<PAGE>
Prospectus--May 1, 2000
PENN SERIES FUNDS, INC.
600 Dresher Road, Horsham, PA 19044oTelephone 800-523-0650
PRELIMINARY PROSPECTUS DATED FEBRUARY 17, 2000
SUBJECT TO COMPLETION
LIMITED MATURITY BOND FUND
GROWTH AND INCOME FUND
INDEX 500 FUND
MID CAP GROWTH FUND
MID CAP VALUE FUND
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
-1-
<PAGE>
Penn Series Funds, Inc. ("Penn Series") is a mutual fund that provides
investment funds for variable annuity and variable life insurance contracts
issued by The Penn Mutual Life Insurance Company ("Penn Mutual") and its
subsidiary, The Penn Insurance and Annuity Company ("PIA"). Penn Series offers
14 different portfolios or "Funds." This Prospectus relates to five of the Funds
offered by Penn Series. One of these Funds, the Growth and Income Fund, is
currently available only to certain contracts issued by Penn Mutual in the
qualified pension plan market.
PROSPECTUS CONTENTS PAGE
FUND INVESTMENT SUMMARIES
Limited Maturity Bond ....................................................... 3
Growth and Income Fund ...................................................... 4
Index 500 Fund .............................................................. 5
Mid Cap Growth Fund ......................................................... 6
Mid Cap Value Fund .......................................................... 7
ADDITIONAL INFORMATION
MANAGEMENT
Investment Adviser .......................................................... 8
Sub-Advisers ................................................................ 8
Expenses and Limitations .................................................... 9
ACCOUNT POLICIES ............................................................10
-2-
<PAGE>
INVESTMENT SUMMARY: LIMITED MATURITY BOND FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to provide the highest available
current income consistent with liquidity and low risk to principal; total
return is secondary.
Investment Strategy: The Fund invests primarily in short- to intermediate term investment-
grade debt securities of U.S. government and corporate issuers. The
Adviser uses an active bond management approach. It seeks best
"value" by employing the following strategies: sector and security
rotation, yield curve analysis to determine which maturities to
concentrate in, and arbitrage to take advantage of inefficient pricing of
new corporate bond issues. The Adviser seeks to reduce credit risk by
diversifying among many issuers and different types of securities.
Duration: The average duration of a fixed income portfolio measures its
exposure to the risk of changing interest rates. Typically, with a 1% rise
in interest rates, an investment's value may be expected to fall
approximately 1% for each year of its duration. Although the Fund may
invest in securities of any duration, under normal circumstances it
maintains an average portfolio duration of one to three years.
Quality: The Fund will invest primarily in investment grade debt
securities and no more than 10% of its assets in "junk bonds."
Sectors: The Fund will invest primarily in Corporate Bonds and U.S.
Government Bonds, including Mortgage-Backed and Asset-Backed
Securities.
Turnover: Because the Adviser will look for inefficiencies in the market
and sell when they feel a security is fully priced, turnover can be
expected to be relatively high.
Risks of Investing: An investment in the Fund may be appropriate for investors who are
seeking the highest current income consistent with liquidity and low risk
to principal available through an investment in investment grade debt.
The Fund's value will change primarily with the changes in the prices of
fixed income securities (e.g., bonds) held by the Fund. The value of
fixed income securities will vary inversely with changes in interest rates.
A decrease in interest rates will generally result in an increase in value
of the Fund. Conversely, during periods of rising interest rates, the
value of the Fund will generally decline. Longer term fixed income
securities tend to experience larger changes in value than shorter-term
securities because they are more sensitive to interest rate changes. A
portfolio with a lower average duration generally will experience less
price volatility in response to changes in interest rates as compared to a
portfolio with a higher duration. Mortgage-backed securities are sensitive
to changes in interest rates, but may respond to these changes differently
from other fixed-income securities due to the pre-payment of underlying
loans. As with investing in other securities whose prices increase or
decrease in market value, you may lose money investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
</TABLE>
-3-
<PAGE>
INVESTMENT SUMMARY: GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to provide total return through a
combination of current income and capital appreciation.
Investment Strategy: The Fund invests primarily in common stocks of well established
companies that the Adviser believes have long-term potential for above
average growth in earnings and income. The Adviser may from time to
time invest in non-dividend paying companies with prospects for future
income or capital appreciation. The Adviser may also use convertible
bonds or preferred stock to enhance income as well as provide capital
appreciation. The Adviser emphasizes companies that it believes are
capable of generating strong earnings and sales gains in an increasingly
global economy. Companies with consistent earnings growth are most
able to provide a predictable level of current income as well as the
potential for growth in income over time. By its nature the Fund invests
primarily in large-capitalization companies.
Risks of Investing: An investment in the Fund may be appropriate for investors who are
willing to accept the uncertainties of investing in common stocks in the
hope of earning above-average growth in capital and income. The
Fund's value will change primarily with changes in the prices of the
stocks and other investments held by the Fund. The prices of common
stocks will increase and decrease based on market conditions, specific
industry conditions, and the conditions of the individual companies who
issued the common stock. Convertible bonds and preferred stocks may
also be affected by the change in the level of interest rates and investor
judgements about the quality of the issuer. In general, common stocks
are more volatile than those of other investments, such as fixed income
securities. However, over the long-term, common stocks have shown
greater potential for capital appreciation. By investing in common
stocks of larger, well established companies, the Adviser seeks to avoid
some of the volatility associated with smaller, less well established
companies. Investing in companies with dividends may also reduce the
volatility associated with common stock investing. In addition, the Fund
is subject to the risk that its principal market segment, large
capitalization growth companies, may underperform compared to other
market segments or the equity markets as a whole. As with investing in
other securities whose prices increase or decrease in market value, you
may lose money investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
</TABLE>
-4-
<PAGE>
INVESTMENT SUMMARY: INDEX 500 FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Wells Capital Management Incorporated
Investment Objective: The Fund's investment objective is total return (capital appreciation and
income) which corresponds to that of the Standard & Poor's Composite
Index of 500 stocks.
Investment Strategy: The Fund invests substantially all of its assets in securities listed in the
S&P 500 Index which is comprised of 500 selected securities (mostly
common stocks). The Sub-Adviser does not actively manage the Fund's
assets using traditional investment analysis. Instead, the Sub-Adviser
invests in each company in the S&P 500 Index in proportion to its
weighting in the Index. In this manner, the Sub-Adviser attempts to
match the return of the S&P 500 as closely as possible.
Risks of Investing: An investment in the Fund may be appropriate for investors who are
willing to accept the uncertainties of investing in common stocks in the
hope of earning a return consistent with the S&P 500 Index. The Fund's
value will change primarily with changes in the prices of the stocks and
other investments held by the Fund. The prices of common stocks will
increase and decrease based on market conditions, specific industry
conditions, and the conditions of the individual companies who issued
the common stocks. In general, common stocks are more volatile than
those of other investments, such as fixed income securities. However,
over the long-term, common stocks have shown greater potential for
capital appreciation. The Fund is also subject to the risk that the
performance of the Fund may not correlate to that of the S&P 500 Index.
In addition, the Fund is subject to the risk that the securities that
comprise the S&P 500 may underperform other market segments or the
equity markets as a whole. As with investing in other securities whose
prices increase or decrease in market value, you may lose money by
investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
</TABLE>
-5-
<PAGE>
INVESTMENT SUMMARY: MID CAP GROWTH FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Turner Investment Partners, Inc.
Investment Objective: The investment objective of the Fund is to maximize capital
appreciation.
Investment Strategy: The Fund invests primarily in common stocks of U.S. companies with
medium market capitalizations (i.e., between $1 billion and $10 billion)
that the Sub-Adviser believes have strong earnings growth potential.
The Fund will invest in securities of companies that are diversified
across economic sectors, and will attempt to maintain sector
concentrations that approximate those of its current benchmark, the
Russell Mid Cap Growth Index. The Fund's exposure is generally
limited to a maximum of 2% in any single issue. However, the Fund
may hold up to two times the index weighting of those securities that
comprise between 1% and 5% of the Index, and up to one and one half
times the index weighting of those securities that comprise more than
5% of the Index. Due to its investment strategy, the Fund may buy and
sell securities frequently which may result in higher transaction costs.
Risks of Investing: An investment in the Fund may be appropriate for investors who are
willing to accept the risks and uncertainties of investing in mid-cap
stocks in the hope of achieving above-average capital appreciation. The
Fund's value will change primarily with the changes in prices of the
common stocks held by the Fund. The prices of common stocks will
increase and decrease based on market conditions, specific industry
conditions, and the conditions of individual companies that issued the
common stocks. In addition to the general risks of common stocks, an
investment in mid-cap stocks may entail special risks. The prices of
mid-cap stocks may be more volatile than investments in larger, more
established companies. In addition, the Fund is subject to the risk that
its principal market segment, medium capitalization growth companies,
may underperform compared to other market segments or the equity
markets as a whole. As with investing in other securities whose prices
increase and decrease in market value, you may lose money by investing
in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
</TABLE>
-6-
<PAGE>
INVESTMENT SUMMARY: MID CAP VALUE FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Neuberger Berman Management Inc.
Investment Objective: The investment objective of the Fund is to achieve growth of capital.
Investment Strategy: The Fund invests primarily in common stocks of U.S. companies with
medium market capitalizations that the Sub-Adviser believes are
undervalued. In selecting individual securities, the Sub-Adviser seeks
well-managed companies whose stock prices are undervalued. To
identify these companies, the Sub-Adviser looks for strong business
fundamentals, consistent cash flow, and a sound track record through all
phases of the market cycle. The Sub-Adviser may also consider the
company's position relative to competitors, a high level of stock
ownership among management and a recent sharp decline in the stock
price that appears to be the result of a short-term market over-reaction to
negative news. The Sub-Adviser generally considers selling a stock
when it reaches the Sub-Adviser's target price, when it fails to perform
as expected, or when other opportunities appear more attractive. The
Sub-Adviser seeks to reduce risk by diversifying among many
companies and industries.
