<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant toss.240.14a-11(c) orss.240.14a-12
Penn Series Funds, Inc.
-----------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: *
----------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------
5) Total fee paid:
----------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:________________________________________________
2) Form, Schedule or Registration Statement No.:__________________________
3) Filing Party:__________________________________________________________
4) Date Filed:____________________________________________________________
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172
Penn Mutual Variable Annuity Accounts I, II and III
Penn Mutual Variable Life Account I
---------------------
To Our Contract Owners, Policy Owners and Payees:
The enclosed Notice of Meeting of Shareholders of Penn Series Funds,
Inc. and Proxy Statement concern proposals to be voted on by the shareholders of
Penn Series Funds, Inc. at the Meeting of Shareholders scheduled to be held on
March 23, 2000.
Shares of Penn Series Funds, Inc. are held by The Penn Mutual Life
Insurance Company ("Penn Mutual") and its subsidiary, The Penn Insurance and
Annuity Company, in separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies.
Shares are held by Penn Mutual in Penn Mutual Variable Annuity Accounts
I, II and III and Penn Mutual Variable Life Account I pursuant to variable
annuity contracts and variable life policies. As owners or payees under the
contracts and policies, you are entitled to instruct Penn Mutual as to the
voting of shares held in the separate accounts.
The proposals to be voted on at the meeting are described in the
accompanying Notice of Meeting of Shareholders and Proxy Statement. We urge you
to read the Proxy Statement carefully, and then exercise your right to give
voting instructions. Penn Mutual will vote, in accordance with your
instructions, the number of Fund shares held in the applicable separate account
or subaccount which is related to your interest therein as of the close of
business on January 31, 2000.
Please complete, date and sign the enclosed voting instruction form and
return the form to us promptly in the enclosed postage paid envelope. In order
to be given effect, your voting instructions must be received not later than
March 21, 2000.
Sincerely,
Richard F. Plush
Vice President
February 28, 2000
<PAGE>
THE PENN INSURANCE AND ANNUITY COMPANY
PHILADELPHIA, PENNSYLVANIA 19172
PIA Variable Annuity Account I
---------------------
To Our Contract Owners and Payees:
The enclosed Notice of Special Meeting of Shareholders of Penn Series
Funds, Inc. and Proxy Statement concern proposals to be voted on by the
shareholders of Penn Series Funds, Inc. at the Meeting of Shareholders scheduled
to be held on March 23, 2000.
Shares of Penn Series Funds, Inc. are held by The Penn Insurance and
Annuity Company ("Penn Insurance") and its parent, The Penn Mutual Life
Insurance Company, in separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies.
Shares are held by Penn Insurance in PIA Variable Annuity Account I
pursuant to variable annuity contracts. As owners or payees under the contracts,
you are entitled to instruct Penn Insurance as to the voting of shares held in
the separate account.
The proposals to be voted on at the meeting are described in the
accompanying Notice of Special Meeting and Proxy Statement. We urge you to read
the Proxy Statement carefully, and then exercise your right to give voting
instructions. Penn Insurance will vote, in accordance with your instructions,
the number of Fund shares held in the applicable subaccount which is related to
your interest therein as of the close of business on January 31, 2000.
Please complete, date and sign the enclosed voting instruction form and
return the form to us promptly in the enclosed postage paid envelope. In order
to be given effect, your voting instructions must be received not later than
March 21, 2000.
Sincerely,
Richard F. Plush
Vice President
February 28, 2000
<PAGE>
PENN SERIES FUNDS, INC.
600 DRESHER ROAD
HORSHAM, PENNSYLVANIA 19044
--------------
NOTICE OF MEETING OF SHAREHOLDERS
March 23, 2000
--------------
A Meeting of Shareholders (the "Meeting") of Penn Series Funds, Inc.
(the "Company") will be held at the offices of The Penn Mutual Life Insurance
Company ("Penn Mutual") on Thursday, March 23, 2000, at 9:00 a.m. (Eastern
Time), in the Board Room, Third Floor, at 600 Dresher Road, Horsham,
Pennsylvania 19044.
At the Meeting, shareholders of Penn Series Funds, Inc.
("Shareholders") will be asked to vote on the following proposals.
1. To approve a proposal which would authorize Independence
Capital Management, Inc. ("ICMI"), subject to the supervision
and approval of the Board of Directors, to hire, terminate or
replace investment sub-advisers for each of the Company's
funds (each, a "Fund" and collectively, the "Funds") without
seeking Shareholder approval.
2. To approve a new investment advisory agreement between the
Company and ICMI.
3. To approve a new investment sub-advisory agreement between
ICMI and OpCap Advisors with respect to the Value Equity and
Small Capitalization Funds.
Shareholders of record at the close of business on January 31, 2000 are
entitled to notice of and to vote at this meeting or any adjournment thereof.
By Order of the Board of Directors
C. Ronald Rubley
Secretary
February 28, 2000
<PAGE>
PROXY STATEMENT
PENN SERIES FUNDS, INC.
600 DRESHER ROAD
HORSHAM, PENNSYLVANIA 19044
--------------
Meeting of Shareholders
To be Held on March 23, 2000
--------------
This proxy statement is furnished in connection with the solicitation
by the Board of Directors (the "Board") of the Penn Series Funds, Inc. (the
"Company") of voting instructions to be voted at a Meeting of Shareholders and
all adjournments thereof (the "Meeting"), to be held at the offices of The Penn
Mutual Life Insurance Company, Board Room, Third Floor, 600 Dresher Road,
Horsham, Pennsylvania on Thursday, March 23, 2000 at 9:00 a.m. (Eastern Time).
The approximate mailing date of this proxy statement and the accompanying voting
instruction form is February 28, 2000.
The purpose of the Meeting is to permit the shareholders of the Company
(the "Shareholders") to consider proposals which would (1) authorize
Independence Capital Management, Inc. ("ICMI"), subject to the supervision and
approval of the Board of Directors, to hire, terminate or replace investment
sub-advisers to each of the Company's funds (each, a "Fund" and collectively,
the "Funds") without Shareholder approval; (2) approve a new investment advisory
agreement between the Company and ICMI, with respect to each Fund; and (3)
approve a new investment sub-advisory agreement between ICMI and OpCap Advisors
("OpCap") with respect to the Value Equity and Small Capitalization Funds.
In Proposal 1, Shareholders are being asked to approve a "manager of
managers" structure for the Company in anticipation of an exemptive order (the
"Order") expected to be granted to the Company and ICMI by the Securities and
Exchange Commission (the "SEC"). If granted, the Order would permit ICMI,
subject to Board approval, to hire, terminate or replace sub-advisers without
Shareholder approval.
In Proposal 2, Shareholders are being asked to consider a new
investment advisory agreement between the Company and ICMI (the "New Advisory
Agreement"). The New Advisory Agreement is being proposed primarily for the
purpose of changing the investment advisory fees paid by the Company to ICMI
with respect to certain Funds. These changes in advisory fees are being proposed
so that the Funds' advisory fees better reflect the costs of managing the Funds
and properly compensate ICMI for services rendered. The new fees will also
enable ICMI, with respect to certain of the Funds, to pay increased fees to
sub-advisers for services when necessary and appropriate. The Company's
management believes that if these new fees are approved by Shareholders they
will more closely track the industry averages for variable product mutual funds
in each Fund's respective peer group.
In Proposal 3, Shareholders of the Value Equity and Small
Capitalization Funds are also being asked to consider a new investment
sub-advisory agreement between ICMI and OpCap with respect to each Fund. On
October 31, 1999, PIMCO Advisors, the indirect parent of OpCap, entered into an
Implementation and Merger Agreement with Allianz of America Inc. ("Allianz of
America"), pursuant to which Allianz of America would acquire PIMCO Advisors
Holding L.P. ("PAH") through a merger of a
<PAGE>
subsidiary of Allianz of America with and into PAH (the "Merger"). If the
transactions take place as planned, it will result in a change of control of
OpCap, the sub-adviser for Value Equity and Small Capitalization Funds and a
change in control of OpCap Advisors will be deemed an assignment and, therefore,
a termination of the current sub-advisory agreement between ICMI and OpCap (the
"Current Sub-Advisory Agreement").
Proposals 1 and 2 must be acted upon by all Shareholders of each Fund,
voting separately. Proposal 3 must be acted upon by the Shareholders of the
Value Equity and Small Capitalization Funds, voting separately.
The summary voting table below sets forth the action required by
Shareholders of the Company:
<TABLE>
<CAPTION>
Proposal Fund
<S> <C> <C>
No. 1 To approve a "manager of managers" structure. All Funds, voting separately
No. 2 To approve a new investment advisory agreement between the Company All Funds, voting separately
and ICMI.
No. 3 To approve a new sub-advisory agreement between ICMI and OpCap with Value Equity and
respect to the Value Equity and Small Capitalization Funds. Small Capitalization Funds,
voting separately
</TABLE>
FOR THOSE SHAREHOLDERS WHO WISH TO VOTE FOR OR AGAINST ALL OF THE PROPOSALS TO
WHICH HIS OR HER SHARES RELATE, THE ACCOMPANYING VOTING INSTRUCTION FORM MAY BE
COMPLETED BY CHECKING A SINGLE BOX. HOWEVER, THE VOTING INSTRUCTION FORM ALSO
SETS FORTH EACH APPLICABLE PROPOSAL, WHICH CAN BE VOTED ON SEPARATELY.
The Company will furnish, without charge, a copy of its most recent
Annual Report to Shareholders upon request. Requests should be directed to the
Company at The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172 or by calling 1-800-523-0650.
Each share is entitled to one vote on each matter to which such shares
are to be voted at the Meeting. Shares of the Company are sold only to The Penn
Mutual Life Insurance Company ("Penn Mutual") and its subsidiary, The Penn
Insurance and Annuity Company ("Penn Insurance"). Penn Mutual and Penn Insurance
hold shares of one or more of the Funds in one or more of the following separate
accounts: Penn Mutual Variable Annuity Account I, II, and III, Penn Mutual
Variable Life Account I, and PIA Variable Annuity Account I. The Funds are held
as investment vehicles for variable annuity contracts and variable life
insurance policies.
The record date for determining Shareholders entitled to vote at the
Meeting is January 31, 2000. The following table sets forth the net assets and
approximate number of shares issued and outstanding for each Fund of the Company
as of the close of business on January 31, 2000.
Fund Net Assets Shares Outstanding
- ---- ---------- ------------------
Growth Equity $212,385,418 7,992,529
Value Equity $267,365,616 14,837,159
Small Capitalization $ 43,843,775 3,564,534
Emerging Growth $198,428,251 4,753,911
Flexibly Managed $458,020,071 27,182,200
International Equity $206,262,815 9,159,094
2
<PAGE>
Fund Net Assets Shares Outstanding
- ---- ---------- ------------------
Quality Bond $54,413,261 5,518,586
High Yield Bond $68,314,047 7,915,880
Money Market $80,199,096 80,199,096
With respect to each Fund, a "vote of the majority of the outstanding
voting securities" is required, which is defined under the Investment Company
Act of 1940, as amended (the "1940 Act"), as the lesser of (i) 67% or more of
the voting shares of the Fund entitled to vote thereon present in person or by
proxy at the Meeting, if the holders of more than 50% of the outstanding voting
shares of the Fund entitled to vote thereon are present in person or represented
by proxy, or (ii) more than 50% of the outstanding voting securities of the Fund
entitled to vote thereon.
Shareholders of each Fund of the Company are entitled to vote
separately for Proposals 1 and 2. Shareholders of Value Equity and Small
Capitalization Funds are entitled to vote for Proposal 3. A Proposal shall be
approved with respect to a Fund if approved by the Shareholders of that Fund,
regardless of whether the Shareholders of any other Fund approve the Proposal.
Under current interpretation and administration of the 1940 Act, and
regulations thereunder, Penn Mutual and Penn Insurance are required to vote
their shares in accordance with instructions from their variable annuity
contract owners and variable life insurance policy owners. Instructions are
obtained by Penn Mutual and Penn Insurance by sending this proxy statement to
their contract owners and policy owners and soliciting instructions.
Shares held in registered separate accounts for which contract owners
and policy owners do not give instructions are voted for and against the
proposal in the same proportions as the shares voted pursuant to instructions.
In addition, any shares held by Penn Mutual or Penn Insurance in their general
accounts also will be voted for or against a proposal in the same proportion as
shares for which voting instructions have been received.
In the event that voting instructions are not received with respect to
50% or more of the shares held in the separate accounts, Penn Mutual and/or Penn
Insurance, at their discretion, may vote all Fund shares in such accounts for
one or more adjournments of the Meeting to permit further solicitation of
instructions.
Voting instructions given pursuant to this solicitation may be revoked
at any time prior to their exercise by filing with Penn Mutual or Penn
Insurance, as appropriate, a written notice of revocation prior to the Meeting,
by delivering a duly authorized voting instruction form bearing a later date, or
by attending the Meeting and voting in person.
PROPOSAL 1 : To approve a proposal which would authorize ICMI, subject to the
supervision and approval of the Board of Directors, to hire,
terminate or replace investment sub-advisers for each Fund
without Shareholder approval.
This Proposal would permit ICMI, subject to the supervision and
approval of the Board of Directors, to replace or appoint investment
sub-advisers for each Fund without obtaining approval of the relevant Fund's
Shareholders. This proposal is being submitted to the Shareholders of each Fund
for approval as required by the terms of an exemptive application filed with the
SEC and will not become
3
<PAGE>
effective with respect to any particular Fund unless and until (1) the SEC has
granted the relief requested in the exemptive application; and (2) this proposal
has been approved by a majority vote of such Fund's Shareholders.
