as amended, may include, but are not limited to: advice, either directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing or selling securities; information about the availability of securities or purchasers or sellers of securities; furnishing analysis and reports concerning issuers, securities or industries; providing information on economic factors and trends; and assistance in determining portfolio strategy. Research services used in connection with our investment decision-making process are not used exclusively for the account generating the brokerage. Although Penn Capital sends orders to broker/dealers who provide brokerage and research services, Penn Capital believes that the commissions (or their equivalent) paid to such broker/dealers are reasonable in relation to the value of the services received. Allocations: Penn Capital may decide to participate in an equity IPO for client accounts when Penn Capital believes that it presents a valuable investment opportunity. Penn Capital has adopted procedures designed to ensure fairness in the allocation of IPO opportunities among our clients. Penn Capital may, on occasion and with client consent, cross bonds or, as necessary, equities from one client account to another using an unaffiliated broker. “Cross Trade” transactions are usually made for the following reasons: (1) an account liquidation; (2) an account needs to raise cash; (3) an account is overweight the security due to asset withdrawals; or (4) the holding is no longer appropriate for the


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account’s strategy. Because ERISA Plan accounts prohibit Cross Trade transactions where Penn Capital has discretion on both sides of the transaction, Penn Capital will not engage in Cross Trades for ERISA accounts. Item 13 - Review of Accounts Portfolio managers, research analysts and the senior investment officers (the “Portfolio Team”) review and discuss investment decisions and the reason(s) for such action(s) at daily meetings. In addition, the Portfolio Team reviews the securities each portfolio holds at least weekly. At these meetings, the Portfolio Team reviews earnings projections, risk/reward parameters, and, as appropriate, recent research information. In addition, the Equity Strategy Committee and the Credit Committees each meet weekly to review top-down strategy positioning such as sector and industry concentrations in the portfolios, both on an absolute basis and relative to the applicable benchmark. Performance for accounts other than registered mutual funds is computed monthly and is reviewed by the Performance Committee. Typically, on a quarterly basis, or as frequently as may be individually negotiated, Penn Capital provides written client reports that detail a client’s performance, accounts holdings, transactions, and other related metrics. SMA clients should reconcile these reports with the records provided by such client’s custodian. Limited partners invested in Penn Capital private investment funds receive written monthly statements. Item 14 - Client Referrals and Other Compensation Penn Capital and its affiliates may compensate individuals, corporations or other entities for soliciting advisory services or proprietary mutual funds. Pursuant to these agreements, Penn Capital or its affiliates pay the referring party a percentage of the management fee and/or performance based fee collected by Penn Capital from the client. The arrangements have no effect on the gross fee charged to the client and comply with all relevant federal and state securities laws, including Rule 206(4)-3 under the Investment Advisers Act of 1940. Item 15 - Custody SMA Accounts: Penn Capital does not select or recommend custodians for our clients’ SMA holdings. Although Penn Capital may provide performance and transaction information to clients on a monthly or quarterly basis, this information should be cross referenced with the client’s custodian to ensure accuracy. Penn Capital’s statements may vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities.

Private Investment Funds: As General Partner of the private funds referenced in Item 4 above, Penn Capital is considered to have custody. Limited partners invested in those private funds receive monthly statements. Each private fund is audited annually by an independent accounting firm. Penn Capital encourages each limited partner investor to carefully review the private fund’s audited financial reports.


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Registered Mutual Funds and Other Programs: When serving as investment adviser to affiliated registered mutual funds, as sub-adviser to unaffiliated registered mutual funds, or sub-adviser to unaffiliated brokers’ investment programs (e.g., WRAP or Model Account programs) Penn Capital does not have custody of those client assets. Investors in such funds and programs should refer to the relevant mutual fund’s prospectus or to the documentation provided by the WRAP or Model Account program. Item 16 - Investment Discretion In most instances, Penn Capital receives full discretionary authority from the client at the beginning of the advisory relationship. Penn Capital, in its role as investment adviser, maintains discretionary authority to invest and reinvest in securities and other instruments consistent with a client’s individually negotiated investment objectives and guidelines, which must be provided to Penn Capital in writing. Penn Capital has a limited number of institutional and investment program relationships for which we provide non-discretionary advisory services (e.g., Model Account programs). Penn Capital does not execute brokerage transactions on behalf of non-discretionary Model Accounts, nor is Penn Capital responsible for any non-discretionary account reconciliations. Item 17 - Voting Client Securities

