<PAGE>
PROSPECTUS -- MAY 1, 1997
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PENN SERIES FUNDS, INC.
600 DRESHER ROAD, HORSHAM, PA 19044 . TELEPHONE (215) 956-8000
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Penn Series Funds, Inc. ("Penn Series") is a diversified open-end management
investment company that currently offers nine different investment portfolios
or Funds. Each Fund is, for investment purposes, a separate investment fund,
and each is represented by a separate series or class of capital stock. The
Funds and their investment objectives are as follows.
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GROWTH EQUITY seeks long-term growth of capital and increase of future
FUND: income by investing primarily in common stocks of well-
established growth companies;
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VALUE EQUITY FUND: seeks to maximize total return (capital appreciation and
income) primarily by investing in equity securities of
companies believed to be undervalued considering such
factors as assets, earnings, growth potential and cash
flows;
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SMALL seeks capital appreciation through investment in a
CAPITALIZATION diversified portfolio of securities consisting primarily of
FUND: equity securities of companies with market capitalizations
of under $1 billion;
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EMERGING GROWTH seeks capital appreciation by investing primarily in common
FUND: stocks of emerging growth companies with above-average
growth prospects;
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FLEXIBLY MANAGED seeks to maximize total return (capital appreciation and
FUND: income) by investing in common stocks, other equity
securities, corporate debt securities, and/or short-term
reserves, in proportions considered appropriate in light of
the availability of attractively valued individual
securities and current and expected economic and market
conditions;
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INTERNATIONAL seeks to maximize capital appreciation by investing in a
EQUITY FUND: carefully selected diversified portfolio consisting
primarily of equity securities. The investments will
consist principally of equity securities of European and
Pacific Basin countries;
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QUALITY BOND FUND: seeks the highest income over the long term consistent with
the preservation of principal by investing primarily in
marketable investment-grade debt securities;
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HIGH YIELD BOND seeks high current income by investing primarily in a
FUND: diversified portfolio of long term high-yield fixed income
securities in the medium to lower quality ranges; capital
appreciation is a secondary objective; SUCH SECURITIES,
WHICH ARE COMMONLY REFERRED TO AS "JUNK" BONDS, GENERALLY
INVOLVE GREATER RISKS OF LOSS OF INCOME AND PRINCIPAL THAN
HIGHER RATED SECURITIES;
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MONEY MARKET FUND: seeks to preserve capital, maintain liquidity and achieve
the highest possible level of current income consistent
therewith, by investing in high quality money market
instruments; AN INVESTMENT IN THE FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO
ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
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Shares of Penn Series Funds, Inc. are sold only to The Penn Mutual Life
Insurance Company ("Penn Mutual") and its subsidiary, The Penn Insurance and
Annuity Company ("PIA"), for their separate and general accounts. The Funds are
underlying investment vehicles for variable annuity contracts and variable life
insurance policies.
This prospectus sets forth concisely the information a prospective purchaser
of a variable contract should know before directing Penn Mutual or PIA to
invest purchase payments or premiums in the Funds. It should be retained for
future reference.
A Statement of Additional Information about the Penn Series Funds, Inc.,
which is incorporated by reference in this prospectus, has been filed with the
Securities and Exchange Commission. It is available, at no charge, by writing
The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia,
PA 19172. Or, you can call toll free, 1-800-523-0650. The date of the Statement
of Additional Information is the same as the date of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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PROSPECTUS CONTENTS
<TABLE>
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<S> <C>
GENERAL INFORMATION......................................................... 3
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FINANCIAL HIGHLIGHTS........................................................ 3
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INVESTMENT OBJECTIVES AND PROGRAMS.......................................... 12
Growth Equity Fund........................................................ 12
Value Equity Fund......................................................... 13
Small Capitalization Fund................................................. 14
Emerging Growth Fund...................................................... 15
Flexibly Managed Fund..................................................... 15
International Equity Fund................................................. 16
Quality Bond Fund......................................................... 18
High Yield Bond Fund...................................................... 19
Money Market Fund......................................................... 22
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ADDITIONAL INVESTMENT INFORMATION RELATING TO THE FUNDS..................... 24
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MANAGEMENT OF PENN SERIES FUNDS, INC........................................ 25
Directors and Officers.................................................... 25
Investment Advisers....................................................... 25
Administrative and Corporate Services Agent............................... 27
Expenses and Limitations Thereon.......................................... 28
Custodian, Accounting Services Agent and Transfer Agent................... 28
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SALE AND REDEMPTION OF SHARES............................................... 28
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NET ASSET VALUE OF SHARES................................................... 28
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DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................... 29
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VOTING RIGHTS............................................................... 29
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RATINGS OF CORPORATE DEBT SECURITIES........................................ 30
Moody's Investors Service, Inc............................................ 30
Standard & Poor's Corporation............................................. 30
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</TABLE>
2
<PAGE>
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GENERAL INFORMATION
Penn Series Funds, Inc. ("Penn Series") was organized as a Maryland corporation
in 1982. In 1983, Penn Mutual Equity Fund, Inc. merged into Penn Series and the
assets and liabilities of Penn Mutual Equity Fund, Inc. became the assets and
liabilities of what is now named the Growth Equity Fund of Penn Series.
Penn Series is registered under the Investment Company Act of 1940 ("1940
Act") as an open-end diversified management investment company, commonly known
as a "mutual fund."
Penn Series currently offers nine Funds and has a separate series or class of
capital stock for each Fund. Each share of capital stock issued with respect to
a Fund has a pro-rata interest in the assets of that Fund and has no interest
in any other Fund. Each Fund bears its own liabilities and also its
proportionate share of the general liabilities of Penn Series.
The Penn Series Funds and the investment advisers are as follows:
FUND INVESTMENT ADVISER/ SUB-ADVISER
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Growth Equity Fund Independence Capital Management, Inc.
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Value Equity Fund OpCap Advisors
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Small Capitalization Fund OpCap Advisors
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Emerging Growth Fund Independence Capital Management, Inc. /
-----------------------------------------------------------------------------
Robertson Stephens Investment
Management, Inc.
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Flexibly Managed Fund T. Rowe Price Associates, Inc.
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International Equity Fund Vontobel USA Inc.
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Quality Bond Fund Independence Capital Management, Inc.
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High Yield Bond Fund T. Rowe Price Associates, Inc.
-----------------------------------------------------------------------------
Money Market Fund Independence Capital Management, Inc.
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The outstanding shares of each of the Funds of Penn Series are owned by The
Penn Mutual Life Insurance Company ("Penn Mutual") and its subsidiary, The Penn
Insurance and Annuity Company ("PIA"). Shares of Penn Series are currently sold
to separate accounts of Penn Mutual and PIA to fund variable annuity contracts
and variable life insurance contracts. It is possible that in the future it may
become disadvantageous for both variable annuity and variable life contract
separate accounts to invest in the same underlying mutual fund. Although
neither Penn Mutual, PIA nor Penn Series currently perceives or anticipates any
such disadvantage, the Board of Directors of Penn Series will monitor events to
determine whether any material conflict between variable annuity contract
owners and variable life contract owners arises. Material conflicts could
result from such things as: (1) changes in state insurance law; (2) changes in
federal income tax law; (3) changes in the investment management of any Fund of
Penn Series; or (4) differences between voting instructions given by variable
annuity contract owners and those given by variable life insurance policy
owners. In the event of a material, irreconcilable conflict, Penn Mutual or PIA
will take the steps necessary to protect its variable annuity and variable life
contract owners. Penn Mutual and PIA will be responsible for reporting any
potential or existing conflicts to the Board of Directors of Penn Series and
will remedy, at its cost, any material, irreconcilable conflict. This could
include discontinuance of investment in shares of Penn Series.
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FINANCIAL HIGHLIGHTS
The financial data included in the tables set forth in the following pages
have been derived from the financial statements of Penn Series Funds, Inc.,
which have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report thereon appears in the Statement of Additional Information. The
financial data included in these tables should be read in conjunction with the
financial statements and the related notes included in the Statement of
Additional Information, which may be obtained upon request without charge.
Further information about the performance of the Funds is included in the
annual report to contract owners, which also may be obtained upon request
without charge.
3
<PAGE>
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FINANCIAL HIGHLIGHTS: GROWTH EQUITY FUND (A)
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of year........... $ 20.00 $ 18.30 $ 20.49 $ 18.82 $ 21.47 $ 16.35 $ 18.86 $ 15.78 $ 15.14 $ 17.81
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.11 0.09 0.13 0.06 0.16 0.23 0.41 0.35 0.35 0.28
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. 3.85 4.75 (1.80) 2.28 1.12 5.45 (2.51) 4.60 1.57 0.80
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 3.96 4.84 (1.67) 2.34 1.28 5.68 (2.10) 4.95 1.92 1.08
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.11) (0.09) (0.13) (0.06) (0.16) (0.23) (0.41) (0.35) (0.33) (0.63)
Distribution in excess
of net investment
income................. 0.00 (0.09) 0.00 0.00 0.00 0.00 0.00 (0.02) 0.00 0.00
Distribution from net
realized gain.......... (2.39) (3.05) (0.39) (0.61) (3.77) (0.33) 0.00 (1.50) (0.95) (3.12)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (2.50) (3.14) (0.52) (0.67) (3.93) (0.56) (0.41) (1.87) (1.28) (3.75)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 21.46 $ 20.00 $ 18.30 $ 20.49 $ 18.82 $ 21.47 $ 16.35 $ 18.86 $ 15.78 $ 15.14
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 19.76% 26.45% (8.12%) 12.43% 5.96% 34.74% (11.13%) 31.37% 12.68% 6.06%
RATIOS/SUPPLEMENTAL DA-
TA:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $106,039 $95,593 $80,078 $83,938 $73,977 $59,670 $39,896 $39,541 $33,184 $31,375
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets..... 0.80% (b) 0.77% (b) 0.79% (b) 0.77% (b) 0.88% (b) 0.87% 0.91% 0.86% 0.77% 0.90%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets................. 0.48% (b) 0.43% (b) 0.70% (b) 0.30% (b) 0.81% (b) 1.28% 2.43% 1.66% 2.07% 1.91%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover rate. 177.1% 169.8% 156.2% 185.3% 120.7% 41.7% 34.0% 40.4% 27.3% 21.1%
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Average commission paid
(c).................... $ 0.0774
========
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</TABLE>
(a) Penn Mutual Equity Fund Inc. prior to May 31, 1983. Growth Stock Fund
prior to November 1, 1992.
(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
.81%, .82%, .84%, .82% and .89%, and the ratio of the net investment in-
come to average net assets would have been .47%, .38%, .65%, .25% and
.80% for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged, as required by the SEC beginning after September 1, 1995.
4
<PAGE>
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FINANCIAL HIGHLIGHTS: VALUE EQUITY FUND (A)
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(B)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 16.28 $ 12.67 $ 12.68 $ 12.14 $ 11.89 $ 9.68 $ 11.18 $ 10.64 $ 8.77 $10.00 (c)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.22 0.25 0.20 0.17 0.45 0.47 0.59 0.51 0.34 0.49
Net realized and
unrealized gain (loss)
on investment
transactions........... 3.88 4.50 0.17 0.69 1.32 2.21 (1.50) 0.88 2.26 (1.17)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations............. 4.10 4.75 0.37 0.86 1.77 2.68 (0.91) 1.39 2.60 (0.68)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.22) (0.25) (0.20) (0.17) (0.45) (0.47) (0.59) (0.51) (0.33) (0.47)
Distribution from net
realized
gain................... (0.84) (0.89) (0.18) (0.15) (1.07) 0.00 0.00 (0.34) (0.40) (0.08)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions..... (1.06) (1.14) (0.38) (0.32) (1.52) (0.47) (0.59) (0.85) (0.73) (0.55)
-------- -------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period................. $ 19.32 $ 16.28 $ 12.67 $ 12.68 $ 12.14 $ 11.89 $ 9.68 $ 11.18 $ 10.64 $ 8.77
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
Total return............ 25.19% 37.48% 2.92% 7.08% 14.89% 27.69% (8.14%) 13.06% 29.65% (6.80%)
RATIOS/SUPPLEMENTAL DA-
TA:
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands).. $200,674 $127,260 $79,021 $69,980 $49,199 $33,610 $22,780 $24,385 $11,998 $4,683
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
Ratio of expenses to
average net assets..... 0.78% 0.80% 0.82% 0.83% 0.88% (e) 0.88% 0.91% 0.89% 0.81% 0.84% (d)
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
Ratio of net investment
income to average net
assets................. 1.38% 1.71% 1.59% 1.49% 3.87% (e) 4.44% 5.42% 5.38% 5.17% 4.91% (d)
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
Portfolio turnover rate. 25.0% 34.3% 30.6% 17.2% 117.4% 32.4% 21.3% 26.9% 34.8% 82.4%
======== ======== ======= ======= ======= ======= ======= ======= ======= ======
Average commission rate
paid (f)............... $ 0.0588
========
</TABLE>
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(a) Equity Income Fund prior to November 1, 1992.
(b) For the period March 2, 1987 (commencement of operations) through December
31, 1987.
(c) Initial capitalization.
(d) Annualized.
(e) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been .90% and 3.85% re-
spectively, for the year ended December 31, 1992.
(f) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged, as required by the SEC beginning after September 1, 1995.
5
<PAGE>
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FINANCIAL HIGHLIGHTS: SMALL CAPITALIZATION FUND
The table below sets forth financial data for a share outstanding throughout
the period
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 (A)
- -------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period............ $ 10.96 $ 10.00
------------ -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.07 0.09
Net realized and unrealized gain (loss) on in-
vestment transactions.......................... 2.09 1.19
------------ -----------
Total from investment operations................ 2.16 1.28
------------ -----------
LESS DISTRIBUTIONS:
Dividend from net investment income............. (0.07) (0.09)
Distribution from capital gains................. (0.52) (0.23)
------------ -----------
Total distributions............................. (0.59) (0.32)
------------ -----------
Net asset value, end of period.................. $ 12.53 $ 10.96
============ ===========
Total return.................................... 19.76% 12.76%
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------
Net assets, end of period (in thousands)........ $ 16,134 $ 4,828
============ ===========
Ratio of expenses to average net assets (c)..... 0.99% 1.00% (b)
============ ===========
Ratio of net investment income to average net
assets (c)..................................... 0.85% 1.53% (b)
============ ===========
Portfolio turnover rate......................... 39.2% 64.3%
============ ===========
Average commission rate paid (d)................ $ 0.0486
============
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</TABLE>
(a) For the period from March 1, 1995 (commencement of operations through De-
cember 31, 1995.
(b) Annualized.
(c) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
1.06% and 1.29%, and the ratio of net investment income to average net as-
sets would have been .78% and 1.24% for the year ended December 31, 1996
and the period ended December 31, 1995.
(d) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged, as required by the SEC beginning after September 1, 1995.
6
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: FLEXIBLY MANAGED FUND (A)
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 17.40 $ 15.19 $ 15.70 $ 14.31 $ 13.73 $ 12.30 $ 13.41 $ 12.65 $ 11.61 $ 13.45
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.65 0.53 0.43 0.34 0.58 0.52 0.54 0.57 0.48 0.54
Net realized and
unrealized gain (loss)
on investment
transactions........... 2.19 2.86 0.22 1.92 0.74 2.14 (0.65) 2.11 1.72 2.56
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 2.84 3.39 0.65 2.26 1.32 2.66 (0.11) 2.68 2.20 3.10
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.65) (0.53) (0.43) (0.34) (0.58) (0.52) (0.54) (0.58) (0.48) (0.76)
Distribution in excess
of net investment
income................. (0.00) (0.01) (0.02) 0.00 0.00 0.00 (0.01) 0.00 0.00 (0.02)
Distribution from net
realized gain.......... (0.85) (0.64) (0.71) (0.53) (0.16) (0.71) (0.45) (1.34) (0.68) (4.16)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total distributions..... (1.50) (1.18) (1.16) (0.87) (0.74) (1.23) (1.00) (1.92) (1.16) (4.94)
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 18.74 $ 17.40 $ 15.19 $ 15.70 $ 14.31 $ 13.73 $ 12.30 $ 13.41 $ 12.65 $ 11.61
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Total return............ 16.37% 22.28% 4.14% 15.79% 9.61% 21.63% (0.82%) 21.19% 18.95% 22.90%
RATIOS/SUPPLEMENTAL
DATA:
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $398,544 $266,556 $169,847 $113,492 $70,979 $47,141 $29,315 $27,439 $18,372 $10,332
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets..... 0.77% 0.79% 0.82% 0.85% 0.89% (b) 0.91% 0.90% 0.90% 0.86% 0.91%
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets................. 3.90% 3.45% 3.14% 2.62% 4.56% (b) 4.45% 4.11% 4.41% 4.38% 3.48%
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Portfolio turnover rate. 32.9% 37.2% 37.3% 42.6% 29.5% 53.6% 43.3% 74.9% 176.7% 183.6%
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Average commission rate
paid (c)............... 0.0627
========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Capital Appreciation Fund prior to November 1, 1992.
(b) Had fees not been waived by the investment adviser and/or administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been .90% and 4.55% for
the year ended December 31, 1992, respectively.
(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged, as required by the SEC beginning after September 1, 1995.
7
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: INTERNATIONAL EQUITY FUND
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992(A)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 14.47 $ 13.01 $ 13.94 $ 10.12 $ 10.00 (b)
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income...... 0.63 0.13 0.09 0.03 0.03
Net realized and unrealized
gain (loss) on investments
and foreign currency
related items............. 1.81 1.67 (0.97) 3.83 0.17
-------- ------- ------- ------- -------
Total from investment
operations................ 2.44 1.80 (0.88) 3.86 0.20
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income......... (0.56) (0.12) (0.02) (0.01) (0.03)
Distribution in excess of
net investment income..... (0.74) (0.22) 0.00 0.00 (0.05)
Distribution from net
realized gain............. 0.00 0.00 (0.00) (0.03) 0.00
Distribution from return of
capital................... 0.00 0.00 (0.03) 0.00 0.00
-------- ------- ------- ------- -------
Total distributions........ (1.30) (0.34) (0.05) (0.04) (0.08)
-------- ------- ------- ------- -------
Net asset value, end of
period.................... $ 15.61 $ 14.47 $ 13.01 $ 13.94 $ 10.12
======== ======= ======= ======= =======
Total return............... 16.87% 13.80% (6.31%) 38.14% 2.00%
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------
Net assets, end of period
(in thousands)............ $104,418 $69,531 $59,393 $40,798 $11,137
======== ======= ======= ======= =======
Ratio of expenses to
average net assets........ 1.17% 1.23% 1.22% 1.21% 1.54% (c)(d)
======== ======= ======= ======= =======
Ratio of net investment
income to average net
assets.................... 0.66% 0.91% 0.82% 0.63% 1.56% (c)(d)
======== ======= ======= ======= =======
Portfolio turnover rate.... 54.8% 62.5% 15.6% 11.1% 0.0%
======== ======= ======= ======= =======
Average Commission Paid
(e)....................... $ 0.0397
========
- --------------------------------------------------------------------------------
</TABLE>
(a) For the period from November 2, 1992 (commencement of operations) to De-
cember 31, 1992.
(b) Initial Capitalization.
(c) Annualized.
(d) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been 1.90% annualized
and 1.20% annualized, respectively for the year ended December 31, 1992.
(e) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged, as required by the SEC beginning after September 1, 1995.
8
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: QUALITY BOND FUND (A)
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(B)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period... $ 10.24 $ 9.04 $ 10.19 $ 10.03 $ 10.51 $ 9.73 $ 9.68 $ 9.22 $ 9.17 $ 10.00 (c)
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 0.66 0.61 0.61 0.46 0.75 0.71 0.72 0.73 0.65 0.91
Net realized and
unrealized gain (loss)
on investment
transactions.......... (0.24) 1.21 (1.15) 0.71 (0.06) 0.81 0.05 0.46 0.04 (0.83)
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
Total from investment
operations............ 0.42 1.82 (0.54) 1.17 0.69 1.52 0.77 1.19 0.69 0.08
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
LESS DISTRIBUTIONS:
Dividend from net
investment income..... (0.66) (0.61) (0.61) (0.46) (0.75) (0.71) (0.72) (0.73) (0.64) (0.91)
Distribution from net
realized gain......... 0.00 0.00 0.00 (0.54) (0.42) (0.03) 0.00 0.00 0.00 0.00
Distribution in excess
of net realized gain.. 0.00 (0.01) 0.00 (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
Total distributions.... 0.66 (0.62) (0.61) (1.01) (1.17) (0.74) (0.72) (0.73) (0.64) (0.91)
------- ------- ------- ------- ------- ------- ------- ------- ------ -------
Net asset value, end of
period................ $ 10.00 $ 10.24 $ 9.04 $ 10.19 $ 10.03 $ 10.51 $ 9.73 $ 9.68 $ 9.22 $ 9.17
======= ======= ======= ======= ======= ======= ======= ======= ====== =======
Total return........... 4.14% 20.14% (5.29%) 11.67% 6.57% 15.62% 7.95% 12.91% 7.57% 0.80%
RATIOS/SUPPLEMENTAL
DATA:
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands). $37,611 $38,048 $31,338 $33,027 $20,314 $21,153 $16,568 $11,809 $7,041 $ 4,673
======= ======= ======= ======= ======= ======= ======= ======= ====== =======
Ratio of expenses to
average net assets.... 0.77% (e) 0.73% (e) 0.78% (e) 0.79% (e) 0.84% (e) 0.83% 0.86% 0.82% (e) 0.73% 0.76% (d)
======= ======= ======= ======= ======= ======= ======= ======= ====== =======
Ratio of net investment
income to average net
assets................ 6.03% (e) 6.20% (e) 6.14% (e) 5.21% (e) 6.25% (e) 7.41% 7.76% 8.10% (e) 7.53% 6.89% (d)
======= ======= ======= ======= ======= ======= ======= ======= ====== =======
Portfolio turnover
rate.................. 107.6% 449.2% 380.9% 389.4% 190.8% 44.1% 13.9% 75.4% 217.7% 170.7%
======= ======= ======= ======= ======= ======= ======= ======= ====== =======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fixed Income Fund prior to November 1, 1992.
(b) For the period March 2, 1987 (commencement of operations) through December
31, 1987.
(c) Initial Capitalization.
(d) Annualized.
(e) Had fees not been waived by the investment advisor and administrator of
the Fund, the ratio of expenses to average net assets would have been
.78%, .78%, .83%, .84%, .87% and .83%, and the ratio of net investment in-
come to average net assets would have been 6.02%, 6.15%, 6.09%, 5.16%,
6.22% and 8.09%, for the years ended December 31, 1996, 1995, 1994, 1993,
1992 and 1989, respectively.
9
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: HIGH YIELD BOND FUND
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 8.44 $ 7.94 $ 9.55 $ 8.63 $ 8.23 $ 6.70 $ 8.63 $ 10.03 $ 9.45 $ 11.86
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.70 0.80 0.90 0.77 0.87 0.93 1.15 1.33 1.10 1.62
Net realized and
unrealized gain (loss)
on investment
transactions........... 0.47 0.50 (1.60) 0.94 0.43 1.55 (1.93) (1.39) 0.58 (1.69)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 1.17 1.30 (0.70) 1.71 1.30 2.48 (0.78) (0.06) 1.68 (0.07)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.70) (0.80) (0.90) (0.77) (0.87) (0.93) (1.15) (1.33) (1.09) (2.34)
Distribution from net
realized gain.......... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distribution in excess
of net investment
income................. 0.00 0.00 (0.01) (0.02) (0.03) (0.02) 0.00 (0.01) (0.01) 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (0.70) (0.80) (0.91) (0.79) (0.90) (0.95) (1.15) (1.34) (1.10) (2.34)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 8.91 $ 8.44 $ 7.94 $ 9.55 $ 8.63 $ 8.23 $ 6.70 $ 8.63 $ 10.03 $ 9.45
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 13.87% 16.41% (7.33%) 19.81% 15.80% 37.01% (9.04%) (0.60%) 17.81% (0.58%)
RATIOS/SUPPLEMENTAL
DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $44,042 $36,442 $32,081 $35,305 $19,840 $15,304 $11,459 $15,571 $15,534 $10,246
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets..... 0.84% 0.87% 0.86% 0.87% 0.88% (a) 0.90% (a) 0.90% (a) 0.89% (a) 0.89% 0.90% (a)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets................. 8.14% 9.20% 9.18% 9.21% 9.87% (a) 11.37% (a) 12.22% (a) 11.73% (a) 11.70% 10.16% (a)
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover rate. 118.5% 84.3% 90.7% 118.7% 94.3% 83.7% 52.8% 62.3% 49.0% 251.6%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratios of expenses to average net assets would have been
.93%, .98%, 1.01%, .95% and .92%, and the ratios of net investment income
to average net assets would have been 9.82%, 11.29%, 12.11%, 11.67%, and
10.14%, respectively, for the years ended December 31, 1992, 1991, 1990,
1989 and 1987.
10
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: MONEY MARKET FUND
The table below sets forth financial data for a share outstanding throughout
each year
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income......... 0.0489 0.0538 0.0365 0.0250 0.0306 0.0536 0.0740 0.0855 0.0702
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations..... 0.0489 0.0538 0.0365 0.0250 0.0306 0.0536 0.0740 0.0855 0.0702
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DIVIDENDS:
Dividends from
net investment
income......... (0.0489) (0.0538) (0.0365) (0.0250) (0.0306) (0.0536) (0.0740) (0.0855) (0.0702)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends. (0.0489) (0.0538) (0.0365) (0.0250) (0.0306) (0.0536) (0.0740) (0.0855) (0.0702)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of year.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return.... 5.00% 5.51% 3.71% 2.53% 3.08% 5.49% 7.65% 8.87% 7.40%
RATIOS/SUPPLEMENTAL
DATA:
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end
of year
(in thousands). 34,501% $24,726 $16,531 $13,005 $11,862 $12,811 $15,348 $11,351 $ 9,578
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of
expenses to
average net
assets......... 0.73% (a) 0.69% (a) 0.73% (a) 0.74% (a) 0.77% (a) 0.79% (a) 0.82% (a) 0.76% (a) .73%
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net
investment
income to
average net
assets......... 4.88% (a) 5.37% (a) 3.74% (a) 2.51% (a) 3.07% (a) 5.47% (a) 7.40% (a) 8.53% (a) 7.02%
======= ======= ======= ======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1987
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of
year........... $ 1.00
-----------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income......... 0.0605
-----------
Total from
investment
operations..... 0.0605
-----------
LESS DIVIDENDS:
Dividends from
net investment
income......... (0.0605)
-----------
Total dividends. (0.0605)
-----------
Net asset value,
end of year.... $ 1.00
===========
Total return.... 6.19%
RATIOS/SUPPLEMENTAL
DATA:
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end
of year
(in thousands). $ 5,681
===========
Ratio of
expenses to
average net
assets......... .80% (a)
===========
Ratio of net
investment
income to
average net
assets......... 5.98% (a)
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratios of expenses to average net assets would have been
.74%, .74%, .79%, .82%, .84%, .83%, .87%, .79% and .86%, and the ratios of
net investment income to average net assets would have been 4.87%, 5.32%,
3.68%, 2.43%, 3.00%, 5.43%, 7.35%, 8.50% and 5.92%, for the years ended
December 31, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989 and 1987, re-
spectively.
11
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND PROGRAMS
The investment objectives of the various Funds, and their policies and programs
for achieving those objectives, are described below. There can be no assurance,
of course, that the Funds will achieve their investment objectives. The
investment objectives of the Funds are fundamental, which means that they may
not be changed without the approval of the holders of a majority of the
outstanding shares of the affected Fund, or if it is less, 67% of the shares
represented at a meeting of shareholders at which the holders of 50% or more of
the shares are represented. Unless otherwise indicated, each Fund's practices,
policies and programs for achieving its objective are not fundamental.
Additional information regarding these investment practices and their
associated risks is contained in the Statement of Additional Information.
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the Growth Equity Fund is
to achieve long-term growth of capital and increase of future income by
investing primarily in common stocks of well-established growth companies.
INVESTMENT PROGRAM. To achieve its objective, the Growth Equity Fund invests
primarily in the stocks of a diversified group of well-established companies
which are expected to demonstrate long-term earnings growth that is greater
than the projected growth rate for the economy as a whole. While current
dividend income is not a prerequisite in the selection of a growth company, the
companies in which the Fund invests will normally have a record of paying
dividends and are generally expected to increase the amounts of such dividends
in future years as earnings increase.
Ordinarily, the Fund's assets will be invested primarily in common stocks,
but the Fund may also invest in convertible securities, preferred stocks, and
securities of foreign issuers which hold the prospect of contributing to the
achievement of the Fund's objectives. The Fund's holdings are generally listed
on a national securities exchange. While the Fund may invest in unlisted
securities, such securities will usually have an established over-the-counter
market. In addition, the Fund may increase its reserves for temporary defensive
purposes or to enable it to take advantage of buying opportunities. The Fund's
reserves will be invested in money market instruments, such as U.S. Government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
and short-term corporate debt securities or shares of investment companies that
invest in such instruments. The Fund may write covered call options and
purchase put options on its portfolio securities, purchase call or put options
on securities indices and invest in stock index futures contracts (and options
thereon) for hedging purposes.
As a matter of fundamental policy, the Fund will not purchase the securities
of any company if, as a result, more than 25% of its total assets would be
concentrated in any one industry.
FOREIGN SECURITIES. The Fund may invest up to 30% of its total assets in
securities principally traded in securities markets outside the United States.
The risks of investing in foreign securities are described below under
"International Equity Fund". Before investing in foreign securities, the risks
will be carefully considered by the adviser.
FOREIGN CURRENCY TRANSACTIONS. Since investments in foreign companies will
usually involve currencies of foreign countries, and since the Fund may
temporarily hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of the assets of the Fund as
measured in United States dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations,
and the Fund may incur costs in connection with conversions between various
currencies. The Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward contracts to
purchase or sell foreign currencies. The Fund will generally not enter into a
forward contract with a term of greater than one year. Risks peculiar to
investments denominated in currencies of foreign countries are described below
under "International Equity Fund". For more information, see "Foreign Currency
Transactions" in the Statement of Additional Information.
PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's portfolio turnover rates for 1996 and
1995 were 177.1%, and 169.8% respectively. A high rate of portfolio turnover
results in increased transaction costs to the Fund, including increased
brokerage expenses. For more information about brokerage expenses, see
"Portfolio Transactions" in the Statement of Additional Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Growth
Equity Fund will achieve its investment objective. Because of its investment
policy, the Growth Equity Fund may or may not be suitable or appropriate for
particular contract holders. The Fund is designed for long-term investors who
can accept the risks entailed in seeking long-term growth of capital and an
increase in future income through investment primarily in common stocks. By
investing primarily in well-established growth companies, the Fund seeks to
avoid some of the volatility associated with investment in less established
companies. The Fund's adviser believes that, over the long term, the earnings
of well-established growth companies will not be
12
<PAGE>
as adversely affected by unfavorable economic conditions as the earnings of
more cyclical companies. The value of the Fund's portfolio securities will
fluctuate based on market conditions, specific industry conditions, and the
condition of the individual issuers. Consistent with a long-term investment
approach, contract holders selecting the Fund should be prepared to withstand
periods of adverse market conditions and should not rely on an investment in
the Fund for their short-term financial needs.
- --------------------------------------------------------------------------------
VALUE EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the Value Equity Fund is
to maximize total return (capital appreciation and income) primarily by
investing in equity securities of companies believed to be undervalued
considering such factors as assets, earnings, growth potential and cash flows.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest primarily
in equity securities that are believed to be undervalued in the marketplace in
relation to factors such as the companies' assets, earnings, potential for
dividend growth and cash flows. Equity securities include common and preferred
stocks and bonds, debentures and notes convertible into common stocks and
depository receipts for such securities. The Fund may write covered call
options and purchase put options on its portfolio securities, purchase call or
put options on securities indices and invest in stock index futures' contracts
(and options thereon) for hedging purposes.
As a matter of fundamental policy, the Fund will not purchase the securities
of any company if, as a result, more than 25% of the Fund's assets would be
concentrated in any one industry.
The Fund may also invest its assets in fixed income securities (corporate,
government, and municipal bonds of various maturities), preferred stock, and
warrants. The Fund will generally purchase debt securities that are considered
investment grade securities (e.g., AAA, AA, A, or BBB by S&P, or Aaa, Aa, A, or
Baa by Moody's), or, if not rated, are of equivalent investment quality as
determined by OpCap Advisors. Debt securities within the top credit categories
(e.g., AAA, AA, and A by S&P) comprise what are generally known as high-grade
bonds. Medium-grade bonds (e.g., BBB by S&P) are regarded as having an adequate
capacity to pay principal and interest, although adverse economic conditions or
changing circumstances are more likely to lead to a weakening of such capacity
than that for higher grade bonds. The Fund may also invest up to 5% of its
assets in noninvestment grade debt securities, which are also known as "junk
bonds". The Fund may, from time to time, invest in municipal bonds when the
expected total return from such bonds appears to exceed the total returns
obtainable from corporate or government bonds of similar credit quality. The
Fund's holdings are generally listed on a national securities exchange. While
the Fund may invest in unlisted securities, such securities will usually have
an established over-the-counter market.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated
securities of foreign issuers which hold the prospect of contributing to the
achievement of the Fund's objectives--limited to 15% of its assets. Nondollar-
denominated fixed income securities and equity securities issued by foreign
issuers will be limited to 5% and 10% of the Fund's assets, respectively. The
Fund may also enter into forward currency contracts. Risks peculiar to
investments in foreign securities and securities that are denominated in
foreign currencies are described below under "International Equity Fund".
CASH RESERVES. While the Fund will remain primarily invested in equity
securities, it may, for temporary defensive purposes, reduce its equity
holdings and invest in reserves without limitation. The reserve position of the
Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate debt securities
and repurchase agreements, or shares of investment companies that invest in
such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.
PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits but, when circumstances warrant, securities may be sold without regard
to the length of time held. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 100%. The Fund's
annual portfolio turnover rates for, 1996 and 1995 were 25.0%, and 34.3%
respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Value Equity
Fund will achieve its investment objective. Because of its investment policy,
the Fund may or may not be suitable or appropriate for particular contract
holders. Investors should be aware that it may take considerable time for the
marketplace to recognize value. Also, it is always possible that anticipated
improvements in a company's performance may not occur.
13
<PAGE>
- --------------------------------------------------------------------------------
SMALL CAPITALIZATION FUND
INVESTMENT OBJECTIVE. The investment objective of the Small Capitalization
Fund is to seek capital appreciation through investment in a diversified
portfolio consisting primarily of equity securities of companies with market
capitalization of under $1 billion.
INVESTMENT PROGRAM. To achieve its objective, the Small Capitalization Fund
attempts to identify securities of smaller-capitalization companies which are
underpriced. Smaller capitalization companies may often be under-priced for the
following reasons: (i) institutional investors, which currently represent a
majority of the trading volume in the shares of publicly-traded companies, are
often less interested in such companies because in order to acquire an equity
position that is large enough to be meaningful to an institutional investor,
such an investor may be required to buy a large percentage of the company's
outstanding equity securities and (ii) such companies may not be regularly
researched by stock analysts, thereby resulting in greater discrepancies in
valuation. The Fund may also purchase securities in initial public offerings,
or shortly after such offerings have been completed, when the investment
adviser believes that such securities have greater-than-average market
appreciation potential. Under normal circumstances at least 65% of the Fund's
assets will be invested in equity securities. The majority of securities
purchased by the Fund will be traded on the New York Stock Exchange, the
American Stock Exchange or in the over-the-counter market.
Ordinarily, the Fund's assets will be primarily invested in equity
securities, but the Fund may also invest a portion of its assets in bonds,
convertible securities, preferred stocks and securities of foreign issuers
which hold the prospect of contributing to the achievement of the Fund's
objective. It is the present intention of the Fund to invest no more than 5% of
its assets in bonds rated below Baa by Moody's or BBB by S&P, commonly known as
"junk bonds". The Fund may write covered call options and purchase put options
on its portfolio securities, purchase put or call options on securities indices
and invest in stock index futures contracts (and options thereon) for hedging
or other non-speculative purposes.
FOREIGN SECURITIES. The Fund may acquire foreign equity and debt securities.
It is currently the Fund's intention to limit foreign equity securities to not
more than 15% of its assets, dollar denominated debt securities of foreign
issuers to not more than 15% of assets, and non-dollar denominated debt
securities of foreign issuers to not more than 5% of assets. The Fund may also
enter into forward currency contracts. The risks of investing in foreign
securities, including those denominated in foreign currencies, are described
below under "International Equity Fund".
CASH RESERVES. While the Fund will normally remain primarily invested in
equity securities, it may, for temporary defensive purposes, reduce its equity
holdings and invest in reserves without limitation. The reserve position of the
Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers acceptances, short-term corporate debt securities and repurchase
agreements, or shares of investment companies that invest in such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.
PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is anticipated that the Small Capitalization
Fund will have an annual turnover rate in excess of 100%. The Fund's annual
portfolio turnover rate for 1996 and 1995 was 39.2% and 64.3%, respectively. A
high rate of portfolio turnover results in increased transaction costs to the
Fund, including increased brokerage expenses. For more information about
brokerage expenses, see "Portfolio Transactions" in the Statement of Additional
Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Small
Capitalization Fund will achieve its investment objective. The Fund is expected
to have greater risk exposure and reward potential than a portfolio which
invests primarily in larger-capitalization companies. Smaller-capitalization
companies may have limited product lines, markets or financial resources or may
depend upon a limited management group. The trading volumes of securities of
smaller-capitalization companies are normally less than those of larger-
capitalization companies. This often translates into greater price swings, both
upward and downward. Since trading volumes are lower, new demand for the
securities of such companies could result in disproportionately large increases
in the price of such securities. The waiting period for the achievement of an
investor's objectives might be longer since these securities are not being
closely monitored by research analysts and, thus, it takes more time for
investors to become aware of fundamental changes or other factors which have
motivated the Fund's purchase. Smaller-capitalization companies often achieve
higher growth rates and experience higher failure rates than do larger-
capitalization companies.
14
<PAGE>
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the Emerging Growth Fund is
capital appreciation.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest primarily
in equity securities (principally common stocks) of emerging growth companies.
Emerging growth companies are companies that have the potential, based upon
superior products or services, operating characteristics, and financial
capabilities, for more rapid growth than the overall economy. The Fund's
investments generally will be in securities of companies in industry segments
that are experiencing rapid growth, and in securities of companies with
proprietary advantages. The adviser will consider a number of factors in
evaluating potential investments, including, for example, the rate of earnings
growth, the quality of management, the extent of proprietary advantage, the
return on equity, and/or the financial condition of the company.
Although the Fund will ordinarily be invested in equity securities, the Fund
may invest in bonds, convertible securities, preferred stocks and securities of
foreign issuers which hold the prospect of contributing to the achievement of
the Fund's objective. The Fund may also invest in bonds rated below Baa by
Moody's or BBB by S&P (commonly referred to as "junk bonds"), but presently
does not expect such investments in any such bonds to exceed 5% of the Fund's
assets. The Fund may write covered call options and purchase put options on its
portfolio securities, purchase put and call options on securities indices and
invest in stock index futures contracts (and options thereon) for hedging and
other non-speculative purposes.
FOREIGN SECURITIES. The Fund may invest up to 10% of its total assets in
foreign equity and debt securities. The Fund may also enter into forward
currency contracts. The risks of investing in foreign securities, including
those denominated in foreign currencies, are described below under
"International Equity Fund."
CASH RESERVES. While the Fund will normally remain primarily invested in
equity securities, it may, for temporary defensive purposes, reduce its equity
holdings, and invest in reserves without limitation. The reserve position of
the Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers acceptances, short-term corporate debt securities and repurchase
agreements, or shares of investment companies that invest in such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.
PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected under normal conditions to
exceed 200%. A high rate of portfolio turnover results in increased transaction
costs to the Fund, including increased brokerage expenses. For more information
about brokerage expenses, see "Portfolio Transactions" in the Statement of
Additional Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Emerging
Growth Fund will achieve its investment objective. The Fund is expected to have
greater risk exposure and reward potential than a portfolio which invests
primarily in larger-capitalization companies. The trading volumes of securities
of smaller-capitalization companies are normally less than those of larger-
capitalization companies. This often translates into greater price swings, both
upward and downward. Since trading volumes are lower, new demand for the
securities of such companies could result in disproportionately large increases
in the price of such securities. The waiting period for the achievement of an
investor's objectives might be longer since these securities are not being
closely monitored by research analysts and, thus, it takes more time for
investors to become aware of fundamental changes or other factors which have
motivated the Fund's purchase. Smaller-capitalization companies often achieve
higher growth rates and experience higher failure rates than do larger-
capitalization companies.
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND
INVESTMENT OBJECTIVE. The investment objective of the Flexibly Managed Fund
is to maximize total return (capital appreciation and income) by investing in
common stocks, equity related securities, corporate debt securities and/or
short term reserves, in proportions considered appropriate in light of the
availability of attractively valued individual securities and current and
expected economic and market conditions.
INVESTMENT PROGRAM. To achieve its objective, the Fund may invest in the
common stocks of established companies that offer above-average prospects for
capital appreciation. Such companies usually can be placed in one of two
portfolio categories: (i) long-term "core" holdings, composed of companies
which are undervalued relative to their assets or growth potential, or
15
<PAGE>
are currently out of favor with investors; and (ii) "short-term" holdings,
which include companies whose stock price is expected to rise over the short
term but whose longer term prospects may or may not be attractive.
The Fund may also invest in the following securities:
. Equity-related securities, such as convertible securities (i.e., bonds
or preferred stock convertible into or exchangeable for common stock),
preferred stock, and warrants.
. Corporate debt securities within the four highest credit categories
assigned by established rating agencies, which include both high and
medium-quality investment grade bonds. The Fund may also invest in
non-investment grade corporate debt securities, which are also known
as "junk bonds," the purchase of which is limited to 5% of net assets.
The Fund's investment in all corporate debt securities will be limited
to 35% of net assets. Medium-quality investment grade bonds are
regarded as having an adequate capacity to pay principal and interest
although adverse economic conditions or changing circumstances are
more likely to lead to a weakening of such capacity than that for
higher grade bonds (see "Ratings of Corporate Debt Securities" on page
29 of the prospectus).
. Short-term reserves (i.e., money market instruments), which may be
used to reduce downside volatility during uncertain or declining
equity market conditions. The Fund's reserves will be invested in the
following high-grade money market instruments: U.S. Government
obligations, certificates of deposit, bankers' acceptances, commercial
paper, short-term corporate debt securities and repurchase agreements.
If the Fund's position in money market securities maturing in one year or
less equals 35% or more of the Fund's total assets, the Fund will normally have
25% or more of its assets concentrated in securities of the banking industry.
Investments in the banking industry may be affected by general economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers. In addition, the profitability of the banking
industry is largely dependent upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. The adviser believes that any risk to the Fund which might result
from concentrating in the banking industry will be minimized by diversification
of the Fund's investments, the short maturity of money market instruments, and
the advisers' credit research.
The Fund may write covered call options, purchase put options on its
portfolio securities, purchase call or put options on securities and securities
indices and invest in stock index futures contracts (and options thereon) for
hedging purposes. The Fund may purchase securities, from time to time, on a
when-issued basis; the value of such securities may decline or increase prior
to settlement date.
FOREIGN SECURITIES. The Fund may invest up to 15% of its total assets in
securities principally traded in securities markets outside the United States.
Risks peculiar to investments in foreign securities and securities that are
denominated in foreign currencies are described below under "International
Equity Fund".
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit categories
assigned by established rating services (Aaa, Aa or A by Moody's or AAA, AA or
A by S&P) or, if not rated, of equivalent investment quality as determined by
the Fund's investment adviser.
PORTFOLIO TURNOVER. The Fund may engage in short-term trading in seeking to
maximize capital appreciation. Changes in the investment portfolio will be made
whenever the adviser believes they are advisable, either as a result of a
security having reached its price objective, or for reasons not foreseen at the
time of the investment--without regard to the length of time the security has
been held by the Fund. As a result, short-term trading may cause portfolio
turnover to be higher than that of other funds with less aggressive trading
strategies, which may, in turn, increase the Fund's transaction costs. The
Fund's portfolio turnover, which will vary from year to year depending on
market conditions, may exceed 100% but, under normal circumstances, is not
expected to exceed 250%. A high rate of portfolio turnover results in increased
transaction costs to the Fund, including increased brokerage expenses. The
Fund's portfolio turnover rates for 1996 and 1995 were 32.9% and 37.2%,
respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Flexibly
Managed Fund will achieve its investment objective. Because of its investment
policy, the Flexibly Managed Fund may or may not be suitable or appropriate for
particular contract holders. The value of the Fund's portfolio securities will
fluctuate based on market conditions, specific industry conditions, and the
condition of the individual issuers.
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE. The investment objective of the International Equity
Fund is to achieve maximum capital appreciation by investing in a diversified
portfolio consisting primarily of equity securities of companies principally in
Europe and Pacific Basin countries.
16
<PAGE>
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest most of
its assets in equity securities (including stocks, warrants, convertible bonds,
and preferred stocks convertible into common stocks) of companies operating
principally in the countries in Europe and the Pacific Basin that are generally
considered to have developed markets. These include the United Kingdom,
Germany, France, the Netherlands, Switzerland, Norway, Spain, Japan, Hong Kong,
Australia and Singapore. A smaller proportion of the Fund's assets may be
invested in "developing countries" such as Taiwan, Malaysia, Indonesia, South
Africa and Mexico.
Under normal circumstances the Fund will have at least 65% of its assets
invested in European and Pacific Basin equity securities. The Fund intends to
diversify investment broadly among countries and to invest in the securities of
companies in not less than three different countries, in addition to the United
States.
The Fund attempts to invest in equity securities with a superior potential
for capital appreciation utilizing a series of macro and micro analyses. The
macro economic analysis will be based upon detailed research on the global
economic and on individual countries' projected economic data. This analysis
will guide the investment adviser's allocation of assets to particular
countries. The micro economic analysis will focus on quality of management and
the relationship of current prices to earnings growth or to undervalued assets.
Strong emphasis is put on cash flow rather than earnings as a more meaningful
way to evaluate companies in foreign countries where accounting standards are
less rigorously enforced than in the United States.
The Fund may not always purchase securities on the principal market. For
example, American Depository Receipts ("ADRs") may be purchased if trading
conditions make them more attractive than the underlying security. ADRs are
registered receipts typically issued in the U.S. by a bank or trust company
evidencing ownership of an underlying foreign security. The Fund may invest in
ADRs which are structured by a U.S. bank without the sponsorship of the
underlying foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADRs may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may
not be current. The International Equity Fund may likewise utilize European
Depository Receipts ("EDRs"), which are receipts typically issued in Europe by
a bank or trust company evidencing ownership of an underlying foreign security.
Unlike ADRs, EDRs are issued in bearer form. For purposes of determining the
country of origin, ADRs and EDRs will not be deemed to be domestic securities.
For temporary defensive purposes, the Fund may hold cash or debt obligations
denominated in U.S. dollars or foreign currencies. These debt obligations
include U.S. and foreign government securities and investment grade corporate
debt securities, or bank deposits of major international institutions. When the
adviser believes that investments should be deployed in a temporary defensive
posture because of economic or market conditions, the Fund may invest up to
100% of its assets in United States Government securities (such as bills,
notes, or bonds of the United States Government and its agencies) or other
forms of indebtedness such as bonds, certificates of deposit or repurchase
agreements.
The International Equity Fund may also acquire fixed income investments where
these fixed income securities are convertible into equity securities (and which
may therefore reflect appreciation in the underlying equity security), and
where anticipated interest rate movements, or factors affecting the degree of
risk inherent in a fixed income security, are expected to change significantly
so as to produce appreciation in the security consistent with the objective of
the Fund. Fixed income securities in which the Fund may invest will be rated at
the time of purchase Baa or higher by Moody's Investor Service, Inc., or BBB or
higher by Standard and Poor's Corporation or, if they are foreign securities
which are not subject to standard credit ratings, the fixed income securities
will be "investment grade" issues (in the judgment of the adviser) based on
available information.
The International Equity Fund has the right to invest in securities which may
be considered to be "thinly-traded" if they are deemed to offer the potential
for appreciation, but it does not presently intend to invest more than 5% of
its total assets in such securities. The trading volume of such securities is
generally lower and their prices may be more volatile as a result, and such
securities are less likely to be exchange-listed securities. The Fund may also
invest, subject to restrictions, in options (puts and calls) and restricted
securities.
FOREIGN CURRENCY TRANSACTIONS. The value of assets of the Fund as measured in
United States dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various securities.
Normally, exchange transactions will be conducted on a spot or cash basis at
the prevailing rate in the foreign exchange market. However, to balance
undesirable currency risk, the Fund may enter into forward contracts to
purchase or sell foreign currencies in anticipation of the currency
requirements, and to protect against possible adverse movements in foreign
exchange rates. Such contracts may reduce the risk of loss due to a decline in
the value of the currency which is sold, they also limit any possible gain
which might result should the value of the currency rise. Similarly, although
forward contracts will be used primarily to protect the Fund from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted. Any transactions in foreign
currencies will be designed to protect the dollar value of the assets
composing, or selected to be acquired for, the
17
<PAGE>
investment portfolio of the Fund. The Fund will not speculate in foreign
currencies. For more information, see "Foreign Currency Transactions" in the
Statement of Additional Information.
The Fund may purchase and write call options on foreign currencies for the
purpose of protection against declines in the dollar value of foreign
securities. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs.
The Fund may enter into contracts for the purchase or sale for future
delivery of foreign currencies ("foreign currency futures"). This investment
technique will be used only to hedge against anticipated future changes in
exchange rates which otherwise might adversely affect the value of the Fund's
securities or adversely affect the prices of securities that the Fund intends
to purchase at a later date. The successful use of currency futures will
usually depend on the investment adviser's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses.
PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's portfolio turnover rates for 1996 and
1995 were 54.8% and 62.5%, respectively.
GENERAL RISK CONSIDERATIONS. Investments in foreign securities involve
sovereign risk in addition to the credit and market risks normally associated
with domestic securities. Such foreign investments may also be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
the financial markets on which they are traded may be subject to less strict
governmental supervision, and foreign brokerage commissions and custodian fees
are generally higher than in the United States. Investments in foreign
securities may also be subject to other risks different from those affecting
U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States). A contract owner who selects
this Fund will incur the risks generally associated with investment in equity
securities and, in addition, the risk of losses attributable to changes in
currency exchange rates to the extent that those risks are not adequately
hedged by the investment adviser.
- --------------------------------------------------------------------------------
QUALITY BOND FUND
INVESTMENT OBJECTIVE. The Quality Bond Fund seeks the highest income over the
long term that is consistent with the preservation of principal by investing
primarily in marketable investment-grade debt securities.
INVESTMENT PROGRAM. To achieve its objective, the Fund invests in a
diversified portfolio primarily consisting of long, intermediate, and short-
term marketable (i.e., securities for which market quotations are readily
available) debt securities. The proportion invested in each category can be
expected to vary depending upon the evaluation of market patterns and trends by
Independence Capital Management. Except as provided below, the Fund will only
purchase debt securities that are considered investment grade securities (e.g.,
AAA, AA, A, or BBB by S&P) by at least one of the established rating agencies
(S&P, Moody's, Duff & Phelps, Inc., Fitch Investors Service, Inc., or McCarthy,
Crisanti & Maffei, Inc.) or, if not rated, are of equivalent investment quality
as determined by Independence Capital Management. The Fund may also invest up
to 10% of its net assets in securities rated BB or B by S&P (or securities with
a comparable rating by another established rating agency), which are also known
as "junk bonds." In normal times, at least 80% of the Fund's total assets will
be invested in income producing securities. At least 75% of the value of the
Fund's total assets (not including cash) will be invested in one or more of the
following categories of investments: (i) Marketable Corporate Debt Securities;
(ii) U.S. Government Obligations; (iii) U.S. Government Agency Securities; (iv)
Bank Obligations; (v) Savings and Loan Obligations; (vi) Commercial Paper;
(vii) Collateralized Mortgage Obligations; (viii) Securities of Certain
Supranational Organizations; (ix) Repurchase Agreements involving these
securities; (x) Private Placements (restricted securities); (xi) Asset Backed
Securities; and (xii) Municipal Obligations. In addition, the Fund may, as part
of this minimum 75% of its assets, write covered call options and purchase put
options on its portfolio securities, purchase call or put options on securities
indices and invest in interest rate futures contracts (and options thereon) for
hedging purposes. Without regard to the above described quality of investments,
the Fund may invest up to 25% of the value of its total assets (not including
cash) in Convertible Securities, which can be converted into or which carry
warrants to purchase common stock or other equity interests, and Preferred and
Common Stocks. The Fund may from time to time purchase these securities on a
when-issued basis; the value of such income-producing securities may decline or
increase prior to settlement date.
18
<PAGE>
The Fund will hold short-term cash reserves if management believes that it is
advisable for temporary defensive or emergency purposes. The Fund will usually
hold its cash reserves in short-term money market securities, such as
certificates of deposit, or in shares of investment companies that invest in
short term money market securities. As a matter of fundamental policy, the Fund
will, under certain conditions explained in the Statement of Additional
Information, invest up to 50% of its total assets in any one of the following
industries: gas utility, gas transmission utility, electric utility, telephone
utility, and petroleum. Investments in any of these industries may be affected
by environmental conditions, energy conservation programs, fuel shortages,
availability of capital to finance operations and construction programs, and
federal and state legislative and regulatory actions. Independence Capital
Management believes that any risk to the Fund which might result from
concentrating in any such industry will be minimized by diversification of the
Fund's investments.
Although investment in the Fund is not without risk, the Fund will seek to
reduce risk through diversification, credit analysis, and attention to current
developments and trends in both the economy and financial markets.
ASSET-BACKED SECURITIES. Asset-backed securities are securities which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool or pools of similar
assets (e.g., trade receivables). Asset-backed commercial paper, one type of
asset-backed security, is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and/or enhancement provided.
MUNICIPAL OBLIGATIONS. The Fund may invest in Municipal Obligations that meet
the Fund's overall quality requirements. Although the Fund and contract owners
will not benefit from the exemption from federal income tax for the interest on
Municipal Obligations, the adviser believes that Municipal Obligations may
under certain market circumstances be desirable investments consistent with the
Fund's objective, particularly the preservation of principal.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on the
same terms as the Money Market Fund, except that the underlying security may be
within the four highest credit categories assigned by established rating
agencies (Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P) or, if
not rated, of equivalent investment quality as determined by the adviser.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated foreign
securities. While investments in foreign securities are intended to reduce risk
by providing further diversification, risks peculiar to investments in foreign
securities are described above under "International Equity Fund".
PORTFOLIO TURNOVER. The Fund may sell any of its portfolio securities if it
believes that the security's market value will fall. The Fund may sell a
security and purchase another when it believes that there is a favorable spread
between the yields of such securities. Although the Fund cannot accurately
predict its portfolio turnover rate, it is not ordinarily expected to exceed
250%. A high rate of portfolio turnover results in increased transaction costs
to the Fund, including increased brokerage expenses. For more information about
brokerage expenses, see "Portfolio Transactions" in the Statement of Additional
Information. The Fund's annual portfolio turnover rates for 1996 and 1995 were
107.6% and 449.2%, respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Quality Bond
Fund will achieve its investment objective. Because of its investment policy,
the Quality Bond Fund may or may not be suitable or appropriate for particular
contract holders. The Fund is not a money market fund and is not an appropriate
investment for those whose primary objective is principal stability. The value
of the portfolio securities of the Fund will fluctuate based upon market
conditions and interest rates. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such diversification does not eliminate
risk.
Yields on short, intermediate, and long-term fixed income securities are
dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce the
value of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Fund to achieve
its investment objective is also dependent on the continuing ability of the
issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due.
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
INVESTMENT OBJECTIVE. The investment objective of the High Yield Bond Fund is
to realize high current income by investing primarily in a diversified
portfolio of long-term high-yield fixed income securities in the medium to
lower quality ranges; a secondary objective is capital appreciation.
19
<PAGE>
INVESTMENT PROGRAM. The Fund will invest at least 80% of the value of its
total assets in high-yielding, income-producing debt securities and preferred
stocks (including convertible securities). The Fund seeks to invest its assets
in securities rated Ba or lower by Moody's, or BB or lower by S&P, or, if not
rated, of comparable investment quality as determined by Price Associates.
Because high yield bonds involve greater risks than higher quality bonds,
they are commonly known as "junk" bonds. The Fund may, from time to time,
purchase bonds that are in default, rated Ca by Moody's or CC by S&P, if, in
the opinion of Price Associates, there is potential for capital appreciation.
Such bonds are regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation (see "Ratings of Corporate Debt Securities"). In
addition, the Fund may invest its portfolio in medium quality investment grade
securities (rated Baa by Moody's or BBB by S&P) which provide greater liquidity
than lower quality securities. Moreover, the Fund may, for temporary defensive
purposes under extraordinary economic or financial market conditions, invest in
higher quality securities.
Investments in the Fund's portfolio may include: (i) Corporate Debt
Securities; (ii) U.S. Government Obligations; (iii) U.S. Government Agency
Securities; (iv) Bank Obligations; (v) Savings and Loan Obligations; (vi)
Commercial Paper; (vii) Securities of Certain Supranational Organizations;
(viii) Repurchase Agreements involving these securities; (ix) Private
Placements (restricted securities); (x) Foreign Securities; (xi) Convertible
Securities--debt securities convertible into or exchangeable for equity
securities or debt securities that carry with them the right to acquire equity
securities, as evidenced by warrants attached to such securities or acquired as
part of units of the securities; (xii) Preferred Stocks--securities that
represent an ownership interest in a corporation and that give the owner a
prior claim over common stock on the company's earnings and assets; (xiii) Loan
Participation and Assignments; (xiv) Trade Claims and (xv) Zero Coupon and Pay-
in-Kind Bonds. The Fund may purchase securities, from time to time, on a when-
issued basis; the value of such securities may decline or increase prior to
settlement date.
RISKS OF HIGH YIELD INVESTING. There can be no assurance that the High Yield
Bond Fund will achieve its investment objective. The high yield securities in
which the Fund may invest are predominantly speculative as regards the issuer's
continuing ability to meet principal and interest payments. The value of the
lower quality securities in which the Fund may invest will be affected by the
creditworthiness of individual issuers, general economic and specific industry
conditions, and will fluctuate inversely with changes in interest rates.
Furthermore, the share price and yield of the Fund are expected to be more
volatile than the share price and yield of a fund investing in higher quality
securities, which react primarily to movements in the general level of interest
rates. Price Associates carefully considers these factors and the Fund attempts
to reduce risk by diversifying its portfolio, by analyzing the creditworthiness
of individual issuers, and by monitoring trends in the economy, financial
markets, and specific industries. Such efforts, however, will not eliminate
risk. High yield bonds may be more susceptible than investment grade bonds to
real or perceived adverse economic and competitive industry conditions. High
yield bond prices may decrease in response to a projected economic downturn
because the advent of a recession could lessen the ability of highly leveraged
issuers to make principal and interest payments on their debt securities.
Highly leveraged issuers also may find it difficult to obtain additional
financing during a period of rising interest rates. In addition, the secondary
trading market for lower quality bonds may be less active and less liquid than
the trading market for higher quality bonds. As such, the prices at which lower
quality bonds can be sold may be adversely affected and valuing such lower
quality bonds can be a difficult task. If market quotations are not available,
these securities will be valued by a method that, in the good faith belief of
the Fund's Board of Directors, accurately reflects fair value. The judgment of
the Penn Series Board of Directors plays a greater role in valuing high yield
securities than is the case with respect to securities for which more objective
market data are available.
20
<PAGE>
During 1996 the dollar weighted average ratings (computed monthly) of the
debt obligations held by the Fund (excluding equities and reserves), expressed
as a percentage of the Fund's total net investments, were as follows:
<TABLE>
<CAPTION>
STANDARD AND POOR'S RATINGS PERCENTAGE OF TOTAL NET INVESTMENTS
----------------------------------------------------------------------------
<S> <C>
AAA 0.0%
----------------------------------------------------------------------------
AA 5.4
----------------------------------------------------------------------------
A 0.0
----------------------------------------------------------------------------
BBB 0.0
----------------------------------------------------------------------------
BB 8.8
----------------------------------------------------------------------------
B 71.2
----------------------------------------------------------------------------
CCC 1.7
----------------------------------------------------------------------------
CC 0.0
----------------------------------------------------------------------------
C 0.0
----------------------------------------------------------------------------
D 0.0
----------------------------------------------------------------------------
Unrated* 7.1
----------------------------------------------------------------------------
</TABLE>
* Price Associates has advised that in its view the unrated debt
obligations were comparable in quality to debt obligations rated in the
S&P categories as follows: BBB: 0.0%; BB: 2.1%; B: 3.2%; CCC: 0.0%; CC:
0.0%; C: 0.5%; D: 0.0%; Unrated: 1.3%.
CREDIT ANALYSIS. Because investment in lower and medium quality fixed-income
securities involves greater investment risk, including the possibility of
default or bankruptcy, achievement of the Fund's investment objectives will be
more dependent on Price Associates' credit analysis than would be the case if
the Fund were investing in higher quality fixed-income securities. Although the
ratings of Moody's or S&P are used as preliminary indicators of investment
quality, a credit rating assigned by such a commercial rating service will not
measure the market risk of lower quality bonds and may not be a timely
reflection of the condition and economic viability of an individual issuer.
Price Associates therefore places primary significance on its own in-depth
credit analysis and security research. All of the Fund's investments will be
selected from an approved list of securities deemed appropriate for the Fund by
Price Associates, which maintains a credit rating system based upon comparative
credit analyses of issuers within the same industry and individual credit
analysis of each company. These analyses take into consideration such factors
as a corporation's present and potential liquidity, profitability, internal
capability to generate funds, and adequacy of capital. Although some issuers do
not seek to have their securities rated by Moody's or S&P, such unrated
securities will also be purchased by the Fund only after being subjected to
analysis by Price Associates. Unrated securities are not necessarily of lower
quality than rated securities, but the market for rated securities is usually
broader.
MATURITY. The maturity of debt securities may be considered long (10 plus
years), intermediate (1 to 10 years), or short-term (12 months or less). The
proportion invested by the Fund in each category can be expected to vary
depending upon the evaluation of market patterns and trends by Price
Associates. However, the Fund anticipates that, under normal circumstances, at
least 80% of its portfolio of fixed income securities will have maturities of
greater than 10 years.
YIELD AND PRICE. Lower to medium quality, long-term fixed-income securities
typically yield more than higher quality, long-term fixed-income securities.
Thus, the Fund's yield normally can be expected to be higher than that of a
fund investing in higher quality debt securities. The yields and prices of
lower quality fixed income securities may tend to fluctuate more than those for
higher rated securities. In the lower quality segments of the fixed income
markets, changes in perception of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner than do changes in higher quality
securities, which may result in greater price and yield volatility. For a given
period of time, the Fund may have a high yield but a negative total return.
OTHER INVESTMENTS. The Fund may invest up to 20% of its total assets in
dividend-paying common stocks (including up to 5% in warrants to purchase
common stocks) that are considered by Price Associates to be consistent with
the Fund's current income and capital appreciation investment objectives.
However, the Fund currently does not intend to purchase equity securities or
securities convertible to equity securities. In seeking higher income or a
reduction in principal volatility, the Fund may write covered call options and
purchase covered put options and spreads and purchase uncovered put options and
uncovered call options; and the Fund may invest in interest rate futures
contracts (and options thereon) for hedging purposes.
21
<PAGE>
CASH RESERVES. The Fund will hold short-term cash reserves (money market
instruments maturing in one year or less) as Price Associates believes is
advisable to maintain liquidity or for temporary defensive purposes.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on the
same terms as the Money Market Fund, except that the underlying security may be
within the three highest credit categories assigned by established rating
agencies (Aaa, Aa or A by Moody's or AAA, AA or A by S&P) or, if not rated, of
equivalent investment quality as determined by Price Associates.
BANKING INDUSTRY. The Fund will, as a matter of fundamental policy, normally
concentrate 25% or more of its assets in the securities of the banking industry
when the Fund's position in issues maturing in one year or less equals 35% or
more of the Fund's total assets. Investments in the banking industry may be
affected by general economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers. In addition, the
profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. Price Associates believes that any
risk to the Fund which might result from concentrating in the banking industry
will be minimized by diversification of the Fund's investments and Price
Associates' credit research.
FOREIGN SECURITIES. Subject to the Fund's quality and maturity standards, the
Fund may invest without limitation in the securities (payable in U.S. dollars)
of foreign issuers in developed countries and in the securities of foreign
branches of U.S. banks such as negotiable certificates of deposit
(Eurodollars). The Fund may also invest up to 20% of its total assets in non-
U.S. dollar-denominated fixed-income securities principally traded in financial
markets outside the United States. Such investments involve certain risks not
normally associated with domestic securities, as explained under "International
Equity Fund". The Fund may also enter into forward foreign currency exchange
contracts, which involve certain risks as explained under "International Equity
Fund".
ZERO COUPON BONDS AND PAY-IN-KIND BONDS. A zero coupon bond does not make
cash interest payments during the life of the bond. Instead, it is sold at a
deep discount to face value, and the interest consists of the gradual
appreciation in price as the bond approaches maturity. "Zeros" can be an
attractive financing method for issuers with near-term cash-flow problems or
seeking to preserve liquidity. Pay-in-kind (PIK) bonds pay interest in cash or
additional securities, at the issuer's option, for a specified period. Like
zeros, they may help a corporation economize on cash. PIK prices reflect the
market value of the underlying debt plus any accrued interest. Zeros and PIKs
can be higher- or lower-quality debt, and both are more volatile than coupon
bonds. There is no limit on the fund's investments in these securities. The
fund is required to distribute to shareholders income imputed to any zero or
PIK investments. Such distributions could reduce the fund's reserve position
and require the fund to sell securities and incur a gain or loss at a time it
may not otherwise want to in order to provide the cash necessary for these
distributions.
LOAN PARTICIPATION AND ASSIGNMENTS. Large loans to corporations or
governments, including governments of less developed countries (LDCs), may be
shared or syndicated among several lenders, usually banks. The Fund could
participate in such syndicates, or could buy part of a loan, becoming a direct
lender. Participation and assignments involve special types of risk, including
those of being a lender, but are not necessarily more risky than junk bonds. As
an operating policy, the Fund may not invest more than 5% of total assets in
loan participation.
TRADE CLAIMS. This is an IOU arising from a business transaction, such as a
sale of goods, not from a loan. Such claims are typically bought at a discount
to their face value, with the size of the discount reflecting the probability
of repayment. They may be illiquid and very volatile in price. As an operating
policy, the Fund may not invest more than 5% of total assets in trade claims.
PORTFOLIO TURNOVER. Due to the nature of the Fund's investment program, the
portfolio turnover may exceed 100%. A high rate of portfolio turnover results
in increased transaction costs to the Fund, including increased brokerage
expenses. The Fund's portfolio turnover rates for 1996 and 1995 were 118.5% and
84.3%, respectively.
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MONEY MARKET FUND
INVESTMENT OBJECTIVE. The investment objective of the Money Market Fund is to
preserve shareholder capital, maintain liquidity and achieve the highest
possible level of current income consistent therewith, by investing in high-
quality money market instruments.
INVESTMENT PROGRAM. To achieve its objective, the Fund invests in a
diversified portfolio of money market securities, limited to those described
below, which are rated within the two highest credit categories assigned by
nationally recognized statistical rating organizations, or, if not rated, are
of comparable investment quality as determined by Independence Capital
Management and approved by the Penn Series Board of Directors. Such securities
include: (i) U.S. Government Obligations; (ii) U.S. Government Agency
Securities; (iii) Bank Obligations; (iv) Commercial Paper; (v) Short-Term
Corporate Debt
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Securities; (vi) Canadian Government Securities, limited to 10% of the Fund's
assets; (vii) Savings and Loan Obligations; (viii) Securities of Certain
Supranational Organizations; (ix) Repurchase Agreements involving these
securities other than Foreign Securities; (x) Foreign Securities--U.S. dollar-
denominated money market securities issued by foreign issuers, foreign branches
of U.S. banks and U.S. branches of foreign banks; and (xi) Asset Backed
Securities. Certain of the securities may have adjustable rates of interest
with periodic demand features. The Fund may also invest in securities of
investment companies that invest in money market securities meeting the
foregoing criteria.
The Fund has a policy of seeking to maintain a stable net asset value of
$1.00 per share, but this is not guaranteed and the Fund's yield is not fixed.
PORTFOLIO QUALITY. The Fund will invest in U.S. dollar-denominated money
market instruments determined by Independence Capital Management, under
guidelines adopted by the Penn Series Board of Directors, to present minimum
credit risk. This determination will take into consideration such factors as
liquidity, profitability, ability to generate funds and capital adequacy. In
addition, the Fund will observe investment restrictions contained in Rule 2a-7
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940, including the following: (a) the Fund will not invest in a
money market instrument if, as a result, more than the greater of 1% of the
Fund's total assets or $1,000,000 would be invested in securities of that
issuer which are not rated in the highest rating category of nationally
recognized statistical rating organizations (or, if not rated, are not of
comparable quality); and (b) the Fund will not invest in a money market
instrument if, as a result, more than 5% of the Fund's total assets would be
invested in securities which are not rated in the highest rating category of
nationally recognized statistical rating organizations (or, if not rated, are
not of comparable quality).
FOREIGN SECURITIES. Subject to the Fund's quality and maturity standards, the
Fund may invest without limitation in U.S. dollar-denominated foreign
securities. While investments in foreign securities are intended to reduce risk
by providing further diversification, such investments involve certain risks
not normally associated with domestic securities, as explained under
"International Equity Fund".
ADJUSTABLE RATE SECURITIES. The Fund may invest in adjustable rate
securities. Adjustable rate securities have interest rates that are adjusted
periodically according to a set formula in order to minimize fluctuation in the
principal value of the investments. The maturity of such securities may be
shortened under certain special conditions. "Variable rate" securities are
domestic certificates of deposit which provide for the establishment of a new
interest rate on predetermined dates or whenever a specified interest rate
(such as the bank prime lending rate) changes. "Floating rate" securities are
corporate or bank holding company notes or Eurodollar certificates of deposit
with reset provisions similar to those for variable rate instruments.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities (see
description of asset-backed securities under "Quality Bond Fund" above).
MATURITY. The Fund purchases securities which mature in 397 days or less, and
the average maturity of all securities held by the Fund will generally not be
greater than 90 days.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements through
which investors (such as the Fund) purchase a security (known as the
"underlying security") from a well-established securities dealer or a bank that
is a member of the Federal Reserve System and on the approved list of the
Fund's investment adviser. Concurrently, the securities dealer or the bank
agrees to repurchase the underlying security at a future point at the same
price, plus specified interest. The underlying security, which is held as
collateral, will be marked to market on a daily basis. The Fund will only enter
into a repurchase agreement where the underlying security is in the highest
rating category of nationally recognized statistical rating organizations (or,
if not rated, is of comparable quality) and the repurchase agreement meets the
other quality and diversification standards of Rule 2a-7. Moreover, the Board
of Penn Series has adopted standards applicable to all the Funds regarding the
creditworthiness of parties with whom each Fund may enter into repurchase
agreements. These standards are designed to provide reasonable assurance that
such a party presents no serious risk of becoming involved in a bankruptcy
proceeding within the time frame contemplated by the repurchase agreement.
Repurchase agreements are generally for a short period of time, often less than
a week. In the event of a bankruptcy or default of certain sellers of
repurchase agreements, the Fund could experience costs and delays in
liquidating the underlying security, which is held as collateral, and the Fund
might incur a loss if the value of the collateral held declines during this
period.
GENERAL RISK CONSIDERATIONS. An investment in the Money Market Fund is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that the Fund will be able to maintain a stable net asset value of
$1.00 per share. While this Fund invests in high-grade money market
instruments, investment in the Fund is not without risk even if all portfolio
instruments are paid in full at maturity. An increase in interest rates could
reduce the value of the Fund's portfolio investments, and a decline in interest
rates could increase the value.
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ADDITIONAL INVESTMENT INFORMATION RELATING TO THE FUNDS
OPTIONS. Each Fund (other than the Money Market Fund) may write covered call
options and purchase put options on its portfolio securities and purchase call
or put options on securities indices. The aggregate market value of the
portfolio securities covering call or put options will not exceed 25% of a
Fund's net assets. Such options may be exchange-traded or dealer options. An
option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time. Although options will primarily be
used to minimize principal fluctuations, or to generate additional premium
income for the Funds, they do involve certain risks. Writing covered call
options involves the risk of not being able to effect closing transactions at a
favorable price or participate in the appreciation of the underlying securities
or index above the exercise price. Purchasing put or call options involves the
risk of losing the entire premium (purchase price of the option). In addition,
the High Yield Bond Fund may also engage in other options transactions within
the limits described in the Statement of Additional Information, which also
provides further details on the risks of options transactions.
FUTURES CONTRACTS. Each Fund (other than the Money Market Fund) may enter
into futures contracts and options thereon (interest rate futures contracts or
stock index futures contracts as applicable) as a hedge against or to minimize
adverse principal fluctuations, or as an efficient means of adjusting its
exposure to the market. The Funds will not use futures contracts for
speculation. Each Fund will limit its use of futures contracts so that: (1) no
more than 5% of the Fund's total assets will be committed to initial margin
deposits or premiums on options and (2) immediately after entering into such
contracts, no more than 30% of the Fund's total assets would be represented by
such contracts. The initial margin is the amount that must be deposited with
the futures commission merchant when a futures contract is entered into. The
value of a futures contract changes daily; and if it decreases, the Fund is
obligated to deposit additional amounts in order to maintain what is known as
"variation margin." Correspondingly, if the value of a futures contract
increases, the Fund may withdraw and use for other purposes a part of the
margin deposit. The premium on an option is equal to the difference between the
market value and the intrinsic value of the option.
These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices; possible reduction of the Fund's total return due to the use
of hedging; possible reduction in value of both the securities hedged and the
hedging instrument; possible lack of liquidity due to daily limits on price
fluctuation or other factors; imperfect correlation between price movements in
the contract and in the securities being hedged; and potential losses in excess
of the amount invested in the futures contracts themselves. Further details
concerning the Funds' use of futures contracts and the risks involved are
contained in the Statement of Additional Information.