Currently, ICMI makes the day-to-day investment decisions for the
Growth Equity, Quality Bond and Money Market Funds. ICMI employs sub-advisers
for the Value Equity, Small Capitalization, Emerging Growth, Flexibly Managed,
International Equity and High Yield Bond Funds ("Sub-Advised Funds"). Under the
supervision of ICMI and the general oversight of the Board, the sub-advisers are
responsible for the day-to-day management of the Sub-Advised Funds.
It is currently anticipated that the Growth Equity, Quality Bond and
Money Market Funds will remain directly managed by ICMI. However, ICMI may in
the future employ sub-advisers to manage the assets of those Funds. Approval of
the Proposal would permit ICMI, subject to the approval of the Board, to appoint
initial sub-advisers.
With respect to each Sub-Advised Fund, ICMI is responsible for
analyzing economic and market trends; formulating and continuing assessment of
investment policies and recommending changes to the Board where appropriate;
supervising compliance by sub-advisers with the Funds' investment objectives,
policies and limits, as well as with laws and regulations applicable to the
Fund; evaluation of the performance of the sub-advisers in light of selected
benchmarks and the needs of the Funds; evaluation of potential additional or
replacement sub-advisers and recommending changes to the Board where
appropriate; and reporting to the Board of Directors and shareholders on the
foregoing. The sub-advisers in turn are responsible for continuously
administering the particular Fund's investment program with respect to the
Fund's assets.
It is anticipated that implementation of this Proposal will enable the
Company to achieve a higher degree of management efficiency and will reduce the
need for costly Shareholder meetings in the future. If Shareholders approve this
Proposal, and an SEC order is obtained, the Board would be able, upon the
recommendation of ICMI, to replace an investment sub-adviser, to appoint initial
sub-advisers and/or additional sub-advisers to the Funds, and to utilize
investment sub-advisory agreements for the Funds with terms that are different
from those currently used by the Company.
SEC Exemptive Relief
Section 15(a) of the 1940 Act requires that all contracts pursuant to
which persons serve as investment advisers to investment companies be approved
by shareholders. As interpreted, this requirement applies to the appointment of
investment sub-advisers to any Fund of the Company for which ICMI acts or in the
future will act as an investment adviser. The SEC has previously granted
exemptions from the shareholder approval requirements under certain
circumstances for open-end investment companies with investment sub-advisers,
and therefore, the Company has applied for such an order. If the SEC approves
the Company's application and Shareholders approve this Proposal, the Board
would, without Shareholder approval, be able to appoint initial, additional or
replacement sub-advisers without having to unnecessarily seek Shareholder
approval. The Board would not, however, be able to replace ICMI without
receiving Shareholder approval, as required by the 1940 Act and applicable
regulations governing investment company advisory contracts. There can be no
assurance that the Order will be granted.
The SEC has in the past required open-end investment companies seeking
relief similar to that sought by the Company to agree to the following
conditions: (1) before a fund may rely on the SEC exemptive order, the
operations of the fund, under a "manager of managers" structure will be approved
4
<PAGE>
by the fund's shareholders, and in the case of a new fund whose public
shareholders purchase shares on the basis of a prospectus containing the
disclosure contemplated by condition (2) below, the operation of the fund under
a "manager of managers" structure will be approved by the sole shareholder
before offering shares of the fund to the public; (2) the prospectus of each
"manager of managers" fund must disclose the existence, substance and effect of
the SEC order, as well as a prominent disclosure in the fund's prospectus that
the investment manager has ultimate responsibility for the investment
performance of the "manager of managers" fund due to its responsibility to
oversee the sub-advisers and recommend their hiring, termination and
replacement, and, in addition, each "manager of managers" fund must hold itself
out to the public as employing the "manager of managers" structure; (3) within
90 days of the hiring of a new investment sub-adviser for the fund or the
implementation of any proposed change in a sub-advisory agreement, the
investment adviser will provide shareholders with information meeting proxy
regulation requirements; (4) the investment adviser will not enter into an
investment sub-advisory agreement with any affiliated investment sub-adviser (as
defined in Section 2(a)(3) of the 1940 Act) without such agreement, including
the compensation to be paid thereunder, being approved by the shareholders of
the fund; (5) at all times, at least a majority of the fund's board of directors
will not be "interested persons," within the meaning of Section 2(a)(19) of the
1940 Act, and the nomination of new or additional independent directors will be
placed within the discretion of the then existing independent directors; (6)
when an investment sub-adviser change is proposed for a fund with an affiliated
adviser, the fund's directors, including a majority of the independent
directors, are required to make a separate finding, reflected in the board
minutes, that such change is in the best interests of the fund and its
shareholders and does not involve a conflict of interest from which the
investment adviser or affiliated sub-adviser derives an inappropriate advantage;
and (7) the investment adviser will provide general investment services to the
fund and subject to board and independent director review and approval, will (i)
set each sub-advisers overall investment strategies, (ii) recommend
sub-advisers, (iii) allocate and, when appropriate, reallocate a fund's assets
among sub-advisers, (iv) monitor and evaluate sub-adviser performance, and (v)
oversee sub-adviser compliance with the fund's investment objectives, policies
and restrictions; and (8) no director or officer of the fund or the investment
adviser will own directly or indirectly (other than through a pooled investment
vehicle over which such person does not have control) any interest in an
investment sub-adviser except for (i) ownership of interests in the investment
adviser or any entity that controls, is controlled by or is under common control
with the investment adviser; or (ii) ownership of less than 1% of the
outstanding securities of any class of equity or debt of a publicly traded
company that is either an investment sub-adviser or an entity that controls, is
controlled by or is under common control with an investment sub-adviser.
If the SEC changes these conditions for granting the relief as
requested by the Company or the Order is granted with materially different
conditions, the Company will take appropriate action, which could include
soliciting Shareholders for reapproval of this Proposal in light of the new
conditions.
Evaluation and Recommendation
This Proposal is intended to facilitate the efficient operation of
those Funds with investment sub-advisers, afford the Company increased
management flexibility and allow the investment adviser to perform to the
fullest extent the principal functions the Company is paying it to perform with
respect to investment sub-advisers -- that is continuously monitoring the
performance of the sub-advisers and, from time to time, recommending that the
Board replace sub-advisers or appoint additional sub-advisers, depending on the
investment adviser's assessment of a sub-adviser's performance and the
probability of such investment sub-adviser achieving a Fund's investment
objectives. While there is no way of knowing exactly how often the investment
adviser may recommend, and the Board approve, the termination and replacement of
a particular sub-adviser or the selection of an additional sub-adviser, each of
which would typically require a Shareholder meeting, experience has shown that
the use of
5
<PAGE>
sub-advisers results in more frequent Shareholder meetings than would otherwise
be the case. Because Shareholder meetings result in substantial costs, the Board
believes that approval of this Proposal would benefit Shareholders.
In reaching this conclusion, the Directors weighed the costs of
Shareholder meetings against the benefits of Shareholder scrutiny of proposed
contracts with additional or replacement sub-advisers. To this end, the
Directors considered that, even in the absence of Shareholder approval, any
proposal to add or replace an investment sub-adviser would receive careful
review. First, the investment adviser would assess the Fund's needs and, if it
believed additional or replacement sub-advisers could benefit the Fund, would
review the relevant universe of available investment managers. Second, any
recommendations made by the investment adviser would have to be approved by a
majority of the Board, including a majority of the Company's independent
directors. Finally, any selections of additional or replacement investment
sub-advisers would have to comply with conditions contained in the Order, if it
is granted.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF EACH FUND OF THE
COMPANY VOTE FOR THE APPROVAL OF PROPOSAL 1.
PROPOSAL 2: To approve a new investment advisory agreement between the
Company and ICMI.
The Board of Directors is asking the Shareholders of each Fund to
approve the New Advisory Agreement between the Company and ICMI relating to each
of the Funds (attached hereto as Exhibit A to the Proxy Statement). The New
Advisory Agreement, if approved by Shareholders, will replace the Funds' current
investment advisory agreements. At a meeting held on February 10, 2000, a
majority of Directors of the Company, including a majority of Directors who are
not (i) parties to the New Advisory Agreement, or (ii) interested persons of any
such party, approved the New Advisory Agreement.
The Board of Directors is recommending the approval of the New Advisory
Agreement primarily for the purpose of changing the advisory fee rates charged
by ICMI for managing certain of the Funds. The changes in advisory fees are
being proposed so that the Funds' advisory fees better reflect the costs of
managing the Funds and properly compensate the investment adviser for services
rendered to the Funds. In the case of the Quality Bond and Money Market Funds,
the fees will decrease in recognition of lower costs involved in managing these
Funds. In the case of the Value Equity, International Equity, Growth Equity and
Small Capitalization Funds, the fees will increase. The proposed new fees
recognize, among other things, the additional responsibilities ICMI will assume
in acting as "manager of managers" and increased fees ICMI will pay to certain
sub-advisers to obtain quality investment management services. Management
believes that the proposed fees will more closely track the industry averages
for variable product mutual funds in each Fund's respective peer group.
The Advisory Agreements
The Current Advisory Agreements
The Funds are currently managed pursuant to three separate investment
advisory agreements between the Company and ICMI (collectively, the "Current
Advisory Agreements"). The investment advisory agreement between the Company and
ICMI, relating to the Growth Equity, Quality Bond and Money Market Funds, dated
as of November 1, 1992, was approved by the shareholders at a Meeting of
Shareholders held on October 15, 1992 and was last approved by the Board of
Directors on February 17, 1999.
6
<PAGE>
The investment advisory agreement between the Company and ICMI relating
to the Emerging Growth Fund, dated as of April 15, 1997, was approved by the
sole shareholder of the Fund on May 1, 1997 and was last approved by the Board
of Directors on February 17, 1999.
The investment advisory agreement between the Company and ICMI,
relating to the Value Equity, Small Capitalization, Flexibly Managed,
International Equity and High Yield Bond Funds, dated as of May 1, 1998, was
initially approved by the Board of Directors on February 9, 1998 and was
approved by the shareholders of each Fund at a Meeting of Shareholders held on
April 16, 1998.
The Current Advisory Agreements provide that ICMI, in return for its
fee, will serve as investment adviser and supervise and direct the investments
of the Funds in accordance with the investment objectives, program and
restrictions applicable to each Fund as provided by the Fund's Prospectus and
Statement of Additional Information. In providing these investment advisory
services, ICMI will obtain and evaluate such information relating to the
economy, industries, businesses, securities markets and securities as necessary
or useful in discharge of its obligations and will formulate and implement a
continuing program for the management of the assets and resources of each Fund
in a manner consistent with the investment objectives of the Fund. In
furtherance of this duty, ICMI is authorized to buy, sell, exchange, convert,
lend and otherwise trade in any stocks, bonds and other securities and place
orders and negotiate the commissions for the execution of transactions in
securities with or through such brokers, dealers, underwriters or issuers as
ICMI may select. The Current Advisory Agreements also provide that ICMI will
furnish or provide and pay the cost of such office space, office equipment,
office personnel and office services. Under the Current Advisory Agreements,
ICMI is authorized to employ, retain or otherwise avail itself of a sub-adviser
or sub-advisers to assist it in performing its duties and meeting its
responsibilities and/or services or facilities of other persons or organizations
for the purpose of providing itself with such statistical and other factual
information, such as information regarding economic factors and trends.
Under the Current Advisory Agreements , ICMI receives a fee from the
Company on a monthly basis, based on an average daily net assets of each Fund,
at the following annual rates: Value Equity Fund - 0.50%; Small Capitalization
Fund - 0.50%; Flexibly Managed Fund - 0.50%; International Equity Fund - 0.75%;
High Yield Bond Fund - 0.50%; Growth Equity Fund - 0.50%; Quality Bond Fund -
0.45% and Money Market Fund - 0.40%. The fees paid to ICMI for managing Growth
Equity, Quality Bond and Money Market Funds are reduced by 0.05% if any of those
Funds assets exceed $100 million. For providing investment advisory and
management services to the Emerging Growth Fund, the Fund pays ICMI, on a
monthly basis, an advisory fee based on average daily net assets of the Fund, at
the following annual rates: 0.80% of the first $25,000,000 of average daily net
assets; 0.75% of the next $25,000,000 of average daily net assets; and 0.70% of
the average daily net assets in excess of $50,000,000.
The Current Advisory Agreements provide for expense limitations. In the
event the operating expenses of a Fund, including all investment advisory,
accounting, administrative and corporate services fees, for any fiscal year
ending on a date on which the agreement is in effect exceed the expense
limitations applicable to the Fund, such expense amount shall be the liability
of ICMI to the Fund. Excluded from such expenses are the amounts of any
interest, taxes, brokerage commissions, other expenses which are capitalized in
accordance with generally accepted accounting principals, and extraordinary
expenses. Such reduction, if any, will be computed and accrued daily, will be
settled on a monthly basis and will be based upon the expense limitation
applicable to the Fund. If, at the end of each month, there is no liability of
ICMI to pay the Fund such excess amount, and if payments of the advisory fee at
the end of prior months during the fiscal year have been reduced in excess of
that required to maintain expenses within the expense limitation, such excess
reduction shall be recaptured by
7
<PAGE>
ICMI and shall be payable by the Fund to ICMI along with the advisory fee
payable to ICMI for that month.
The services of ICMI are not to be deemed exclusive, and ICMI is free
to render investment advisory and other services to others, including other
investment companies, and to engage in other activities, so long as its services
under the agreement are not impaired thereby. The Current Advisory Agreements
provide that ICMI will permit officers or employees of ICMI to serve as
officers, directors, members of any committee of directors, members of any
advisory board, or members of any other committee of the Company, at ICMI's
expense and without cost to the Company.
Following the expiration of its initial two-year term, the Current
Advisory Agreements continue in force and effect from year to year, provided
that such continuance is approved at least annually by the Fund's Board or by
the vote of a majority of the outstanding voting securities of the Fund, and by
the affirmative vote of a majority of the Directors who are not parties to the
agreement or "interested persons" of a party to the agreement (other than as
Directors of the Fund) by votes cast in person at a meeting specifically called
for such purpose.
