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Prospectus -- May 1, 2000
PENN SERIES FUNDS, INC.
600 Dresher Road, Horsham, PA 19044 o Telephone 800-523-0650
MONEY MARKET FUND
LIMITED MATURITY BOND FUND
QUALITY BOND FUND
HIGH YIELD BOND FUND
FLEXIBLY MANAGED FUND
GROWTH AND INCOME FUND
GROWTH EQUITY FUND
LARGE CAP VALUE FUND
INDEX 500 FUND
MID CAP GROWTH FUND
MID CAP VALUE FUND
EMERGING GROWTH FUND
SMALL CAP VALUE FUND
INTERNATIONAL EQUITY FUND
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
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Penn Series Funds, Inc. ("Penn Series") is a mutual fund that provides
investment funds for variable annuity and variable life insurance contracts
issued by The Penn Mutual Life Insurance Company ("Penn Mutual") and its
subsidiary, The Penn Insurance and Annuity Company ("PIA"). Penn Series offers
14 different portfolios or "Funds" advised by Independence Capital Management,
Inc. ("ICMI") and, in the case of certain Funds, sub-advised by T. Rowe Price
Associates, Inc., Putnam Investment Management, Inc., Royce & Associates, Inc.,
Vontobel USA Inc., RS Investment Management, Inc., Neuberger Berman Management
Inc., Turner Investment Partners, Inc. and Wells Capital Management
Incorporated. One of the Funds, the Growth and Income Fund, is currently
available only to certain contracts issued by Penn Mutual in the qualified
pension plan market.
PROSPECTUS CONTENTS
FUND INVESTMENT SUMMARIES
Money Market Fund ......................... 4
Limited Maturity Bond Fund ................ 6
Quality Bond Fund ......................... 8
High Yield Bond Fund ...................... 10
Flexibly Managed Fund ..................... 12
Growth and Income Fund .................... 14
Growth Equity Fund ........................ 16
Large Cap Value Fund ...................... 18
Index 500 Fund ............................ 20
Mid Cap Growth Fund ....................... 22
Mid Cap Value Fund ........................ 24
Emerging Growth Fund ...................... 26
Small Cap Value Fund ...................... 28
International Equity ...................... 30
ADDITIONAL INFORMATION .................... 32
MANAGEMENT
Investment Adviser ........................ 32
Sub-Advisers .............................. 33
Expenses and Limitations .................. 35
ACCOUNT POLICIES .......................... 36
FINANCIAL HIGHLIGHTS ...................... 38
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INVESTMENT SUMMARY: MONEY MARKET FUND
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Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to preserve
shareholder capital, maintain liquidity and achieve the
highest possible level of current income consistent
therewith.
Investment Strategy: The Fund will invest in a diversified portfolio of high
quality money market instruments, which are rated within the
two highest credit categories assigned by recognized rating
organizations or, if not rated, are of comparable investment
quality as determined by the Adviser. Investments include
commercial paper, U.S. Treasury securities, bank
certificates of deposit and repurchase agreements. The
Adviser looks for money market instruments that present
minimal credit risks. Important factors in selecting
investments include a company's profitability, ability to
generate funds and capital adequacy, and liquidity of the
investment. The Fund will invest only in securities that
mature in 397 days or less. Penn Series policy is to
maintain a stable price of $1.00 per share of the Fund.
Risks of Investing: The Fund may be appropriate for investors who want to
minimize the risk of loss of principal and maintain
liquidity of their investment, and at the same time receive
a return on their investment. The Fund follows strict rules
about credit risk, maturity and diversification of its
investments. However, although the Fund seeks to preserve
the value of your investment in shares of the Fund at $1.00
per share, there is no guarantee and it is still possible to
lose money. An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They include only those periods in which
ICMI managed the Fund's investments. The bar chart and table
demonstrate the variability of performance over time and
provide an indication of the risks and volatility of an
investment in the Fund. Past performance does not
necessarily indicate how the Fund will perform in the
future. This performance information does not include the
impact of any charges deducted under your insurance
contract. If it did, returns would be lower.
</TABLE>
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For years ended December 31,
2.53% 3.71% 5.51% 5.00% 5.15% 5.00% 4.66%
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1993 1994 1995 1996 1997 1998 1999
Best Quarter Worst Quarter
1.39% 0.61%
(6/30/95) (3/31/93)
Average Annual Total Return (for Periods Ended December 31, 1999)
Money Market Fund
1 Year................................. 4.66%
5 Year ................................ 5.06%
Since November 1, 1992(1).............. 4.46%
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(1) Date ICMI began managing the Fund's investments.
The current yield of the Money Market Fund for the seven-day period ended
December 31, 1999 was 5.22%.
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INVESTMENT SUMMARY: LIMITED MATURITY BOND FUND
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Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to provide the
highest available current income consistent with liquidity
and low risk to principal; total return is secondary.
Investment Strategy: The Fund invests primarily in short-to intermediate term
investment-grade debt securities of U.S. government and
corporate issuers. The Adviser uses an active bond
management approach. It seeks to find securities that are
undervalued in the marketplace based on both a relative
value analysis of individual securities combined with an
analysis of macro-economic factors. With this approach, the
Adviser attempts to identify securities that are undervalued
based on their quality, maturity, and sector in the market
place. The Advisor will purchase an individual security when
doing so is also consistent with its macro-economic outlook,
including its forecast of interest rates and its analysis of
the yield curve (a measure of interest rates of securities
with the same quality, but different maturities). In
addition, the Advisor will opportunistically purchase
securities to take advantage of inefficiencies of prices in
the securities markets. The Advisor will sell a security
when it believes that the security has been fully priced.
The Adviser seeks to reduce credit risk by diversifying
among many issuers and different types of securities.