Risks of Investing: An investment in the Fund may be appropriate for investors who are
willing to accept the risks and uncertainties of investing in mid-cap
stocks in the hope of achieving above-average capital appreciation. The
Fund's value will change primarily with the changes in prices of the
common stocks held by the Fund. The prices of common stocks will
increase and decrease based on market conditions, specific industry
conditions, and the conditions of individual companies that issued the
common stocks. In addition to the general risks of common stocks, an
investment in mid-cap stocks may entail special risks. The prices of
mid-cap stocks may be more volatile than investments in larger, more
established companies. In addition, the Fund is subject to the risks that is
principal market segment, medium capitalization value companies, may
underperform compared to other market segments or the equity markets
as a whole. As with investing in other securities whose prices increase
and decrease in market value, you may lose money by investing in the
Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
</TABLE>
-7-
<PAGE>
ADDITIONAL INFORMATION
Temporary Investing: When a Fund's Adviser or Sub-Adviser believes that changes
in economic, financial or political conditions warrant, each Fund, except for
the Index 500 Fund, may invest without limit in money market instruments and
other short-term fixed income securities. If they incorrectly predict the
effects of these changes, such defensive investments may adversely affect Fund
performance.
Portfolio Turnover: Consistent with their investment objectives, the Funds may
sell securities without regard to the effect on portfolio turnover. A high rate
of portfolio turnover may result in increased transaction costs.
Year 2000. Penn Series and its service providers do not appear to have been
adversely affected by computer problems related to the transition to the year
2000. However, there remains a risk that such problems could arise or be
discovered in the future. Year 2000 related problems also may negatively affect
issuers whose securities the Funds purchase, which could have an impact on the
value of your investment.
MANAGEMENT
Investment Adviser
Independence Capital Management, Inc. Independence Capital Management, Inc.
("ICMI") serves as investment adviser to each of the Funds. ICMI is a
wholly-owned subsidiary of Penn Mutual, a life insurance company that has been
in the insurance and investment business since the late 1800s. Penn Mutual and
its subsidiaries currently have assets under management of over $10.5 billion.
ICMI was organized in June 1989 and, in addition to serving as investment
adviser to the Funds, also serves as investment adviser to corporate and pension
fund accounts. Its offices are located at 600 Dresher Road, Horsham,
Pennsylvania 19044. As of December 31, 1999, ICMI serves as investment adviser
for over $1.9 billion of investment assets.
ICMI provides day-to-day portfolio management services for the Limited Maturity
Bond and Growth and Income Funds.
Richardson T. Merriman, Senior Vice President of Independence Capital
Management, Inc., manages the Growth and Income Fund. He has served as portfolio
manager of the Growth and Income Fund since its inception in May, 2000. Mr.
Merriman is also President of The Pennsylvania Trust Company, a Penn Mutual
subsidiary.
Peter M. Sherman, President and Portfolio Manager of Independence Capital
Management, Inc., manages the Limited Maturity Bond Fund. He has served as
portfolio manager of the Limited Maturity Bond Fund since its inception in May,
2000. He served as Executive Vice President, ICMI, prior to becoming President.
Mr. Sherman is Executive Vice President and Chief Investment Officer of Penn
Mutual; prior to May 1996, he was Vice President, Fixed Income Portfolio
Management, Penn Mutual.
In addition, ICMI provides investment management services to the Index 500, Mid
Cap Growth and Mid Cap Value Funds through sub-advisers that are specially
selected and qualified to manage the Funds.
-8-
<PAGE>
Manager of Managers Structure. ICMI acts as "manger of mangers" for the Funds.
In this capacity, ICMI has hired sub-advisers to manage the assets of certain
Funds. ICMI remains responsible for the performance of these funds as it
recommends hiring or changing sub-advisers to the Company's Board of Directors.
ICMI oversees the sub-advisers to ensure compliance with the Fund's investment
policies and guidelines, and monitors each sub-adviser's adherence to its
investment style. While ICMI has no intention to do so, the Growth and Income
Fund has authorized ICMI, subject to the supervision and approval of the
Company's Board of Directors, to hire a sub-adviser without shareholder
approval. Shareholders of the Limited Maturity Bond, Index 500, Mid Cap Growth
and Mid Cap Value Funds may, in the future, be asked to approve the manager of
managers structure.
Sub-Advisers
Wells Capital Management Incorporated. Wells Capital Management Incorporated
("Wells") is sub-adviser to the Index 500 Fund. As sub-adviser, Wells provides
day-to-day portfolio management services to the Fund. Wells is located at 525
Market Street, 10th Floor, San Francisco, California 94105. As of December 31,
1999, Wells and its affiliates had approximately $71 billion in assets under
management.
David D. Sylvester and Laurie R. White have primary responsibility for the
day-to-day management of the Index 500 Fund. Mr. Sylvester is an Executive Vice
President at Wells and has been affiliated with Wells or its affiliates since
1979. Ms. White is a Managing Director at Wells and has been affiliated with
Wells or its affiliates since 1991.
Turner Investment Partners, Inc. Turner Investment Partners, Inc. ("Turner") is
sub-adviser to the Mid Cap Growth Fund. As sub-adviser, Turner provides
investment management services to the Fund. Turner is located at 1235 Westlakes
Drive, Suite 350, Berwyn, Pennsylvania 19312. As of December 31, 1999, Turner
had approximately $5.6 billion in assets under management.
Chris McHugh, Bill McVail and Robert Turner are primarily responsible for the
day-to-day portfolio management of the Mid Cap Growth Fund. Mr. McHugh is Senior
Equity Fund Portfolio Manager of Turner and joined Turner in 1990. Mr. McVail is
Senior Equity Portfolio Manager of Turner and joined Turner in 1998. Prior to
1998, Mr. McHugh was Portfolio Manager at PNC Equity Advisors. Mr. Turner
founded Turner in 1990 and serves as Turner's Chairman and Chief Investment
Officer.
Neuberger Berman Management Inc. Neuberger Berman Management, Inc. ("Neuberger
Berman") is sub-adviser to the Mid Cap Value Fund. As sub-adviser, Neuberger
Berman provides investment management services to the Fund. Neuberger Berman is
located at 605 Third Avenue, 2nd Floor, New York, New York 10158. As of December
31, 1999, Neuberger Berman and its affiliates had approximately $54.4 billion in
assets under management.
Robert I. Gendelman and S. Basu Mullick have primary responsibility for managing
the Mid Cap Value Fund's assets. Messrs. Gendelman and Mullick are Vice
Presidents of Neuberger Berman and are Managing Directors of Neuberger Berman,
LLC. Mr. Gendelman has been a portfolio manager with Neuberger Berman since
1994. Mr. Mullick joined Neuberger Berman in 1998. Prior to 1998, he was
portfolio manager at another firm.
-9-
<PAGE>
Expenses and Limitations
The Fund bear all expenses of their operations other than those incurred by
their investment adviser and sub-advisers under the investment advisory
agreement and investment sub-advisory agreements and those incurred by Penn
Mutual under its administrative and corporate services agreement. In particular,
each Fund pays investment advisory fees, administrator's fee, shareholder
servicing fees and expenses, custodian and accounting fees and expenses, legal
and auditing fees, expenses of printing and mailing prospectuses and shareholder
reports, registration fees and expenses, proxy and annual meeting expenses, and
directors' fees and expenses.
With respect to each Fund, Penn Mutual has agreed to waive fees or reimburse
expenses to the extent the Fund's total expense ratio (excluding interest,
taxes, brokerage, other expenses which are capitalized in accordance with
generally accepted accounting principles, and extraordinary expenses, but
including investment advisory and administrative and corporate services fees)
exceeds the expense limitation for the Fund. The expense limitations for the
Funds are as follows:
----------------------------------------------------------------
Fund Expense Limitation
----------------------------------------------------------------
Limited Maturity Bond 0.90%
----------------------------------------------------------------
Growth and Income 1.00%
----------------------------------------------------------------
Index 500 0.40%*
----------------------------------------------------------------
Mid Cap Growth 1.00%
----------------------------------------------------------------
Mid Cap Value 1.00%
----------------------------------------------------------------
*Penn Mutual currently intends to voluntarily waive its fees and
reimburse expenses so that the Index 500 Fund's total expenses do
not exceed 0.25%.
Penn Mutual will waive fees or reimburse expenses for the entirety of any excess
above the expense limitation.
For providing investment management services to the Limited Maturity Bond,
Growth and Income, Index 500, Mid Cap Growth and Mid Cap Value Funds, the Funds
pay ICMI, on a monthly basis, a fee based on the average daily net assets of the
Fund, at the following annual rate: Limited Maturity Bond Fund, 0.30%; Growth
and Income Fund, 0.50%; Index 500 Fund, 0.07%; Mid Cap Growth Fund, 0.70%; and
Mid Cap Value Fund, 0.55%.
ACCOUNT POLICIES
Purchasing and Selling Fund Shares
Shares are offered on each day that the New York Stock Exchange ("NYSE") is open
for business (a "Business Day").
The Funds offer their shares only to Penn Mutual and PIA for separate accounts
they establish to fund variable life insurance and variable annuity contracts.
Penn Mutual or PIA purchases or redeems shares of the Funds based on, among
other things, the amount of net contract premiums or purchase payments allocated
to a separate account investment division, transfers to or from a separate
account investment
-10-
<PAGE>
division, contract loans and repayments, contract withdrawals and surrenders,
and benefit payments. The contract prospectus describes how contract owners may
allocate, transfer and withdraw amounts to, and from, separate accounts.
The price per share will be the net asset value per share (NAV) next determined
after receipt of the purchase order. NAV for one share is the value of that
share's portion of all of the assets in the Fund. The Fund determines the net
asset value for the Funds as of the close of business of the NYSE (normally 4:00
p.m. Eastern Time) on each day that the NYSE is open for business.
How the Funds Calculate NAV
In calculating NAV, the Funds generally value their portfolio securities at
their market price. If market prices are unavailable or the Funds think that
they are unreliable, the Funds may determine fair value prices using methods
approved by the Board of Directors. Some Funds may hold portfolio securities
that are listed on foreign exchanges. These securities may trade on weekends or
other days when the Funds do not calculate NAV. As a result, the value of these
Funds' investments may change on days when you cannot purchase or sell Fund
shares.