INVESTMENT COMPANIES. Each Fund may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. The International Equity Fund may invest
in securities of mutual funds that invest in foreign securities. Securities of
investment companies will be acquired by a Fund within the limits prescribed by
the 1940 Act. In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, each Fund may, as a fundamental policy, lend securities with a value of
up to 30% of its total assets to unaffiliated broker-dealers or institutional
investors. Any such loan will be continuously secured by collateral at least
equal to the value of the security loaned. Although the risks of lending
portfolio securities are believed to be slight, as with other extensions of
secured credit, such lending could result in delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed to be of good standing and will not be made unless the
consideration to be earned from such loans would justify the risk.
INVESTMENT RESTRICTIONS APPLICABLE TO ALL THE FUNDS. As a matter of
fundamental policy, each Fund will not: (i) own more than 10% of the
outstanding voting securities of any company; (ii) purchase any security if it
would cause the Fund's holdings of that issuer (other than obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) to
amount to more than 5% of the Fund's total assets, except that this restriction
applies to the Flexibly Managed, the Small Capitalization and the Emerging
Growth Funds only with respect to 75% of their respective total assets; (iii)
borrow money, except that the Funds may borrow from banks as a temporary
measure for extraordinary or emergency purposes, and then only in amounts not
exceeding 15% of each Fund's total assets valued at market or, with respect to
the Quality Bond Fund and the Money Market Fund, the lesser of 10% of its total
assets valued at cost or 5% of its total assets valued at market; the Funds
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities; interest paid on any such borrowings will
reduce net investment income;
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(iv) in any manner transfer as collateral any securities owned by the Fund
except as may be necessary in connection with permissible borrowings; and (v)
purchase additional securities when money borrowed exceeds 5% of the Fund's
total assets.
In addition to the restrictions set forth above and those set forth in the
Statement of Additional Information, each Fund may be subject to investment
restrictions imposed under the insurance laws and regulations of Pennsylvania
and other states. These restrictions are non-fundamental and, in the event of
amendments to the applicable statutes or regulations, each Fund will comply,
without the approval of the shareholders, with the requirements as so modified.
Finally, Section 817(h) of the Internal Revenue Code requires that the assets
of each Fund be adequately diversified so that Penn Mutual or its affiliated
insurance companies, and not the variable contract owners, are considered the
owners for federal income tax purposes of the assets held in the separate
accounts. Each Fund ordinarily must satisfy the diversification requirements
within one year after contract owner funds are first allocated to the
particular Fund. In order to meet the diversification requirements of
regulations issued under Section 817(h), each Fund will meet the following
test: no more than 55% of the assets will be invested in any one investment; no
more than 70% of the assets will be invested in any two investments; no more
than 80% of the assets will be invested in any three investments; and no more
than 90% will be invested in any four investments. Each Fund must meet the
above diversification requirements within 30 days of the end of each calendar
quarter.
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MANAGEMENT OF PENN SERIES FUNDS, INC.
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DIRECTORS AND OFFICERS
The affairs of Penn Series are managed under the direction of its Board of
Directors. The directors decide upon matters of general policy and review the
actions of Penn Series' investment advisers and its administrative and
corporate services agent, as set forth below. The Penn Series' officers conduct
and supervise the daily business operations of Penn Series.
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INVESTMENT ADVISERS
PRICE ASSOCIATES. T. Rowe Price Associates, Inc., Baltimore Maryland, ("Price
Associates") is investment adviser for the Flexibly Managed and the High Yield
Bond Funds. Price Associates was incorporated in 1947 as successor to the
investment counseling firm founded by the late Mr. T. Rowe Price in 1937. Its
corporate home office is located at 100 East Pratt Street, Baltimore, Maryland
21202. Price Associates serves as investment adviser to a variety of individual
and institutional investors accounts, including other mutual funds. As of
December 31, 1996, Price Associates and its affiliates, managed more than $95
billion of assets.
Price Associates manages the investments of the Flexibly Managed Fund and the
High Yield Bond Fund. Each Fund pays Price Associates, on a monthly basis, an
advisory fee based on the average daily net assets of each Fund at the annual
rate of 0.50%.
Richard P. Howard, Vice President, T. Rowe Price Associates, Inc., is
primarily responsible for the day-to-day investment management of the
Flexibility Managed Fund. Mr. Howard has had that responsibility since 1989.
During the past five years, he has served as Vice President and a portfolio
manager of T. Rowe Price Associates, Inc.
Mark J. Vaselkiv, Vice President of T. Rowe Price Associates, Inc., is
primarily responsible for the day-to-day investment management of the High
Yield Bond Fund. Mr. Vaselkiv has had that responsibility since 1994. During
the past five years, he has been a Vice President and a portfolio manager of T.
Rowe Price Associates, Inc.
INDEPENDENCE CAPITAL MANAGEMENT. Independence Capital Management, Inc.
("Independence Capital Management") is investment adviser for the Growth
Equity, the Quality Bond, and the Money Market Funds. Independence Capital
Management is a wholly-owned subsidiary of The Penn Mutual Life Insurance
Company ("Penn Mutual"), a life insurance company that has been in the
insurance and investment business since the late 1800s. Penn Mutual and its
subsidiaries currently have assets under management of over $7 billion.
Independence Capital Management was organized in June 1989 and currently also
serves as investment adviser to corporate and pension fund accounts. Its
offices are located at 600 Dresher Road, Horsham, Pennsylvania 19044. As of
December 31, 1996, Independence Capital Management was responsible for the
management of over $360 million of investment assets.
Independence Capital Management manages the investments of the Growth Equity,
the Quality Bond and the Money Market Funds. Each Fund pays Independence
Capital Management, on a monthly basis, an advisory fee based on the average
daily net assets of each Fund at the following annual rates: Growth Equity
Fund, 0.50%; Quality Bond Fund, 0.45%; Money Market Fund, 0.40%. The fees will
be reduced by 0.05% for any of the Funds whose assets exceed $100 million.
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Richardson T. Merriman, Senior Vice President of Independence Capital
Management, manages the Growth Equity Fund since June 1995. Mr. Merriman is
also President of Pennsylvania Trust Company, a Penn Mutual subsidiary.
Peter M. Sherman, President and Portfolio Manager of Independence Capital
Management, Inc. since September 1995, is primarily responsible for the day-to-
day investment management of the Quality Bond and Money Market Funds. He served
as Senior Vice President, Independence Capital Management, prior to becoming
President. Mr. Sherman is Senior Vice President and Chief Investment Officer of
Penn Mutual; prior to May 1996, he was Vice President, Fixed Income Portfolio
Management, Penn Mutual.
Independence Capital Management is investment adviser and Robertson Stephens
Investment Management, Inc. ("Robertson Stephens") is sub-adviser for the
Emerging Growth Fund. With the establishment of Penn Series' newest Fund, the
advisory agreement between Penn Series and Independence Capital Management and
the sub-advisory agreement between Independence Capital Management and
Robertson Stephens were entered into as of April 15, 1997.
Independence Capital Management is responsible for the investment management
of the Emerging Growth Fund. The Fund pays Independence Capital Management, on
a monthly basis, an advisory fee based on the average daily net assets of the
Fund. The advisory fee is paid at the following rates: (i) 0.80% of the first
$25,000,000 of average daily net assets of the Fund; (ii) 0.75% of the next
$25,000,000 of average daily net assets of the Fund; and (iii) 0.70% of average
daily net assets of the Fund in excess of $50,000,000.
Independence Capital Management selected Robertson Stephens as sub-adviser to
assist it in working to achieve the investment objectives of the Emerging
Growth Fund. Robertson Stephens will make the investment decisions for the Fund
and will be responsible for the day-to-day operation of the Fund. See below for
information regarding Robertson Stephens.
OPCAP. OpCap Advisors ("OpCap") is investment adviser for the Value Equity
Fund. OpCap Advisors is a general partnership of which Oppenheimer Capital
holds a 99% interest. Oppenheimer Capital is a registered investment adviser
with extensive experience in the management of mutual funds and institutional
accounts, and its employees perform all investment advisory services provided
to the Value Equity Fund by OpCap. Oppenheimer Financial Corp., a holding
company, holds a 33% interest in Oppenheimer Capital. Oppenheimer Capital,
L.P., a Delaware limited partnership whose units are traded on the New York
Stock Exchange and of which Oppenheimer Financial Corp. is the sole general
partner, owns the remaining 67% interest. Oppenheimer Capital has operated as
an investment advisor since 1968.
On February 13, 1997, PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser with approximately $110 billion in assets under management
through various subsidiaries, signed an Agreement and Plan of Merger with
Oppenheimer Group, Inc. ("OGI") and its subsidiary Oppenheimer Financial Corp.
("Opfin") pursuant to which PIMCO Advisors and its affiliate, Thomson Advisory
Group Inc. ("TAG"), will acquire a one-third managing general partner interest
in Oppenheimer Capital, a 1.0% general partnership interest in OpCap Advisors,
and a 1.0% general partner interest in Oppenheimer Capital L.P. (the
"Transaction"), and OGI will be merged with and into TAG. The transaction is
subject to certain conditions being satisfied prior to closing, including
consents from certain lenders, approvals from regulatory authorities, including
a favorable tax ruling from the Internal Revenue Service, and consents of
certain clients, which are expected to take up six months to obtain. If the
transaction is consummated, it will involve a change in control of Oppenheimer
Capital and its subsidiary OpCap Advisors which will constitute an assignment
and termination of the Subadvisory Agreement. At a meeting held on April 2,
1997, the Board of Directors, including all of the independent directors,
approved and determined to submit to shareholders for approval, a new
investment advisory agreement with OpCap Advisors, substantially upon the same
terms and conditions as the existing agreement.
OpCap is located at One World Financial Center, New York, New York 10281. It
acts as investment adviser and subadviser to other mutual funds. As of December
31, 1996, OpCap managed assets of mutual funds with an aggregate value of more
than $10.4 billion.
Under the investment advisory agreements, OpCap manages the investments of
the Value Equity and the Small Capitalization Funds. The Value Equity Fund pays
OpCap, on a monthly basis, an advisory fee based on the average daily net
assets of the Fund, at the annual rate of 0.50%. The Small Capitalization Fund
pays OpCap, on a monthly basis, an advisory fee based on the average daily net
assets of the Fund, at the annual rate of 0.50%.
Eileen P. Rominger, Managing Director, Oppenheimer Capital, parent of OpCap
Advisors, is primarily responsible for the day-to-day investment management of
the Value Equity Fund. Ms. Rominger has had that responsibility since 1992.
During the past six years, she has been a Senior Vice President of Oppenheimer
Capital.
The Small Capitalization Fund is managed by Timothy McCormack, Timothy Curro
and Gavin Albert. Timothy McCormack has been a portfolio manager of the Fund
since March 1996. Timothy Curro and Gavin Albert became portfolio managers of
the Fund on January 1, 1997. Mr. Curro has been a Vice President of Oppenheimer
Capital since November 1996. Prior thereto, he was a general partner of Value
Holdings, L.P., an investment partnership, from May 1995 to November 1996,
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a Vice President in the equity research department at UBS Securities Inc. from
June 1994 through May 1995 and from January 1991 through February 1993, and was
a partner with Omega Advisors, Inc. from March 1993 to March 1994. Mr. Albert,
Vice President of Oppenheimer Capital since December 1996, joined the firm in
September 1994 as a research analyst. Prior thereto he was a management
consultant for EDS Energy Management in 1994, attended the Vanderbilt
University Business School from September 1992 to May 1994 (with a Masters of
Business Administration degree in finance and management) and was a financial
analyst in the Corporate Finance department of Texaco, Inc. from 1990 to 1992.
Mr. McCormack, Vice President of Oppenheimer Capital, joined the firm in 1994.
From 1993 to 1994 he was a security analyst at U.S. Trust Company and prior
thereto he was a securities analyst at Gabelli & Company. He has a masters of
Business Administration degree from the Wharton School.
VONTOBEL. Vontobel USA, Inc. ("Vontobel") is investment adviser for the
International Equity Fund. Vontobel is a wholly owned subsidiary of Vontobel
Holding Ltd., one of the largest private banks and brokerage firms in
Switzerland. Its principal place of business is located at 450 Park Avenue, New
York, New York 10022. As of December 31, 1996, Vontobel managed assets of over
$1.45 billion, a substantial part of which was invested outside of the United
States. The Vontobel group of companies has investments in excess of $24
billion under management.
Under the investment advisory agreement, Vontobel manages the investments of
the International Equity Fund. The Fund pays Vontobel, on a monthly basis, an
advisory fee based on the average daily net assets of the Fund, at the annual
rate of 0.75%.
Fabrizio Pierallini, Vice President and Portfolio Manager, Vontobel USA Inc.,
is primarily responsible for the day-to-day investment management of the
International Equity Fund. Mr. Pierallini joined Vontobel in April 1994 with
responsibilities for managing international equities. Prior thereto, he served
as Associate Director/Portfolio Manager, Swiss Bank Corporation, New York, from
May 1991, and as Vice President and Portfolio Manager, SBC Portfolio
Management, Ltd. (an affiliate of Swiss Bank Corporation, Zurich), from
September 1988 to April 1991.
ROBERTSON STEPHENS. Robertson Stephens Investment Management, Inc.
("Robertson Stephens") is sub-adviser for the Emerging Growth Fund pursuant to
the sub-advisory agreement between Independence Capital Management and
Robertson Stephens (see above). Robertson Stephens commenced operations in
March 1986 and is an indirect wholly-owned subsidiary of Robertson, Stephens &
Company LLC. Robertson, Stephens & Company LLC is a distributor of mutual funds
and a major investment banking firm specializing in emerging growth companies
that has developed substantial investment research, underwriting, and venture
capital expertise. Since 1978, Robertson, Stephens & Company LLC has managed
underwritten public offerings for over $15.23 billion of securities of emerging
growth companies. Robertson Stephens & Company LLC, Robertson Stephens &
Company, Inc., and Sanford R. Robertson may be deemed to be control persons of
Robertson Stephens. The principal place of business of Robertson Stephens and
its affiliates is 555 California Street, San Francisco, California 94104.
Independence Capital Management pays Robertson Stephens, on a monthly basis,
a sub-advisory fee based on average daily net assets of the Fund. The sub-
advisory fee is paid at the following rates: (i) 0.70% of the first $25,000,000
of average daily net assets of the Fund; (ii) 0.65% of the next $25,000,000 of
average daily net assets of the Fund; and (iii) 0.60% of average daily net
assets of the Fund in excess of $50,000,000.
James Callinan, Managing Director of Robertson Stephens & Company Investment
Management, L.P. and Portfolio Manager of Robertson Stephens, is responsible
for managing the Emerging Growth Fund. Mr. Callinan has more than nine years of
investment research and management experience. From 1986 until June 1996, Mr.
Callinan was employed by Putnam Investments, where, beginning in June 1994, he
served as portfolio manager of the Putnam OTC Emerging Growth Fund. Mr.
Callinan received an A.B. in economics from Harvard College, and M.S. in
accounting from New York University, and an M.B.A. from Harvard Business
School, and is a Chartered Financial Analyst.
GENERAL INFORMATION. In allocating to brokers purchases and sales of
portfolio securities of the Growth Equity, Value Equity, Small Capitalization,
Emerging Growth, International Equity and Quality Bond Funds, the advisers are
required to seek best price and most favorable execution but may take into
consideration the sale of Fund shares. The advisers periodically make payments
to Penn Mutual to assist it in defraying costs incurred in providing
information about their services and performance.
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ADMINISTRATIVE AND CORPORATE SERVICES AGENT
The Penn Mutual Life Insurance Company ("Penn Mutual") is the administrative
and corporate services agent of Penn Series Funds, Inc. Penn Mutual is a
Pennsylvania mutual life insurance company chartered in 1847 and has been
engaged continuously in the life insurance business since that date. Its
corporate home office is located at Independence Square, Philadelphia,
Pennsylvania 19172.
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Under an administrative and corporate services agreement between the Fund and
Penn Mutual, Penn Mutual administers Penn Series' corporate affairs, subject to
the supervision of the Board of Directors and, in connection therewith,
furnishes Penn Series with office facilities, prepares regulatory filings,
provides staff assistance to the Board, and provides those ordinary clerical
and bookkeeping services which are not provided by Penn Series' custodian,
transfer agent, accounting services agent or adviser. Each Fund pays Penn
Mutual an annual fee equal to 0.15% of the Fund's average daily net assets,
subject to the limitations on Fund expenses described below.
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EXPENSES AND LIMITATIONS THEREON
Each Fund bears all expenses of its operations other than those incurred by
its investment adviser under its investment advisory agreement and those
incurred by Penn Mutual under its administrative and corporate services
agreement. In particular, each Fund pays: investment advisory fees;
administrator's fee; shareholder servicing fees and expenses; custodian and
accounting fees and expenses; legal and auditing fees; expenses of printing and
mailing prospectuses and shareholder reports; registration fees and expenses;
proxy and annual meeting expenses; and directors' fees and expenses.
With respect to each Fund, the investment advisers and Penn Mutual have
agreed to waive fees or reimburse expenses to the extent the Fund's total
expense ratio (excluding interest, taxes, brokerage, other expenses which are
capitalized in accordance with generally accepted accounting principles, and
extraordinary expenses, but including investment advisory and administrative
and corporate services fees) exceeds the expense limitation for the Fund. The
expense limitations for the Funds are as follows: Growth Equity Fund: 1.00%;
Value Equity Fund: 1.00%; Small Capitalization Fund: 1.00%; Emerging Growth
Fund: 1.15%; Flexibly Managed Fund: 1.00%; International Equity Fund: 1.50%;
Quality Bond Fund: 0.90%; High Yield Bond Fund: 0.90% and Money Market Fund:
0.80%. All waivers of fees or reimbursements of expenses with respect to the
Flexibly Managed Fund and the High Yield Bond Fund will be shared equally by
Price Associates and Penn Mutual, and all expenses with respect to the Emerging
Growth Fund will be shared equally by Robertson Stephens and Penn Mutual. For
all other Funds, the investment adviser will waive fees with regards to the
entirety of the first 0.10% of excess above the expense limitations; Penn
Mutual will waive fees or reimburse expenses for the entirety of any additional
excess above the first 0.10%.
For the year ended December 31, 1996, the annualized ratios of operating
expenses (after waivers) to the average net assets for each of the Funds were:
Growth Equity Fund: .80%; Value Equity Fund: .78%; Small Capitalization Fund:
.99%; Flexibly Managed Fund: .77%; International Equity Fund: 1.17%; Quality
Bond Fund: .77%; High Yield Bond Fund: .84%; Money Market Fund: .73%.
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CUSTODIAN, ACCOUNTING SERVICES AGENT AND TRANSFER AGENT
PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107, is custodian of
the assets of the Funds of Penn Series, and maintains certain records and books
in connection therewith. A subsidiary of PNC Bank, PFPC Inc., Wilmington,
Delaware 19809, is the accounting services agent and transfer agent for the
Funds of Penn Series.
As accounting services agent, PFPC Inc. provides accounting services to, and
keeps the accounts and records of, Penn Series. Under the accounting services
agreement, the accounting service fee is calculated daily based on a
predetermined percentage of daily net assets. For domestic portfolios (Growth
Equity, Value Equity, Small Capitalization, Flexibly Managed, Quality Bond,
High Yield Bond and Money Market), the percentages are as follows: .075% of the
first $100 million, .050% of the next $200 million, .030% of the next $300
million, and .020% of the remainder. For international portfolios
(International Equity), the percentages are as follows: .085% of the first $100
million, .060% of the next $300 million, .040% of the next $200 million, and
.030% of the remainder. Additionally, all non-money market funds are subject to
specified minimum annual fees.
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SALE AND REDEMPTION OF SHARES
Shares of Penn Series are sold to Penn Mutual and its subsidiaries for their
general and separate accounts at net asset value of the shares next determined
after receipt of the purchase order. There is no sales charge or sales load on
purchase of those shares.
Shares of Penn Series are redeemed at their net asset value next determined
after receipt of a written request for redemption. There is no redemption
charge.
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NET ASSET VALUE OF SHARES
Net asset value per share of the Growth Equity, Value Equity, Small
Capitalization, Emerging Growth, Flexibly Managed, International Equity,
Quality Bond, and High Yield Bond Funds is determined as of the close of the
New York Stock Exchange, on each day the New York Stock Exchange is open for
trading. The net asset value per share of each Fund is
28
<PAGE>
determined by subtracting that Fund's liabilities (including accrued expenses)
from its total assets (the value of the securities the Fund holds plus cash and
other assets, including income accrued but not yet received) and dividing the
result by the total number of shares outstanding.
Portfolio securities listed on a national securities exchange are valued at
the last quoted sales price on the exchange or, if there has been no sale on
that day, at the mean between the current closing bid and asked prices. All
other portfolio securities for which over-the-counter market quotations are
readily available are valued on the basis of the mean between the last current
bid and asked prices. When market quotations are not readily available, or when
restricted or other assets are being valued, the securities or assets will be
valued at fair value as determined by, or pursuant to delegated authority of,
the Board of Directors.
Foreign portfolio securities generally are valued in accordance with the
above procedures, except as described below. Trading in foreign securities on
European and Far Eastern securities exchanges and over-the-counter markets is
normally completed well before the close of the business day in New York. In
addition, Far Eastern securities trading may not take place on all business
days in New York. Furthermore, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days which are not business
days in New York and on which net asset value is not calculated.
Foreign portfolio securities, including ADRs and EDRs, which are traded on
stock exchanges, are valued at the last sale price, prior to the Fund valuation
time, on the exchange on which such securities are traded, unless the Fund is
aware of a material change in the value prior to the time the Fund values its
securities, or, lacking any sales, at the last available bid price. ADR's for
which such a value cannot be readily determined on any day will be valued at
the closing price of the underlying security adjusted for the exchange rate.
The Funds will make the effort to follow the above pricing procedures,
recognizing that due to differing hours, the calculation of net asset value may
not take place contemporaneously with the determination of the prices of
foreign portfolio securities used in such calculations. Events affecting the
values of foreign portfolio securities that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund calculation of net asset value unless the Board of
Directors deems that the particular event would materially affect the net asset
value, in which case an adjustment will be made. Assets or liabilities
initially expressed in terms of foreign currencies are translated prior to the
next determination of the net asset value of the Fund shares into U.S. dollars
at the prevailing market rates.
Net asset value per share of the Money Market Fund is determined, as of Noon,
Philadelphia time, on each day the New York Stock Exchange is open for trading.
The net asset value per share of the Money Market Fund is determined by
subtracting the Fund's liabilities from its total assets and dividing the
result by the total number of shares outstanding. Securities held by the Money
Market Fund are valued by the amortized cost method. This means that each
obligation will be valued initially at its purchase price and thereafter by
amortizing any discount or premium uniformly to maturity.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
Penn Series is qualified as a regulated investment company under Section 851 of
the Internal Revenue Code and distributes substantially all of its net
investment income and realized gains from securities transactions to
shareholders. For each taxable year in which it and each of its Funds so
qualify, Penn Series will not be subject to tax on net investment income and
realized gains from securities transactions distributed to shareholders.
Further, under current provisions of the Code, Penn Mutual and PIA do not
expect to incur federal income tax on earnings of their separate accounts
resulting from their shares of Penn Series to the extent that those earnings
are credited to variable contracts.
- --------------------------------------------------------------------------------
VOTING RIGHTS
The shares of the Funds have equal voting rights, except that certain issues
will be voted on separately by the shareholders of each Fund. Penn Mutual and
PIA own all the outstanding shares of Penn Series, either in their separate
accounts registered under the 1940 Act or in their unregistered separate
accounts or general accounts. Pursuant to the 1940 Act, however, Penn Mutual
and PIA will vote the shares held in registered separate accounts in accordance
with voting instructions received from variable contract owners or payees
having the right to give such instructions. Fund shares for which contract
owners or payees are entitled to give voting instructions, but as to which no
voting instructions are received, and shares owned by Penn Mutual and PIA in
their general and unregistered separate accounts, will be voted in proportion
to the shares for which voting instructions have been received. Under state
insurance law and federal regulations, there are certain circumstances under
which Penn Mutual and PIA may disregard such voting instructions. If voting
instructions are ever so ignored, contract owners will be advised of that
action in the next semiannual report.
Penn Series currently does not intend to hold annual meetings of shareholders
unless required to do so under applicable law. The law provides shareholders
with the right under certain circumstances to call a meeting of shareholders to
consider removal of one or more directors. As required by law, Penn Series will
assist in variable contract owner and payee communication on such matters.
29
<PAGE>
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RATINGS OF CORPORATE DEBT SECURITIES
The quality of a bond is measured by credit risk--the continuing ability of the
issuer to meet interest and principal payments. Issuers who are believed to be
good credit risks receive high quality ratings, and those believed to be poor
credit risks receive low quality ratings. As a result of the greater credit
risk involved, medium and low quality bonds typically offer a higher yield than
bonds of high quality.
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MOODY'S INVESTORS SERVICE, INC.
AAA Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge."
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AA Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds.
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A Bonds rated A possess many favorable investment attributes and are
generally considered as upper medium grade obligations.
- --------------------------------------------------------------------------------
BAA Bonds rated Baa are considered medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
- --------------------------------------------------------------------------------
BA Bonds rated Ba are judged to have speculative elements: their future
cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterize bonds in this class.
- --------------------------------------------------------------------------------
B Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance
of other terms of the contract over any long period of time may be
small.
- --------------------------------------------------------------------------------
CAA Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
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CA Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-
comings.
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STANDARD & POOR'S CORPORATION
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
- --------------------------------------------------------------------------------
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
- --------------------------------------------------------------------------------
A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
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BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the
A category.
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BB, B, CCC, CC
Bonds rated BB, B, CCC, and CC are regarded on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
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30
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
600 DRESHER ROAD, HORSHAM, PA 19044 . TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------
This statement is not a prospectus but should be read in conjunction with the
current prospectus of Penn Series Funds, Inc. ("Penn Series") dated May 1,
1997. To obtain the prospectus you may write to The Penn Mutual Life Insurance
Company ("Penn Mutual"), Customer Service Group--H3F, Independence Square,
Philadelphia, PA 19172. Or, you may call, toll free, 1-800-548-1119.
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
INVESTMENT OBJECTIVES...................................................... B-2
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SECURITIES AND INVESTMENT TECHNIQUES....................................... B-3
Investments in Debt Securities........................................... B-3
Investments in Foreign Equity Securities................................. B-5
Investments in Smaller Companies......................................... B-5
Foreign Currency Transactions............................................ B-6
Repurchase Agreements.................................................... B-7
Lending of Portfolio Securities.......................................... B-7
Illiquid Securities...................................................... B-8
Warrants................................................................. B-8
When-Issued Securities................................................... B-8
The Quality Bond Fund's Policy Regarding Industry Concentration.......... B-9
Options.................................................................. B-9
Future Contracts......................................................... B-10
Loan Participations and Assignments...................................... B-10
Trade Claims............................................................. B-11
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INVESTMENT RESTRICTIONS.................................................... B-12
Growth Equity Fund....................................................... B-12
Value Equity Fund........................................................ B-13
Small Capitalization Fund................................................ B-14
Emerging Growth Fund..................................................... B-15
Flexibly Managed Fund.................................................... B-15
International Equity Fund................................................ B-16
Quality Bond Fund........................................................ B-17
High Yield Bond Fund..................................................... B-18
Money Market Fund........................................................ B-19
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GENERAL INFORMATION........................................................ B-21
Investment Advisory Services............................................. B-21
Administrative and Corporate Services.................................... B-22
Accounting Services...................................................... B-23
Limitation on Fund Expenses.............................................. B-23
Portfolio Transactions................................................... B-23
Directors and Officers................................................... B-26
Custodial Services....................................................... B-26
Independent Accountants.................................................. B-27
Legal Matters............................................................ B-27
Net Asset Value of Shares................................................ B-27
Ownership of Shares...................................................... B-28
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RATINGS OF COMMERCIAL PAPER................................................ B-28
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FINANCIAL STATEMENTS OF PENN SERIES........................................ B-29
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REPORT OF INDEPENDENT ACCOUNTANTS.......................................... B-30
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</TABLE>
B-1
<PAGE>
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INVESTMENT OBJECTIVES
Information in this Statement of Additional Information supplements the
discussion in the Penn Series Prospectus regarding investment objectives,
programs and restrictions of the nine Funds that comprise the Penn Series
Funds, Inc. Unless otherwise specified, the investment policies and
restrictions of the Funds are not fundamental policies. The operating policies
of each Fund are subject to change by the Board of Directors without
shareholder approval. Fundamental policies of each Fund may not be changed
without the approval of at least a majority of the outstanding shares of that
Fund or, if it is less, 67% of the shares represented at a meeting of
shareholders at which the holders of 50% or more of the shares are represented.
The investment objectives of the nine Funds are as follows. There is, of
course, no assurance that these objectives will be achieved.
- --------------------------------------------------------------------------------
GROWTH EQUITY seeks long-term growth of capital and increase of
FUND future income by investing primarily in common stocks
of well-established growth companies;
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VALUE EQUITY FUND seeks to maximize total return (capital appreciation
and income) primarily by investing in equity
securities of companies believed to be undervalued
considering such factors as assets, earnings, growth
potential and cash flows;
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SMALL seeks capital appreciation through investment in a
CAPITALIZATION diversified portfolio of securities consisting
FUND primarily of equity securities of companies with
market capitalizations of under $1 billion;
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EMERGING GROWTH seeks capital appreciation by investing primarily in
FUND common stocks of emerging growth companies with above-
average growth prospects;
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED seeks to maximize total return (capital appreciation
FUND and income) by investing in common stocks, other
equity securities, corporate debt securities, and/or
short-term reserves, in proportions considered
appropriate in light of the availability of
attractively valued individual securities and current
and expected economic and market conditions;
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INTERNATIONAL seeks to maximize capital appreciation by investing in
EQUITY FUND a carefully selected diversified portfolio consisting
primarily of equity securities. The investments will
consist principally of equity securities of European
and Pacific Basin countries.
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QUALITY BOND FUND seeks the highest income over the long term consistent
with the preservation of principal by investing
primarily in marketable investment-grade debt
securities;
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HIGH YIELD BOND seeks high current income by investing primarily in a
FUND diversified portfolio of long-term high-yield/high
risk fixed income securities in the medium to lower
quality ranges; capital appreciation is a secondary
objective; SUCH SECURITIES, WHICH ARE COMMONLY
REFERRED TO AS "JUNK" BONDS, GENERALLY INVOLVE GREATER
RISKS OF LOSS OF INCOME AND PRINCIPAL THAN HIGHER
RATED SECURITIES;
- --------------------------------------------------------------------------------
MONEY MARKET FUND seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income
consistent therewith, by investing in high quality
money market instruments; AN INVESTMENT IN THE FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT
AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
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B-2
<PAGE>
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SECURITIES AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
INVESTMENTS IN DEBT SECURITIES
Debt securities in which one or more of the Funds may invest in include those
described below.
U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in bills, notes, bonds, and
other debt securities issued by the U.S. Treasury. These are direct obligations
of the U.S. Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. The Funds may invest in debt securities
issued or guaranteed by U.S. Government sponsored enterprises, federal
agencies, and international institutions. These include securities issued by
the Federal National Mortgage Association, Government National Mortgage
Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, and the Tennessee Valley Authority.
Some of these securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
Treasury; and the remainder are supported only by the credit of the
instrumentality.
LONG-TERM, MEDIUM TO LOWER QUALITY CORPORATE DEBT SECURITIES. The High Yield
Bond Fund will invest in outstanding convertible and nonconvertible corporate
debt securities (e.g., bonds and debentures) that generally have maturities of
at least 10 years. This Fund will generally invest in long-term corporate
obligations which are rated BBB or lower by Standard & Poor's Corporation
("Standard & Poor's") or Baa or lower by Moody's Investors Service, Inc.
("Moody's"), or, if not rated, are of equivalent quality as determined by the
Fund's investment adviser. Other Funds may invest limited amounts in medium to
lower quality corporate debt securities in accordance with their stated
investment policies.
INVESTMENT GRADE CORPORATE DEBT SECURITIES. The Quality Bond Fund will invest
principally in corporate debt securities of various maturities that are
considered investment grade securities by at least one of the established
rating services (e.g., AAA, AA, A, or BBB by Standard & Poor's) or, if not
rated, are of equivalent quality as determined by the Fund's investment
adviser, Independence Capital Management, Inc.
BANK OBLIGATIONS. The Funds may invest in certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates of deposit are
short-term obligations of commercial banks. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with
international commercial transactions.
No Fund will invest in any security issued by a commercial bank unless (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank by any
one Income Fund is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation,
(ii) in the case of a U.S. Bank, it is a member of the Federal Deposit
Insurance Corporation, and (iii) in the case of foreign banks, the security is,
in the opinion of the Fund's investment adviser, of an investment quality
comparable with other debt securities which may be purchased by the Fund. These
limitations do not prohibit investments in securities issued by foreign
branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
COMMERCIAL PAPER. The Funds may invest in short-term promissory notes issued
by corporations primarily to finance short-term credit needs. The Money Market
Fund will only invest in commercial paper which is rated A-2 or better by
Standard & Poor's, Prime-2 or better by Moody's or, if not rated, is of
equivalent quality as determined by the investment adviser, and further will
invest only in instruments permitted under the SEC Rule 2a-7 which governs
money market fund investing.
CANADIAN GOVERNMENT SECURITIES. The Funds may invest in debt securities
issued or guaranteed by the Government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof. However, the Money Market
Fund will only purchase these securities if they are marketable and payable in
U.S. dollars. The Money Market Fund will not purchase any such security if, as
a result, more than 10% of the value of its total assets would be invested in
such securities.
SAVINGS AND LOAN OBLIGATIONS. The Quality Bond, High Yield Bond, and Money
Market Funds may invest in negotiable certificates of deposit and other debt
obligations of savings and loan associations. They will not invest in any
security issued by a savings and loan association unless: (i) the savings and
loan association has total assets of at least $1 billion, or, in the case of
savings and loan associations which do not have total assets of at least $1
billion, the aggregate investment made in any one savings and loan association
is limited to $100,000 and the principal amount of such investment is insured
in full by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation; (ii) the savings and loan association issuing the
security is a member of the Federal Home Loan Bank System; and (iii) the
security is insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation.
No Fund will purchase any security of a small bank or savings and loan
association which is not readily marketable if, as a result, more than 10% of
the value of its total assets would be invested in such securities, other
illiquid securities, and securities
B-3
<PAGE>
without readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.
MUNICIPAL OBLIGATIONS. The Quality Bond and Value Equity Funds may invest in
Municipal Obligations that meet the Fund's quality standards. The two principal
classifications of Municipal Obligations are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Revenue securities include private
activity bonds which are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Municipal Obligations may include variable and floating rate instruments. If
such instruments are unrated, they will be determined by the adviser to be of
comparable quality at the time of the purchase to rated instruments purchasable
by a Fund.
To the extent a Fund's assets are to a significant extent invested in
Municipal Obligations that are payable from the revenues of similar projects,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects to a greater extent than it would
be if its assets were not so invested.
FOREIGN DEBT SECURITIES. Subject to the particular Fund's quality and
maturity standards, the Quality Bond, High Yield Bond and Money Market Funds
may invest without limitation in the debt securities (payable in U.S. dollars)
of foreign issuers in developed countries and in the securities of foreign
branches of U.S. banks such as negotiable certificates of deposit
(Eurodollars). The High Yield Bond Fund may also invest up to 20% of its assets
in non-U.S. dollar--denominated fixed-income securities principally traded in
financial markets outside the United States.
The International Equity Fund may invest in debt securities of foreign
issuers. The securities will be rated Baa or higher by Moody's Investor
Services, Inc. or BBB or higher by Standard and Poor's Corporation or, if they
have not been so rated, will be the equivalent of investment grade (Baa or BBB)
as determined by the adviser. The Value Equity Fund may also invest up to 15%
of its assets in U.S.-traded dollar denominated debt securities of foreign
issuers, and up to 5% of its assets in non-dollar denominated fixed income
securities issued by foreign issuers.
The Small Capitalization and Emerging Growth Funds may also invest up to 15%
of its assets in U.S.-traded dollar denominated debt securities of foreign
issuers, and up to 5% of its assets in non-dollar denominated fixed income
securities issued by foreign issuers.
For information on risks involved in investing in foreign securities, see
information on "INVESTMENT IN FOREIGN EQUITY SECURITIES" below.
PRIME MONEY MARKET SECURITIES DEFINED. Prime money market securities include:
U.S. Government obligations; U.S. Government agency securities; bank or savings
and loan association obligations issued by banks or savings and loan
associations whose debt securities or parent holding companies' debt securities
or affiliates' debt securities guaranteed by the parent holding company are
rated AAA or A-1 or better by Standard & Poor's, Aaa or Prime-1 by Moody's, or
AAA by Fitch; commercial paper rated A-1 or better by Standard & Poor's, Prime-
1 by Moody's, or, if not rated, issued by a corporation having an outstanding
debt issue rated AAA by Standard & Poor's, Moody's, or Fitch; short-term
corporate debt securities rated AAA by Standard & Poor's, Moody's, or Fitch;
Canadian Government securities issued by entities whose debt securities are
rated AAA by Standard & Poor's, Moody's, or Fitch; and repurchase agreements
where the underlying security qualifies as a prime money market security as
defined above.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Quality Bond Fund may invest in
collateralized mortgage obligations ("CMOs"). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. CMOs may also be
less marketable than other securities.
ASSET-BACKED SECURITIES. The Quality Bond and Money Market Funds may invest a
portion of their assets in debt obligations known as "asset-backed securities."
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of
B-4
<PAGE>
the originator or any other affiliated entities, and the amount and quality of
any credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed security
is difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity. Asset-backed securities may be
classified as "pass through certificates" or "collateralized obligations."