Duration: The average duration of a fixed income portfolio
measures its exposure to the risk of changing interest
rates. Typically, with a 1% rise in interest rates, an
investment's value may be expected to fall approximately 1%
for each year of its duration. Although the Fund may invest
in securities of any duration, under normal circumstances it
maintains an average portfolio duration of one to three
years.
Quality: The Fund will invest primarily in investment grade
debt securities and no more than 10% of its assets in "junk
bonds."
Sectors: The Fund will invest primarily in Corporate Bonds
and U.S. Government Bonds, including Mortgage-Backed and
Asset-Backed Securities.
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Turnover: Because the Adviser will look for inefficiencies
in the market and sell when they feel a security is fully
priced, turnover can be expected to be relatively high.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are seeking the highest current income consistent with
liquidity and low risk to principal available through an
investment in investment grade debt. The Fund's value will
change primarily with the changes in the prices of fixed
income securities (e.g., bonds) held by the Fund. The value
of fixed income securities will vary inversely with changes
in interest rates. A decrease in interest rates will
generally result in an increase in value of the Fund.
Conversely, during periods of rising interest rates, the
value of the Fund will generally decline. Longer term fixed
income securities tend to experience larger changes in value
than shorter-term securities because they are more sensitive
to interest rate changes. A portfolio with a lower average
duration generally will experience less price volatility in
response to changes in interest rates as compared to a
portfolio with a higher duration. The prices of
mortgage-backed securities may be particularly sensitive to
changes in interest rates because of the risk that borrowers
will become more or less likely to refinance their
mortgages. For example, an increase in interest rates
generally will reduce pre-payments, effectively lengthening
the maturity of some mortgage-backed securities, and making
them more volatile. Due to pre-payment risk,
mortgage-backed securities may respond differently to
changes in interest rates than other fixed income
securities. As with investing in other securities whose
prices increase or decrease in market value, you may lose
money investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly no
performance information is presented.
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INVESTMENT SUMMARY: QUALITY BOND FUND
Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The Fund seeks the highest income over the long term that is
consistent with the preservation of principal.
Investment Strategy: The Fund invests primarily in marketable investment-grade
debt securities. The portfolio manager heads up a team of
analysts that uses an active bond management approach. It
seeks to find securities that are undervalued in the
marketplace based on both a relative value analysis of
individual securities combined with an analysis of
macro-economic factors. With this approach, the Adviser
attempts to identify securities that are undervalued based
on their quality, maturity, and sector in the market place.
The Advisor will purchase an individual security when doing
so is also consistent with its macro-economic outlook,
including its forecast of interest rates and its analysis of
the yield curve (a measure of interest rates of securities
with the same quality, but different maturities). In
addition, the Advisor will opportunistically purchase
securities to take advantage of inefficiencies of prices in
the securities markets. The Advisor will sell a security
when it believes that the security has been fully priced.
The Adviser seeks to reduce credit risk by diversifying
among many issuers and different types of securities.
Duration: The average duration of a fixed income portfolio
measures its exposure to the risk of changing interest
rates. Typically, with a 1% rise in interest rates, an
investment's value may be expected to fall approximately 1%
for each year of its duration. Duration is set for the
portfolio generally at between 3.5 and 5.5 years, depending
on the interest rate outlook.
Quality: The Fund will invest primarily in investment grade
debt securities and no more than 10% of the net assets in
"junk bonds."
Sectors: The fund will invest primarily in the following
sectors: Corporate Bonds, U.S. Government Bonds, U.S.
Government Agency Securities, Commercial Paper,
Collateralized Mortgage Obligations, and Asset Backed
Securities.
Turnover: Because the portfolio management team looks for
inefficiencies in the market and will sell when they feel a
security
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is fully priced, turnover can be relatively high. The Fund's
annual portfolio turnover rates for 1999, 1998 and 1997 were
815.1%, 477.2% and 317.3% respectively.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are seeking investment income and preservation of
principal. The Fund's value will change primarily with the
changes in the prices of the fixed income securities (e.g.,
bonds) held by the Fund. The value of the fixed income
securities will vary inversely with changes in interest
rates. A decrease in interest rates will generally result in
an increase in value of the Fund. Conversely, during periods
of rising interest rates, the value of the Fund will
generally decline. Longer term fixed income securities tend
to experience larger changes in value than shorter-term
securities because they are more sensitive to interest rate
changes. A portfolio with a lower average duration generally
will experience less price volatility in response to changes
in interest rates as compared with a portfolio with a higher
duration. The prices of mortgage-backed securities may be
particularly sensitive to changes in interest rates because
of the risk that borrowers will become more or less likely
to refinance their mortgages. For example, an increase in
interest rates generally will reduce pre-payments,
effectively lengthening the maturity of some mortgage-backed
securities, and making them more volatile. Due to
pre-payment risk, mortgage-backed securities may respond
differently to changes in interest rates than other fixed
income securities. As with investing in other securities
whose prices increase and decrease in market value, loss of
money is a risk of investing in the Fund.
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They only include those periods in which
ICMI managed the Fund's investments. They demonstrate the
variability of performance over time and provide an
indication of the risks and volatility of an investment in
the Fund. Past performance does not necessarily indicate how
the Fund will perform in the future. This performance
information does not include the impact of any charges
deducted under your insurance contract. If it did, returns
would be lower.
</TABLE>
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For years ended December 31,
11.67% -5.29% 20.14% 4.14% 8.03% 10.17% 0.00%
---------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
Best Quarter Worst Quarter
6.31% -4.71%
(3/31/95) (3/31/94)
Average Annual Total Return (for Periods Ended December 31, 1999)
Lehman Brothers
Quality Bond Fund Aggregate Bond Index(1)
1 Year........................ 0.00% -0.83%
5 Year ....................... 8.29% 7.73%
Since November 1, 1992(2)..... 6.82% 6.50%
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(1) The Lehman Brothers Aggregate Bond Index is an unmanaged index that is a
widely recognized benchmark of general bond performance. The index is a
passive measure of bond market returns. It does not factor in the costs of
buying, selling and holding securities -- costs which are reflected in the
Fund's results.