Dividends, Distributions and Taxes
Dividends and Distributions
The Funds distribute their investment income annually as dividends and make
distributions of capital gains, if any, at least annually.
Taxes
Please consult your tax adviser regarding your specific questions about federal,
state and local income taxes. Below we have summarized some important tax issues
that affect the Funds and their shareholders. This summary is based on current
tax laws, which may change.
The Funds expect that they will not have to pay income taxes if they distribute
all of their income and gains. Net income and realized capital gains that the
Funds distribute are not currently taxable to owners of variable annuity or
variable life insurance contracts when left to accumulate in the contracts.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Funds and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.
-11-
<PAGE>
Statement of Additional Information
In addition to this Prospectus, Penn Series has a Statement of Additional
Information ("SAI"), dated May 1, 2000, which contains additional, more detailed
information about the Funds. The SAI is incorporated by reference into this
Prospectus and, therefore, legally forms a part of this Prospectus.
Shareholder Reports
Penn Series publishes annual and semi-annual reports containing additional
information about each Fund's investments. In Penn Series' shareholder reports,
you will find a discussion of the market conditions and the investment
strategies that significantly affected each Fund's performance during that
period.
You may obtain the SAI and shareholder reports, when available, without charge
by contacting the Fund at 1-800-523-0650.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Securities and Exchange Commission in any of
the following ways: (1) In person: you may review and copy documents in the
Commission's Public Reference Room in Washington, D.C. (for information call
1-202-942-8090); (2) On-line: you may retrieve information from the Commission's
web site at "http://www.sec.gov"; or (3) By mail; you may request documents,
upon payment of a duplicating fee, by electronic request at [email protected]
or by writing to Securities Exchange Commission, Public Reference Section,
Washington, D.C. 20549-0102. To aid you in obtaining this information, Penn
Series' Investment Company Act registration number is 811-03459.
-12-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PENN SERIES FUNDS, INC.
600 Dresher Road
Horsham, Pennsylvania 19044
Penn Series Funds, Inc. ("Penn Series") is a no-load mutual fund with fourteen
separate investment portfolios (the "Funds"). This Statement of Additional
Information relates to the following Funds:.
LIMITED MATURITY BOND FUND
GROWTH AND INCOME FUND
INDEX 500 FUND
MID CAP GROWTH FUND
MID CAP VALUE FUND
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Penn Series prospectus dated May 1, 2000. A copy of the
prospectus is available, without charge, by writing to The Penn Mutual Life
Insurance Company, Customer Service Group - H3F, Philadelphia, PA, 19172. Or,
you may call, toll free, 1-800-548-1119.
The date of this Statement of Additional Information is
May 1, 2000.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED
FEBRUARY 17, 2000 SUBJECT TO COMPLETION
<PAGE>
TABLE OF CONTENTS
Investment Objectives..........................................................1
Investment Policies............................................................2
Securities and Investment Techniques...........................................3
Investments in Debt Securities........................................3
Investments in Foreign Equity Securities..............................6
Foreign Currency Transactions.........................................6
Repurchase Agreements.................................................7
Lending of Portfolio Securities.......................................8
Illiquid Securities...................................................8
Warrants .............................................................8
When-Issued Securities................................................9
Options .............................................................9
Futures Contracts....................................................10
Investment Companies.................................................10
Investment Restrictions.......................................................11
Limited Maturity Bond Fund...........................................11
Growth and Income Fund...............................................11
Index 500 Fund.......................................................12
Mid Cap Growth Fund..................................................13
Mid Cap Value Fund ..................................................13
General Information...........................................................14
Investment Advisory Services.........................................14
Administrative and Corporate Services................................15
Accounting Services..................................................15
Limitation on Fund Expenses..........................................15
Portfolio Transactions...............................................15
Directors and Officers...............................................17
Custodial Services...................................................18
Independent Auditors.................................................18
Legal Matters........................................................18
Net Asset Value of Shares............................................18
Ownership of Shares..................................................19
Tax Status...........................................................19
Voting Rights .......................................................20
Performance Information.......................................................20
Total Return.........................................................21
Ratings of Commercial Paper...................................................21
Ratings of Corporate Debt Securities..........................................22
Financial Statements of Penn Series...........................................23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
The investment objectives of the Funds are as follows. There can be no assurance that these objectives will
be achieved.
- -------------------------------------------------------------------------------------------------------------------
Limited Maturity Bond Fund highest available current income consistent with liquidity
and low risk to principal; total return is secondary;
- -------------------------------------------------------------------------------------------------------------------
Growth and Income Fund provide total return through a combination of current income and capital
appreciation;
- -------------------------------------------------------------------------------------------------------------------
Index 500 Fund total return (capital appreciation and income) which corresponds to that of the
Standard & Poor's Composite Index of 500 stocks;
- -------------------------------------------------------------------------------------------------------------------
Mid Cap Growth Fund maximize capital appreciation;
- -------------------------------------------------------------------------------------------------------------------
Mid Cap Value Fund achieve growth of capital;
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Information in this Statement of Additional Information supplements the
discussion in the Penn Series Prospectus regarding investment policies and
restrictions of the Funds. Unless otherwise specified, the investment policies
and restrictions are not fundamental policies and may be changed by the Board of
Directors without shareholder approval. Fundamental policies and restrictions of
each Fund may not be changed without the approval of at least a majority of the
outstanding shares of that Fund or, if it is less, 67% of the shares represented
at a meeting of shareholders at which the holders of 50% or more of the shares
are represented.
- --------------------------------------------------------------------------------
Limited Maturity Bond Fund
The Fund invests in a diversified portfolio of short to intermediate
term debt securities. The Fund will invest primarily in investment grade
securities (e.g., AAA, AA, A or BBB by S&P) by at least one of the established
rating agencies (S&P, Moody's, Duff & Phelps, Inc., Fitch Investors Service,
Inc., or McCarthy, Crisanti & Maffei, Inc.) or, if not rated, are of equivalent
investment quality as determined by the investment adviser. The Fund may also
invest up to 10% of its net assets in "high yield" securities which are rated BB
or B by S&P (or securities with a comparable rating by another established
rating agency), and are sometimes referred to as "junk bonds." In normal times,
at least 80% of the Fund's total assets will be invested in income producing
securities. At least 75% of the value of the Fund's total assets (not including
cash) will be invested in one or more of the following categories of
investments: (i) Marketable Corporate Debt Securities; (ii) U.S. Government
Obligations; (iii) U.S. Government Agency Securities; (iv) Bank Obligations; (v)
Savings and Loan Obligations; (vi) Commercial Paper; (vii) Collateralized
Mortgage Obligations; (viii) Securities of Certain Supranational Organizations;
(ix) Repurchase Agreements involving these securities; (x) Private Placements
(restricted securities); (xi) Asset Backed Securities; and (xii) Municipal
Obligations. In addition, the Fund may, as part of this minimum 75% of its
assets, write covered call options and purchase put options on its portfolio
securities, purchase call or put options on securities indices and invest in
interest rate futures contracts (and options thereon) for hedging purposes.
Without regard to the above described quality of investments, the Fund may
invest up to 25% of the value of its total assets (not including cash) in
convertible securities, which can be converted into or which carry warrants to
purchase common stock or other equity interests, and Preferred and common
stocks. The Fund may from time to time purchase these securities on a
when-issued basis; the value of such income-producing securities may decline or
increase prior to settlement date.
- --------------------------------------------------------------------------------
Index 500 Fund
The Fund seeks to replicate the return of the S&P 500 Index, which is
comprised of approximately 500 securities selected by Standard & Poor's (most of
which are common stocks listed on the New York Stock Exchange). The Fund will
normally invest in all of the stocks and other securities which comprise the S&P
500 Index. The Fund's policy is to be substantially invested in common stocks
included in the S&P 500 Index, and it is expected that cash reserves items held
to accommodate shareholder transactions would be hedged with S&P 500 Index
futures. Over time, the correlation between the performance of the Fund and the
S&P 500 Index is expected to be over 0.95. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of the
Fund, including the value of its dividends and capital gains distributions,
increasing or decreasing in exact proportion to changes in the S&P 500 Index.
- --------------------------------------------------------------------------------
Mid Cap Growth Fund
The Fund will invest at least 65% of the value of its total assets in a
diversified portfolio of equity securities of U.S. issuers that have market
capitalizations between $1 billion and $10 billion at the time of purchase that
the Sub-Adviser believes to have strong earnings growth potential. Any remaining
assets may be invested in securities issued by smaller capitalization companies
and larger capitalization companies, warrants and rights to purchase common
stocks, ADRs and foreign securities. The Fund seeks to purchase securities that
are well diversified across economic sectors and to maintain sector
concentrations that approximate the economic sector weightings comprising the
Russell Midcap Growth Index (or such other appropriate index selected by the
Sub-Adviser). In addition, the Fund may increase its reserves for temporary
defensive purposes or to enable it to take advantage of buying opportunities.
The Fund's reserves will be invested in money market instruments, such as U.S.
Government obligations, certificates of deposit, bankers' acceptances,
commercial paper, and short-term corporate
2
<PAGE>
debt securities or shares of investment companies that invest in such
instruments. The Fund may invest in derivatives including covered call options
and purchase put options on its portfolio securities, purchase call or put
options on securities indices and invest in stock index futures contracts (and
options thereon) for hedging purposes. As a matter of fundamental policy, the
Fund will not purchase the securities of any company if, as a result, more than
25% of its total assets would be concentrated in any one industry.