"Pass through certificates" are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets. Pass
through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders thereof. Such
issuers generally hold no assets other than those underlying the asset-backed
securities and any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the event of
defaults on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
ZERO COUPON AND PAY-IN-KIND BONDS. The High Yield Bond Fund may invest in
zero coupon and pay-in-kind bonds. A zero coupon security has no cash coupon
payments. Instead, the issuer sells the security at a substantial discount from
its maturity value. The interest received by the investor from holding this
security to maturity is the difference between the maturity value and the
purchase price. The advantage to the investor is that reinvestment risk of the
income received during the life of the bond is eliminated. However, zero-coupon
bonds like other bonds retain interest rate and credit risk and usually display
more price volatility than those securities that pay a cash coupon.
Pay-in-Kind (PIK) Instruments are securities that pay interest in either cash
or additional securities, at the issuer's option, for a specified period.
PIK's, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. PIK bonds can be either senior or subordinated debt and
trade flat (i.e., without accrued interest). The price of PIK bonds is expected
to reflect the market value of the underlying debt plus an amount representing
accrued interest since the last payment. PIK's are usually less volatile than
zero coupon bonds, but more volatile than cash pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless be
required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce the
amount of cash available for investment by the Fund.
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INVESTMENTS IN FOREIGN EQUITY SECURITIES
The Growth Equity, Value Equity, Small Capitalization, Emerging Growth,
Flexibly Managed, and International Equity Funds may invest in the equity
securities of foreign issuers. The Growth Equity and Emerging Growth Funds
currently intend to limit any such investment to not more than 30% of their
respective assets, and the Value Equity, Small Capitalization and the Flexibly
Managed Funds currently intend to limit any such investment to not more than
15% of their respective assets. The International Equity Fund, under normal
circumstances, will have at least 65% of its assets in such investments.
Because these Funds may invest in foreign securities, selection of these Funds
involves risks that are different in some respects from an investment in a fund
which invests only in securities of U.S. domestic issuers. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. There may be less publicly available information
about a foreign company than about a U.S. company, and foreign companies may
not be subject to accounting, auditing, and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities may also be
subject to other risks different from those affecting U.S. investments,
including local political or economic developments, expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from being
brought back to the United States).
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INVESTMENTS IN SMALLER COMPANIES
The Small Capitalization and Emerging Growth Funds may invest a substantial
portion of their assets in securities issued by smaller companies. Such
companies may offer greater opportunities for capital appreciation than larger
companies, but
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investments in such companies may involve certain special risks. Such companies
may have limited product lines, markets, or financial resources and may be
dependent on a limited management group. While the markets in securities of
such companies have grown rapidly in recent years, such securities may trade
less frequently and in smaller volume than more widely held securities. The
values of these securities may fluctuate more sharply than those of other
securities, and a Fund may experience some difficulty in establishing or
closing out positions in these securities at prevailing market prices. There
may be less publicly available information about the issuers of these
securities or less market interest in such securities than in the case of
larger companies, and it may take a longer period of time for the prices of
such securities to reflect the full value of their issuers' underlying earnings
potential or assets. Some securities of smaller issuers may be restricted as to
resale or may otherwise be highly illiquid. The ability of a Fund to dispose of
such securities may be greatly limited, and a Fund may have to continue to hold
such securities during periods when they would otherwise be sold.
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FOREIGN CURRENCY TRANSACTIONS
The Growth Equity, Value Equity, Small Capitalization, Emerging Growth,
International Equity and High Yield Bond Funds may enter into forward foreign
currency exchange contracts as described below. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
These Funds may enter into forward foreign currency exchange contracts only
under two circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date the security is purchased
or sold and the date on which payment is made or received. Second, when the
adviser to one of these Funds believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract to sell, for a fixed amount of dollars,
the amount of the foreign currency approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. The International Equity
Fund may enter into a forward contract to buy or sell foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's portfolio securities denominated in such
currency. In certain circumstances the adviser to the International Equity Fund
may commit substantial portion of the portfolio to the consummation of forward
contracts. The Growth Equity Fund, Value Equity, Small Capitalization Fund and
High Yield Bond Fund do not intend to enter into such forward contracts under
this second circumstance on a regular or continuous basis, and will not do so
if, as a result, the Fund will have more than 15% of the value of its total
assets committed to the consummation of such contracts. The Funds will also not
enter into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate them to deliver an
amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. A Fund's custodian bank will place cash or
liquid equity or debt securities in a separate account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
forward foreign currency exchange contracts entered into under the second
circumstance, as set forth above. If the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver
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and if a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent that the price of the currency it has agreed
to purchase exceeds the price of the currency it has agreed to sell.
It also should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which one can achieve at some future
point in time. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from the value of such
currency increase.
Although the International Equity Fund, Growth Equity Fund, Value Equity,
Small Capitalization Fund and High Yield Bond Fund value their assets daily in
terms of U.S. dollars, they do not intend to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. They will do so from time to
time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to a Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer.
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REPURCHASE AGREEMENTS
Each Fund, other than the Growth Equity Fund, may enter into repurchase
agreements through which an investor (such as a Fund) purchases a security
(known as the "underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Concurrently, the
bank or securities dealer agrees to repurchase the underlying security at a
future point at the same price, plus specified interest. Repurchase agreements
are generally for a short period of time, often less than a week. A Fund will
not enter into a repurchase agreement with a maturity of more than seven
business days if, as a result, more than 10% of the value of its total assets
would then be invested in such repurchase agreements. The Quality Bond Fund
will only enter into a repurchase agreement where the underlying securities are
(excluding maturity limitations) rated within the four highest credit
categories assigned by established rating services (Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by Standard & Poor's), or, if not rated, of
equivalent investment quality as determined by Independence Capital. With the
exception of the Money Market Fund, the underlying security must be rated
within the top three credit categories, or, if not rated, must be of equivalent
investment quality as determined by the investment adviser. In the case of the
Money Market Fund, the underlying security must be rated within the top credit
category or, if not rated, must be of comparable investment quality as
determined by the investment adviser and the repurchase agreement must meet the
other quality and diversification standards of Rule 2a-7 under the Investment
Company Act of 1940. In addition, each Fund will only enter into a repurchase
agreement where (i) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (ii) payment for the underlying security is made only
upon physical delivery or evidence of book- entry transfer to the account of
the custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, a Fund could experience both
delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period
while a Fund seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
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LENDING OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. This policy is a fundamental policy for all the Funds. Securities loans
are made to unaffiliated broker-dealers or institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent. The collateral
received will consist of government securities, letters of credit or such other
collateral as may be permitted under its investment program and by regulatory
agencies and approved by
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the Board of Directors. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Each Fund has a right to call each loan
and obtain the securities on five business days' notice. No Fund will have the
right to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
Loans will only be made to firms deemed by the adviser to be of good standing
and will not be made unless, in the judgment of the adviser, the consideration
to be earned from such loans would justify the risk.
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ILLIQUID SECURITIES
Each Fund, other than the Growth Equity and Money Market Funds, may invest up
to 10% of its net assets in illiquid securities. The Growth Equity Fund may
invest up to 5% of its total assets in illiquid securities. Illiquid securities
are those which may not be sold in the ordinary course of business within seven
days at approximately the value at which the Fund has them. Variable and
floating rate instruments that cannot be disposed of within seven days and
repurchase agreements with a maturity of greater than seven days are considered
illiquid. The Money Market Fund may invest up to 10% of its total assets in
only the following illiquid securities: repurchase agreements with a maturity
of greater than seven days, and illiquid obligations of small banks and savings
and loan associations.
The Funds may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A Fund's treatment of Rule
144A securities as liquid could have the effect of increasing the level of fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. The adviser will continue to
monitor the liquidity of any Rule 144A security which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions,
the holdings of illiquid securities will be reviewed to determine if any steps
are required to assure that the 10% test continues to be satisfied.
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WARRANTS
The Funds, other than the Growth Equity Fund, may invest in warrants;
however, not more than 5% of a Fund's assets (at the time of purchase) will be
invested in warrants other than warrants acquired in units or attached to other
securities. Of such 5% not more than 2% of such assets at the time of purchase
may be invested in warrants that are not listed on the New York or American
Stock Exchange. Warrants basically are options to purchase equity securities at
a specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. They have no
voting rights, pay no dividends and have no rights with respect to the assets
of the corporation issuing them. Warrants differ from call options in that
warrants are issued by the issuer of the security which may be purchased on
their exercise, whereas call options may be written or issued by anyone. The
prices of warrants do not necessarily move parallel to the prices of the
underlying securities.
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WHEN-ISSUED SECURITIES
The Value Equity Fund, Small Capitalization Fund, Quality Bond Fund, Flexibly
Managed Fund and High Yield Bond Fund may from time to time purchase securities
on a "when-issued" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase. During
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund purchasing the when-issued
security. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the
particular Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The advisers do not believe that the net asset
value or income of the Funds will be adversely affected by the respective
Fund's purchase of securities on a when-issued basis. The Funds will maintain
cash and marketable
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securities equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
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THE QUALITY BOND FUND'S POLICY REGARDING INDUSTRY CONCENTRATION
When the market for corporate debt securities is dominated by issues in the
gas utility, gas transmission utility, electric utility, telephone utility, or
petroleum industries, the Quality Bond Fund will as a matter of fundamental
policy concentrate 25% or more, but not more than 50% of its assets, in any one
such industry, if the Fund has cash for such investment (i.e., will not sell
portfolio securities to raise cash) and, if in Independence Capital
Management's judgment, the return available and the marketability, quality, and
availability of the debt securities of such industry justifies such
concentration in light of the Fund's investment objective. Domination would
exist with respect to any one such industry, when, in the preceding 30-day
period, more than 25% of all new-issue corporate debt offering (within the four
highest grades of Moody's or S&P and with maturities of 10 years or less) of
$25,000,000 or more consisted of issues in such industry. Although the Fund
will normally purchase corporate debt securities in the secondary market as
opposed to new offerings, Independence Capital Management believes that the new
issue-based dominance standard, as defined above, is appropriate because it is
easily determined and represents an accurate correlation to the secondary
market. Investors should understand that concentration in any industry may
result in increased risk. Investments in any of these industries may be
affected by environmental conditions, energy conservation programs, fuel
shortages, difficulty in obtaining adequate return on capital in financing
operations and large construction programs, and the ability of the capital
markets to absorb debt issues. In addition, it is possible that the public
service commissions which have jurisdiction over these industries may not grant
future increases in rates sufficient to offset increases in operating expenses.
These industries also face numerous legislative and regulatory uncertainties at
both federal and state government levels. Independence Capital Management
believes that any risk to the Fund which might result from concentration in any
industry will be minimized by the Fund's practice of diversifying its
investments in other respects. The Quality Bond Fund's policy with respect to
industry concentration is a fundamental policy. See INVESTMENT RESTRICTIONS
below.
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OPTIONS
Each Fund, other than the Money Market Fund, may write covered calls and buy
put options on its portfolio securities and purchase call or put options on
securities indices. The High Yield Bond Fund may engage in other options
transactions described in INVESTMENT RESTRICTIONS below, including the purchase
of spread options, which give the owner the right to sell a security that it
owns at a fixed dollar spread or yield spread in relation to another security
that the owner does not own, but which is used as a benchmark.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a percentage basis,
more risky than an investment in the underlying securities themselves.
A Fund will write call options only if they are "covered." This means that a
Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities.
There are several risks associated with transactions in options on securities
and indices. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.
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FUTURE CONTRACTS
Each Fund, other than the Money Market Fund, may invest in futures contracts
and options thereon (interest rate futures contracts or stock index futures
contracts, as applicable), in accordance with each Fund's individual
restrictions on futures contracts set forth under INVESTMENT RESTRICTIONS
below. Such futures contracts would not be entered into for speculative
purposes, but to hedge risks associated with the Fund's securities investments
or to provide an efficient means of regulating its exposure to the market. To
enter into a futures contract, a Fund must make a deposit of initial margin
with its custodian in a segregated account in the name of its futures broker.
Initial margin on futures contracts is in the nature of a performance bond or
good faith deposit. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying index or
instrument fluctuates, making the long and short positions in the futures
contracts more or less valuable.
Successful use of futures by a Fund is subject, first, to the investment
adviser's ability to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions.
Even if the investment adviser has correctly predicted market movements, the
success of a futures position may be affected by imperfect correlations between
the price movements of the futures contract and the securities being hedged. A
Fund may purchase or sell futures contracts on any stock index or interest rate
index or instrument whose movements will, in the investment adviser's judgment,
have a significant correlation with movements in the prices of all or portions
of the Fund's portfolio securities. The correlation between price movements in
the futures contract and in the portfolio securities probably will not be
perfect, however, and may be affected by differences in historical volatility
or temporary price distortions in the futures markets. To attempt to compensate
for such differences, the Fund could purchase or sell futures contracts with a
greater or lesser value than the securities it wished to hedge or purchase.
Despite such efforts, the correlation between price movements in the futures
contract and the portfolio securities may be worse than anticipated, which
could cause the Fund to suffer losses even if the investment adviser had
correctly predicted the general movement of the market.
A Fund which engages in the purchase or sale of futures contracts may also
incur risks arising from illiquid markets. The ability of a Fund to close out a
futures position depends on the availability of a liquid market in the futures
contract, and such a market may not exist for a variety of reasons, including
daily limits on price movements in futures markets. In the event a Fund is
unable to close out a futures position because of illiquid markets, it would be
required to continue to make daily variation margin payments, and could suffer
losses due to market changes in the period before the futures position could be
closed out.
The trading of futures contracts is also subject to the risks of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Options on futures contracts are subject to risks similar to those described
above, and also to a risk of loss due to an imperfect correlation between the
option and the underlying futures contract.
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LOAN PARTICIPATIONS AND ASSIGNMENTS
The High Yield Bond Fund may invest in loan participations and assignments
(collectively "participations"). Such participations will typically be
participating interests in loans made by a syndicate of banks, represented by
an agent bank which has negotiated and structured the loan, to corporate
borrowers to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buyouts and other corporate activities. Such loans may also have been
made to governmental borrowers, especially governments of developing countries
(LDC debt). LDC debt will involve the risk that the governmental entity
responsible for the repayment of the debt may be unable or unwilling to do so
when due. The loans underlying such participations may be secured or unsecured,
and the Fund may invest in loans collateralized by mortgages on real property
or which have no collateral. The loan participations themselves may extend for
the entire term of the loan or may extend only for short "strips" that
correspond to a quarterly or monthly floating rate interest period on the
underlying loan. Thus, a term or revolving credit that extends for several
years may be subdivided into shorter periods.
The loan participations in which the High Yield Bond Fund will invest will
also vary in legal structure. Occasionally, lenders assign to another
institution both the lender's rights and obligations under a credit agreement.
Since this type of assignment relieves the original lender of its obligations,
it is called a novation. More typically, a lender assigns only its right to
receive payments of principal and interest under a promissory note, credit
agreement or similar document. A true assignment shifts to the assignee the
direct debtor-creditor relationship with the underlying borrower.
Alternatively, a lender may assign
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only part of its rights to receive payments pursuant to the underlying
instrument or loan agreement. Such partial assignments, which are more
accurately characterized as "participating interests," do not shift the debtor-
creditor relationship to the assignee, who must rely on the original lending
institution to collect sums due and to otherwise enforce its rights against the
agent bank which administers the loan or against the underlying borrower.
Because the High Yield Bond Fund is allowed to purchase debt securities,
including debt securities at private placement, the Fund will treat loan
participations as securities and not subject to its fundamental investment
restriction prohibiting the Fund from making loans.
There is not a recognizable, liquid public market for the loan
participations. Hence, the High Yield Bond Fund would consider loan
participations as illiquid securities and subject them to the Fund's
restriction on investing no more than 10% of assets in securities for which
there is no readily available market. The Fund would initially impose a limit
of no more than 5% of total assets in illiquid loan participations.
Where required by applicable SEC positions, the Fund will treat both the
corporate borrower and the bank selling the participation interest as an issuer
for purposes of its fundamental investment restriction which prohibits
investing more than 5% of Fund assets in the securities of a single issuer.
Various service fees received by the High Yield Bond Fund from loan
participations, may be treated as non-interest income depending on the nature
of the fee (commitment, takedown, commission, service or loan origination). To
the extent the service fees are not interest income, they will not qualify as
income under Section 851(b) of the Internal Revenue Code. Thus the sum of such
fees plus any other non-qualifying income earned by the Fund cannot exceed 10%
of total income.
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TRADE CLAIMS
The High Yield Bond may invest up to 5% of its total assets in trade claims.
Trade claims are non-securitized rights of payment arising from obligations
other than borrowed funds. Trade claims typically arise when, in the ordinary
course of business-, vendors and suppliers extend credit to a company by
offering payment terms. Generally, when a company files for bankruptcy
protection payments on these trade claims cease and the claims are subject to a
compromise along with the other debts of the company. Trade claims typically
are bought and sold at a discount reflecting the degree of uncertainty with
respect to the timing and extent of recovery. In addition to the risks
otherwise associated with low-quality obligations, trade claims have other
risks, including the possibility that the amount of the claim may be disputed
by the obligor.
Over the last few years a market for the trade claims of bankrupt companies
has developed. Many vendors are either unwilling or lack the resources to hold
their claim through the extended bankruptcy process with an uncertain outcome
and timing. Some vendors are also aggressive in establishing reserves against
these receivables, so that the sale of the claim at a discount may not result
in the recognition of a loss.
Trade claims can represent an attractive investment opportunity because these
claims typically are priced at a discount to comparable public securities. This
discount is a reflection of both a less liquid market, a smaller universe of
potential buyers and the risks peculiar to trade claim investing. It is not
unusual for trade claims to be priced at a discount to public securities that
have an equal or lower priority claim.
As noted above, investing in trade claims does carry some unique risks which
include:
ESTABLISHING THE AMOUNT OF THE CLAIM. Frequently, the supplier's estimate of
its receivable will differ from the customer's estimate of its payable.
Resolution of these differences can result in a reduction in the amount of the
claim. This risk can be reduced by only purchasing scheduled claims (claims
already listed as liabilities by the debtor) and seeking representations from
the seller.
DEFENSES TO CLAIMS. The debtor has a variety of defenses that can be asserted
under the bankruptcy code against any claim. Trade claims are subject to these
defenses, the most common of which for trade claims relates to preference
payments. (Preference payments are all payments made by the debtor during the
90 days prior to the filing. These payments are presumed to have benefitted the
receiving creditor at the expense of the other creditors. The receiving
creditor may be required to return the payment unless it can show the payments
were received in the ordinary course of business.) While none of these defenses
can result in any additional liability of the purchaser of the trade claim,
they can reduce or wipe out the entire purchased claim. This risk can be
reduced by seeking representations and indemnification from the seller.
DOCUMENTATION/INDEMNIFICATION. Each trade claim purchased requires
documentation that must be negotiated between the buyer and seller. This
documentation is extremely important since it can protect the purchaser from
losses such as those described above. Legal expenses in negotiating a purchase
agreement can be fairly high. Additionally, it is important to note that the
value of an indemnification depends on the seller's credit.
B-11
<PAGE>
VOLATILE PRICING DUE TO ILLIQUID MARKET. There are only a handful of brokers
for trade claims and the quoted price of these claims can be volatile. All
trade claims would be considered illiquid investments.
NO CURRENT YIELD/ULTIMATE RECOVERY. Trade claims are almost never entitled to
earn interest. As a result, the return on such an investment is very sensitive
to the length of the bankruptcy, which is uncertain. Although not unique to
trade claims, it is worth noting that the ultimate recovery on the claim is
uncertain and there is no way to calculate a conventional yield to maturity on
this investment. Additionally, the exit for this investment is a plan of
reorganization which may include the distribution of new securities. These
securities may be as illiquid as the original trade claim investment.
TAX ISSUE. Although the issue is not free from doubt, it is likely that trade
claims would be treated as nonsecurities investments. As a result, any gains
would be considered "non-qualifying" under the Internal Revenue Code. The High
Yield Bond Fund may have up to 10% of its gross income (including capital
gains) derived from non-qualifying sources.
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INVESTMENT RESTRICTIONS
Except as otherwise specified, the investment restrictions described below have
been adopted as fundamental policies of the eight respective Funds. Fundamental
policies may not be changed without the approval of the lesser of (1) 67% of a
Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (2) more than 50% of
the Fund's outstanding shares. Operating policies are subject to change by Penn
Series' Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrowings by, a Fund.
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GROWTH EQUITY FUND
Investment restrictions (1) through (14) and (20) through (22) described
below have been adopted by the Growth Equity Fund and are fundamental policies,
except as otherwise indicated. Restrictions (15) through (19) are operating
policies which are subject to change by the Board of Directors without
shareholder approval.
The Fund may not: (1) PERCENT LIMIT ON ASSETS INVESTED IN ANY ONE ISSUER.
Purchase any securities which would cause more than 5% of its total assets at
the time of such purchase to be invested in the securities of any issuer,
except for securities issued or guaranteed by the U.S. Government; (2) PERCENT
LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE. Purchase any securities which would
cause the Fund at the time of such purchase to own more than 10% of the
outstanding securities of any class of any issuer; (3) UNSEASONED ISSUERS.
Purchase the securities of any issuer engaged in continuous operation for less
than three years; (4) INDUSTRY CONCENTRATION. Purchase any securities which
would cause more than 25% of its total assets at the time of such purchase to
be concentrated in the securities of issuers engaged in any one industry; (5)
REAL ESTATE. Purchase or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate; (6) COMMODITIES. Purchase or sell commodities or commodity contracts;
except that it may enter into futures contracts subject to (22) below; (7)
INVESTMENT COMPANIES. Acquire the securities of any investment company, except
securities purchased in regular transactions in the open market or acquired
pursuant to a plan of merger or consolidation (to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder); (8) SHORT
SALES AND PURCHASES ON MARGIN. Effect short sales of securities or purchase
securities on margin, except for use of short-term credit necessary for
clearance of purchases of portfolio securities, and except for margin deposits
made in connection with futures contracts, subject to (22) below; (9) LOANS.
Make loans, except that it may (i) acquire publicly distributed bonds,
debentures, notes, and other debt securities, and (ii) lend portfolio
securities provided that no such loan may be made if as a result the aggregate
of such loans would exceed 30% of the value of the Fund's total assets; (10)
BORROWING. Borrow money, except the Fund may borrow from banks as a temporary
measure for extraordinary or emergency purposes, and then only in amounts not
exceeding 15% of its total assets valued at market. The Fund will not borrow in
order to increase income (leveraging), but only to facilitate redemption
requests which might otherwise require untimely disposition of portfolio
securities. Interest paid on such borrowings will reduce net investment income.
The Fund may also enter into futures contracts as set forth in (22) below; (11)
UNDERWRITING. Act as an underwriter of securities, except insofar as it might
technically be deemed to be an underwriter for purposes of the Securities Act
of 1933 upon disposition of certain securities; (12) SECURITIES OF ADVISER.
Purchase or retain the securities of its investment adviser, or of any
corporation of which any officer, director, or member of the investment
committee of the investment adviser is a director; (13) ALLOCATION OF PRINCIPAL
BUSINESS TO OFFICERS AND DIRECTORS. Deal with any of its officers or directors,
or with any firm of which any of its officers or directors is a member, as
principal in the purchase or sale of portfolio securities; (14) ALLOCATION OF
BROKERAGE BUSINESS TO ADVISER. Pay commissions on portfolio transactions to its
investment adviser or to any officer or director of its investment adviser;
(15) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of
exercising management or control; (16) RESTRICTED AND ILLIQUID SECURITIES.
Purchase any securities which wold cause more
B-12
<PAGE>
than 5% of its total assets at the time of such purchase to be invested in
securities which may not be publicly sold without registration under the
Securities Act of 1933, or are otherwise illiquid or not readily marketable;
(17) PUTS, CALLS, ETC. Invest in puts, calls, straddles, spreads, or any
combination thereof, except that the Fund reserves the right to write covered
call options and purchase put and call options; (18) OIL AND GAS PROGRAMS.
Purchase participations or other direct interests in oil, gas, or other mineral
exploration or development programs; (19) OWNERSHIP OF PORTFOLIO SECURITIES BY
OFFICERS AND DIRECTORS. Purchase or retain the securities of any issuer if
those officers or directors of Penn Series, or of its investment adviser, who
each owns beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities; (20)
MORTGAGING. Mortgage, pledge, or hypothecate or, in any other manner, transfer
as security for indebtedness any security owned by the Growth Equity Fund,
except (i) as may be necessary in connection with permissible borrowings, in
which event such mortgaging, pledging, or hypothecating may not exceed 15% of
the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market, and (ii) it may enter into futures contracts; (21)
SENIOR SECURITIES. Issue any class of securities senior to any other class of
securities; or (22) FUTURES CONTRACTS. Enter into a futures contract if, as a
result thereof, (i) the then current aggregate futures market prices of
securities required to be delivered under open futures contract sales plus the
then current aggregate purchase prices of securities required to be purchased
under open futures contract purchases would exceed 30% of the Fund's total
assets (taken at market value at the time of entering into the contract) or
(ii) more than 5% of the Fund's total assets (taken at market value at the time
of entering into the contract) would be committed to margin on such futures
contracts or to premiums on options thereon.
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VALUE EQUITY FUND
Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and (15)
are fundamental policies of the Value Equity Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; (D) UNSEASONED
ISSUERS. More than 5% of the value of the Value Equity Fund's total assets
would be invested in the securities of issuers which at the time of purchase
had been in operation for less than three years, including predecessors and
unconditional guarantors; (2) RESTRICTED OR NOT READILY MARKETABLE SECURITIES.
Purchase a security if, as a result, more than 10% of the Fund's total assets
would be invested in (a) securities with legal or contractual restrictions on
resale; (b) repurchase agreements maturing in more than seven (7) days; and (c)
other securities that are not readily marketable; (3) REAL ESTATE. Purchase or
sell real estate (although it may purchase money market securities secured by
real estate or interests therein, or issued by companies which invest in real
estate or interests therein); (4) INVESTMENT COMPANIES. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
COMMODITIES. Purchase or sell commodities or commodity contracts; except that
it may enter into futures contracts subject to (15) below; (6) OIL AND GAS
PROGRAMS. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (7) SHORT SALES AND
PURCHASES ON MARGIN. Effect short sales of securities or purchase securities on
margin, except for use of short-term credit necessary for clearance of
purchases of portfolio securities, except that it may make margin deposits in
connection with futures contracts, subject to (15) below; (8) LOANS. Make
loans, although the Fund may (i) purchase money market securities and enter
into repurchase agreements, and (ii) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans would exceed
30% of the value of the Fund's total assets; provided, however, that the Fund
may acquire publicly distributed bonds, debentures, notes and other debt
securities and may purchase debt securities at private placement within the
limits imposed on the acquisition of restricted securities; (9) BORROWING.
Borrow money, except from banks as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 15% of its total
assets valued at market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities; interest paid on any such
borrowings will reduce net investment income; the Fund may also enter into
futures contracts as set forth in (15) below; (10) MORTGAGING. Mortgage,
pledge, or hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except (i) as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a
B-13
<PAGE>
matter of operating policy, which may be changed without shareholder approval,
the Fund will limit any such mortgaging, pledging, or hypothecating to 10% of
its net assets, valued at market; and (ii) it may enter into futures contracts;
(11) UNDERWRITING. Underwrite securities issued by other persons except: (i) to
the extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with he purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the acquisition of
restricted securities; (12) CONTROL OF PORTFOLIO COMPANIES. Invest in companies
for the purpose of exercising management or control; (13) OWNERSHIP OF
PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or retain the
securities of any issuer if, to the knowledge of the Fund's management or
investment adviser, those officers and directors of Penn Series, and of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (14) SENIOR SECURITIES. Issue any class of securities senior to any
other class of securities; or (15) FUTURES CONTRACTS. Enter into a futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of securities required to be delivered under open futures contract sales
plus the then current aggregate purchase prices of securities required to be
purchased under open futures contract purchases would exceed 30% of the Fund's
total assets (taken at market value at the time of entering into the contract)
or (ii) more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin on such
futures contracts or to premiums on options thereon.
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SMALL CAPITALIZATION FUND
Investment restrictions (1) through (9) are fundamental policies of the Small
Capitalization Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.
The Fund may not: (1) DIVERSIFICATION. Make an investment unless, when
considering all its other investments, 75% of the value of the Fund's assets
would consist of cash, cash items, obligations of the U.S. Government, its
agencies or instrumentalities and other securities. For purposes of this
restriction, "other securities" are limited for each issuer to not more than 5%
of the value of the Fund's assets and to not more than 10% of the issuer's
outstanding voting securities held by Penn Series as a whole; (2) INDUSTRY
CONCENTRATION. Invest more than twenty-five percent or more of the value of the
Fund's total assets in the securities of issuers having their principal
business activities in the same industry; (3) REAL ESTATE. Invest in real
estate or interests in real estate, but may purchase readily marketable
securities of companies holding real estate or interests therein, and
securities which are secured by real estate or interests therein; (4)
COMMODITIES. Invest in physical commodities or physical commodity contracts,
but it may purchase and sell financial futures contracts and options thereon;
(5) PURCHASES ON MARGIN. Purchase securities on margin, except that it may make
margin deposits in connection with financial futures contracts or options; (6)
LOANS. Make loans, although the Fund may (i) purchase money market securities
and enter into repurchase agreements, and (ii) lend portfolio securities
provided that no such loan may be made if, as a result, the aggregate of such
loans would exceed 30% of the value of the Fund's total assets; provided,
however, that the Fund may acquire publicly distributed bonds, debentures,
notes and other debt securities and may purchase debt securities at private
placement within the limits imposed on the acquisition of restricted
securities; (7) BORROWING. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 15% of its total assets valued at market; the Fund
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities; (8) UNDERWRITING. Underwrite securities
issued by other persons except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (9) SENIOR
SECURITIES. Issue any class of securities senior to any other class of
securities. Entering into repurchase agreements, borrowing money in accordance
with restriction 7 above, or lending portfolio securities in accordance with
restriction 6 above, shall not be considered for purposes of the present
restriction a senior security; (10) CONTROL OF PORTFOLIO COMPANIES. Invest in
companies for the purpose of exercising management or control; (11) OWNERSHIP
OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
any officer or director of the Adviser, owns more than .5% of the outstanding
securities of such issuer, and such officers and directors who own more than
.5% own in the aggregate more than 5% of the such securities; (12) OIL AND GAS
PROGRAMS. Invest in oil, gas or mineral exploration or developmental programs,
except that it may invest in the securities of companies which operate, invest
in, or sponsor such programs; (13) RESTRICTED OR NOT READILY MARKETABLE
SECURITIES. Purchase a security if, as a result, more than 10% of the Fund's
total assets would be invested in illiquid securities; (14) SHORT SALES. Effect
short sales of securities, except short sales "against the box;"
(15) MORTGAGING. Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security
B-14
<PAGE>
owned by the Fund, except as may be necessary in connection with permissible
borrowings (including reverse repurchase agreements) financial options and
other hedging activities.
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EMERGING GROWTH FUND
Investment restrictions (1) through (9) are fundamental policies of the Small
Capitalization Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.
The Fund may not: (1) DIVERSIFICATION. Make an investment unless, when
considering all its other investments, 75% of the value of the Fund's assets
would consist of cash, cash items, obligations of the U.S. Government, its
agencies or instrumentalities and other securities. For purposes of this
restriction, "other securities" are limited for each issuer to not more than 5%
of the value of the Fund's assets and to not more than 10% of the issuer's
outstanding voting securities held by Penn Series as a whole; (2) INDUSTRY
CONCENTRATION. Invest more than twenty-five percent or more of the value of the
Fund's total assets in the securities of issuers having their principal
business activities in the same industry; (3) REAL ESTATE. Invest in real
estate or interests in real estate, but may purchase readily marketable
securities of companies holding real estate or interests therein, and
securities which are secured by real estate or interests therein; (4)
COMMODITIES. Invest in physical commodities or physical commodity contracts,
but it may purchase and sell financial futures contracts and options thereon;
(5) PURCHASES ON MARGIN. Purchase securities on margin, except that it may make
margin deposits in connection with financial futures contracts or options; (6)
LOANS. Make loans, although the Fund may (i) purchase money market securities
and enter into repurchase agreements, and (ii) lend portfolio securities
provided that no such loan may be made if, as a result, the aggregate of such
loans would exceed 30% of the value of the Fund's total assets; provided,
however, that the Fund may acquire publicly distributed bonds, debentures,
notes and other debt securities and may purchase debt securities at private
placement within the limits imposed on the acquisition of restricted
securities; (7) BORROWING. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 15% of its total assets valued at market; the Fund
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities; (8) UNDERWRITING. Underwrite securities
issued by other persons except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (9) SENIOR
SECURITIES. Issue any class of securities senior to any other class of
securities. Entering into repurchase agreements, borrowing money in accordance
with restriction 7 above, or lending portfolio securities in accordance with
restriction 6 above, shall not be considered for purposes of the present
restriction a senior security; (10) CONTROL OF PORTFOLIO COMPANIES. Invest in
companies for the purpose of exercising management or control; (11) OWNERSHIP
OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
any officer or director of the Adviser, owns more than .5% of the outstanding
securities of such issuer, and such officers and directors who own more than
.5% own in the aggregate more than 5% of the such securities; (12) OIL AND GAS
PROGRAMS. Invest in oil, gas or mineral exploration or developmental programs,
except that it may invest in the securities of companies which operate, invest
in, or sponsor such programs; (13) RESTRICTED OR NOT READILY MARKETABLE
SECURITIES. Purchase a security if, as a result, more than 10% of the Fund's
total assets would be invested in illiquid securities; (14) SHORT SALES. Effect
short sales of securities, except short sales "against the box;"
(15) MORTGAGING. Mortgage, pledge, hypothecate or, in any other manner,
transfer as security for indebtedness any security owned by the Fund, except as
may be necessary in connection with permissible borrowings (including reverse
repurchase agreements) financial options and other hedging activities.
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND
Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and (15)
are fundamental policies of the Flexibly Managed Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Flexibly Managed Fund may not: (1) purchase the securities of any issuer
(other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS
INVESTED IN ANY ONE ISSUER. With respect to 75% of the Fund's assets, invest
more than 5% of the value of the Fund's total assets in the securities of a
single issuer (including repurchase agreements with any one issuer); (B)
PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE. More than 10% of the
outstanding voting securities of any issuer would be held by the Fund; (C)
INDUSTRY CONCENTRATION. Twenty-five percent or more of the value of the Fund's
total assets would be invested in the securities of
B-15
<PAGE>
issuers having their principal business activities in the same industry;
provided, however, that the Fund will normally concentrate 25% or more of its
assets in the banking industry when the Fund's position in issues maturing in
one year or less equals 35% or more of the Fund's total assets; (D) UNSEASONED
ISSUERS. More than 5% of the value of the Fund's total assets would be invested
in the securities of issuers which at the time of purchase had been in
operation for less than three years, including predecessors and unconditional
guarantors; (2) RESTRICTED OR NOT READILY MARKETABLE SECURITIES. Purchase a
security if, as a result, more than 10% of the value of the Fund's total assets
would be invested in: (a) securities with legal or contractual restrictions on
resale; (b) repurchase agreements maturing in more than seven (7) days; and (c)
other securities that are not readily marketable; (3) REAL ESTATE. Purchase or
sell real estate (although it may purchase money market securities secured by
real estate or interests therein, or issued by companies which invest in real
estate or interests therein); (4) INVESTMENT COMPANIES. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
COMMODITIES. Purchase or sell commodities or commodity contracts; except that
it may enter into futures contracts, subject to (15) below; (6) OIL AND GAS
PROGRAMS. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (7) SHORT SALES AND
PURCHASES ON MARGIN. Effect short sales of securities or purchase securities on
margin, except for use of short-term credit necessary for clearance of
purchases of portfolio securities; except that it may make margin deposits in
connection with futures contracts, subject to (15) below; (8) LOANS. Make
loans, although the Fund may (i) purchase money market securities and enter
into repurchase agreements, and (ii) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans would exceed
30% of the value of the Fund's total assets; provided, however, that the Fund
may acquire publicly distributed bonds, debentures, notes and other debt
securities and may purchase debt securities at private placement within the
limits imposed on the acquisition of restricted securities; (9) BORROWING.
Borrow money, except the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes, and then only in amounts not exceeding 15%
of its total assets valued at market; the Fund will not borrow in order to
increase income (leveraging), but only to facilitate redemption requests which
might otherwise require untimely disposition of portfolio securities. Interest
paid on any such borrowings will reduce net investment income. The Fund may
enter into futures contracts as set forth in (15) below; (10) MORTGAGING.
Mortgage, pledge, hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except (i) as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy, which may be
changed without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market, and (ii)
it may enter into futures contracts; (11) UNDERWRITING. Underwrite securities
issued by other persons, except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
conection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (12) CONTROL OF
PORTFOLIO COMPANIES. Invest in companies for the purpose of exercising
management or control; (13) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND
DIRECTORS. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund's management or investment adviser, those officers and directors of
the Penn Series, and of its investment adviser, who each owns beneficially more
than .5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities; (14) SENIOR SECURITIES. Issue any
class of securities senior to any other class of securities; or (15) FUTURES
CONTRACTS. Enter into a futures contract if, as a result thereof, (i) the then
current aggregate futures market prices of securities required to be delivered
under open futures contract sales plus the then current aggregate purchase
prices of securities required to be purchased under open futures contract
purchases would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract) or (ii) more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to margin on such futures contracts or to premiums on
options thereon.