(2) Date ICMI began managing the Fund's investments.
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INVESTMENT SUMMARY: HIGH YIELD BOND FUND
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Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: T. Rowe Price Associates, Inc.
Investment Objective: The investment objective of the Fund is to realize high
current income.
Investment Strategy: The Fund invests in a widely diversified portfolio of
high-yield corporate bonds, often called "junk" bonds,
income-producing convertible securities and preferred
stocks. High-yield bonds are rated below investment-grade
(BB and lower) and generally provide high income in an
effort to compensate investors for their higher risk of
default, that is the failure to make required interest or
principal payments. High-yield bond issuers include small or
relatively new companies lacking the history or capital to
merit investment-grade status, former blue chip companies
downgraded because of financial problems, companies electing
to borrow heavily to finance or avoid a takeover or buyout,
and firms with heavy debt loads. The Fund's dollar weighted
average maturity generally is expected to be in the eight to
twelve year range. In selecting investments for the Fund,
the Sub-Adviser relies extensively on its research analysts.
When their outlook for the economy is positive, they may
purchase slightly lower-rated bonds in an effort to secure
additional income and appreciation potential. When they are
less positive, they may gravitate toward higher-rated junk
bonds. The Fund may sell holdings for a variety of reasons,
such as to adjust portfolio's average maturity or quality,
or to shift assets into higher yielding securities.
Risks of Investing: An investment in the Fund may be appropriate for long-term,
risk oriented investors who are willing to accept the
greater risks and uncertainties of investing in high yield
bonds in the hope of earning high current income. The Fund's
value will change primarily with changes in the prices of
the bonds held by the Fund. The value of bonds will vary
inversely with changes in interest rates. A decrease in
interest rates will generally result in an increase in value
of the Fund. Conversely, during periods of rising interest
rates, the value of the Fund will generally decline. Longer
term fixed income securities tend to suffer greater declines
than
</TABLE>
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shorter-term securities because they are more sensitive to
interest rate changes. The Fund may be more vulnerable to
interest rate risk if it is focusing on BB rated bonds,
since better-quality junk bonds follow the higher-grade
market to some extent. But if the Fund's focus is bonds
rated B and below, credit risk will probably predominate.
Investing in high yield bonds involves additional risks,
including credit risk. The value of high yield, lower
quality bonds is affected by the creditworthiness of the
companies that issue the securities, general economic and
specific industry conditions. Companies issuing high-yield
bonds are not as strong financially as those with higher
credit ratings, so the bonds are usually considered
speculative investments. These companies are more vulnerable
to financial setbacks and recession than more creditworthy
companies which may impair their ability to make interest
and principal payments. Therefore, the Fund's credit risk
increases when the U.S. economy slows or enters a recession.
The share price of the Fund is expected to be more volatile
than the share price of a fund investing in higher quality
securities, which react primarily to the general level of
interest rates. In addition, the trading market for lower
quality bonds may be less active and less liquid, that is,
the Sub-Adviser may not be able to sell bonds at desired
prices and large purchases or sales of certain high-yield
bond issues can cause substantial price swings. As a result,
the price at which lower quality bonds can be sold may be
adversely affected and valuing such lower quality bonds can
be a difficult task. As with investing in other securities
whose prices increase and decrease in market value, you may
lose money by investing in the Fund.
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They demonstrate the variability of
performance over time and provide an indication of the risks
and volatility of an investment in the Fund. Past
performance does not necessarily indicate how the Fund will
perform in the future. This performance information does not
include the impact of any charges deducted under your
insurance contract. If it did, returns would be lower.
</TABLE>
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<PAGE>
For years ended December 31,
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<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -9.04% 37.01% 15.80% 19.81% 7.33% 16.41% 13.87% 15.78% 4.79% 4.24%
- ---------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
Best Quarter Worst Quarter
14.09% -6.86%
(03/31/91) (09/30/90)
Average Annual Total Return (for Periods Ended December 31, 1999)
First Boston
High Yield Bond Fund High Yield Index(1)
1 Year....................... 4.24% 3.28%
5 Year ...................... 10.87% 11.20%
10 Year ..................... 10.38% 12.13%
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(1) The First Boston Index is a widely recognized benchmark of high yield bond
performance. The index is a passive measure of bond market returns. It does
not factor in the costs of buying, selling and holding securities -- costs
which are reflected in the Fund's results.
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INVESTMENT SUMMARY: FLEXIBLY MANAGED FUND
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Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: T. Rowe Price Associates, Inc.
Investment Objective: The investment objective of the Fund is to maximize total
return (capital appreciation and income).
Investment Strategy: The Sub-Adviser invests primarily in common stocks of
established U.S. companies that it believes have above
average potential for capital growth. Common stocks
typically constitute at least half of total assets. The
remaining assets are generally invested in other securities,
including convertibles, warrants, preferred stocks,
corporate and government debt, in keeping with the Fund's
objective. The Fund's investments in common stocks generally
fall into one of two categories. The larger category
comprises long-term core holdings that the Sub-Adviser
considers to be underpriced in terms of company assets,
earnings, or other factors at the time they are purchased.
The smaller category comprises opportunistic investments
whose prices the Sub-Adviser expects to rise in the
short-term, but not necessarily over the long-term. Since
the Sub-Adviser attempts to prevent losses as well as
achieve gains, it typically uses a "value approach" in
selecting investments. Its in-house research team seeks to
identify companies that seem undervalued by various
measures, such as price/book value, and may be temporarily
out of favor but have good prospects for capital
appreciation. The Sub-Adviser may establish relatively large
positions in companies it finds particularly attractive.