- --------------------------------------------------------------------------------
Mid Cap Value Fund
The Fund will invest at least 65% of the value of its assets in equity
securities of U.S. issuers that have medium capitalizations. Any remaining
assets may be invested in securities issued by smaller capitalization companies
and larger capitalization companies, warrants and rights to purchase common
stocks, foreign securities and ADRs. The Fund will invest primarily in a
diversified portfolio of common stocks of issuers that have market
capitalizations between $1 billion and $8 billion that the Sub-Adviser believes
to be undervalued relative to the stock market. The Adviser selects securities
that are undervalued in the marketplace either in relation to strong
fundamentals, such as a low price-to-earnings ratio, consistent with cash flow,
and successful track records through all parts of the market cycles. In
addition, the Fund may increase its reserves for temporary defensive purposes or
to enable it to take advantage of buying opportunities. The Fund's reserves will
be invested in money market instruments, such as U.S. Government obligations,
certificates of deposit, bankers' acceptances, commercial paper, and short-term
corporate debt securities or shares of investment companies that invest in such
instruments. The Fund may invest in derivatives including covered call options
and purchase put options on its portfolio securities, purchase call or put
options on securities indices and invest in stock index futures contracts (and
options thereon) for hedging purposes. As a matter of fundamental policy, the
Fund will not purchase the securities of any company if, as a result, more than
25% of its total assets would be concentrated in any one industry.
- --------------------------------------------------------------------------------
SECURITIES AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
Investments in Debt Securities
Debt securities in which one or more of the Funds may invest in include
those described below.
U.S. Government Obligations. The Funds may invest in bills, notes, bonds,
and other debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the length of their
maturities.
U.S. Government Agency Securities. The Funds may invest in debt securities
issued or guaranteed by U.S. Government sponsored enterprises, federal agencies,
and international institutions. These include securities issued by the Federal
National Mortgage Association, Government National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration, Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank, Farm
Credit Banks, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury, and the
remainder are supported only by the credit of the instrumentality.
Investment Grade Corporate Debt Securities. The Limited Maturity Bond Fund
will invest principally in corporate debt securities of various maturities that
are considered investment grade securities by at least one of the established
rating services (e.g., AAA, AA, A, or BBB by Standard & Poor's) or, if not
rated, are of equivalent quality as determined by the Fund's investment adviser,
Independence Capital Management, Inc. ("ICMI").
Bank Obligations. The Funds may invest in certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates of deposit are
short-term obligations of commercial banks. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with
international commercial transactions.
No Fund will invest in any security issued by a commercial bank unless: (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank by any
one Fund is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of a U.S. Bank, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign
3
<PAGE>
banks, the security is, in the opinion of the Fund's investment adviser, of an
investment quality comparable with other debt securities which may be purchased
by the Fund. These limitations do not prohibit investments in securities issued
by foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
Commercial Paper. The Funds may invest in short-term promissory notes
issued by corporations primarily to finance short-term credit needs.
Canadian Government Securities. The Funds may invest in debt securities
issued or guaranteed by the Government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof. However, the Money Market Fund
will only purchase these securities if they are marketable and payable in U.S.
dollars. The Money Market Fund will not purchase any such security if, as a
result, more than 10% of the value of its total assets would be invested in such
securities.
Savings and Loan Obligations. The Limited Maturity Bond Fund may invest in
negotiable certificates of deposit and other debt obligations of savings and
loan associations. It will not invest in any security issued by a savings and
loan association unless: (i) the savings and loan association has total assets
of at least $1 billion, or, in the case of savings and loan associations which
do not have total assets of at least $1 billion, the aggregate investment made
in any one savings and loan association is limited to $100,000 and the principal
amount of such investment is insured in full by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation; (ii) the savings
and loan association issuing the security is a member of the Federal Home Loan
Bank System; and (iii) the security is insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation.
The Fund will not purchase any security of a small bank or savings and loan
association which is not readily marketable if, as a result, more than 10% of
the value of its total assets would be invested in such securities, other
illiquid securities, and securities without readily available market quotations,
such as restricted securities and repurchase agreements maturing in more than
seven days.
Municipal Obligations. The Limited Maturity Bond Fund may invest in
Municipal Obligations that meet the Fund's quality standards. The two principal
classifications of Municipal Obligations are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Revenue securities include private activity
bonds which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal Obligations may include variable and floating rate instruments.
If such instruments are unrated, they will be determined by the adviser to be of
comparable quality at the time of the purchase to rated instruments purchasable
by a Fund.
To the extent a Fund's assets are to a significant extent invested in
Municipal Obligations that are payable from the revenues of similar projects,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects to a greater extent than it would
be if its assets were not so invested.
Foreign Debt Securities. Subject to the Fund's quality and maturity
standards, the Limited Maturity Bond Fund may invest without limitation in the
debt securities (payable in U.S. dollars) of foreign issuers in developed
countries and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars).
For information on risks involved in investing in foreign securities, see
information on "Investments in Foreign Equity Securities" below.
4
<PAGE>
Prime Money Market Securities Defined. Prime money market securities
include: U.S. Government obligations; U.S. Government agency securities; bank or
savings and loan association obligations issued by banks or savings and loan
associations whose debt securities or parent holding companies' debt securities
or affiliates' debt securities guaranteed by the parent holding company are
rated AAA or A-1 or better by Standard & Poor's, AAA or Prime-1 by Moody's, or
AAA by Fitch; commercial paper rated A-1 or better by Standard & Poor's, Prime-1
by Moody's, or, if not rated, issued by a corporation having an outstanding debt
issue rated AAA by Standard & Poor's, Moody's, or Fitch; short-term corporate
debt securities rated AAA by Standard & Poor's, Moody's, or Fitch; Canadian
Government securities issued by entities whose debt securities are rated AAA by
Standard & Poor's, Moody's, or Fitch; and repurchase agreements where the
underlying security qualifies as a prime money market security as defined above.
Collateralized Mortgage Obligations. The Limited Maturity Bond Fund may
invest in collateralized mortgage obligations ("CMS"). CMS are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMS on the same schedule as they are received, although certain
classes of CMS have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMS in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. CMS may also be less
marketable than other securities.
Asset-Backed Securities. The Limited Maturity Bond Fund may invest a
portion of their assets in debt obligations known as "asset-backed securities."
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or any
other affiliated entities, and the amount and quality of any credit support
provided to the securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-backed securities may be classified as
"pass through certificates" or "collateralized obligations."
"Pass through certificates" are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets. Pass
through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are pledged
to a trustee or custodian for the benefit of the holders thereof. Such issuers
generally hold no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event of defaults
on the underlying assets not covered by any credit support, the issuing entities
are unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
Convertible Securities. The Funds may invest in debt securities or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertible securities have developed which combine higher or
lower current income with options and other features.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless be
required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce the
amount of cash available for investment by the Fund.
5
<PAGE>
- --------------------------------------------------------------------------------
Investments in Foreign Equity Securities
The Growth and Income, Mid Cap Growth and Mid Cap Value Funds may invest in
the equity securities of foreign issuers, subject to the following limitations
based upon the total assets of each Fund: Growth and Income - 30%, Mid Cap
Growth Fund -25%; and Mid Cap Value Fund -25%. Because these Funds may invest in
foreign securities, selection of these Funds involves risks that are different
in some respects from an investment in a fund which invests only in securities
of U.S. domestic issuers. Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange control regulations. There
may be less publicly available information about a foreign company than about a
U.S. company, and foreign companies may not be subject to accounting, auditing,
and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Investments in foreign securities may also be subject to other risks different
from those affecting U.S. investments, including local political or economic
developments, expropriation or nationalization of assets, imposition of
withholding taxes on dividend or interest payments, and currency blockage (which
would prevent cash from being brought back to the United States).
- --------------------------------------------------------------------------------
Foreign Currency Transactions
As a means of reducing the risks associated with investing in
securities denominated in foreign currencies, a Fund may purchase or sell
foreign currency on a forward basis ("forward contracts"), enter into foreign
currency futures and options on futures contracts ("forex futures") and foreign
currency options ("forex options"). These investment techniques are designed
primarily to hedge against anticipated future changes in currency prices that
otherwise might adversely affect the value of the Fund's investments.
Forward contracts involve an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
Forex futures are standardized contracts for the future delivery of a
specified amount of a foreign currency at a future date at a price set at the
time of the contract. Forex futures traded in the United States are traded on
regulated futures exchanges. A Fund will incur brokerage fees when it purchases
or sells forex futures and it will be required to maintain margin deposits.
Parties to a forex future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the contract
price. There also are requirements to make "variation" margin deposits as the
value of the futures contract fluctuates. Forex futures and forex options will
be used only to hedge against anticipated future changes in exchange rates that
might otherwise adversely affect the value of the Fund's securities or adversely
affect the prices of the securities the Fund intends to purchase at a later
date.
The Funds may enter into forward foreign contracts only under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received. Second, when the adviser or sub-adviser to
one of these Funds believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
the foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The International Equity Fund may enter into a
forward contract to buy or sell foreign currency (or another currency which acts
as a proxy for that currency) approximating the value of some or all of the
Fund's portfolio securities denominated in such currency. The Growth & Income
Fund, Mid Cap Growth Fund, Mid Cap Value Funds do not intend to enter into such
forward contracts under this second circumstance on a regular or continuous
basis, and will not do so if, as a result, the Fund will have more than 15% of
the value of its total assets committed to the consummation of such contracts.
The Funds will also
6
<PAGE>
not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate them to deliver
an amount of foreign currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. A Fund's custodian bank will place cash or
liquid equity or debt securities in a separate account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
forward foreign currency exchange contracts entered into under the second
circumstance, as set forth above. If the value of the securities placed in the
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent that the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
It also should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which one can achieve at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result from the value of such
currency increase.
Although the Growth and Income, Mid Cap Growth and Mid Cap Equity Funds
value their assets daily in terms of U.S. dollars, they do not intend to convert
their holdings of foreign currencies into U.S. dollars on a daily basis. They
will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
- --------------------------------------------------------------------------------
Repurchase Agreements
Each Fund, may enter into repurchase agreements through which an investor
(such as a Fund) purchases a security (known as the "underlying security") from
a well-established securities dealer or a bank that is a member of the Federal
Reserve System. Concurrently, the bank or securities dealer agrees to repurchase
the underlying security at a future point at the same price, plus specified
interest. Repurchase agreements are generally for a short period of time, often
less than a week. A Fund will not enter into a repurchase agreement with a
maturity of more than seven business days if, as a result, more than 10% of the
value of its total assets would then be invested in such repurchase agreements.