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and (15)
are fundamental policies of the International Equity Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business
B-16
<PAGE>
activities in the same industry; (D) UNSEASONED ISSUERS. More than 5% of the
value of the Fund's total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three years,
including predecessors and unconditional guarantors; (2) RESTRICTED OR NOT
READILY MARKETABLE SECURITIES. Purchase a security if, as a result, more than
10% of the Fund's total assets would be invested in (a) securities with legal
or contractual restrictions on resale; (b) repurchase agreements maturing in
more than seven (7) days; and (c) other securities that are not readily
marketable; (3) REAL ESTATE. Purchase or sell real estate (although it may
purchase money market securities secured by real estate or interests therein,
or issued by companies which invest in real estate or interests therein); (4)
INVESTMENT COMPANIES. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) COMMODITIES. Purchase or sell commodities
or commodity contracts; except that it may enter into futures contracts subject
to (15) below; (6) OIL AND GAS PROGRAMS. Purchase participations or other
direct interests in oil, gas, or other mineral exploration or development
programs; (7) SHORT SALES AND PURCHASES ON MARGIN. Effect short sales of
securities or purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio securities, except
that it may make margin deposits in connection with futures contracts, subject
to (15) below; (8) LOANS. Make loans, although the Fund may (i) purchase money
market securities and enter into repurchase agreements, and (ii) lend portfolio
securities provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 30% of the value of the Fund's total
assets; provided, however, that the Fund may acquire publicly distributed
bonds, debentures, notes and other debt securities and may purchase debt
securities at private placement within the limits imposed on the acquisition of
restricted securities; (9) BORROWING. Borrow money, except from banks as a
temporary measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 15% of its total assets valued at market. The Fund will
not borrow in order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrowings will reduce net
investment income. The Fund may also enter into futures contracts as set forth
in (15) below; (10) MORTGAGING. Mortgage, pledge, or hypothecate or, in any
other manner, transfer as security for indebtedness any security owned by the
Fund, except (i) as may be necessary in connection with permissible borrowings,
in which event such mortgaging, pledging, or hypothecating may not exceed 15%
of the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market; and (ii) it may enter into futures contracts; (11)
UNDERWRITING. Underwrite securities issued by other persons except: (i) to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with he purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the acquisition of
restricted securities; (12) CONTROL OF PORTFOLIO COMPANIES. Invest in companies
for the purpose of exercising management or control; (13) OWNERSHIP OF
PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or retain the
securities of any issuer if, to the knowledge of the Fund's management or
investment adviser, those officers and directors of Penn Series, and of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (14) SENIOR SECURITIES. Issue any class of securities senior to any
other class of securities; or (15) FUTURES CONTRACTS. Enter into a futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of securities required to be delivered under open futures contract sales
plus the then current aggregate purchase prices of securities required to be
purchased under open futures contract purchases would exceed 30% of the Fund's
total assets (taken at market at the time of entering into the contract) or
(ii) more than 5% of the Fund's total assets (taken at market value at the time
of entering into the contract) would be committed to margin on such futures
contracts or to premiums on options thereon.
- --------------------------------------------------------------------------------
QUALITY BOND FUND
Investment restrictions (1), (2), (4) through (9), (14) and (15) have been
adopted by the Quality Bond Fund as fundamental policies, except as otherwise
indicated. Restrictions (3) and (10) through (13) are operating policies
subject to change by the Board of Directors without shareholder approval.
The Fund may not (1) purchase a security if, as a result: (A) PERCENT LIMIT
ON ASSETS INVESTED IN ANY ONE ISSUER. More than 5% of the value of the Fund's
total assets would be invested in the securities of a single issuer, except
securities issued or guaranteed by the U.S. Government, or any of its agencies
or instrumentalities; (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund, except securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities; (C) INDUSTRY CONCENTRATION. Twenty-
five percent or more of the value of the Fund's total assets would be invested
in the securities of issuers having their principal activities in the same
industry; provided, however, that the Fund will invest 25% or more of its
assets, but not more than 50%, in any one of the gas utility, gas transmission
utility, electric utility, telephone utility, and petroleum industries under
certain
B-17
<PAGE>
circumstances (see THE QUALITY BOND FUND'S POLICY REGARDING INDUSTRY
CONCENTRATION above), but this limitation does not apply to bank certificates
of deposit; (D) UNSEASONED ISSUERS. More than 5% of the value of the Fund's
total assets would be invested in the securities (taken at cost) of issuers
which at the time of purchase had been in operation less than three years (for
this purpose, the period of operation of any issuer shall include the period of
operation of any predecessor or unconditional guarantor of the issuer) and in
equity securities which are not readily marketable for reasons other than
restrictions against sale to the public without registration under the
Securities Act of 1933; (E) RESTRICTED SECURITIES. More than 10% of the value
of the total assets of the Fund would be invested in securities which are
subject to legal or contractual restrictions on resale; or (F) WARRANTS. More
than 2% of the value of the total assets of the Fund would be invested in
warrants which are not listed on the New York Stock Exchange or the American
Stock Exchange, or more than 5% of the value of the total assets of the Fund
would be invested in warrants whether or not so listed, such warrants in each
case to be valued at the lesser of cost or market, but assigning no value to
warrants acquired by the Fund in units with or attached to debt securities; (2)
REAL ESTATE. Purchase or sell real estate (although it may purchase securities
of companies whose business involves the purchase or sale of real estate); (3)
INVESTMENT COMPANIES. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (4) COMMODITIES. Purchase or sell commodities
or commodity contracts, except that the Fund may enter into interest rate
futures contracts, subject to (15) below; (5) SHORT SALES AND PURCHASES ON
MARGIN. Purchase securities on margin or effect short sales of securities, but
the Fund may make margin deposits in connection with interest rate futures
transactions subject to (15) below; (6) LOANS. Make loans (although it may
acquire publicly-distributed bonds, debentures, notes, and other debt
securities, may enter into repurchase agreements, may lend portfolio
securities, and may purchase debt securities at private placement within the
limits imposed above on the acquisition of restricted securities); (7)
BORROWING. Borrow money, except the Fund may (i) borrow money for temporary
administrative purposes and then only in amounts not exceeding the lesser of
10% of its total assets valued at cost, or 5% of its total assets valued at
market and, in any event, only if immediately thereafter there is an asset
coverage of at least 300%, and (ii) enter into interest rate futures contracts;
(8) MORTGAGING. Mortgage, pledge, or hypothecate securities, except (i) in
connection with permissible borrowings where the market value of the securities
mortgaged, pledged, or hypothecated does not exceed 15% of the Fund's assets
taken at cost; provided, however, that as a matter of operating policy, the
Fund will limit any such mortgaging, pledging, or hypothecating to 10% of its
net assets, taken at market, in order to comply with certain state investment
restrictions, and (ii) interest rate futures contracts; (9) UNDERWRITING. Act
as an underwriter of securities, except insofar as it might be deemed to be
such for purposes of the Securities Act of 1933 upon the disposition of certain
portfolio securities acquired within the limitations of restriction (e) above;
(10) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or
retain securities of any issuer if, to the knowledge of the Fund's management
or investment adviser, those officers or directors of Penn Series, or of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (11) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the
purpose of exercising management or control; (12) PUTS, CALLS, ETC. Invest in
puts, calls, straddles, spreads, or any combination thereof, except the Fun
reserves the right to write covered call options and purchase put and call
options; (13) OIL AND GAS PROGRAMS. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(14) SENIOR SECURITIES. Issue any class of securities senior to any other class
of securities; or (15) FUTURES CONTRACTS. Enter into an interest rate futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of financial instruments required to be delivered under open futures
contract sales plus the then current aggregate purchase prices of financial
instruments required to be purchased under open futures contract purchases
would exceed 30% of the Fund's total assets (taken at market value at the time
of entering into the contract) or (ii) more than 5% of the Fund's total assets
(taken at market value at the time of entering into the contract) would be
committed to margin on such futures contracts or to premiums on options
thereon.
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
Investment restrictions (1) through (4), (6), (8) through (12), and (16)
through (17) have been adopted by the High Yield Bond Fund as fundamental
policies, except as otherwise indicated. Restrictions (5), (7), (13) through
(15), and (18) through (20) are operating policies subject to change by the
Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; provided,
however, that the Fund will normally concentrate 25% or more of its assets in
the
B-18
<PAGE>
securities of the banking industry when the Fund's position in issues maturing
in one year or less equals 35% or more of the Fund's total assets; (D)
UNSEASONED ISSUERS. More than 5% of the value of the Fund's total assets would
be invested in the securities of issuers which at the time of purchase had been
in operation for less than three years, including predecessors and
unconditional guarantors; (2) EQUITY SECURITIES. Invest more than 20% of the
Fund's total assets in common stocks (including up to 5% in warrants); (3)
RESTRICTED OR ILLIQUID SECURITIES. Invest more than 10% of the value of its
total assets in repurchase agreements maturing in more than seven days and
restricted securities, illiquid securities and securities without readily
available market quotations; (4) REAL ESTATE. Purchase or sell real estate
(although it may purchase money market securities secured by real estate or
interests therein, or issued by companies which invest in real estate or
interests therein); (5) INVESTMENT COMPANIES. Purchase securities of open-end
or closed-end investment companies except in compliance with the Investment
Company Act of 1940; (6) COMMODITIES. Purchase or sell commodities or commodity
contracts, except that it may enter into interest rate futures contracts,
subject to (17) below; (7) OIL AND GAS PROGRAMS. Purchase participations or
other direct interests in or enter into leases with respect to oil, gas, or
other mineral exploration or development programs; (8) PURCHASES ON MARGIN.
Purchase securities on margin, except for use of short-term credit necessary
for clearance of purchases of portfolio securities; except that it may make
margin deposits in connection with interest rate futures contracts, subject to
(17) below; (9) LOANS. Make loans, although the Fund may (i) purchase money
market securities and enter into repurchase agreements, and (ii) lend portfolio
securities provided that no such loan may be made if as a result the aggregate
of such loans would exceed 30% of the value of the Fund's total assets;
provided, however, that the Fund may acquire publicly-distributed bonds,
debentures, notes and other debt securities and may purchase debt securities at
private placement within the limits imposed on the acquisition of restricted
securities; (10) BORROWING. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 15% of its total assets valued at market; the Fund
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities. Interest paid on any such borrowings will
reduce net investment income; the Fund may enter into interest rate futures
contracts as set forth in (17) below; (11) MORTGAGING. Mortgage, pledge,
hypothecate or, in any other manner, transfer as security for indebtedness any
security owned by the Fund, except (i) as may be necessary in connection with
permissible borrowings, in which event such mortgaging, pledging, or
hypothecating may not exceed 15% of the Fund's assets, valued at cost;
provided, however, that as a matter of operating policy, which may be changed
without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market, and (ii)
it may enter into interest rate futures contracts; (12) UNDERWRITING.
Underwrite securities issued by other persons, except: (i) to the extent that
the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase of government securities
directly from the issuer in accordance with the Fund's investment objectives,
program, and restrictions; and (ii) the later disposition of restricted
securities acquired within the limits imposed on the acquisition of restricted
securities; (13) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the
purpose of exercising management or control; (14) OWNERSHIP OF PORTFOLIO
SECURITIES BY OFFICERS AND DIRECTORS. Purchase or retain the securities of any
issuer if, to the knowledge of the Fund's management or investment adviser,
those officers and directors of Penn Series, and of its investment manager, who
each owns beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities; (15) PUTS,
CALLS, ETC. Invest in puts, calls, straddles, spreads, or any combination
thereof, except to the extent permitted by the prospectus and Statement of
Additional Information; (16) SENIOR SECURITIES. Issue any class of securities
senior to any other class of securities; (17) FUTURES CONTRACTS. Enter into an
interest rate futures contract if, as a result thereof, (i) the then current
aggregate futures market prices of financial instruments required to be
delivered under open futures contract sales plus the then current aggregate
purchase prices of financial instruments required to be purchased under open
futures contract purchases would exceed 30% of the Fund's total assets (taken
at market value at the time of entering into the contract) or (ii) more than 5%
of the Fund's total assets (taken at market value at the time of entering into
the contract) would be committed to margin on such futures contracts or to
premiums on options thereon; (18) PURCHASES WHEN BORROWINGS OUTSTANDING.
Purchase additional securities when money borrowed exceeds 5% of the Fund's
total assets; (19) SHORT SALES. Effect short sales of securities; or (20)
WARRANTS. Invest in warrants if, as a result thereof, more than 2% of the value
of the total assets of the Fund would be invested in warrants which are not
listed on the New York Stock Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of the value of the total assets
of the Fund would be invested in warrants whether or not so listed. For
purposes of these percentage limitations, the warrants will be valued at the
lower of cost or market and warrants acquired by the Fund in units or attached
to securities may be deemed to be without value.
- --------------------------------------------------------------------------------
MONEY MARKET FUND
Investment restrictions (1) through (4), (6), (8) through (12), and (16)
described below have been adopted by the Money Market Fund and are fundamental
policies, except as otherwise indicated. Restrictions (5), (7), and (13)
through (15) are operating policies subject to change by the Board of Directors
without shareholder approval.
B-19
<PAGE>
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; provided, that
this limitation does not apply to obligations issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities, or to certificates of
deposit, or bankers' acceptances; (D) UNSEASONED ISSUERS. More than 5% of the
value of the Fund's total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three years,
including predecessors and unconditional guarantors; (2) EQUITY SECURITIES.
Purchase any common stocks or other equity securities, or securities
convertible into equity securities; (3) RESTRICTED OR ILLIQUID SECURITIES.
Purchase restricted securities, illiquid securities, or securities without
readily available market quotations, or invest more than 10% of the value of
its total assets in repurchase agreements maturing in more than seven days and
in the obligations of small banks and savings and loan associations which do
not have readily available market quotations; (4) REAL ESTATE. Purchase or sell
real estate (although it may purchase money market securities secured by real
estate or interests therein, or issued by companies which invest in real estate
or interests therein); (5) INVESTMENT COMPANIES. Purchase securities of open-
end and closed-end investment companies, except to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder; (6)
COMMODITIES. Purchase or sell commodities or commodity contracts; (7) OIL AND
GAS PROGRAMS. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (8) PURCHASES ON MARGIN.
Purchase securities on margin, except for use of short-term credit necessary
for clearance of purchases of portfolio securities; (9) LOANS. Make loans,
although the Fund may (i) purchase money market securities and enter into
repurchase agreements, and (ii) lend portfolio securities provided that no such
loan may be made if, as a result, the aggregate of such loans would exceed 30%
of the value of the Fund's total assets; (10) BORROWING. Borrow money, except
that the Fund may borrow from banks as a temporary measure for extraordinary or
emergency purposes, and then only from banks in amounts not exceeding the
lesser of 10% of its total assets valued at cost or 5% of its total assets
valued at market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities. Interest paid on any such
borrowings will reduce net investment income; (11) MORTGAGING. Mortgage,
pledge, hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy, which may be
changed without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market; (12)
UNDERWRITING. Underwrite securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; (13) CONTROL OF PORTFOLIO COMPANIES.
Invest in companies for the purpose of exercising management or control; (14)
OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or retain
the securities of any issuer if, to the knowledge of the Fund's management or
investment adviser, those officers and directors of Penn Series, and of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (15) PUTS, CALLS, ETC. Invest in puts, calls, straddles, spreads,
or any combination thereof; or (16) SENIOR SECURITIES. Issue any class of
securities senior to any other class of securities.
In addition to the foregoing, the Money Market Fund will restrict its
investments in accordance with the portfolio quality, diversification and
maturity standards contained in Rule 2a-7 under the Investment Company Act of
1940. See "INVESTMENT OBJECTIVES AND POLICIES - MONEY MARKET FUND" in the
prospectus for certain of the restrictions contained in the Rule.
B-20
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
PRICE ASSOCIATES. On March 1, 1987, T. Rowe Price Associates ("Price
Associates") began serving as the investment adviser of Penn Series, Price
Associates provides the Flexibly Managed and High Yield Bond Funds with
discretionary investment services. Specifically, Price Associates is
responsible for supervising and directing the investments of the Flexibly
Managed and High Yield Bond Funds in accordance with each Fund's investment
objectives, programs, and restrictions as described in the Penn Series
prospectus and this Statement of Additional Information. Price Associates is
also responsible for effecting all security transactions on behalf of the
Flexibly Managed and High Yield Bond Funds, including the allocation of
portfolio brokerage and the negotiation of commissions, as well as the
selection of dealers with whom securities transactions are effected. Price
Associates provided these investment advisory services under the Original
Advisory Agreement.
The Flexibly Managed and High Yield Bond Funds each pay Price Associates, on
a monthly basis, an advisory fee based on the average daily net assets of each
Fund at the annual rate of 0.50%.
INDEPENDENCE CAPITAL MANAGEMENT. Independence Capital Management, Inc.
("Independence Capital Management") began serving as the investment adviser to
the Growth Equity, Quality Bond and Money Market Funds of Penn Series on
November 1, 1992. Independence Capital Management is responsible for
supervising and directing the investments of the Funds in accordance with each
Fund's investment objectives, programs, and restrictions as described in the
Penn Series prospectus and statement of additional information. Independence
Capital Management is also responsible for effecting all securities
transactions on behalf of the Growth Equity, Quality Bond and Money Market
Funds, including the allocation of portfolio brokerage and the negotiation of
commissions, as well as the selection of dealers with whom securities
transactions are effected.
The Growth Equity, Quality Bond and Money Market Funds each pay Independence
Capital Management, on a monthly basis, an advisory fee based on the average
daily net assets of each Fund at the following annual rates: Growth Equity
Fund, 0.50%; Quality Bond Fund, 0.45%; Money Market Fund, 0.40%. These rates
are reduced by 0.05% (five basis points) for the assets of each Fund over $100
million.
Independence Capital Management is also the investment adviser to Penn
Series' newest Fund, the Emerging Growth Fund. Independence Capital Management
has entered into an investment sub-advisory agreement with Robertson Stephens
Investment Management, Inc. ("Robertson Stephens"), under which Robertson
Stephens manages the investments of the Fund on a day-to-day basis.
Independence Capital Management will oversee and monitor Robertson Stephens and
will provide the Board of Directors with information and analyses on investment
decisions and results.
The Emerging Markets Fund pays Independence Capital Management, on a monthly
basis, an advisory fee based on the average daily net assets of the Fund. The
advisory fee is paid at the following rates: (i) 0.80% of the first $25,000,000
of average daily net assets of the Fund; (ii) 0.75% of the next $25,000,000 of
average daily net assets of the Fund; and (iii) 0.70% of average daily net
assets of the Fund in excess of $50,000,000.
OPCAP ADVISORS. OpCap Advisors ("OpCap Advisors") (formerly Quest for Value
Advisors), a general partnership of which Oppenheimer Capital holds a 99%
interest, began serving as the investment adviser to the Value Equity Fund on
November 1, 1992 and investment adviser to the Small Capitalization Fund on
March 1, 1995. OpCap Advisors provides the Value Equity and Small
Capitalization Funds with discretionary investment services. OpCap Advisors is
responsible for supervising and directing the investments of the Funds in
accordance each Fund's investment objectives, programs, and restrictions as
described in the Penn Series prospectus and Statement of Additional
Information. OpCap Advisors is also responsible for effecting all securities
transactions on behalf of the Funds, including the allocation of portfolio
brokerage and the negotiation of commissions, as well as the selection of
dealers with whom securities transactions are effected.
The Value Equity and the Small Capitalization Funds pay OpCap Advisors, on a
monthly basis, advisory fees based on the average daily net assets of each Fund
at the annual rate of 0.50%.
Information on the proposed sale of a controlling interest of Oppenheimer
Capital is set forth in the prospectus under "MANAGEMENT OF PENN SERIES FUNDS,
INC.--INVESTMENT ADVISERS."
VONTOBEL. Vontobel USA, Inc. ("Vontobel"), a wholly-owned subsidiary of
Vontobel Holding Ltd., began serving as the investment adviser to the
International Equity Fund on November 1, 1992. Vontobel provides the
International Equity Fund with discretionary investment services. Vontobel is
responsible for supervising and directing the investments of the International
Equity Fund in accordance with the Fund's investment objectives, programs, and
restrictions as described in the Penn Series prospectus and Statement of
Additional Information. Vontobel is also responsible for effecting all
securities transactions on behalf of the International Equity Fund, including
the allocation of portfolio brokerage and the negotiation of commissions, as
well as the selection of dealers with whom securities transactions are
effected.
B-21
<PAGE>
The International Equity Fund pays Vontobel, on a monthly basis, an advisory
fee based on the average daily net assets of the Fund at the annual rate of
0.75%.
ROBERTSON STEPHENS. Robertson Stephens Investment Management, Inc. is sub-
adviser to the Emerging Markets Fund under an investment sub-advisory agreement
entered into by Independence Capital Management and Robertson Stephens on April
15, 1997. Robertson Stephens is responsible for investing the assets of the
Emerging Markets Fund in accordance each Fund's investment objectives,
programs, and restrictions, as described in the Penn Series prospectus and
statement of additional information. Robertson Stephens is also responsible for
effecting all securities transactions on behalf of the Emerging Markets Fund,
including the allocation of portfolio brokerage and the negotiation of
commissions, as well as the selection of dealers with whom securities
transactions are effected.
Independence Capital Management pays Robertson Stephens, on a monthly basis,
a sub-advisory fee based on the average daily net assets of the Fund. The sub-
advisory fee is paid at the following rates: (i) 0.70% of the first $25,000,000
of average daily net assets of the Fund; (ii) 0.65% of the next $25,000,000 of
average daily net assets of the Fund; and (iii) 0.60% of average daily net
assets of the Fund in excess of $50,000,000.
For 1996, 1995, and 1994, the advisory fees paid by the Funds then in
existence were as follows:
<TABLE>
<CAPTION>
FUND 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Growth Equity Fund $ 494,636 $ 400,482 $362,851
----------------------------------------------------------
Value Equity Fund 800,404 523,127 374,544
----------------------------------------------------------
Small Capitalization Fund 51,982 12,149 N/A
----------------------------------------------------------
Flexibly Managed Fund 1,645,769 1,090,740 708,525
----------------------------------------------------------
International Equity Fund 646,040 462,151 399,983
----------------------------------------------------------
Quality Bond Fund 175,993 138,201 129,372
----------------------------------------------------------
High Yield Bond Fund 196,230 170,581 177,564
----------------------------------------------------------
Money Market Fund 119,842 67,864 48,738
----------------------------------------------------------
</TABLE>
In 1996, the advisory fee allocated to the Small Capitalization Fund is after
voluntary fee Waivers of $7,964. In 1995, the advisory fees allocated to the
Growth Equity and Quality Bond Funds are after voluntary fee waivers of 44,498
and 17,275, respectively. In 1994, the advisory fees allocated to the Growth
Equity and Quality Bond Funds are after voluntary fee waivers of $40,332 and
$16,172, respectively. In 1995 and 1994, the advisory fees allocated to the
Money Market Fund are after expense waivers and voluntary fee waivers of
$9,700, and $8,795, respectively.
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND CORPORATE SERVICES
On March 1, 1987, Penn Mutual began serving as the administrative and
corporate services agent for Penn Series, pursuant to the Original
Administrative and Corporate Services Agreement. On February 27, 1989, the
Board of Penn Series, including a majority of directors who were not interested
persons of Penn Series, approved the current Administrative and Corporate
Services Agreement with Penn Mutual. The current Agreement was approved by
shareholders in accordance with instructions from contract owners and payees at
their 1989 Annual Meeting on April 27, 1989, and on May 1, 1989, the Original
Administrative Services Agreement terminated and the current Agreement became
effective. The current Agreement, as amended and restated, was approved by the
shareholders on October 15, 1992. As administrative and corporate services
agent, Penn Mutual receives a fee equal to the annual rate of 0.15% of each
Fund's average daily net assets and provides a variety of services including:
(a) the maintenance of records pertaining to Penn Series' affairs, except those
that are required to be maintained by Penn Series' investment adviser,
accounting services agent, custodian, or transfer agent; (b) the preparation of
certain filings, reports and proxy statements required by the federal
securities laws; (c) the preparation of Penn Series' federal and state tax
returns and any other filings required for tax purposes other than those
required to be made by Penn Series' custodian, transfer agent, accounting
services agent, or investment adviser; (d) such services as Penn Series' Board
of Directors may require in connection with its oversight of Penn Series'
investment adviser, accounting services agent, custodian, or transfer agent,
including the periodic collection and presentation of data concerning the
investment performance of Penn Series' various investment portfolios; (e) the
organization of all meetings of Penn Series' Board of Directors; (f) the
organization of all meetings of Penn Series' shareholders; (g) the collection
and presentation of any financial or other data required by Penn Series' Board
of Directors, accountants, or counsel; and (h) the preparation and negotiation
of any amendments to, or substitutes for, the present agreements with Penn
Series' investment adviser, accounting services agent, custodian, or transfer
B-22
<PAGE>
agent. Penn Mutual also bears certain expenses in connection with the services
it renders as administrative and corporate services agent, including all rent
and other expense involved in the provision of office space for Penn Series and
in connection with Penn Mutual's performance of its services as administrative
and corporate services agent.
For 1996, 1995, and 1994 the administrative fees paid for each of the Funds
then in existence were as follows:
<TABLE>
<CAPTION>
FUND 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Growth Equity Fund $149,014 $133,494 $120,951
------------------------------------------------------
Value Equity Fund 240,121 157,021 112,363
------------------------------------------------------
Small Capitalization Fund 15,135 3,644 N/A
------------------------------------------------------
Flexibly Managed Fund 493,731 327,756 212,558
------------------------------------------------------
International Equity Fund 129,460 92,430 79,997
------------------------------------------------------
Quality Bond Fund 58,663 51,238 48,515
------------------------------------------------------
High Yield Bond Fund 58,869 51,240 53,078
------------------------------------------------------
Money Market Fund 45,111 29,059 21,607
------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ACCOUNTING SERVICES
On May 1, 1989, PFPC Inc. ("PFPC") began serving as the accounting services
agent for Penn Series. In that capacity, PFPC provides certain accounting and
related services to Penn Series, including: (a) the maintenance for each Fund
of a daily trial balance, general ledger, subsidiary records, capital stock
accounts (other than those maintained by the transfer agent for Penn Series),
investment ledger and all other books, accounts and other documents which Penn
Series is required to maintain and keep current pursuant to Rule 31a-1(a) and
(b) under the 1940 Act (other than those documents listed in subparagraph (4)
of Rule 31a-1(b)); (b) the daily valuation of the securities held by, and the
net asset value per share of, each Fund; (c) the preparation of such financial
information as may reasonably be necessary for reports to shareholders, the
Board of Directors and officers, the Securities and Exchange Commission and
other Federal and state regulatory agencies; and (d) the maintenance for each
Fund of all records that may reasonably be required in connection with the
audits of such Fund. The fee for the accounting services is based on a
predetermined percentage of daily average net assets of each fund.
For 1996, 1995, and 1994, the accounting fees paid for each of the Funds then
in existence were as follows:
<TABLE>
<CAPTION>
FUND 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Growth Equity Fund $ 74,103 $ 67,062 $53,461
-----------------------------------------------------
Value Equity Fund 105,040 76,467 49,983
-----------------------------------------------------
Flexibly Managed Fund 182,975 133,697 87,573
-----------------------------------------------------
International Equity Fund 73,307 52,431 40,146
-----------------------------------------------------
Quality Bond Fund 29,335 27,616 23,829
-----------------------------------------------------
High Yield Bond Fund 29,453 27,418 24,571
-----------------------------------------------------
Small Capitalization Fund 27,268 8,559 N/A
-----------------------------------------------------
Money Market Fund 22,555 14,917 9,728
-----------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
LIMITATION ON FUND EXPENSES
See "EXPENSES AND LIMITATIONS THEREON" in the Prospectus for information on
limitations on expenses of the Funds.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Decisions with respect to the purchase and sale of portfolio securities on
behalf of each Fund that makes up Penn Series are made by the respective
investment adviser of that Fund. Each Fund's adviser is responsible for
implementing these decisions, including the negotiation of commissions and the
allocation of principal business and portfolio brokerage. Most purchases and
sales of portfolio debt securities are transacted with the issuer or with a
primary market maker acting as principal for the securities on a net basis,
with no brokerage commission being paid by a Fund. Transactions placed through
dealers serving as primary market makers reflect the spread between the bid and
the asked prices. Occasionally, a Fund may make purchases of underwritten debt
issues at prices which include underwriting fees.
B-23
<PAGE>
In purchasing and selling portfolio securities, the policies of the
investment advisers are to seek quality execution at the most favorable prices
through responsible broker-dealers and, in the case of agency transactions, at
competitive commission rates. In selecting broker-dealers to execute a Fund's
portfolio transactions, the investment advisers will consider such factors as
the price of the security, the rate of the commission, the size and difficulty
of the order, the reliability, integrity, financial condition, general
execution and operational capabilities of competing broker-dealers, and the
brokerage and research services they provide to the adviser or the Fund.
Any of the investment advisers may effect principal transactions on behalf of
a Fund with a broker-dealer who furnishes brokerage and/or research services,
designate any such broker-dealer to receive selling concessions, discounts or
other allowances, or otherwise deal with any such broker-dealer in connection
with the acquisition of securities in underwritings. Additionally, purchases
and sales of fixed income securities may be transacted with the issuer, the
issuer's underwriter, or with a primary market maker acting as principal or
agent. A Fund does not usually pay brokerage commissions for these purchases
and sales, although the price of the securities generally includes compensation
which is not disclosed separately. The prices the Fund pays to underwriters of
newly-issued securities usually include a commission paid by the issuer to the
underwriter. Transactions placed through dealers who are serving as primary
market makers reflect the spread between the bid and asked prices.
The investment advisers may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each investment
adviser's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
With regard to payment of brokerage commissions, the investment advisers to
the Flexibly Managed, High Yield, International Equity and Emerging Growth
Funds have adopted brokerage allocation policies embodying the concepts of
Section 28(e) of the Securities Exchange Act of 1934, which permit investment
advisers to cause a fund or portfolio to pay a commission in excess of the rate
another broker or dealer would have charged for the same transaction, if the
adviser determines in good faith that the commission paid is reasonable in
relation to the value of the brokerage and research services provided. The
determination to pay commissions may be made in terms of either the particular
transaction involved or the overall responsibilities of the adviser with
respect to the accounts over which it exercises investment discretion. In some
cases, research services are generated by third parties, but are provided to
the advisers by or through brokers and dealers. With respect to the Flexibly
Managed and High Yield Bond Funds, the adviser may receive research service in
connection with selling concessions and designations in fixed price offerings
in which the Fund participates.
In allocating to brokers purchase and sale orders for portfolio securities of
the Growth Equity, Value Equity, Small Capitalization, Emerging Growth,
International Equity and Quality Bond Funds, the investment advisers may take
into account the sale of Penn Mutual variable annuity contracts and variable
life insurance policies that invest in those Funds. Before brokerage business
may be directed on the basis of those sales, the investment adviser must be
satisfied that the quality of the transaction and commission payable are
comparable to what they would have been had other qualified brokers been
selected to execute the transaction.
In allocating brokerage for the Flexibly Managed Fund and the High Yield Bond
Fund, Price Associates annually assesses the contribution of the brokerage and
research services provided by broker-dealers, and allocates a portion of the
brokerage business of its clients on the basis of these assessments. In
addition, broker-dealers sometimes suggest a level of business they would like
to receive in return for the various brokerage and research services they
provide. Actual brokerage received by any firm may be less than the suggested
allocations, but can (and often does) exceed the suggestions because total
brokerage is allocated on the basis of all the considerations described above.
In no instance is a broker-dealer excluded from receiving business because it
has not been identified as providing research services. Price Associates cannot
readily determine the extent to which net prices or commission rates charged by
broker-dealers reflect the value of their research services. However, net
prices and commissions are periodically reviewed to determine whether they are
reasonable in relation to the services provided. In some instances, Price
Associates receives research services it might otherwise have had to perform
for itself. The research services provided by broker-dealers can be useful to
Price Associates in serving the Funds, as well as its other clients.
For the years ended 1996, 1995, and 1994, the total brokerage commissions
paid by the Growth Equity Fund, including the discounts received by securities
dealers in connection with underwritings, were $641,514, $522,493 and $526,265,
respectively. During 1996, the adviser directed transactions of $258,175,642
(with related commissions of $577,362) to brokers who provided research
services.
B-24
<PAGE>
For the years ended 1996, 1995, and 1994, the total brokerage commissions
paid by the Value Equity Fund, including discounts received by securities
dealers in connection with underwritings, were $119,775, $98,671, and $76,523,
respectively. During 1996, the adviser directed transactions of $18,399,268
(with related commissions of $22,470) to brokers who provided research
services.
For the years ended 1996, 1995, and 1994 the total brokerage commissions paid
by the Flexibly Managed Fund, including the discounts received by securities
dealers in connection with underwritings, were $323,511, $221,716, and
$186,948, respectively. During 1996, the adviser directed transactions of
$1,282,345,533, (with related commissions of $253,463) to brokers who provided
research services.
For 1996, 1995, and 1994, the total brokerage commissions paid by the
International Equity Fund including the discounts received by the securities
dealers in connection with underwritings, were $282,591, $280,461 and $110,471,
respectively. During 1996, the adviser directed transactions of $26,696,352
(with related commissions of $66,309) to brokers who provided research
services.
For 1996 and the period March 1, 1995 (commencement of operations) through
December 31, 1995, the total brokerage commissions paid by the Small
Capitalization Fund, including the discounts received by the Securities
division in connection with underwritings, were $28,271 and $14,492,
respectively. During 1996, the adviser directed transactions of $1,032,422
(with related commissions of $2,646) to brokers who provided research services.
For the years 1996, 1995, and 1994 the Quality Bond Fund engaged in portfolio
transactions involving broker-dealers totaling $838,148,194, $458,184,878, and
$304,773,718, respectively. For the years 1996, 1995, and 1994, the High Yield
Bond Fund engaged in portfolio transactions involving broker-dealers totaling
$263,291,031, $236,641,374, and $65,037,000, respectively, and the Money Market
Fund engaged in portfolio transactions involving broker-dealers totaling
$329,947,899, $138,010,705 and $105,398,321, respectively. The entire amounts
for each of these years represented principal transactions as to which the
Funds have no knowledge of the profits or losses realized by the respective
broker-dealers. Of all such portfolio transactions, none were placed with firms
which provided research, statistical, or other services to the Funds or its
adviser.
Some of the investment advisers' other clients have investment objectives and
programs similar to those of the Funds. An investment adviser may occasionally
make recommendations to other clients which result in their purchasing or
selling securities simultaneously with a Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may increase,
and this could have an adverse effect on the price of those securities. It is
each of the investment advisers' policy not to favor one client over another in
making recommendations or in placing orders. If two or more of an investment
adviser's clients are purchasing a given security at the same time from the
same broker-dealer, the investment adviser will average the price of the
transactions and allocate the average among the clients participating in the
transaction. In addition, Price Associates has established a general investment
policy that it will ordinarily not make additional purchases of a common stock
for its clients (including the Penn Series) if, as a result of such purchases,
10% or more of the outstanding common stock of such company would be held by
its clients in the aggregate.
Price Associates may place orders for portfolio transactions with broker-
dealers through the same trading desk of T. Rowe Price used for portfolio
transactions in domestic securities. The trading desks access brokers and
dealers in various markets in which the Fund's foreign securities are located.
These brokers and dealers may include certain affiliates of Robert Fleming
Holdings Limited ("Robert Fleming Holdings"), and Jardine Fleming Group Limited
("JFG"), persons directly related to Price Associates. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary, owns 25% of the
common stock of Rowe Price-Fleming International, Inc. ("RPFI"), an investment
adviser registered under the Investment Advisers Act of 1940. Fifty percent of
the common stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of Price Associates, and the remaining 25% is owned by Jardine
Fleming Holdings Limited, a subsidiary of JFG. JFG is 50% owned by RFH and 50%
owned by Jardine Matheson Holdings Limited. Orders for the Fund's portfolio
transactions placed with affiliates of RFH and JFG will result in commissions
being received by such affiliates.
Price Associates is authorized to utilize certain affiliates of RHL and JFG
in the capacity of a broker in connection with the execution of portfolio
transactions, provided that Price Associates believes that doing so will result
in an economic advantage (in the form of lower execution costs or otherwise)
being obtained for the Fund. Such affiliates include, but are not limited to,
Jardine Fleming Securities Limited ("JFS"), a wholly-owned subsidiary of JFG,
Robert Fleming & Co. Limited, Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other affiliates of RFN and
JFG may also be used. Although Price Associates does not believe that the
Fund's use of these brokers would be subject to Section 17(e) of the Investment
Company Act of 1940, it has agreed that the procedures set forth in Rule
17(a)(1) under that Act will be followed when using such brokers.
Price Associates placed no portfolio transactions with, and paid no brokerage
commissions to these broker-dealers during the past three years.
B-25
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
The directors and principal officers of Penn Series, their business addresses
and principal occupations during the past five years are set forth in the
following table.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN SERIES DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <C> <S>
Eugene Bay Director Senior Pastor, Bryn Mawr Presbyterian
121 Fishers Road Church, Bryn Mawr, PA
Bryn Mawr, PA 19010
- -------------------------------------------------------------------------------
James S. Greene Director Retired: Vice President and Director,
P.O. Box 3761 International Raw Materials, Inc.,
Vero Beach, FL 32964-3761 Philadelphia, PA (commodities
trading), prior to September 1990.
