<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Flexibly Managed Fund
For the eighth straight year, stock prices advanced, tying the longevity record
set in 1989. More surprisingly, the S&P 500 gained more than 20% for the fourth
year in a row, doubling the prior two-year record for such gains. Good news on
the economy and interest rates underpinned this performance. Gross domestic
product advanced at an above average rate in '98, although corporate profits may
have been flat. Despite tight labor markets, wage gains were reasonable.
Inflation was negligible as weak economies overseas, especially in Asia,
depressed global commodity prices, and those same economies used spare capacity
to pump cheap goods into the United States.
This positive scenario was interrupted in midsummer by an old fashion financial
scare: a debt default and financial collapse in Russia, and disastrous trading
losses by a major hedge fund partnership. The Fed responded admirably by cutting
rates in three small steps between late September and early November and also by
"persuading" major investment organizations to make credit available to the
otherwise doomed hedge fund.
There were, of course, negatives here in the U.S. in addition to the financial
scare. The largest 50 companies, by market value, generated nearly all of the
stock market's advance; smaller-capitalization stocks, many of them actually
very large companies, were basically unchanged. Whether attracted by the pricing
power or the rash of mega mergers, investors cast their votes for the giants in
1998. Volatility, as defined by days when market prices changed by 1% or more,
continued at last year's high level. Such volatility has often preceded market
shifts.
Portfolio Highlights
Our assembly of asset classes -- common stocks, convertibles, preferred stocks,
bonds, and reserves -- shifted only modestly over the year. The changes were, as
usual, driven by individual security price changes and other opportunities
rather than any grand strategy. Nevertheless, within each asset class,
particularly the common stocks and convertibles (about 75% of assets), there was
a great deal of activity. Two of our long-time top five holdings, Genentech and
Automatic Data Processing, were eliminated during the year. When we initially
purchased them, both had very limited risk of loss and good potential for gain.
At today's higher prices, however, we believed that the relationship of risk and
reward, while still marginally favorable, no longer justified ownership.
Positions established during the past six months included convertibles issued by
Loews, Union Pacific, France Telecom, and Hilton. With all four of these, we
give up a portion of any future appreciation in return for contractual
guarantees that should significantly limit possible losses. Most of our common
stock purchases supplemented existing holdings, although we also established
some new positions, including Octel, Imperial Chemical, Circus Circus, and
Canadian Pacific.
Beside the success of Genentech and Automatic Data, we were especially pleased
with the performance of media holdings such as Washington Post and Time Warner.
The media and communications industry has been a mainstay of the portfolio for
several years; not only were our investments initially purchased at a discount
to their perceived underlying value, but that value has steadily increased,
pulling up their share prices. Niagara Mohawk, our number one 1998 contributor,
continued a long string of portfolio successes in the relatively low-risk
electric utility industry.
Unfortunately, although perhaps inevitably given the broad market's dynamics,
this year also featured some negative contributors. Natural resources -- energy,
gold, or forest-related -- occupied the cellar. We remain convinced that
specific holdings, including Amerada Hess, Mitchell Energy, Newmont Mining, and
MacMillan Bloedel are attractively positioned, but the expected pay-off is not
currently in sight.
<PAGE>
Outlook
We were surprised that the economy in 1998 could be so strong while inflation
stayed low and interest rates fell. We seriously doubt this will happen again.
More likely in our view is a modest economic slowing and perhaps lower interest
rates -- a benign but not highly positive financial market outlook. Some may
disagree with this forecast, but we think it is reasonable.
Your fund is well positioned for this scenario. Should stock prices fall, we
would expect the fund to do better than the broad market. (In the third quarter
decline, the fund dropped only about one third as much as the market.) On the
other hand, if stocks soar for an unprecedented fifth straight year, our results
are likely to lag. Maintaining an investment discipline is easy when market
trends flow your way, but when they don't, it can be tempting to make
modifications based on recent events. However, we see no reason to overturn a
strategy that has served investors well over time. We like what we own and
continue to find attractive securities to purchase. Our holdings should have
good potential for gain even if the future is gloomier than anticipated.
Independence Capital Management, Inc.
Investment Adviser
T. Rowe Price Associates, Inc.
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn Series Flexibly
Managed Fund and S&P 500
Flexibly Managed Fund
Penn Series S&P 500
3/1/87 $10,000 $10,000
12/31/87 $10,420 $8,915
12/31/88 $12,390 $10,394
12/31/89 $15,020 $13,658
12/31/90 $14,893 $13,278
12/31/91 $18,118 $17,315
12/31/92 $19,851 $18,634
12/31/93 $22,986 $20,511
12/31/94 $23,938 $20,868
12/31/95 $29,271 $28,702
12/31/96 $34,063 $35,292
12/31/97 $39,394 $47,051
12/31/98 $41,793 $60,493
The performance information shown here does not reflect variable account charges
and fees nor does it reflect the period prior to March 1, 1987 when T. Rowe
Price Associates Inc. became the Fund's investment sub-adviser. Past performance
is not predictive of future performance. Shares may be worth more or less when
redeemed than when purchased. Assumes reinvestment of all dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
High Yield Bond Fund
After enjoying an excellent environment for over two years, the high-yield bond
market was clobbered during the third calendar quarter. Russia's midsummer
financial crisis and default decimated emerging market bonds and also some
highly leveraged hedge funds. Stocks sold off around the world, and investors
fled from lower-quality bonds. Your fund did not escape unscathed but held up
significantly better than its average competitor and overall high-yield indices.
Our increasingly cautious assessment of the high-yield market in the first half
of 1998 had led us to upgrade the portfolio and largely avoid the low-quality
new issues that were flooding the market. Our tilt to a more conservative
posture enabled the fund to preserve earlier gains, leading to a respectable
return for the year.
Market Environment
You might sum up the second half by saying the chickens came home to roost. A
number of previous trends had made the high-yield market vulnerable to the kind
of destabilizing events that occurred last summer. Chief among these were the
extraordinary amount of money that yield-seeking investors were pouring into
lower-quality investments and the deteriorating quality of the huge new issue
supply. Even though the U.S. economy continued to grow, which is usually
positive for high-yield bonds, the high-yield market could not survive the
collapse of confidence in emerging markets, the unwinding of leveraged hedge
fund positions, and the global "flight to quality" - principally to U.S.
Treasury securities. Dramatic evidence of the rush from lower-quality bonds was
the jump in the yield spread between noninvestment-grade bonds and Treasuries to
almost six percentage points.
The sell-off persisted through mid-October, when the second of the Federal
Reserve's three interest rate cuts sparked a stock market rally as well as
renewed confidence in the high-yield market. The depressed new issue market
showed signs of life, and investors began to move substantial amounts of money
back into high-yield bond funds. Consequently, high-yield bond prices rose
strongly in November, enabling most funds, including yours, to post returns in
excess of 5% for the month. December saw little change either up or down.
<PAGE>
Portfolio Review
During the second half, we continued the strategy initiated in the late spring
of gradually paring the fund's exposure to B rated debt and adding to our BB
rated holdings. While the B category remained our greatest concentration, it
decreased as a percent of assets from about two-thirds at the beginning of 1998
to just over one-half at the end of September. At the same time, BB/B
(split-rated) and BB bonds increased from approximately 9% of net assets to a
high of almost 23% during this time span. We largely avoided owning bonds of
"deep cyclicals," such as steel companies, which are directly exposed to
domestic or global economic growth cycles. Fund holdings remained almost
exclusively domestic. These moves provided some cushion when the decline
commenced in August. However, we continued to have significant exposure to the
telecommunications sector, which, like the deep cyclicals, was badly hurt.
Within this sector, however, our exposure to CCC rated bonds was lower than that
of our typical competitor.
In September, we viewed the market as oversold and used some of our cash to pick
up bonds that seemed cheap, increasing our B rated holdings. For instance, we
added to our overall holdings in the depressed telecommunications sector,
raising our sector weighting to about 17% -- still low compared with the average
high-yield bond fund. Within that sector, for example, we added to our position
in Nextel, which we think is the "blue chip" of wireless companies. Telecom
bonds subsequently participated strongly in the November rebound. Two of our
best performers during the six months were Doane Products and Windy Hill Pet
Food. These makers of private-label dog food (for Wal-Mart and other stores)
merged with each other. While plenty of our holdings declined with the market,
none was among those experiencing major difficulties, for which we credit the
efforts of our research analysts.
<PAGE>
Outlook
Our pleasure at the high-yield market's swift rebound is tempered by our outlook
and by certain market fundamentals. On the plus side, the market seems
technically strong because a lot of money is returning and the flow of new
issues, which dried up during the fall, is still meager. While yield spreads
between high-yield and high-quality bonds have narrowed, they are still wide,
which might suggest that high-yield bonds are cheap. However, the average is
skewed by three industry sectors -- telecommunications, energy, and commodity
producers -- that continue to carry substantial risk premiums. Outside of those,
we think it's hard to make a case for a cheap market in view of the likelihood
of slower economic growth in 1999. Lower growth is bound to be reflected in
declining corporate earnings, but we won't know for certain until next April
when companies report annual results. In the meantime, last fall's hiatus in new
issues created a backlog that will undoubtedly pour into the resurgent market.
Most of these issues are low-quality.
In summary, we see many reasons to remain on the cautious side. We intend to
maintain our widely diversified portfolio, to emphasize cash-paying bonds rated
B or better, and to draw heavily on our research team for guidance. If the
economy slows and the stock market declines again, the high-yield market will
follow suit. We cannot insulate the fund from such broad moves, but we think our
relatively conservative posture may again cushion performance. We would, of
course, be happy to have a stronger-than-expected economy, but we think
long-term high-yield investors should -- as always -- be prepared for the
possibility of bumps in the months ahead.
Independence Capital Management, Inc.
Investment Adviser
T. Rowe Price Associates, Inc.
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn Series High Yield
Bond Fund and First Boston High Yield Index
High Yield Bond Fund
Penn Series First Boston
3/1/87 $10,000 $10,000
12/31/87 $9,677 $10,101
12/31/88 $11,397 $11,480
12/31/89 $11,330 $11,523
12/31/90 $10,316 $10,788
12/31/91 $14,122 $15,508
12/31/92 $16,354 $18,092
12/31/93 $19,587 $21,513
12/31/94 $18,151 $21,302
12/31/95 $21,128 $25,010
12/31/96 $24,042 $28,116
12/31/97 $27,836 $31,667
12/31/98 $29,169 $35,068
The performance information shown here does not reflect variable account charges
and fees nor does it reflect the period prior to March 1, 1987 when T. Rowe
Price Associates Inc. became the Fund's investment sub-adviser. Past performance
is not predictive of future performance. Shares may be worth more or less when
redeemed than when purchased. Assumes reinvestment of all dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Value Equity Fund
The stock market rallied strongly in the fourth quarter, with the S&P 500 Index
delivering a total return of 21.3%. As a consequence, 1998 turned out to be
another in a series of remarkable years for the market. The total return on the
Standard & Poor's 500 Index was 28.6% in 1998, signaling the fourth consecutive
year in which the index has gained more than 20%. Beneath the surface, however,
there were many crosscurrents. The 1998 increase of the S&P 500 was driven
primarily by a limited group of super-large company stocks. Many other stocks
were left behind. For instance, the Russell 2000, a benchmark of small company
stocks, actually declined 2.6% in 1998. This strong relative performance of
large versus small stocks reflected the preference of many investors for owning
highly liquid large issues -- especially those with predictable earnings -- in
an uncertain global economic environment.
The Portfolio delivered positive returns in the year and the fourth quarter, but
below the S&P 500. While the Portfolio's 1998 results did not live up to our
expectations, we are sticking with our risk-averse investment philosophy which
has produced excellent returns over time. We are concerned about the extremely
high price/earnings ratios of many large growth stocks and also about a recent
trend toward rampant speculation, such as the craze for Internet stocks. We
think this is a time to invest carefully for the long term, not to buy companies
that happen to be in vogue.
We focus on individual companies and try to understand where their businesses
are heading over the next several years. Simply stated, we want to invest in
superior businesses that are underpriced in the stock market. We define a
superior business as one that is extremely well managed, earns high returns on
capital, has a dominant competitive position to protect those returns and uses
the free cash flow resulting from those returns to create shareholder value,
such as through astute acquisitions or share repurchase. The objectives of our
strategy are to control risk and generate above-market returns over time.
To a large degree, the strong performance of the stock market in the fourth
quarter reflected the positive impact of interest rate cuts by the Federal
Reserve, rather than improved corporate earnings. In fact, as we enter 1999, the
outlook for the economy and for corporate earnings is more unsettled than is
usually the case. We think the rate of economic growth in the U.S. is likely to
slow in the coming year and that corporate earnings will be under pressure. To
us, this scenario dictates a careful investment approach. We believe the
challenge for investors will be to chart a course that captures favorable
returns while guarding against economic and market uncertainty. Through our
disciplined value philosophy, we seek to do just that by owning quality
businesses that can generate high levels of cash flow in all economic
environments.
Independence Capital Management, Inc.
Investment Adviser
OpCap Advisors
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn
Series Value Equity Fund and S&P 500
Value Equity
Penn Series S&P 500
11/1/92 $10,000 $10,000
12/31/92 $10,402 $10,467
12/31/93 $11,138 $11,522
12/31/94 $11,464 $11,674
12/31/95 $15,761 $16,061
12/31/96 $19,731 $19,748
12/31/97 $24,660 $26,328
12/31/98 $27,025 $33,850
The performance information shown here does not reflect variable account charges
and fees nor does it reflect the period prior to November 1, 1992 when OpCap
became the Fund's investment sub-adviser. Past performance is not predictive of
future performance. Shares may be worth more or less when redeemed than when
purchased. Assumes reinvestment of all dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Small Capitalization Fund
Small cap stocks, which had been battered in the third quarter, sprang back to
life in early October, with technology issues leading the advance. However, the
rally proved short lived. By mid-November, small caps were again lagging large
caps, reflecting the preference of many investors for owning highly liquid large
cap stocks -- especially large caps with predictable earnings -- in a volatile
market environment.
Small caps have now underperformed large caps for five years, resulting in a
record valuation gap between small and large stocks. The Russell 2000, a small
cap benchmark, has historically carried a price/earnings ratio equal to about
125% of the P/E of the Standard & Poor's 500. Investors have traditionally been
willing to pay more for small caps because of their entrepreneurial
characteristics and superior earnings growth potential. By contrast, at the end
of 1998 the Russell 2000's P/E was just 78% of the S&P 500's, the lowest ratio
since the Russell was introduced in 1979.
A patient, disciplined value style tends to work well in the small cap sector,
where quality stocks are sometimes overlooked and mispriced because of lack of
analyst coverage. We buy businesses with high returns on capital, high cash flow
and barriers to entry, available at reasonable valuations. Owning superior
companies at low relative valuations provides opportunity for profit and helps
control risk.
Our returns in the quarter were competitive within our small cap value peer
group, but were below the Russell 2000. Our performance was hurt, in particular,
by our holdings of oil and gas stocks, including Cabot Oil & Gas and St. Mary
Land & Exploration. We continue to like both investments. Not only do they trade
below net asset value, but we believe both companies possess the fundamental
strengths to perform well long term even if energy prices do not recover. Both
companies have consistently demonstrated their ability to add new oil and gas
reserves at a finding cost well below the industry average.
<PAGE>
Early in the quarter, we capitalized on price weakness to establish a new
position in Dentsply International. Dentsply is a leading manufacturer of dental
consumables and equipment. The company is using its substantial free cash flow
to make one or two acquisitions per year, achieving cost efficiencies by folding
the acquired companies into its existing infrastructure and distribution
network. Dentsply's earnings, which are relatively predictable, are increasing
at a rate of about 15% annually. Moreover, unlike other health care sectors,
Dentsply's business is only minimally influenced by managed care.
We added to several existing holdings, including Wallace Computer Services.
Wallace supplies Fortune 1000 companies with consumable business and office
products, such as business forms and labels, as well as custom and commercial
printing. Although recent earnings have been dampened by declining paper prices
and costs associated with assimilating an acquisition, revenues continue to
increase. We believe the company will benefit over time from a rationalization
of its industry, which is contracting from five large companies to three. The
stock is trading at about 14 times anticipated fiscal 1999 earnings.
Late in the quarter, we established a new position in Precision Castparts, which
makes castings for customers in the aerospace industry and other markets. We
bought the stock after the price fell in response to production problems at
Boeing, Precision's largest customer. Apart from its work for Boeing, the
company's business, including its sales to the gas turbine market, continues to
grow. Moreover, the company earns high returns on equity and generates
substantial and growing free cash flow. We believe the stock is undervalued at
nine times anticipated earnings.
Independence Capital Management, Inc.
Investment Advisor
OpCap Advisors
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn
Series Small Cap Fund and Russell 2000
Small Cap Fund
Penn Series Russell 2000
3/1/95 $10,000 $10,000
12/31/95 $11,276 $12,490
12/31/96 $13,504 $14,550
12/31/97 $16,613 $17,804
12/31/98 $15,091 $17,346
The performance information shown here does not reflect variable account charges
and fees. Past performance is not predictive of future performance. Shares may
be worth more or less when redeemed than when purchased. Assumes reinvestment of
all dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Growth Equity Fund
We entered 1998 with modest expectations. There were sufficient positives to
provide a reasonably attractive environment for the U.S. financial markets, but
the market's valuation and several other factors gave us some cause for concern.
At the time we suggested that returns for the stock market in 1998 would be
positive but less robust than those realized the previous few years. Many of the
same factors were at work as in the previous year, but with a twist. A year
earlier investor concerns had centered around the reemergence of inflationary
pressures within the U.S. economy, while at the outset of 1998 those same
investors were more concerned about the global deflationary pressures being
exacerbated by the turmoil in Southeast Asia. We envisioned a Federal Reserve
walking a tightrope as it evaluated our nation's ability to adjust to this
heightening influence.
Overall this scenario proved to be on the mark, although the issues the
financial markets had to cope with in 1998 were even more numerous than
originally thought. Over the course of the year Southeast Asia and Japan's woes
were duplicated in South and Central America and Russia. The U.S. and its allies
intervened in the Middle East. And at home the United States faced an
impeachment debate. Despite a late summer decline that felt rather bearish to
many, the stock market, by most measures, was able to post gains for the year.
The U.S. economy had continued to grow throughout 1998, contributing to
respectable corporate earnings growth, particularly from its growth sectors,
while declines in both inflation and interest rates, aided by shrinkage of the
budget deficit and a newly accommodative Federal Reserve, provided the stock
market with some valuation support.
The largest capitalization stocks, but in particular growth stocks, dominated
the performance ranks throughout the year.Additionally, among growth stocks
there was better performance registered by each successively larger
capitalization grouping. For value stocks the differences based upon
capitalization were also pronounced. Consider that the Russell 2500,
representing all but the 500 largest companies in the Russell 3000, returned
only 0.38% for the year, while the Russell 1000, which includes all 1000 of the
largest companies, returned 27.02%. That performance difference is solely
attributable to the outstanding performance of those 500 largest stocks.
The Penn Series Growth Equity Fund continued to emphasize the ownership of
companies capable of generating consistent and sustainable earnings growth.
Growth in both earnings and sales remain well above those of the general market.
Using an analysis that focuses on the evaluation of earnings trends for
individual companies we have been able to establish and maintain a significant
edge in identifying firms that can and do produce positive earnings surprise and
subsequently report growth at rates that betters their historical trends. Growth
continues to be found most consistently among technology, consumer cyclical,
healthcare and financial service companies.
Outlook
At the risk of being repetitive, we enter 1999 much as we entered 1998, with
modest expectations. While there are enough positives to provide a reasonably
attractive environment for the U.S. financial markets, the negatives remain
sufficient to keep us wary.