The Fund's approach differs from that of many other stock
funds. The Sub-Adviser works as hard to reduce risk as to
maximize gains and may realize gains rather than lose them
in market declines. In addition, the Sub-Adviser searches
for the best risk/reward values among all types of
securities. The portion of the Fund invested in a particular
type of security, such as common stocks, results largely
from case-by-case investment decisions, and the size of the
Fund's cash reserve may reflect the manager's ability to
find companies that meet valuation criteria rather than his
market outlook. Bonds and convertible securities may be
purchased to gain additional exposure to a company or for
their income or other features; maturity and quality are not
necessarily major
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considerations. The Fund may sell securities for a variety
of reasons, such as to secure gains, limit losses, or
redeploy assets into more promising opportunities.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are seeking a relatively conservative approach to
investing for total return and are willing to accept the
risks and uncertainties of investing in common stocks and
bonds. The Fund's value will change primarily with changes
in the prices of the securities held by the Fund. The prices
of common stocks will increase and decrease based on market
conditions, specific industry conditions, and the conditions
of the individual companies who issued the common stocks. In
general, common stocks are more volatile than fixed income
securities. However, over the long-term, common stocks have
shown greater potential for capital appreciation. A
particular risk of the Sub-Adviser's value approach is that
some holdings may not recover and provide the capital growth
anticipated. A sizable cash or fixed income position may
hinder the Fund from participating fully in a strong,
rapidly rising bull market. In addition, significant
exposure to bonds increases the risk that the Fund's share
value could be hurt by rising interest rates or credit
downgrades or defaults. Convertible securities are also
exposed to price fluctuations of the company's stock. As
with investing in other securities whose prices increase and
decrease in market value, you may lose money by investing in
the Fund.
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They demonstrate the variability of
performance over time and provide an indication of the risks
and volatility of an investment in the Fund. Past
performance does not necessarily indicate how the Fund will
perform in the future. This performance information does not
include the impact of any charges deducted under your
insurance contract. If it did, returns would be lower.
</TABLE>
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For years ended December 31,
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<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -0.82% 21.63% 9.61% 15.79% 4.14% 22.28% 16.37% 15.65% 6.09% 7.15%
- ---------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
Best Quarter Worst Quarter
12.44% -9.28%
(03/31/91) (09/30/90)
Average Annual Total Return (for Periods Ended December 31, 1999)
Flexibly Managed Fund S & P 500(1)
1 Year....................... 7.15% 21.04%
5 Year ...................... 13.34% 28.54%
10 Year ..................... 11.54% 18.28%
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(1) The S & P 500 is an unmanaged index that is a widely recognized benchmark
of general market performance. The index is a passive measure of equity
market returns. It does not factor in the costs of buying, selling and
holding securities -- costs which are reflected in the Fund's results.
-15-
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INVESTMENT SUMMARY: GROWTH AND INCOME FUND
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Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to provide total
return through a combination of current income and capital
appreciation.
Investment Strategy: The Fund invests primarily in common stocks of well
established companies that the Adviser believes have
long-term potential for above average growth in earnings and
income. The Adviser may from time to time invest in
non-dividend paying companies with prospects for future
income or capital appreciation. The Adviser may also use
convertible bonds or preferred stock to enhance income as
well as provide capital appreciation. The Adviser emphasizes
companies that it believes are capable of generating strong
earnings and sales gains in an increasingly global economy.
Companies with consistent earnings growth are most able to
provide a predictable level of current income as well as the
potential for growth in income over time. By its nature the
Fund invests primarily in large-capitalization companies.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are willing to accept the uncertainties of investing in
common stocks in the hope of earning above-average growth in
capital and income. The Fund's value will change primarily
with changes in the prices of the stocks and other
investments held by the Fund. The prices of common stocks
will increase and decrease based on market conditions,
specific industry conditions, and the conditions of the
individual companies who issued the common stock. In
general, common stocks are more volatile than other
investments, such as fixed income securities. However, over
the long-term, common stocks have shown greater potential
for capital appreciation. By investing in common stocks of
larger, well established companies, the Adviser seeks to
avoid some of the volatility associated with smaller, less
well established companies. Investing in companies with
dividends may also reduce the volatility associated with
common stock investing. In addition, the Fund is subject to
the risk that its principal market segment, large
capitalization growth companies, may underperform compared
to other market segments or the equity markets as a whole.
Convertible bonds and preferred stocks may also be affected
by the change in the level of interest rates and investor
judgements about the quality of the issuer. As with
investing in other securities
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whose prices increase or decrease in market value, you may
lose money investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly
no performance information is presented.
</TABLE>
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INVESTMENT SUMMARY: GROWTH EQUITY FUND
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Investment Adviser: Independence Capital Management, Inc.
Investment Objective: The investment objective of the Fund is to achieve long-term
growth of capital and increase of future income.
Investment Strategy: The Fund invests primarily in common stocks of well
established companies that the Adviser believes have
long-term growth potential. In selecting the Fund's
investments, the Adviser seeks companies that are expected
to demonstrate long-term earnings growth that is greater
than the projected growth rate of the economy as a whole.
The Adviser emphasizes those companies that it believes are
capable of generating consistently strong earnings and sales
gains in an increasingly global economy. The Adviser
believes that, over the long term, the earnings of well-
established companies will not be as adversely affected by
unfavorable economic conditions as the earnings of more
cyclical companies. Secondarily, the Adviser also considers
the dividend-paying potential of well-established companies.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are willing to accept the risks and uncertainties of
investing in common stocks in the hope of earning
above-average long-term growth of capital and income. The
Fund's value will change primarily with changes in the
prices of the common stocks held by the Fund. The prices of
common stocks will increase and decrease based on market
conditions, specific industry conditions, and the conditions
of the individual companies who issued the common stocks. In
general, common stocks are more volatile than other
investments, such as fixed income securities. However, over
the long-term, common stocks have shown greater potential
for capital appreciation. By investing in the common stocks
of larger, well-established companies, the Adviser seeks to
avoid some of the volatility associated with investment in
smaller, less well-established companies. In addition, the
Fund is subject to the risk that its principal market
segment, large capitalization growth companies, may
underperform compared to other market segments or the equity
markets as a whole. As with investing in other securities
whose prices increase and decrease in market value, you may
lose money by investing in the Fund.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They include only those periods in which
ICMI managed the Fund's investments. The bar chart and table
demonstrate the variability of performance over time and
provide an indication of the risks and volatility of an
investment in the Fund. Past performance does not
necessarily indicate how the Fund will perform in the
future. This performance information does not include the
impact of any charges deducted under your insurance
contract. If it did, returns would be lower.