Clients’ proxies are voted in accordance with Penn Capital’s Proxy Voting Policy, which is designed to vote proxies in a manner consistent with what Penn Capital believes is in the client’s best interest. Some clients contractually reserve the right to either vote their own proxies or direct Penn Capital to vote their proxies in a certain manner. Penn Capital votes proxies based on a client’s instruction, or a client’s legal structure (such as an ERISA-covered pension plan). Penn Capital uses t Glass Lewis & Co. (“Glass Lewis”), proxy research firm, to provide proxy research and voting recommendations based on objective analysis. Penn Capital does not consider recommendations from Glass Lewis to be determinative of its ultimate decision. Rather, Penn Capital exercises its independent judgment in making voting decisions and reserves the right to vote contrary to Glass Lewis recommendations in the event that Penn Capital determines that it is in the client’s best interest. Broadridge Proxy Edge, an automated voting system provided by Broadridge, is used to vote proxy ballots electronically. Broadridge also maintains records on proxy votes for each client, or group of clients. Additionally, Penn Capital manually votes proxies in certain limited situations. Clients can submit a written request for a copy of Penn Capital’s “Proxy Voting Policy” or the proxy-voting history for their account(s), free of charge, to the following address:

Investor Services Department Penn Capital Management Company, Inc. Navy Yard Corporate Center 1200 Intrepid Avenue Suite 400 Philadelphia, PA 19112


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Item 18 - Financial Information Penn Capital has no financial commitment that impairs our ability to meet the contractual and fiduciary commitments that have been made to clients.

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Form ADV Part 2B Brochure Supplement

Penn Capital Management Company, Inc. Navy Yard Corporate Center

1200 Intrepid Drive, Suite 400 Philadelphia, PA 19112

215-302-1500 www.penncapital.com

March 31, 2017 This ADV Part 2B Brochure Supplement provides information about the qualifications of investment professionals of Penn Capital Management Company, Inc. If you have any questions about the contents of this Brochure Supplement, please contact us at (215) 302-1500. The information in this Brochure Supplement has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Additional Information about Penn Capital Management Company, Inc. is also available at www.adviserinfo.sec.gov.

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Richard A. Hocker Chief Executive Officer and Chief Investment Officer


Penn Capital Management Company, Inc. 1200 Intrepid Drive, Suite 400, Philadelphia, PA 19112, (215) 302-1500

March 31, 2017 This Brochure Supplement provides information about Richard A. Hocker that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn CAPITAL if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1946 Formal Education: Kogod School of Business, American University, B.S. (Accounting) Kogod School of Business, American University, M.B.A. (Finance) Business Background: Chief Executive Officer and Chief Investment Officer (since 1987) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Hocker has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Hocker is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Hocker receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Hocker is a senior member of the Executive Committee and Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. The Executive Committee is responsible for the day-to-day management of Penn Capital’s business. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Penn Capital’s compliance program is designed in accordance with the requirements of Rule 206(4)-7 of the Investment Advisers Act of 1940. Mr. Hocker is supervised by the Executive Committee. Mr. Hocker can be reached at (215) 302-1500.

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Eric J. Green, CFA* Director of Research & Senior Managing Partner



March 31, 2017

This Brochure Supplement provides information about Eric J. Green that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1970 Formal Education: Kogod School of Business, American University, B.S.B.A. (Finance) (Minor in

Psychology) Yale School of Management, M.B.A. (Investments) Business Background: Director of Research & Senior Managing Partner (since 1997) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Green has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Green is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Green receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Green is a member of the Executive Committee and Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of Rule 206(4)-7 of the Investment Advisers Act of 1940. The Executive Committee is responsible for the day-to-day management of Penn Capital’s business. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Green is supervised by Rich Hocker. Mr. Hocker can be reached at (215) 302-1500.

*The Chartered Financial Analyst (CFA) designation is an international professional certification offered by the CFA Institute to financial analysts who complete a series of three examinations. A Charterholder must pass each of three six-hour exams, possess a bachelor’s degree (or equivalent, as assessed by CFA Institute) and have 48 months of qualified, professional work experience. Charterholders are also obligated to adhere to a strict Code of Ethics and Standards governing their professional conduct.

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Scott D. Schumacher Senior Managing Partner and Senior Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about Scott D. Schumacher that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1965 Formal Education: Rutgers University, B.A. (Accounting) Business Background: Senior Managing Partner and Senior Portfolio Manager (since 1999) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Schumacher has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Schumacher is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Schumacher receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Schumacher is a member of the Executive Committee and Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of Rule 206(4)-7 of the Investment Advisers Act of 1940. The Executive Committee is responsible for the day-to-day management of Penn Capital’s business. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Schumacher is supervised by Rich Hocker. Mr. Hocker can be reached at (215) 302-1500.