<PAGE>
First the positives. The U.S. economy continued to expand in 1998 and is
expected to do so again in 1999. Consensus forecasts project growth of the real
gross domestic product (GDP) in a range of 1.5% - 2.5%. We believe a recession
is unlikely given the recent shift in Federal Reserve policy toward
accommodation and its positive impact, particularly on the American consumer.
Internationally, central banks around the globe are also easing, which should
help to stabilize many of these economies. Inflation in the U.S. should remain
in check, increasing at a rate of about 1.5%. This will have a salutary effect
on interest rates, bolstering economic growth. Couple subdued inflation and
continued economic growth with ongoing productivity gains and it is quite
possible that corporate earnings will move ahead in 1999 at a pace that
surpasses expectations. Remember, too, that the U.S. government may run a
surplus in 1999, again reducing its demands on the financial markets.
Among the negatives, of particular concern are the uncertainties created by the
impeachment trial of President Clinton, the economic upheaval in Southeast Asia
and Latin American, and the political upheaval in Russia and the Middle East.
There is also the concern about the costs associated with the Year 2000 (Y2K)
conversion of computer systems. Although these issues have been pushed into the
background by the market's improvement in recent months their occasional
resurfacing will, if nothing else, add an element of volatility to the financial
markets. At the same time it is difficult to overlook the issue of valuation.
Currently the S&P 500 is trading at a price/earnings multiple of around 30 times
reported earnings, a historically high figure. Can the S&P 500 stretch its
streak of years with positive annual total returns to nine?
In this environment we can not overemphasize the importance of owning companies
that can deliver earnings that are consistent with history and expectations.
Companies in the computer, telecommunications, pharmaceutical and growth
retailing industries that utilize technology or innovation to unlock
opportunities for new products and services and to increase productivity should
be favored. Commodity-oriented companies, or any dependent on rising prices,
will likely under-perform again this year.
Independence Capital Management, Inc.
Investment Adviser
Comparison of Change in Value of $10,000 Investment in Penn
Series Growth Equity Fund and S&P 500
Growth Equity Fund
Penn Series S&P 500
11/1/92 $10,000 $10,000
12/31/92 $10,661 $10,467
12/31/93 $11,986 $11,522
12/31/94 $11,013 $11,687
12/31/95 $13,926 $16,075
12/31/96 $16,678 $19,767
12/31/97 $21,140 $26,353
12/31/98 $29,950 $33,882
The performance information shown here does not reflect variable account charges
and fees nor does it reflect the period prior to November 1, 1992 when
Independence Capital Management Inc. became the Fund's investment sub-adviser.
Past performance is not predictive of future performance. Shares may be worth
more or less when redeemed than when purchased. Assumes reinvestment of all
dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Quality Bond Fund
For the fourth quarter, interest rates backed up from the 1998 lows reached at
the end of the third quarter. Treasury yields backed up 10-25 basis points with
most of the back up in the front end of the yield curve. This in spite of the
three Federal Reserve moves to lower the Federal Funds rate by a total of 75
basis points over a six week period ending in November.
Essentially, the bond market experienced something of a flight from quality in
the fourth quarter as the stock market and the economy responded vigorously to
the interest rate cuts. In addition, the Federal Reserve rate reductions and
subsequent strength in the stock market also contributed to a significant
tightening in credit market quality yield spreads as perceptions of financial
and economic crises dissipated.
Growth in the fourth quarter is estimated to come in at over 4% Real GDP and
this has led many market participants to believe that the US economy is
virtually immune to the travails of the global economic scene. After all, the
beginning of the Asian crisis began one and one half years ago and the US
economy has averaged well over a 3.5% real GDP pace over that period. The view
is that this crisis has done its worst and yet the US economy and the stock
market is still alive and kicking. We humbly disagree. We think that the global
contagion is alive and well and has continued to wreak havoc throughout the
world, slowing global growth and creating deflationary pressures as well as
disappointing profits for corporations worldwide, including the US.
Recent events have linked the global contagion to Latin America with the
devaluation in Brazil this week. We believe that this will add to the troubles
in the region already initiated by low commodity prices. This adds another large
part of the world's economy in turmoil and one where U.S. business is more
closely linked than in other territories exposed to the economic problems.
What has benefited the US economy in the past year that cannot be necessarily
counted on in the future is the dramatic drop in interest rates and the response
by the interest sensitive sectors of the economy. In addition, the economy's
sensitivity to the stock market has apparently increased in recent years. The
sensitivity has been demonstrated yet again in closer degree in recent months.
Given the historically high valuation measures and poor outlook for profits it
is not a given that past gains is prologue for the stock market. The question
for 1999 is whether it is credible that the U.S. stock market and the U.S.
consumer sector can remain an oasis of prosperity given the stress the U.S.
business sector is experiencing. Most likely, it cannot.
<PAGE>
Our positioning in the new year is to have roughly neutral weightings in both
duration and in spread products. However we continue to think that the next
major move in the bond market is for yields to make new lows and for the Federal
Reserve to eventually move the Federal Funds rate aggressively lower to attempt
to offset the domestic economic weakness engendered by the global economic
contagion.
Independence Capital Management, Inc.
Investment Adviser
Comparison of Change in Value of $10,000 Investment in Penn
Series Quality Bond Fund and Lehman Aggregate Bond Index
Quality Bond Fund
Penn Series Lehman Index
11/1/92 $10,000 $10,000
12/31/92 $10,198 $10,161
12/31/93 $11,388 $11,152
12/31/94 $10,778 $10,826
12/31/95 $12,949 $12,826
12/31/96 $13,485 $13,289
12/31/97 $14,568 $14,576
12/31/98 $16,049 $15,839
The performance information shown here does not reflect variable account charges
and fees nor does it reflect the period prior to November 1, 1992 when
Independence Capital Management Inc. became the Fund's investment sub-adviser.
Past performance is not predictive of future performance. Shares may be worth
more or less when redeemed than when purchased. Assumes reinvestment of all
dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
Emerging Growth Fund
The small-cap sector was volatile, depressing, inspiring, and when all was done,
reasonably flat in performance for the year. Fortunately, we managed to provide
significantly better returns.
The Penn Series Emerging Growth Portfolio rose 38% in the fourth quarter 1998 to
finish the year with a 35.70% calendar year return. This compares to the
benchmark Russell 2000 Growth that rallied up 23.64% in the fourth quarter to
close the year with a very modest -2.57% return.
The broad equity market rallied in the fourth quarter as the Fed implemented
three interest rate cuts. We were encouraged to see demand for small company
shares return in a meaningful way and were well positioned to take advantage of
this renewed small-cap interest, particularly in companies leveraging the
changes created by the rapid spread of the Internet.
We maintained our overweighted exposure to the broad technology sector and were
rewarded with strong performance from the sector and outstanding performance
from certain holdings. We added TranSwitch Corporation and MIPS Technologies
Inc. to the portfolio in late summer as we sensed that these companies were
positioned to benefit from the positive turn in the semi-conductor industry.
We also realized strong gains in Gemstar International Group and ECsoft Group
plc. We have owned both companies since we began managing your account. We have
enjoyed a price /earnings multiple expansion in both, as the companies continue
to execute their business strategies and investors expand their ownership of the
stocks. Our understanding of both companies business, and active dialogue with
company management, gave us the confidence to maintain both positions in the
face of third quarter volatility, particularly in ECsoft stock.
Network Solutions, Inc., is another long held position that capped spectacular
calendar year performance with a strong fourth quarter rise. We researched
Network Solutions, Inc., in late 1997 and were attracted to the company's
dominant position in providing domain names associated with Internet web sites.
We concluded that the company could continue to produce superior revenue and
earnings growth even if their market share was reduced. In fact, their
competitive environment heightened as we moved through 1998. Yet, the company
continued to flourish and investors, realizing the attractive growth
characteristics and reoccurring revenue characteristics of the business bid the
stock significantly higher.
<PAGE>
We also realized strong performance from an overweighted retail allocation in
the fourth quarter. Several specialty retailers provided strong performance,
including Bebe Stores Inc.
Bebe Stores Inc. is a specialty retailer that caters to women in the 20-30-age
bracket. The company has exploited this critical market with a strong mix of
popular brand and logo merchandise that helps boost gross margins ahead of many
other retailers. We purchased the stock in mid-1998 at an attractive P/E
multiple and have been rewarded with strong performance as investors recognize
Bebe Stores Inc.'s solid product mix, aggressive inventory management, and sound
new store opening strategy.
The small-cap market provided investors a great challenge last year. Our
diligent research effort paid off, enabling us to understand, analyze, and
finally purchase a broad number of truly exciting emerging growth companies and
navigate the volatility that characterized the year.
We go into the New Year, optimistic about the small-cap investment environment.
Independence Capital Management, Inc.
Investment Adviser
Robertson Stephens Investment Management
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn
Series Emerging Growth Fund and Russell 2000
Emerging Growth Fund
Penn Series Russell 2000
5/1/97 $10,000 $10,000
12/31/97 $13,922 $12,868
12/31/98 $18,892 $12,537
The performance information shown here does not reflect variable account charges
and fees. Past performance is not predictive of future performance. Shares may
be worth more or less when redeemed than when purchased. Assumes reinvestment of
all dividends.
<PAGE>
Penn Series Funds, Inc.
Management's Discussion of Fund Performance
International Equity Fund
Asia experienced positive momentum for the fourth quarter, with Japan returning
26.9% and the Pacific Region ex Japan returning 23.5%. Government
recapitalization plans helped to spur the financials to rally in Japan. For the
rest of Asia, improving current accounts, lower interest rates, strengthening
currencies and portfolio reallocation helped to support equity returns in the
region. The Japanese economy continues to be weak -- last year's company
failures and bankruptcies in the manufacturing sector exceeded the record set in
1984. The longer it takes for a full-scale resolution of the bad debt problem,
the greater the risk that currently strong borrowers end up as victims. Japan
has only five Moody's triple A-rated firms left.
Our underexposure to the Japanese banking sector hurt our performance relative
to the benchmark. While benchmark risk inflicts occasional short-term pain, we
believe the greater risk is owning firms that destroy shareholder value instead
of creating it. We do not believe the Japanese Government's methodology in
dealing with its bad debt problem (i.e. merging banks and creating bridge banks)
will be constructive in creating better profits, in terms of ROE, for any
institution. Our stock selection process does not allow us to own firms with
weak balance sheets. We prefer to own firms with high interest rate coverage
ratios and low debt levels, such as Credit Saison, Nintendo, Takeda Chemical and
Fuji Photo, which relative to their cost of capital are creating value.
The finalization of the "Euro" continues to attract capital to the European
capital markets. The new Eurozone is a border free-market composed of 11
countries with a $6.5 trillion economy and an aggregate population greater than
that of the US. The Euro will act as the world's second largest reserve
currency. Merger & Acquisition activity has been a continuous theme in Europe,
but to a certain extent has driven valuations to unsustainable levels,
particularly in the telecom stocks, with the exception of Vodafone, which has a
proven track record and, we believe, will remain strong. The perceived financial
and economic repercussions from the Russian debacle hit the European markets
with force in the early fall. European equities declined on average 40%.
However, we believe Russia will have little impact on the real economies of core
Europe and the U.K. Valuations became attractive against falling bond yields and
reinforced the profitability profiles of European companies.
Our lack of exposure to the Italian and Spanish equity markets hurt the
performance of the portfolio. Takeover speculation in the Italian and Spanish
markets, particularly in the utilities, telecom and banking sectors, was
tremendous and, in our view, overdone. Additionally, Spanish companies are
heavily exposed to the volatile Latin American markets. More importantly, the
absolute valuations of most companies were not compelling.
Independence Capital Management, Inc.
Investment Adviser
Vontobel, USA
Investment Sub-Adviser
Comparison of Change in Value of $10,000 Investment in Penn Series International
Equity Fund and MSCI Europe Australia Far East (EAFE) Index
Intl Equity Fund
Penn Series EAFE
11/2/92 $10,000 $10,000
12/31/92 $10,200 $10,140
12/31/93 $14,090 $13,446
12/31/94 $13,201 $14,491
12/31/95 $15,023 $16,114
12/31/96 $17,557 $17,087
12/31/97 $19,385 $17,391
12/31/98 $23,039 $20,869
The performance information shown here does not reflect variable account charges
and fees. Past performance is not predictive of future performance. Shares may
be worth more or less when redeemed than when purchased. Assumes reinvestment of
all dividends.
<PAGE>
- ----------------------------------------------------------
This Page Left Intentionally Blank
<PAGE>
<TABLE>
<CAPTION>
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE MONEY MARKET FUND
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (41.4%)
Carolina Power and Light
5.13%............................................ 02/03/99 A-1 1,700 $1,692,006
5.45%............................................ 01/28/99 A-1 750 746,934
Caterpillar Inc.
5.05%............................................ 01/08/99 A-1 1,000 999,018
Dekalb County For
Emory University
5.25%............................................ 01/21/99 A-1 1,500 1,500,000
Ford Motor Credit Corp.
5.01%............................................ 01/28/99 A-1 2,300 2,291,358
5.05%............................................ 02/05/99 A-1 700 696,563
General Electric
Capital Corp.
5.16%............................................ 03/09/99 A-1 2,000 1,980,793
General Electric Capital
Mortgage Services
5.01%............................................ 02/19/99 A-1 250 248,295
General Motors
Acceptance Corp.
5.16%............................................ 01/14/99 A-2 2,500 2,495,342
GTE Corp.
5.20%............................................ 02/22/99 A-2 1,000 992,489
5.30%............................................ 02/09/99 A-2 1,500 1,491,388
Merrill Lynch
5.47%............................................ 01/22/99 A-1 1,000 996,809
Monsanto Co.
5.47%............................................ 01/11/99 A-1 1,500 1,497,721
5.10%............................................ 02/01/99 A-1 300 298,683
New York, New York
5.40%............................................ 01/14/99 A-1 1,600 1,600,000
Walt Disney Co.
5.05%............................................ 01/15/99 A-1 2,500 2,495,090
5.10%............................................ 02/16/99 A-1 103 102,329
----------
TOTAL COMMERCIAL PAPER
(Cost $22,124,818) 22,124,818
==========
CORPORATE BONDS (24.0%)
Associates Corporation
North America
7.25%............................................ 09/01/99 AA- 150 151,533
6.68%............................................ 09/17/99 AA- 1,650 1,661,120
Caterpillar Financial
Service Corp.
6.77%............................................ 02/02/99 A+ 1,000 1,001,308
Chase Manhattan Corp.
7.58%............................................ 07/23/99 A 2,000 2,020,849
Coca-Cola Enterprises
7.00%............................................ 11/15/99 A+ 1,000 1,016,379
Florida Power and Light
5.50%............................................ 07/01/99 AA- 250 249,805
General Motors
Acceptance Corp.
7.75%............................................ 01/15/99 A-2 325 325,228
GTE Northwest Inc.
6.125%........................................... 02/15/99 A-1 375 375,114
Mobil Corp.
7.25%............................................ 03/15/99 AA 115 115,351
Norwest Financial Inc.
6.68%............................................ 09/15/99 A+ 1,000 1,007,240
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Sears Roebuck Co.
8.00%............................................ 02/16/99 A- 2,500 $2,507,990
Southern California Edison
7.50%............................................ 04/15/99 A- 500 502,382
Texas Instruments Inc.
6.75%............................................ 07/15/99 A 1,550 1,558,224
Wachovia Bank
North America
6.00%............................................ 03/15/99 AA+ 350 350,169
----------
TOTAL CORPORATE BONDS
(Cost $12,842,692)............................... 12,842,692
==========
VARIABLE RATE DEMAND NOTES (21.6%)+
Alabama State
Development Authority
6.00%............................................ 01/07/99 A-1 500 500,000
Barton Healthcare
5.70%............................................ 01/06/99 A-1 430 430,000
Baylis Group Partnership
6.00%............................................ 01/06/99 A-1 700 700,000
Berks County Industrial
Development Authority
6.05%............................................ 01/07/99 A-1 535 535,000
Bloomfield, New Mexico
5.70%............................................ 01/07/99 A-1 600 600,000
Columbia County Georgia
Development Authority
5.70%............................................ 01/07/99 A-1 1,390 1,390,000
Community Health
Systems, Inc.
6.05%............................................ 01/07/99 A-1 1,065 1,065,000
Community Health
Systems, Inc.
6.05%............................................ 01/07/99 A-1 365 365,000
Durham Risk
Management Co.
5.17%............................................ 01/07/99 A-1 500 500,000
Fairview Hospital and
Healthcare Services
5.65%............................................ 01/07/99 AAA 500 500,000
GMG Warehouse
American National
5.70%............................................ 01/06/99 A-1 875 875,000
Health Insurance Plan of
Greater NY
5.65%............................................ 01/07/99 A-1 500 500,000
Illinois Development
Finance Authority
5.70%............................................ 01/07/99 A-1 600 600,000
Liliha Partners LP
6.05%............................................ 01/06/99 A-1 1,155 1,155,000
Montgomery County PA
Industrial Development
Authority
6.05%............................................ 01/07/99 A-1 775 775,000
Saint Francis Health
6.05%............................................ 01/07/99 A-2 490 490,000
Silver City New Mexico
5.70%............................................ 01/07/99 A-1 600 600,000
-----------
TOTAL VARIABLE RATE DEMAND NOTES
(Cost $11,580,000)............................... 11,580,000
-----------
</TABLE>
1
<PAGE>
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE MONEY MARKET FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
MEDIUM TERM NOTES (5.4%)
Associates Corporation
North America
6.125%............................................ 11/12/99 AA- 1,000 $1,009,113
Bank One Wisconsin
5.74%............................................ 05/11/99 AA 350 349,938
Caterpillar Financial
Service Corp.
6.78%............................................ 08/05/99 A+ 250 251,600
NYNEX Capital Funding
7.60%............................................ 07/19/99 A 1,000 1,012,377
Xerox Corp.
7.01%............................................ 04/30/99 A 250 250,980
---------
TOTAL MEDIUM TERM NOTES
(Cost $2,874,008)................................ 2,874,008
=========
Number
of Shares
---------
SHORT-TERM INVESTMENTS (7.6%)
Janus Money Market
Fund............................................. 2,666,715 2,666,715
Temporary Investment
Fund Class B .................................... 1,416,465 1,416,465
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,083,180)................................ 4,083,180
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $53,504,698)(a............................. $53,504,698
===========
</TABLE>
(a) Cost for Federal income tax purposes.
+ The rate shown is the rate as of December 31, 1998, and the maturity is the
next interest readjustment date.
The Standard & Poor's Corporation, Moody's Investors Service, Fitch Investors
Service and Duff & Phelps Credit Rating Co. ratings are the most recent ratings
available at December 31, 1998. Ratings are unaudited.
Percentage of Portfolio
Maturity Amount -----------------------
Schedule Par (cum)
-------- ------ -----
1- 7 days $11,580,000 23.4% 23.4%
8- 14 days 6,600,000 13.4% 36.8%
15- 30 days 8,375,000 17.0% 53.8%
31- 60 days 9,428,000 19.1% 72.9%
61- 90 days 2,465,000 5.0% 77.9%
91-120 days 750,000 1.5% 79.4%
121-150 days 350,000 0.7% 80.1%
Over 150 days 9,850,000 19.9% 100.0%
----------- -----
$49,398,000 100.0%
=========== =====
Average Weighted Maturity -- 69 days
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE QUALITY BOND FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
CORPORATE BONDS (10.5%)
Canadian Gov't Agency (2.2%)
Hydro-Quebec 8.05%............................... 07/07/06 A+ 1,150 $1,398,687
-----------
Financial (1.7%)
Associates Corp. N.A.