</TABLE>
For years ended December 31,
12.43% -8.12% 26.45% 19.76% 26.74% 41.67% 34.10%
-----------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
Best Quarter Worst Quarter
27.93% -7.61%
(12/31/99) (9/30/98)
-19-
<PAGE>
Average Annual Total Return (for periods ended December 31, 1999)
Growth Equity Fund S & P 500(1)
1 Year............................ 34.10% 21.04%
5 Year ........................... 29.53% 28.54%
Since November 1, 1992(2)......... 21.41% 21.76%
- -------------------
(1) The S & P 500 is an unmanaged index that is a widely recognized benchmark
of general market performance. The index is a passive measure of equity
market returns. It does not factor in the costs of buying, selling and
holding securities -- costs which are reflected in the Fund's results.
(2) Date ICMI began managing the Fund's investments.
-20-
<PAGE>
INVESTMENT SUMMARY: LARGE CAP VALUE FUND
(formerly the Value Equity Fund)
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Putnam Investment Management, Inc.
Investment Objective: The investment objective of the Fund is to maximize total
return (capital appreciation and income).
Investment Strategy: The Fund invests primarily in common stocks of large
capitalization companies that the Sub-Adviser believes are
undervalued. In selecting individual investments for the
Fund, the Sub-Adviser attempts to find value stocks that
offer the potential for both current income and capital
appreciation. To find such a stock, the Sub-Adviser
considers a company's financial strength, competitive
position in its industry and projected future earnings and
dividends. The Sub-Adviser will purchase the common stock of
a company when it believes that the stock is undervalued
compared to its true worth.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are willing to accept the risks and uncertainties of
investing in common stocks in the hope of earning
above-average total return. The Fund's value will change
primarily with changes in the prices of the common stocks
held by the Fund. The prices of common stocks will increase
and decrease based on market conditions, specific industry
conditions, and the conditions of the individual companies
who issued the common stocks. In general, common stocks are
more volatile than other investments, such as fixed income
securities. However, over the long-term, common stocks have
shown greater potential for capital appreciation. In
addition, the Fund is subject to the risk that its principal
market segment, large capitalization value companies, may
underperform compared to other market segments or the equity
markets as a whole. As with investing in other securities
whose prices increase and decrease in market value, you may
lose money by investing in the Fund.
Performance Information: The bar chart and table below show the performance of the
Fund both year-by-year and as an average over different
periods of time. They represent the performance of the
Fund's previous manager. Since May 1, 2000, Putnam
Investment Management, Inc. has been
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
responsible for the Fund's day-to-day portfolio management.
The bar chart and table demonstrate the variability of
performance over time and provide an indication of the risks
and volatility of an investment in the Fund. Past
performance does not necessarily indicate how the Fund will
perform in the future. This performance information does not
include the impact of any charges deducted under your
insurance contract. If it did, returns would be lower.
</TABLE>
For years ended December 31,
7.08% 2.92% 37.48% 25.19% 24.98% 9.59% -0.80%
----------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999
Best Quarter Worst Quarter
16.16% -18.06%
(06/30/97) (09/30/98)
-22-
<PAGE>
Average Annual Total Return (for Periods Ended December 31, 1999)
Large Cap Value Fund S & P 500(1)
1 Year........................... -0.80% 21.04%
5 Year .......................... 18.52% 28.54%
Since November 1, 1992(2)........ 14.75% 21.76%
(1) The S & P 500 is an unmanaged index that is a widely recognized benchmark
of general market performance. The index is a passive measure of equity
market returns. It does not factor in the costs of buying, selling and
holding securities -- costs which are reflected in the Fund's results.
(2) Date OpCap Advisors, the Fund's previous manager, began managing the Fund's
investments.
-23-
<PAGE>
INVESTMENT SUMMARY: INDEX 500 FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Wells Capital Management Incorporated
Investment Objective: The Fund's investment objective is total return (capital
appreciation and income) which corresponds to that of the
Standard & Poor's Composite Index of 500 stocks.
Investment Strategy: The Fund invests substantially all of its assets in
securities listed in the S&P 500 Index which is comprised of
500 selected securities (mostly common stocks). The
Sub-Adviser does not actively manage the Fund's assets using
traditional investment analysis. Instead, the Sub-Adviser
invests in each company in the S&P 500 Index in proportion
to its weighting in the Index. In this manner, the
Sub-Adviser attempts to match the return of the S&P 500 as
closely as possible.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are willing to accept the uncertainties of investing in
common stocks in the hope of earning a return consistent
with the S&P 500 Index. The Fund's value will change
primarily with changes in the prices of the stocks and other
investments held by the Fund. The prices of common stocks
will increase and decrease based on market conditions,
specific industry conditions, and the conditions of the
individual companies who issued the common stocks. In
general, common stocks are more volatile than other
investments, such as fixed income securities. However, over
the long-term, common stocks have shown greater potential
for capital appreciation. The Fund is also subject to the
risk that the performance of the Fund may not correlate to
that of the S&P 500 Index. In addition, the Fund is subject
to the risk that the securities that comprise the S&P 500
may underperform other market segments or the equity markets
as a whole. As with investing in other securities whose
prices increase or decrease in market value, you may lose
money investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly
no performance information is presented.