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Martin A. Smith Senior Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about Martin A. Smith that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1970 Formal Education: Pace University, B.B.A. (Finance) Rutgers University, M.B.A. (Finance) Business Background: Senior Portfolio Manager, (since 1999) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Smith has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Smith is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Smith receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Smith is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, is responsible for Mr. Smith’s supervision. Mr. Green can be reached at (215) 302-1500.

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Kevin C. Roche

Senior Portfolio Manager Form ADV Part 2B Brochure Supplement

Penn Capital Management Company, Inc.

1200 Intrepid Drive, Suite 400, Philadelphia, PA 19112, (215) 302-1500

March 31, 2017

This Brochure Supplement provides information about Kevin C. Roche that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1971 Formal Education: The Catholic University of America, B.A. (English) F.W. Olin Graduate School of Business at Babson College, M.B.A.

(Finance) Business Background: Senior Portfolio Manager (since 2002) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Roche has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Roche is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Roche receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Roche is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, is responsible for Mr. Roche’s supervision. Mr. Green can be reached at (215) 302-1500.

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J. Paulo Silva, CFA* Managing Partner and Senior Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about J. Paulo Silva that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1975 Formal Education: Tufts University, B.S. (Engineering) Yale School of Management, M.B.A. Business Background: Managing Partner and Senior Portfolio Manager (since 2002) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Silva has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Silva is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Silva receives no additional compensation for providing investment advisory services to clients Item 6. Supervision Mr. Silva is a member of the Executive Committee and Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. The Executive Committee is responsible for the day-to-day management of Penn Capital’s business. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Silva is supervised by Rich Hocker. Mr. Hocker can be reached at (215) 302-1500.


of 11

Peter R. Duffy, CFA* Senior Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about Peter R. Duffy that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1972 Formal Education: Villanova University, B.S. (Finance) The Wharton School, University of Pennsylvania, M.B.A. (Finance) Business Background: Senior Portfolio Manager (since 2006) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Duffy has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Duffy is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Duffy receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Duffy is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, is responsible for Mr. Duffy’s supervision. Mr. Green can be reached at (215) 302-1500.


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Joseph C. Maguire, CFA* Senior Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about Joseph C. Maguire that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1975 Formal Education: The College of William & Mary, B.B.A. (Accounting) Kenan-Flagler Business School at the University of North Carolina at

Chapel Hill, M.B.A. Business Background: Senior Portfolio Manager (since 2013); Portfolio Manager (2005-2013) (For the last five years)

2006 – 2013 Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Maguire has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Maguire is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Maguire receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Maguire is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, is responsible for Mr. Maguire’s supervision. Mr. Green can be reached at (215) 302-1500.


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David H. Jackson, CFA* Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about David H. Jackson that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1978 Formal Education: Rutgers University, B.S. (Finance) Business Background: Portfolio Manager (since 2012); Senior Research Analyst (2008 – 2012) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn Capital or our integrity. Mr. Jackson has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Jackson is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Jackson receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. Jackson is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, and J. Paulo Silva, Senior Portfolio Manager, are responsible for Mr. Jackson’s supervision. Mr. Green and Mr. Silva can be reached at (215) 302-1500.


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Steven E. Civera, CFA* Portfolio Manager



March 31, 2017

This Brochure Supplement provides information about Steven E. Civera that supplements the Penn Capital Management Company, Inc., (“Penn Capital”) Brochure. You should have received a copy of that Brochure. Please contact Penn Capital if you did not receive the Brochure or if you have any questions about the contents of this Supplement. Item 2. Educational Background and Business Experience Year of Birth: 1980 Formal Education: Bucknell University, B.S.B.A. (Accounting) Loyola College, M.B.A. Business Background: Portfolio Manager (since 2012); Research Analyst (2010 – 2012) (For the last five years) Item 3. Disciplinary Information We are required to disclose any material facts regarding legal or disciplinary events that would be material to your evaluation of Penn or our integrity. Mr. Civera has no disciplinary information or events to disclose. Item 4. Other Business Activities Mr. Civera is not actively engaged in any other investment-related business or occupation. Item 5. Additional Compensation Mr. Civera receives no additional compensation for providing investment advisory services to clients. Item 6. Supervision Mr. is a member of the Investment Team and is subject to Penn Capital’s written compliance and supervisory procedures and the related ongoing compliance monitoring and testing. Penn Capital’s compliance program is designed in accordance with the requirements of the Investment Advisers Act of 1940, Rule 206(4)-7. Penn Capital’s Investment Team is responsible for supervision, formulation and monitoring of investment advice offered to clients. Mr. Eric J. Green, Director of Research, and J. Paulo Silva, Senior Portfolio Manager, are responsible for Mr. Civera’s supervision. Mr. Green and Mr. Silva can be reached at (215) 302-1500.