7.75%............................................ 02/15/05 AA- 500 555,625
General Electric Capital
Corp. 8.125%..................................... 02/01/99 AAA 500 501,028
-----------
1,056,653
General Obligation Bonds (1.6%)
General Electric Capital
Corp. 6.66%...................................... 05/01/00 AAA 1,000 1,017,500
-----------
Industrial (1.7%)
IBM Corp. 6.22%................................... 08/01/27 A+ 1,000 1,061,250
-----------
Retail (0.3%)
Penney (J.C.) Inc.
Note 9.45%....................................... 07/15/02 A+ 175 185,500
-----------
Services-Equipment Renting & Leasing (0.2%)
Service Corporation
International 7.00%.............................. 06/01/15 BBB+ 100 103,875
-----------
Transportation (1.1%)
CSX Corp. 7.05%................................... 05/01/02 BBB 660 685,575
-----------
Utility (1.7%)
Calenergy Co. Inc.
8.48%............................................ 09/15/28 BB+ 975 1,084,688
-----------
TOTAL CORPORATE BONDS
(Cost $6,099,819)................................ 6,593,728
-----------
U.S. TREASURY OBLIGATIONS (34.9%)
Treasury Bonds (3.2%)
7.50%............................................ 11/15/16 NR 700 869,831
6.125%............................................ 11/15/27 NR 1,025 1,145,938
-----------
2,015,769
-----------
Treasury Notes (31.7%)
6.25%............................................ 08/31/02 NR 3,750 3,946,545
5.75%............................................ 04/30/03 NR 6,625 6,896,268
5.75%............................................ 08/15/03 NR 1,900 1,984,987
6.50%............................................ 05/15/05 NR 5,625 6,166,091
5.625%........................................... 05/15/08 NR 900 961,005
-----------
19,954,896
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $21,961,438)............................... 21,970,665
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
AGENCY OBLIGATIONS (40.5%)
Federal National Mortgage Association Bonds
4.50%............................................ 01/04/99 NR 6,400 $6,397,600
5.625%........................................... 03/15/01 NR 3,100 3,150,555
6.00%............................................ 11/30/28 NR 5,000 4,935,950
6.45%............................................ 12/01/03 NR 1,207 1,241,677
6.50%............................................ 12/01/26 NR 1,500 1,510,320
6.67%............................................ 12/01/04 NR 1,759 1,831,648
6.825%........................................... 09/01/07 NR 2,702 2,819,497
7.00%............................................ 01/01/29 NR 2,000 2,041,260
7.50%............................................ 12/01/26 NR 1,500 1,540,320
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $25,218,011)............................... 25,468,827
-----------
COMMERCIAL ASSET BACKED SECURITIES (6.5%)
Comed Transitional
Funding Trust
5.44%............................................ 03/25/07 AAA 2,000 1,997,500
Morgan Stanley 6.95%.............................. 12/10/07 AA 464 494,689
Railcar Leasing, LLC
7.125%........................................... 01/15/13 AAA 1,000 1,098,750
Sasco 96- CFl Class B
6.303%........................................... 02/25/28 AA 500 508,642
-----------
TOTAL COMMERCIAL ASSET BACKED SECURITIES
(Cost $4,013,482).............................. 4,099,581
-----------
Shares
------
SHORT-TERM INVESTMENTS (7.6%)
Janus Money Market Fund.......................... 2,644,429 2,644,429
Temporary Investment Fund Class B................ 2,161,869 2,161,869
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,806,298)................................ 4,806,298
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $62,099,048) (a)........................... $62,939,099
===========
</TABLE>
(a) At December 31, 1998, the cost for Federal income tax purposes was
$62,136,407. Net unrealized appreciation was $802,692. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $982,439 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $179,747.
The Standard & Poor's corporation ratings are the most recent ratings
available at December 31, 1998. Ratings are unaudited.
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
CORPORATE BONDS (87.9%)
- -----------------------
<S> <C> <C> <C> <C>
Advertising (0.2%)
American Business
Information
Inc. 9.50% ........................................... 06/15/08 B 175 $ 140,000
----------
Aerospace & Defense (2.3%)
Communication & Power
Industries 12.00% .................................... 08/01/05 B 750 778,125
Dyncorp, Inc.
9.50% ................................................ 03/01/07 B 425 420,750
L-3 Communications
Corp. 10.375% ........................................ 05/01/07 B 325 357,500
----------
1,556,375
----------
Automobiles & Related (1.4%)
Advance Stores Co.
10.25% ............................................... 04/15/08 B- 300 304,500
Federal Mogul, Inc.
7.75% ................................................ 07/01/06 BB+ 400 405,912
Trident Automotive
10.00% ............................................... 12/15/05 B- 250 252,500
----------
962,912
----------
Broadcasting (3.8%)
CBS Radio, Inc.
11.375% .............................................. 01/15/09 NR 263 307,827
Chancellor Media
Corporation 9.375% ................................... 10/01/04 B 500 518,750
Citadel Broadcasting
Co. 9.25% ............................................ 11/15/08 B- 150 156,000
Jacor Communications
Co. 8.00% ............................................ 02/15/10 B 375 393,750
Lin Holdings, Corp.
9.319%++ ............................................. 03/01/08 B- 150 105,375
Muzak Limited Partners
10.00% ............................................... 10/01/03 B+ 500 520,000
Radio Unica Corp.
14.99%++ ............................................. 08/01/06 NR 250 135,000
Sinclair Broadcast Group
8.75% ................................................ 12/15/07 B 250 253,125
TV Azteca SA DE CV
10.50% ............................................... 02/15/07 B+ 200 163,000
----------
2,552,827
----------
Building Products (2.7%)
American Builders
and Contractors
10.625% .............................................. 05/15/07 B 500 465,000
Associated Materials, Inc.
9.25% ................................................ 03/01/08 B 600 612,000
Building Materials Corp.
7.75% ................................................ 07/15/05 BB 250 246,250
ISG Resources, Inc.
10.00% ............................................... 04/15/08 B- 500 495,000
----------
1,818,250
----------
Cable Operators (3.5%)
Adelphia
Communications
Corp. 9.875% ......................................... 03/01/07 B+ 250 276,875
CSC Holdings, Inc.
7.625% ............................................... 07/15/18 BB+ 425 433,041
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Falcon Holding Group
9.246%++ ............................................. 04/15/10 B 200 $ 136,000
Frontiervision L.P.
11.00% ............................................... 10/15/06 B 400 444,000
Frontiervision Holdings
L.P. 9.9%++ .......................................... 09/15/07 B 400 335,000
Fundy Cable Ltd.
11.00% ............................................... 11/15/05 BB 300 318,000
Marcus Cable Co.
11.162%++ ............................................ 12/15/05 B 450 432,000
----------
2,374,916
----------
Chemicals (1.3%)
International Specialty
Products, Inc.
9.75% ................................................ 02/15/02 BB- 500 531,250
Sovereign Specialty
Chemicals 9.50% ...................................... 08/01/07 B- 350 355,250
----------
886,500
----------
Conglomerates (0.6%)
ICF Kaiser International,
Inc. 13.00% .......................................... 12/31/03 NR 400 396,000
----------
Consumer Products (1.6%)
Purina Mills, Inc.
9.00% ................................................ 03/15/10 B 600 597,000
Revlon Consumer
Products 8.125% ...................................... 02/01/06 B 150 142,500
8.625% ............................................... 02/01/08 B- 350 322,000
----------
1,061,500
----------
Container (3.8%)
Anchor Advanced
Products 11.75% ...................................... 04/01/04 BB- 600 654,000
BWAY Corp.
10.25% ............................................... 04/15/07 B 500 525,000
Plastic Containers, Inc.
10.00% ............................................... 12/15/06 B+ 1,000 1,050,000
U.S. Can Corp.
10.125% .............................................. 10/15/06 B 350 368,375
----------
2,597,375
----------
Diversified Chemicals (0.7%)
Koppers Industry, Inc.
9.875% ............................................... 12/01/07 B- 500 490,000
----------
Electric Utilities (0.8%)
Niagara Mohawk
Power Corp.
7.281%++ ............................................. 07/01/10 BB+ 400 309,052
7.75% ................................................ 10/01/08 BB+ 200 217,620
----------
526,672
----------
Electronic Components (0.5%)
Fairchild Semiconductor
10.125% .............................................. 03/15/07 B 125 123,750
Viasystems, Inc.
9.75% 06/01/07 B- 250 232,500
----------
356,250
----------
Energy Services (4.3%)
Amerigas Partners LP
10.125% .............................................. 04/15/07 BB+ 400 408,000
Canadian Forest Oil
Ltd. 8.75% ........................................... 09/15/07 B 150 137,250
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Energy Corporation of
America 9.50% ........................................ 05/15/07 B 600 $555,000
Flores & Rucks
9.75% ................................................ 10/01/06 BB- 275 280,500
Kelley Oil & Gas
Corporation
10.375% .............................................. 10/15/06 B- 150 111,000
Lomak Petroleum
8.75% ................................................ 01/15/07 B 300 276,000
Plains Resources, Inc.
10.25% ............................................... 03/15/06 B- 550 555,500
Pride Petroleum Services
9.375% ............................................... 05/01/07 BB 425 395,250
Rutherford-Moran Oil
10.75% ............................................... 10/01/04 CC 175 199,500
----------
2,918,000
----------
Entertainment & Leisure (3.5%)
Bally Total Fitness
Holdings 9.875% ...................................... 10/15/07 B- 400 392,000
IMAX Corp.
7.875% ............................................... 12/01/05 BB- 250 250,625
Loews Cineplex
Entertainment
8.875% ............................................... 08/01/08 B 75 77,438
Park Place Entertainment
7.875% ............................................... 12/15/05 BB+ 400 400,500
Premier Parks, Inc.
9.68%++ .............................................. 04/01/08 B- 125 84,687
Six Flags Theme Parks
12.25% ............................................... 06/15/05 B- 600 666,000
Speedway Motorsports,
Inc. 8.50% ........................................... 08/15/07 B+ 500 527,500
----------
2,398,750
----------
Financial Services (0.2%)
Ocwen Capital Trust I
10.875% .............................................. 08/01/27 B- 150 120,000
----------
Food Processing (1.9%)
B&G Foods, Inc.
9.625% ............................................... 08/01/07 B- 600 585,000
Mrs. Fields Original
10.125% .............................................. 12/01/04 B+ 250 241,250
Shoppers Food Warehouse
9.75% ................................................ 06/15/04 B+ 400 431,000
----------
1,257,250
----------
Food/Tobacco (3.5%)
Archibald Candy Corp.
10.25% ............................................... 07/01/04 B 100 101,500
Del Monte Foods Co.
11.131%++ ............................................ 12/15/07 B- 75 51,375
Eagle Family Foods
8.75% ................................................ 01/15/08 B- 250 235,625
International Home
Foods, Inc. Senior
Subordinated Notes
10.375% .............................................. 11/01/06 B- 600 649,500
Keebler Corporation
10.75% ............................................... 07/01/06 BB+ 600 678,000
Smithfield Foods, Inc.
7.625% ............................................... 02/15/08 BB+ 125 125,625
Southern Foods, Inc.
9.875% ............................................... 09/01/07 B 500 522,500
----------
2,364,125
----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Healthcare (3.4%)
Genesis Healthcare
9.25% ................................................ 10/01/06 B- 100 $94,000
Genesis Health Ventures,
Inc. 9.75% ........................................... 06/15/05 B- 100 97,000
Hudson Respiratory Care
9.125% ............................................... 04/15/08 B- 100 81,000
Integrated Health
Services, Inc.
9.25% ................................................ 01/15/08 B- 300 279,000
Kinetic Concepts, Inc.
9.625% ............................................... 11/01/07 B- 250 237,500
Mariner Post-Acute
Network 9.50% ........................................ 11/01/07 B- 250 192,500
Owens & Minor, Inc.
10.875% .............................................. 06/01/06 B+ 500 537,500
Quest Diagnostic, Inc.
10.75% ............................................... 12/15/06 B+ 250 277,500
Tenet Healthcare Corp.
8.125% ............................................... 12/01/08 BB- 500 516,250
----------
2,312,250
----------
Hotels & Gaming (7.4%)
Argosy Gaming
12.00% ............................................... 06/01/01 NR 150 147,563
Casino America, Inc.
12.50% ............................................... 08/01/03 B+ 250 275,625
Courtyards By Marriott
10.75% ............................................... 02/01/08 B- 600 618,000
Grand Casinos, Inc.
10.125% .............................................. 12/01/03 BB 500 545,135
9.00% ................................................ 10/15/04 B+ 300 336,000
Host Marriott Travel
Plaza 9.50% .......................................... 05/15/05 BB- 600 624,000
HMH Properties
7.875% ............................................... 08/01/08 BB 600 582,000
ITT Corp.
7.375% ............................................... 11/15/15 BB 300 253,740
Players International,
Inc. 10.875% ......................................... 04/15/05 BB- 300 321,000
Red Roof Inns
9.625% ............................................... 12/15/03 B 500 508,750
Rio Hotel & Casino,
Inc. 10.625% ......................................... 07/15/05 B+ 350 381,500
9.50% ................................................ 04/15/07 B+ 50 55,562
Venetian Casino LV
Sands 12.25% ......................................... 11/15/04 B- 400 374,000
----------
5,022,875
----------
Manufacturing (3.3%)
Grove Worldwide
L.L.C. 9.25% ......................................... 05/01/08 B 500 455,000
Goss Graphic Systems,
Inc. 12.00% .......................................... 10/15/06 CCC+ 25 13,750
Hawk Corp.
10.25% ............................................... 12/01/03 B+ 500 525,000
HCC Industries, Inc.
10.75% ............................................... 05/15/07 B- 500 480,000
International Wire
Group 11.75% ......................................... 06/01/05 B- 500 526,250
Paragon Corp.
Holdings 9.625% ...................................... 04/01/08 B+ 250 207,500
----------
2,207,500
----------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Media and Communications (1.4%)
Mediacom L.L.C.
8.50% ............................................... 04/15/08 B+ 175 $ 178,938
Northland Cable
Television 10.25% ................................... 11/15/07 B- 500 526,250
Transwestern Holdings
11.431%++ ........................................... 11/15/08 B- 250 165,625
Transwestern Publishing
9.625% .............................................. 11/15/07 B- 100 104,500
----------
975,313
----------
Mining (0.3%)
P&L Coal Holdings
Corp. 8.875% ........................................ 05/15/08 B+ 200 203,500
----------
Metals & Steels (0.3%)
Republic Engineered
Steel 9.875% ........................................ 12/15/01 CCC+ 200 202,000
----------
Miscellaneous Consumer Products (4.9%)
American Safety Razor
Co. 9.875% .......................................... 08/01/05 BB- 500 500,000
Chattem, Inc.
12.75% .............................................. 06/15/04 B- 500 562,500
Doane Products Co.
9.75% ............................................... 05/15/07 B- 1,266 1,303,980
Hedstrom Holdings, Inc.
17.274%++ ........................................... 06/01/09 B- 50 22,437
Herff Jones, Inc.
11.00% .............................................. 08/15/05 B 500 542,500
Holmes Products Corp.
9.875% .............................................. 11/15/07 B- 400 376,000
----------
3,307,417
----------
Paper & Paper Products (1.4%)
Repap New Brunswick
9.00% ............................................... 06/01/04 B- 200 182,000
10.625% ............................................. 04/15/05 CCC+ 650 442,000
Riverwood International
10.25% .............................................. 04/01/06 B- 150 147,000
10.625% ............................................. 08/01/07 B- 200 198,000
----------
969,000
----------
Printing and Publishing (2.3%)
American Lawyer
Media Holdings
12.246%++ ........................................... 12/15/08 CCC+ 175 109,375
Hollinger International
Publishing 9.25% .................................... 03/15/07 BB- 400 422,000
Liberty Group Publishing
9.375% .............................................. 02/01/08 CCC+ 250 240,625
Mail-Well Corp.
8.75% ............................................... 12/15/08 B+ 500 500,000
Sun Media Corp.
9.50% ............................................... 02/15/07 B- 275 305,250
----------
1,577,250
----------
Retail (2.4%)
Eye Care Centers of
America 9.125% ...................................... 05/01/08 B- 350 325,500
MTS, Inc.
9.375% .............................................. 05/01/05 B 100 97,500
Pantry, Inc.
10.25% .............................................. 10/15/07 B- 500 522,500
Safelite Glass Corp.
9.875% .............................................. 12/15/06 B 300 276,750
9.875% .............................................. 12/15/06 B- 100 92,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Specialty Retailers, Inc.
8.50% ............................................... 07/15/05 BB- 325 $ 279,500
----------
1,594,000
----------
Savings & Loan Associations (0.8%)
First Federal Financial
Corp. 11.75% ........................................ 10/01/04 B+ 500 515,625
----------
Service (5.1%)
Alliance Imaging
9.625% .............................................. 12/15/05 B- 450 445,500
AP Holdings, Inc.
13.283%++ ........................................... 03/15/08 B- 200 108,000
APCOA, Inc.
9.249% .............................................. 03/15/08 B- 600 552,000
Coinmach Corp.
11.75% .............................................. 11/15/05 B+ 307 338,468
Intertek Finance PLC
10.25% .............................................. 11/01/06 B 500 465,000
Iron Mountain, Inc.
8.75% ............................................... 09/30/09 B- 500 515,000
MSX International, Inc.
11.375% ............................................. 01/15/08 B- 400 381,000
Protection One Alarm
7.375% .............................................. 08/15/05 BBB- 250 251,760
13.625% ............................................. 06/30/05 BB+ 260 295,100
8.125% .............................................. 01/15/09 BB+ 150 149,600
----------
3,501,428
----------
Specialty Chemicals (0.9%)
Furon Co.
8.125% .............................................. 03/01/08 B+ 325 321,750
Octel Developments
PLC. 10.00% ......................................... 05/01/06 B+ 250 260,000
----------
581,750
----------
Supermarkets (0.8%)
Jitney-Jungle Stores
10.375% ............................................. 09/15/07 B- 325 329,875
12.00% .............................................. 03/01/06 B+ 200 223,000
----------
552,875
----------
Telecommunications (13.8%)
Centennial Cellular
10.75% .............................................. 12/15/08 CCC+ 200 201,000
Clearnet
Communications
12.358%++ ........................................... 12/15/05 NR 200 172,000
Colt Telecom Group
PLC 9.579%++ ........................................ 12/15/06 B 750 622,500
Comcast Cellular
Holdings 9.50% ...................................... 05/01/07 BB+ 200 213,500
E. Spire
Communications
13.75% .............................................. 07/15/07 NR 100 98,000
14.157%++ ........................................... 07/01/08 NR 200 82,000
ICG Holdings, Inc.
13.106%++ ........................................... 09/15/05 NR 500 408,355
Intercel, Inc.
13.056%++ ........................................... 02/01/06 B 250 184,807
Intermedia
Communication, Inc.
8.50% ............................................... 01/15/08 B 100 95,500
11.021%++ ........................................... 07/15/07 B 275 189,750
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
Mastec, Inc.
7.75% ............................................... 02/01/08 BB- 200 $193,000
Metrocall, Inc.
9.75% ............................................... 11/01/07 CCC+ 500 480,000
Metromedia Fiber
Network 10.00% ...................................... 11/15/08 B 200 205,500
Metronet
Communications,
Corp. 11.146%++ ..................................... 11/01/07 B 300 195,000
12.00% .............................................. 08/15/07 B 150 163,125
10.661%++ ........................................... 06/15/08 B 150 91,875
Microcell
Telecommunications,
Inc. 12.445%++ ...................................... 06/01/06 NR 500 370,000
Nextel Communications,
Inc. 11.477%++ ...................................... 10/31/07 CCC+ 450 274,500
10.31%++ ............................................ 08/15/04 CCC+ 500 485,000
NEXTLINK
Communications, Inc.