The Limited Maturity Bond Fund will only enter into a repurchase agreement where
the underlying securities are (excluding maturity limitations) rated within the
four highest credit categories assigned by established rating services (AAA, Aa,
A, or Baa by Moody's or AAA, AA, A, or BBB by Standard & Poor's), or, if not
rated, of equivalent investment quality as determined by the investment adviser.
The underlying security must be rated
7
<PAGE>
within the top three credit categories, or, if not rated, must be of equivalent
investment quality as determined by the investment adviser or sub-adviser. In
addition, each Fund will only enter into a repurchase agreement where (i) the
market value of the underlying security, including interest accrued, will be at
all times equal to or exceed the value of the repurchase agreement, and (ii)
payment for the underlying security is made only upon physical delivery or
evidence of book-entry transfer to the account of the custodian or a bank acting
as agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline in the value of
the underlying security during the period while a Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
- --------------------------------------------------------------------------------
Lending of Portfolio Securities
For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. This policy is a fundamental policy for all the Funds. Securities loans
are made to unaffiliated broker-dealers or institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent. The collateral
received will consist of government securities, letters of credit or such other
collateral as may be permitted under its investment program and by regulatory
agencies and approved by the Board of Directors. While the securities are being
lent, the Fund will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has a right
to call each loan and obtain the securities on five business days' notice. No
Fund will have the right to vote securities while they are being lent, but it
will call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by the adviser to be of
good standing and will not be made unless, in the judgment of the adviser, the
consideration to be earned from such loans would justify the risk.
- --------------------------------------------------------------------------------
Illiquid Securities
Illiquid securities generally are those which may not be sold in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued them.
The Funds may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser or sub-adviser,
acting under guidelines approved and monitored by the Board of Directors, that
an adequate trading market exists for that security. In making that
determination, the adviser or sub-adviser will consider, among other relevant
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades. A
Fund's treatment of Rule 144A securities as liquid could have the effect of
increasing the level of fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. The adviser or sub-adviser will continue to monitor the liquidity of
any Rule 144A security which has been determined to be liquid. If a security is
no longer liquid because of changed conditions, the holdings of illiquid
securities will be reviewed to determine if any steps are required to assure
compliance with applicable limitations on investments in illiquid securities.
- --------------------------------------------------------------------------------
Warrants
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds may, consistent with their investment objectives and
policies invest an unlimited amount in warrants. Warrants basically are options
to purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right to
buy them. They have no voting rights, pay no dividends and have no rights with
respect to the assets of the corporation issuing them. Warrants differ from call
options in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices of
the underlying securities.
8
<PAGE>
- --------------------------------------------------------------------------------
When-Issued Securities
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds, may from time to time purchase securities on a
"when-issued" basis. The price of such securities, which may be expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase. During
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund purchasing the when-issued
security. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the settlement date, the Funds
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the
particular Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The advisers do not believe that the net asset
value or income of the Funds will be adversely affected by the respective Fund's
purchase of securities on a when-issued basis. The Funds will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
- --------------------------------------------------------------------------------
Options
Each Fund may write covered call and buy put options on its portfolio
securities and purchase call or put options on securities indices. The aggregate
market value of the portfolio securities covering call or put options will not
exceed 25% of a Fund's total assets. Such options may be exchange-traded or
dealer options. An option gives the owner the right to buy or sell securities at
a predetermined exercise price for a given period of time. Although options will
primarily be used to minimize principal fluctuations, or to generate additional
premium income for the Funds, they do involve certain risks. Writing covered
call options involves the risk of not being able to effect closing transactions
at a favorable price or participate in the appreciation of the underlying
securities or index above the exercise price.
A Fund will write call options only if they are "covered." This means that
a Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, more risky
than an investment in the underlying securities themselves.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
9
<PAGE>
- --------------------------------------------------------------------------------
Futures Contracts
Each Fund may invest in futures contracts and options thereon (interest
rate futures contracts, currency futures or stock index futures contracts, as
applicable). Each Fund will limit its use of futures contracts so that: (i) no
more than 5% of the Fund's total assets will be committed to initial margin
deposits or premiums on options and (ii) immediately after entering into such
contracts, no more than 30% of the Fund's total assets would be represented by
such contracts. Such futures contracts would not be entered into for speculative
purposes, but to hedge risks associated with the Fund's securities investments
or to provide an efficient means of regulating its exposure to the market. To
enter into a futures contract, a Fund must make a deposit of initial margin with
its custodian in a segregated account in the name of its futures broker. Initial
margin on futures contracts is in the nature of a performance bond or good faith
deposit. Subsequent payments to or from the broker, called variation margin,
will be made on a daily basis as the price of the underlying index or instrument
fluctuates, making the long and short positions in the futures contracts more or
less valuable.
Successful use of futures by a Fund is subject, first, to the investment
adviser's or sub-adviser's ability to correctly predict movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit of the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions.
Even if the investment adviser or sub-adviser has correctly predicted
market movements, the success of a futures position may be affected by imperfect
correlations between the price movements of the futures contract and the
securities being hedged. A Fund may purchase or sell futures contracts on any
stock index or interest rate index or instrument whose movements will, in the
investment adviser's or sub-adviser's judgment, have a significant correlation
with movements in the prices of all or portions of the Fund's portfolio
securities. The correlation between price movements in the futures contract and
in the portfolio securities probably will not be perfect, however, and may be
affected by differences in historical volatility or temporary price distortions
in the futures markets. To attempt to compensate for such differences, the Fund
could purchase or sell futures contracts with a greater or lesser value than the
securities it wished to hedge or purchase. Despite such efforts, the correlation
between price movements in the futures contract and the portfolio securities may
be worse than anticipated, which could cause the Fund to suffer losses even if
the investment adviser had correctly predicted the general movement of the
market.
A Fund which engages in the purchase or sale of futures contracts may also
incur risks arising from illiquid markets. The ability of a Fund to close out a
futures position depends on the availability of a liquid market in the futures
contract, and such a market may not exist for a variety of reasons, including
daily limits on price movements in futures markets. In the event a Fund is
unable to close out a futures position because of illiquid markets, it would be
required to continue to make daily variation margin payments, and could suffer
losses due to market changes in the period before the futures position could be
closed out.
The trading of futures contracts is also subject to the risks of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Options on futures contracts are subject to risks similar to those
described above, and also to a risk of loss due to an imperfect correlation
between the option and the underlying futures contract.
- --------------------------------------------------------------------------------
Investment Companies
Each Fund may invest in securities issued by other investment companies
which invest in short-term, high quality debt securities and which determine
their net asset value per share based on the amortized cost or penny-rounding
method of valuation. Securities of investment companies will be acquired by a
Fund within the limits prescribed by the 1940 Act. In addition to the advisory
fees and other expenses a Fund bears directly in connection with its own
operations, as a shareholder of another investment company, a Fund would bear
its pro rata portion of the other investment company's advisory fees and other
expenses.
10
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
Except as otherwise specified, the investment restrictions described
below have been adopted as fundamental policies of the fourteen respective
Funds. Fundamental policies may not be changed without the approval of the
lesser of: (1) 67% of a Fund's shares present at a meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy; or
(2) more than 50% of the Fund's outstanding shares. Operating policies are
subject to change by Penn Series' Board of Directors without shareholder
approval. Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
of securities or assets of, or borrows by, a Fund.