Rev. 09/01/2016

FACTS

Why?

What?

How?

Does Penn Capital

share?Can you limit this sharing?

Yes No

No No

No No

Yes No

No No

No No

Questions?

WHAT DOES PENN CAPITAL MANAGEMENT COMPANY, INC.

DO WITH YOUR PERSONAL INFORMATION?

Financial companies choose how they share your personal information. Federal law gives

consumers the right to limit some but not all sharing. Federal law also requires us to tell

you how we collect, share, and protect your personal information. Please read this notices

carefully to understand what we do.

The types of personal information we collect and share depend on the product or service

you have with us. The information can include:

* Social Security number

* Account balances and account transactions

* Assets and transaction history

When you are no longer our client, we continue to share your information as described in

this notice.

All financial companies need to share clients' personal information to run the everyday

business. In the section below, we list the reasons financial companies can share their

clients' personal information; the reasons Penn Capital Management Company, Inc. ("Penn

Capital") chooses to share; and whether you can limit this sharing.

For nonaffiliates to market to you

Call 215‐302‐1500 or go to www.penncapital.com

For affiliates' everyday business purposes ‐

information about your creditworthiness

For affiliates' everyday business purposes ‐

information about transaction(s) and experiences

For joint marketing with other financial companies

For marketing purposes ‐

to offer our products and services to you

For everday business purposes ‐

such as to process your transactions, maintain your

account(s), respond to court orders and legal investigations, or

report to credit bureaus

Reasons we can share your personal information

Federal law gives you the right to limit only

* sharing for affiliates everyday business purposes ‐

information about your creditworthiness

* affiliates from using you information to market to you

* sharing for nonafilliates to market to you

State laws and individual companies may give you additional

rights to limit sharing.

We collect your personal information, for example, when you

* Open an account or deposit money

* Provide information on client questionaires

To protect your personal information from unauthorized access

and use, we use security measures that comply with federal

law. These measures include computer and secured files and

buildings.

Affiliates

Companies related by common ownership or control. They can

be financial or nonfinancial companies

* PENN Capital Funds Group LLC

* PENN Capital Funds Trust

How does Penn Capital protect my personal

information?

How does Penn Capital collect my personal

information?

Why can't I limit all sharing?

What we do

Who we are

Who is providing this notice? Penn Capital

Definitions

This notice replaces all previous notices of our consumer privacy policy, and may be amended from time

to time. Penn Capital will inform you of updates or changes as required by law.

Nonaffiliates

Companies not related by common ownership or control. They

can be financial or nonfinancial companies

* Penn Capital does not share information with

nonaffiliates

Joint marketingA formal agreement between non affiliated companies that

together market financial products or services to you

* Penn Capital does not have joint marketing partners

Other important information

PENN Capital Management Company, Inc. Compliance Manual

57

Chapter 19: Proxy Voting Policy Under Rule 206(4)-6 of the Advisers Act and the SEC’s Form NP-X

Introduction PENN has adopted and implemented policies and procedures that are reasonably designed to ensure that proxies are voted in the economic interest of its clients.

This policy sets forth the guidelines that PENN uses in voting specific proposals presented by the boards of directors or shareholders of companies whose securities are held in client portfolios.

PENN maintains information about proxy votes to file Form NP-X with the SEC for certain Mutual Fund clients.

How Adviser Votes Proxies For clients that give us authority to vote proxies, we have the ability to tailor voting. We vote proxies based on a client’s instruction or a client’s legal structure, such as an ERISA pension plan. Absent legal structure considerations or specific instructions, clients’ proxies are voted in accordance with what PENN believes is in the economic interest of the shareholders, in consultation with our proxy research provider, as described below. Additionally, some clients contractually reserve the right to vote their own proxies or contractually direct us to vote their proxies in a certain manner.

We utilize the services of the research firm of Glass Lewis & Co. (“Glass Lewis”) to provide proxy research and voting recommendations. Recommendations are based on objective analysis. PENN reserves the right to vote contrary to Glass Lewis recommendations in the event that PENN determines that it is in the client’s interest.