12.50% .............................................. 04/15/06 B 500 535,000
Pegasus Communications
9.625% .............................................. 10/15/05 B- 200 200,000
Pegasus Communications,
Inc. 9.75% .......................................... 12/01/06 B- 100 100,250
Price Communications
9.125% .............................................. 12/15/06 B 600 606,000
PSINet, Inc.
10.00% .............................................. 02/15/05 B- 150 148,500
11.50% .............................................. 11/01/08 B- 450 465,750
Qwest Communications
Intl., Inc. 7.50% ................................... 11/01/08 BB+ 125 130,625
8.120%++ ............................................ 10/15/07 BB+ 600 468,000
RSL Communications
PLC 12.00% .......................................... 11/01/08 B- 300 310,500
Satelites Mexicanos SA
10.125% ............................................. 11/01/04 B- 250 207,500
Sitel Corporation
9.25% ............................................... 03/15/06 B+ 200 180,000
Teligent, Inc.
11.50% .............................................. 12/01/07 CCC 50 46,000
14.769%++ ........................................... 03/01/08 CCC 450 220,500
United International
Holdings
13.167%++ ........................................... 02/15/08 B 525 283,500
Verio, Inc.
10.375% ............................................. 04/01/05 B- 150 147,000
11.25% .............................................. 12/01/08 B- 300 303,000
Viatel, Inc.
11.25% .............................................. 04/15/08 NR 100 100,000
13.165%++ ........................................... 04/15/08 NR 200 113,000
21st Century Telecom
Group 17.351%++ ..................................... 02/15/08 NR 150 63,000
----------
9,353,537
-----------
Textiles & Apparel (1.2%)
Delta Mills, Inc.
9.625% .............................................. 09/01/07 B+ 400 387,000
Dyersburg Corp.
9.75% ............................................... 09/01/07 B+ 300 268,500
Glenoit Corp.
11.00% .............................................. 04/15/07 B- 150 139,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par
Maturity Rating (000) Value
-------- ------ ----- -----
<S> <C> <C> <C> <C>
+@#Plaid Clothing Corp.
11.00% .............................................. 08/01/03 D 375 $ 0
----------
795,000
----------
Transportation (1.6%)
Greyhound Lines, Inc.
11.50% .............................................. 04/15/07 B- 500 567,500
Travelcenters of
America 10.25% ...................................... 04/01/07 B 500 497,500
----------
1,065,000
----------
TOTAL CORPORATE BONDS
(Cost $60,146,842) $59,514,022
-----------
COMMERCIAL PAPER (5.5%)
- -----------------------
Ciesco L.P.
5.20% ............................................... 01/13/99 A-1+ 1,340 1,337,677
General Electric Capital
5.09% ............................................... 03/10/99 A-1+ 1,135 1,123,927
@ Sysco Corp.
5.10% ............................................... 01/04/99 A-1+ 1,243 1,242,472
----------
TOTAL COMMERCIAL PAPER
(Cost $3,704,237) 3,704,076
----------
Number
of Shares
---------
Common Stock (0.9%)
- -------------------
@+#Capital Gaming Intl., Inc ............................ 34 0
+ Dr. Pepper Bottling Holdings, Inc.,
Class A ............................................. 14,800 444,000
+ Gaylord Containers Corp., Class A .................... 7,500 45,937
+ Hedstrom Holdings .................................... 6,065 6,065
+ Isle of Capri Casinos ................................ 3,600 14,288
+ Nextel Communications Inc. ........................... 232 5,481
+ Protection One, Inc. ................................. 8,400 71,925
----------
TOTAL COMMON STOCK
(Cost $242,187) 587,696
----------
PREFERRED STOCK (5.2%)
- ----------------------
@ Anvil Holdings, Inc. ................................. 4,545 45,450
Bank United Capital Trust ............................ 250 250,000
Capstar Broadcasting Partners ........................ 3,588 430,572
Citadel Broadcasting Co. ............................. 1,819 207,368
Clarke USA, Inc. ..................................... 2,792 223,344
Concentric Network Corp. ............................. 2 1,710
CSC Holdings, Inc. Series H .......................... 1,783 205,477
CSC Holdings, Inc. Series M .......................... 9,125 1,021,991
Cumulus Media, Inc. .................................. 160 172,352
E. Spire Communication, Inc. ......................... 1,682 82,404
+ Global Crossing Holdings, Ltd. ....................... 1,500 147,375
Intermedia Communications, Inc. ...................... 6,167 66,293
+ International Utility Structures ..................... 150 132,000
Nextel Communications, Inc. .......................... 1,063 109,804
Pegasus Communications Corp. ......................... 109 104,640
Rural Cellular Corp. ................................. 310 285,200
Viatel, Inc. ......................................... 154 5,390
----------
TOTAL PREFERRED STOCK
(Cost $3,650,612) .................................... 3,491,370
----------
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
Number
of Shares Value
--------- -----
WARRANTS (0.5%)
- ---------------
+Allegiance Telecom, Inc. .......................... 250 $ 438
+Colt Telecom ...................................... 700 299,005
@+Globalstar, Inc. .................................. 350 21,000
@+ICF Kaiser International Inc. ..................... 1,575 1
+Intermedia Communication .......................... 50 2,137
+Metronet Communications ........................... 150 6,324
@+Microcell Telecom ................................. 800 10,272
@+President Casinos, Inc. ........................... 4,415 221
+UIH Australia Exp. ................................ 175 583
+Wireless One, Inc. ................................ 450 5
@+Wright Medical Technology, Inc. ................... 2,676 2
-----------
TOTAL WARRANTS
(Cost $44,111) ............................................. 339,988
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $67,787,989)(a) ...................................... $67,637,152
===========
@ Restricted Security
+ Non-Income Producing
++ Effective Yield
# Securities in default
(a) At December 31, 1998, the cost for Federal income tax purposes was
$67,822,003. Net unrealized depreciation was $184,851. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $2,079,571 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $2,264,422.
The Standard & Poor's Corporation, Moody's Investors Service, Fitch
Investors Service and Duff & Phelps Credit Rating Co. ratings are the most
recent ratings available at December 31, 1998. Ratings are unaudited.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE GROWTH EQUITY FUND
Number
of Shares Value
--------- -----
COMMON STOCK (95.6 %)
- ---------------------
Computer Software & Services (11.0%)
America Online, Inc. ...................... 20,000 $ 2,895,000
+ Cisco Systems, Inc. ....................... 90,000 8,355,937
+ Microsoft Corp. ........................... 70,000 9,697,188
------------
20,948,125
------------
Computer Systems (7.6%)
Compaq Computer Corp. ..................... 70,000 2,935,625
+ Compuware Corp. ........................... 75,000 5,857,031
+ Dell Computer Corp. ....................... 80,000 5,857,500
-----------
14,650,156
------------
Diversified Operations (3.5%)
General Electric Co. ...................... 65,000 6,634,063
------------
Electronics-Semiconductors (6.2%)
Intel Corp. ............................... 50,000 5,926,563
Texas Instruments, Inc. ................... 70,000 5,989,375
------------
11,915,938
------------
Financial Services (13.5%)
Chase Manhattan Corp. ..................... 60,000 4,083,750
Federal National Mortgage
Association .............................. 90,000 6,660,000
First Union Corp. ......................... 125,000 7,601,562
MBNA Corp. ................................ 300,000 7,481,250
------------
25,826,562
------------
Insurance (2.0%)
American International Group, Inc. ........ 40,000 3,865,000
------------
Medical Supplies (2.3%)
Guidant Corp. ............................. 40,000 4,410,000
------------
Pharmaceuticals (15.0%)
Eli Lilly and Co. ......................... 60,000 5,332,500
Johnson & Johnson ......................... 30,000 2,516,250
Merck & Co., Inc. ......................... 50,000 7,384,375
Pfizer, Inc. .............................. 40,000 5,017,500
Schering-Plough Corp. ..................... 85,000 4,696,250
Warner-Lambert Co. ........................ 50,000 3,759,375
------------
28,706,250
------------
Retail Stores (19.5%)
CVS Corporation ........................... 140,000 7,700,000
+ Safeway, Inc. ............................. 150,000 9,140,625
+ Staples, Inc. ............................. 175,000 7,650,781
Wal Mart Stores, Inc. ..................... 90,000 7,329,375
The Home Depot, Inc. ...................... 90,000 5,506,875
------------
37,327,656
------------
Telecommunications (15.0%)
Lucent Technologies, Inc. ................. 60,000 6,600,000
+ MCI WorldCom, Inc. ........................ 100,000 7,178,125
SBC Communications, Inc. .................. 120,000 6,435,000
Time Warner, Inc. ......................... 135,000 8,378,438
------------
28,591,563
------------
Total Common Stock
(Cost $113,072,390) ....................... 182,875,313
------------
<PAGE>
Number
of Shares Value
--------- -----
SHORT TERM INVESTMENTS (4.4%)
- -----------------------------
Temporary Investment Fund - Temp Cash ..... 4,211,143 $ 4,211,143
Temporary Investment Fund, Inc. ........... 4,211,142 4,211,142
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $8,422,285) ......................... 8,422,285
------------
TOTAL INVESTMENTS (100.0%)
(Cost $121,494,675) (a) ................... $191,297,598
============
- -----------------
+ Non-Income Producing
(a) At December 31, 1998, the cost for Federal income tax purposes was
$121,546,835. Net appreciation was $69,750,763 this consisted of aggregate
gross unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $69,966,415 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $215,652.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE VALUE EQUITY FUND
Number
of Shares Value
--------- -----
COMMON STOCK (90.7%)
- --------------------
Advertising (1.7%)
Omnicom Group, Inc. ......................... 100,000 $ 5,800,000
-----------
Aerospace & Defense (4.8%)
Allied-Signal, Inc. ......................... 160,000 7,090,000
Lockheed Martin Corp. ....................... 104,000 8,814,000
-----------
15,904,000
-----------
Airlines (2.3%)
+ AMR Corp. ................................... 129,000 7,659,375
-----------
Automotive Parts-Equipment (1.8%)
Lucas Varity PLC ............................ 178,520 5,980,420
-----------
Building Products (0.6%)
Armstrong World Industries, Inc. ............ 32,000 1,930,000
-----------
Communications (0.2%)
+ Sprint PCS .................................. 36,125 835,391
-----------
Chemicals (1.7%)
Dupont (E.I.) de Nemours & Co. .............. 80,000 4,245,000
Hercules, Inc. .............................. 50,000 1,368,750
-----------
5,613,750
-----------
Consumer Non-Durable (3.7%)
Philip Morris Companies ..................... 230,000 12,305,000
-----------
Cosmetics-Toiletry (1.1%)
International Flavors &
Fragrances, Inc. ........................... 80,000 3,535,000
-----------
Diversified Operations (6.8%)
Canadian Pacific, Ltd. ...................... 150,000 2,831,250
Minnesota Mining &
Manufacturing Co. .......................... 115,000 8,179,375
Textron, Inc. ............................... 155,000 11,770,313
-----------
22,780,938
-----------
Entertainment & Leisure (2.0%)
Carnival Corp. - Class A .................... 140,000 6,720,000
-----------
Electronic Components (0.7%)
+ Conexant Systems, Inc. ...................... 2,000 33,438
Motorola, Inc. .............................. 40,000 2,442,500
-----------
2,475,938
-----------
Electronic Systems (2.7%)
Rockwell International Corp. ................ 224,000 9,005,500
-----------
Electronics (2.2%)
+ Arrow Electronics, Inc. ..................... 96,000 2,562,000
Avnet, Inc. ................................. 81,000 4,900,500
-----------
7,462,500
-----------
<PAGE>
Number
of Shares Value
--------- -----
Financial Services (14.9%)
Bank Boston Corp. ........................... 127,000 $ 4,945,063
Citigroup Inc. .............................. 137,500 6,806,250
Conseco Inc. ................................ 311,610 9,523,581
Countrywide Credit Industries, Inc. ......... 190,000 9,535,625
Freddie Mac ................................. 169,000 10,889,938
Wells Fargo & CO ............................ 203,330 8,120,492
-----------
49,820,949
-----------
Healthcare (2.2%)
+ Tenet Healthcare Corp. ...................... 282,500 7,415,625
-----------
Insurance (20.7%)
Ace Limited ................................. 505,000 17,390,938
AFLAC, Inc. ................................. 164,750 7,249,000
American International Group, Inc. .......... 45,375 4,384,359
Everest Reinsurance Holdings, Inc. .......... 250,000 9,734,375
EXEL Limited ................................ 283,196 21,239,700
Berkshire Hathaway Class B .................. 3,885 9,129,750
-----------
69,128,122
-----------
Machinery (Diversified) (4.7%)
Caterpillar, Inc. ........................... 137,000 6,302,000
Dover Corp. ................................. 256,000 9,376,000
-----------
15,678,000
-----------
Medical Supplies (2.2%)
Becton, Dickinson & Co. ..................... 168,000 7,171,500
-----------
Office Supplies (2.2%)
+ Avery Dennison Corp. ........................ 160,000 7,210,000
-----------
Paper & Paper Products (1.2%)
Champion International Corp. ................ 100,000 4,050,000
-----------
Photographic Equipment (0.6%)
Polaroid Corp. .............................. 115,000 2,149,062
-----------
Restaurants (3.1%)
McDonald's Corporation ...................... 136,000 10,421,000
-----------
Retail (2.5%)
The May Department Stores Co. ............... 138,000 8,331,750
-----------
Telecommunications (1.8%)
Sprint Corp. ................................ 72,250 6,078,031
-----------
Toys (0.6%)
Mattel, Inc. ................................ 89,531 2,042,426
-----------
Travel Services (1.7%)
+ The Sabre Group Holdings, Inc. .............. 125,000 5,562,500
-----------
TOTAL COMMON STOCK
(Cost $216,288,658) ......................... 303,066,778
-----------
10
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE VALUE EQUITY FUND
Par
Maturity (000) Value
-------- ----- -----
COMMERCIAL PAPER (8.7%)
- -----------------------
American Express Credit Corp.
5.05% ............................. 01/06/99 10,687 $ 10,679,504
Ford Motor Credit Corp.
5.01% ............................. 01/20/99 9,005 8,981,189
General Motors Acceptance
Corp. 5.32% ....................... 01/13/99 9,501 9,484,152
------------
TOTAL COMMERCIAL PAPER
(Cost $29,144,845).......................................... 29,144,845
------------
Number
of Shares
---------
SHORT TERM INVESTMENTS (0.6%)
- -----------------------------
Temporary Cash Investment
Fund, Inc. ........................ 978,115 978,115
Temporary Investment Fund, Inc. .... 980,841 980,841
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,958,956) .......................................... 1,958,956
------------
TOTAL INVESTMENTS (100.0%)
(Cost $247,392,459) (a) .................................... $334,170,576
============
- -------------
+ Non-Income Producing
(a) At December 31, 1998, the cost for Federal income tax purposes was
$247,423,512. At December 31, 1998, net unrealized appreciation was
$86,747,067. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$99,737,759 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $12,990,692.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE FLEXIBLY MANAGED FUND
Number
of Shares Value
--------- -----------
COMMON STOCK (50.9%)
Automotive Parts-Equipment (0.1%)
Exide Corp. ................................. 35,000 $ 568,750
-----------
Banks (0.2%)
Bank Fuer International Zahlungs ............ 150 955,602
-----------
Chemicals (3.2%)
English China Clays PLC ..................... 112,000 308,404
Great Lakes Chemical Corp. .................. 190,000 7,600,000
+ Imperial Chemical Industries PLC (ADR) ...... 107,000 3,738,313
+ Octel Corp. ................................. 410,000 5,688,750
-----------
17,335,467
-----------
Construction (0.5%)
Johns Manville Corp. ........................ 153,000 2,514,938
-----------
Consumer Non-Durable (0.5%)
+ Nine West Group Inc. ........................ 7,500 116,719
+ Reebok International, Ltd. .................. 173,500 2,580,812
-----------
2,697,531
-----------
Electric Utilities (7.2%)
First Energy Corp. .......................... 390,500 12,715,656
Kansas City Power & Light Co. ............... 226,000 6,695,250
+ Nevada Power Co. ............................ 29,000 754,000
+ Niagara Mohawk Power Corp. .................. 873,000 14,077,125
Unicom Corp. ................................ 118,500 4,569,656
38,811,687
-----------
Exploration & Production (1.3%)
+ Mitchell Energy & Development Corp.,
Class A .................................... 10,000 114,375
Mitchell Energy & Development Corp.,
Class B .................................... 434,000 5,045,250
+ Oryx Energy Co. ............................. 140,600 1,889,312
-----------
7,048,937
-----------
Financial Services (0.9%)
Fund American Enterprises
Holdings, Inc. ............................ 35,000 4,902,188
-----------
Food Processing (0.6%)
McCormick & Co., Inc. ....................... 94,000 3,175,438
-----------
Forest Products (0.8%)
Georgia-Pacific Corp. (Timber Group) ........ 40,000 952,500
Weyerhaeuser Co. ............................ 64,000 3,252,000
-----------
4,204,500
-----------
Holdings Company Diversified (5.5%)
BTR PLC ..................................... 124,313 256,472
Hanson PLC (ADR) ............................ 74,125 2,890,875
Loews Corp. ................................. 244,500 24,022,125
Lonrho Africa PLC ........................... 305,000 281,641
Lonrho PLC .................................. 428,000 2,278,755
-----------
29,729,868
-----------
Hotels & Gaming (0.6%)
+ Circus Circus Enterprises,Inc ............... 274,000 3,133,875
-----------
Insurance (2.1%)
Aetna Inc. .................................. 29,000 2,280,125
+ Leucadia National Corp. ..................... 172,000 5,418,000
Unitrin, Inc. ............................... 49,500 3,533,062
-----------
11,231,187
-----------
<PAGE>
- --------------------------------------------------------------------------------
Number
of Shares Value
--------- -----------
Media and Communications (2.4%)
+ Chris-Craft Industries, Inc. ................ 206,000 $ 9,926,625
Meredith Corp. .............................. 80,000 3,030,000
-----------
12,956,625
-----------
Medical (0.8%)
Smith and Nephew PLC ........................ 1,530,000 4,722,144
-----------
Mining (2.2%)
Homestake Mining Co. ........................ 461,500 4,240,031
Newmont Mining Corp. ........................ 418,000 7,550,125
-----------
11,790,156
-----------
Miscellaneous Consumer Durables (1.0%)
Corning, Inc. ............................... 115,000 5,175,000
-----------
Miscellaneous Consumer Products (1.8%)
Cross (A.T.) Co., Class A ................... 38,000 204,250
Philip Morris Co., Inc. ..................... 182,000 9,737,000
-----------
9,941,250
-----------
Oil & Gas (8.3%)
Amerada Hess Corp. .......................... 443,000 22,039,250
Atlantic Richfield Co. ...................... 58,500 3,817,125
Kerr-McGee Corp. ............................ 34,100 1,304,325
Murphy Oil Corp. ............................ 196,000 8,085,000
Texaco, Inc. ................................ 144,500 7,640,437
Unocal Corp. ................................ 75,000 2,189,063
-----------
45,075,200
-----------
Paper & Forest Products (2.3%)
Domtar, Inc. (ADR) .......................... 652,000 3,830,500
MacMillian Bloedel, Ltd. (ADR) .............. 858,000 8,472,750
-----------
12,303,250
-----------
Pharmaceuticals (0.2%)
Schering-Plough Corp. ....................... 21,000 1,160,250
-----------
Photographic Equipment (0.4%)
Polaroid Corp. .............................. 113,000 2,111,688
-----------
Publishing (5.3%)
New York Times Co., Class A ................. 287,000 9,955,313
Reader's Digest Assoc., Inc., Class A ....... 65,000 1,637,188
Reader's Digest Assoc., Inc., Class B ....... 52,000 1,254,500
The Washington Post Co., Class B ............ 27,800 16,066,662
-----------
28,913,663
-----------
Railroads (0.5%)
+ Canadian Pacific, Ltd. (ADR) ................ 160,000 3,020,000
-----------
Retail (0.5%)
+ Hills Stores Co. ............................ 93,000 133,687
+ J.C. Penney Co., Inc. ....................... 54,000 2,531,250
-----------
2,664,937
-----------
Specialty Merchandisers (1.2%)
+ Petrie Stores Corp. ......................... 1,372,500 3,045,234
+ Toys `R' Us, Inc. ........................... 193,000 3,256,875
-----------
6,302,109
-----------
Transportation Services (0.5%)
Overseas Shipholding Group, Inc. ............ 182,000 2,923,375
-----------
Total Common Stock
(Cost ....................................... $242,890,127) 275,369,615
-----------
12
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE FLEXIBLY MANAGED FUND
Number
of Shares Value
--------- -----------
PREFERRED STOCK (6.4%)
Cleveland Electric Illum. Series
L 7.00% ...................................... 29,550 $ 2,980,856
Cleveland Electric Illum. Series
R 8.80% ...................................... 350 372,750
Cleveland Electric Illum. Series
S 9.00% ...................................... 2,100 2,236,500
Entergy Gulf States Utilities Inc. Series
B 7.20% ...................................... 14,414 724,304
Kemper Corp. Series E 144A 5.75% .............. 100,000 5,287,500
Niagara Mohawk Power Corp. Series
A 6.50% ...................................... 16,000 408,500
Niagara Mohawk Power Corp. Series
B 7.50% ...................................... 6,800 172,975
Niagara Mohawk Power Corp. Series
C 7.20% ...................................... 5,500 139,734
Reckson Assoc. Realty Corp. Series
A 7.625% ..................................... 21,000 443,625
Rouse Co. Series B $3 ......................... 278,500 12,079,938
Sealed Air Corp. Series A $2 .................. 40,300 2,090,563
Union Pacific Cap Trust 6.25% ................. 93,000 4,324,500
Union Pacific Cap Trust 6.25% 144A ............ 66,000 3,069,000
Unocal Corp. 6.25% ............................ 7,300 356,787
-----------
TOTAL PREFERRED STOCK
(Cost $33,451,743) ............................ 34,687,532
-----------
Number of
Contracts
---------
PUT OPTIONS (0.1%)
+ Clear Channel Communications
$55, 1/16/99 ................................. 126 35,831
+ Clear Channel Communications
$60, 1/16/99 ................................. 30 19,125
+ IBM $130, 1/16/99 ............................. 125 391
+ MCI WorldCom $55, 1/16/99 ..................... 130 812
+ Pharmacia & Upjohn, Inc. ......................