</TABLE>
-24-
<PAGE>
INVESTMENT SUMMARY: MID CAP GROWTH FUND
<TABLE>
<CAPTION>
<S> <C>
Investment Adviser: Independence Capital Management, Inc.
Sub-Adviser: Turner Investment Partners, Inc.
Investment Objective: The investment objective of the Fund is to maximize capital
appreciation.
Investment Strategy: The Fund invests primarily in common stocks of U.S.
companies with medium market capitalizations (i.e., between
$1 billion and $10 billion) that the Sub-Adviser believes
have strong earnings growth potential. The Fund will invest
in securities of companies that are diversified across
economic sectors, and will attempt to maintain sector
concentrations that approximate those of its current
benchmark, the Russell Mid Cap Growth Index. The Fund's
exposure is generally limited to a maximum of 2% in any
single issue. However, the Fund may hold up to two times the
index weighting of those securities that comprise between 1%
and 5% of the Index, and up to one and one half times the
index weighting of those securities that comprise more than
5% of the Index. Due to its investment strategy, the Fund
may buy and sell securities frequently which may result in
higher transaction costs.
Risks of Investing: An investment in the Fund may be appropriate for investors
who are willing to accept the risks and uncertainties of
investing in mid-cap stocks in the hope of achieving
above-average capital appreciation. The Fund's value will
change primarily with the changes in prices of the common
stocks held by the Fund. The prices of common stocks will
increase and decrease based on market conditions, specific
industry conditions, and the conditions of individual
companies that issued the common stocks. In general, common
stocks are more volatile than other investments, such as
fixed income securities. However, over the long term, common
stocks have shown greater potential for capital
appreciation. In addition to the general risks of common
stocks, an investment in mid-cap stocks may entail special
risks. The prices of mid-cap stocks may be more volatile
than investments in larger, more established companies. In
addition, the Fund is subject to the risk that its principal
market segment, medium capitalization growth companies, may
underperform compared to other market segments or the equity
markets as a whole. As with investing in
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
other securities whose prices increase and decrease in
market value, you may lose money by investing in the Fund.
Performance Information: The Fund had no assets prior to May 1, 2000 and accordingly
no performance information is presented.
</TABLE>
-26-
<PAGE>
INVESTMENT SUMMARY: MID CAP VALUE FUND
Investment Adviser:
Independence Capital Management, Inc.
Sub-Adviser:
Neuberger Berman Management Inc.
Investment Objective:
The investment objective of the Fund is to achieve growth of capital.
Investment Strategy:
The Fund invests primarily in common stocks of U.S. companies with medium market
capitalizations that the Sub-Adviser believes are undervalued. In selecting
individual securities, the Sub-Adviser seeks well-managed companies whose stock
prices are undervalued. To identify these companies, the Sub-Adviser looks for
strong business fundamentals, consistent cash flow, and a sound track record
through all phases of the market cycle. The Sub-Adviser may also consider the
company's position relative to competitors, a high level of stock ownership
among management and a recent sharp decline in the stock price that appears to
be the result of a short-term market over-reaction to negative news. The
Sub-Adviser generally considers selling a stock when it reaches the
Sub-Adviser's target price, when it fails to perform as expected, or when other
opportunities appear more attractive. The Sub-Adviser seeks to reduce risk by
diversifying among many companies and industries.
Risks of Investing:
An investment in the Fund may be appropriate for investors who are willing to
accept the risks and uncertainties of investing in mid-cap stocks in the hope
of achieving above-average growth of capital. The Fund's value will change
primarily with the changes in prices of the common stocks held by the Fund. The
prices of common stocks will increase and decrease based on market conditions,
specific industry conditions, and the conditions of individual companies that
issued the common stocks. In general, common stocks are more volatile than other
investments, such as fixed income securities. However, over the long term,
common stocks have shown greater potential for capital appreciation. In addition
to the general risks of common stocks, an investment in mid-cap stocks may
entail special risks. The prices of mid-cap stocks may be more volatile than
investments in larger, more established companies. In addition, the Fund is
-27-
<PAGE>
subject to the risks that is principal market segment, medium capitalization
value companies, may underperform compared to other market segments or the
equity markets as a whole. As with investing in other securities whose prices
increase and decrease in market value, you may lose money by investing in the
Fund.
Performance Information:
The Fund had no assets prior to May 1, 2000 and accordingly no performance
information is presented.
-28-
<PAGE>
INVESTMENT SUMMARY: EMERGING GROWTH FUND
Investment Adviser:
Independence Capital Management, Inc.
Sub-Adviser:
RS Investment Management, Inc.
Investment Objective:
The investment objective of the Fund is capital appreciation.
Investment Strategy:
The Fund will invest primarily in common stocks of emerging growth companies. In
selecting the Fund's investments, the Sub-Adviser seeks companies that have the
potential, based on superior products or services, operating characteristics,
and financial capabilities, for growth more rapid than the overall economy. The
Sub-Adviser considers a company's rate of earnings growth and the quality of
management, the return on equity, and the financial condition of the company. In
addition to these factors, the Sub-Adviser focuses on companies that enjoy a
competitive advantage in the marketplace. The Sub-Adviser emphasizes companies
in those sectors of the economy that are experiencing rapid growth.
Risks of Investing:
An investment in the Fund may be appropriate for investors who are willing to
accept the risks and uncertainties of investing in emerging growth companies in
the hope of earning above-average capital appreciation. The Fund's value will
change with changes in the prices of the investments held by the Fund. The
prices of common stocks held by the Fund will increase and decrease based on
market conditions, specific industry conditions, and the conditions of the
individual companies who issued common stocks. In general, common stocks are
more volatile than other investments, such as fixed income securities. However,
over the long term, common stocks have shown greater potential for capital
appreciation. In addition to the general risks of common stocks, an investment
in small-cap stocks may entail special risks. Small-cap stocks may be more
volatile and less liquid than investments in larger, more established companies.