The Current Advisory Agreements may be terminated, without the payment
of any penalty, by the Company or ICMI, upon 60 days' prior notice in writing
from the Company to ICMI or upon 90 days' prior notice in writing from ICMI to
the Company, provided that such action has been authorized by resolution of a
majority of its Directors who are not interested persons of any party to these
Agreements, or by vote of a majority of the outstanding voting securities of
each Fund of the Company.
Under the Current Advisory Agreements, ICMI is not liable for any act
or omission which does not constitute negligence or willful misfeasance on the
part of ICMI or its affiliates, agents or contractors, or constitutes a failure
by ICMI or any affiliate to comply with any term of these Agreements.
The New Advisory Agreement.
At a meeting held on February 10, 2000, the Board of Directors approved
a New Advisory Agreement between ICMI and the Company with respect to each Fund.
The New Advisory Agreement is substantially identical to the Current Advisory
Agreements, except for the dates of execution and initial term, changes in
certain of the fees paid by the Company to ICMI and a new expense limitation for
the Small Capitalization Fund.
Under the New Advisory Agreement, ICMI will receive a fee from the
Company, on a monthly basis, based on an average daily net assets of each Fund,
at the following annual rates: Value Equity Fund - 0.60%; Small Capitalization
Fund - 0.85%; Flexibly Managed Fund - 0.60%; International Equity Fund - 0.85%;
High Yield Bond Fund - 0.50%; Growth Equity Fund - 0.65%; Quality Bond Fund -
0.35% and Money Market Fund - 0.20%. The fees paid to ICMI for managing Growth
Equity, Quality Bond and Money Market Funds are reduced by 0.05% if any of those
Funds' assets exceed $100 million. For providing investment advisory and
management services to the Emerging Growth Fund, the Company will pay ICMI, on a
monthly basis, an advisory fee based on average daily net assets of the Fund, at
the following annual rates: 0.80% of the first $25,000,000 of average daily net
assets; 0.75% of the next $25,000,000 of average daily net assets; and 0.70% of
the average daily net assets in excess of $50,000,000.
8
<PAGE>
The following table sets forth the contractual fees (as a percentage of
average daily net assets) currently paid under the Current Advisory Agreement
and the fees proposed under the New Advisory Agreement and the percentage of
change between the two Agreements.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fee as a % of Average Daily Net Assets
- -------------------------------------------------------------------------------------------------------------------
Fund Current New Change
- ---- ------- --- ------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market 0.40% for the first 0.20% for the first -0.20%
$100,000,000; 0.35% of the $100,000,000; 0.15% of the
assets in excess of assets in excess of
$100,000,000 $100,000,000
- -------------------------------------------------------------------------------------------------------------------
Quality Bond 0.45% for the first 0.35% for the first -0.10%
$100,000,000; 0.40% of the $100,000,000; 0.30% of the
assets in excess of assets in excess of
$100,000,000 $100,000,000
- -------------------------------------------------------------------------------------------------------------------
High Yield Bond 0.50% 0.50% No Change
- -------------------------------------------------------------------------------------------------------------------
Emerging Growth 0.80% of first $25,000,000 0.80% of first $25,000,000 No Change
0.75% of the next 0.75% of the next
$25,000,000 $25,000,000
0.70% of the assets in excess 0.70% of the assets in excess
of $50,000,000 of $50,000,000
- -------------------------------------------------------------------------------------------------------------------
Value Equity 0.50% 0.60% +0.10%
- -------------------------------------------------------------------------------------------------------------------
International Equity 0.75% 0.85% +0.10%
- -------------------------------------------------------------------------------------------------------------------
Flexibly Managed 0.50% 0.60% +0.10%
- -------------------------------------------------------------------------------------------------------------------
Growth Equity 0.50% for the first 0.65% for the first +0.15%
$100,000,000; 0.45% of the $100,000,000; 0.60% of the
assets in excess of assets in excess of
$100,000,000 $100,000,000
- -------------------------------------------------------------------------------------------------------------------
Small Capitalization 0.50% 0.85% +0.35%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The expense limitation for the Funds, with the exception of the Small
Capitalization Fund, will remain the same. The Small Capitalization Fund's
expense limitation will increase from 1.00% to 1.15%. The new expense limitation
takes into account the complexity of monitoring and managing the Fund and the
fee that will be paid to the sub-adviser to obtain its management activities.
Independence Capital Management, Inc.
ICMI is a wholly-owned subsidiary of Penn Mutual, a mutual life
insurance company that has been in the insurance and investment business since
the late 1800s. As of December 31, 1999, Penn Mutual and its subsidiaries had
assets under management of over $10.5 billion. ICMI was organized in June 1989
and serves as investment adviser to all of the Funds. In addition, ICMI serves
as investment adviser to corporate and pension fund accounts. As of December 31,
1999, ICMI had under management approximately $ 1.9 billion, including assets of
the Company and the assets of ICMI's other clients. The principal address of
ICMI and Penn Mutual is 600 Dresher Road, Horsham, Pennsylvania 19044.
Listed below are the names of the directors and principal executive
officers of ICMI.
<TABLE>
<CAPTION>
Name Address Principal Occupation
---- ------- --------------------
<S> <C> <C>
Peter M. Sherman 600 Dresher Road Executive Vice President (since December
President, Chief Executive Horsham, Pennsylvania 19044 1998), Chief Investment Officer (since May
Officer and Director 1996), The Penn Mutual Life Insurance
Company.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Name Address Principal Occupation
---- ------- --------------------
<S> <C> <C>
Robert E. Chappell 600 Dresher Road Director; Chairman and Chief Executive
Director Horsham, Pennsylvania 19044 Officer, The Penn Mutual Life Insurance
Company
Richardson T. Merriman Five Radnor Corporate Center Director and Senior Vice President;
Director Suite 452 President, Chief Executive Officer and Chief
100 Matsonford Road Investment Officer, The Pennsylvania Trust
Radnor, Pennsylvania 19087 Company
</TABLE>
For the fiscal year ended December 31, 1999, the Company paid ICMI an
aggregate fee of $8,143,417 for advisory services.
Comparison of Fees Paid Under the Agreements
The following table compares the fee paid to ICMI by each Fund of the
Company under the Current Advisory Agreements for the fiscal year ended December
31, 1999 and the fee ICMI would have received if the New Advisory Agreement had
been in effect for the same period.
<TABLE>
<CAPTION>
Fee due to ICMI, if
the proposed fee had Difference between
Actual Fee Paid to ICMI been in effect for the the actual fee and the
for the fiscal year ended fiscal year ended proposed fee
Fund December 31, 1999 December 31, 1999 (as a %)
- ---- ------------------ ----------------- ---------
<S> <C> <C> <C>
Money Market $ 263,557 $ 131,779 -50.0%
Quality Bond $ 251,361 $ 195,503 -22.2%
High Yield Bond $ 355,521 $ 355,521 0.00%
Emerging Growth $ 623,468 $ 623,468 0.00%
Value Equity $1,591,815 $1,910,178 20.0%
International Equity $1,234,994 $1,399,660 13.3%
Flexibly Managed $2,531,597 $3,037,916 20.0%
Growth Equity $1,076,233 $1,419,712 31.9%
</TABLE>
Evaluation and Recommendation
To assist the Directors in their consideration of the New Advisory
Agreement at the Board meeting held on February 10, 2000, ICMI presented a
comparative analysis, under the existing and pro forma advisory fees, of the
performance and expenses of the Company. The Directors took into account among
other things (1) the nature and quality of the advisory services rendered and
the results achieved by ICMI in advising the Funds of the Company, giving due
consideration to the likely impact of the proposed fee on relative performance;
(2) the ability of ICMI to perform the services required under the New Advisory
Agreement; (3) the relationship of the proposed advisory fee schedule to the fee
schedules of comparable investment companies, the impact of the proposed
increase in advisory fees on the Company's expense ratio and the relationship of
the Company's pro forma expense ratio to the expense ratios of comparable
investment companies; (4) the costs borne by ICMI in providing investment
advisory services to the Company; (5) the professional personnel who would
perform services for the Company, including education and experience; (6)
economies of scale that ICMI might experience as a result of growth in the
Company's assets would be shared with the Company; (7) research services
10
<PAGE>
received in return for allocation of brokerage; and (8) the philosophy and
general approach of the investment adviser.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF EACH FUND OF THE
COMPANY VOTE FOR APPROVAL OF PROPOSAL 2.
PROPOSAL 3: To approve new sub-advisory agreement between ICMI and OpCap
with respect to the Value Equity and Small Capitalization Funds.
Information Concerning the Sub-Adviser
OpCap serves as the sub-adviser to the Value Equity and Small
Capitalization Funds pursuant to a sub-advisory agreement with ICMI dated May 1,
1998. OpCap, a general partnership, is a subsidiary of Oppenheimer Capital, a
registered investment adviser with approximately $52 billion in assets under
management on December 31, 1999. PIMCO Advisors owns a one-third managing
general partner interest in Oppenheimer Capital and 1.0% general partner
interest in OpCap. The principal business address of OpCap and Oppenheimer
Capital is 1345 Avenue of the Americas, 50th Floor, New York, New York 10105.
The principal business address for PIMCO Advisors is 800 Newport Center Drive,
Suite 100, Newport Beach, California 92660.
Listed below is the name, address and principal occupation of the
principal executive officer of OpCap:
Name and Address Principal Occupation
- ---------------- --------------------
Kenneth Poovey Chief Executive Officer, OpCap; and Chief
1345 Avenue of the Americas Operating Officer, PIMCO Advisors
50th Floor
New York, NY 10105
For the fiscal year ended December 31, 1999, ICMI paid OpCap an
aggregate fee of $1,234,012 for sub-advisory services provided to the Value
Equity and Small Capitalization Funds. For such fiscal year, the Company paid
ICMI an aggregate fee of $1,806,686 for advisory services with regard to the
Value Equity and Small Capitalization Funds.
Currently, OpCap provides investment advisory services to other funds
with investment objectives similar to the Value Equity and Small Capitalization
Funds. The name, net assets and contractual advisory fees for these funds are
listed on Annex A.
Information Concerning the Adviser
ICMI, located at 600 Dresher Road, Horsham, PA 19044, serves as
investment adviser to the Value Equity and Small Capitalization Funds. ICMI is a
wholly-owned subsidiary of Penn Mutual. The Fund's investment advisory agreement
with ICMI is unaffected by the Merger.
The Allianz Merger
On October 31, 1999, PIMCO Advisors, PAH and PIMCO Partners G.P.
("Partners GP"), certain of their affiliates, and Allianz of America and certain
other parties named therein entered into an
11
<PAGE>
Implementation and Merger Agreement (the "Merger Agreement") pursuant to which
Allianz of America will acquire majority ownership of PIMCO Advisors.
The Merger Agreement provides for the acquisition of PAH by Allianz of
America through a merger of a subsidiary of Allianz of America with and into
PAH. In the merger, each of the outstanding limited and partnership and general
partner units in PAH will be converted into the right to receive cash in an
amount per unit equal to $38.75, subject to downward adjustment if the aggregate
annualized investment advisory and sub-advisory fees for all accounts managed by
PIMCO Advisors and its subsidiaries, expressed as a "revenue run rate," declines
(excluding market-based changes) below a specified level (the "Unit Transaction
Price"). In no event will the Unit Transaction Price be reduced below $31.00 per
unit. As a result of the Merger, PAH will become an indirect wholly-owned
subsidiary of Allianz of America. As a result of the transactions contemplated
by the Merger Agreement, Allianz of America will control PIMCO Advisors, having
acquired approximately 70% of the outstanding partnership interests in PIMCO
Advisors. The Merger is expected to be completed by the end of the first quarter
of 2000, although there is no assurance that the Merger will be completed.
Following the Merger, subsidiaries of Allianz of America will, in a
series of transactions, acquire for cash additional partnership interests in
PIMCO Advisors (the "PA Units"), bringing its ownership interest in PIMCO
Advisors to approximately 70%, including the approximately 44% interest held
through PAH. As part, a subsidiary of Allianz of America will acquire Partners
GP through an acquisition of the managing general partner interest in Partners
GP from Partners LLC (the managing general partner of Partners GP) for
approximately $5.5 million and of the member interests in Partners GP that are
indirectly owned by Pacific Life Insurance Company ("Pacific Life"). Pacific
Life, which through subsidiaries owns approximately a 30% interest in PIMCO
Advisors, will maintain an indirect interest in PIMCO Advisors following the
closing.
In connection with the closing, Allianz of America will enter into a
put/call arrangement for the eventual disposition of Pacific Life's indirect
investment in PIMCO Advisors. The put option held by Pacific Life will allow it
to require Allianz of America, on the last business day of each calendar quarter
following the closing, to purchase at a formula-based price all of the PIMCO
Advisors' units owned directly or indirectly by Pacific Life. The call option
held by Allianz of America will allow it, beginning January 31, 2003 or upon a
change of control of Pacific Life, to require Pacific Life to sell or cause to
be sold to Allianz of America, at the same formula-based price, all of the PIMCO
Advisors' units owned directly or indirectly by Pacific Life.
As a result of the Merger, OpCap will be controlled by Allianz of
America. This change of control of OpCap will be deemed an assignment and
therefore a termination of the Current Sub-Advisory Agreement between ICMI and
OpCap. Therefore, in connection with the Merger and as required by the 1940 Act,
Shareholders of each Fund are being asked to approve a new investment
sub-advisory agreement between the Funds and OpCap which is substantially
identical to the Current Sub-Advisory Agreement (the "New Sub-Advisory
Agreement"). If the Merger is not completed for any reason, the Current
Sub-Advisory Agreement will remain in effect.