- --------------------------------------------------------------------------------
Limited Maturity Bond Fund
Investment restrictions (1) through (9) have been adopted by the
Limited Maturity Bond Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase the securities of any issuer if twenty-five percent or
more of the value of the Fund's total assets would be invested in the securities
of issuers having their principal activities in the same industry; provided,
however, that (i) there are no limitations on the amount that may be invested in
the securities of the U.S. Government and instrumentalities; (ii) the Fund may
invest in the securities of open-end management investment companies to the
extent permitted by applicable law; (iii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (iv) financial services
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (v) asset backed securities will be
classified according to the underlying assets securing such securities; (3) Real
Estate. Purchase or sell real estate although it may purchase or sell securities
of companies whose business involves the purchase or sale of real estate and may
purchase and sell securities that are secured by interests in real estate; (4)
Investment Companies. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) Commodities. Purchase or sell commodities
or commodity contracts, unless acquired as a result of ownership of securities
or other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options thereon or from investing in
securities or other instruments backed by the physical commodities); (6)
Borrowing. Borrow money except to the extent permitted by the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended from time to time; (7) Underwriting. Act as
an underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
describe in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
- --------------------------------------------------------------------------------
Growth and Income Fund
Investment restrictions (1) through (9) have been adopted by the Growth
and Income Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase the securities of any issuer if twenty-five percent or
more of the value of the Fund's total assets would be invested in the securities
of issuers having their principal activities in the same industry; provided,
however, that (i) there are no limitations on the amount that may be invested in
the
11
<PAGE>
securities of the U.S. Government and instrumentalities; (ii) the Fund may
invest in the securities of open-end management investment companies to the
extent permitted by applicable law; (iii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (iv) financial services
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (v) asset backed securities will be
classified according to the underlying assets securing such securities; (3) Real
Estate. Purchase or sell real estate although it may purchase or sell securities
of companies whose business involves the purchase or sale of real estate and may
purchase and sell securities that are secured by interests in real estate; (4)
Investment Companies. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) Commodities. Purchase or sell commodities
or commodity contracts, unless acquired as a result of ownership of securities
or other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options thereon or from investing in
securities or other instruments backed by the physical commodities); (6)
Borrowing. Borrow money except to the extent permitted by the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended from time to time; (7) Underwriting. Act as
an underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
describe in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
- --------------------------------------------------------------------------------
Index 500 Fund
Investment restrictions (1) through (9) have been adopted by the Index
500 Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase the securities of any issuer if twenty-five percent or
more of the value of the Fund's total assets would be invested in the securities
of issuers having their principal activities in the same industry; provided,
however, that (i) there are no limitations on the amount that may be invested in
the securities of the U.S. Government and instrumentalities; (ii) the Fund may
invest in the securities of open-end management investment companies to the
extent permitted by applicable law; (iii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (iv) financial services
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (v) asset backed securities will be
classified according to the underlying assets securing such securities; (3) Real
Estate. Purchase or sell real estate although it may purchase or sell securities
of companies whose business involves the purchase or sale of real estate and may
purchase and sell securities that are secured by interests in real estate; (4)
Investment Companies. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) Commodities. Purchase or sell commodities
or commodity contracts, unless acquired as a result of ownership of securities
or other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options thereon or from investing in
securities or other instruments backed by the physical commodities); (6)
Borrowing. Borrow money except to the extent permitted by the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended from time to time; (7) Underwriting. Act as
an underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
describe in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
12
<PAGE>
- --------------------------------------------------------------------------------
Mid Cap Growth Fund
Investment restrictions (1) through (9) have been adopted by the Mid
Cap Growth Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase the securities of any issuer if twenty-five percent or
more of the value of the Fund's total assets would be invested in the securities
of issuers having their principal activities in the same industry; provided,
however, that (i) there are no limitations on the amount that may be invested in
the securities of the U.S. Government and instrumentalities; (ii) the Fund may
invest in the securities of open-end management investment companies to the
extent permitted by applicable law; (iii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (iv) financial services
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (v) asset backed securities will be
classified according to the underlying assets securing such securities; (3) Real
Estate. Purchase or sell real estate although it may purchase or sell securities
of companies whose business involves the purchase or sale of real estate and may
purchase and sell securities that are secured by interests in real estate; (4)
Investment Companies. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) Commodities. Purchase or sell commodities
or commodity contracts, unless acquired as a result of ownership of securities
or other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options thereon or from investing in
securities or other instruments backed by the physical commodities); (6)
Borrowing. Borrow money except to the extent permitted by the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended from time to time; (7) Underwriting. Act as
an underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
describe in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
- --------------------------------------------------------------------------------
Mid Cap Value Fund
Investment restrictions (1) through (9) have been adopted by the Mid
Cap Value Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase the securities of any issuer if twenty-five percent or
more of the value of the Fund's total assets would be invested in the securities
of issuers having their principal activities in the same industry; provided,
however, that (i) there are no limitations on the amount that may be invested in
the securities of the U.S. Government and instrumentalities; (ii) the Fund may
invest in the securities of open-end management investment companies to the
extent permitted by applicable law; (iii) utility companies will be divided
according to their services, for example, gas, gas transmission, electric and
telephone will each be considered a separate industry; (iv) financial services
companies will be classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance will each be
considered a separate industry; and (v) asset backed securities will be
classified according to the underlying assets securing such securities; (3) Real
Estate. Purchase or sell real estate although it may purchase or sell securities
of companies whose business involves the purchase or sale of real estate and may
purchase and sell securities that are secured by interests in real estate; (4)
Investment Companies. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (5) Commodities. Purchase or sell commodities
or commodity contracts, unless acquired as a result of ownership of securities
or other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options
13
<PAGE>
thereon or from investing in securities or other instruments backed by the
physical commodities); (6) Borrowing. Borrow money except to the extent
permitted by the 1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended from time to
time; (7) Underwriting. Act as an underwriter of securities within the meaning
of the Federal securities laws, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities; (8) Senior Securities. Issue
senior securities (as defined in the 1940 Act) except in connection with
permitted borrowing as describe in (6) above or as permitted by rule, regulation
or order of the SEC. Restrictions on senior securities do not apply to certain
techniques (such as reverse repurchase agreements) entered into in compliance
with applicable laws and interpretations thereof; and (9) Lending. Make loans,
except that the Fund may purchase or hold debt instruments and may enter into
repurchase agreements and make loans of portfolio securities in accordance with
its investment objectives and policies.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Investment Advisory Services
Independence Capital Management, Inc. Independence Capital Management,
Inc. ("ICMI") serves as investment adviser to all of the Funds and performs
day-to-day investment management services for the Limited Maturity Bond and
Growth and Income Funds. See "INVESTMENT ADVISER" in the prospectus for
information regarding ICMI and investment advisory and management services
provided to the Funds by ICMI.
The Limited Maturity Bond and Growth and Income pay ICMI, on a monthly
basis, an advisory fee based on the average daily net assets of each Fund at the
following annual rates: Limited Maturity Bond Fund, 0.30%; Growth and Income
Fund 0.50%.
For providing investment advisory and management services to the Index
500, Mid Cap Growth and Mid Cap Value Funds, the Funds pay ICMI, on a monthly
basis, an advisory fee based on average daily net assets of each Fund, at the
following annual rates: Index 500, 0.07%, Mid Cap Growth, 0.70%; and Mid Cap
Value 0.55%.
Wells Capital Management Incorporated. Wells Capital Management
Incorporated ("Wells") serves as sub-adviser to the Index 500 Fund and performs
day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for more information regarding the investment
advisory services provided to the Fund. For providing sub-advisory services to
the Index 500 Fund, ICMI pays Wells, on a monthly basis, a sub-advisory fee
based on average daily net assets of the Fund, at an annual rate of 0.07% of the
first $100,000,000 of average daily net assets and 0.03% of average daily net
assets in excess of $100,000,000.
Turner Investment Partners, Inc. Turner Investment Partners, Inc.
("Turner") serves as sub-adviser to the Mid Cap Growth Fund and performs
day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for information regarding the investment
advisory services provided to the Fund. For providing sub-advisory services to
the Mid Cap Growth Fund, ICMI pays Turner, on a monthly basis, based on the
average daily net assets of the Fund, a sub-advisory fee at an annual rate of
0.50% with respect to the first $100,000,000 of average daily net assets.
Neuberger Berman Management, Inc. Neuberger Berman Management, Inc.
("Neuberger Berman") serves as sub-adviser to the Mid Cap Value Fund and
performs day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for more information regarding the investment
advisory services provided to the Fund. For providing sub-advisory service to
the Mid Cap Value Fund, ICMI pays Neuberger Berman, on a monthly basis, a
sub-advisory fee based on average daily net assets of the Fund, at an annual
rate of 0.43%.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth
and Mid Cap Value Funds were not active as of the date of this Statement of
Additional Information. Accordingly, no investment advisory or sub-advisory fees
were paid by these Funds during the fiscal years ended December 31, 1999, 1998
and 1997.
14
<PAGE>
- --------------------------------------------------------------------------------
Administrative and Corporate Services
Penn Mutual provides administrative and corporate services to Penn
Series and receives a fee from Penn Series for those services equal to the
annual rate of 0.15% of each Fund's average daily net assets. The administrative
and corporate services include: (a) maintenance of records pertaining to Penn
Series' affairs, except those that are required to be maintained by Penn Series'
investment adviser, accounting services agent, custodian, or transfer agent; (b)
preparation of certain filings, reports and proxy statements required by the
federal securities laws; (c) preparation of Penn Series' federal and state tax
returns and any other filings required for tax purposes other than those
required to be made by Penn Series' custodian, transfer agent, accounting
services agent, or investment adviser; (d) such services as Penn Series' Board
of Directors may require in connection with its oversight of Penn Series'
investment adviser, accounting services agent, custodian, or transfer agent,
including the periodic collection and presentation of data concerning the
investment performance of Penn Series' various investment portfolios; (e) the
organization of all meetings of Penn Series' Board of Directors; (f) the
organization of all meetings of Penn Series' shareholders; (g) the collection
and presentation of any financial or other data required by Penn Series' Board
of Directors, accountants, or counsel; and (h) the preparation and negotiation
of any amendments to, or substitutes for, the present agreements with Penn
Series' investment adviser, accounting services agent, custodian, or transfer
agent. Penn Mutual also bears certain expenses in connection with the services
it renders as administrative and corporate services agent, including all rent
and other expense involved in the provision of office space for Penn Series and
in connection with Penn Mutual's performance of its services as administrative
and corporate services agent.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth
and Mid Cap Value Funds were not active as of the date of this Statement of
Additional Information. Accordingly, no administration fees were paid by these
Funds during the fiscal years ended December 31, 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
Accounting Services
PFPC Inc. ("PFPC") serves as the accounting services agent to Penn Series.
PFPC provides certain accounting and related services to Penn Series, including:
(a) the maintenance for each Fund of a daily trial balance, general ledger,
subsidiary records, capital stock accounts (other than those maintained by the
transfer agent for Penn Series), investment ledger and all other books, accounts
and other documents which Penn Series is required to maintain and keep current
pursuant to Rule 31a-1(a) and (b) under the 1940 Act (other than those documents
listed in subparagraph (4) of Rule 31a-1(b)); (b) the daily valuation of the
securities held by, and the net asset value per share of, each Fund; (c) the
preparation of such financial information as may reasonably be necessary for
reports to shareholders, the Board of Directors and officers, the Securities and
Exchange Commission and other federal and state regulatory agencies; and (d) the
maintenance for each Fund of all records that may reasonably be required in
connection with the audits of such Fund. The fee for the accounting services is
based on a predetermined percentage of daily average net assets of each Fund.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds were not active as of the date of this Statement of
Additional Information. Accordingly, no accounting fees were paid by these Funds
during the fiscal years ended December 31, 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
Limitation on Fund Expenses
See "EXPENSES AND LIMITATIONS" in the prospectus for information on
limitations on expenses of the Funds.
- --------------------------------------------------------------------------------
Portfolio Transactions
Decisions with respect to the purchase and sale of portfolio securities on
behalf of each Fund that makes up Penn Series are made by the respective
investment adviser or sub-adviser of that Fund. Each Fund's adviser or
sub-adviser is responsible for implementing these decisions, including the
negotiation of commissions and the allocation of principal business and
portfolio brokerage. Most purchases and sales of portfolio debt securities are
transacted with the issuer or with a primary market maker acting as principal
for the securities on a net basis, with no brokerage commission being paid by a
Fund. Transactions placed through dealers serving as primary market makers
15
<PAGE>
reflect the spread between the bid and the asked prices. Occasionally, a Fund
may make purchases of underwritten debt issues at prices which include
underwriting fees.