Smaller capitalization companies may have limited product lines, markets or
financial resources and may depend on a limited management group. As a result,
smaller capitalization companies may be more vulnerable to adverse business or
market developments. In addition, the Fund is subject to the risk that is
principal market segment, small capitalization emerging growth companies, may
underperform compared to other market segments or the equity markets as a whole.
As with investing in other securities whose prices increase and decrease in
market value, you may lose money by investing in the Fund.
-29-
<PAGE>
Performance Information:
The bar chart and table show the performance of the Fund for both year-by-year
and as an average over different periods of time. They demonstrate the
variability of performance over time and provide an indication of the risks and
volatility of an investment in the Fund. Past performance does not necessarily
indicate how the Fund will perform in the future. This performance information
does not include the impact of any charges deducted under your insurance
contract. If it did, returns would be lower.
1998 1999
------ -------
35.7% 183.03%
Best Quarter Worst Quarter
76.17% -22.42%
(12/31/99) (09/30/98)
Average Annual Total Return (for Periods Ended December 31, 1999)
- --------------------------------------------------------------------------------
Emerging Growth Fund Russell 2000
1 Year................................. 185.03% 21.26%(1)
- --------------------------------------------------------------------------------
Since May 1, 1997(2)................... 87.87% 16.99%
- --------------------------------------------------------------------------------
(1) The Russell 2000 Index is an unmanaged index that is a widely recognized
benchmark of general market performance. The index is a passive measure of
equity market returns. It does not factor in the costs of buying, selling
and holding securities -- costs which are reflected in the Fund's results.
(2) Date of inception.
-30-
<PAGE>
INVESTMENT SUMMARY: SMALL CAP VALUE FUND
(formerly the Small Capitalization Fund)
Investment Adviser:
Independence Capital Management, Inc.
Sub-Adviser:
Royce & Associates, Inc.
Investment Objective:
The investment objective of the Fund is to seek capital appreciation.
Investment Strategy:
The Fund invests primarily in common stocks of small cap and micro-cap companies
in an attempt to take advantage of what the sub-adviser believes are
opportunistic situations for undervalued securities. Such opportunities may
include turnarounds, emerging growth companies with interrupted earnings
patterns, companies with unrecognized asset value or undervalued growth
companies. The Fund will invest primarily in companies with a market
capitalization of $1.5 billion or less.
Risks of Investing:
An investment in the Fund may be appropriate for investors who are willing to
accept the risks and uncertainties of investing in small-cap stocks in the hope
of earning above-average capital appreciation. The Fund's value will change
primarily with changes in the prices of the stocks and other investments held by
the Fund. The prices of common stocks will increase and decrease based on market
conditions, specific industry conditions, and the conditions of the individual
companies who issued the common stocks. In general, common stocks are more
volatile than other investments, such as fixed income securities. However, over
the long-term, common stocks have shown greater potential for capital
appreciation.
In addition to the general risks of common stocks, an investment in small-cap
stocks may entail special risks. Small-cap stocks may be more volatile and less
liquid than investments in larger, more established companies. Smaller
capitalization companies may have limited product lines, markets or financial
resources and may depend on a limited management group. As a result, smaller
capitalization companies may be more vulnerable to adverse business or market
-31-
<PAGE>
developments. These risks are even greater for the micro-cap companies that the
Fund owns. Micro-cap companies are followed by relatively few securities
analysts and there tends to be less information about them. Their securities
generally have limited trading volumes and are subject to even more abrupt
erratic price movements. Micro-cap companies are even more vulnerable to adverse
business and market developments.
The Fund's ability to achieve its goal will depend largely on the Sub-Advisers
skill in selecting the Fund's investments using its opportunistic approach. In
addition, the Fund is subject to the risk that its principal market segment,
small capitalization companies, may underperform compared to other market
segments or the equity markets as a whole. As with investing in other securities
whose prices increase and decrease in market value, you may lose money by
investing in the Fund.
Performance Information:
The bar chart and table show the performance of the Fund for both year-by-year
and as an average over different periods of time. They represent the performance
of the Fund's previous manager. Since May 1, 2000, Royce & Associates, Inc. has
been responsible for the Fund's day-to-day portfolio management. The bar chart
and table demonstrate the variability of performance over time and provide an
indication of the risks and volatility of an investment in the Fund. Past
performance does not necessarily indicate how the Fund will perform in the
future. This performance information does not include the impact of any charges
deducted under your insurance contract. If it did, returns would be lower.
-32-
<PAGE>
1996 1997 1998 1999
------ ------ ------ ------
19.76% 23.02% -9.16% -1.33%
Best Quarter Worst Quarter
14.35% -14.69%
(12/31/98) (09/30/98)
Average Annual Total Return (for Periods Ended December 31, 1999)
- --------------------------------------------------------------------------------
Small Cap Value Fund Russell 2000
- --------------------------------------------------------------------------------
1 Year................................. -1.33% 21.26%(1)
- --------------------------------------------------------------------------------
Since March 1, 1995(2)................. 8.58% 16.61%
- --------------------------------------------------------------------------------
(1) The Russell 2000 Index is an unmanaged index that is a widely recognized
benchmark of general market performance. The index is a passive measure of
equity market returns. It does not factor in the costs of buying, selling
and holding securities -- costs which are reflected in the Fund's results.
(2) Date of Inception
-33-
<PAGE>
INVESTMENT SUMMARY: INTERNATIONAL EQUITY FUND
Investment Adviser:
Independence Capital Management, Inc.
Sub-Adviser:
Vontobel USA Inc.
Investment Objective:
The investment objective of the Fund is to achieve capital appreciation.