Post-Merger Operations
After the Merger, Allianz of America will control PIMCO Advisors
through its managing member interest in PacPartners LLC, which will be the sole
general partner of PIMCO Advisors following the Merger. While Allianz of America
will control PacPartners LLC, Pacific Life will hold a portion of its continuing
interest in PIMCO Advisors through an interest in PacPartners.
12
<PAGE>
Allianz of America, through subsidiaries, will be the managing member
of PacPartners LLC and will have full authority and control over all actions
taken by PacPartners LLC as the general partner of PIMCO Advisors, provided that
Pacific Life's consent is required for certain extraordinary actions.
Operationally, PIMCO Advisors is expected to become a unit of Allianz
Asset Management ("AAM"), the division of Allianz AG ("Allianz") that
coordinates global Allianz asset management activities. PIMCO Advisors and its
subsidiaries, including OpCap, are currently expected to continue to operate in
the United States under their existing names. Allianz has advised Oppenheimer
Capital and OpCap Advisors that it does not presently intend for the Merger to
affect the future management of Oppenheimer Capital and its subsidiary OpCap. In
addition, Allianz has advised Oppenheimer Capital and OpCap that it presently
anticipates that the senior portfolio management teams of Oppenheimer Capital
and OpCap will continue in their present capacities; that the eligibility of
OpCap, under the Investment Advisers Act of 1940, to serve as a sub-adviser
should not be affected by the Merger; and that Oppenheimer Capital and OpCap
will be able to continue to provide advisory and management services with no
material changes in operating conditions. Allianz has also advised Oppenheimer
Capital and OpCap that it currently anticipates that the Merger will not affect
the ability of OpCap to fulfill its obligations under the New Sub-Advisory
Agreement.
Information Concerning Allianz and Its Affiliates
Allianz, the parent of Allianz of America, is a publicly traded German
Aktiengesellschaft and which, together with its subsidiaries, comprise the
world's second largest insurance group as measured by premium income. Allianz is
a leading provider of financial services, particularly in Europe, and is
represented in 68 countries world-wide through subsidiaries, branch and
representative offices, and other affiliated entities. The Allianz group
currently has assets under management of more than $390 billion, and in its last
fiscal year wrote approximately $50 billion in gross insurance premiums. After
completion of the Merger, PIMCO Advisors and the Alliance group combined will
have over $650 billion in assets under management. The address of Allianz is:
Koniginstrasse 28, D-80802, Munich, Germany.
Affiliates of Allianz currently include Dresdner Bank AG, Deutsche Bank
AG, Munich Re, and HypoVereinsbank. These entities, as well as certain
broker-dealers that might be deemed to be controlled by or affiliated with these
entities, such as Bankers Trust Company and DB Alex. Brown LLC, Deutsche Bank
Securities, Inc. and Dresdner Kleinworth Benson North America LLC, may be
considered as "Affiliated Brokers". Once the Transaction is completed, absent an
SEC exemption or other relief, the Value Equity and Small Capitalization Funds
would generally be precluded from effecting principal transactions with the
Affiliated Brokers, and its ability to purchase securities from underwriting
syndicates including an Affiliated Broker or to utilize the Affiliated Brokers
for agency transactions would be subject to restrictions. OpCap does not believe
that applicable restrictions on transactions with the Affiliated Brokers
described above will materially adversely affect its ability, post-closing, to
provide services to the Value Equity and Small Capitalization Funds, the Funds'
ability to take advantage of market opportunities, or the Funds overall
performance.
The Sub-Advisory Agreements
In anticipation of the Merger, a majority of the Directors of the
Company, including a majority of the Directors who are not (i) parties to the
New Sub-Advisory Agreement or (ii) interested persons of any such party,
approved the New Sub-Advisory Agreement between ICMI and OpCap. The form of the
New Sub-Advisory Agreement is identical to the Current Sub-Advisory Agreement
except for the dates of execution and effectiveness. The holders of the majority
of the outstanding voting securities
13
<PAGE>
(within the meaning of the 1940 Act) of the Value Equity and Small
Capitalization Funds are being asked to approve the New Sub-Advisory Agreement.
The Current Sub-Advisory Agreement
The Current Sub-Advisory Agreement was approved by the Shareholders of
each Fund at a Meeting of Shareholders held on April 16, 1998.
The Current Sub-Advisory Agreement provides that OpCap, as sub-adviser,
shall supervise and direct the investments of the Value Equity and Small
Capitalization Funds in accordance with the Funds' investment objectives,
including the selection of securities for the Company to purchase, sell, convert
or lend, and the selection of brokers through whom the Funds' portfolio
transactions are executed.
Under the Current Sub-Advisory Agreement, OpCap shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Company,
except for a loss resulting from willful misfeasance, bad faith, negligence, or
willful misconduct in the performance of its duties. OpCap shall not be liable
for any loss incurred by an act or omission of a custodian, broker, dealer,
underwriter, or issuer selected by OpCap with reasonable care. In addition, the
Current Sub-Advisory Agreement provides indemnification to both ICMI and OpCap
for losses arising under the agreement under certain conditions.
The Current Sub-Advisory Agreement requires OpCap to render periodic
reports as the Company or ICMI may request and cooperate with the Company's
independent public accountants. The Current Sub-Advisory Agreement may be
terminated by ICMI, the Company or OpCap upon 60 days' prior notice in writing
from ICMI to OpCap, or upon 90 days' prior notice in writing from OpCap to ICMI,
provided that in the case of termination by ICMI or the Company, such action
shall have been authorized by (1) a majority of the directors who are not
interested persons of any party to the agreement; or (2) a vote of the majority
of the outstanding voting securities of the Value Equity or Small Capitalization
Funds.
Under the Current Sub-Advisory Agreement, as compensation for services,
ICMI pays OpCap a fee, based on the average daily net assets of each Fund as
follows: 0.40% with respect to the first $50,000,000 of the combined total
average daily net assets of the two Funds, 0.35% with respect to the next
$200,000,000 of the combined total average daily net assets of the two Funds and
0.30% with respect to the combined total average daily net assets of the two
Funds in excess of $250,000,000. To the extent that the Fund's total expenses
for a fiscal year (excluding interest, taxes, brokerage, and certain other
expenses) exceeds 1.00% of the Fund's daily net assets, OpCap is liable to ICMI
in an amount up to and including 0.10% of the excess.
The New Sub-Advisory Agreement
Subject to Shareholders approval, the Board approved the New
Sub-Advisory Agreement on December 15, 1999, the form of which is attached as
Exhibit B. The form of the New Sub-Advisory Agreement is substantially identical
to the Current Sub-Advisory Agreement, except for the dates of execution and
effectiveness.
The investment advisory fee as a percentage of net assets payable by
each Fund will be the same under the New Sub-Advisory Agreement as it was under
the Current Sub-Advisory Agreement.
14
<PAGE>
In evaluating the New Sub-Advisory Agreement, the Board took into
account that the Fund's Current Sub-Advisory Agreement, including its terms
relating to services to be provided thereunder by OpCap and the fees and
expenses payable by the Company, is substantially identical, except for the
dates of execution and effectiveness.
The Board considered the terms of the Merger and the possible effects
of the Merger upon the ability of OpCap to provide advisory services to the
Company. In this regard, the Board considered that (i) OpCap anticipates that
the portfolio managers for the Funds will remain the same after the Merger; and
(ii) OpCap anticipates that it will continue to provide advisory services to the
Funds with no material changes in operating conditions due to the Merger.
After consideration of the above factors and such other factors as the
Board deemed relevant, the Directors, including the Independent Directors,
unanimously (i) approved the New Sub-Advisory Agreement; and (ii) voted to
recommend the approval of the New Sub-Advisory Agreement to Shareholders of the
Value Equity and Small Capitalization Funds.
In the event that the Shareholders of the Fund do not approve the New
Sub-Advisory Agreement, the Current Sub-Advisory Agreement will remain in effect
and the Board will take such action as it deems in the interest of the Fund and
their Shareholders, which may include proposing that Shareholders approve an
agreement in lieu of the New Sub-Advisory Agreement. If the Merger is not
consummated, OpCap would continue to serve as investment sub-adviser to the
Value Equity and Small Capitalization Funds pursuant to the terms in the Current
Sub-Advisory Agreement.
As discussed above, Shareholders are being asked to approve the New
Sub-Advisory Agreement due to an assignment and termination of the Current
Sub-Advisory Agreement resulting from the Merger. However, if the "manager of
managers" structure in Proposal 1 is approved by the SEC and by Shareholders,
ICMI may, subject to oversight and approval of the Board of Directors, replace
OpCap Advisors as investment sub-adviser to the Value Equity and Small
Capitalization Funds. It is currently anticipated that the Company's management
will recommend to the Board that Putnam Investment Management, Inc. replace
OpCap Advisors as sub-adviser to the Value Equity Fund and that Royce &
Associates, Inc. replace OpCap Advisors as sub-adviser to the Small
Capitalization Fund, effective May 1, 2000. With a new investment sub-adviser,
the Value Equity and Small Capitalization Funds would continue to have the same
investment objective and Company management expects that the new sub-advisers
would continue to use similar investment policies and strategies in managing
these Funds.
Shareholders of the Value Equity and Small Capitalization Funds are
entitled to vote separately on Proposal 3. The Proposal shall be approved with
respect to a Fund, regardless of whether the Shareholders of the other Fund
approve the Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF THE SMALL
CAPITALIZATION AND VALUE EQUITY FUNDS OF THE COMPANY VOTE FOR APPROVAL OF
PROPOSAL 3.
15
<PAGE>
ADDITIONAL INFORMATION
Directors and Officers of the Company
Information is set forth below about the Company's current Directors and
principal executive officers, including their names, positions with the Company,
and principal occupations or employment for the last five years. No Director or
officer owns shares of the Company.
<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
121 Fishers Road Mawr, PA.
Bryn Mawr, PA 19010
James S. Greene Director Retired; Vice President and Director, International Raw
P.O. Box 3761 Materials, Inc., Philadelphia, PA (commodities trading),
Vero Beach, FL 32964-3761 prior to September 1990.
Robert E. Chappell* Director Chairman of the Board and Chief Executive Officer
600 Dresher Road (since December 1996), President and Chief Executive
Horsham, PA 19044 Officer (April 1995 - December 1996), President and
Chief Operating Officer, prior thereto The Penn Mutual
Life Insurance Company.
William H. Loesche, Jr. Director Retired; Adviser (since April 1988), Director (prior
100 Grays Lane thereto), Keystone Insurance Company and Keystone
Apt. 101 Automobile Club, Philadelphia, PA.
Haverford, PA 19014
Larry L. Mast* Director Executive Vice President, The Penn Mutual Life
The Penn Mutual Life Insurance Company May 1997 to present. Formerly
Insurance Company Senior Vice President, Lafayette Life Insurance
600 Dresher Road Company September 1994 to May 1997; prior thereto
Horsham, PA 19044 Vice President, Security Benefit Insurance Company
May 1993 to September 1994; Vice President, Home
Life Insurance Company July 1990 to May 1993;
Agency Manager, The Equitable Life Insurance
Company August 1978 to July 1990.
Daniel J. Toran* Director President and Chief Operating Officer, (January 1997 to
The Penn Mutual Life present), Executive Vice President, Sales and Marketing
Insurance Company (May 1996 to January 1997), The Penn Mutual Life
600 Dresher Road Insurance Company; Executive Vice President, The New
Horsham, PA 19044 England Mutual Life Insurance Company, (prior
thereto).
M. Donald Wright Director President, M. Donald Wright Professional Corporation,
100 Chetwynd Drive Bryn Mawr, PA (financial planning and consulting);
Rosemont, PA 19010 Director, Graduate School of Financial Services, The
American College, since April 1991.
Peter M. Sherman President Chairman and President of Independence Capital
600 Dresher Road Management, Inc; Executive Vice President and Chief
Horsham, PA 19044 Investment Officer since 1998, Senior Vice President and
Chief Investment Officer (from 1996-1998) and Vice President
of Fixed Income Investments (from 1995 to 1996) of The
Penn Mutual Life Insurance Company.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address Penn Series During Past Five Years
---------------- ----------- ----------------------
<S> <C> <C>
Richard F. Plush Vice President Assistant Vice President and Senior Actuary, The Penn
600 Dresher Road Mutual Life Insurance Company (1973 to present).
Horsham, PA 19044
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius LLP, Philadelphia,
1701 Market Street PA, since January 1996; Associate General Counsel, The
Philadelphia, PA 19103 Penn Mutual Life Insurance Company, prior thereto.
Steven M. Herzberg Treasurer Assistant Vice President and Treasurer, The Penn Mutual
600 Dresher Road Life Insurance Company (December 1997 to present);
Horsham, PA 19044 Director of Financial Planning and Treasurer (November
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),
600 Dresher Road Assistant Vice President, Financial and Management
Horsham, PA 19044 Accounting (since 1994), Director of Financial
Accounting (prior thereto), The Penn Mutual Life
Insurance Company.
</TABLE>
- -------------------
* Messrs. Chappell, Mast and Toran are "interested persons" of the Company under
the 1940 Act by virtue of their relationship with Penn Mutual.
Principal Holders of Securities
On January 31, 2000 the outstanding shares of the Funds were owned by
Penn Mutual and PIA as follows:
<TABLE>
<CAPTION>
High
Growth Value Emerging Flexibly International Quality Yield Small Money
Equity Equity Growth Managed Equity Bond Bond Capitalization Market
Fund Fund Fund Fund Fund Fund Fund Fund 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% 54.9% 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%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
High
Growth Value Emerging Flexibly International Quality Yield Small Money
Equity Equity Growth Managed Equity Bond Bond Capitalization Market
Fund Fund Fund Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% 36.0% 15.0% 13.4% 23.1% 30.4%
</TABLE>
Administrative and Corporate Services Agent
Penn Mutual is the administrative and corporate services agent for the
Company. Penn Mutual is a Pennsylvania mutual life insurance company located at
600 Dresher Road, Horsham, Pennsylvania 19044. Under an administrative and
corporate services agreement, Penn Mutual administers the Company's corporate
affairs, subject to the supervision of the Board and, in connection therewith,
furnishes the Company with office facilities, prepares regulatory filings,
provides staff assistance to the Board, and provides ordinary bookkeeping
services and general administrative services required in the conduct of its
investment business. In the fiscal year ended December 31, 1999, Penn Mutual
received $2,305,502 for providing administrative and corporate services to the
Company.