$50, 1/16/99 ................................. 120 3,000
+ Reebok International, Ltd. ....................
$35, 1/16/99 ................................. 130 263,250
+ Schering-Plough Corp. .........................
$52.50, 2/20/99 .............................. 260 42,250
+ Time Warner, Inc. $50, 3/20/99 ................ 360 24,750
-----------
TOTAL OPTIONS
(Cost $937,970) ............................... 389,409
-----------
Par
Maturity Rating (000)
-------- ------ ------
U.S. TREASURY OBLIGATIONS (5.9%)
- --------------------------------
U.S. Treasury Notes
5.50% ............... 02/28/99 NR 10,000 10,010,900
6.75% ............... 05/31/99 NR 2,000 2,016,240
5.875%............... 02/15/00 NR 12,900 13,067,313
6.125%............... 07/31/00 NR 1,250 1,277,538
6.25% ............... 04/30/01 NR 2,500 2,587,900
6.25% ............... 10/31/01 NR 2,500 2,604,675
----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $31,343,445) ............................................ 31,564,566
----------
<PAGE>
- --------------------------------------------------------------------------------
Par
Maturity Rating (000) Value
-------- ------ ------ -----------
AGENCY OBLIGATIONS (7.9%)
FNMA-Global Bond
6.375% ............... 01/16/02 AAA 3,200 $ 3,321,437
California State
5.25% ................ 10/01/11 A+ 2,925 3,133,348
Tennessee Valley
Authority
5.88% ................ 04/01/36 AAA 17,000 17,844,883
5.98% ................ 04/01/36 AAA 4,600 4,830,621
6.235% ............... 07/15/45 AAA 9,950 10,440,366
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $38,610,204) ........................................... 39,570,655
-----------
MEDIUM TERM NOTES (0.3%)
FNMA Medium Term
Note 5.37%
(Cost $1,576,000) .......... 02/07/01 AAA 1,600 1,615,020
-----------
CORPORATE BONDS (0.7%)
BellSouth Telecommunications
Debentures 5.85%
(Cost $3,776,250) .......... 11/15/45 AAA 3,800 3,848,222
-----------
CONVERTIBLE BONDS (14.9%)
Centor, Inc. 4.75% ......... 02/15/05 NR 1,165 1,233,444
Chiron Corp.1.90% .......... 11/17/00 BB+ 7,775 7,940,219
Clear Channel 2.625% ....... 04/01/03 BBB- 1,050 1,124,813
Exide Corp. 144A 2.90% ..... 12/15/05 B 1,363 805,874
France Telecom Euro
Bond 2.00% ................ 01/01/04 AA+ 5,870 5,865,891
George Weston, Ltd. ........
3.00% ..................... 06/30/23 NR 1,500 899,449
Hilton Hotels Corp. ........
5.00% ..................... 05/15/06 BBB- 4,400 3,987,500
Homestake Mining Co. .......
5.50% ..................... 06/23/00 B+ 7,190 6,794,550
Homestake Mining Co. .......
Euro Bond 5.50% ........... 06/23/00 NR 1,890 1,786,050
Inco, Ltd. 7.75% ........... 03/15/16 BBB- 1,950 1,755,000
Inco, Ltd. 5.75% ........... 07/01/04 BBB- 10,100 8,711,250
Loews Corp. 3.125% ......... 09/15/07 A+ 7,975 6,380,000
Lonhro 6.00% ............... 02/27/04 NR 4,260 6,077,816
Mckesson Corp. .............
4.50% ..................... 03/01/04 BBB+ 1,500 1,357,500
National Semiconductor
Corp. 6.50% ............... 10/01/02 NR 4,015 3,513,125
Nedlloyd Group
4.25% ..................... 03/15/01 NR 497 287,341
Nine West Group Inc. .......
5.50% ..................... 07/15/03 B+ 3,050 2,405,687
Ogden Corp. 5.75% .......... 10/20/02 BBB 250 239,063
Oryx Energy Co. ............
7.50% ..................... 05/15/14 BB- 425 418,625
Peninsular & Oriental
7.25% ..................... 05/19/03 NR 580 1,066,336
Pep Boys 4.00% ............. 09/01/99 BB+ 2,650 2,610,250
Phycor, Inc. 4.50% ......... 02/15/03 B+ 3,500 2,117,500
Potomac Electric Power
Co. 5.00% ................. 09/01/02 A 4,050 3,908,250
13
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE FLEXIBLY MANAGED FUND
Par
Maturity Rating (000) Value
-------- ------ ------ -----------
Rouse Co. Euro Bond
5.75% ................ 07/23/02 BBB- 4,380 $ 4,588,400
Teck Corp.
3.75% ................ 07/15/06 BBB- 5,200 3,393,000
Thomas Nelson
5.75% ................ 11/30/99 NR 1,050 1,060,50
-----------
TOTAL CONVERTIBLE BONDS
(Cost $80,676,906) ............................................ 80,327,433
-----------
ZERO COUPON BONDS (6.2%)
Marriott International
3.9978%++ ........... 03/25/11 BBB 5,330 3,513,483
Motorola, Inc.
2.2453%++ ........... 09/27/13 A+ 2,600 1,937,000
News American Holdings
Lyons 5.3533%++ ..... 03/11/13 BBB- 2,515 1,450,627
Pep Boys 4.6148%++ ... 09/20/11 BB+ 2,680 1,393,600
Roche Holdings, Inc.
144A 6.3750%++ ...... 05/06/12 NR 6,395 3,421,325
Times Mirror Co.
4.4492%++ ........... 04/15/17 A 27,150 12,387,187
U.S. Cellular
5.8820%++ ........... 06/15/15 BBB- 22,600 9,352,332
-----------
TOTAL ZERO COUPON BONDS
(Cost $31,413,869) .......................................... 33,455,554
-----------
COMMERCIAL PAPER (6.4%)
Aluminum Company of
America 5.25% ....... 02/04/99 A-1 3,265 3,248,811
Ciesco L.P.
5.20% ............... 01/13/99 A-1+ 1,420 1,417,539
5.17% ............... 01/13/99 A-1+ 11,245 11,225,621
Duke Energy 5.15% .... 01/14/99 A-1 14,500 14,473,034
Equilon Enterprises
5.00% ............... 01/04/99 A-1+ 3,613 3,611,494
Falcon Asset Sec.
6.75% ............... 01/05/99 A-1+ 500 499,625
Federal Home Loan Bank
4.50% ............... 01/04/99 AAA 3,387 3,385,730
-----------
TOTAL COMMERCIAL PAPER
(Cost $37,861,854) .......................................... 37,861,854
-----------
Number
of Shares Value
--------- ------------
Short Term Investments (0.3%)
Temporary Investment Fund, Inc.
(Cost $1,745,433) ............................. 1,745,433 $ 1,745,433
TOTAL INVESTMENTS (100.0%)
(Cost $504,283,801) (a) ...................................... $540,435,293
============
- ---------------
+ Non-Income Producing
++ Effective Yield.
(a) At December 31, 1998, the cost for Federal income tax purposes was
$504,473,403. Net unrealized appreciation was $35,961,890. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $66,274,133 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $30,312,243.
ADR--American Depository Receipt
The Standard & Poor's Corporation, Moody's Investors Service, Fitch
Investors Service and Duff & Phelps Credit Rating Co. ratings are the most
recent ratings available at December 31, 1998. Ratings are unaudited.
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE INTERNATIONAL EQUITY FUND
Number
of Shares Value
----------- -----------
COMMON STOCK (93.7%)
- --------------------
Belgium (1.1%)
Barco N.V. ................................... 6,000 $ 1,694,192
-----------
Denmark (0.6%)
Bang & Olufsen Holding-B ..................... 14,000 853,504
-----------
Finland (0.8%)
+ Nokia Corp. (ADR) ............................ 9,000 1,083,938
+ Pohjola Insurance ............................ 4,000 219,621
-----------
1,303,559
-----------
France (11.9%)
AXA-AUP ...................................... 25,500 3,697,638
Compagnie Generale D'Industrie
Et de Participations ....................... 30,000 1,654,136
Dassault Systemes SA ......................... 39,000 1,834,103
L'OREAL ...................................... 3,300 2,386,682
LVMH (Louis Vuitton
Moet Hennessy) ............................. 9,300 1,841,354
Scor SA ...................................... 40,000 2,645,901
Societe BIC SA ............................... 14,566 808,353
Societe Generale Paris ....................... 12,000 1,944,146
Total SA-B ................................... 14,185 1,437,292
-----------
18,249,605
-----------
Germany (4.9%)
Allianz AG ................................... 4,508 1,678,105
AXA Colonia Konzern AG ....................... 7,500 851,072
Bayerische Motoren Werke
(BMW) AG ................................... 1,000 785,328
+ Bayerische Motoren Werke (BMW)
AG-NEW ..................................... 600 460,390
Mannesmann AG ................................ 18,500 2,140,965
Muenchener Rueckversicherungs
Gesellschaft AG ............................ 3,204 1,567,810
-----------
7,483,670
-----------
Greece (0.5%)
+ Alpha Credit Bank ............................ 8,000 834,733
-----------
Hong Kong (1.0%)
Dah Sing Financial Group ..................... 172,100 422,085
Sun Hung Kai Properties Limited .............. 150,000 1,093,969
-----------
1,516,054
-----------
Ireland (5.6%)
Allied Irish Banks PLC ....................... 193,290 3,441,098
+ Bank of Ireland .............................. 65,000 1,448,916
CRH PLC ...................................... 49,021 834,376
+ Elan Corp. PLC (ADR) ......................... 25,000 1,739,063
Greencore Group PLC .......................... 112,027 506,985
Viridian Group PLC ........................... 56,000 678,768
-----------
8,649,206
-----------
Japan (17.7%)
The Bank of Tokyo-Mitsubishi,
Limited .................................... 85,000 881,675
Bridgestone Corp. ............................ 105,000 2,387,705
Credit Saison Co. Limited .................... 80,000 1,975,237
Fuji Photo Film Co. Limited .................. 69,000 2,569,226
Hoya Corp .................................... 33,000 1,609,091
Ito-Yokado Co. Limited ....................... 30,000 2,101,127
Murata Manufacturing Co. Limited ............. 25,000 1,039,482
Nintendo Co. Limited ......................... 22,000 2,135,702
NTT Data Corp. ............................... 260,000 1,293,124
<PAGE>
Number
of Shares Value
----------- -----------
Rohm Co. Limited ............................. 34,000 $ 3,101,689
Sony Corp. ................................... 22,000 1,605,190
Takeda Chemical Industries ................... 103,000 3,972,194
Tokyo Broadcasting System, Inc. .............. 30,000 335,914
Tokyo Electron Limited ....................... 40,000 1,521,322
Yasuda Fire & Marine Insurance
Co. Limited ................................ 145,000 699,312
-----------
27,227,990
-----------
Malaysia (0.1%)
Malayan Banking Berhad ....................... 160,000 226,893
-----------
Netherlands (10.7%)
AEGON N.V. (ADR) ............................. 27,000 3,300,750
AEGON N.V. ................................... 32,840 4,035,362
+ ASM Lithography Holding ...................... 47,000 1,437,573
+ Getronics N.V. ............................... 19,000 941,579
+ Heineken N.V. ................................ 26,000 1,565,568
ING Groep N.V. ............................... 33,000 2,013,444
Philips Electronics N.V. ..................... 21,500 1,443,541
+ Vedior N.V. .................................. 39,189 772,656
Vendex N.V. (Non Food) ....................... 39,933 970,324
-----------
16,480,797
-----------
Portugal (0.6%)
+ Telecel-Comunicacaoes Pessoais SA ............ 4,200 858,566
-----------
Singapore (1.4%)
+ Jardine Strategic Holdings Ltd. .............. 575,000 833,750
+ Singapore Press Holdings ..................... 125,000 1,363,669
-----------
2,197,419
-----------
Spain (0.9%)
Banco Popular Espanol SA ..................... 18,000 1,359,296
-----------
Sweden (5.9%)
ABB AB B Shares .............................. 145,000 1,538,454
ASSA Abloy AB-B .............................. 62,700 2,397,990
Astra AB-B ................................... 70,000 1,424,951
Hennes & Mauritz AB-B ........................ 28,000 2,286,831
+ Investment AB Bure ........................... 60,000 851,270
Om Gruppen AB ................................ 47,100 592,706
-----------
9,092,202
-----------
Switzerland (11.8%)
Credit Suisse Group .......................... 23,000 3,600,344
Nestle SA .................................... 1,250 2,721,190
Novartis Limited ............................. 550 1,081,195
+ Pharma Vision 2000 AG ........................ 1,000 706,235
Roche Holding AG ............................. 70 1,267,765
Roche Holding AG -Genusshein ................. 370 4,514,955
Swiss Reinsurance ............................ 900 2,346,521
+ Zurich Allied AG ............................. 2,650 1,962,206
-----------
18,200,411
-----------
United Kingdom (18.2%)
Barclays PLC ................................. 1 22
British Petroleum Co. PLC (ADR) .............. 13,467 1,206,980
Capita Group PLC ............................. 100,000 924,247
CGU PLC ...................................... 94,941 1,486,440
Compass Group PLC ............................ 328,000 3,757,350
Dixons Group PLC ............................. 128,000 1,800,642
Hays PLC ..................................... 150,000 1,316,490
HSBC Holdings PLC ............................ 71,000 1,925,528
Lloyds TSB Group PLC ......................... 140,000 1,991,581
Misys PLC .................................... 257,640 1,894,695
Provident Financial PLC ...................... 81,334 1,174,615
15
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE INTERNATIONAL EQUITY FUND
Number
of Shares Value
----------- -----------
Rentokil Initial PLC ......................... 570,000 $4,296,125
+ Schroders PLC ................................ 43,000 784,836
Siebe PLC .................................... 296,360 1,168,616
Vodafone Group PLC ........................... 88,000 1,429,014
WPP Group PLC ................................ 200,000 1,217,077
Zeneca Group PLC ............................. 36,500 1,589,280
-----------
27,963,538
-----------
TOTAL COMMON STOCK
(Cost $106,126,061) ......................................... 144,191,635
-----------
PREFERRED STOCK (2.3%)
- ----------------------
Germany
SAP AG Prf ................................. 7,350 3,528,168
-----------
TOTAL PREFERRED STOCK
(Cost $1,874,933) ........................................... 3,528,168
-----------
WARRANTS (0.3%)
- ---------------
+ Credit Suisse ................................ 280,000 452,573
+ Muenchener Reuckversicherungs ................ 104 4,870
-----------
TOTAL WARRANTS
(Cost $1,409,378) ........................................... 457,443
-----------
SHORT TERM INVESTMENTS (3.7%)
- -----------------------------
Temporary Cash Investment
Fund, Inc. ................................. 2,890,887 2,890,887
Temporary Investment Fund, Inc. .............. 2,890,887 2,890,887
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $5,781,774) ........................................... 5,781,774
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $115,192,146) (a) ..................................... $153,959,020
===========
- --------------
+ Non-Income Producing
(a) At December 31, 1998, the cost for Federal income tax purposes was
$115,192,146. Net unrealized appreciation was $38,766,874. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $43,273,642 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $4,506,768.
ADR--American Depository Receipt.