In purchasing and selling portfolio securities, the policies of the
investment advisers and sub-adviser are to seek quality execution at the most
favorable prices through responsible broker-dealers and, in the case of agency
transactions, at competitive commission rates. In selecting broker-dealers to
execute a Fund's portfolio transactions, the investment advisers will consider
such factors as the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services they provide to the adviser, sub-adviser or
the Fund.
Any of the investment advisers or sub-advisers may effect principal
transactions on behalf of a Fund with a broker-dealer who furnishes brokerage
and/or research services, designate any such broker-dealer to receive selling
concessions, discounts or other allowances, or otherwise deal with any such
broker-dealer in connection with the acquisition of securities in underwritings.
Additionally, purchases and sales of fixed income securities may be transacted
with the issuer, the issuer's underwriter, or with a primary market maker acting
as principal or agent. A Fund does not usually pay brokerage commissions for
these purchases and sales, although the price of the securities generally
includes compensation which is not disclosed separately. The prices the Fund
pays to underwriters of newly-issued securities usually include a commission
paid by the issuer to the underwriter. Transactions placed through dealers who
are serving as primary market makers reflect the spread between the bid and
asked prices.
The investment advisers and sub-advisers may receive a wide range of
research services from broker-dealers, including information on securities
markets, the economy, individual companies, statistical information, accounting
and tax law interpretations, technical market action, pricing and appraisal
services, and credit analyses. Research services are received primarily in the
form of written reports, telephone contacts, personal meetings with security
analysts, corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-generated data.
Research services received from broker-dealers are supplemental to each
investment adviser's and sub-adviser's own research efforts and, when utilized,
are subject to internal analysis before being incorporated into the investment
process.
With regard to payment of brokerage commissions, the investment advisers
and sub-advisers have adopted brokerage allocation policies embodying the
concepts of Section 28(e) of the Securities Exchange Act of 1934, as amended,
which permit investment advisers to cause a fund or portfolio to pay a
commission in excess of the rate another broker or dealer would have charged for
the same transaction, if the adviser determines in good faith that the
commission paid is reasonable in relation to the value of the brokerage and
research services provided. The determination to pay commissions may be made in
terms of either the particular transaction involved or the overall
responsibilities of the adviser or sub-adviser with respect to the accounts over
which it exercises investment discretion. In some cases, research services are
generated by third parties, but are provided to the advisers by or through
brokers and dealers. The advisers and sub-advisers may receive research service
in connection with selling concessions and designations in fixed price offerings
in which the Fund participates.
In allocating to brokers purchase and sale orders for portfolio securities,
the investment advisers and sub-advisers may take into account the sale of Penn
Mutual variable annuity contracts and variable life insurance policies that
invest in those Funds. Before brokerage business may be allocated on the basis
of those sales, the investment adviser or sub-adviser must be satisfied that the
quality of the transaction and commission payable are comparable to what they
would have been had other qualified brokers been selected to execute the
transaction.
In allocating brokerage business the advisers and sub-advisers annually
assesses the contribution of the brokerage and research services provided by
broker-dealers, and allocate a portion of the brokerage business of their
clients on the basis of these assessments. The advisers and sub-advisers seek to
evaluate the brokerage and research services they receive from broker/dealers
and make judgements as to the level of business which would recognize such
services. In addition, broker-dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research services
they provide. Actual brokerage received by any firm may be less than the
suggested allocations, but can (and often does) exceed the suggestions because
total brokerage is allocated on the basis of all the considerations described
above. In no instance is a broker-dealer excluded from receiving business
because it has not been identified as providing research services. The advisers
and sub-advisers cannot readily determine the extent to which net prices or
commission rates charged by broker-dealers reflect the value of their research
services. However, commission rates are periodically reviewed to determine
whether they are reasonable in relation to the services provided. In some
instances, the advisers and sub-advisers receive research
16
<PAGE>
services they might otherwise have had to perform for themselves. The research
services provided by broker-dealers can be useful to the advisers and
sub-advisers in serving the Funds, as well as its other clients.
Some of the investment advisers' and sub-advisers' other clients have
investment objectives and programs similar to those of the Funds. An investment
adviser or sub-adviser may occasionally make recommendations to other clients
which result in their purchasing or selling securities simultaneously with a
Fund. As a result, the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an adverse effect on the
price of those securities. It is each of the investment adviser's and
sub-adviser's policy not to favor one client over another in making
recommendations or in placing orders. If two or more of an investment adviser's
or sub-adviser's clients are purchasing a given security at the same time from
the same broker-dealer, the investment adviser or sub-adviser will average the
price of the transactions and allocate the average among the clients
participating in the transaction. In addition, the advisers and sub-advisers in
general follow the policy that they will ordinarily not make additional
purchases of a common stock for its clients (including the Penn Series) if, as a
result of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds were not active as of the date of this Statement of
Additional Information. Accordingly, no brokerage fees were paid by these Funds
during the fiscal years ended December 31, 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
Directors and Officers
The affairs of Penn Series are managed under the direction of its Board of
Directors. The directors decide upon matters of general policy and review the
actions of Penn Series' investment advisers and sub-advisers and its
administrative and corporate services agent, as set forth below. The Penn
Series' officers conduct and supervise the daily business operations of Penn
Series.
The directors and principal officers of Penn Series, their business
addresses and principal occupations during the past five years are set forth in
the following table.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address Penn Series During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eugene Bay Director Senior Pastor, Bryn Mawr Presbyterian Church, Bryn Mawr, PA.
121 Fishers Road
Bryn Mawr, PA 19010
- ------------------------------------------------------------------------------------------------------------------------------------
James S. Greene Director Retired; Vice President and Director, International Raw Materials, Inc.,
P.O. Box 3761 Philadelphia, PA (commodities trading), prior to September 1990.
Vero Beach, FL 32964-3761
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Chappell* Director Chairman of the Board and Chief Executive Officer (since December 1996), President
600 Dresher Road and Chief Executive Officer (April 1995 - December 1996), President and Chief
Horsham, PA 19044 Operating Officer, prior thereto The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Larry L. Mast* Director Executive Vice President, The Penn Mutual Life Insurance Company May 1997 to present.
The Penn Mutual Life Formerly Senior Vice President, Lafayette Life Insurance Company September 1994 to May
Insurance Company 1997; prior thereto Vice President, Security Benefit Insurance Company May 1993 to
600 Dresher Road September 1994; Vice President, Home Life Insurance Company July 1990 to May 1993;
Horsham, PA 19044 Agency Manager, The Equitable Life Insurance Company August 1978 to July 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran* Director President and Chief Operating Officer, (January 1997 to present), Executive Vice
The Penn Mutual Life President, Sales and Marketing (May 1996 to January 1997), The Penn Mutual Life
Insurance Company Insurance Company; Executive Vice President, The New England Mutual Life
600 Dresher Road Insurance Company, (prior thereto).
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Loesche, Jr. Director Retired; Adviser (since April 1988); Director (prior thereto), Keystone Insurance
100 Gray's Lane Company and Keystone Automobile Club, Philadelphia, PA.
Apt. 101
Haverford, PA 19041
- ------------------------------------------------------------------------------------------------------------------------------------
M. Donald Wright Director President, M. Donald Wright Professional Corporation, Bryn Mawr, PA (financial
100 Chetwynd Drive planning and consulting); Director, Graduate School of Financial Services, The
Rosemont, PA 19010 American College, since April 1991.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Peter M. Sherman President Chairman and President of Independence Capital Management Inc.; Executive Vice
600 Dresher Road President and Chief Investment Officer of the Penn Mutual Life Insurance Company
Horsham, PA 19044 since 1998; Senior Vice President and Chief Investment Officer of Penn Mutual from
1996. Head of Fixed Income Investments from 1995 to 1996.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard F. Plush Vice President Vice President and Senior Actuary, The Penn Mutual Life Insurance Company (1973 to
600 Dresher Road present).
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius LLP, Philadelphia, PA (since January 1996);
1701 Market Street Associate General Counsel, The Penn Mutual Life Insurance Company, (prior
Philadelphia, PA 19103 thereto).
- ------------------------------------------------------------------------------------------------------------------------------------
Steven M. Herzberg Treasurer Assistant Vice President and Treasurer, The Penn Mutual Life Insurance Company
600 Dresher Road (December 1997 to present); Director of Financial Planning and Treasurer (November
Horsham, PA 19044 1995 to December 1997): Director, Cost and Budget (November 1991 to November
1995); Director, Benefits Administration, (prior thereto).
- ------------------------------------------------------------------------------------------------------------------------------------
Ann M. Strootman Controller Vice President and Controller (since January 1996), Assistant Vice President,
600 Dresher Road Financial and Management Accounting (since 1994), Director of Financial Accounting
Horsham, PA 19044 (prior thereto), The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Director is an "interested person" of Penn Series, as defined in the
Investment Company Act of 1940, as amended.
Directors and officers of Penn Series who are employed by Penn Mutual will
not receive any special compensation for serving in such capacities. Penn Series
has made no provision for the payment of retirement or pension benefits to any
director or officer. In 1999, Penn Series paid directors' fees in the aggregate
amount of $____ to directors who are not "interested persons" of Penn Series.
The Board of Directors has an Executive Committee currently consisting of
Messrs. Chappell, Toran and Greene. Subject to limits under applicable law,
during intervals between meetings of the Board, the Committee may exercise the
powers of the Board.
- --------------------------------------------------------------------------------
Custodial Services
PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107 is custodian of
the assets of the Funds of Penn Series. The custodial services performed by PNC
Bank are those customarily performed for registered investment companies by
qualified financial institutions. Penn Series has authorized the Bank to deposit
certain portfolio securities in a central depository system as allowed by
federal law.
- --------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP serves as the independent auditors of Penn Series Funds,
Inc. Their offices are located at 2001 Market Street, Suite 4000, Philadelphia,
PA 19103. Ernst & Young LLP is also the independent auditors of The Penn Mutual
Life Insurance Company.