Expenses
All costs of solicitation (including printing and mailing of this proxy
statement, meeting notice, and voting instruction forms, as well as any
necessary supplementary solicitations) will be paid for by the Company, except
that the proportionate costs of Proposal 3 will be paid for by Allianz and PIMCO
Advisors.
Submission of Shareholder Proposals
The Company does not hold annual shareholder meetings. Shareholders
wishing to submit proposals for inclusion in a proxy statement for a shareholder
meeting subsequent to the Meeting, if any, should send their written proposals
to Secretary, Penn Series Funds, Inc., 600 Dresher Road, Horsham, PA 19044.
General
The Company knows of no business other than that mentioned in the
Proposals contained in the Notice that will be presented for consideration at
the Meeting. If any other matters are properly presented, it is the intention of
the persons named on the enclosed voting instruction form to vote instructions
in accordance with their best judgment.
A list of shareholders of the Company entitled to be present and vote
at the meeting will be available at the offices of the Company, 600 Dresher
Road, Horsham, PA 19044, for inspection by any shareholder during regular
business hours for ten days prior to the date of the Meeting.
18
<PAGE>
IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED VOTING INSTRUCTION FORM PROMPTLY. NO POSTAGE IS REQUIRED IF
MAILED IN THE UNITED STATES.
19
<PAGE>
EXHIBIT A
FORM OF
INVESTMENT ADVISORY AGREEMENT
Between
PENN SERIES FUNDS, INC.
and
INDEPENDENCE CAPITAL MANAGEMENT, INC.
INVESTMENT ADVISORY AGREEMENT, made as of May 1, 2000 by and between
PENN SERIES FUNDS, INC. ("Penn Series"), a corporation organized and existing
under the laws of the State of Maryland, and INDEPENDENCE CAPITAL MANAGEMENT,
INC. ("Adviser"), a corporation organized and existing under the laws of the
State of Pennsylvania.
WITNESSETH:
WHEREAS, Penn Series is an open-end management investment company
registered as such under the Investment Company Act of 1940, as amended (the
"Act") and is authorized to issue shares in separate series with each series
representing interests in a separate fund of securities and other assets; and
WHEREAS, Adviser is engaged principally in the business of rendering
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, Penn Series desires Adviser to render investment advisory
services to Penn Series in the manner and on the terms and conditions
hereinafter set forth, and Adviser desires to render such services under such
terms and conditions:
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Investment Advisory Services. Adviser shall serve as investment
adviser and shall supervise and direct the investments of the investment funds
of Penn Series set forth in Schedule A to this Agreement (individually a "Fund"
and collectively the "Funds"), in accordance with the investment objectives,
program and restrictions applicable to the Fund as provided in Penn Series'
Prospectus and Statement of Additional Information, as amended from time to
time, and such other limitations as may be imposed by law or as Penn Series may
impose with notice in writing to Adviser. No investment will be made by Adviser
for a Fund if that investment would be in violation of the objectives, program,
restrictions or limitations of the Fund. Adviser shall not take custody of any
assets of Penn Series, but shall issue settlement instructions to the custodian
designated by Penn Series (the "Custodian"). Adviser shall obtain and evaluate
such information relating to the economy, industries, businesses, securities
markets and securities as it may deem necessary or useful in the discharge of
its obligations hereunder and
A-1
<PAGE>
shall formulate and implement a continuing program for the management of the
assets and resources of each Fund in a manner consistent with the investment
objectives of the Fund. In furtherance of this duty, Adviser, as agent and
attorney-in-fact with respect to Penn Series, is authorized, in its discretion
and without prior consultation with Penn Series, to:
(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and
(ii) place orders and negotiate the commissions (if any) for the
execution of transactions in securities with or through such
brokers, dealers, underwriters or issuers as Adviser may
select, in conformance with the provisions of Paragraph 4
herein;
provided, however, that Adviser shall make no investment for a Fund that is in
violation of the objectives, program, restrictions or limitations of the Fund.
2. Accounting and Related Services. Adviser agrees to cooperate with
the Accounting Services Agent appointed by Penn Series pursuant to the
Accounting Services Agreement entered into by Penn Series and the Accounting
Services Agent. As requested from time to time, Adviser shall provide Penn
Series and its Accounting Services Agent with such information as may be
reasonably necessary to properly account for financial transactions with respect
to each Fund.
3. Investment Advisory Fees. For the services rendered to Penn Series
under this Agreement, Penn Series will pay Adviser fees based on average daily
net assets of each Fund at the rates set forth in Schedule B to this Agreement.
Each fee shall be accrued for each calendar day and the sum of the daily fee
accruals shall be paid monthly to Adviser as of the first business day of the
next succeeding calendar month. The daily fee will be computed by multiplying
the fraction of one over the number of calendar days in the year by the annual
rate applicable to the Fund as set forth above, and multiplying this product by
the net assets of the Fund. The Fund's net assets, for purposes of the
calculations described above, will be determined in accordance with Penn Series'
Prospectus and Statement of Additional Information as of the close of business
on the most recent previous business day on which Penn Series was open for
business.
4. Expense Limitations. In the event expenses of certain Funds exceed
the expense limitation set forth in Schedule C to this Agreement, Adviser agrees
to waive its investment advisory fee or remit payments to such Funds in the
manner and to the extent set forth in Schedule C.
5. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for a Fund, Adviser will use its best efforts to seek the best price
and the most favorable execution of its orders. In assessing the best price and
the most favorable execution for any transaction, Adviser shall consider the
breadth of the market in the security, the price of the security, the skill,
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any. Where best price and most favorable
execution will not be compromised, Adviser may take into account the research
and related services that the broker has provided to Penn Series or the Adviser.
It is understood that the Adviser will not be deemed to have acted unlawfully or
to have breached a fiduciary duty to the Fund or be in breach of any obligation
owing to the Fund under this Agreement, or otherwise, by reason of its having
directed a securities transaction on behalf of the Fund to a broker-dealer in
compliance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934 or as described from time to time in the Penn Series' Prospectus and
Statement of Additional Information. In addition, Adviser is authorized to take
into account the sale of variable contracts which are invested in Penn Series
shares in allocating to brokers or dealers purchase and sale orders for
portfolio securities, provided that Adviser believes that the quality of
A-2
<PAGE>
the transaction and commission are comparable to what they would be with other
qualified firms. Adviser shall regularly advise Penn Series' Board of Directors
as to all payments of commissions and as to its brokerage policies and practices
and shall follow such instructions with respect thereto as may be, given by Penn
Series' board.
6. Use of the Services of Others. Adviser may (at its cost except as
contemplated in Section 5 of this Agreement) employ, retain or otherwise avail
itself of a sub-adviser or sub-advisers to assist it in performing its duties
and meeting its responsibilities under this Agreement, and may delegate to such
sub-adviser or sub-advisers duties assumed by the Adviser under this Agreement.
In addition, Adviser may (at its cost, except as contemplated in Section 5 of
this Agreement) employ, retain or otherwise avail itself of the services or
facilities of other persons or organizations for the purpose of providing itself
or Penn Series, as appropriate, with such statistical and other factual
information, such advice regarding economic factors and trends, such advice as
to occasional transactions in specific securities or such other information,
advice or assistance as Adviser may deem necessary, appropriate or convenient
for the discharge of its obligations hereunder or otherwise helpful to Penn
Series, or in the discharge of Adviser's overall responsibilities with respect
to the other accounts which it serves as investment adviser.
7. Personnel, Office Space, and Facilities. Adviser at its own expense
shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and office services as it, or any affiliated
corporation of Adviser, requires in the performance of services under this
Agreement.
8. Ownership of Software and Related Material. All computer programs,
magnetic tapes, written procedures and similar items developed and used by
Adviser or any affiliate in performance of this Agreement are the property of
Adviser and will not become the property of Penn Series.
9. Certain Personnel. Adviser agrees to permit individuals who are
officers or employees of Adviser to serve (if duly elected or appointed) as
officers, directors, members of any committee of directors, members of any
advisory board, or members of any other committee of Penn Series, without
remuneration or other cost to Penn Series. Adviser shall pay all salaries,
expenses, and fees of officers and/or directors of Penn Series who are
affiliated with Adviser.
10. Reports to Penn Series and Cooperation with Accountants. Adviser,
and any affiliated corporation of Adviser performing services for Penn Series
described in this Agreement, shall furnish to or place at the disposal of Penn
Series, such information, reports, evaluations, analyses and opinions as Penn
Series may, at any time or from time to time, reasonably request or as Adviser
may deem helpful, to reasonably ensure compliance with applicable laws and
regulations or for any other purpose. Adviser and its affiliates shall cooperate
with Penn Series' independent public accountants and take all reasonable action
in the performance of services and obligations under this Agreement to assure
that the information needed by such accountants is made available to them for
the expression of their opinion without any qualification as to the scope of
their examination, including, but not limited to, their opinion included in Penn
Series' annual report under the Act and annual amendment to Penn Series'
registration statement under the Act.
11. Reports to Adviser. Penn Series shall furnish or otherwise make
available to Adviser such prospectuses, financial statements, proxy statements,
reports, and other information relating to the business and affairs of Penn
Series, as Adviser may, at any time or from time to time, reasonably require in
order to discharge its obligations under this Agreement.
12. Ownership of Records. All records required to be maintained and
kept current by Penn Series pursuant to the provisions of rules or regulations
of the Securities and Exchange Commission under
A-3
<PAGE>
Section 31(a) of the Act and that are maintained and kept current by Adviser or
any affiliated corporation of Adviser, or by any sub-adviser or affiliated
corporation of a sub-adviser, on behalf of Penn Series are the property of Penn
Series. Such records will be preserved by Adviser or an affiliated corporation,
or by any sub-adviser or affiliated corporation, for the periods prescribed in
Rule 3la-2 under the Act, where applicable, or in such other applicable rules
that may be adopted from time to time under the Act. Such records may be
inspected by representatives of Penn Series at reasonable times, and, in the
event of termination of this Agreement, will be promptly delivered to Penn
Series.
13. Services to Other Clients. Nothing herein contained shall limit the
freedom of Adviser or any affiliated person of Adviser to render investment
supervisory and other services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms or
corporations, or to engage in other business activities. It is understood that
Adviser may give advice and take action for its other clients which may differ
from advice given, or the timing or nature of action taken, for a Fund. Adviser
is not obligated to initiate transactions for a Fund in any security which
Adviser, its principals, affiliates or employees may purchase or sell for its or
their own accounts or for other clients.
14. Confidential Relationship. Information furnished by one party to
another, including a party's respective agents and employees, is confidential
and shall not be disclosed to third parties unless required by law. Adviser, on
behalf of itself and its affiliates and representatives, agrees to keep
confidential all records and other information relating to Penn Series, except
after prior notification to and approval in writing by Penn Series, which
approval shall not be unreasonably withheld, and may not be withheld where
Adviser or any affiliate may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by Penn Series.
15. Proxies. Subject to such direction and oversight by Penn Series as
the Board of Directors of Penn Series shall deem appropriate, Adviser shall
vote proxies solicited by or with respect to the issuers of securities held in
the Funds.
16. Instructions, Opinion of Counsel and Signatures. At any time
Adviser may apply to an officer of Penn Series for instructions, and may consult
legal counsel for Penn Series, in respect of any matter arising in connection
with this Agreement, and Adviser shall not be liable for any action taken or
omitted by it or an affiliate in good faith in accordance with such instructions
or with the advice or opinion of Penn Series' legal counsel. Adviser and its
affiliates shall be protected in acting upon any instruction, advice, or opinion
provided by Penn Series or its legal counsel and upon any other paper or
document delivered by Penn Series or its legal counsel believed by Adviser to be
genuine and to have been signed by the proper person or persons and shall not be
held to have notice of any change of authority of any officer or agent of Penn
Series, until receipt of written notice thereof from Penn Series.
17. Compliance with Governmental Rules and Regulations. Except as such
responsibility may be placed upon Adviser or any affiliate expressly by, or by
fair implication of, the terms of this Agreement, and except for the accuracy of
information furnished to Penn Series by Adviser or any affiliate, Penn Series
assumes full responsibility for the preparation, contents and distribution of
the prospectuses for Penn Series, for complying with all applicable requirements
of the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, and
any other laws, rules and regulations of governmental authorities having
jurisdiction over Penn Series.
18. Limitation of Liability. Neither Adviser nor any of its
affiliates, their officers, directors, employees or agents, or any person
performing executive, administrative, trading, or other functions for Penn
Series (at the direction or request of Adviser), or Adviser or its affiliates in
connection with the
A-4
<PAGE>
discharge of obligations undertaken or reasonably assumed with respect to this
Agreement, shall be liable for any error of judgment or mistake of law or for
any loss suffered by Penn Series in connection with the matters to which this
Agreement relates, except for such error, mistake or loss resulting from willful
misfeasance, bad faith, negligence or misconduct in the performance of its, his
or her duties on behalf of Penn Series or constituting or resulting from a
failure to comply with any term of this Agreement. Adviser shall not be
responsible for any loss incurred by reason of any act or omission of the
Custodian Transfer Agent, Accounting Services Agent, or other third party with
which Company has a contractual arrangement, or of any broker, dealer,
underwriter or issuer selected by Adviser with reasonable care.
19. Obligations of Penn Series and Adviser. It is expressly agreed that
the obligations of Penn Series and Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized by
the Board of Directors of Penn Series and signed by an authorized officer of
Penn Series, acting as such, and shall bind Penn Series.