- -------------------------------------------------------------------------------
L. Stockton Illoway* President Senior Vice President, Marketing and
600 Dresher Road and Director Field Sales Support (since June
Horsham, PA 19044 1996), Senior Vice President, Pension
and Annuity (December 1993 to June
1996) Senior Vice President,
Individual Retirement Investment
Service (September 1993 to December
1993), Regional Vice President (prior
thereto), The Penn Mutual Life
Insurance Company.
- -------------------------------------------------------------------------------
Richard J. Liburdi* Director Senior Vice President, Career Agency
600 Dresher Road System (since June 1996), Senior Vice
Horsham, PA 19044 President, Insurance and Life Sales (
December 1990 to June 1996), Vice
President, Group Annuities (November
1988 to December 1990), Assistant
Vice President (prior thereto), The
Penn Mutual Life Insurance Company.
- -------------------------------------------------------------------------------
William H. Loesche, Jr. Director Retired; Adviser (since April 1988),
100 Gray's Lane Director (prior thereto), Keystone
Apt. 101 Insurance Company and Keystone
Haverford, PA 19041 Automobile Club, Philadelphia, PA.
- -------------------------------------------------------------------------------
M. Donald Wright Director President, M. Donald Wright
100 Chetwynd Drive Professional Corporation, Bryn Mawr,
Rosemont, PA 19010 PA (financial planning and
consulting); Director, Graduate
School of Financial Services, The
American College, since April 1991.
- -------------------------------------------------------------------------------
Richard F. Plush Vice President Vice President, The Penn Mutual Life
600 Dresher Road Insurance Company.
Horsham, PA 19044
- -------------------------------------------------------------------------------
James B. McElwain Executive Assistant Vice President, Investment
600 Dresher Road Vice President Marketing and Operations (since
Horsham, PA 19044 August 1995), Assistant Vice
President, Retirement and Investment
Sales Operation, The Penn Mutual Life
Insurance Company, (November 1991 to
August 1995), National Director of
Marketing, Asset Management Sales,
The Metropolitan Life Insurance
Company, prior thereto.
- -------------------------------------------------------------------------------
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius
2000 One Logan Square LLP, Philadelphia, PA, since January
Philadelphia, PA 19103 1996; Associate General Counsel, The
Penn Mutual Life Insurance Company,
prior thereto.
- -------------------------------------------------------------------------------
Steven M. Herzberg Treasurer Director of Financial Planning and
600 Dresher Road Treasurer (since November 1995),
Horsham, PA 19044 Director, Cost and Budget (November
1991 to November 1995), Director,
Benefits Administrator (prior
thereto). The Penn Mutual Life
Insurance Company.
- -------------------------------------------------------------------------------
James D. Benson Controller Manager, Financial Reporting, The
600 Dresher Road Penn Mutual Life Insurance Company,
Horsham, PA 19044 since June, 1992; Manager, Financial
Services Discipline (January 1992 to
June 1992), Supervisor and other
positions (prior thereto), Coopers &
Lybrand, Philadelphia, PA.
- -------------------------------------------------------------------------------
</TABLE>
* Director is an "interested person" of Penn Series, as defined in the
Investment Company Act of 1940.
Directors and officers of Penn Series who are employed by Penn Mutual will
not receive any special compensation for serving in such capacities. Penn
Series has made no provision for the payment of retirement or pension benefits
to any director or officer. In 1996, Penn Series paid directors' fees in the
aggregate amount of $39,000 to directors who are not "interested persons" of
Penn Series.
The Board of Directors has an Executive Committee currently consisting of
Messrs. Greene, Illoway and Liburdi. Subject to limits under applicable law,
during intervals between meetings of the Board, the Committee may exercise the
powers of the Board.
- --------------------------------------------------------------------------------
CUSTODIAL SERVICES
PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107 is custodian of
the assets of the Funds of Penn Series. The custodial services performed by PNC
Bank are those customarily performed for registered investment companies by
qualified financial institutions. Penn Series has authorized the Bank to
deposit certain portfolio securities in a central depository system as allowed
by federal law.
B-26
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serve as the independent accountants of Penn Series
Funds, Inc. Their offices are located at 2400 Eleven Penn Center, Philadelphia,
PA 19103. Coopers & Lybrand L.L.P. are also the independent accountants of The
Penn Mutual Life Insurance Company.
- --------------------------------------------------------------------------------
LEGAL MATTERS
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relative to the federal securities laws and the
offering of shares of Penn Series Funds, Inc.
- --------------------------------------------------------------------------------
NET ASSET VALUE OF SHARES
The following information supplements the information on net asset value of
shares set forth in the Prospectus.
The purchase and redemption price of each Fund's shares is equal to that
Fund's net asset value per share. Each Fund determines its net asset value per
share by subtracting the Fund's liabilities (including accrued expenses and
dividends payable) from its total assets (the market value of the securities
the Fund holds plus cash and other assets, including income accrued but not yet
received) and dividing the result by the total number of shares outstanding.
The net asset value per share of each Fund is calculated every day the New York
Stock Exchange ("Exchange") is open for trading. The Exchange is closed on the
following days: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Presidential Election Day, Thanksgiving Day, and
Christmas Day.
Debt securities held in the Funds may be valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Use of the pricing service may be determined without
exclusive reliance on quoted prices and may take into account appropriate
factors such as institution-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data.
The Money Market Fund uses the amortized cost method of valuation. Under the
amortized cost method of valuing portfolio securities, the security is valued
at cost on the date of purchase and thereafter a proportionate amortization of
any discount or premium until maturity of the security is assumed. The value of
the security for purposes of determining net asset value normally does not
change in response to fluctuating interest rates. While the amortized cost
method is believed to provide certainty in portfolio valuation, it may result
in periods during which values are higher or lower than the amount the Money
Market Fund would receive if the security was sold.
In accordance with Rule 2a-7 under the Investment Company Act of 1940, the
Penn Series Board of Directors has established procedures reasonably designed,
taking into account current conditions and the Money Market Fund's objectives,
to stabilize the net asset value per share of the Fund, as computed for
purposes of distribution and redemption, at $1.00. Penn Series will maintain a
dollar weighted average portfolio maturity in the Money Market Fund appropriate
to the objective of maintaining a stable net asset value per share, and to that
end the Fund will neither purchase any instrument with a remaining maturity of
more than 397 days nor maintain a dollar weighted average portfolio maturity
which exceeds 90 days. The Board of Directors will review, at such intervals as
it determines appropriate, the extent, if any, to which the net asset value per
share calculated by using available market quotations deviates from the $1.00
per share. In the event such deviation exceeds 1/2 of 1%, the Board will
promptly consider what action, if any, should be initiated. If the Board
believes that the extent of any deviation from the Money Market Fund's $1.00
amortized cost price per share may result in material dilution or other unfair
results to prospective or existing shareholders or contract holders, it has
agreed to take such steps as it considers appropriate to eliminate or reduce to
the extent reasonably practicable any such dilution or unfair results. These
steps may include redeeming shares in kind; selling portfolio instruments prior
to maturity to realize capital gains or losses or to shorten the average
portfolio maturity of the Money Market Fund; reducing or withholding dividends;
utilizing a net asset value per share as determined by using available market
quotations; or reducing the number of shares outstanding by requesting
shareholders to contribute to capital shares of the Money Market Fund.
B-27
<PAGE>
- --------------------------------------------------------------------------------
OWNERSHIP OF SHARES
The outstanding shares of each of the Funds of Penn Series are owned by The
Penn Mutual Life Insurance Company ("Penn Mutual") and its subsidiary, The Penn
Insurance and Annuity Company ("PIA") and are held in their Separate Accounts
pursuant to variable annuity contracts and variable life insurance policies.
A description of the shares is set forth in the Prospectus under the caption
General Information.
On January 31, 1997, the outstanding shares of Penn Series were owned as
follows:
<TABLE>
<CAPTION>
GROWTH VALUE FLEXIBLY QUALITY SMALL MONEY
EQUITY EQUITY MANAGED INTERNATIONAL BOND HIGH YIELD CAPITALIZATION MARKET
FUND FUND FUND EQUITY FUND FUND BOND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of
Outstanding Shares
Owned by Penn Mutual
and Held in Separate
Accounts Pursuant to
Variable Annuity
Contracts 93% 85% 82% 84% 83% 83% 62% 64%
- -----------------------------------------------------------------------------------------------------
Percentage of
Outstanding Shares
owned by PIA and held
in a Separate Account
Pursuant to Variable
Annuity Contracts 2% 8% 11% 7% 9% 9% 27% 18%
- -----------------------------------------------------------------------------------------------------
Percentage of
Outstanding Shares
owned by Penn Mutual
and held in a Separate
Account Pursuant to
Variable Life
Insurance Contracts 5% 7% 7% 9% 8% 8% 11% 18%
- -----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management of
the issuer; economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated P1, P2, or P3.
STANDARD & POOR'S CORPORATION. Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within the
industry. The reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A1, A2, or A3.
FITCH INVESTORS SERVICE, INC.: FITCH 1--HIGHEST GRADE. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment. FITCH 2--VERY GOOD GRADE. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than the
strongest issues.
B-28
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF PENN SERIES
The following pages include audited financial statements as of December 31,
1996 for the Growth Equity Fund, Value Equity Fund, Small Capitalization Fund,
Flexibly Managed Fund, International Equity Fund, Quality Bond Fund, High Yield
Bond Fund and Money Market Fund.
B-29
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF PENN SERIES FUNDS, INC.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of Penn Series Funds, Inc. (comprising
respectively, the Money Market Fund, Quality Bond Fund, High Yield Bond Fund,
Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund, International
Equity Fund, and Small Capitalization Fund) as of December 31, 1996, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years or periods in the period then
ended and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
respective portfolios of Penn Series Funds, Inc. as of December 31, 1996, and
the results of their operations for the year then ended, the changes in their
net assets for each of the two years or periods in the period then ended and
the financial highlights for each of the periods presented in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 11, 1997
B-30
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1996
THE MONEY MARKET FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------- ------ -----------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (26.2%)
- ------------------------
BEVERAGES (2.9%)
Coca-Cola Co.
6.00%................... 01/03/97 A-1/P-1 $1,000 $ 999,667
-----------
FINANCIAL SERVICES (14.8%)
American Honda
5.65%................... 01/30/97 A-2/P-1 1,000 995,449
Countrywide Funding Corp.
5.97%................... 01/14/97 A-1/P-2 750 748,383
General Electric Capital
Corp. 5.32%............. 01/16/97 A-1/P-1 750 748,338
Merrill Lynch & Co., Inc.
5.44%................... 01/21/97 A-1/P-1 700 697,884
5.48%................... 01/08/97 A-1/P-1 300 299,680
5.95%................... 01/10/97 A-1/P-1 500 499,256
New York City
5.60%................... 04/01/97 NR 600 600,000
New York City General
Obligation 5.50%........ 01/07/97 NR 500 500,000
-----------
5,088,990
-----------
MISCELLANEOUS (4.4%)
Dekalb County for Emory
University 5.60%........ 02/18/97 NR 1,500 1,500,000
-----------
UTILITIES - GAS (4.1%)
San Diego Gas & Electric
Co. 5.58%............... 02/06/97 A-1/P-1 1,400 1,400,000
-----------
TOTAL COMMERCIAL PAPER
(Cost $8,988,657)................................ 8,988,657
-----------
CORPORATE BONDS (15.4%)
- -----------------------
American Home Products
6.875%.................. 04/15/97 A 855 857,922
BankAmerica Corp.
6.00%................... 07/15/97 A+ 100 100,095
Chrysler Financial Corp.
6.41%................... 07/28/97 A- 250 250,697
Ford Holdings Inc.
9.25%................... 07/15/97 A+ 370 376,656
Ford Motor Credit
7.875%.................. 01/15/97 A+ 240 240,163
General Motors Corp.
7.625%.................. 02/15/97 A- 1,000 1,002,072
General Motors Acceptance
Corp.
7.75%................... 04/15/97 A- 295 296,643
7.95%................... 04/30/97 A- 175 176,234
Manufacturer's Hanover
Corp. 8.125%............ 01/15/97 A 1,300 1,301,126
Merrill Lynch
7.25%................... 05/15/97 AA- 100 100,525
Philip Morris
9.75%................... 05/01/97 A 600 607,613
-----------
TOTAL CORPORATE BONDS
(Cost $5,309,746)................................ 5,309,746
-----------
VARIABLE RATE DEMAND NOTES (49.4%)+
- -----------------------------------
Alabama State Development
Authority 5.75%......... 01/07/97 A-1/P-1 550 550,000
Barton Healthcare
5.70%................... 01/07/97 A-1/P-1 465 465,000
Baylis Group Partnership
5.90%................... 01/01/97 A-1/P-1 700 700,000
Berks County Industrial
Development Authority
5.75%................... 01/07/97 A-1/P-1 545 545,000
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------- ------ -----------
<S> <C> <C> <C> <C>
Bloomfield, New Mexico 5.90%.............. 01/07/97 A-1/P-1 $ 600 $ 600,000
Columbia County Georgia Development
Authority 5.90%.......................... 01/07/97 A-1/P-1 470 470,000
Community Health Systems, Inc.
5.90%.................................... 01/07/97 A-1/P-1 400 400,000
5.95%.................................... 01/07/97 A-1/P-1 1,165 1,165,000
Dean Witter Discover 5.53%................ 01/07/97 A-1/P-1 1,200 1,199,782
Durham Risk Management Co.
5.96%.................................... 01/07/97 A-1+/P- 500 500,000
Fairview Hospital and Healthcare Services
5.90%.................................... 01/07/97 A-1+/P- 500 500,000
GMG Warehouse American National
5.70%.................................... 01/02/97 NR 1,050 1,050,000
Health Insurance Plan of Greater NY 5.80%. 01/07/97 A-1/P-1 1,000 1,000,000
Illinois Development Finance Authority
5.70%.................................... 01/07/97 A-1/P-1 600 600,000
Liliha Partners
6.15%.................................... 01/02/97 NR 1,100 1,100,000
Mississippi Business Finance Authority
5.75%.................................... 01/07/97 A-1/P-1 1,600 1,600,000
Montgomery County PA Industrial
Development Authority 5.75%.............. 01/07/97 A-1/P-1 805 805,000
New York, New York 5.50%.................. 01/07/97 A-1/P-1 1,000 1,000,000
Passaic County Utilities Authority Series
1996-A 6.25%............................. 09/03/97 SP1+ 650 650,000
Richmond County Georgia Industrial
Development Authority Monsato County
Project
6.01%.................................... 06/01/97 A-1/P-1 1,000 1,000,000
Saint Francis Health
6.05%.................................... 01/07/97 A-1/P-1 490 490,000
Sliver City, New Mexico 5.90%............. 01/07/97 A-1/P-1 600 600,000
-----------
TOTAL VARIABLE RATE DEMAND NOTES
(Cost $16,989,782)................................................ 16,989,782
-----------
GOVERNMENT OBLIGATIONS (1.5%)+
- ------------------------------
Student Loan Marketing Association 5.39%
(Cost $499,852).......................... 01/07/97 A-1/P-1 500 499,852
-----------
MEDIUM TERM NOTES (6.1%)
- ------------------------
Ford Motor Credit
7.75%.................................... 04/29/97 A+ 1,000 1,006,894
Pacific Gas & Electric 5.00%.............. 10/07/97 A- 1,100 1,093,434
-----------
TOTAL MEDIUM TERM NOTES
(Cost $2,100,328)................................................. 2,100,328
-----------
</TABLE>
B-31
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- -----------
<S> <C> <C>
SHORT TERM INVESTMENTS (1.4%)
- -----------------------------
Janus Money Market
Fund.............................. 309,438 $ 309,438
Temporary Investment Fund
Class B........................... 171,848 171,848
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $481,286)............................... 481,286
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $34,369,651) (a)........................ $34,369,651
-----------
</TABLE>
- -------
(a) Cost for Federal income tax purposes.
+ The rate shown is the rate as of December 31, 1996, and the maturity shown
is the next interest readjustment date.
The Standard & Poor's Corporation, Moody's Investor Service, Fitch Investors
Service and Duff & Phelps Credit Rating Co. Ratings are the most recent
ratings available at December 31, 1996. These ratings have not been verified
by the Independent Accountants and, therefore, are not covered by the Report
of Independent Accountants. The information presented below is also
unaudited.
<TABLE>
<CAPTION>
PERCENTAGE OF
MATURITY ---------------------------
SCHEDULE AMOUNT PAR (CUM)
-------- ----------- ------
<S> <C> <C> <C>
1 - 7 days $17,340,000 51.2% 51.2%
8 - 14 days 1,550,000 4.6% 55.8%
15 - 30 days 3,990,000 11.8% 67.6%
31 - 60 days 3,900,000 11.5% 79.1%
91 - 120 days 2,925,000 8.6% 87.7%
121 - 150 days 700,000 2.1% 89.8%
Over 150 days 3,470,000 10.2% 100.0%
----------- ------
$33,875,000 100.0%
=========== ======
</TABLE>
Average Weighted Maturity - 45 Days
The accompanying notes are an integral part of these financial statements.
B-32
<PAGE>
- --------------------------------------------------------------------------------
THE QUALITY BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS (19.9%)
- -----------------------
AGRICULTURAL OPERATIONS (0.7%)
Cargill, Inc.
7.375%.................................... 10/01/25 AA- $ 250 $ 248,750
-----------
BEVERAGES (1.2%)
Coca-Cola Enterprises
6.95%..................................... 11/15/26 AA- 475 454,219
-----------
BROADCASTING (1.0%)
News America Holdings
8.50%..................................... 02/23/07 BBB 360 393,300
-----------
CANADIAN GOV'T AGENCY (4.5%)
Hydro Quebec
7.50%..................................... 04/01/16 A+ 400 404,500
8.05%..................................... 07/07/06 A+ 1,150 1,263,562
-----------
1,668,062
-----------
ELECTRIC POWER (2.0%)
Korea Electric Power
7.75%..................................... 04/01/13 AA- 500 510,000
Minnesota Power & Light First Mortgage
7.375%.................................... 03/01/97 BBB+ 250 250,625
-----------
760,625
-----------
FINANCE & CREDIT (0.7%)
American Express Credit Corp. Senior Note
7.75%..................................... 03/01/97 A+ 250 250,772
-----------
FINANCIAL (8.3%)
African Development Bank 6.875%............ 10/15/15 AA- 500 486,250
Associates Corp. N.A. Senior Note 7.75%.... 02/15/00 AA- 500 527,500
General Electric Capital Corp. 6.66%....... 05/01/00 AAA 1,000 1,003,750
8.125%.................................... 02/01/99 AAA 500 519,375
General Motors Acceptance Corp. Note 6.40%. 07/30/97 A- 300 301,386
Morgan Stanley Financial PLC
8.03%..................................... 02/28/07 A- 250 250,000
-----------
3,088,261
-----------
RAILROADS (0.7%)
Union Pacific Co.
8.35%..................................... 05/01/05 BBB 250 261,563
-----------
RETAIL (0.5%)
Penney (J.C.), Inc. Note
9.45%..................................... 07/15/00 A+ 175 190,969
-----------
SERVICES - EQUIPMENT RENTING & LEASING (0.3%)
Service Co. International 7.00%............ 06/01/02 BBB+ 100 100,750
-----------
TOTAL CORPORATE BONDS
(Cost $7,203,423)................................................. 7,417,271
-----------
U.S. TREASURY OBLIGATIONS (52.0%)
- ---------------------------------
U.S. Treasury Notes
5.875%.................................... 11/15/05 N/A 2,855 2,754,475
6.25%..................................... 05/31/00 N/A 500 502,395
6.50%..................................... 08/31/01 N/A 3,125 3,160,843
6.50%..................................... 05/15/05 N/A 750 755,205
6.75%..................................... 04/30/00 N/A 1,000 1,019,490
6.875%.................................... 05/15/06 N/A 1,500 1,546,275
7.75%..................................... 12/31/99 N/A 1,000 1,046,520
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
7.875%.................................... 11/15/99 N/A $ 750 $ 786,277
7.875%.................................... 11/15/04 N/A 3,500 3,821,650
-----------
15,393,130
-----------
U.S. Treasury Bonds
6.00%..................................... 02/15/26 N/A 350 318,766
7.25%..................................... 05/15/16 N/A 3,455 3,651,348
-----------
3,970,114
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $18,934,260)................................................ 19,363,244
-----------
AGENCY OBLIGATIONS (19.7%)
- --------------------------
Federal Home Loan Bank
5.55%..................................... 01/02/97 N/A 2,000 1,999,692
Federal National Mortgage Assoc. 6.45%..... 12/01/03 N/A 1,232 1,226,995
Federal National Mortgage Assoc. 6.50% due
11/01/25 to 12/01/25...................... N/A 1,853 1,769,194
Government National Mortgage Assoc. 8.00%
due 06/15/23 to 12/15/25.................. N/A 2,296 2,343,709
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $7,408,307)................................................. 7,339,590
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES (1.3%)
- --------------------------------------------
Sasco 96-CFL Class B 6.303%
(Cost $500,010) .......................... 02/25/28 AA 500 484,687
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
PREFERRED STOCK (1.2%)
- ----------------------
Cleveland Electric Illuminating 9.125%
(Cost $448,695)........................................ 4,515 450,936
-----------
SHORT-TERM INVESTMENTS (5.9%)
- -----------------------------
Janus Money Market
Fund................................................... 1,814,596 1,814,596
Temporary Investment Fund
Class B ............................................... 381,401 381,401
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,195,997)................................................. 2,195,997
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $36,690,692) (a)............................................ $37,251,725
-----------
</TABLE>
- -----------
(a) At December 31, 1996, the cost for Federal income tax purposes was
$36,702,958. The excess of value over tax cost was $648,154, and the excess
of tax cost over value was $99,387.
The Standard & Poors corporation ratings are the most recent rating
available at December 31, 1996. These ratings have not been verified by the
Independent Accountants and, therefore, are not covered by the Report of
Independent Accountants.
The accompanying notes are an integral part of these financial statements.
B-33
<PAGE>
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE SECURITIES (1.3%)
- -----------------------------------------
Airplanes Pass Through Trust 10.875%
(Cost $506,762)............................ 03/15/19 BB $ 500 $ 558,750
-----------
CORPORATE BONDS (87.1%)
- -----------------------
ADVERTISING (1.7%)
Outdoor Systems, Inc.
9.375%..................................... 10/15/06 B 500 515,000
Universal Outdoor, Inc.
9.75%...................................... 10/15/06 B 200 206,500
-----------
721,500
-----------
AEROSPACE & DEFENSE (5.8%)
BE Aerospace, Inc.
9.875%..................................... 02/01/06 B 425 446,250
Communication & Power Industries
12.00%..................................... 08/01/05 B 500 558,750
K & F Industries, Inc.
10.375%.................................... 09/01/04 B- 225 237,375
11.875%.................................... 12/01/03 B+ 550 592,625
Tracor, Inc.
10.875%.................................... 08/15/01 B 250 263,750
UNC, Inc.
11.00%..................................... 06/01/06 B 400 428,000
-----------
2,526,750
-----------
AUTOMOBILES & RELATED (2.5%)
Aetna Industries, Inc.
11.875%.................................... 10/01/06 B- 300 321,000
Hayes Wheels International, Inc.
11.00%..................................... 07/15/06 B 350 381,937
Speedy Muffler King, Inc.
10.875%.................................... 10/01/06 B+ 350 373,187
-----------
1,076,124
-----------
AUTOMOBILES - CARS (0.2%)
Venture Holdings Trust
9.75%...................................... 04/01/04 B 100 92,000
-----------
BEVERAGES (2.7%)
Dr. Pepper Bottling Holdings, Inc.
4.4178%++.................................. 02/15/03 CCC+ 700 658,000
Texas Bottling Group, Inc.
9.00%...................................... 11/15/03 B+ 500 506,250
-----------
1,164,250
-----------
BROADCASTING (2.5%)
Chancellor Broadcasting
9.375%..................................... 10/01/04 B- 500 505,000
Heritage Media Corp.
11.00%..................................... 10/01/02 B 550 587,125
-----------
1,092,125
-----------
BUILDING & REAL ESTATE (1.3%)
B.F. Saul Reit.
11.625%.................................... 04/01/02 B- 500 540,000
-----------
BUILDING PRODUCTS (3.0%)
Foamex L.P.
11.875%.................................... 10/01/04 B- 500 532,500
Maxxam Group, Inc.
11.25%..................................... 08/01/03 B- 500 510,000
Waxman Industries, Inc.
4.4071%++.................................. 06/01/04 CCC+ 325 238,062
-----------
1,280,562
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
CABLE OPERATORS (2.7%)
Diamond Cable Communication Co.
4.6957%++.................................. 12/15/05 B- $ 500 $ 360,000
Frontiervision
11.00%..................................... 10/15/06 B 300 300,750
Fundy Cable Ltd.
11.00%..................................... 11/15/05 BB 500 530,000
-----------
1,190,750
-----------
CONGLOMORATES (1.9%)
Alpine Group, Inc.
12.25%..................................... 07/15/03 B- 249 268,920
ICF Kaiser International, Inc.
13.00%..................................... 12/31/03 NR 175 172,375
Jordan Industries, Inc.
10.375%.................................... 08/01/03 B+ 400 394,000
-----------
835,295
-----------
CONTAINER (4.4%)
Plastic Containers, Inc.
10.00%..................................... 12/15/06 B+ 400 412,000
Portola Packaging, Inc.
10.75%..................................... 10/01/05 B 500 521,250
Silgan Corp.
11.75%..................................... 06/15/02 B- 500 532,500
U.S. Can Corp.
10.125%.................................... 10/15/06 B 400 420,500
-----------
1,886,250
-----------
ELECTRONIC COMPONENTS (0.7%)
Celestica International
10.50%..................................... 12/31/06 B 300 315,000
-----------
ENERGY SERVICES (5.9%)
Coda Energy, Inc.
10.50%..................................... 04/01/06 B 100 105,000
Dual Drilling Co.
9.875%..................................... 01/15/04 B- 500 540,000
Falcon Drilling Co.
8.875%..................................... 03/15/03 B+ 150 153,000
Flores & Rucks
9.75%...................................... 10/01/06 B- 275 291,500
Kelley Oil & Gas Corp.
10.375%.................................... 10/15/06 B- 175 182,438
Mesa Operating Co.
10.625%.................................... 07/01/06 B 150 162,750
Parker Drilling Corp.
9.75%...................................... 11/15/06 B+ 300 316,500
Petroleum Heat & Power, Inc.
12.25%..................................... 02/01/05 B+ 500 555,000
Plains Resources, Inc.
10.25%..................................... 03/15/06 B- 250 267,500
-----------
2,573,688
-----------
ENTERTAINMENT & LEISURE (2.6%)
Alliance Entertainment Corp.
11.25%..................................... 07/15/05 B- 250 180,000
Six Flags Theme Parks
2.4799%++.................................. 06/15/05 B 600 564,000
United Artists Theatre
9.30%...................................... 07/01/15 BB 397 369,929
-----------
1,113,929
-----------
</TABLE>
B-34
<PAGE>
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND, CONT'D
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
FINANCE (3.1%)
Aames Financial Corp.
9.125%.................................... 11/01/03 BB- $ 250 $ 254,375
First Nationwide
10.625%................................... 10/01/03 BB 500 540,000
Ocwen Financial Corp.
11.875%................................... 10/01/03 B+ 500 546,250
-----------
1,340,625
-----------
FOOD/TOBACCO (4.3%)
Consolidated Cigar Corp.
10.50%.................................... 03/01/03 B 750 783,750
Keebler Corp.
10.75%.................................... 07/01/06 NR 500 545,000
Mac Andrews & Forbes Co.
11.875%................................... 11/15/02 B 500 527,500
-----------
1,856,250
-----------
HEALTHCARE (3.0%)
Dade International, Inc.
11.125%................................... 05/01/06 NR 250 271,250
Imed Corp.
9.75%..................................... 12/01/06 B 500 508,750
Owens & Minor, Inc.
10.875%................................... 06/01/06 B+ 500 536,250
-----------
1,316,250
-----------
HOTELS & GAMING (5.2%)
@ Capital Gaming International, Inc.
45.6951%++................................ 02/01/01 NR 5 250
Courtyard by Marriott
10.75%.................................... 02/01/08 B- 350 370,125
Eldorado Resorts LLC
10.50%.................................... 08/15/06 B 250 264,063
HMC Acquisition Properties
9.00%..................................... 12/15/07 BB 400 406,000
Players International, Inc.
10.875%................................... 04/15/05 BB 250 247,500
President Riverboat Casinos, Inc.
13.00%.................................... 09/15/01 B 200 167,000
Rio Hotel & Casino, Inc.
10.625%................................... 07/15/05 B 250 266,875
Trump Atlantic City Assoc. Funding, Inc.
11.25%.................................... 05/01/06 BB- 535 529,650
-----------
2,251,463
-----------
MANUFACTURING (3.5%)
Hawk Corp.
10.25%.................................... 12/01/03 B+ 350 357,000
International Knife & Saw
11.375%................................... 11/15/06 B- 325 335,563
Mettler Toledo, Inc.
9.75%..................................... 10/01/06 B 300 315,000
Tokheim Corp.
11.50%.................................... 08/01/06 B 475 496,375
-----------
1,503,938
-----------
METALS & MINING (0.9%)
Haynes International, Inc.
11.625%................................... 09/01/04 B- 350 369,250
-----------
MISCELLANEOUS (0.6%)
Bankunited Capital Trust
10.25%.................................... 12/31/26 NR 250 250,000
-----------
MISCELLANEOUS - CONSUMER PRODUCTS (5.7%)
American Safety Razor Co.
9.875%.................................... 08/01/05 BB- 500 531,250
Doane Products Co.
10.625%................................... 03/01/06 B+ 500 532,500
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
Herff Jones, Inc.
11.00%..................................... 08/15/05 B $ 500 $ 537,500
PM Holdings Corp.
5.1115%++.................................. 09/01/05 B 150 100,500
Rayovac Corp.
10.25%..................................... 11/01/06 B- 500 512,500
Revlon Worldwide Corp.
11.5728%++................................. 03/15/98 B- 300 258,000
-----------
2,472,250
-----------
PAPER & PRODUCTS (4.0%)
Container Corp. Of America
11.25%..................................... 05/01/04 B+ 250 271,250
Gaylord Container
12.75%..................................... 05/15/05 B- 500 552,500
Repap Wisconsin, Inc.
9.875%..................................... 05/01/06 B 350 357,000
S.D. Warren Co.
12.00%..................................... 12/15/04 B+ 500 540,000
-----------
1,720,750
-----------
RETAIL (2.7%)
Barry's Jewelers, Inc.
11.00%..................................... 12/22/00 B 500 375,000
Loehmann's, Inc.
11.875%.................................... 05/15/03 B 350 377,125
Safelite Glass Corp.
9.875%..................................... 12/15/06 B 400 413,000
-----------
1,165,125
-----------
SAVINGS & LOAN ASSOCIATIONS (1.2%)
First Federal Financial Corp.
11.75%..................................... 10/01/04 B+ 500 540,000
-----------
SERVICE (3.3%)
Allied Waste North America
10.25%..................................... 12/01/06 B+ 325 341,250
Coinmach Corp.
11.75%..................................... 11/15/05 B+ 632 684,140
Intertek Finance
10.25%..................................... 11/01/06 B 395 410,800
-----------
1,436,190
-----------
SUPERMARKETS (1.8%)
Brunos, Inc.
10.50%..................................... 08/01/05 B- 250 265,000
Grand Union Co.
12.00%..................................... 09/01/04 B- 500 527,500
-----------
792,500
-----------
TELECOMMUNICATIONS (5.8%)
Brooks Fiber Properties
5.9169%++.................................. 03/01/06 NR 350 224,000
Colt Telecommunication Group
5.9094%++.................................. 12/15/06 NR 700 406,000
ICG Holdings, Inc.
5.2729%++.................................. 09/15/05 NR 150 105,750
Intermedia Communications of Florida
4.2945%++.................................. 06/15/06 B- 500 340,000
13.50%..................................... 06/01/05 B- 50 57,250
Nextel Communications
5.9476%++.................................. 08/15/04 CCC- 150 102,375
Omnipoint Corp.
11.625%.................................... 08/15/06 CCC+ 350 362,250
Pricellular Wire
10.75%..................................... 11/01/04 B 250 260,000
Pronet, Inc.
11.875%.................................... 06/15/05 CCC 100 94,000
RSL Communications Ltd.
12.25%..................................... 11/15/06 NR 200 202,000
Teleport Communications
4.3941%++.................................. 07/01/07 B 550 376,750
-----------
2,530,375
-----------
</TABLE>
B-35
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ --------- -----------
<S> <C> <C> <C> <C>
TEXTILES & APPAREL (3.6%)
Dan River, Inc.
10.125%............................... 12/15/03 B $ 500 $ 505,000
Pillowtex Corp.
10.00%................................ 11/15/06 B+ 375 386,250
# Plaid Clothing Group
11.00%................................ 08/01/03 D 375 24,375
Synthetic Industries
12.75%................................ 12/01/02 B- 600 661,500
-----------
1,577,125
-----------
TRANSPORTATION (0.5%)
Sea Containers Ltd.
12.50%................................ 12/01/04 BB- 215 236,500
-----------
TOTAL CORPORATE BONDS
(Cost $36,490,484)................................................ 37,766,814
-----------
COMMERCIAL PAPER (5.3%)
- -----------------------
Minnesota Mining & Mfg. Co.
5.50%................................. 01/22/97 NR 207 206,336
Northern States Power Co.
6.00%................................. 01/07/97 A+ 567 566,433
St. Paul Co.
6.50%................................. 01/02/97 NR 1,515 1,514,726
-----------
TOTAL COMMERCIAL PAPER
(Cost $2,287,495)................................................. 2,287,495
-----------
<CAPTION>
SHARES
---------
<S> <C> <C>
COMMON STOCK (3.4%)
- -------------------
+ Berg Electronics Corp. ................................ 7,498 220,254
Borg-Warner Automotive, Inc. .......................... 6,100 234,850
+ Capital Gaming International, Inc. .................... 13,335 433
+ Dr. Pepper Bottling Holdings, Inc., Class A............ 57,800 751,400
+ Gaylord Containers Corp., Class A...................... 7,500 45,938
+ Loehmann's Holdings, Inc. ............................. 7,091 146,784
+ Loehmann's Holdings, Inc., Class B..................... 2,475 51,233
+ Protection One, Inc. .................................. 4,200 41,475
-----------
TOTAL COMMON STOCK
(Cost $548,043)................................................... 1,492,367
-----------
<CAPTION>
NUMBER OF
CONTRACTS
---------
<S> <C> <C>
OPTIONS (0.0%)
- --------------
Loehmann $24.913 Call Due August 27, 1997............... 96 (19,419)
Loehmann $22.752 Put Due August 27, 1997................ 96 16,262
-----------
TOTAL OPTIONS
(Cost $8)......................................................... (3,157)
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
PREFERRED STOCK (2.8%)
- ----------------------
Chevy Chase Pfd. Capital Corp. ........................... 5,185 $ 270,268
Criimi Mae, Inc. ......................................... 20,000 580,000
+ Kelley Oil & Gas Corp. ................................... 15,500 375,875
-----------
TOTAL PREFERRED STOCK
(Cost $1,059,263)................................................. 1,226,143
-----------
WARRANTS (0.1%)
- ---------------
@+Capital Gaming International, Inc. ....................... 11,375 15
+ Intermedia Communication.................................. 50 1,750
@+President Riverboat Casinos, Inc. ........................ 4,415 1,104
+ Wireless One, Inc. ....................................... 450 675
+ Wright Medical Technology, Inc. .......................... 2,676 34,794
-----------
TOTAL WARRANTS
(Cost $73,245).................................................... 38,338
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $40,965,300) (a)............................................ $43,366,750
-----------
</TABLE>
- -------
@ Restricted security.
+ Non-income producing.
++ Effective Yield.
# Securities in default.
(a) Also cost for Federal income tax. At December 31, 1996, the excess of
value over tax cost was $3,151,471, and the excess of tax cost over value
was $750,021.
The Standard & Poor's corporation ratings are the most recent ratings
available at December 31, 1996. These ratings have not been verified by the
Independent Accountants and, therefore, are not covered by the report of
Independent Accountants.
The accompanying notes are an integral part of these financial statements.