We utilize the services of the Proxy Edge automated voting system provided by Broadridge to electronically vote ballots. Broadridge notifies PENN in advance of the board meetings, provides the appropriate proxies to be voted, and maintains records of proxy statements received and votes cast.

Proxy Voting Guidelines The following Glass Lewis guidelines have been adopted by PENN to objectively evaluate proxy votes that are in the economic interest of our clients:

1. Board of Directors: The election of directors and an independent board is important to ethical and effective corporate governance. Directors are expected to be competent individuals and they should be accountable and responsive to shareholders. Adviser supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. Adviser generally votes against management efforts to classify a board and generally supports proposals to declassify the board of directors. Adviser considers withholding votes from directors with an unsatisfactory attendance record. While generally in favor of separating Chairman and CEO positions, Adviser will review this issue on a case-by-case basis, considering other factors, including the company's corporate governance guidelines and performance. Adviser evaluates proposals to restore or provide for cumulative voting


58

on a case-by-case basis and considers such factors as corporate governance provisions as well as relative performance.

2. Ratification of Auditors: In light of several high profile accounting scandals, Glass Lewis

closely scrutinizes the role and performance of auditors. On a case-by-case basis, Glass Lewis examines proposals relating to non-audit relationships and non-audit fees. Glass Lewis considers, on a case-by-case basis, proposals to rotate auditors, and votes against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence attributable to the auditors.

3. Management & Director Compensation: A company's equity-based compensation plan

should align with the shareholders' long-term interests. Glass Lewis evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable. Adviser generally opposes plans that have the potential to be excessively dilutive. The Adviser generally supports employee stock option plans. Severance compensation arrangements are reviewed on a case-by-case basis, although Adviser generally opposes "golden parachutes" that are considered excessive. Adviser normally supports proposals that require a percentage of director compensation be in the form of common stock, as it aligns their interests with those of the shareholders. Adviser reviews on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans, and continues to monitor future developments in this area.

4. Anti-Takeover Mechanisms and Related Issues: Adviser generally opposes anti-takeover

measures since they tend to reduce shareholder rights. However, as with all proxy issues, Glass Lewis conducts an independent review of each anti-takeover proposal. Occasionally, Adviser may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm Client interests as stockholders. Adviser generally supports proposals that require shareholder rights plans ("poison pills") to be subject to a shareholder vote. Adviser evaluates shareholder rights' plans on a case-by-case basis to determine whether they warrant support. Adviser generally votes against any proposal to issue stock that has unequal or subordinate voting rights. Additionally, Adviser generally opposes any supermajority voting requirements as well as the payment of "greenmail." Adviser usually supports "fair price" provisions and confidential voting.

5. Changes to Capital Structure: Adviser realizes that a company's financing decisions

significantly impact its shareholders, particularly when they involve the issuance of additional shares of common or preferred stock or the assumption of additional debt. Glass Lewis will carefully review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase. Adviser generally votes against dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. Adviser generally votes in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. Glass Lewis reviews proposals seeking preemptive rights on a case-by-case basis.


59

6. Social and Corporate Policy Issues: As a fiduciary, Adviser is primarily concerned about the financial interests of its Clients. Adviser generally gives management discretion with regard to social, environmental and ethical issues, although Adviser may vote in favor of those issues that are believed to have significant economic benefits or implications.

Responsibility and Oversight PENN has established a Proxy Voting Committee, which is responsible for the review and approval of the firm’s written Proxy Policy procedures and guidelines. The firm’s CCO monitors regulatory developments with respect to proxy voting and works with the Proxy Voting Committee to develop policies that implement those requirements. Daily administration of the proxy voting process is the responsibility of the Portfolio Accounting department.

Conflicts of Interest Conflicts of interest will be resolved in favor of the clients’ interests. The CCO is responsible for resolving potential conflicts of interest in the proxy voting process. Examples of potential conflicts of interest include:

1. Adviser or principals have a business or personal relationship with participants in a proxy contest, corporate directories or candidates for directorships;

2. The Adviser or principals have a material business relationship with a proponent of a proxy proposal and this business relationship may influence how the proxy vote is cast.

When a potential material conflict of interest exists, PENN will obtain Client consent before voting. PENN will provide the Client with sufficient information regarding the shareholder vote and the Adviser’s potential conflict, so the Client can make an informed decision whether to consent.

If you need further information, please direct your written requests to:

Director of Client Services PENN Capital Management Company, Inc. Navy Yard Business Center Three Crescent Drive, Suite 400 Philadelphia, PA 19112

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