20. Indemnification by Penn Series. Penn Series will indemnify and hold
Adviser harmless from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Adviser resulting from: (i) any action
or omitting to act by Adviser or any affiliated corporation, with respect to any
service described in this Agreement, upon instructions reasonably believed by
Adviser or any affiliated corporation to have been executed by an individual who
has been identified in writing by Penn Series as a duly authorized officer of
Penn Series; or (ii) any action by Adviser or any affiliated corporation, with
respect to any service described in this Agreement, upon information provided by
Penn Series in form and under policies agreed to by Adviser and Penn Series.
Adviser shall not be entitled to such indemnification in respect of actions or
omissions constituting negligence or willful misconduct of Adviser or its
affiliates, agents or contractors, or constituting a failure by Adviser or any
affiliate to comply with any term of this Agreement. Prior to the confession of
any claim against Adviser which may be subject to this indemnification, Adviser
shall give Penn Series reasonable opportunity to defend against said claim in
its own name or in the name of Adviser.
21. Indemnification by Adviser. Adviser will indemnify and hold
harmless Penn Series from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by Penn Series resulting from
any claim, demand, action or suit arising out of Adviser's or any affiliate's
failure to comply with any term of this Agreement or which arise out of the
willful misfeasance, bad faith, negligence or misconduct of Adviser, its
affiliates, their agents or contractors. Penn Series shall not be entitled to
such indemnification in respect of actions or omissions constituting negligence
or willful misconduct of Penn Series or its agents or contractors or
constituting a failure by Penn Series to comply with any term of this Agreement;
provided, that such negligence or misconduct is not attributable to Adviser or
any person that is an affiliate of Adviser or an affiliate of an affiliate of
Adviser. Prior to confessing any claim against it which may be subject to this
indemnification, Penn Series shall give Adviser reasonable opportunity to defend
against said claim in its own name or in the name of Penn Series. For purposes
of this Section 21 and of Section 20 hereof, no broker or dealer shall be deemed
to be acting as agent or contractor of Adviser or any affiliate of Adviser, in
effecting or executing any portfolio transaction for a Fund.
22. Further Assurances. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
23. Dual Interests. It is understood that some person or persons may
be, or from time to time become, directors, officers, or shareholders of both
Penn Series and Adviser (including its affiliates), and
A-5
<PAGE>
that the existence of any such dual interest shall not affect the validity
hereof or of any transactions hereunder except as otherwise provided by a
specific provision of applicable law.
24. Term of Agreement. The term of this Agreement shall begin on the
date first above written, and unless sooner terminated as hereinafter provided,
this Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to the Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the board of directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Adviser shall furnish
to Penn Series, promptly upon its request, such information as may reasonably be
necessary to evaluate the terms of this Agreement with respect to the Fund or
any extension, renewal or amendment hereof.
25. Amendment of Agreement. This Agreement may be amended only by
written agreement of Penn Series and the Adviser and only in accordance with the
provisions of the Act, the rules and regulations promulgated under the Act and
the provisions of any other applicable law or regulation.
26. Assignment of Agreement. This Agreement shall terminate
automatically in the event of its assignment, as required by the Act and rules
and regulations promulgated thereunder.
27. Termination of Agreement. This Agreement may be terminated by Penn
Series or by Adviser with respect to any Fund, without the payment of any
penalty, upon 60 days' prior notice in writing from Penn Series to Adviser, or
upon 90 days' prior notice in writing from Adviser to Penn Series; provided,
that in the case of termination by Penn Series, such action shall have been
authorized by resolution of a majority of its directors who are not interested
persons of any party to this Agreement, or by vote of a majority of the
outstanding voting securities of the series of shares of Penn Series
representing interests in the Fund.
28. Miscellaneous.
A. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect
their construction or effect.
B. Interpretation. Nothing herein contained shall be deemed to
require Penn Series to take any action contrary to its
Articles of Incorporation or By-Laws, or any applicable
statutory or regulatory requirement to which it is subject or
by which it is bound, or to relieve or deprive the board of
directors of Penn Series of its responsibility for and control
of the conduct of the affairs of Penn Series.
C. Definitions. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the Act shall be
resolved by reference to such term or provision of the Act and
to interpretations thereof, if any, by the United States
courts or, in the absence of any controlling decision of any
such court, by rules, regulations or orders of the Securities
and Exchange Commission validly issued pursuant to the Act.
Specifically, the terms "vote of a majority of the outstanding
voting securities," "interested person," "assignment," and
"affiliated person," as used herein, shall have the meanings
assigned to them by Section
A-6
<PAGE>
2(a) of the Act. In addition, where the effect of a
requirement of the Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or of
general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
D. Notice. Notice under the Agreement shall be in writing,
addressed and delivered or sent by registered or certified
mail, postage prepaid, to the addressed party at such address
as such party may designate for the receipt of such notices.
Until further notice, it is agreed that for this purpose the
address of Penn Series is Penn Series Funds, Inc., 600 Dresher
Road, Horsham, PA 19044, Attention: President, and that of
Adviser is Independence Capital Management, Inc., 600 Dresher
Road, Horsham, PA 19044, Attention: President.
E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of
Maryland except where such state laws have been preempted by
Federal law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.
PENN SERIES FUNDS, INC.
By:__________________________________
Peter M. Sherman
President
INDEPENDENCE CAPITAL MANAGEMENT, INC.
By:__________________________________
Richardson T. Merriman
Senior Vice President
A-7
<PAGE>
Schedule A
to
INVESTMENT ADVISORY AGREEMENT
between
PENN SERIES FUNDS, INC.
and
INDEPENDENCE CAPITAL MANAGEMENT, INC.
Penn Series Funds
Money Market Fund
Quality Bond Fund
High Yield Bond Fund
Flexibly Managed Fund
Growth Equity Fund
Value Equity Fund
Emerging Growth Fund
Small Capitalization Fund
International Equity Fund
A-8
<PAGE>
Schedule B
to
INVESTMENT ADVISORY AGREEMENT
between
PENN SERIES FUNDS, INC.
and
INDEPENDENCE CAPITAL MANAGEMENT, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME OF FUND INVESTMENT ADVISORY FEES
(As a Percentage of the Average Daily
Net Assets of the Fund)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund 0.20% with respect to the first $100,000,000 of average daily
net assets of the Fund; 0.15% with respect to average daily net
assets of the Fund in excess of $100,000,000.
- -----------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 0.35% with respect to the first $100,000,000 of average daily
net assets of the Fund; 0.30% with respect to average daily net
assets of the Fund in excess of $100,000,000.
- -----------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 0.50%
- -----------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 0.60%
- -----------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 0.65% with respect to the first $100,000,000 of average daily
net assets of the Fund; 0.60% with respect to average daily net
assets of the Fund in excess of $100,000,000.
- -----------------------------------------------------------------------------------------------------------------------
Value Equity Fund 0.60%
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Fund 0.80% of the first $25,000,000 of average daily net assets of
the Fund; 0.75% of the next $25,000,000 of average daily net
assets of the Fund; and 0.70% of average daily net assets of
the Fund in excess of $50,000,000.
- -----------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund 0.85%
- -----------------------------------------------------------------------------------------------------------------------
International Equity Fund 0.85%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
A-9
<PAGE>
Schedule C
to
INVESTMENT ADVISORY AGREEMENT
between
PENN SERIES FUNDS, INC.
and
INDEPENDENCE CAPITAL MANAGEMENT, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME OF FUND EXPENSE LIMITATIONS
(As a Percentage of the Average Daily
Net Assets of the Fund)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund(1) 0.80%
- -----------------------------------------------------------------------------------------------------------------------
Quality Bond Fund(1) 0.90%
- -----------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund(2) 0.90%
- -----------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund(2) 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Growth Equity Fund(1) 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Value Equity Fund(3) 1.00%
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Fund(2) 1.15%
- -----------------------------------------------------------------------------------------------------------------------
Small Capitalization Fund(1) 1.15%
- -----------------------------------------------------------------------------------------------------------------------
International Equity Fund(1) 1.50%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) With respect to each of the Money Market, Quality Bond, Growth
Equity, Value Equity, Small Capitalization and International Equity Funds, to
the extent that a Fund's total expenses for a fiscal year (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
before any adjustment pursuant to this provision) exceed the expense limitation
for the Fund in an amount up to and including 0.10% of the average daily net
assets of the Fund, such excess amount shall be a liability of Adviser to Penn
Series. The liability (if any) of Adviser to pay Penn Series such excess amount
shall be determined on a daily basis. If, at the end of each month, there is any
liability of Adviser to pay Penn Series such excess amount, the advisory fee
shall be reduced by such liability. If, at the end of each month, there is no
liability of Adviser to pay Penn Series such excess amount and if payments of
the advisory fee at the end of prior months during the fiscal year have been
reduced in excess of that required to maintain expenses within the expense
limitation, such excess reduction shall be recaptured by Adviser and shall be
payable by Penn Series to Adviser along with the advisory fee payable to Advisor
for that month.
(2) With respect to each of the Emerging Growth, Flexibly Managed and
High Yield Bond Funds, to the extent that a Fund's total expenses for a fiscal
year (excluding interest, taxes, brokerage, other expenses which are capitalized
in accordance with generally accepted accounting principles, and extraordinary
expenses, but including investment advisory and accounting administrative and
corporate service fees before any adjustment pursuant to this provision) exceed
the expense limitation for the Fund,
A-10
<PAGE>
one-half of such excess amount shall be a liability of Adviser to Penn Series.
The liability (if any) of Adviser to pay Penn Series one-half of such excess
amount shall be determined on a daily basis. If, at the end of each month, there
is any liability of Adviser to pay Penn Series such excess amount, the advisory
fee shall be reduced by such liability. If, at the end of each month, there is
no liability of Adviser to pay Penn Series such excess amount and if payments of
the advisory fee at the end of prior months during the fiscal year have been
reduced in excess of that required to maintain expenses within the expense
limitation, such excess reduction shall be recaptured by Adviser and shall be
payable by Penn Series to Adviser along with the advisory fee payable to Adviser
for that month. If, at the end of the fiscal year, there is any remaining
liability of Adviser to pay Penn Series such excess amount (which has not been
paid through reduction of the advisory fee), Adviser shall remit to Penn Series
an amount sufficient to pay such remaining liability.
A-11
<PAGE>
EXHIBIT B
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
Between
INDEPENDENCE CAPITAL MANAGEMENT, INC.
and
OPCAP ADVISORS
Relating to
VALUE EQUITY FUND
SMALL CAPITALIZATION FUND
INVESTMENT SUB-ADVISORY AGREEMENT, made as of March __, 2000 by and
between INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Adviser"), a corporation
organized and existing under the laws of the State of Pennsylvania, and OPCAP
ADVISORS ("Sub-Adviser"), a partnership organized and existing under the laws of
the State of Delaware.
WITNESSETH:
WHEREAS, Penn Series Funds, Inc. ("Penn Series") is an open-end
management investment company registered as such under the Investment Company
Act of 1940, as amended (the "Act"), and is authorized to issue shares in
separate series with each series representing interests in a separate fund of
securities and other assets; and
WHEREAS, Adviser and Sub-Adviser are engaged principally in the
business of rendering investment advisory services and are registered as
investment advisers under the Investment Advisers Act of 1940, as amended; and
WHEREAS, Adviser is authorized to render investment advisory services
to Penn Series and to enter into a sub-advisory agreement with a sub-adviser for
the rendering of investment advisory services by the Sub-Adviser to Adviser;
WHEREAS, Adviser desires Sub-Adviser to render investment sub-advisory
services to Penn Series in the manner and on the terms and conditions
hereinafter set forth; and Sub-Adviser desires to render such services, in such
manner and under such terms;
NOW, THEREFORE, in consideration of the premises and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Investment Sub-Advisory Services. Sub-Adviser shall serve as
investment sub-adviser and shall supervise and direct the investments of the
Value Equity and Small Capitalization Funds (each a "Fund" and together the
"Funds"), and to exercise all rights incidental to ownership in accordance with
the
B-1
<PAGE>
investment objectives, program and restrictions applicable to the Funds as
provided in Penn Series' Prospectus and Statement of Additional Information
("SAI"), as amended from time to time, and such other limitations as may be
imposed by law or as Penn Series or Adviser may impose with notice in writing to
Sub-Adviser. To enable Sub-Adviser to fully exercise its discretion, Adviser
hereby appoints Sub-Adviser as agent and attorney-in-fact for the Funds with
full power and authority to buy, sell and otherwise deal in securities and
contracts for the Funds. No investment will be made by Sub-Adviser for a Fund if
that investment would violate the investment objectives, investment restrictions
or limitations of a Fund set out in the Prospectus and the SAI delivered to the
Sub-Adviser and as may be amended and delivered to Sub-Adviser in the future.
Sub-Adviser shall not take custody of any assets of Penn Series, but shall issue
settlement instructions to the custodian designated by Penn Series (the
"Custodian"). Sub-Adviser shall, in its discretion, obtain and evaluate such
information relating to the economy, industries, businesses, securities markets
and securities as it may deem necessary or useful in the discharge of its
obligations hereunder and shall formulate and implement a continuing program for
the management of the assets and resources of the Funds in a manner consistent
with the investment objectives of the Funds. In furtherance of this duty,
Sub-Adviser, as agent and attorney-in-fact with respect to Adviser and Penn
Series, is authorized, in its discretion and without prior consultation with
Adviser or Penn Series, to:
(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and
(ii) place orders and negotiate the commissions (if any) for the
execution of transactions in securities with or through such
brokers, dealers, underwriters or issuers as Sub-Adviser may
select, in conformance with the provisions of Paragraph 4
herein; and
(iii) take such other actions Sub-Adviser deems to be appropriate;
provided, however, that Sub-Adviser shall make no investment for the Fund that
would violate the objectives, investment program, or restrictions or limitations
of the Fund.