B-36
<PAGE>
- --------------------------------------------------------------------------------
THE GROWTH EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
COMMON STOCK (97.0%)
- --------------------
AEROSPACE & DEFENSE (2.4%)
Boeing Co. ............................................... 11,000 $ 1,170,125
United Technologies Corp. ................................ 20,000 1,320,000
------------
2,490,125
------------
AUTOMOBILES - CARS (0.5%)
Chrysler Corp. ........................................... 15,000 495,000
------------
BEVERAGES - SOFT DRINKS (0.8%)
PepsiCo, Inc. ............................................ 30,000 877,500
------------
CHEMICALS (1.8%)
Du Pont (E.I.) de Nemours & Co. .......................... 10,000 943,750
Monsanto Co. ............................................. 25,000 971,875
------------
1,915,625
------------
COMMERCIAL SERVICES (0.2%)
Paychex, Inc. ............................................ 5,000 257,188
------------
COMPUTER SOFTWARE & SERVICES (9.1%)
+ BMC Software, Inc. ....................................... 10,000 415,625
+ Cambridge Technology Partners, Inc. ...................... 25,000 839,062
+ Cisco Systems, Inc. ...................................... 25,000 1,592,187
Computer Associates International, Inc. .................. 10,000 497,500
+ Microsoft Corp. .......................................... 25,000 2,067,188
+ Oracle Corp. ............................................. 25,000 1,042,188
+ Parametric Technology Corp. .............................. 20,000 1,028,750
+ Seagate Technology, Inc. ................................. 35,000 1,382,500
+ Tech Data Corp. .......................................... 30,000 821,250
------------
9,686,250
------------
COMPUTER SYSTEMS (4.4%)
+ Compaq Computer Corp. .................................... 25,000 1,856,250
+ Gateway 2000, Inc. ....................................... 12,000 642,750
Hewlett-Packard Co. ...................................... 15,000 753,750
+ Sun Microsystems, Inc. ................................... 25,000 642,188
+ 3Com Corp. ............................................... 10,000 733,125
------------
4,628,063
------------
CONGLOMERATES (2.1%)
General Electric Co. ..................................... 23,000 2,274,125
------------
COSMETICS (0.4%)
Gillette Co. ............................................. 5,000 388,750
------------
DIVERSIFIED OPERATIONS (0.7%)
Tyco International Limited................................ 15,000 793,125
------------
ELECTRONICS (3.3%)
+ Altera Corp. ............................................. 15,000 1,090,312
+ Rockwell International Corp. ............................. 25,000 1,521,875
+ SCI Systems, Inc. ........................................ 20,000 895,000
------------
3,507,187
------------
ELECTRONICS - SEMICONDUCTORS (5.6%)
+ Adaptec, Inc. ............................................ 35,000 1,402,187
+ Atmel Corp. .............................................. 25,000 831,250
Intel Corp. .............................................. 23,000 3,011,563
+ Maxim Integrated Products, Inc. .......................... 15,000 649,687
------------
5,894,687
------------
ENTERTAINMENT (1.6%)
The Walt Disney Co. ...................................... 25,000 1,740,625
------------
FINANCIAL SERVICES (15.0%)
American Express Co. ..................................... 35,000 1,977,500
BankAmerica Corp. ........................................ 10,000 997,500
Chase Manhattan Corp. .................................... 15,000 1,338,750
Citicorp ................................................. 20,000 2,060,000
Federal Home Loan Mortgage Corp. ......................... 10,000 1,101,250
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Federal National Mortgage Assoc. ......................... 30,000 $ 1,117,500
First USA, Inc. .......................................... 40,000 1,385,000
Green Tree Financial Corp. ............................... 10,000 386,250
MBNA Corp. ............................................... 30,000 1,245,000
Money Store, Inc. ........................................ 50,000 1,387,500
SunAmerica, Inc. ......................................... 35,000 1,553,125
Wells Fargo & Co. ........................................ 5,000 1,348,750
------------
15,898,125
------------
FOOD - PROCESSING (1.2%)
ConAgra, Inc. ............................................ 25,000 1,243,750
------------
HEALTH CARE (0.6%)
+ Oxford Health Plans, Inc. ................................ 10,000 585,625
------------
HOSPITAL MANAGEMENT & SERVICES (0.5%)
+ HEALTHSOUTH Corp. ........................................ 15,000 579,375
------------
HOUSEHOLD PRODUCTS (1.7%)
Procter & Gamble Co. ..................................... 17,000 1,827,500
------------
INSURANCE (5.7%)
Allstate Corp. ........................................... 15,000 868,125
American International Group, Inc. ....................... 12,000 1,299,000
MGIC Investment Corp. .................................... 20,000 1,520,000
Travelers Group, Inc. .................................... 20,000 907,500
Travelers/Aetna Property Casualty Corp. .................. 40,000 1,415,000
------------
6,009,625
------------
MACHINERY - DIVERSIFIED (0.7%)
Caterpillar, Inc. ........................................ 10,000 752,500
------------
MANUFACTURING - DIVERSIFIED (1.8%)
AlliedSignal, Inc. ....................................... 16,000 1,072,000
Eastman Kodak Co. ........................................ 10,000 802,500
------------
1,874,500
------------
MEDICAL SUPPLIES (1.8%)
+ Boston Scientific Corp. .................................. 15,000 900,000
Medtronic, Inc. .......................................... 15,000 1,020,000
------------
1,920,000
------------
OIL/GAS (9.5%)
Baker Hughes, Inc. ....................................... 20,000 690,000
Burlington Resources, Inc. ............................... 25,000 1,259,375
Coastal Corp. ............................................ 10,000 488,750
+ ENSCO International, Inc. ................................ 15,000 727,500
+ Global Marine, Inc. ...................................... 50,000 1,031,250
Helmerich & Payne, Inc. .................................. 25,000 1,303,125
Parker & Parsley Petroleum Co. ........................... 15,000 551,250
+ Rowan Cos., Inc. ......................................... 25,000 565,625
Sonat, Inc. .............................................. 15,000 772,500
Williams Cos., Inc. ...................................... 15,000 562,500
Schlumberger Limited...................................... 6,000 599,250
Transocean Offshore, Inc. ................................ 24,000 1,503,000
------------
10,054,125
------------
PAPER & FOREST PRODUCTS (1.5%)
+ Fort Howard Corp. ........................................ 25,000 692,188
Kimberly-Clark Corp. ..................................... 10,000 952,500
------------
1,644,688
------------
PHARMACEUTICALS (10.2%)
Abbott Laboratories....................................... 18,000 913,500
American Home Products Corp. ............................. 15,000 879,375
+ Amgen, Inc. .............................................. 5,000 272,187
Cardinal Health, Inc...................................... 18,000 1,048,500
Eli Lilly & Co. .......................................... 25,000 1,825,000
Johnson & Johnson......................................... 30,000 1,492,500
Merck & Co., Inc. ........................................ 27,000 2,139,750
</TABLE>
B-37
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
Pfizer, Inc. ............................................. 20,000 $ 1,657,500
Schering-Plough Corp. .................................... 10,000 647,500
------------
10,875,812
------------
RESTAURANTS (0.7%)
+ Boston Chicken, Inc. ..................................... 20,000 717,500
------------
RETAIL (7.6%)
Dayton Hudson Corp. ...................................... 25,000 981,250
Home Depot, Inc. ......................................... 25,000 1,253,125
+ Price/Costco, Inc. ....................................... 50,000 1,259,375
Ross Stores, Inc. ........................................ 15,000 748,125
+ Safeway, Inc. ............................................ 40,000 1,710,000
+ Staples, Inc. ............................................ 20,000 361,250
TJX Companies, Inc. ...................................... 20,000 947,500
Walgreen Co. ............................................. 20,000 800,000
------------
8,060,625
------------
SHOES & APPAREL (1.1%)
Nike, Inc. ............................................... 20,000 1,195,000
------------
TELECOMMUNICATIONS (2.9%)
+ Andrew Corp. ............................................. 18,000 955,125
Lucent Technologies, Inc. ................................ 15,000 693,750
+ Tellabs, Inc. ............................................ 20,000 753,750
+ U.S. Robotics Corp. ...................................... 10,000 720,625
------------
3,123,250
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
TOBACCO (1.6%)
Philip Morris Cos., Inc. ............................. 15,000 $ 1,689,375
------------
TOTAL COMMON STOCK
(Cost $83,528,229)............................................... 102,999,625
------------
SHORT TERM INVESTMENTS (3.0%)
- -----------------------------
Temporary Cash Investment Fund, Inc. ................. 1,601,620 1,601,620
Temporary Investment Fund, Inc. ...................... 1,601,620 1,601,620
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $3,203,240)................................................ 3,203,240
------------
TOTAL INVESTMENTS (100.0%)
(Cost $86,731,469) (a)........................................... $106,202,865
------------
</TABLE>
- -------
+ Non-Income Producing.
(a) At December 31, 1996, the cost for Federal income tax purposes was
$86,923,583. The excess of value over tax cost was $20,129,838, and the
excess of tax cost over value was $850,556.
The accompanying notes are an integral part of these financial statements.
B-38
<PAGE>
- --------------------------------------------------------------------------------
THE VALUE EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (85.5%)
- --------------------
AEROSPACE & DEFENSE (4.6%)
Lockheed Martin Corp. ................................ 45,000 $ 4,117,500
McDonnell Douglas Corp. .............................. 81,000 5,184,000
------------
9,301,500
------------
AIRLINES (2.1%)
+ AMR Corp. ............................................ 48,000 4,230,000
------------
AUTOMOTIVE PARTS - EQUIPMENT (3.0%)
+ LucasVarity PLC ADR................................... 158,520 6,023,760
------------
BROADCASTING (1.0%)
+ TCI Satellite Entertainment Inc Class A............... 12,000 119,250
+ Tele-Communications Inc. ............................. 150,000 1,959,375
------------
2,078,625
------------
CHEMICALS (3.9%)
Du Pont (E.I.) de Nemours & Co. ...................... 30,000 2,831,250
Hercules, Inc. ....................................... 50,000 2,162,500
Monsanto Co. ......................................... 77,000 2,993,375
------------
7,987,125
------------
CONGLOMERATES (2.0%)
General Electric Co. ................................. 42,000 4,152,750
------------
COSMETICS (1.4%)
Avon Products, Inc. .................................. 50,000 2,856,250
------------
DIVERSIFIED (3.0%)
Canadian Pacific Limited.............................. 110,000 2,915,000
Tenneco, Inc. ........................................ 70,000 3,158,750
------------
6,073,750
------------
ENTERTAINMENT & LEISURE (2.0%)
Carnival Corp. Class A................................ 125,000 4,125,000
------------
ELECTRONIC SEMICONDUCTORS (1.5%)
+ Adaptec, Inc. ........................................ 78,000 3,124,875
------------
ELECTRONICS (1.4%)
+ Arrow Electronics, Inc. .............................. 53,000 2,835,500
------------
FINANCIAL SERVICES (13.1%)
Citicorp.............................................. 70,000 7,210,000
Countrywide Credit Industries, Inc. .................. 210,000 6,011,250
Federal Home Loan Mortgage Corp. ..................... 55,000 6,056,875
Wells Fargo & Co. .................................... 27,333 7,373,077
------------
26,651,202
------------
HOSPITAL MANAGEMENT (3.8%)
Columbia/HCA Healthcare Corp. ........................ 82,500 3,361,875
+ OrNda HealthCorp...................................... 10,000 292,500
+ Tenet Healthcare Corp. ............................... 190,000 4,156,250
------------
7,810,625
------------
INSURANCE (22.4%)
Ace, Limited.......................................... 171,000 10,281,375
AFLAC, Inc. .......................................... 105,375 4,504,781
American International Group, Inc. ................... 33,500 3,626,375
Everest Re Holdings, Inc. ............................ 135,000 3,881,250
Exel Limited.......................................... 227,600 8,620,350
General Re Corp. ..................................... 25,000 3,943,750
Mid Ocean Limited..................................... 83,000 4,357,500
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Progressive Corp. .................................... 55,000 $ 3,705,625
Transamerica Corp. ................................... 33,000 2,607,000
------------
45,528,006
------------
MACHINERY - DIVERSIFIED (3.1%)
Caterpillar, Inc. .................................... 83,000 6,245,750
------------
MANUFACTURING (0.9%)
AlliedSignal, Inc. ................................... 27,000 1,809,000
------------
MEDICAL SUPPLIES (2.9%)
Becton, Dickinson & Co. .............................. 134,000 5,812,250
------------
METALS (0.7%)
Freeport-McMoRan Copper & Gold, Inc. Class B.......... 47,016 1,404,603
------------
OIL/GAS (2.1%)
El Paso Natural Gas................................... 6,510 328,755
+ Triton Energy Limited................................. 62,000 3,007,000
Union Pacific Resources Group, Inc. .................. 28,796 842,283
------------
4,178,038
------------
PAPER & PAPER PRODUCTS (0.4%)
Champion International Corp. ......................... 20,000 865,000
------------
RESTAURANTS (1.5%)
McDonald's Corp. ..................................... 67,000 3,031,750
------------
RETAIL (3.3%)
May Department Stores Co. ............................ 144,000 6,732,000
------------
TELECOMMUNICATIONS (1.4%)
Sprint Corp. ......................................... 72,250 2,880,969
------------
TEXTILES (0.8%)
Shaw Industries, Inc. ................................ 140,000 1,645,000
------------
TOYS (1.6%)
Mattel, Inc. ......................................... 114,531 3,178,235
------------
TRANSPORT SERVICES (1.6%)
CSX Corp. ............................................ 30,000 1,267,500
Union Pacific Corp. .................................. 34,000 2,044,250
------------
3,311,750
------------
TOTAL COMMON STOCK
(Cost $120,302,726).............................................. 173,873,313
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ------
<S> <C> <C> <C>
COMMERCIAL PAPER (9.6%)
- -----------------------
IBM Credit Corp.
5.35%........................................... 01/08/97 $6,104 6,097,650
John Deere Credit Co.
5.48%........................................... 01/29/97 5,000 4,978,689
JP Morgan, Inc.
5.36%........................................... 01/10/97 6,156 6,147,751
Prudential Funding
5.37%........................................... 01/08/97 2,308 2,305,590
------------
TOTAL COMMERCIAL PAPER
(Cost $19,529,680)............................................... 19,529,680
------------
</TABLE>
B-39
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS (4.9%)
- -----------------------------
Temporary Cash Investment Fund, Inc. ..... 5,016,502 $ 5,016,502
Temporary Investment Fund, Inc. .......... 5,021,357 5,021,357
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $10,037,859).................................. 10,037,859
------------
TOTAL INVESTMENTS (100.0%)
(Cost $149,870,265) (a)............................. $203,440,852
------------
</TABLE>
- ------------
+ Non-income producing.
(a) Also cost for Federal income tax purposes. At December 31, 1996, the excess
of value over tax cost was $54,230,586, the excess of tax cost over value
was $659,999.
The accompanying notes are an integral part of these financial statements.
B-40
<PAGE>
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (48.7%)
- --------------------
BUILDING MATERIALS (0.8%)
Schuller Corp. ....................................... 290,000 $ 3,081,250
------------
CHEMICALS (1.0%)
English China Clays PLC............................... 20,000 65,945
Great Lakes Chemical Corp. ........................... 82,500 3,856,875
+ Millennium Chemicals, Inc. ........................... 10,000 177,500
------------
4,100,320
------------
COMPUTERS (0.6%)
International Business Machines Corp. ................ 15,000 2,265,000
------------
DIVERSIFIED OPERATIONS (2.3%)
+ Chris-Craft Industries, Inc. ......................... 115,000 4,815,625
Corning, Inc. ........................................ 90,000 4,162,500
------------
8,978,125
------------
ELECTRIC UTILITIES (6.4%)
Centerior Energy Corp. ............................... 1,550,000 16,662,500
Entergy Corp. ........................................ 70,000 1,942,500
Ohio Edison Co. ...................................... 45,000 1,023,750
Public Service Co. Of New Mexico...................... 39,000 765,375
Unicom Corp. ......................................... 190,000 5,153,750
------------
25,547,875
------------
FINANCIAL SERVICES (3.3%)
American Express Co. ................................. 60,000 3,390,000
Federal National Mortgage Assoc. ..................... 70,000 2,607,500
Fund American Enterprises, Inc. ...................... 24,000 2,298,000
Student Loan Marketing Assoc. ........................ 50,000 4,656,250
------------
12,951,750
------------
FOOD/PROCESSING (0.2%)
McCormick & Co., Inc. ................................ 35,000 824,687
------------
HOLDINGS COMPANY DIVERSIFIED (3.3%)
Hanson PLC ADR........................................ 235,000 1,586,250
Loews Corp. .......................................... 115,000 10,838,750
Lonrho PLC............................................ 252,000 537,392
------------
12,962,392
------------
INSURANCE (1.9%)
Alexander & Alexander Services, Inc. ................. 40,000 695,000
Harleysville Group, Inc. ............................. 45,000 1,361,250
Unitrin, Inc. ........................................ 52,000 2,912,000
Willis Corroon Group PLC ADR.......................... 120,000 1,380,000
Zurich Reinsurance Centre Holdings, Inc. ............. 39,100 1,221,875
------------
7,570,125
------------
LEASING COMPANIES (1.3%)
PHH Corp. ............................................ 75,000 3,225,000
Ryder System, Inc. ................................... 70,000 1,968,750
------------
5,193,750
------------
METALS & STEEL (0.7%)
Allegheny Teledyne, Inc. ............................. 120,000 2,760,000
------------
MINING (2.9%)
+ Hecla Mining Co. ..................................... 55,000 309,375
Homestake Mining Co. ................................. 155,000 2,208,750
Newmont Mining Corp. ................................. 121,000 5,414,750
Prime Resources Group, Inc. .......................... 37,000 262,104
Santa Fe Pacific Gold Corp. .......................... 210,000 3,228,750
------------
11,423,729
------------
MULTIMEDIA (0.6%)
Meredith Corp. ....................................... 47,000 2,479,250
------------
OFFICE SUPPLIES (0.1%)
Cross (A.T.) Co., Class A............................. 38,000 441,750
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
OIL/GAS (9.5%)
Amerada Hess Corp. ...................................... 160,000 $ 9,260,000
Atlantic Richfield Co. .................................. 35,000 4,637,500
Kerr-McGee Corp. ........................................ 14,000 1,008,000
Mitchell Energy & Development Corp.
Class B................................................. 105,000 2,323,125
Murphy Oil Corp. ........................................ 126,000 7,008,750
+ Oryx Energy Co. ......................................... 55,000 1,361,250
Petro-Canada............................................. 20,000 280,000
Sun Company, Inc. ....................................... 90,000 2,193,750
Texaco, Inc. ............................................ 65,000 6,378,125
Union Texas Petroleum Holdings, Inc. .................... 142,000 3,177,250
------------
37,627,750
------------
PAPER & FOREST PRODUCTS (1.3%)
International Paper Co. ................................. 28,000 1,130,500
Weyehaeuser Co. ......................................... 85,000 4,026,875
------------
5,157,375
------------
PHARMACEUTICALS (3.7%)
+ Genentech, Inc. ......................................... 230,000 12,333,750
+ Novartis................................................. 1,067 1,221,853
Schering-Plough Corp. ................................... 20,000 1,295,000
------------
14,850,603
------------
PHOTO EQUIPMENT (0.9%)
Polaroid Corp............................................ 85,000 3,697,500
------------
PUBLISHING (5.2%)
New York Times Co., Class A.............................. 285,000 10,830,000
Readers Digest Assoc., Inc., Class B..................... 50,300 1,823,375
Times Mirror Co., Class A................................ 23,500 1,169,125
Washington Post Co., Class B............................. 21,000 7,037,625
------------
20,860,125
------------
RETAIL (1.2%)
+ Hills Stores Co. ........................................ 67,000 402,000
+ Petrie Stores Corp. ..................................... 995,000 2,674,063
+ Toys "R" Us, Inc. ....................................... 20,500 615,000
Wal-mart Stores, Inc. ................................... 45,000 1,029,375
------------
4,720,438
------------
TOBACCO (1.0%)
+ Imperial Tobacco Group PLC............................... 8,750 111,569
Philip Morris Companies, Inc. ........................... 35,000 3,941,875
------------
4,053,444
------------
TRANSPORTATION - MISCELLANEOUS (0.5%)
Overseas Shipholding Group, Inc. ........................ 110,000 1,870,000
------------
TOTAL COMMON STOCK
(Cost $149,523,684)............................................... 193,417,238
------------
PREFERRED STOCK (4.4%)
- ----------------------
Cleveland Electric Illum. Series L 7.00%................. 34,550 2,815,825
Cleveland Electric Illum. Series R 8.80%................. 2,550 2,542,044
Cleveland Electric Illum. Series S 9.00%................. 3,000 3,020,640
Entergy Gulf States Utilities, Inc.
Series B 7.20%.......................................... 15,853 776,797
International Paper Co., Convertible 5.25%............... 10,000 455,000
Kemper Co. Series E 5.75%................................ 100,000 5,200,000
Microsoft Corp. Series A 2.75%........................... 20,000 1,601,250
Niagara Mohawk Power Corp.
Series A 6.50%.......................................... 24,000 426,000
Niagara Mohawk Power Corp.
Series B 7.50%.......................................... 7,000 138,250
Niagara Mohawk Power Corp.
Series C 7.20%.......................................... 29,500 560,500
------------
TOTAL PREFERRED STOCK
(Cost $15,900,525)................................................ 17,536,306
------------
</TABLE>
B-41
<PAGE>
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND, CONT'D
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS VALUE
--------- ------------
<S> <C> <C>
PUT OPTIONS (0.5%)
- ------------------
+ Allegheny Teledyne $20, January 18, 1997 45 $ 563
+ Allegheny Teledyne $22.50,
January 18, 1997.................................... 75 2,813
+ Allegheny Teledyne $25, April 19, 1997................ 45 11,250
+ Amerada Hess $60, May 17, 1997........................ 100 40,625
+ Automatic Data $40, February 22, 1997................. 80 4,000
+ Automatic Data $45, February 22, 1997................. 230 61,812
+ Automatic Data $50, February 22, 1997................. 40 28,500
+ HFS $60, April 19, 1997............................... 100 65,625
+ HFS $60, July 19, 1997................................ 200 197,500
+ HFS $85, April 19, 1997............................... 100 253,750
+ Home Depot $60, May 17, 1997.......................... 100 100,000
+ IBM $110, January 18, 1997............................ 50 312
+ IBM $140, April 19, 1997.............................. 30 15,375
+ IBM $155, July 19, 1997............................... 50 68,125
+ IBM $160, July 19, 1997............................... 50 81,250
+ IBM $170, July 19, 1997............................... 50 115,000
+ Microsoft $85, July 19, 1997.......................... 100 81,250
+ Philip Morris $105, March 22, 1997.................... 32 7,200
+ Philip Morris $115, March 22, 1997.................... 55 28,875
+ Schering Plough $70, May 17, 1997..................... 100 107,500
+ Schering Plough $70, May 17, 1997..................... 100 65,000
+ Silicon Graphics $30, February 22, 1997............... 100 46,875
+ Texaco $95, April 19, 1997............................ 35 10,719
+ Times Mirror $50, March 22, 1997...................... 65 14,219
+ Toys "R' Us $35, January 18, 1997..................... 35 17,062
+ Toys "R' Us $35, March 22, 1997....................... 60 30,750
+ Toys "R' Us $40, June 21, 1997........................ 200 201,250
+ Wal-Mart $27.5, March 22, 1997........................ 260 118,625
+ Wal-Mart $30, March 22, 1997.......................... 190 135,375
------------
TOTAL PUT OPTIONS
(Cost $1,955,699)................................................ 1,911,200
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000)
-------- ------ -------
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (4.5%)
- --------------------------------
U.S. Treasury Notes
5.50%.................................. 02/28/99 N/A $10,000 9,915,600
5.75%.................................. 10/31/97 N/A 2,500 2,503,525
6.125%................................. 07/31/00 N/A 1,250 1,250,000
6.75%.................................. 05/31/99 N/A 2,000 2,034,060
7.375%................................. 11/15/97 N/A 2,000 2,028,740
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $17,680,781)............................................... 17,731,925
------------
AGENCY OBLIGATIONS (1.8%)
- -------------------------
Tennessee Valley Authority 5.98%
(Cost $7,025,930)...................... 04/01/36 AAA 7,000 7,096,250
------------
MEDIUM TERM NOTE (0.4%)
- -----------------------
Federal National Mortgage Assoc. 5.37%
(Cost $1,576,000)...................... 02/07/01 NR 1,600 1,546,320
------------
COMMERCIAL PAPER (13.6%)
- ------------------------
Abbott Laboratories
6.00%.................................. 01/07/97 A-1+ 10,000 9,990,000
Assett Securization Coop. 5.40%......... 02/25/97 A-1+ 1,723 1,708,013
Corporate Asset Funding Co. 5.75%....... 01/27/97 AAA 2,600 2,589,203
Delaware Funding Corp.
5.55%.................................. 01/15/97 A-1+ 1,100 1,097,626
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ ------------
<S> <C> <C> <C> <C>
Dillard Investment Co.
5.52%.................................... 01/10/97 A-1 $ 644 $ 643,111
6.75%.................................... 01/02/97 A-1 4,600 4,599,138
Dow Jones and Co., Inc.
5.32%.................................... 02/14/97 A-1+ 10,500 10,428,800
Heinz (H.J.) Co. 5.35%.................... 01/23/97 A-1 2,300 2,292,480
Island Finance - Puerto Rico 5.55%........ 02/07/97 A-1+ 8,796 8,745,826
Mobil Australia Finance
5.40%.................................... 01/02/97 A-1+ 7,000 6,998,950
Raytheon Co.
5.50%.................................... 01/13/97 A-2 5,056 5,046,730
------------
TOTAL COMMERCIAL PAPER
(Cost $54,143,576)................................................ 54,139,877
------------
CONVERTIBLE BONDS (26.0%)
- -------------------------
Alza Corp.
5.0261%++................................ 07/14/14 BBB- 4,500 1,861,875
Automatic Data Processing, Inc.
5.1212%++................................ 02/20/12 AA 30,250 17,254,902
Cellular Communications
6.7496%++................................ 07/27/99 BBB 5,950 4,968,250
CHUBB Capital Euro Bond 6.00%............. 05/15/98 AA 2,400 2,965,824
Comcast Corp. 3.375%...................... 09/09/05 BB- 5,000 4,701,400
Cooper Industries, Inc.
7.05%.................................... 01/01/15 BBB+ 594 635,092
Ensearch Corp. 6.375%..................... 04/01/02 BBB- 3,800 3,743,000
Grand Metropolitan PLC Euro-Bond
6.50%.................................... 01/31/00 A+ 3,000 3,559,770
Grand Metropolitan
PLC 6.50%............................... 01/31/00 A+ 1,300 1,542,567
Home Depot, Inc.
3.25%.................................... 10/01/01 A+ 1,500 1,465,200
Homestake Mining Co.
5.50%.................................... 06/23/00 NR 4,900 4,740,750
Lonhro Finance Conv. Euro Bond 6.00%...... 02/27/04 BB 1,250 1,929,747
McKesson Corp.
4.50%.................................... 03/01/04 A- 1,500 1,315,125
Office Depot, Inc.
4.2615%++................................ 11/01/08 BB- 2,800 1,592,248
4.6260%++................................ 12/11/07 BB- 1,200 718,464
Outboard Marine Corp.
7.00%.................................... 07/01/02 B+ 1,850 1,817,625
Peninsular & Oriental
7.25%.................................... 05/19/03 NR 1,000 1,764,242
Potomac Electric Power Co. 5.00%.......... 09/01/02 A- 2,100 1,953,000
Price Co. Subordinated Debenture 5.50%.... 02/28/12 BBB 1,200 1,260,000
Rouse Co. Euro Bond
5.75%.................................... 07/23/02 BBB- 6,700 7,227,625
Sandoz Capital
2.00%.................................... 10/06/02 AAA 7,000 7,525,000
Silicon Graphics
3.8396%++................................ 11/02/13 BB+ 4,500 2,385,000
Time Warner, Inc.
6.2910%++................................ 12/17/12 BBB- 14,000 5,326,440
Turner Broadcasting
7.1717%++................................ 02/13/07 BB+ 9,500 4,666,875
U.S. West, Inc.
7.1386%++................................ 06/25/11 BBB 16,000 5,833,600
UBS Finance 2.00%......................... 12/15/00 AAA 300 279,750
</TABLE>
B-42
<PAGE>
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND, CONT'D
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- ------------
<S> <C> <C> <C> <C>
USF&G Corp.
4.3663%++............................... 03/03/09 BBB- $8,500 $ 5,724,920
WMX Technologies
2.00%................................... 01/24/05 A 4,700 4,399,529
------------
TOTAL CONVERTIBLE BONDS
(Cost $96,966,537)........................................ 103,157,820
------------
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT TERM INVESTMENTS (0.1%)
- -----------------------------
Temporary Investment Fund, Inc.
(Cost $546,528)......................................... 546,528 546,528
------------
TOTAL INVESTMENTS (100.00%)
(Cost $345,319,260) (a)... ....................................... $397,083,464
============
</TABLE>
- -------
+ Non-income producing.
++ Effective Yield.
(a) At December 31, 1996, the cost for Federal income tax purposes was
$345,325,238. The excess of value over tax cost was $58,623,388, and the
excess of tax cost over value was $6,865,162.
The Standard & Poors corporation ratings are the most recent ratings
available at December 31, 1996. These ratings have not been verified by the
Independent Accountants and, therefore, are not covered by the Report of
Independent Accountants.
The accompanying notes are an integral part of these financial statements.
B-43
<PAGE>
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK (88.6%)
- --------------------
AUSTRALIA (0.8%)
Broken Hill Proprietary Co.
Limited..................... 60,948 $ 868,816
------------
BELGIUM (0.7%)
+ Barco N.V.................... 4,500 778,778
------------
BRAZIL (0.5%)
Companhia Cervejaria Brahma
(ADR)....................... 47,000 513,851
------------
FINLAND (0.6%)
Cultor Oy, Series II......... 12,000 619,473
------------
FRANCE (8.5%)
AXA SA....................... 22,500 1,433,315
Carrefour Supermarche SA..... 2,100 1,368,569
Compagnie de Suez SA......... 18,000 766,519
+ Dassault Systemes SA......... 21,000 970,079
Grand Optical - Photoservice. 3,750 608,797
LVMH (Moet-Hennessy Louis
Vuitton).................... 4,100 1,146,825
Societe Bic SA............... 7,500 1,126,383
Total SA-B................... 12,185 992,620
Valeo SA..................... 8,063 498,072
------------
8,911,179
------------
GERMANY (7.0%)
Adidas AG..................... 11,000 951,854
Allianz AG Holding............ 350 630,774
Bayer AG...................... 35,000 1,422,089
Bayerische Motoren Werke
(BMW) AG..................... 1,000 690,956
CKAG Colonia Konzern AG....... 4,400 367,287
+ Frensenius Medical Care AG
(ADR)........................ 7,000 181,563
+ Fresenius Medical Care AG
(ADR)........................ 17,000 478,125
Gehe AG...................... 10,800 694,587
SGL Carbon AG................ 9,700 1,224,964
VEBA AG...................... 14,000 806,116
------------
7,448,315
------------
HONG KONG (2.6%)
Cheung Kong Holdings Limited. 120,000 1,066,649
Dah Sing Financial Group..... 195,800 794,896
Sun Hung Kai Properties
Limited..................... 70,000 857,521
------------
2,719,066
------------
IRELAND (3.7%)
Allied Irish Banks PLC....... 139,076 932,621
CRH PLC...................... 91,022 940,903
+ Elan Corp. PLC (ADR)......... 31,000 1,030,750
Greencore Group PLC.......... 150,196 951,878
------------
3,856,152
------------
ITALY (0.5%)
Danieli & Co. ............... 132,000 550,000
------------
JAPAN (21.9%)
Bridgestone Corp. ........... 85,000 1,616,948
Canon, Inc. ................. 40,000 885,430
Eisai Co. Limited............ 80,000 1,577,173
Ezaki Glico Co. Limited...... 75,000 648,508
Fuji Photo Film Co. Limited.. 40,000 1,321,228
Hitachi Maxell Limited....... 25,000 553,394
Ito-Yokado Co. Limited....... 12,000 522,957
JUSCO Co. Limited............ 48,000 1,631,128
Komatsu Limited.............. 80,000 657,155
Kyocera Corp. ............... 11,000 686,727
Mitsubishi Electric Corp. ... 120,000 715,953
Mitsubishi Heavy Industries
Limited..................... 250,000 1,988,759
Mitsui & Co. Limited......... 125,000 1,015,997
Murata Manufacturing Co.
Limited..................... 18,000 599,222
Nikko Securities Co. Limited. 60,000 448,249
Nippon Steel Corp. .......... 320,000 946,304
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
NTT Data Corp. ...... 18,000 $ 527,626
Omron Corp. ......... 66,000 1,244,099
Rohm Co. Limited..... 17,000 1,117,164
SMC Corp. ........... 10,000 673,584
Taisho Pharmaceutica
Co. Limited......... 69,000 1,628,794
Tokyo Broadcasting
System, Inc. ....... 30,000 459,144
Yamato Transport Co.
Limited............. 80,000 830,091
Yasuda Fire & Marine
Insurance Co.
Limited............. 145,000 754,777
------------
23,050,411
------------
MALAYSIA (2.3%)
Malayan Banking
Berhad.............. 80,000 887,023
Sime Darby Berhad.... 132,000 520,097
Telekom Malaysia
Berhad.............. 60,000 534,590
United Engineers
(Malaysia) Limited.. 50,000 451,432
------------
2,393,142
------------
NETHERLANDS (6.4%)
Aegon N.V. (ADR)..... 9,813 620,672
Aegon N.V. .......... 10,137 647,080
Elsevier N.V. ....... 70,000 1,185,065
Hagemeyer N.V. ...... 15,000 1,201,009
Oce-Van Der Grinten
N.V. ............... 12,057 1,311,394
Vendex International
N.V. ............... 42,000 1,799,513
------------
6,764,733
------------
NORWAY (0.5%)
+ Smedvig - ASA (ADR)
B.................... 25,000 503,125
------------
PHILIPPINES (0.5%)
Manila Electric Co. B 68,250 557,937
------------
SINGAPORE (1.9%)
City Developments
Limited............. 66,000 594,595
Cycle & Carriage
Limited............. 67,000 819,176
Keppel Corp. Limited. 70,000 545,546
------------
1,959,317
------------
SPAIN (1.0%)
Banco Intercontinental
Espanol SA.......... 2,600 404,342
Banco Popular Espanol
SA.................. 3,500 689,509
------------
1,093,851
------------
SWEDEN (5.8%)
Assa Abloy AB B...... 60,000 1,095,422
Astra AB B........... 39,300 1,903,694
Autoliv AB........... 12,500 550,288
Hennes & Mauritz AB B 4,000 555,956
Kinnevik AB B........ 24,000 664,321
OM Gruppen AB........ 17,000 513,111
Telefonaktiebolaget
LM Ericsson B........ 25,000 776,660
------------
6,059,452
------------
SWITZERLAND (6.2%)
Nestle SA............ 850 912,688
+ Pharma Vision 2000
AG................... 3,050 1,367,406
Roche Holding AG-
Genusshein.......... 400 3,112,904
Union Bank of
Switzerland B....... 1,352 1,185,008
------------
6,578,006
------------
THAILAND (0.3%)
Bangkok Bank Public
Co. Limited
(Foreign)........... 30,000 290,002
------------
UNITED KINGDOM (16.9%)
British Petroleum Co.
PLC (ADR)........... 7,000 989,625
Dixons Group PLC..... 185,000 1,719,066
EMI Group PLC........ 32,000 756,398
General Accident PLC. 136,534 1,792,561
GKN PLC.............. 130,267 2,233,518
HSBC Holdings PLC.... 52,554 1,175,628
</TABLE>
B-44
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
Mirror Group PLC.......................................... 170,000 $ 627,505
Misys PLC................................................. 32,000 611,969
Powerscreen International PLC............................. 95,000 919,376
Provident Financial PLC................................... 91,739 789,607
Rentokil Initial PLC...................................... 82,000 616,594
Reuters Holdings PLC...................................... 80,000 1,029,769
Shell Transport & Trading Co. PLC......................... 92,000 1,593,950
Siebe PLC................................................. 93,643 1,735,496
Smiths Industries PLC..................................... 90,000 1,234,798
------------
17,825,860
------------
TOTAL COMMON STOCK
(Cost $76,803,475)................................ 93,341,466
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ---------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (2.8%)
- ----------------------------------
U.S. Treasury Bills
4.87%................................. 03/06/97 N/A $ 1,000 991,026
4.89%................................. 03/06/97 N/A 1,000 991,026
4.96%................................. 03/27/97 N/A 1,000 988,223
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $2,971,036)................................................. 2,970,275
------------
<CAPTION>
SHARES
----------
<S> <C> <C>
WARRANTS (0.7%)
- ---------------
+ Bank Vision 01/15/97.................................. 15,000 28,021
+ Roche Holding 12/18/98................................ 110,000 706,867
------------
TOTAL WARRANTS
(Cost $1,040,021)................................................. 734,888
------------
SHORT - TERM INVESTMENTS (7.9%)
- -------------------------------
Temporary Cash Investment Fund, Inc.................... 4,123,862 4,123,862
Temporary Investment Fund, Inc......................... 4,123,206 4,123,206
------------
TOTAL SHORT - TERM INVESTMENTS
(Cost $8,247,068)................................................. 8,247,068
------------
TOTAL INVESTMENTS (100.0%)
(Cost $89,061,600) (a)............................................ $105,293,697
------------
</TABLE>
- -------
+ Non-income Producing.
(a) Also cost for Federal Income tax purposes. At December 31, 1996, the excess
of value over tax cost was $18,341,684 and the excess of tax cost over
value was $2,109,587.
ADR - American Depository Receipt
The accompanying notes are an integral part of these financial statements.