<PAGE>
% of
Market Value
Value (000's)
------ -------
COMMON AND PREFERRED STOCK SECTOR
DIVERSIFICATION
- ---------------------------------
Financial Services ................................ 18.5% $ 27,269
Insurance ......................................... 16.6% 24,491
Pharmaceuticals ................................... 10.6% 15,590
Electronics ....................................... 10.1% 14,939
Diversified Operations ............................ 3.7% 5,538
Computer Software ................................. 3.6% 5,362
Retail Diversified ................................ 3.6% 5,358
Telecommunication Equipment ....................... 3.2% 4,665
Diversified Commercial Services ................... 2.9% 4,296
Metal Processors & Fabricators .................... 2.7% 4,052
Catering Services ................................. 2.6% 3,757
Diversified Food Products ......................... 2.2% 3,228
Human Resources ................................... 2.0% 3,013
Computer Services ................................. 1.9% 2,836
Oil ............................................... 1.8% 2,644
Photographic Equipment ............................ 1.7% 2,569
Automotive Parts & Equipment ...................... 1.6% 2,388
Cosmetics ......................................... 1.6% 2,387
Electrical Services ............................... 1.5% 2,217
Machinery - General Industry ...................... 1.4% 2,141
Optical Equipment ................................. 1.1% 1,609
Beverages ......................................... 1.1% 1,566
Publishing ........................................ 1.0% 1,364
Automobile Manufacturing .......................... 0.8% 1,246
Advertising ....................................... 0.8% 1,217
Building Materials ................................ 0.6% 834
Office Supplies & Forms ........................... 0.6% 808
Media Communications .............................. 0.2% 336
------ -------
100.0% 147,720
====== =======
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE SMALL CAPITALIZATION FUND
Number
of Shares Value
----------- -----------
COMMON STOCK (90.0%)
- --------------------
Agricultural Products (1.1%)
+ Agribrands International, Inc. ............... 15,600 $468,000
-----------
Audio & Video Equipment (2.1%)
Harman International Industries, Inc. ........ 23,300 888,312
-----------
Auto-Parts/Equipment (2.5%)
Borg-Warner Automotive, Inc. ................. 19,100 1,066,019
-----------
Chemicals (5.0%)
+ Lawter International, Inc. ................... 5,200 60,450
+ McWhorter Technologies, Inc. ................. 16,000 366,000
Schulman, A. Inc. ............................ 47,800 1,079,981
+ TETRA Technologies, Inc. ..................... 62,400 682,500
-----------
2,188,931
-----------
Chemicals-Diversified (1.2%)
M.A. Hanna Co. ............................... 43,100 530,669
-----------
Commercial Services (2.3%)
+ Volt Information Sciences, Inc. .............. 43,300 976,956
-----------
Computers (1.3%)
+ Artesyn Technologies, Inc. ................... 40,000 571,250
-----------
Computer Services & Software (5.8%)
+ BANCTEC, Inc. ................................ 50,200 630,638
+ Wang Laboratories, Inc. ...................... 67,500 1,868,906
-----------
2,499,544
-----------
Computer Systems (0.7%)
+ Adaptec, Inc. ................................ 17,000 298,031
-----------
Diversified Operations (6.2%)
+ GP Strategies Corp. .......................... 54,600 819,000
+ Lydall, Inc. ................................. 53,700 637,687
+ Triarc Companies, Inc. ....................... 65,400 1,046,400
U.S. Industries, Inc. ........................ 8,400 156,450
-----------
2,659,537
-----------
Electronic Components (8.6%)
CTS Corp. .................................... 23,900 1,039,650
+ Exar Corp. ................................... 47,000 757,875
+ General Semiconductor, Inc. .................. 63,700 521,544
+ Oak Industries, Inc. ......................... 4,200 147,000
+ Unitrode Corp. ............................... 42,600 745,500
Technitrol, Inc. ............................. 15,900 506,812
-----------
3,718,381
-----------
Financial Services (2.3%)
Enhance Financial Services
Group, Inc. ................................ 33,400 1,002,000
-----------
Healthcare (2.7%)
+ Corvel Corp. ................................. 18,100 641,419
+ Trigon Healthcare, Inc. ...................... 13,900 518,644
-----------
1,160,063
-----------
Insurance (11.4%)
Chartwell Re Corp. ........................... 35,900 852,625
CNA Surety Corp. ............................. 47,600 749,700
E.W. Blanch Holdings, Inc. ................... 20,300 962,981
Horace Mann Educators Corp. .................. 7,900 225,150
RenaissanceRe Holdings Ltd. .................. 34,600 1,267,225
Terra Nova (Bermuda) Holdings Ltd. ........... 33,700 850,925
-----------
4,908,606
-----------
<PAGE>
Number
of Shares Value
----------- -----------
Insurance (Life)(7.4%)
+ American Medical Security Group, Inc. ........ 69,800 $999,013
Annuity and Life Re (Holdings), Ltd. ......... 44,900 1,201,075
+ Delphi Financial Group, Inc. ................. 18,967 994,582
-----------
3,194,670
-----------
Machinery (1.4%)
+ Albany International Corp. ................... 31,306 592,854
-----------
Machine Tools (0.9%)
+ Baldwin Technology Company,Inc. .............. 72,500 407,813
-----------
Manufacturing (4.1%)
Flowserve Corp. .............................. 44,600 738,688
+ Paxar Corp. .................................. 116,650 1,042,559
-----------
1,781,247
-----------
Medical-Hosp Mgt+Svc (2.6%)
+ Magellan Health Services, Inc. ............... 66,200 554,425
United Wisconsin Services, Inc. .............. 64,300 558,606
-----------
1,113,031
-----------
Medical Supplies (1.1%)
DENTSPLY International, Inc. ................. 8,700 222,937
Vital Signs, Inc. ............................ 15,400 270,944
-----------
493,881
-----------
Metals (0.6%)
+ Precision Castparts Corp. .................... 5,700 252,225
-----------
Office Equipment & Supplies (2.9%)
+ Wallace Computer Services, Inc. .............. 47,200 1,244,900
-----------
Oil/Gas-Exploration (0.5%)
KCS Energy, Inc. ............................. 72,200 221,113
-----------
Oil & Gas (4.7%)
+ Basin Exploration, Inc. ...................... 30,900 391,078
Cabot Oil & Gas Corp. ........................ 40,500 607,500
+ Nuevo Energy Co. ............................. 30,000 345,000
St. Mary Land & Exploration Co. .............. 37,200 695,175
-----------
2,038,753
-----------
Packaging & Paper Products (0.2%)
+ AEP Industries, Inc. ......................... 3,800 82,413
-----------
Publishing (3.1%)
Hollinger International, Inc. ................ 96,000 1,338,000
-----------
Textiles (3.3%)
Guilford Mills, Inc. ......................... 59,100 986,231
+ WestPoint Stevens, Inc. ...................... 14,500 457,203
-----------
1,443,434
-----------
Transportation (1.8%)
Interpool, Inc. .............................. 45,700 765,475
-----------
Transportation Services (2.2%)
Air Express International Corp. .............. 43,600 961,925
-----------
TOTAL COMMON STOCK
(Cost $39,983,304) ........................................... 38,868,033
-----------
17
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE SMALL CAPITALIZATION FUND
Par
Maturity (000) Value
-------- ----- -----
AGENCY OBLIGATIONS (7.3%)
- -------------------------
Federal Home Loan Bank
5.00% ............................ 01/22/99 1,000 $997,083
Federal Home Loan Mortgage
Corporation 5.11% ................ 01/04/99 2,185 2,184,070
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $3,181,153) ........................................... 3,181,153
-----------
Number
of Shares
---------
SHORT TERM INVESTMENTS (2.7%)
- -----------------------------
Temporary Investment Fund, Inc.
(Cost $1,160,677) ............................. 1,160,677 1,160,677
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $44,325,134) (a) ...................................... $43,209,863
===========
- --------------
+ Non-Income Producing
(a) At December 31, 1998, the cost for federal income tax purposes was
$44,325,134. Net unrealized depreciation was $1,115,271. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $4,810,700 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $5,925,971.
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998
THE EMERGING GROWTH FUND
Number
of Shares Value
----------- -----------
COMMON STOCK (94.6%)
- --------------------
Advertising (2.7%)
+ Lamar Advertising Co. ........................ 9,700 $ 363,750
+ TMP Worldwide, Inc. .......................... 15,800 672,487
-----------
1,036,237
-----------
Airlines (1.1%)
+ Atlantic Coast Airlines, Inc. ................ 800 20,200
SkyWest, Inc. ................................ 13,000 424,937
-----------
445,137
-----------
Broadcasting (2.0%)
+ CD Radio, Inc. ............................... 3,600 123,525
+ Emmis Broadcasting Corp. ..................... 7,400 320,975
+ Infinity Broadcasting Corp. .................. 1,100 30,112
+ Jacor Communications, Inc. ................... 4,800 310,500
-----------
785,112
-----------
Building Products (0.5%)
+ Comfort Systems USA, Inc. .................... 10,000 178,750
-----------
Business Services (4.5%)
+ NCO Group, Inc. .............................. 15,100 679,972
+ Professional Detailing, Inc. ................. 8,200 233,700
+ Ritchie Bros. Auctioneers, Inc. .............. 12,000 323,250
USweb Corp. .................................. 20,000 526,250
-----------
1,763,172
-----------
Cable Operators (0.8%)
+ Univision Communications, Inc. ............... 8,800 318,450
-----------
Computer Services & Software (35.2%)
+ Abovenet Communications, Inc. ................ 1,100 23,031
+ Brightstar Information
Technology Group, Inc. ..................... 4,700 36,719
+ CMGI, Inc. ................................... 5,500 585,922
+ Cognizant Technology Solutions Corp. ......... 19,300 582,016
+ Concord Communications, Inc. ................. 1,300 74,425
+ Concur Technologies, Inc. .................... 400 12,088
+ Earthlink Network, Inc. ...................... 5,600 318,675
+ Ecsoft Group, PLC (ADR) ...................... 24,700 867,587
+ Electronic Processing, Inc. .................. 8,500 82,875
+ Imrglobal Corp. .............................. 4,300 126,716
+ Inso Corp. ................................... 13,200 330,825
+ International Network Services ............... 3,300 219,450
+ ISS Group, Inc. .............................. 8,400 464,625
+ Keane, Inc. .................................. 3,200 127,800
+ Lycos, Inc. .................................. 11,200 621,950
+ Macromedia, Inc. ............................. 28,300 952,472
+ Mapics, Inc. ................................. 7,700 128,494
+ Mastech Corp. ................................ 10,500 298,594
+ Maxtor Corp. ................................. 10,000 140,625
+ Micromuse, Inc. .............................. 13,400 260,462
+ Mindspring Enterprises, Inc. ................. 2,000 122,188
+ Network Appliance, Inc. ...................... 14,800 662,300
+ Network Solutions, Inc. ...................... 8,600 1,121,762
+ New Era of Networks, Inc. .................... 10,200 447,525
+ Pervasive Software, Inc. ..................... 21,700 408,231
+ PSINet, Inc. ................................. 20,000 420,000
+ Quantum Corp. ................................ 10,000 212,187
+ Sapient Corp. ................................ 5,000 279,688
+ Seagate Technology, Inc. ..................... 10,000 302,500
+ Timberline Software Corp. .................... 3,600 49,387
<PAGE>
Number
of Shares Value
----------- -----------
+ TSI International Software Ltd. .............. 26,000 $ 1,257,750
+ VeriSign, Inc ................................ 10,400 615,550
+ VISTA Information Solutions, Inc ............. 5,300 41,406
+ Visual Networks, Inc. ........................ 15,400 577,019
+ Wind River Systems, Inc. ..................... 6,100 286,319
+ Xoom.Com, Inc. ............................... 1,700 55,569
+ 24/7 Media, Inc. ............................. 21,900 615,937
-----------
13,730,669
-----------
Drugs And Cosmetics (0.2%)
+ USANA, Inc. .................................. 7,800 78,487
-----------
Education (2.2%)
+ Bright Horizons Family Solutions, Inc. ....... 3,360 91,140
+ Education Management Corp. ................... 20,200 475,331
+ ITT Educational Services, Inc. ............... 9,000 306,000
-----------
872,471
-----------
Entertainment & Leisure (2.9%)
+ Championship Auto Racing Teams, Inc. ......... 17,300 512,512
+ Steiner Leisure Ltd. ......................... 19,925 636,977
-----------
1,149,489
-----------
Electronic Components (8.9%)
+ Applied Micro Circuits Corp. ................. 9,700 329,800
+ Artisan Components, Inc. ..................... 11,500 60,734
+ Broadcom Corp. ............................... 5,300 639,313
+ Cree Research, Inc. .......................... 5,000 239,063
+ E-Tek Dynamics, Inc. ......................... 2,700 71,550
+ Gemstar International Group Ltd. ............. 15,300 875,447
+ InTEST Corp. ................................. 6,400 53,000
+ Macrovision Corp. ............................ 7,900 332,294
+ Power Intergrations, Inc. .................... 8,000 201,250
+ TranSwitch Corp. ............................. 17,400 677,513
-----------
3,479,964
-----------
Electronics (2.0%)
+ Jabil Circuit, Inc. .......................... 5,300 395,512
+ Sanmina Corp. ................................ 6,100 380,488
-----------
776,000
-----------
Finance (2.1%)
+ Knight/Trimark Group, Inc. ................... 34,300 822,128
-----------
Financial Services (2.8%)
+ Ameritrade Holding Corp. ..................... 14,700 462,591
+ Financial Federal Corp. ...................... 20,800 514,800
+ International Telecommunications
Data Systems, Inc. ......................... 3,800 54,981
+ TeleBanc Financial Corp. ..................... 1,300 44,444
-----------
1,076,816
-----------
Home Furnishings/Housewares (0.3%)
+ Select Comfort Corp. ......................... 4,300 114,756
-----------
Hotels (1.2%)
Four Seasons Hotels, Inc. .................... 15,800 462,150
-----------
Human Resources (2.7%)
+ Data Processing Resources Corp. .............. 12,100 353,925
+ Labor Ready, Inc. ............................ 17,200 338,625
+ On Assignment, Inc. .......................... 4,400 150,287
+ Select Appointments Holdings, PLC
(ADR) ...................................... 5,300 113,288
+ Vincam Group, Inc. ........................... 6,700 117,459
-----------
1,073,584
-----------
19
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1998 (CONTINUED)
THE EMERGING GROWTH FUND
Number
of Shares Value
----------- -----------
Insurance (0.8%)
+ ARM Financial Group, Inc. .................... 13,200 $ 292,875
-----------
Medical Information Systems (0.7%)
+ Incyte Pharmaceuticals, Inc. ................. 7,500 279,844
-----------
Medical-Hospitals (0.6%)
+ Province Healthcare Co. ...................... 6,200 220,487
-----------
Medical Supplies (1.9%)
+ Biomatrix, Inc. .............................. 700 40,775
+ Cytyc Corp. .................................. 13,400 345,888
+ Ocular Sciences, Inc. ........................ 11,900 322,788
+ Xomed Surgical Products, Inc. ................ 1,500 48,000
-----------
757,451
-----------
Office Equipment (0.8%)
+ Knoll, Inc. .................................. 10,000 296,250
-----------
Pharmaceuticals (0.1%)
+ Geltex Pharmaceuticals, Inc. ................. 2,300 52,038
-----------
Printing & Publishing (1.4%)
+ American Bank Note
Holographics, Inc. ........................... 1,500 26,250
+ Consolidated Graphics, Inc. .................. 7,500 506,719
-----------
532,969
-----------
Real Estate (0.8%)
+ CB Commercial Real Estate
Services Group, Inc. ....................... 11,000 199,375
Intrawest Corp. .............................. 7,400 124,875
-----------
324,250
-----------
Recreational (0.5%)
+ Global Vacation Group, Inc. .................. 11,700 100,913
+ Resort Quest International, Inc. ............. 6,400 93,600
-----------
194,513
-----------
Restaurants (0.2%)
+ PJ America, Inc. ............................. 3,800 68,638
-----------
Retail (3.9%)
+ Abercrombie & Fitch Co. ...................... 7,800 551,850
+ bebe stores, Inc. ............................ 15,000 529,219
Beyond.Com Corp. ............................. 20,600 426,162
-----------
1,507,231
-----------
Specialty Retailer (2.1%)
+ DM Management Co. ............................ 27,200 526,150
+ Tropical Sportswear International Corp. ...... 8,700 308,306
-----------
834,456
-----------
Telecommunications (8.0%)
+ Allegiance Telecom, Inc. ..................... 31,200 380,250
+ Carrier Access Corp. ......................... 500 17,141
+ COM21, Inc. .................................. 23,600 498,550
+ DSET Corp. ................................... 20,000 221,875
+ Echostar Communications Corp. ................ 13,100 635,759
+ Electric Lightwave, Inc. ..................... 48,900 398,841
+ ICG Communications, Inc. ..................... 14,600 314,812
+ Primus Telecommunications
Group, Inc. ................................ 21,100 346,172
+ RF Micro Devices, Inc. ....................... 6,900 317,184
-----------
3,130,584
-----------
<PAGE>
Number
of Shares Value
---------- -----------
Waste Management (0.7%)
+ US Liquids, Inc. ............................. 12,100 $ 272,250
-----------
TOTAL COMMON STOCK
(Cost $25,489,040) ........................................... 36,927,208
-----------
SHORT TERM INVESTMENTS (5.4%)
- -----------------------------
Temporary Investment Fund
- Temp Cash ................................ 1,060,277 1,060,277
Temporary Investment Fund
Class B .................................... 1,060,277 1,060,277
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,120,554) ............................................ 2,120,554
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $27,609,594) (a) ....................................... $39,047,762
-----------
- ----------------
+ Non-income producing
(a) At December 31, 1998, the cost for Federal income tax purposes was
$27,935,119. Net unrealized appreciation was $11,112,643. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $12,126,724 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $1,014,081.