2. Accounting and Related Services. Sub-Adviser agrees to cooperate
with the Accounting Services Agent appointed by Penn Series pursuant to the
Accounting Services Agreement entered into by Penn Series and the Accounting
Services Agent. As requested from time to time, Sub-Adviser shall provide Penn
Series and its Accounting Services Agent with such information as may be
reasonably necessary to properly account for financial transactions with respect
to the Fund.
3. Fees.
A. Payment of Fees. For the services Sub-Adviser renders to
Penn Series under this Agreement, Adviser will pay Sub-Adviser
fees based on the average daily net assets of each Fund.
B. Fee Rates. The fee rates, based on the average daily net
assets of each Fund, shall be as follows:
0.40% with respect to the first $50,000,000 of the
combined total average daily net assets of the two Funds;
0.35% with respect to the next $200,000,000 of the
combined total average daily net assets of the two Funds;
B-2
<PAGE>
0.30% with respect to the combined total average daily net
assets of the two Funds in excess of $250,000,000.
C. Method of computation. The fee shall be accrued for each
calendar day and the sum of the daily fee accruals shall be
paid monthly to Sub-Adviser as of the first business day of
the next succeeding calendar month. The daily fee will be
computed by multiplying the fraction of one over the number of
calendar days in the year by the annual rate applicable to the
Fund as set forth above, and multiplying this product by the
net assets of the Fund. A Fund's net assets, for purposes of
the calculations described above, will be determined in
accordance with Penn Series' Prospectus and Statement of
Additional Information as of the close of business on the most
recent previous business day on which Penn Series was open for
business.
D. Expense Limitation. The expense limitation of each Fund, as
a percentage of the Fund's average daily net assets, is 1.00%.
To the extent that a Fund's total expenses for a fiscal year
(excluding interest, taxes, brokerage, other expenses which
are capitalized in accordance with generally accepted
accounting principles, and extraordinary expenses, but
including investment advisory and accounting, administrative
and corporate services fees before any adjustment pursuant to
this provision) exceed the expense limitation for the Fund in
an amount up to and including .10% of the average daily net
assets of the Fund, such excess amount shall be a liability of
Sub-Adviser to Adviser. The liability (if any) of Sub-Adviser
to pay Adviser such excess amount shall be determined on a
daily basis. If, at the end of each month, there is any
liability of Sub-Adviser to pay Adviser such excess amount,
the advisory fee shall be reduced by such liability. If, at
the end of each month, there is no liability of Sub-Adviser to
pay Adviser such excess amount and if payments of the advisory
fee at the end of prior months during the fiscal year have
been reduced in excess of that required to maintain expenses
within the expense limitation, such excess reduction shall be
recaptured by Sub-Adviser and shall be payable by Adviser to
Sub-Adviser along with the advisory fee payable to Sub-Adviser
for that month.
4. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for the Fund, Sub-Adviser will use its best efforts to seek the best
price and the most favorable execution of its orders. In assessing the best
price and the most favorable execution for any transaction, Sub-Adviser shall
consider the breadth of the market in the security, the price of the security,
the skill, financial condition and execution capability of the broker or dealer,
and the reasonableness of the commission, if any. Where best price and most
favorable execution will not be compromised, Sub-Adviser may take into account
the research and related services that the broker has provided to Penn Series or
the Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to
have acted unlawfully or to have breached a fiduciary duty to the Fund or be in
breach of any obligation owing to the Fund under this Agreement, or otherwise,
by reason of its having directed a securities transaction on behalf of the Fund
to a broker-dealer in compliance with the provisions of Section 28(e) of the
Securities Exchange Act of 1934, as amended, or as described from time to time
in the Penn Series' Prospectus and Statement of Additional Information. In
addition, Sub-Adviser is authorized to take into account the sale of variable
contracts which are invested in Penn Series shares in allocating to brokers or
dealers purchase and sale orders for portfolio securities, provided that
Sub-Adviser believes that the quality of the transaction and commission are
comparable to what they would be with other qualified firms. Sub-Adviser shall
advise Penn Series' Board of Directors, when requested, as to all payments of
commissions and as to its brokerage policies and practices and shall follow such
instructions with respect thereto as may be given by Penn Series' board.
B-3
<PAGE>
5. Use of the Services of Others. Sub-Adviser may (at its cost except
as contemplated by Section 4 of this Agreement) employ, retain or otherwise
avail itself of the services or facilities of other persons or organizations for
the purpose of providing Penn Series, Adviser or itself, as appropriate, with
such statistical and other factual information, such advice regarding economic
factors and trends, such advice as to occasional transactions in specific
securities or such other information, advice or assistance as Sub-Adviser may
deem necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to Penn Series and Adviser, or in the discharge
of Sub-Adviser's overall responsibilities with respect to the other accounts
which it serves as investment adviser.
6. Personnel, Office Space, and Facilities. Sub-Adviser at its own
expense shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and office services as it, or any affiliated
corporation of Sub-Adviser, requires in the performance of services under this
Agreement.
7. Ownership of Software and Related Material. All computer programs,
magnetic tapes, written procedures and similar items developed and used by
Sub-Adviser or any affiliate in performance of this Agreement are the property
of Sub-Adviser and will not become the property of Penn Series or Adviser.
8. Reports to Penn Series and Cooperation with Accountants.
Sub-Adviser, and any affiliated corporation of Sub-Adviser performing services
for Adviser and Penn Series described in this Agreement, shall furnish to or
place at the disposal of Penn Series and Adviser, such information, reports,
evaluations, analyses and opinions as Penn Series and Adviser may, at any time
or from time to time, reasonably request or as Sub-Adviser may deem helpful, to
reasonably ensure compliance with applicable laws and regulations or for any
other purpose. Sub-Adviser and its affiliates shall cooperate with Penn Series'
independent public accountants and take all reasonable action in the performance
of services and obligations under this Agreement to assure that the information
needed by such accountants is made available to them for the expression of their
opinion without any qualification as to the scope of their examination,
including, but not limited to, their opinion included in Penn Series' annual
report under the Act and annual amendment to Penn Series' registration statement
under the Act.
9. Reports to Sub-Adviser. Penn Series and/or Adviser shall furnish or
otherwise make available to Sub-Adviser such prospectuses, statements of
additional information, financial statements, proxy statements, reports, and
other information relating to the business and affairs of Penn Series, as
Sub-Adviser may, at any time or from time to time, reasonably require in order
to discharge its obligations under this Agreement.
10. Ownership of Records. All records required to be maintained and
kept current by Penn Series pursuant to the provisions of rules or regulations
of the Securities and Exchange Commission under Section 31(a) of the Act and
that are maintained and kept current by Sub-Adviser or any affiliated
corporation of Sub-Adviser on behalf of Penn Series are the property of Penn
Series. Such records will be preserved by Sub-Adviser itself or through an
affiliated corporation for the periods prescribed in Rule 3la-2 under the Act,
where applicable, or in such other applicable rules that may be adopted from
time to time under the Act. Such records may be inspected by representatives of
Penn Series and Adviser at reasonable times and, in the event of termination of
this Agreement, will be promptly delivered to Adviser and Penn Series upon
request.
11. Services to Other Clients. Nothing herein contained shall limit the
freedom of Sub-Adviser or any affiliated person of Sub-Adviser to render
investment supervisory and other services to other investment companies, to act
as investment adviser or investment counselor to other persons, firms
B-4
<PAGE>
or corporations or to engage in other business activities; but so long as this
Agreement or any extension, renewal or amendment hereof shall remain in effect
as to Fund, or until Sub-Adviser shall otherwise consent, Sub-Adviser shall be
the only investment sub-adviser to the Fund. It is understood that Sub-Adviser
may give advice and take action for its other clients which may differ from
advice given, or the timing or nature of action taken, for a Fund. Sub-Adviser
is not obligated to initiate transactions for a Fund in any security which
Sub-Adviser , its principals, affiliates or employees may purchase or sell for
its or their own accounts or other clients.
12. Confidential Relationship. Information furnished by Penn Series or
by one party to another, including Penn Series' or a party's respective agents
and employees, is confidential and shall not be disclosed to third parties
unless required by law. Sub-Adviser, on behalf of itself and its affiliates and
representatives, agrees to keep confidential all records and other information
relating to Adviser or Penn Series (as the case may be), except after prior
notification to and approval in writing by Adviser or Penn Series (as the case
may be), which approval shall not be unreasonably withheld, and may not be
withheld, where Sub-Adviser or any affiliate may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, when so requested by Adviser and
Penn Series.
13. Proxies. Subject to such oversight by Penn Series as the Board of
Directors of Penn Series shall deem appropriate, Sub-Adviser shall vote proxies
solicited by or with respect to the issuers of securities held in a Fund.
14. Instructions, Opinion of Counsel and Signatures. At any time
Sub-Adviser may apply to an officer of Penn Series for instructions, and may
consult legal counsel for Penn Series, in respect of any matter arising in
connection with this Agreement, and Sub-Adviser shall not be liable for any
action taken or omitted by it or by any affiliate in good faith in accordance
with such instructions or with the advice or opinion of Penn Series' legal
counsel. Sub-Adviser and its affiliates shall be protected in acting upon any
instruction, advice, or opinion provided by Penn Series or its legal counsel and
upon any other paper or document delivered by Penn Series or its legal counsel
believed by Sub-Adviser to be genuine and to have been signed by the proper
person or persons and shall not be held to have notice of any change of
authority of any officer or agent of Penn Series, until receipt of written
notice thereof from Penn Series. Sub-Adviser shall inform Adviser of all
applications to Penn Series for instructions and all consultations with legal
counsel for Penn Series at the time of such application or consultation.
15. Compliance with Governmental Rules and Regulations. Except as such
responsibility may be placed upon Sub-Adviser or any affiliate by the terms of
this Agreement, and except for the accuracy of information furnished to Penn
Series by Sub-Adviser or any affiliate, Sub-Adviser does not assume
responsibility for the preparation, contents and distribution of the
prospectuses for Penn Series, for complying with any applicable requirements of
the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, or any
other laws, rules and regulations of governmental authorities having
jurisdiction over Penn Series.
16. Limitation of Liability. Neither Sub-Adviser nor any of its
affiliates, their respective officers, directors, employees or agents, or any
person performing executive, administrative, trading, or other functions for
Penn Series (at the direction or request of Sub-Adviser), or Sub-Adviser or its
affiliates in connection with the discharge of obligations undertaken or
reasonably assumed with respect to this Agreement, shall be liable for any error
of judgment or mistake of law or for any loss suffered by Penn Series in
connection with the matters to which this Agreement relates, except for such
error, mistake or loss resulting from willful misfeasance, bad faith, negligence
or willful misconduct in the performance of its, his or her duties on behalf of
Penn Series or constituting or resulting from a failure to comply with any
B-5
<PAGE>
term of this Agreement. Sub-Adviser shall not be responsible for any loss
incurred by reason of any act or omission of the Custodian or of any broker,
dealer, underwriter or issuer selected by Sub-Adviser with reasonable care.
17. Obligations of Adviser and Sub-Adviser. It is expressly agreed that
the obligations of Adviser and Sub-Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized in
accordance with the governing documents of each party and in accordance with
applicable law, and shall be signed by an authorized officer of each party,
acting as such, and shall be binding on each party.
18. Indemnification by Adviser. Adviser will indemnify and hold
Sub-Adviser harmless from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by Sub-Adviser resulting from:
(i) any action or omission of Sub-Adviser or any affiliated corporation, with
respect to any service described in this Agreement, upon instructions reasonably
believed by Sub-Adviser or any affiliated corporation to have been executed by
an individual who has been identified in writing by Penn Series as a duly
authorized officer of Penn Series or Adviser; (ii) any action of Sub-Adviser or
any affiliated corporation, with respect to any service described in this
Agreement upon information provided by Penn Series or Adviser in form and under
policies agreed to by Sub-Adviser and Penn Series or Adviser. Sub-Adviser shall
not be entitled to such indemnification in respect of actions or omissions
constituting negligence or willful misconduct of Sub-Adviser or its affiliates,
agents or contractors, or constituting a failure by Sub-Adviser or any affiliate
to comply with any term of this Agreement. Prior to the confession of any claim
against Adviser which may be subject to this indemnification, Sub-Adviser shall
give Adviser reasonable opportunity to defend against said claim in its own name
or in the name of Sub-Adviser.
19. Indemnification by Sub-Adviser. Sub-Adviser will indemnify and hold
harmless Penn Series and Adviser from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by Penn Series and
Adviser and resulting from any claim, demand, action or suit arising out of
Sub-Adviser's or any affiliate's failure to comply with any term of this
Agreement or which arise out of the willful misfeasance, bad faith, negligence
or misconduct of Sub-Adviser, its affiliates, their agents or contractors.
Neither Penn Series nor Adviser shall be entitled to such indemnification in
respect of actions or omissions constituting negligence or willful misconduct of
Penn Series or Adviser, or their agents or contractors or constituting a failure
by Adviser to comply with any term of this Agreement; provided, that such
negligence or misconduct is not attributable to Sub-Adviser or any person that
is an affiliate of Sub-Adviser or an affiliate of an affiliate of Sub-Adviser.
Prior to confessing any claim against it which may be subject to this
indemnification, Adviser shall give Sub-Adviser reasonable opportunity to defend
against said claim in its own name or in the name of Adviser. For purposes of
this Section 19 and of Section 18 hereof, no broker or dealer shall be deemed to
be acting as agent or contractor of Sub-Adviser or any affiliate of Sub-Adviser,
in effecting or executing any portfolio transaction for the Fund.
20. Further Assurances. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
21. Term of Agreement. The term of this Agreement shall begin on the
date first above written, and unless sooner terminated as hereinafter provided,
this Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to each Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board of Directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
B-6
<PAGE>
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Sub-Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
each Fund or any extension, renewal or amendment hereof.