- --------------------------------------------------------------------------------
Legal Matters
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relative to the federal securities laws and the
offering of shares of Penn Series Funds, Inc.
- --------------------------------------------------------------------------------
Net Asset Value of Shares
The following information supplements the information on net asset value of
shares set forth in "Account Policies" in the Prospectus.
The purchase and redemption price of each Fund's shares is equal to that
Fund's net asset value per share. Each Fund determines its net asset value per
share by subtracting the Fund's liabilities (including accrued expenses and
dividends payable) from its total assets (the market value of the securities the
Fund holds plus cash and other assets, including income accrued but not yet
received) and dividing the result by the total number of shares outstanding. The
net asset value per share of each Fund is calculated every day the New York
Stock Exchange ("Exchange") is open for trading. The Exchange is closed when the
following holidays are observed: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Presidential Election Day, Thanksgiving Day, and Christmas Day.
18
<PAGE>
Debt securities held in the Funds may be valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Use of the pricing service may be determined without
exclusive reliance on quoted prices and may take into account appropriate
factors such as institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data.
- --------------------------------------------------------------------------------
Ownership of Shares
The outstanding shares of each of the Funds of Penn Series are owned by The
Penn Mutual Life Insurance Company ("Penn Mutual") and its subsidiary, The Penn
Insurance and Annuity Company ("PIA") and are held in their Separate Accounts
pursuant to variable annuity contracts and variable life insurance policies.
On January 31, 2000, the outstanding shares of Penn Series were owned as
follows:*
<TABLE>
<CAPTION>
Money Quality Flexibly Growth Large Cap Emerging Small
Market Bond High Yield Managed Equity Value Growth Cap Value International
Fund Fund Bond Fund Fund Fund Fund Fund Fund Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in Separate
Accounts Pursuant to
Variable Annuity Contracts 81.0% 73.1% 69.3% 71.1% 52.5% 67.9% 69.2% 54.4% 50.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by PIA and
Held in a Separate Account
Pursuant to Variable Annuity
Contracts 8.7% 13.5% 14.6% 16.7% 11.5% 17.1% 17.4% 22.0% 19.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in a Separate
Account Pursuant to Variable
Life Insurance Contracts 10.3% 13.4% 16.1% 12.2% 31.0% 15.0% 13.4% 23.1% 30.4%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unaudited.
- --------------------------------------------------------------------------------
Tax Status
The following is only a summary of certain federal tax considerations
generally affecting the Funds and their shareholders that are not described in
the Funds' prospectus. No attempt is made to present a detailed explanation of
the tax treatment of Funds or their shareholders and the discussion here and in
the Funds' prospectus is not intended as a substitute for careful tax planning.
Shareholders are urged to consult their tax advisers with specific reference to
their own tax situations, including their state and local tax liabilities.
The following general discussion of certain Federal income tax consequences
is based on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, certain administrative changes, or
court decisions may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
It is the policy of each of the Funds to continue to qualify for the
favorable tax treatment accorded regulated investment companies under Subchapter
M of the Code. By following such policy, each of the Funds expect to be relieved
of the Federal income taxes on net investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to shareholders.
In order to continue to qualify as a regulated investment company each Fund
must, among other things, (1) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in stock,
securities or currencies; and (2) diversify its holdings so that at the end of
each quarter of each taxable year (i) at least 50% of the market value of the
Fund's total assets is represented by cash or cash items, U.S. Government
19
<PAGE>
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to a value not greater than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities or securities of any other regulated investment company) or of two or
more issuers that the Fund controls and that are engaged in the same, similar,
or related trades or businesses. These requirements may restrict the degree to
which the Funds may engage in short-term trading and in certain hedging
transactions and may limit the range of the Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to Federal
income tax on the part of it's net investment income and net realized capital
gains, if any, which it distributes each year to the shareholders, provided the
Fund distributes at least (a) 90% of its "investment company taxable income"
(generally, net investment income plus the excess, if any, of net short-term
capital gain over net long-term capital losses) and (b) 90% of its net exempt
interest income (the excess of (i) its tax-exempt interest income over (ii)
certain deductions attributable to that income).
If for any taxable year, a Fund does not qualify as a regulated investment
company under Subchapter M of the Code, all of its taxable income will be
subject to tax at regular corporate tax rates without any deduction for
distributions to shareholders and all such distributions will be taxable to
shareholders as ordinary dividends to the extent of the fund's current or
accumulated earnings and profits. Such distributions will generally qualify for
the corporate dividends received deduction for corporate shareholders.
If a Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its net realized gains (the excess of
short and long term capital gain over short and long term capital losses) for
the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Fund will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax.
Distributions declared in October, November, or December to shareholders of
record during those months and paid during the following January are treated as
if they were received by each shareholder on December 31 of the prior year for
tax purposes.
A Fund's transactions in certain futures contracts, options, forward
contracts, foreign currencies, foreign debt securities, and certain other
investment and hedging activities will be subject to special tax rules. In a
given case, these rules may accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's assets, convert
short-term capital losses into long-term capital losses, or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing, and character of distributions to shareholders. Each Fund will endeavor
to make any available elections pertaining to such transactions in a manner
believed to be in the best interest of the Fund.
- --------------------------------------------------------------------------------
Voting Rights
Penn Series is an open end management investment company. Each Fund is
"diversified" as defined in the 1940 Act. The shares of the Funds have equal
voting rights, except that certain issues will be voted on separately by the
shareholders of each Fund. Penn Mutual and PIA own all the outstanding shares of
Penn Series, either in their separate accounts registered under the 1940 Act or
in their unregistered separate accounts or general accounts. Pursuant to the
1940 Act, however, Penn Mutual and PIA will vote the shares held in registered
separate accounts in accordance with voting instructions received from variable
contract owners or payees having the right to give such instructions. Fund
shares for which contract owners or payees are entitled to give voting
instructions, but as to which no voting instructions are received, and shares
owned by Penn Mutual and PIA in their general and unregistered separate
accounts, will be voted in proportion to the shares for which voting
instructions have been received. Under state insurance law and federal
regulations, there are certain circumstances under which Penn Mutual and PIA may
disregard such voting instructions. If voting instructions are ever so ignored,
contract owners will be advised of that action in the next semiannual report.
Penn Series currently does not intend to hold annual meetings of
shareholders unless required to do so under applicable law. The law provides
shareholders with the right under certain circumstances to call a meeting of
shareholders to consider removal of one or more directors. As required by law,
Penn Series will assist in variable contract owner and payee communication on
such matters.
20
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations used by the Fund are based
on the standardized methods of computing performance mandated by the Commission.
An explanation of those and other methods used by the Company to compute or
express performance follows.
- --------------------------------------------------------------------------------
Total Return
From time to time each Fund, may advertise total return. Total return
figures are based on historical earnings and are not intended to indicate future
performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Fund) that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes the
amount was completely redeemed at the end of each 1-, 5-, and 10-year period (or
over the life of the Fund) and the deduction of all applicable Company expenses
on an annual basis.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds were not active as of the date of this Statement of
Additional Information. Accordingly, no performance information has been
presented for these Funds.
- --------------------------------------------------------------------------------
RATINGS OF COMMERCIAL PAPER
- --------------------------------------------------------------------------------
Moody's Investor Services, Inc. Commercial paper ratings:
PRIME-1 Issues rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Board margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- --------------------------------------------------------------------------------
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
- --------------------------------------------------------------------------------
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
21
<PAGE>
- --------------------------------------------------------------------------------
Standard & Poor's Rating Group commercial paper ratings:
A-1 This is the highest category and indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
- --------------------------------------------------------------------------------
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories.
- --------------------------------------------------------------------------------
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
- --------------------------------------------------------------------------------
B Issues rated B are regarded as having significant speculative
characteristics for timely payment.
- --------------------------------------------------------------------------------
C This rating is assigned to short-term debt obligations that is
currently vulnerable to nonpayment.
- --------------------------------------------------------------------------------
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
D rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.
- --------------------------------------------------------------------------------
Fitch Investors Service, Inc.:
Fitch 1--Highest grade. Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment. Fitch 2--Very good
grade. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than the strongest issues.
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT SECURITIES
- --------------------------------------------------------------------------------
The quality of a bond is measured by credit risk--the continuing ability of
the issuer to meet interest and principal payments. Issuers who are believed to
be good credit risks receive high quality ratings, and those believed to be poor
credit risks receive low quality ratings. As a result of the greater credit risk
involved, medium and low quality bonds typically offer a higher yield than bonds
of high quality.
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc.
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
- --------------------------------------------------------------------------------
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the AAA group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in AAA
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than AAA securities.
22
<PAGE>
- --------------------------------------------------------------------------------
A Bonds which are rated A possess many favorable investment attributes
and are generally considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment some time in the future.
- --------------------------------------------------------------------------------
Baa Bonds which are rated Baa are considered medium-grade obligations
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
- --------------------------------------------------------------------------------
Ba Bonds which are rated Ba are judged to have the following speculative
elements: their future cannot be considered as well-assured; the
protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over
the future; and uncertainty of position characterizes bonds in this
class.
- --------------------------------------------------------------------------------
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of
time may be small.
- --------------------------------------------------------------------------------
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
- --------------------------------------------------------------------------------
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked short-comings.
- --------------------------------------------------------------------------------
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
- --------------------------------------------------------------------------------
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
the generic rating category.
- --------------------------------------------------------------------------------
Standard & Poor's Ratings Group
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
- --------------------------------------------------------------------------------
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only to a small degree.
- --------------------------------------------------------------------------------
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
- --------------------------------------------------------------------------------
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
- --------------------------------------------------------------------------------
Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major risk exposures to adverse conditions.
23
<PAGE>
The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing of
a bankruptcy petition of the taking of a similar action if payments on a
obligation are jeopardized.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF PENN SERIES
- --------------------------------------------------------------------------------
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and Mid
Cap Value Funds were not active as of the date of this Statement of Additional
Information. Accordingly, there are no financial Statements for the Funds.
24