ADR - American Depository Receipt
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THIS PAGE LEFT INTENTIONALLY BLANK
21
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity Value Equity
Market Fund Bond Fund Bond Fund Fund Fund
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments at value (1) ..................... $ 53,504,698 $ 62,939,099 $ 67,637,152 $ 191,297,598 $ 334,170,576
Cash ......................................... 500 500 980 -- --
Interest, dividends and reclaims receivable .. 390,187 555,763 1,188,421 97,191 348,765
Receivable for investment securities sold .... -- 6,674,677 -- 6,914,211 1,617,790
Receivable for capital stock sold ............ -- 206,367 281,364 72,223 56,830
Net unrealized appreciation on forward foreign
currency contracts ......................... -- -- -- -- --
Other assets ................................. 680 677 989 2,389 4,960
------------- ------------- ------------- ------------- -------------
Total Assets ............................. 53,896,065 70,377,083 69,108,906 198,383,612 336,198,921
------------- ------------- ------------- ------------- -------------
Liabilities:
Payable for investment securities purchased .. -- 16,705,259 -- 2,262,093 --
Payable for capital stock redeemed ........... -- 115,591 35,783 266,610 416,826
Dividends payable ............................ 216,179 -- -- -- --
Payable to the investment advisor ............ 18,732 20,135 29,310 74,931 140,103
Payable to The Penn Mutual Life Insurance Co . 21,643 19,458 25,297 63,005 122,309
Other liabilities ............................ 13,089 11,534 15,282 25,084 41,153
------------- ------------- ------------- ------------- -------------
Total Liabilities ........................ 269,643 16,871,977 105,672 2,691,723 720,391
------------- ------------- ------------- ------------- -------------
Net Assets ...................................... $ 53,626,422 $ 53,505,106 $ 69,003,234 $ 195,691,889 $ 335,478,530
============= ============= ============= ============= =============
Shares of $.10 par value capital stock issued
and outstanding .............................. 53,629,171 5,142,854 7,509,507 6,337,061 14,980,843
Net asset value, offering and redemption price
per share .................................... $1.00 $10.40 $9.19 $30.88 $22.39
Net assets consist of:
Capital paid in .............................. $ 53,629,171 $ 52,702,414 $ 70,781,166 $ 125,941,128 $ 248,731,465
Undistributed net investment loss ............ -- -- -- -- --
Accumulated net realized gain (loss) on
investment transactions and foreign exchange (2,749) (37,359) (1,627,095) (52,162) (31,052)
Net unrealized appreciation (depreciation) in
value of investments, futures contracts and
foreign currency related items ............. -- 840,051 (150,837) 69,802,923 86,778,117
------------- ------------- ------------- ------------- -------------
Total net assets ......................... $ 53,626,422 $ 53,505,106 $ 69,003,234 $ 195,691,889 $ 335,478,530
============= ============= ============= ============= =============
(1) Investments at cost ......................... $ 53,504,698 $ 62,099,048 $ 67,787,989 $ 121,494,675 $ 247,392,459
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
22
<PAGE>
- --------------------------------------------------------------------------------
[RESTUBBED]
<TABLE>
<CAPTION>
Flexibly Small Emerging
Managed International Capitalization Growth
Fund Equity Fund Fund Fund
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments at value (1) ..................... $ 540,435,293 $ 153,959,020 $ 43,209,863 $ 39,047,762
Cash ......................................... -- -- 191,286 44,651
Interest, dividends and reclaims receivable .. 3,512,006 326,439 22,931 10,494
Receivable for investment securities sold .... 1,739,146 -- 75,472 --
Receivable for capital stock sold ............ 1,428,523 -- 275,192 13,681
Net unrealized appreciation on forward foreign
currency contracts ......................... 250 -- -- --
Other assets ................................. 8,226 12,953 611 391
------------- ------------- ------------- -------------
Total Assets .............................. 547,123,444 154,298,412 43,775,355 39,116,979
============= ============= ============= =============
Liabilities:
Payable for investment securities purchased .. 793,421 9,031 89,221 5,800
Payable for capital stock redeemed ........... 336,488 281,470 8,632 406,924
Dividends payable ............................ -- -- -- --
Payable to the investment advisor ............ 230,603 93,868 17,870 21,821
Payable to The Penn Mutual Life Insurance Co . 204,095 53,297 15,383 6,757
Other liabilities ............................ 73,265 38,538 9,409 11,995
------------- ------------- ------------- -------------
Total Liabilities ......................... 1,637,872 476,204 140,515 453,297
------------- ------------- ------------- -------------
Net Assets ...................................... $ 545,485,572 $ 153,822,208 $ 43,634,840 $ 38,663,682
============= ============= ============= =============
Shares of $.10 par value capital stock issued
and outstanding .............................. 29,790,433 8,371,341 3,407,397 2,218,181
Net asset value, offering and redemption price
per share .................................... $18.31 $18.37 $12.81 $17.43
Net assets consist of:
Capital paid in .............................. $ 509,598,717 $ 116,420,636 $ 44,758,954 $ 29,697,547
Undistributed net investment loss ............ -- (1,681,574) -- (229,925)
Accumulated net realized gain (loss) on
investment transactions and foreign exchange (264,986) 304,342 (8,843) (2,242,108)
Net unrealized appreciation (depreciation) in
value of investments, futures contracts and
foreign currency related items ............. 36,151,841 38,778,804 (1,115,271) 11,438,168
------------- ------------- ------------- -------------
Total net assets ......................... $ 545,485,572 $ 153,822,208 $ 43,634,840 $ 38,663,682
============= ============= ============= =============
(1) Investments at cost ......................... $ 504,283,801 $ 115,192,146 $ 44,325,134 $ 27,609,594
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
23
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Money Quality High Yield Growth Equity Value Equity
Market Fund Bond Fund Bond Fund Fund Fund
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income:
Dividends ......................................... $ -- $ -- $ 356,617 $ 1,045,730 $ 4,099,205
Interest .......................................... 2,543,263 2,759,686 5,589,119 270,930 2,650,627
Foreign tax withheld .............................. -- -- -- -- (50,492)
---------- ---------- ---------- ----------- ------------
Total investment income ........................... 2,543,263 2,759,686 5,945,736 1,316,660 6,699,340
---------- ---------- ---------- ----------- ------------
Expenses:
Investment advisory fees .......................... 181,722 206,065 326,267 753,060 1,651,501
Administration fees ............................... 68,174 68,688 97,880 234,353 495,450
Accounting fees ................................... 34,073 34,344 48,940 103,118 183,900
Custodian fees and expenses ....................... 18,792 21,939 27,349 31,014 45,479
Other expenses .................................... 24,459 21,393 31,842 63,826 136,117
---------- ---------- ---------- ----------- ------------
Total expenses ................................. 327,220 352,429 532,278 1,185,371 2,512,447
Less: Expense waivers .......................... -- -- -- -- --
---------- ---------- ---------- ----------- ------------
Net expenses ................................... 327,220 352,429 532,278 1,185,371 2,512,447
---------- ---------- ---------- ----------- ------------
Net investment income (loss) ......................... 2,216,043 $2,407,257 $5,413,458 131,289 4,186,893
---------- ---------- ---------- ----------- ------------
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investment
transactions .................................... (992) 1,533,022 (34,795) 20,481,154 27,331,911
Net realized foreign exchange gain (loss) ......... -- -- -- -- --
Change in net unrealized appreciation/depreciation
of investments, futures contracts and foreign
currency related items .......................... -- 487,720 (2,434,085) 36,064,087 (3,543,595)
---------- ---------- ---------- ----------- ------------
Net realized and unrealized gain (loss) on investments (992) 2,020,742 (2,468,880) 56,545,241 23,788,316
---------- ---------- ---------- ----------- ------------
Net Increase (Decrease) in Net Assets Resulting
from Operations .................................... $2,215,051 $4,427,999 $2,944,578 $56,676,530 $ 27,975,209
========== ========== ========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
24
<PAGE>
- --------------------------------------------------------------------------------
[RESTUBBED]
<TABLE>
<CAPTION>
Flexibly Small Emerging
Managed International Capitalization Growth
Fund Equity Fund Fund Fund
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends ......................................... $ 6,988,321 $ 1,960,357 $ 303,081 $ 12,143
Interest .......................................... 12,385,014 395,839 315,503 115,098
Foreign tax withheld .............................. (142,793) (171,001) -- (490)
------------ ------------ ------------ -----------
Total investment income ........................ 19,230,542 2,185,195 618,584 126,751
------------ ------------ ------------ -----------
Expenses:
Investment advisory fees .......................... 2,719,881 1,071,377 210,456 208,963
Administration fees ............................... 815,964 214,275 63,137 39,416
Accounting fees ................................... 248,193 110,710 31,608 26,161
Custodian fees and expenses ....................... 98,787 69,865 18,160 28,264
Other expenses .................................... 239,953 71,524 20,712 15,895
------------ ------------ ------------ -----------
Total expenses ................................. 4,122,778 1,537,751 344,073 318,699
Less: Expense waivers .......................... -- -- -- (17,207)
------------ ------------ ------------ -----------
Net expenses ................................... 4,122,778 1,537,751 344,073 301,492
------------ ------------ ------------ -----------
Net investment income (loss) ......................... 15,107,764 647,444 274,511 (174,741)
------------ ------------ ------------ -----------
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investment
transactions .................................... 55,261,526 5,177,853 712,102 (2,191,288)
Net realized foreign exchange gain (loss) ......... (7,284) 114,386 -- --
Change in net unrealized appreciation/depreciation
of investments, futures contracts and foreign
currency related items .......................... (39,212,128) 18,456,661 (5,286,799) 10,934,484
------------ ------------ ------------ -----------
Net realized and unrealized gain (loss) on investments 16,042,114 23,748,900 (4,574,697) 8,743,196
------------ ------------ ------------ -----------
Net Increase (Decrease) in Net Assets Resulting
from Operations .................................... $ 31,149,878 $ 24,396,344 ($ 4,300,186) $ 8,568,455
============ ============ ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
25
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Money Market Fund Quality Bond Fund
------------------------ ---------------------
Year Year Year Year
ended ended ended ended
12/31/98 12/31/97 12/31/98 12/31/97
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)....................................... $ 2,216,043 $ 1,896,676 $ 2,407,257 $ 2,207,510
Net realized gain (loss) on investment transactions ............... (992) (225) 1,533,022 912,980
Net realized foreign exchange gain (loss) ......................... -- -- -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items ............. -- -- 487,720 (208,702)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations ........................................................ 2,215,051 1,896,451 4,427,999 2,911,788
----------- ----------- ----------- -----------
Distributions to Shareholders from:
Net investment income ............................................. (2,216,043) (1,896,676) (2,407,257) (2,207,510)
Net realized capital gains ........................................ -- -- (1,568,759) (16,338)
In excess of net investment income ................................ -- -- (1,623) (16,277)
----------- ----------- ----------- -----------
Total distributions ............................................. (2,216,043) (1,896,676) (3,977,639) (2,240,125)
----------- ----------- ----------- -----------
Capital Share Transactions:
Net increase in net assets from capital share transactions ........ 16,151,030 2,975,990 12,977,718 1,794,024
----------- ----------- ----------- -----------
Total Increase in Net Assets .................................... 16,150,038 2,975,765 13,428,078 2,465,687
Net Assets, beginning of period ...................................... 37,476,384 34,500,619 40,077,028 37,611,341
----------- ----------- ----------- -----------
Net Assets, end of period ............................................ $53,626,422 $37,476,384 $53,505,106 $40,077,028
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Value Equity Fund Flexibly Managed Fund
------------------------ ---------------------
Year Year Year Year
ended ended ended ended
12/31/98 12/31/97 12/31/98 12/31/97
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss)....................................... $ 4,186,893 $ 3,663,616 $ 15,107,764 $14,346,115
Net realized gain (loss) on investment transactions ............... 27,331,911 16,381,602 55,261,526 29,490,467
Net realized foreign exchange gain (loss) ......................... -- -- (7,284) 80,506
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items ............. (3,543,595) 36,751,125 (39,212,128) 23,598,612
----------- ----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations ....................................................... 27,975,209 56,796,343 31,149,878 67,515,700
----------- ----------- ----------- -----------
Disributions to Shareholders from:
Net investment income ............................................. (4,186,893) (3,663,616) (15,107,764) (14,346,115)
Net realized capital gains ........................................ (27,362,963) (16,381,602) (55,129,786) (29,491,615)
In excess of net investment income ................................ -- -- (363,128) (99,694)
----------- ----------- ----------- -----------
Total distributions ............................................. (31,549,856) (20,045,218) (70,600,678) (43,937,424)
----------- ----------- ----------- -----------
Capital Share Transactions:
Net increase in net assets from capital share transactions ....... 36,092,709 65,535,450 68,797,648 94,016,309
----------- ----------- ----------- -----------
Total Increase in Net Assets ................................... 32,518,062 102,286,575 29,346,848 117,594,585
Net Assets, beginning of period ..................................... 302,960,468 200,673,893 516,138,724 398,544,139
----------- ----------- ----------- -----------
Net Assets, end of period ........................................... $335,478,530 $302,960,468 $545,485,572 $516,138,724
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
26
<PAGE>
<TABLE>
<CAPTION>
High Yield Bond Fund Growth Equity Fund
------------------------ ---------------------
Year Year Year Year
12/31/98 12/31/97 12/31/98 12/31/97
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss) ...................................... $ 5,413,458 $ 4,560,298 $ 131,289 $ 482,003
Net realized gain (loss) on investment transactions ............... (34,795) 2,964,765 20,481,154 13,834,988
Net realized foreign exchange gain (loss) ......................... -- -- -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items ............ (2,434,085) (118,203) 36,064,087 14,267,440
------------ ----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations ........................................................ 2,944,578 7,406,860 56,676,530 28,584,431
------------ ----------- ----------- -----------
Distributions to Shareholders from:
Net investment income ............................................. (5,413,458) (4,560,298) (131,289) (482,003)
Net realized capital gains ....................................... -- -- (20,497,332) (13,678,856)
In excess of net investment income ................................ (6,598) (10,576) -- --
------------ ----------- ----------- -----------
Total distributions ............................................. (5,420,056) (4,570,874) (20,628,621) (14,160,859)
------------ ----------- ----------- -----------
Capital Share Transactions:
Net increase in net assets from capital share transactions ........ 12,341,048 12,260,119 23,585,734 15,595,214
------------ ----------- ----------- -----------
Total Increase in Net Assets .................................... 9,865,570 15,096,105 59,633,643 30,018,786
Net Assets, beginning of period ..................................... 59,137,664 44,041,559 136,058,246 106,039,460
------------ ----------- ----------- -----------
Net Assets, end of period ........................................... $69,003,234 $59,137,664 $195,691,889 $136,058,246
============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
International Equity Fund Small Capitalization Fund
------------------------- -------------------------
Year Year Year Year
ended ended ended ended
12/31/98 12/31/97 12/31/98 12/31/97
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss) ...................................... $ 647,444 $ 754,837 $ 274,511 $ 181,451
Net realized gain (loss) on investment transactions ............... 5,177,853 4,305,835 712,102 2,278,532
Net realized foreign exchange gain (loss) ......................... 114,386 2,563,120 -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items ............ 18,456,661 3,833,566 (5,286,799) 2,875,385
----------- ----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations ........................................................ 24,396,344 11,457,358 (4,300,186) 5,335,368
----------- ----------- ----------- -----------
Distributions to Shareholders from:
Net investment income ............................................. (647,444) (754,837) (274,511) (181,451)
Net realized capital gains ....................................... (4,938,505) (4,305,835) (711,962) (2,286,865)
In excess of net investment income ................................ (769,506) (3,230,284) -- --
----------- ----------- ----------- -----------
Total distributions ............................................. (6,355,455) (8,290,956) (986,473) (2,468,316)
----------- ----------- ----------- -----------
Capital Share Transactions:
Net increase in net assets from capital share transactions ........ 6,143,763 22,053,566 10,195,405 19,725,010
----------- ----------- ----------- -----------
Total Increase in Net Assets .................................... 24,184,652 25,219,968 4,908,746 22,592,062
Net Assets, beginning of period ..................................... 129,637,556 104,417,588 38,726,094 16,134,032
----------- ----------- ----------- -----------
Net Assets, end of period ........................................... $153,822,208 $129,637,556 $43,634,840 $38,726,094
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Emerging Growth Fund
-------------------------
Year Year
ended ended
12/31/98 12/31/97*
---------- --------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income (loss) ...................................... $ (174,741) $ (56,325)
Net realized gain (loss) on investment transactions ............... (2,191,288) 1,331,710
Net realized foreign exchange gain (loss) ......................... -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items ............ 10,934,484 504,824
------------ ----------
Net increase (decrease) in net assets resulting from
operations ........................................................ 8,568,455 1,780,209
------------ ----------
Distributions to Shareholders from:
Net investment income ............................................. -- --
Net realized capital gains ....................................... (8,966) (1,373,564)
In excess of net investment income ................................ -- --
------------ ----------
Total distributions ............................................. (8,966) (1,373,564)
------------ ----------
Net increase in net assets from capital share transactions ........ 12,162,475 17,535,073
------------ ----------
Total Increase in Net Assets .................................... 20,721,964 17,941,718
Net Assets, beginning of period ..................................... 17,941,718 --
------------ ----------
Net Assets, end of period ........................................... $38,663,682 $17,941,718
============ ==========
</TABLE>
* For the period from May 1, 1997 (commencement of operations) through
December 31, 1997.
The accompanying notes are an integral part of these financial statements
27
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE MONEY MARKET FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income. .................................... 0.0489 0.0503 0.0489 0.0538 0.0365
------- ------- ------- ------- -------
Total from investment operations ....................... 0.0489 0.0503 0.0489 0.0538 0.0365
------- ------- ------- ------- -------
Less dividends:
Dividends from net investment income ...................... (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
------- ------- ------- ------- -------
Total dividends ........................................ (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
------- ------- ------- ------- -------
Net asset value, end of year .............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return ........................................... 5.00% 5.15% 5.00% 5.51% 3.71%
Ratios/Supplemental data:
Net assets, end of year (in thousands) .................... $53,626 $37,476 $34,501 $24,726 $16,531
------- ------- ------- ------- -------
Ratio of expenses to average net assets ................... 0.72% 0.70% 0.73%(a) 0.69%(a) 0.73%(a)
------- ------- ------- ------- -------
Ratio of net investment income to average net assets ...... 4.88% 5.04% 4.88%(a) 5.37%(a) 3.74%(a)
------- ------- ------- ------- -------
</TABLE>
- ------
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been .74%,
.74%, and .79%, and the ratios of net investmentincome to average net assets
would have been 4.87%, 5.32%, and 3.68% for the years ended December 31,
1996, 1995, and 1994, respectively.
<PAGE>
- --------------------------------------------------------------------------------
THE QUALITY BOND FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $ 10.20 $ 10.00 $ 10.24 $ 9.04 $ 10.19
------- ------- ------- ------- -------
Income (loss) from investment operations:
Net investment income ..................................... 0.51 0.60 0.66 0.61 0.61
Net realized and unrealized gain (loss) on investment
transactions ........................................... 0.53 0.20 (0.24) 1.21 (1.15)
------- ------- ------- ------- -------
Total from investment operations ....................... 1.04 0.80 0.42 1.82 (0.54)
------- ------- ------- ------- -------
Less distributions:
Dividend from net investment income ....................... (0.51) (0.60) (0.66) (0.61) (0.61)
Distribution from net investment income ................... (0.33) 0.00 0.00 0.00 0.00
Distribution in excess of net investment income ........... 0.00 0.00 0.00 (0.01) 0.00
------- ------- ------- ------- -------
Total distributions .................................... (0.84) (0.60) (0.66) (0.62) (0.61)
------- ------- ------- ------- -------
Net asset value, end of year .............................. $ 10.40 $ 10.20 $ 10.00 $ 10.24 $ 9.04
======= ======= ======= ======= =======
Total return ........................................... 10.17% 8.03% 4.14% 20.14% (5.29)%
Ratios/Supplemental data:
Net assets, end of year (in thousands) .................... $53,505 $40,077 $37,611 $38,048 $31,338
------- ------- ------- ------- -------
Ratio of expenses to average net assets ................... 0.77% 0.75% 0.77%(a) 0.73%(a) 0.78%(a)
------- ------- ------- ------- -------
Ratio of net investment income to average net assets ...... 5.26% 5.87% 6.03%(a) 6.20%(a) 6.14%(a)
------- ------- ------- ------- -------
Portfolio turnover rate ................................... 477.2% 317.3% 107.6% 449.2% 380.9%
------- ------- ------- ------- -------
</TABLE>
- ----------
(a) 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%, and .83%, and the ratio of net investment income to average net assets
would have been 6.02%, 6.15%, and 6.09% for the years ended December 31,
1996, 1995, and 1994, respectively.
28
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $ 9.52 $ 8.91 $ 8.44 $ 7.94 $ 9.55
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ..................................... 0.79 0.80 0.70 0.80 0.90
Net realized and unrealized gain (loss) on investment
transactions ............................................ (0.33) 0.61 0.47 0.50 (1.60)
------- ------- ------- ------- -------
Total from investment operations ....................... 0.46 1.41 1.17 1.30 (0.70)
------- ------- ------- ------- -------
Less distributions:
Dividend from net investment income ....................... (0.79) (0.80) (0.70) (0.80) (0.90)
Distribution in excess of net investment income ........... 0.00 0.00 0.00 0.00 (0.01)
------- ------- ------- ------- -------
Total distributions .................................... (0.79) (0.80) (0.70) (0.80) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year .............................. $ 9.19 $ 9.52 $ 8.91 $ 8.44 $ 7.94
======= ======= ======= ======= =======
Total return ........................................... 4.79% 15.78% 13.87% 16.41% 7.33%
Ratios/Supplemental data:
Net assets, end of year (in thousands) .................... $69,003 $59,138 $44,042 $36,442 $32,081
------- ------- ------- ------- -------
Ratio of expenses to average net assets ................... 0.82% 0.81% 0.84% 0.87% 0.86%
------- ------- ------- ------- -------
Ratio of net investment income to average net assets ...... 8.30% 8.96% 8.14% 9.20% 9.18%
------- ------- ------- ------- -------
Portfolio turnover rate ................................... 82.7% 111.3% 118.5% 84.3% 90.7%
------- ------- ------- ------- -------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE GROWTH EQUITY FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $ 24.37 $ 21.46 $ 20.00 $ 18.30 $ 20.49
-------- -------- -------- ------- -------
Income (loss) from investment operations:
Net investment income (loss) .............................. 0.02 0.10 0.11 0.09 0.13
Net realized and unrealized gain (loss) on investment
transactions ............................................ 10.12 5.64 3.85 4.75 (1.80)
-------- -------- -------- ------- -------
Total from investment operations ....................... 10.14 5.74 3.96 4.84 (1.67)
-------- -------- -------- ------- -------
Less distributions:
Dividend from net investment income ....................... (0.02) (0.10) (0.11) (0.09) (0.13)
Distribution from net realized gains ...................... (3.61) (2.73) (2.39) (3.05) (0.39)
-------- -------- -------- ------- -------
Total distributions .................................... (3.63) (2.83) (2.50) (3.14) (0.52)
-------- -------- -------- ------- -------
Net asset value, end of year .............................. $ 30.88 $ 24.37 $ 21.46 $ 20.00 $ 18.30
======== ======== ======== ======= =======
Total return ........................................... 41.67% 26.74% 19.76% 26.45% (8.12)%
Ratios/Supplemental data:
Net assets, end of year (in thousands) .................... $195,692 $136,058 $106,039 $95,593 $80,078
-------- -------- -------- ------- -------
Ratio of expenses to average net assets ................... 0.76% 0.77% 0.80%(a) 0.77%(a) 0.79%(a)
-------- -------- -------- ------- -------
Ratio of net investment income to average net assets ...... 0.08% 0.39% 0.48%(a) 0.43%(a) 0.70%(a)
-------- -------- -------- ------- -------
Portfolio turnover rate ................................... 161.3% 169.1% 177.1% 169.8% 156.2%
-------- -------- -------- ------- -------
</TABLE>
(a) 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 .81%,
.82%, and .84%, and the ratio of net investment income to average net assets
would have been .47%, .38%, and .65% for the years ended December 31, 1996,
1995, and 1994, respectively.