22. Amendment and Assignment of Agreement. This Agreement may not be
amended or assigned without the written consent of the parties hereto, and
without the affirmative vote of a majority of the outstanding voting securities
of the series of shares of Penn Series representing interests in the affected
Fund, and, without affecting any claim for damages or other right that any party
hereto may have as a result thereof, this Agreement shall automatically and
immediately terminate in the event of its assignment.
23. Termination of Agreement. This Agreement may be terminated by
Adviser, Penn Series or by Sub-Adviser, with respect to a Fund, without payment
of any penalty, upon 60 days' prior notice in writing from Adviser to
Sub-Adviser, or upon 90 days' prior notice in writing from Sub-Adviser to
Adviser; provided, that in the case of termination by Adviser or Penn Series,
such action shall have been authorized by resolution of a majority of its
directors who are not interested persons of any party to this Agreement, or by
vote of a majority of the outstanding voting securities of the series of shares
of Penn Series representing interests in the affected Fund.
24. Miscellaneous.
A. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect
their construction or effect.
B. Interpretation. Nothing herein contained shall be deemed to
require Penn Series to take any action contrary to its
Articles of Incorporation or By-Laws, or any applicable
statutory or regulatory requirement to which it is subject or
by which it is bound, or to relieve or deprive the board of
directors of Penn Series of its responsibility for and control
of the conduct of the affairs of Penn Series.
C. Definitions. Any question of interpretation of any terms or
provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the Act shall be
resolved by reference to such term or provision of the Act and
to interpretations thereof, if any, by the United States
courts or, in the absence of any controlling decision of any
such court, by rules, regulations or orders of the Securities
and Exchange Commission validly issued pursuant to the Act.
Specifically, the terms "vote of a majority of the outstanding
voting securities," "interested person," "assignment," and
"affiliated person," as used herein, shall have the meanings
assigned to them by Section 2(a) of the Act. In addition,
where the effect of a requirement of the Act reflected in any
provision of this Agreement is relaxed by a rule, regulation
or order of the Securities and Exchange Commission, whether of
special or of general application, such provision shall be
deemed to incorporate the effect of such rule, regulation or
order.
D. Notice. Notice under the Agreement shall be in writing,
addressed and delivered or sent by registered or certified
mail, postage prepaid, to the addressed party at such address
as such party may designate for the receipt of such notices.
Until further notice, it is agreed that for this purpose the
address of Adviser is Independence Capital
B-7
<PAGE>
Management, Inc., 600 Dresher Road, Horsham, PA 19044,
Attention: President, and that of Sub-Adviser is OpCap
Advisors, 1 World Financial Center, New York, New York 10281,
Attention: President.
E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of Maryland except
where such state laws have been preempted by Federal law.
F. Counterparts. This Agreement may be entered into in
counterparts, each of which when so executed and delivered
shall be deemed to be an original, and together shall
constitute one document.
G. Entire Agreement; Severability. This Agreement is the
entire agreement of the parties and supersedes all prior or
contemporaneous written or oral negotiations, correspondence,
agreements and understandings regarding the subject matter
hereof. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability
of any and all other provisions hereof.
H. No Third Party Beneficiaries. Neither party intends for
this Agreement to benefit any third-party not expressly named
in this Agreement.
I. Changes in Sub-Adviser Organization. The Sub-Adviser agrees
to notify the Adviser within a reasonable period of time
regarding a material change in the members of Sub-Adviser.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.
Attest: INDEPENDENCE CAPITAL
MANAGEMENT, INC.
______________________________ By:___________________________
Secretary Peter M. Sherman
President
Attest: OPCAP ADVISORS
By:___________________________
______________________________
Secretary
B-8
<PAGE>
<TABLE>
<CAPTION>
Annex A
Approximate Net Assets
Fund (as of 12/31/99) Advisory Fee Rate
---- ---------------- -----------------
<S> <C> <C> <C>
Oppenheimer Quest Value Fund, Inc. $1,438,154,183 1.00% on the first $400 million of
average daily net assets;
0.90% on the next $400 million; and
0.80% of net assets in excess of $800
million(1)
Oppenheimer Quest $249,148,872 1.00% on the first $400 million of
Small Cap Value Fund average daily net assets;
0.90% on the next $400 million; and
0.80% of net assets in excess of $800
million(1)
OCC Accumulation Trust $70,512,213 0.80% on the first $400 million of
Equity Portfolio average daily net assets; 0.75% on the
next $400 million; and 0.70% of average
daily net assets in excess of $800
million(2)
OCC Accumulation Trust $151,289,879 0.80% on the first $400 million of
Small Cap Portfolio average daily net assets; 0.75% on the
next $400 million; and 0.70% of average
daily net assets in excess of $800
million(2)
Endeavor Series Trust $209,597,451 0.40%(3)
Value Equity Portfolio
The Saratoga Advantage Trust $78,402,989 0.30%(4)
Large Capitalization Value Portfolio
</TABLE>
- ----------------------
(1) With respect to each of these funds, Oppenheimer Funds, Inc. ("OFI") is
the investment adviser and OpCap Advisors is the sub-adviser. OFI pays
OpCap Advisors monthly an annual fee based on the average daily net
assets of the fund equal to 40% of the advisory fee collected by OFI
based on the total net assets of the fund as of November 22, 1995 (the
"base amount") plus 30% of the investment advisory fee collected by OFI
based on the total net assets of the fund that exceed the base amount.
(2) Total Portfolio Expenses for the Equity and Small Cap Portfolios are
limited by OpCap Advisors so that their respective annualized operating
expenses (net of any expense offsets) do not exceed 1.00% of average
daily net assets.
(3) This fee is for investment advisory services only. Management services
are provided to the portfolio by a party other than OpCap Advisors. The
Manager, who pays the investment advisory fee to OpCap Advisors,
receives a management fee of 0.80% of average daily net assets of the
portfolio.
(4) This fee is for investment advisory services only. Management services
are provided to the portfolio by a party other than OpCap Advisors. The
Manager, who pays the investment advisory fee to OpCap Advisors,
receives a management fee of 0.65% of average daily net assets of the
portfolio.
B-9
<PAGE>
THE PENN INSURANCE AND ANNUITY COMPANY
PIA Variable Annuity Account I
Voting Instruction Form
At the Meeting of Shareholders of Penn Series Funds, Inc. (the "Company")
scheduled to be held on March 23, 2000 and at any adjournments thereof, the
undersigned owner of a variable annuity contract(s) participating in the named
separate account, hereby instructs The Penn Insurance and Annuity Company
("PIA") to vote shares of the fund or funds of the Company (each a "Fund" and,
collectively, the "Funds") held under the contract(s) on the proposals set forth
in the Notice of Meeting and Proxy Statement that accompanied this Voting
Instruction Form, and for any adjournments of the Meeting, in accordance with
the instructions below.
The undersigned acknowledges receipt of the Notice of Meeting of
Shareholders scheduled to be held on March 23, 2000 and the accompanying Proxy
Statement.
[X] Please mark your choice like this where shares are entered and
sign and date below.
If you wish to vote for or against all of the Proposals that are
applicable to your contract(s), mark [X] in the appropriate space here in lieu
of marking individual Proposals.
FOR [ ] AGAINST [ ]
PROPOSAL 1. PROPOSAL 2.
Approve proposal which would Approve new investment advisory
authorize Independence Capital agreement between the Company and
Management, Inc. ("ICMI"), subject ICMI.
to the supervision and approval of
the Board of Directors, to hire,
terminate or replace investment
sub-advisers for each of the
Company's Funds without seeking
shareholder approval.
<TABLE>
<CAPTION>
PROPOSAL 1. PROPOSAL 2.
FUND UNITS FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C> <C> <C>
Growth Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Value Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Small Capitalization Fund [ ] [ ] [ ] [ ] [ ] [ ]
Emerging Growth Fund [ ] [ ] [ ] [ ] [ ] [ ]
Flexibly Managed Fund [ ] [ ] [ ] [ ] [ ] [ ]
International Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Quality Bond Fund [ ] [ ] [ ] [ ] [ ] [ ]
High Yield Bond Fund [ ] [ ] [ ] [ ] [ ] [ ]
Money Market Fund [ ] [ ] [ ] [ ] [ ] [ ]
</TABLE>
<PAGE>
PROPOSAL 3.
Approve new investment sub-advisory
agreement between ICMI and OpCap
Advisors with respect to the Value
Equity and Small Capitalization
Funds.
PROPOSAL 3.
FUND UNITS FOR AGAINST ABSTAIN
Small Capitalization Fund [ ] [ ] [ ]
Value Equity Fund [ ] [ ] [ ]
The Shares will be voted as directed. If no direction is given on this
form when duly executed and returned, the Shares will be voted FOR the Proposal
in accordance with the recommendations of the Board of Directors of the Company.
Penn Mutual will vote on any other business that may properly come before the
meeting in the discretion of its management. This voting instruction is
solicited by Penn Mutual.
Your signature(s) should be exactly as your name or names appear on this
Voting Instruction Form. If the shares are held jointly, each holder should
sign. If signing is by an attorney, executor, administrator or guardian, please
print your full name below your signature.
________________________________
Signature
_________________________________ Dated:_____________________ , 2000
Signature
<PAGE>
The Shares will be voted as directed. If no direction is given on this
form when duly executed and returned, the Shares will be voted FOR the Proposal
in accordance with the recommendations of the Board of Directors of the Company.
PIA will vote on any other business that may properly come before the meeting in
the discretion of its management. This voting instruction is solicited by PIA.
Your signature(s) should be exactly as your name or names appear on this
Voting Instruction Form. If the shares are held jointly, each holder should
sign. If signing is by an attorney, executor, administrator or guardian, please
print your full name below your signature.
________________________________ Dated:_____________________ , 2000
Signature
_________________________________
Signature
<PAGE>
THE PENN MUTUAL LIFE INSURANCE COMPANY
Penn Mutual Variable Annuity Accounts I, II and III
Penn Mutual Variable Life Account I
Voting Instruction Form
- -----------------------------------------------
- -----------------------------------------------
At the Meeting of Shareholders of Penn Series Funds, Inc. (the "Company")
scheduled to be held on March 23, 2000 and at any adjournments thereof, the
undersigned owner of a variable annuity contract(s) or variable life insurance
policy(ies) participating in one or more of the named separate accounts, hereby
instructs The Penn Mutual Life Insurance Company ("Penn Mutual") to vote shares
of the fund or funds of the Company (each a "Fund" and, collectively, the
"Funds") held under the contract(s) and/or policy(ies) on the proposals set
forth in the Notice of Meeting and Proxy Statement that accompanied this Voting
Instruction Form, and for any adjournments of the Meeting, in accordance with
the instructions below.
The undersigned acknowledges receipt of the Notice of Meeting of
Shareholders scheduled to be held on March 23, 2000 and the accompanying Proxy
Statement.
[X] Please mark your choice like this where shares are entered and
sign and date below.
If you wish to vote for or against all of the Proposals that are
applicable to your contract(s) or policy(ies), mark [X] in the appropriate space
here in lieu of marking individual Proposals.
<TABLE>
<CAPTION>
FOR [ ] AGAINST [ ]
PROPOSAL 1. PROPOSAL 2.
<S> <C> <C> <C> <C> <C> <C>
Approve proposal which would authorize Approval new investment advisory agreement between
Independence Capital Management, Inc. the Company and ICMI.
("ICMI"), subject to the supervision and
approval of the Board of Directors, to
hire, terminate or replace investment
sub-advisers for each of the Company's
Funds without seeking shareholder approval. PROPOSAL 1. PROPOSAL 2.
FUND UNITS FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
Growth Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Value Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Small Capitalization Fund [ ] [ ] [ ] [ ] [ ] [ ]
Emerging Growth Fund [ ] [ ] [ ] [ ] [ ] [ ]
Flexibily Managed Fund [ ] [ ] [ ] [ ] [ ] [ ]
International Equity Fund [ ] [ ] [ ] [ ] [ ] [ ]
Quality Bond Fund [ ] [ ] [ ] [ ] [ ] [ ]
High Yield Bond Fund [ ] [ ] [ ] [ ] [ ] [ ]
Money Market Fund [ ] [ ] [ ] [ ] [ ] [ ]
PROPOSAL 3.
Approve new investment sub-advisory
agreement between ICMI and OpCap Advisors
with respect to the Value Equity and
Small Capitalization Funds. PROPOSAL 1.
FUND UNITS FOR AGAINST ABSTAIN
Small Capitalization Fund [ ] [ ] [ ]
Value Equity Fund [ ] [ ] [ ]
</TABLE>
<PAGE>
The Shares will be voted as directed. If no direction is given on this
form when duly executed and returned, the Shares will be voted FOR the Proposal
in accordance with the recommendations of the Board of Directors of the Company.
Penn Mutual will vote on any other business that may properly come before the
meeting in the discretion of its management. This voting instruction is
solicited by Penn Mutual.
Your signature(s) should be exactly as your name or names appear on this
Voting Instruction Form. If the shares are held jointly, each holder should
sign. If signing is by an attorney, executor, administrator or guardian, please
print your full name below your signature.
_________________________________
Signature
_________________________________ Dated:_________________________, 2000
Signature
<PAGE>
The Shares will be voted as directed. If no direction is given on this
form when duly executed and returned, the Shares will be voted FOR the Proposal
in accordance with the recommendations of the Board of Directors of the Company.
Penn Mutual will vote on any other business that may properly come before the
meeting in the discretion of its management. This voting instruction is
solicited by Penn Mutual.
Your signature(s) should be exactly as your name or names appear on this
Voting Instruction Form. If the shares are held jointly, each holder should
sign. If signing is by an attorney, executor, administrator or guardian, please
print your full name below your signature.
_________________________________
Signature
_________________________________ Dated:_________________________, 2000
Signature