B-45
<PAGE>
- --------------------------------------------------------------------------------
THE SMALL CAP FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
COMMON STOCK (86.8%)
- --------------------
ADVERTISING (2.4%)
+ Katz Media Group, Inc. .... 33,500 $ 376,875
-----------
AUTOMOTIVE PARTS (2.7%)
Borg - Warner Automotive,
Inc. ..................... 8,400 323,400
+ Jason, Inc. ............... 16,800 109,200
-----------
432,600
-----------
BROADCASTING COMPANY (0.6%)
+ American Radio Systems
Corp. ..................... 3,700 100,825
-----------
BUILDING MATERIALS (3.2%)
Carlisle Companies, Inc. .. 2,100 127,050
+ Dal-Tile International,
Inc. ...................... 9,600 195,600
+ Falcon Building Products,
Inc. ...................... 13,100 193,225
-----------
515,875
-----------
CHEMICALS (1.4%)
+ McWhorter Technologies,
Inc. ...................... 6,000 137,250
+ Sybron Chemicals, Inc. .... 5,400 86,400
-----------
223,650
-----------
COMPUTER SERVICES & SOFTWARE
(7.0%)
+ BancTec, Inc. ............. 26,600 548,625
+ Exabyte Corp. ............. 14,700 197,531
+ Wang Laboratories, Inc. ... 18,200 370,825
-----------
1,116,981
-----------
ELECTRICAL EQUIPMENT (0.4%)
AVX Corp. ................. 2,700 58,050
-----------
ELECTRONICS (8.9%)
+ Arrow Electronics, Inc. ... 4,800 256,800
+ Channell Commercial Corp. . 5,400 68,175
EG&G, Inc. ................ 27,500 553,438
+ Oak Industries, Inc. ...... 13,860 318,780
+ Tracor Inc. ............... 10,500 224,438
-----------
1,421,631
-----------
ELECTRONICS - SEMICONDUCTORS
(4.1%)
+ Exar Corp. ................ 21,500 338,625
+ Marshall Industries........ 10,400 318,500
-----------
657,125
-----------
ENGINEERED INDUSTRIAL
PRODUCERS (1.4%)
Crane Co. ................. 7,800 226,200
-----------
FINANCIAL SERVICES (1.5%)
First Financial Caribbean
Corp. .................... 3,200 90,000
First Financial Corp. ..... 6,125 150,063
-----------
240,063
-----------
FOODS (0.4%)
+ Sylvan, Inc. .............. 4,900 63,394
-----------
HOUSEHOLD PRODUCTS (1.7%)
Armor All Products Corp. .. 8,100 154,406
Libbey, Inc. .............. 4,200 117,075
-----------
271,481
-----------
INSURANCE (15.8%)
Ace, Limited............... 4,900 294,612
+ Capsure Holdings Corp. .... 19,300 219,537
+ Delphi Financial Group,
Inc. ...................... 11,400 336,300
E.W. Blanch Holdings, Inc.. 24,700 497,088
Everest Re Holdings, Inc. . 6,400 184,000
+ Gryphon Holdings........... 8,400 118,650
Horace Mann Educators
Corp. ..................... 8,100 327,037
Protective Life Corp. ..... 3,500 139,563
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
United Wisconsin Services,
Inc. ........................ 9,200 $ 241,500
W.R. Berkley Corp. ........... 3,200 163,400
-----------
2,521,687
-----------
MACHINE TOOLS (0.5%)
Greenfield Industries, Inc. .. 2,600 79,462
-----------
MACHINERY (DIVERSIFIED) (3.9%)
+ Baldwin Technology Co., Inc. . 70,100 175,250
Briggs & Stratton Corp. ...... 2,400 105,600
United Dominion Industries,
Limited...................... 14,900 350,150
-----------
631,000
-----------
MANUFACTURED HOUSING (0.7%)
McGrath Rentcorp.............. 4,500 114,188
-----------
MANUFACTURING (1.2%)
+ Alltrista Corp. .............. 7,600 192,850
-----------
MEDICAL - HOSPITAL MANAGEMENT &
SERVICES (5.4%)
+ Magellan Health Services,
Inc. ......................... 34,100 762,987
+ Summit Care Corp. ............ 6,300 101,194
-----------
864,181
-----------
MEDICAL SUPPLIES (4.4%)
Dentsply International, Inc. . 1,200 57,075
+ SpaceLabs Medical, Inc. ...... 30,800 642,950
-----------
700,025
-----------
METAL FABRICATE/HARDWARE (1.1%)
Easco, Inc. .................. 24,400 181,475
-----------
OFFICE EQUIPMENT & SERVICES
(2.2%)
+ Nu-Kote Holdings, Inc. ....... 34,900 357,725
-----------
OIL/GAS (4.7%)
+ Belden & Blake Corp. ......... 2,400 61,500
+ Nuevo Energy Co. ............. 5,200 270,400
Petroleum Heat & Power Co.,
Inc. ........................ 15,000 93,750
St. Mary Land & Exploration
Co. ......................... 5,000 125,000
+ Seagull Energy Corp. ......... 3,696 81,312
+ Triton Energy Limited......... 2,300 111,550
-----------
743,512
-----------
PACKAGING & PAPER PRODUCTS
(2.9%)
+ Repap Enterprises, Inc........ 71,300 199,417
+ Shorewood Packaging Corp. .... 13,000 255,938
-----------
455,355
-----------
PUBLISHING (1.5%)
+ International Imaging
Materials, Inc. .............. 10,700 238,075
-----------
REAL ESTATE (1.9%)
Security Capital Industrial
Trust........................ 5,400 115,425
Security Capital Pacific Trust 8,300 189,863
-----------
305,288
-----------
RETAIL (0.7%)
+ Maxim Group, Inc.............. 6,600 115,088
-----------
TELECOMMUNICATIONS (0.7%)
ECI Telecommunications Limited
Designs...................... 5,400 114,412
-----------
TEXTILES (1.7%)
+ WestPoint Stevens, Inc. ...... 8,900 264,774
-----------
TRANSPORTATION (1.8%)
Interpool, Inc. .............. 6,000 140,250
+ MTL, Inc. .................... 7,500 153,750
-----------
294,000
-----------
TOTAL COMMON STOCK
(Cost $12,581,075)............. 13,877,847
-----------
</TABLE>
B-46
<PAGE>
- --------------------------------------------------------------------------------
THE SMALL CAP FUND, CONT'D.
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- -------- -----------
<S> <C> <C> <C>
AGENCY OBLIGATIONS (9.8%)
- -------------------------
Federal Home Loan Bank
5.21%........................ 02/14/97 $ 100 $ 99,353
Federal Home Loan Mortgage
Corp.
5.23%........................ 01/02/97 100 99,985
5.31%........................ 01/23/97 200 199,351
Federal National Mortgage
Association
5.24%........................ 02/03/97 200 199,039
5.34%........................ 02/03/97 100 99,511
5.40%........................ 01/07/97 100 99,910
Tennessee Valley Authority
5.35%........................ 03/11/97 785 776,834
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $1,574,110)............................... 1,573,983
-----------
<CAPTION>
SHARES
--------
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.4%)
- -----------------------------
Temporary Investment Fund Class B
(Cost $544,376)...................... 544,376 544,376
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $14,699,561).................... $15,996,206
-----------
</TABLE>
- ------------
+ Non-income producing.
(a) At December 31, 1996, the cost for Federal income tax purposes was
$14,700,712. The excess of value over tax cost was $1,733,527, and the
excess of tax cost over value was $438,033.
The accompanying notes are an integral part of these financial statements.
B-47
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
MARKET FUND BOND FUND BOND FUND FUND
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments at value
(1).................... $34,369,651 $37,251,725 $43,366,750 $106,202,865
Cash.................... 1,861 1,951 606 100,809
Interest, dividends and
reclaims receivable.... 298,287 407,510 847,536 81,388
Receivable for invest-
ment securities sold... -- -- -- 1,145,650
Receivable for capital
stock sold............. -- 11,290 60,344 43,251
Net unrealized
appreciation on forward
foreign currency
contracts & foreign
currency related items. -- -- -- --
Other assets............ 700 767 766 1,948
----------- ----------- ----------- ------------
Total Assets........... 34,670,499 37,673,243 44,276,002 107,575,911
----------- ----------- ----------- ------------
LIABILITIES:
Payable for investment
securities purchased... -- -- -- 1,408,940
Payable for capital
stock redeemed......... -- 19,980 186,054 15,107
Dividends payable....... 137,681 -- -- --
Payable to the invest-
ment advisor........... 13,590 18,613 18,442 45,187
Payable to The Penn Mu-
tual Life Insurance
Co. ................... 12,106 14,368 15,947 39,935
Other liabilities....... 6,503 8,941 14,000 27,282
----------- ----------- ----------- ------------
Total Liabilities...... 169,880 61,902 234,443 1,536,451
----------- ----------- ----------- ------------
NET ASSETS.............. $34,500,619 $37,611,341 $44,041,559 $106,039,460
----------- ----------- ----------- ------------
Shares of $.10 par value
capital stock issued
and outstanding........ 34,502,151 3,760,294 4,941,766 4,942,020
NET ASSET VALUE, OFFER-
ING AND REDEMPTION
PRICE PER SHARE........ $ 1.00 $ 10.00 $ 8.91 $ 21.46
NET ASSETS CONSIST OF:
Capital paid in........ $34,502,151 $37,930,673 $46,179,999 $ 86,760,178
Distribution in excess
of net investment in-
come.................. -- -- -- --
Accumulated net
realized gain (loss)
on investment
transactions and
foreign exchange...... (1,532) (880,365) (4,539,890) (192,114)
Net unrealized
appreciation in value
of investments,
futures contracts and
foreign currency
related items......... -- 561,033 2,401,450 19,471,396
----------- ----------- ----------- ------------
TOTAL NET ASSETS....... $34,500,619 $37,611,341 $44,041,559 $106,039,460
----------- ----------- ----------- ------------
(1) Investments at cost.. $34,369,651 $36,690,692 $40,965,300 $ 86,731,469
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
B-48
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL
VALUE EQUITY MANAGED INTERNATIONAL CAPITALIZATION
FUND FUND EQUITY FUND FUND
- ------------ ------------ ------------- --------------
<S> <C> <C> <C>
$203,440,852 $397,083,464 $105,293,697 $15,996,206
-- -- -- --
251,678 1,647,480 217,681 8,854
-- 124,071 680,985 179,651
267,888 1,274,375 261,515 --
-- 1,153 263,885 --
3,633 7,313 2,034 253
- ------------ ------------ ------------ -----------
203,964,051 400,137,856 106,719,797 16,184,964
- ------------ ------------ ------------ -----------
2,534,755 923,733 1,830,033 33,543
573,370 303,711 334,646 723
-- -- -- --
83,763 166,472 64,730 6,474
71,578 143,323 36,205 5,340
26,692 56,478 36,595 4,852
- ------------ ------------ ------------ -----------
3,290,158 1,593,717 2,302,209 50,932
- ------------ ------------ ------------ -----------
$200,673,893 $398,544,139 $104,417,588 $16,134,032
- ------------ ------------ ------------ -----------
10,387,893 21,265,896 6,688,564 1,287,316
$ 19.32 $ 18.74 $ 15.61 $ 12.53
$147,103,306 $346,784,760 $ 88,223,307 $14,838,538
-- -- (359,289) --
-- (5,978) 64,993 (1,151)
53,570,587 51,765,357 16,488,577 1,296,645
- ------------ ------------ ------------ -----------
$200,673,893 $398,544,139 $104,417,588 $16,134,032
- ------------ ------------ ------------ -----------
$149,870,265 $345,319,260 $ 89,061,600 $14,699,561
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
B-49
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH
MARKET FUND BOND FUND BOND FUND EQUITY FUND
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................... $ -- $ 51,203 $ 33,479 $ 1,069,865
Interest..................... 1,685,899 2,607,110 3,490,874 202,281
Foreign tax withheld......... -- -- -- (680)
---------- ---------- ---------- -----------
Total investment income..... 1,685,899 2,658,313 3,524,353 1,271,466
---------- ---------- ---------- -----------
EXPENSES:
Investment advisory fees..... 122,620 180,125 196,230 504,809
Administration fees.......... 45,111 58,663 58,869 149,014
Accounting fees.............. 22,555 29,335 29,453 74,103
Custodian fees and expenses.. 13,169 12,433 17,287 27,560
Other expenses............... 17,959 24,107 28,075 50,538
---------- ---------- ---------- -----------
Total expenses.............. 221,414 304,663 329,914 806,024
Less: Expense waivers....... (2,778) (4,132) -- (10,173)
---------- ---------- ---------- -----------
Net expenses................ 218,636 300,531 329,914 795,851
---------- ---------- ---------- -----------
NET INVESTMENT INCOME......... 1,467,263 2,357,782 3,194,439 475,615
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on
investment transactions..... -- (117,033) (499,838) 10,366,718
Net realized foreign exchange
gain (loss)................. -- -- -- --
Change in net unrealized ap-
preciation (depreciation) of
investments and foreign cur-
rency related items......... -- (692,970) 2,501,662 7,073,178
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS... 0 (810,003) 2,001,824 17,439,896
---------- ---------- ---------- -----------
NET INCREASE IN NET ASSETS RE-
SULTING FROM OPERATIONS...... $1,467,263 $1,547,779 $5,196,263 $17,915,511
---------- ---------- ---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
B-50
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FLEXIBLY SMALL
VALUE MANAGED INTERNATIONAL CAPITALIZATION
EQUITY FUND FUND EQUITY FUND FUND
- ----------- -------- ------------- --------------
<S> <C> <C> <C>
$ 2,065,845 $ 7,484,229 $ 1,307,584 $ 113,544
1,385,703 7,932,728 378,764 75,838
-- (22,877) (107,833) (500)
- ----------- ----------- ----------- ----------
3,451,548 15,394,080 1,578,515 188,882
- ----------- ----------- ----------- ----------
800,404 1,645,769 647,302 51,982
240,121 493,731 129,460 15,135
105,040 182,975 73,307 27,268
28,904 76,836 109,665 7,655
67,052 144,318 52,418 7,371
- ----------- ----------- ----------- ----------
1,241,521 2,543,629 1,012,152 109,411
-- -- (1,262) (7,964)
- ----------- ----------- ----------- ----------
1,241,521 2,543,629 1,010,890 101,447
- ----------- ----------- ----------- ----------
2,210,027 12,850,451 567,625 87,435
- ----------- ----------- ----------- ----------
8,252,470 16,818,384 5,713,489 588,102
-- (2,411) 3,145,612 --
25,690,221 21,020,920 4,322,244 1,130,459
- ----------- ----------- ----------- ----------
33,942,691 37,836,893 13,181,345 1,718,561
- ----------- ----------- ----------- ----------
$36,152,718 $50,687,344 $13,748,970 $1,805,996
- ----------- ----------- ----------- ----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
B-51
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET FUND QUALITY BOND FUND
-------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/96 12/31/95
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS
Net investment income.. $ 1,467,263 $ 1,042,271 $ 2,357,782 $ 2,141,403
Net realized gain
(loss) on investment
transactions.......... -- (416) (117,033) 2,350,516
Net realized foreign
exchange loss......... -- -- -- --
Net change in
unrealized
appreciation
(depreciation) of
investments and
foreign currency
related items......... -- -- (692,970) 1,752,675
------------ ------------ ------------- ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS........... 1,467,263 1,041,855 1,547,779 6,244,594
------------ ------------ ------------- ------------
DISTRIBUTIONS TO SHARE-
HOLDERS FROM:
Net investment income.. (1,467,263) (1,042,271) (2,342,476) (2,141,403)
Net realized capital
gains................. -- -- -- --
In excess of net in-
vestment income....... -- -- -- (28,700)
------------ ------------ ------------- ------------
TOTAL DISTRIBUTIONS... (1,467,263) (1,042,271) (2,342,476) (2,170,103)
------------ ------------ ------------- ------------
CAPITAL SHARE TRANSAC-
TIONS:
Net increase in net as-
sets from capital
share transactions.... 9,775,026 8,194,917 357,633 2,636,284
------------ ------------ ------------- ------------
TOTAL INCREASE (DE-
CREASE) IN NET AS-
SETS................. 9,775,026 8,194,501 (437,064) 6,710,775
Net Assets, beginning of
year................... 24,725,593 16,531,092 38,048,405 31,337,630
------------ ------------ ------------- ------------
NET ASSETS, END OF YEAR. $ 34,500,619 $ 24,725,593 $ 37,611,341 $ 38,048,405
------------ ------------ ------------- ------------
<CAPTION>
FLEXIBLY MANAGED FUND INTERNATIONAL EQUITY FUND
-------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/96 12/31/95
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIOMS:
Net investment income.. $ 12,850,451 $ 7,533,134 $ 567,625 $ 559,922
Net realized gain
(loss) on investment
transactions.......... 16,818,384 9,328,518 5,713,489 (551,350)
Net realized foreign
exchange gain (loss).. (2,411) (3,841) 3,145,612 331,107
Net change in
unrealized apprecia-
tion of investments
and foreign currency
related items......... 21,020,920 25,862,516 4,322,244 7,975,550
------------ ------------ ------------- ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS........... 50,687,344 42,720,327 13,748,970 8,315,229
------------ ------------ ------------- ------------
DISTRIBUTIONS TO SHARE-
HOLDERS FROM:
Net investment income.. (12,850,451) (7,533,134) (567,625) (559,922)
Net realized capital
gains................. (16,768,765) (9,122,820) (4,589,862) --
In excess of net in-
vestment income....... (4,084) (189,189) (2,877,835) (1,014,490)
------------ ------------ ------------- ------------
TOTAL DISTRIBUTIONS... (29,623,300) (16,845,143) (8,035,322) (1,574,412)
------------ ------------ ------------- ------------
CAPITAL SHARE TRANSAC-
TIONS:
Net increase in net as-
sets from capital
share transactions.... 110,923,988 70,833,754 29,173,205 3,397,112
------------ ------------ ------------- ------------
TOTAL INCREASE IN NET
ASSETS............... 131,988,032 96,708,938 34,886,853 10,137,929
Net Assets, beginning of
period................. 266,556,107 169,847,169 69,530,735 59,392,806
------------ ------------ ------------- ------------
NET ASSETS, END OF PERI-
OD..................... $398,544,139 $266,556,107 $ 104,417,588 $ 69,530,735
------------ ------------ ------------- ------------
</TABLE>
- -----------------------
*For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.
The accompanying notes are an integral part of these financial statements.
B-52
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND GROWTH EQUITY FUND VALUE EQUITY FUND
- ---------------------------- -------------------------- --------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/96 12/31/95 12/31/96 12/31/95
- ------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 3,194,439 $ 3,148,730 $ 475,615 $ 382,247 $ 2,210,027 $ 1,794,849
(499,838) (1,070,877) 10,366,718 12,597,090 8,252,470 6,520,338
-- -- -- -- -- --
2,501,662 3,034,116 7,073,178 7,613,791 25,690,221 23,682,719
- ------------- ------------- ------------ ------------ ------------ ------------
5,196,263 5,111,969 17,915,511 20,593,128 36,152,718 31,997,906
- ------------- ------------- ------------ ------------ ------------ ------------
(3,194,439) (3,148,730) (475,615) (382,247) (2,210,027) (1,794,912)
-- -- (10,558,832) (12,597,090) (8,252,470) (6,520,338)
(25,808) (15,253) -- -- -- --
- ------------- ------------- ------------ ------------ ------------ ------------
(3,220,247) (3,163,983) (11,034,447) (12,979,337) (10,462,497) (8,315,250)
- ------------- ------------- ------------ ------------ ------------ ------------
5,623,807 2,412,668 3,565,102 7,901,598 47,723,822 24,556,320
- ------------- ------------- ------------ ------------ ------------ ------------
7,599,823 4,360,654 10,446,166 15,515,389 73,414,043 48,238,976
36,441,736 32,081,082 95,593,294 80,077,905 127,259,850 79,020,874
- ------------- ------------- ------------ ------------ ------------ ------------
$ 44,041,559 $ 36,441,736 $106,039,460 $ 95,593,294 $200,673,893 $127,259,850
- ------------- ------------- ------------ ------------ ------------ ------------
<CAPTION>
SMALL CAPITALIZATION FUND
- ----------------------------
YEAR PERIOD
ENDED ENDED
12/31/96 12/31/95*
- ------------- -------------
<S> <C>
$ 87,435 $ 37,156
588,102 116,284
-- --
1,130,459 166,186
- ------------- -------------
1,805,996 319,626
- ------------- -------------
(87,435) (37,156)
(607,875) (97,662)
-- --
- ------------- -------------
(695,310) (134,818)
- ------------- -------------
10,195,439 4,643,099
- ------------- -------------
11,306,125 4,827,907
4,827,907 0
- ------------- -------------
$ 16,134,032 $ 4,827,907
- ------------- -------------
</TABLE>
B-53
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1 - SIGNIFICANT ACCOUNTING POLICIES
Penn Series Funds, Inc. (Penn Series) was incorporated in Maryland on April 22,
1982. Penn Series is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. Shares of
Penn Series are offered only to Penn Mutual Life Insurance Company Group
Annuity, variable annuity and variable life separate accounts.
Penn Series is presently offering shares in its Money Market, Quality Bond,
High Yield Bond, Growth Equity, Value Equity, Flexibly Managed, International
Equity and Small Capitalization Funds (the Funds). It is authorized under its
Articles of Incorporation to issue a separate class of shares in each of two
additional funds. Each Fund would have its own investment objective and policy.
The following is a summary of significant accounting policies followed by
Penn Series in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
INVESTMENT VALUATION:
MONEY MARKET FUND - Investments in securities are valued under the amortized
cost method, which approximates current market value. Under this method,
securities are valued at cost on the date of purchase and thereafter a
proportionate amortization of any discount or premium until maturity is
assumed. Penn Series has agreed to maintain a dollar weighted average portfolio
maturity appropriate to the objective of maintaining a stable net asset value
per share. The Penn Series Board of Directors (The Board) has established
procedures reasonably designed to stabilize the net asset value per share for
purposes of sales and redemptions at $1.00. The Board performs regular review
and monitoring of the valuation in an attempt to avoid dilution or unfair
results to shareholders.
QUALITY BOND, HIGH YIELD BOND, GROWTH EQUITY, VALUE EQUITY, FLEXIBLY MANAGED,
INTERNATIONAL EQUITY AND SMALL CAPITALIZATION FUNDS - Portfolio securities
listed on a national securities exchange are valued at the last sale price on
the securities exchange or securities market on which such securities primarily
are traded or, if there has been no sale on that day, at the mean between the
current closing bid and asked prices. All other securities for which over-the-
counter market quotations are readily available will be valued on the basis of
the mean between the last current bid and asked prices. When market quotations
are not readily available, or when restricted or other assets are being valued,
the securities or assets will be valued at fair value as determined by The
Board.
The high yield securities in which the High Yield Bond Fund may invest are
predominantly speculative as to the issuer's continuing ability to meet
principal and interest payments. The value of the lower quality securities in
which the High Yield Bond Fund may invest will be affected by the credit
worthiness of individual issuers, general economic and specific industry
conditions, and will fluctuate inversely with changes in interest rates. In
addition, the secondary trading market for lower quality bonds may be less
active and less liquid than the trading market for higher quality bonds.
FOREIGN CURRENCY TRANSLATION - The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis: market value of investment securities and
assets and liabilities at the current rate of exchange; and purchase and sales
of investment securities and income and expenses at the relevant rates of
exchange prevailing on the respective dates of such transactions.
The Funds do not isolate that portion of realized and unrealized gains and
losses on investments in equity securities which are due to changes in the
foreign exchange rate from that which is due to changes in market prices of
equity securities.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the level of governmental
supervision and regulation of foreign securities markets and the possibility of
political or economic instability.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on the trade date. Dividend income is recorded on the ex-dividend
date and interest income is accrued as earned. The cost of investment
securities sold is determined by using the specific identification method for
both financial reporting and income tax purposes.
DIVIDENDS TO SHAREHOLDERS: Dividends of investment income and realized
capital gains of the Quality Bond, High Yield Bond, Growth Equity, Value
Equity, Flexibly Managed, International Equity and Small Capitalization Funds
will be declared and paid annually. Dividends of net investment income of the
Money Market Fund are declared daily and paid monthly. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for paydowns of
mortgage-backed securities, accretion of market discount and foreign currency
transactions.
FEDERAL INCOME TAXES: It is the policy of each of the Funds to comply with
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income, including
realized gains, to its shareholders. Therefore, no provision is made for
federal income taxes.
B-54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2 - DERIVATIVE FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
The Funds may trade financial instruments with off-balance sheet risk in the
normal course of investing activities and to assist in managing exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts and futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Funds have in particular classes of financial instruments and do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
FUTURES CONTRACTS - Each of the Funds, other than Money Market, may enter
into financial futures contracts for the delayed delivery of securities,
currency or contracts based on financial indices on a future date. A Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
a Fund each day, dependent on daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by a Fund. A Fund's investment in financial futures contracts is
designed only to hedge against anticipated future changes in interest or
exchange rates. Should interest or exchange rates move unexpectedly, a Fund may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The Quality Bond Fund has entered into futures contracts during
the year ended December 31, 1996. There were no open futures contracts at
December 31, 1996.
OPTIONS - Each of the Funds, other than Money Market, may write covered
calls. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised or
are closed are offset against the proceeds or amount paid on the transaction to
determine the realized gain or loss. Additionally, each of the Funds may buy
put or call options for which premiums are paid whether or not the option is
exercised. If a put option is exercised, the premium increases the cost basis
of the securities purchased by a Fund. As writer of an option, the Fund may
have no control over whether the underlying securities may be sold (call) and,
as a result, bears the market risk of an unfavorable change in the price of the
securities underlying the written option.
At December 31, 1996 the written option held by the High Yield Bond Fund was
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES # OF SHARES SUBJECT 12/31/96 VALUE STRIKE EXERCISE
SUBJECT TO OPTION TO CALL PER OPTION OF EACH OPTION PRICE PRICE
------------------ ------------------- -------------- ------- --------
<S> <C> <C> <C> <C>
Loehmann's Class B....... 100 $2.03 $24.813 $24.813
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS - The Funds may enter into forward foreign
currency exchange contracts as a way of managing foreign exchange rate risk. A
Fund may enter into these contracts to fix the U.S. dollar value of a security
that it has agreed to buy or sell for the period between the date the trade was
entered into and the date the security is delivered and paid for. A Fund may
also use these contracts to hedge the U.S. dollar value of securities it
already owns denominated in foreign currencies.
Forward foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by the Fund as
an unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the Fund's portfolio securities, but it does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result should the value of the currency increase. In addition, the Funds could
be exposed to risks if the counterparties to the contracts are unable to meet
the terms of their contracts. The Flexibly Managed and International Equity
funds have entered into forward foreign currency contracts for the year ended
December 31, 1996.
At December 31, 1996 there were no open contracts in the Flexibly Managed
Fund. Open forward foreign currency contracts held by the International Equity
Fund at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
FOREIGN FOREIGN
FORWARD CURRENCY SETTLEMENT CURRENCY CONTRACT CONTRACT EXCHANGE
CONTRACT DATE TO BE SOLD AMOUNT VALUE GAIN (LOSS)
---------------- ---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
German Deutsche Mark.... 03/12/97 15,000,000 $ 9,715,026 $ 9,800,655 $(85,629)
Swiss Franc............. 03/12/97 6,000,000 4,559,271 4,513,043 46,228
Japanese Yen............ 03/12/97 1,600,000,000 14,311,270 13,964,246 347,024
French Franc............ 03/12/97 17,000,000 3,250,478 3,294,216 (43,738)
----------- ----------- --------
$31,836,045 $31,572,160 $263,885
----------- ----------- --------
</TABLE>
B-55
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
3 - INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES
INVESTMENT ADVISORY SERVICES
Under investment advisory agreements, the following advisors manage the
investments of their respective Fund and provide guidance on certain accounting
matters:
<TABLE>
<CAPTION>
ADVISOR PENN SERIES FUND
------- ----------------
<S> <C>
Independence Capital Management, Inc. Money Market Fund
(A wholly owned subsidiary of Penn Quality Bond Fund
Mutual)
T. Rowe Price Associates Growth Equity Fund
Flexibly Managed Fund
High Yield Bond Fund
Vontobel USA, Inc. International Equity Fund
OpCap Advisors Value Equity Fund
Small Capitalization Fund
</TABLE>
Each of the Funds pays their respective advisors, on a monthly basis, an annual
advisory fee based on the average daily net assets of each Fund, at the
following rates pursuant to the investment advisory agreements: Money Market
Fund: 0.40% for first $100 million and 0.35% thereafter; Quality Bond Fund:
0.45% for first $100 million and 0.40% thereafter; Growth Equity Fund: 0.50%
for the first $100 million and 0.45% thereafter; Flexibly Managed Fund: 0.50%;
High Yield Bond Fund: 0.50%; International Equity Fund: 0.75%; Value Equity
Fund: 0.50%; Small Capitalization Fund: 0.50%.
ADMINISTRATIVE AND CORPORATE SERVICES
Under an administrative and corporate services agreement, The Penn Mutual Life
Insurance Company ("Penn Mutual") serves as administrative and corporate
services agent for Penn Series. Each of the Funds pays Penn Mutual, on a
quarterly basis, an annual fee equal to 0.15% of each of the Funds' average
daily net assets.
EXPENSES AND LIMITATIONS THEREON
The investment advisors and Penn Mutual have each voluntarily agreed to waive
fees or reimburse expenses to the extent each of the Fund's expense ratio
(excluding interest, taxes, brokerage, other capitalized expenses, but
including investment advisory and administrative and corporate services fees)
exceeds the applicable expense limitations for each Fund. The expense
limitations for the Funds are as follows: Money Market: 0.80%; Quality Bond:
0.90%; High Yield Bond: 0.90%; Growth Equity: 1.00%; Value Equity: 1.00%;
Flexibly Managed: 1.00%; International Equity: 1.50%; and Small Capitalization:
1.00%.
Fees were paid to non-affiliated Directors of Penn Series for the year ended
December 31, 1996. However, no person received compensation from Penn Series
who is an officer, director, or employee of Penn Series, the investment
advisors, administrator, accounting agent or any parent or subsidiary thereof.
- --------------------------------------------------------------------------------
4 - CAPITAL STOCK
At December 31, 1996, there were one billion shares of $.10 par value capital
stock authorized for Penn Series. The shares are divided into ten classes of
100 million shares of capital stock. Eight of the classes designated are Penn
Series Money Market Fund Common Stock, Penn Series Quality Bond Fund Common
Stock, Penn Series High Yield Bond Fund Common Stock, Penn Series Growth Equity
Fund Common Stock, Penn Series Value Equity Fund Common Stock, Penn Series
Flexibly Managed Fund Common Stock, Penn Series International Equity Fund
Common Stock and Penn Series Small Capitalization Fund Common Stock. Two of the
classes of common stock are presently designated Class H and I, and no shares
have been issued.
Transactions in capital stock of the Money Market Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold............. 44,071,472 $ 44,071,472 24,631,336 $ 24,631,336
Shares issued to
shareholders in
reinvestment of
Net investment income.. 1,440,949 1,440,949 1,003,043 1,003,043
Shares reacquired....... (35,737,395) (35,737,395) (17,439,462) (17,439,462)
----------- ------------ ----------- ------------
9,775,026 $ 9,775,026 8,194,917 $ 8,194,917
----------- ------------ ----------- ------------
</TABLE>
B-56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4 - CAPITAL STOCK, CONTINUED
Transactions in capital stock of the Quality Bond Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Shares sold................... 816,952 $ 8,374,183 503,916 $ 5,106,936
Shares issued to shareholders
in reinvestment of
Net investment income........ 234,248 2,342,476 211,924 2,170,103
Net realized gain from
investment transactions..... 0 0 0 0
Distribution in excess of net
investment income........... 0 0 0 0
Shares reacquired............. (1,006,891) (10,359,026) (465,354) (4,640,755)
---------- ------------ -------- -----------
44,309 $ 357,633 250,486 $ 2,636,284
---------- ------------ -------- -----------
</TABLE>
Transactions in capital stock of the High Yield Bond Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Shares sold..................... 1,055,047 $ 9,465,000 598,550 $ 5,210,863
Shares issued to shareholders in
reinvestment of
Net investment income.......... 361,419 3,220,247 374,880 3,163,983
Distribution in excess of net
investment income............. 0 0 0 0
Shares reacquired............... (792,896) (7,061,440) (695,380) (5,962,178)
--------- ----------- -------- -----------
623,570 $ 5,623,807 278,050 $ 2,412,668
--------- ----------- -------- -----------
</TABLE>
Transactions in capital stock of the Growth Equity Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Shares sold.................... 320,394 $ 7,089,450 255,618 $ 5,357,105
Shares issued to shareholders
in reinvestment of
Net investment income......... 22,163 475,615 19,112 382,248
Net realized gain from
investment transactions...... 492,024 10,558,832 629,855 12,597,090
Shares reacquired.............. (673,246) (14,558,795) (500,318) (10,434,845)
-------- ------------ -------- ------------
161,335 $ 3,565,102 404,267 $ 7,901,598
-------- ------------ -------- ------------
</TABLE>
Transactions in capital stock of the Value Equity Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold.................... 2,485,344 $45,626,673 1,658,765 $25,527,797
Shares issued to shareholders
in reinvestment of
Net investment income......... 114,391 2,210,027 110,253 1,794,912
Net realized gain from
investment transactions...... 427,146 8,252,470 400,512 6,520,338
Shares reacquired.............. (457,053) (8,365,348) (588,540) (9,286,727)
--------- ----------- --------- -----------
2,569,828 $47,723,822 1,580,990 $24,556,320
--------- ----------- --------- -----------
</TABLE>
B-57
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1996
- --------------------------------------------------------------------------------
4 - CAPITAL STOCK, CONTINUED
Transactions in capital stock of the Flexibly Managed Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold.................. 5,176,205 $ 96,448,634 3,828,143 $ 65,639,740
Shares issued to shareholders
in reinvestment of
Net investment income....... 685,941 12,854,535 443,812 7,722,323
Net realized gain from
investment transactions.... 894,811 16,768,765 524,300 9,122,820
Shares reacquired............ (807,605) (15,147,946) (662,762) (11,651,129)
--------- ------------ --------- ------------
5,949,352 $110,923,988 4,133,493 $ 70,833,754
--------- ------------ --------- ------------
</TABLE>
Transactions in capital stock of the International Equity Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold.................... 1,812,851 $28,060,006 980,799 $ 13,291,658
Shares issued to shareholders
in reinvestment of
Net investment income......... 220,720 3,445,460 108,805 1,574,412
Net realized gain from
investment transactions...... 294,034 4,589,862 0 0
Shares reacquired.............. (442,745) (6,922,123) (852,234) (11,468,958)
--------- ----------- -------- ------------
1,884,860 $29,173,205 237,370 $ 3,397,112
--------- ----------- -------- ------------
</TABLE>
Transactions in capital stock of the Small Capitalization Fund were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995*
---------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold....................... 1,108,381 $13,236,881 433,221 $4,564,368
Shares issued to shareholders in
reinvestment of
Net investment income............ 6,978 87,435 3,390 37,156
Net realized gain from investment
transactions.................... 48,711 607,875 8,911 97,662
Shares reacquired................. (317,129) (3,736,752) (5,147) (56,087)
--------- ----------- ------- ----------
846,941 $10,195,439 440,375 $4,643,099
--------- ----------- ------- ----------
</TABLE>
* For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.
- --------------------------------------------------------------------------------
5 - PURCHASES AND SALES OF INVESTMENTS
During the year ended December 31, 1996 the Funds made the following purchases
and sales of portfolios securities:
<TABLE>
<CAPTION>
QUALITY BOND FUND HIGH YIELD BOND FUND
------------------------- -----------------------
PURCHASES SALES PURCHASES SALES
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations.......... $ 34,262,555 $ 29,049,943 $ 0 $ 0
Other Long-Term Securities... 3,181,229 6,895,559 47,955,955 44,208,064
------------ ------------ ----------- -----------
Totals...................... $ 37,443,784 $ 35,945,502 $47,955,955 $44,208,064
------------ ------------ ----------- -----------
<CAPTION>
GROWTH EQUITY FUND VALUE EQUITY FUND
------------------------- -----------------------
PURCHASES SALES PURCHASES SALES
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations.......... $ 0 $ 0 $ 0 $ 0
Other Long-Term Securities... 168,864,328 174,984,842 66,097,926 33,433,136
------------ ------------ ----------- -----------
Totals...................... $168,864,328 $174,984,842 $66,097,926 $33,433,136
------------ ------------ ----------- -----------
</TABLE>
B-58
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5 - PURCHASES AND SALES OF INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
INTERNATIONAL
FLEXIBLY MANAGED FUND EQUITY FUND
------------------------ -------------------------
PURCHASES SALES PURCHASES SALES
------------ ----------- -------------------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations......... $ 14,836,547 $ 0 $ 0 $ 0
Other Long-Term Securities.. 183,619,632 87,871,108 60,052,427 43,169,448
------------ ----------- ------------ ------------
Totals..................... $198,456,179 $87,871,108 $ 60,052,427 $ 43,169,448
------------ ----------- ------------ ------------
<CAPTION>
SMALL CAPITALIZATION FUND
-------------------------
PURCHASES SALES
-------------------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and Agency Obligations.......... $ 0 $ 0
Other Long-Term Securities........................... 12,302,712 3,516,424
------------ ------------
Totals.............................................. $ 12,302,712 $ 3,516,424
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
6 - CAPITAL LOSS CARRYOVERS
Capital loss carryovers expire as follows:
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD
MARKET BOND BOND
FUND FUND FUND
------- --------- -----------
<S> <C> <C> <C>
1997........................................... $ 0 $ 0 $ 0
1998........................................... (872) 0 0
1999........................................... 0 0 (1,355,386)
2000........................................... (61) 0 0
2001........................................... (183) 0 0
2002........................................... 0 (778,292) (1,572,728)
2003........................................... (416) 0 (1,086,129)
2004........................................... 0 (89,807) (525,647)
------- --------- -----------
Total......................................... $(1,532) $(868,099) $(4,539,890)
------- --------- -----------
</TABLE>
B-59