29
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE VALUE EQUITY FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................. $ 22.55 $ 19.32 $ 16.28 $ 12.67 $ 12.68
--------- --------- --------- --------- --------
Income from investment operations:
Net investment income .............................. 0.31 0.29 0.22 0.25 0.20
Net realized and unrealized gain
on investment transactions ...................... 1.85 4.53 3.88 4.50 0.17
--------- --------- --------- --------- --------
Total from investment operations ................ 2.16 4.82 4.10 4.75 0.37
--------- --------- --------- --------- --------
Less distributions:
Dividend from net investment income ................ (0.31) (0.29) (0.22) (0.25) (0.20)
Distribution from net realized gains ............... (2.01) (1.30) (0.84) (0.89) (0.18)
--------- --------- --------- --------- --------
Total distributions ............................. (2.32) (1.59) (1.06) (1.14) (0.38)
--------- --------- --------- --------- --------
Net asset value, end of year ....................... $ 22.39 $ 22.55 $ 19.32 $ 16.28 $ 12.67
========= ========= ========= ========= ========
Total return .................................... 9.59% 24.98% 25.19% 37.48% 2.92%
Ratios/Supplemental data:
Net assets, end of year (in thousands) ............. $ 335,479 $ 302,960 $ 200,674 $ 127,260 $ 79,021
--------- --------- --------- --------- --------
Ratio of expenses to average net assets ............ 0.76% 0.76% 0.78% 0.80% 0.82%
--------- --------- --------- --------- --------
Ratio of net investment income to average net assets 1.27% 1.43% 1.38% 1.71% 1.59%
--------- --------- --------- --------- --------
Portfolio turnover rate ............................ 24.0% 18.7% 25.0% 34.3% 30.6%
--------- --------- --------- --------- --------
</TABLE>
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................... $ 19.83 $ 18.74 $ 17.40 $ 15.19 $ 15.70
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income ............................................ 0.60 0.61 0.65 0.53 0.43
Net realized and unrealized gain (loss) on investment transactions 0.61 2.33 2.19 2.86 0.22
--------- --------- --------- --------- ---------
Total from investment operations .............................. 1.21 2.94 2.84 3.39 0.65
--------- --------- --------- --------- ---------
Less distributions:
Dividend from net investment income .............................. (0.60) (0.61) (0.65) (0.53) (0.43)
Distribution in excess of net investment income .................. (0.00) 0.00 0.00 (0.01) (0.02)
Distribution from net realized gains ............................. (2.13) (1.24) (0.85) (0.64) (0.71)
--------- --------- --------- --------- ---------
Total distributions ........................................... (2.73) (1.85) (1.50) (1.18) (1.16)
--------- --------- --------- --------- ---------
Net asset value, end of year ..................................... $ 18.31 $ 19.83 $ 18.74 $ 17.40 $ 15.19
========= ========= ========= ========= =========
Total return .................................................. 6.09% 15.65% 16.37% 22.28% 4.14%
Ratios/Supplemental data:
Net assets, end of year (in thousands) ........................... $ 545,486 $ 516,139 $ 398,544 $ 266,556 $ 169,847
--------- --------- --------- --------- ---------
Ratio of expenses to average net assets .......................... 0.76% 0.76% 0.77% 0.79% 0.82%
--------- --------- --------- --------- ---------
Ratio of net investment income to average net assets ............. 2.78% 3.10% 3.90% 3.45% 3.14%
--------- --------- --------- --------- ---------
Portfolio turnover rate .......................................... 48.0% 37.1% 32.9% 37.2% 37.3%
--------- --------- --------- --------- ---------
</TABLE>
30
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................... $ 16.13 $ 15.61 $ 14.47 $ 13.01 $ 13.94
--------- --------- --------- -------- --------
Income (loss) from investment operations:
Net investment income ................................ 0.10 0.58 0.63 0.13 0.09
Net realized and unrealized gain (loss) on investments
and foreign currency related transactions ......... 2.93 1.04 1.81 1.67 (0.97)
--------- --------- --------- -------- --------
Total from investment operations .................. 3.03 1.62 2.44 1.80 (0.88)
--------- --------- --------- -------- --------
Less distributions:
Dividend from net investment income .................. (0.10) (0.53) (0.56) (0.12) (0.02)
Distribution in excess of net investment income ...... (0.08) 0.00 (0.74) (0.22) 0.00
Distribution from net realized gains ................. (0.61) (0.57) 0.00 0.00 0.00
Distribution from capital ............................ 0.00 0.00 0.00 0.00 (0.03)
--------- --------- --------- -------- --------
Total distributions ............................... (0.79) (1.10) (1.30) (0.34) (0.05)
--------- --------- --------- -------- --------
Net asset value, end of year ......................... $ 18.37 $ 16.13 $ 15.61 $ 14.47 $ 13.01
========= ========= ========= ======== ========
Total return ...................................... 18.85% 10.41% 16.87% 13.80% 6.31%
Ratios/Supplemental data:
Net assets, end of year (in thousands) ............... $ 153,822 $ 129,638 $ 104,418 $ 69,531 $ 59,393
--------- --------- --------- -------- --------
Ratio of expenses to average net assets .............. 1.08% 1.13% 1.17% 1.23% 1.22%
--------- --------- --------- -------- --------
Ratio of net investment income to average net assets . 0.45% 0.62% 0.66% 0.91% 0.82%
--------- --------- --------- -------- --------
Portfolio turnover rate .............................. 43.5% 35.7% 54.8% 62.5% 15.6%
--------- --------- --------- -------- --------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE SMALL CAPITALIZATION FUND
The following table includes selected data for a share outstanding throughout
each period or year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1998 1997 1996 1995*
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period or year... $ 14.43 $ 12.53 $ 10.96 $ 10.00
-------- -------- -------- -------
Income (loss) from investment operations:
Net investment income ......................... 0.08 0.07 0.07 0.09
Net realized and unrealized gain (loss) on
investment transactions ...................... (1.41) 2.81 2.09 1.19
-------- -------- -------- -------
Total from investment operations .............. (1.33) 2.88 2.16 1.28
-------- -------- -------- -------
Less distributions:
Dividend from net investment income ........... (0.08) (0.07) (0.07) (0.09)
Distribution from net realized gains .......... (0.21) (0.91) (0.52) (0.23)
-------- -------- -------- -------
Total distributions ........................ (0.29) (0.98) (0.59) (0.32)
-------- -------- -------- -------
Net asset value, end of period or year ........ $ 12.81 $ 14.43 $ 12.53 $ 10.96
======== ======== ======== =======
Total return .................................. (9.16)% 23.02% 19.76% 12.76%(b)
Ratios/Supplemental data:
Net assets, end of period or year
(in thousands) ............................... $ 43,635 $ 38,726 $ 16,134 $ 4,828
-------- -------- -------- -------
Ratio of expenses to average net assets ....... 0.82% 0.85% 0.99%(a) 1.00%(a)(c)
-------- -------- -------- -------
Ratio of net investment income to
average net assets ........................... 0.65% 0.66% 0.85%(a) 1.53%(a)(c)
-------- -------- -------- -------
Portfolio turnover rate ....................... 61.9% 71.1% 39.2% 64.3%
-------- -------- -------- -------
</TABLE>
- -----------------
(a) Had fees not been waived by the investment advisor and administrator of
the Fund, the ratios of expenses to average net assets would have been 1.06%
and 1.29%, and the ratios of net investment income to average net assets
would have been 0.78% and 1.24%, respectively, for the year ended December
31, 1996 and the period ended December 31, 1995.
(b) Not annualized.
(c) Annualized.
* For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.
31
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE EMERGING GROWTH FUND
The following table includes selected data for a share outstanding throughout
each period or year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1998 1997*
------------ ------------
<S> <C> <C>
Net asset value, beginning of period or year .................. $ 12.85 $ 10.00
-------- --------
Income from investment operations:
Net investment income (loss) .................................. (0.06) 0.00
Net realized and unrealized gain on investment transactions ... 4.65 3.92
-------- --------
Total from investment operations ........................... 4.59 3.92
-------- --------
Less distributions:
Distribution from net realized gains .......................... (0.01) (1.07)
-------- --------
Total distributions ........................................ (0.01) (1.07)
-------- --------
Net asset value, end of period or year ........................ $17.43 $12.85
======== ========
Total return ............................................... 35.70% 39.22%(c)
Ratios/Supplemental data:
Net assets, end of period or year (in thousands) .............. $38,664 $17,942
-------- --------
Ratio of expenses to average net assets ....................... 1.15%(b) 1.15%(a)(b)
-------- --------
Ratio of net investment loss to average net assets ............ (0.66)%(b) (0.73)%(a)(b)
-------- --------
Portfolio turnover rate ....................................... 240.9% 392.3%
-------- --------
</TABLE>
- --------------
(a) Annualized.
(b) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been 1.21%
and 1.41%, and the ratios of net investment loss to average net assets
would have been (0.73)% and (0.99)%, respectively, for the periods ended
December 31, 1998 and December 31, 1997.
(c) Not annualized.
* For the period from May 1, 1997 (commencement of operations) through
December 31, 1997.
32
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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.
Penn Series is presently offering shares in its Money Market, Quality Bond,
High Yield Bond, Growth Equity, Value Equity, Flexibly Managed, International
Equity, Small Capitalization and Emerging Growth Funds (the Funds). It is
authorized under its Articles of Incorporation to issue a separate class of
shares in one additional fund. The 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 accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those 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 maintains 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, Small Capitalization and Emerging Growth 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 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 are 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, assets
and liabilities at the current rate of exchange, purchases and sales of
investment securities, income and expenses at the relevant rates of exchange
prevailing on the respective dates of such transactions.
The Funds do not isolate the portion of realized and unrealized gains and
losses on investments which is due to changes in the foreign exchange rate from
that which is due to changes in market prices of equity securities. Such
fluctuations are included with net realized and unrealized gain or loss from
investments.
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.
<PAGE>
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, Small Capitalization, and Emerging
Growth 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
mortgage - backed securities, market discount and foreign currency transactions.
FEDERAL INCOME TAXES: The Funds intend to continue to qualify as regulated
investment companies under Subchapter M of the Internal Revenue code and to
distribute all of their taxable income, including realized gains, to their
shareholders. Therefore, no federal income tax provision is required.
Dividends from net investment income and distributions from net realized
gains are determined in accordance with federal income tax regulations which may
differ from net investment income and net realized capital gains recorded in
accordance with generally accepted accounting principles. To the extent these
differences are permanent, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporay differences do not
require such reclassification. Distributions from net realized gains for book
purposes may involve short-term capital gains, which are included as ordinary
income for tax purposes.
33
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 transaction 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, 1998. There were no open futures contracts at
December 31, 1998.
Options - Each of the Funds, other than Money Market, may write covered
calls. Additionally, each of the Funds may buy put or call options for which
premiums are paid whether or not the option is exercised. 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. 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. The Flexibly Managed Fund has entered
into put options during the year ended December 31, 1998. Purchased put options
open and outstanding at December 31, 1998 are disclosed in the schedule of
investments.
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 the 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, 1998. At December 31, 1998 there was one open contract in the
Flexibly Managed Fund and none in the International Equity Fund. Open forward
foreign currency contracts held by the Flexibly Managed Fund at December 31,
1998 were as follows:
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Foreign
Foreign Exchange
Forward Foreign Expiration Currency Forward Contract Contract Gain/
Currency Contract Date to be Sold Rate Amount Value Loss
- ------------------ ---------- ---------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
British Pound Sterling ............ 01/05/99 19,761 .597569 $33,069 $32,819 $250
</TABLE>
3 - INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES
Investment Advisory Services
Effective May 1, 1998 Independence Capital Management, Inc. ("ICMI") serves
as investment advisor to each of the Funds. ICMI is a wholly-owned subsidiary of
The Penn Mutual Life Insurance Company.
T. Rowe Price Associates, Inc. ("Price Associates") is sub-advisor to the
Flexibly Managed and the High Yield Bond Funds pursuant to an investment
sub-advisory agreement entered into by ICMI and Price Associates on May 1, 1998.
As sub-advisor, Price Associates provides investment management services to the
Funds.
34
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------
OpCap Advisors ("OpCap") is sub-advisor to Value Equity and Small
Capitalization Funds pursuant to an investment sub-advisor agreement entered
into by ICMI and OpCap on May 1, 1998. As sub-advisor, OpCap provides investment
management services to the Funds.
OpCap is a subsidiary of Oppenheimer Capital.
Vontobel USA Inc. ("Vontobel") is sub-advisor to the International Equity
Fund pursuant to an investment sub-advisor agreement entered into by ICMI and
Vontobel on May 1, 1998. As sub-advisor, Vontobel provides investment management
services to the Fund. Vontobel is a wholly owned subsidiary of Vontobel Holding
Ltd. an affiliate of Bank J. Vontobel & Co. Ltd.
RS Investment Management, Inc. (formerly Robertson Stephens Investment
Management, Inc. ) ("RS") is sub-advisor to the Emerging Growth Fund pursuant to
an investment sub-advisor agreement entered into by ICMI and RS on May 1, 1998.
As sub-advisor, RS provides investment management services to the Fund.
Each of the Funds pay ICMI, on a monthly basis, an 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% and Emerging Growth Fund: .80% for the first $25 million, 0.75% for
next $25 million and 0.70% thereafter.
For providing investment management services to the Funds, ICMI pays the
sub-advisors, on a monthly basis, a sub-advisory fee.
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 pay Penn Mutual, on a
quarterly basis, an annual fee equal to 0.15% of each of the Fund's average
daily net assets.
Expenses and Limitations Thereon
Each Fund bears all expenses of its operations other than those incurred by
the investment advisors under their respective investment advisory agreements
and those incurred by Penn Mutual under its administrative and corporate
services agreement. 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: 1.00%; Growth Equity: 1.00%; Value Equity: 1.00%;
Flexibly Managed: 1.00%; International Equity: 1.50%; Small Capitalization
1.00%; and Emerging Growth 1.15%.
Fees were paid to non-affiliated Directors of Penn Series for the year ended
December 31, 1998. 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.
<PAGE>
4 - CAPITAL STOCK
At December 31, 1998, 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. Nine 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, Penn
Series Small Capitalization Fund Common Stock and Penn Series Emerging Growth
Fund Common Stock. One of the classes of common stock is presently designated
Class I, and no shares have been issued.
Transactions in capital stock of Penn Series Funds, Inc. were as follows:
<TABLE>
<CAPTION>
The Year Ended December 31, 1998:
------------------------------------------------------------------------------
Dividend
Shares Sold Reinvestment Shares Reacquired
------------------------ ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund ..................... 84,556,622 $84,556,622 2,176,407 $2,176,407 70,581,999 $70,581,999
Quality Bond Fund ..................... 1,642,975 $17,780,630 382,465 $3,977,639 811,620 $8,780,551
High Yield Bond Fund .................. 1,757,800 $17,292,747 589,778 $5,420,056 1,052,320 $10,371,757
Growth Equity Fund .................... 691,494 $19,801,255 669,396 $20,628,621 607,072 $16,844,142
Value Equity Fund ..................... 1,671,304 $40,295,090 1,409,105 $31,549,856 1,532,040 $35,752,237
Flexibly Managed Fund ................. 2,831,936 $58,177,184 3,855,202 $70,600,678 2,926,275 $59,980,214
International Equity Fund ............. 1,780,356 $31,336,651 345,781 $6,355,455 1,793,330 $31,548,343
Small Capitalization Fund ............. 1,065,490 $14,767,847 76,921 $986,473 418,401 $5,558,915
Emerging Growth Fund .................. 1,366,179 $20,129,936 638 $8,966 544,610 $7,976,427
</TABLE>
35
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Transactions in capital stock of Penn Series Funds, Inc. were as follows:
<TABLE>
<CAPTION>
The Year Ended December 31, 1997:
-----------------------------------------------------------------------------
Dividend
Shares Sold Reinvestment Shares Reacquired
------------------------ ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund ..................... 52,596,243 $52,596,243 1,857,904 $1,857,904 51,478,157 $51,478,157
Quality Bond Fund ..................... 695,043 $7,228,270 219,620 $2,240,125 745,923 $7,674,394
High Yield Bond Fund .................. 1,621,677 $15,567,712 480,137 $4,570,874 829,328 $7,878,467
Growth Equity Fund .................... 560,843 $13,907,900 581,078 $14,160,857 500,698 $12,473,543
Value Equity Fund ..................... 2,867,800 $61,202,630 888,923 $20,045,218 712,142 $15,712,398
Flexibly Managed Fund ................. 4,061,684 $80,965,783 2,215,705 $43,937,424 1,513,715 $30,886,898
International Equity Fund ............. 1,665,223 $27,762,536 514,008 $8,290,956 829,261 $13,999,926
Small Capitalization Fund ............. 1,398,053 $19,734,987 171,055 $2,468,316 173,037 $2,478,293
Emerging Growth Fund* ................. 1,427,602 $18,230,138 106,892 $1,373,564 138,520 $2,069,490
</TABLE>
* For the period from May 1, 1997 (commencement of operations) through December
31, 1997.
5 - PURCHASES AND SALES OF INVESTMENTS
During the year ended December 31, 1998, the Funds made the following purchases
and sales of portfolio securities, excluding U.S. Government and Agency
obligations and short term securities:
Purchases Sales
--------- -----
Quality Bond Fund ..................... $108,643,907 $119,461,219
High Yield Bond Fund .................. $60,196,551 $48,652,828
Growth Equity Fund .................... $241,534,849 $243,891,278
Value Equity Fund ..................... $95,882,522 $67,620,213
Flexibly Managed Fund ................. $260,791,434 $230,954,970
International Equity Fund ............. $65,046,636 $58,985,257
Small Capitalization Fund ............. $31,338,551 $22,535,904
Emerging Growth Fund .................. $73,498,020 $59,063,803
6 - CAPITAL LOSS CARRYOVERS
Capital loss carryovers expire as follows:
Money High Yield Emerging
Market Bond Growth
Fund Fund Fund
------ ---------- -----------
2000 .................................. $ 61 $ 0 $ 0
2001 .................................. 183 0 0
2003 .................................. 416 1,052,436 0
2004 .................................. 0 525,647 0
2005 .................................. 225 0 0
2006 .................................. 992 14,558 1,908,042
------ ---------- ----------
Total .............................. $1,877 $1,592,641 $1,908,042
36
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
PENN SERIES FUNDS, INC.
We have audited the 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, Small
Cap Fund, and Emerging Growth Fund) as of December 31, 1998, and the related
statements of operations for the year then ended and the statements of changes
in net assets and financial highlights for each of the two years in the period
then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial highlights of Penn Series Funds,
Inc. for the years and periods through December 31, 1996 included herein were
audited by other auditors whose report dated February 11, 1997, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights. Our procedures included confirmation of securities owned as of
December 31, 1998, 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 presentation. We
believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting Penn Series Funds, Inc. at December 31, 1998, the
results of their operations for the year then ended, the changes in their net
assets and their financial highlights for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 29, 1999
37