Investment Strategy:
The Fund invests primarily in common stocks of companies operating in the
countries in Europe and the Pacific Basin that are generally considered to have
developed markets. These include the eleven euro-zone countries (France,
Germany, Italy, Spain, Portugal, Finland, Ireland, Belgium, the Netherlands,
Luxembourg and Austria), the United Kingdom, Denmark, Sweden, Switzerland,
Norway, Japan, Hong Kong, Australia, New Zealand and Singapore. Using a
bottom-up investment approach, focusing on individual stock selection, the
Sub-Adviser invests in large- and medium-capitalization companies that have a
long record of successful operations in their core business. Typically such
companies occupy a leading position in their industry, have consistently
generated free cash flow, and have achieved earnings growth through increasing
market share and unit sales volumes. The Sub-Adviser's goal is to construct a
portfolio of the best companies in the developed markets of Europe and the
Pacific Basin without making any country bets. With approximately 80-100
issuers, the Fund also seeks to be well diversified in terms of industry
exposure.
Risks of Investing:
An investment in the Fund may be appropriate for investors who are willing to
accept the risks and uncertainties of international investing in the hope of
realizing capital appreciation while diversifying their investment portfolio.
The Fund's value will change primarily with changes in the prices of the common
stocks held by the Fund. The prices of common stocks held by the Fund will
increase and decrease based on market conditions, specific industry conditions,
and the conditions of the individual companies who issued the common stocks. In
addition to the general risks of common stocks, foreign investing involves the
risk that news and events unique to a country or region will affect those
markets and their issuers. These same events will not necessarily have an effect
on the U.S. economy or similar issuers located in the United States. In
-34-
<PAGE>
addition, the Fund's investments in foreign countries generally will be
denominated in foreign currencies. As a result, changes in the value of a
country's currency compared to the U.S. dollar may affect the value of the
Fund's investments. These changes may happen separately from and in response to
events that do not otherwise affect the value of the security in the issuing
company's home country. The Sub-Adviser may invest in certain instruments, such
as forward currency exchange contracts and may use certain techniques such as
hedging, to manage these risks. However, the Sub-Adviser cannot guarantee that
it will succeed in doing so. In certain markets, it may not be possible to hedge
currency risk. As with investing in other securities whose prices increase and
decrease in market value, you may lose money by investing in the Fund.
Performance Information:
The bar chart and table show the performance of the Fund both year-by-year and
as an average over different periods of time. They demonstrate the variability
of performance over time and provide an indication of the risks and volatility
of an investment in the Fund. Past performance does not necessarily indicate how
the Fund will perform in the future. This performance information does not
include the impact of any charges deducted under your insurance contract. If it
did, returns would be lower.
1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------
38.14% -6.31% 13.80% 16.87% 10.41% 18.85% 45.78%
-35-
<PAGE>
Best Quarter Worst Quarter
32.31% -14.90%
(12/31/99) (9/30/98)
Average Annual Total Return (for Periods Ended December 31, 1999)
- --------------------------------------------------------------------------------
International Equity Fund MSCI EAFE Index(1)
- --------------------------------------------------------------------------------
1 Year......................... 45.78% 26.96%
- --------------------------------------------------------------------------------
5 Year ........................ 20.53% 12.83%
- --------------------------------------------------------------------------------
Since November 2, 1992(2)...... 18.42% 14.56%
- --------------------------------------------------------------------------------
(1) The Morgan Stanley Capital International EAFE Index is an unmanaged index
that is a widely recognized benchmark of International Equity performance.
The index is a passive measure of equity market returns. It does not factor
in the costs of buying, selling and holding securities -- costs which are
reflected in the Fund's results.
(2) Date of Inception.
-36-
<PAGE>
ADDITIONAL INFORMATION
Temporary Investing: When a Fund's Adviser or Sub-Adviser believes that changes
in economic, financial or political conditions warrant, each Fund, except for
the Index 500 Fund, may invest without limit in money market instruments and
other short-term fixed income securities. If they incorrectly predict the
effects of these changes, such defensive investments may adversely affect Fund
performance.
Portfolio Turnover: Consistent with their investment objectives, the Funds may
sell securities without regard to the effect on portfolio turnover. A high rate
of portfolio turnover may result in increased transaction costs.
MANAGEMENT
Investment Adviser
Independence Capital Management, Inc. Independence Capital Management, Inc.
("ICMI") serves as investment adviser to each of the Funds. ICMI is a
wholly-owned subsidiary of Penn Mutual, a life insurance company that has been
in the insurance and investment business since the late 1800s. Penn Mutual and
its subsidiaries currently have assets under management of over $10.5 billion.
ICMI was organized in June 1989 and, in addition to serving as investment
adviser to the Funds, also serves as investment adviser to corporate and pension
fund accounts. Its offices are located at 600 Dresher Road, Horsham,
Pennsylvania 19044. As of December 31, 1999, ICMI serves as investment adviser
for over $1.9 billion of investment assets.
ICMI provides day-to-day portfolio management services for the Money Market,
Limited Maturity Bond, Quality Bond, Growth and Income, and Growth Equity Funds.
Richardson T. Merriman, Senior Vice President of Independence Capital
Management, Inc., manages the Growth and Income and Growth Equity Funds. He has
served as portfolio manager of the Growth Equity Fund since 1995 and the Growth
and Income Fund since its inception in May, 2000. Mr. Merriman is also President
of The Pennsylvania Trust Company, a Penn Mutual subsidiary.
Peter M. Sherman, President and Portfolio Manager of Independence Capital
Management, Inc., manages the Money Market, Limited Maturity Bond and Quality
Bond Funds. He has served as portfolio manager of the Money Market and Quality
Bond Funds since November 1992 and the Limited Maturity Bond Fund since its
inception in May, 2000. He served as Executive Vice President, ICMI, prior to
becoming President. Mr. Sherman is Executive Vice President and Chief Investment
Officer of Penn Mutual; prior to May 1996, he was Vice President, Fixed Income
Portfolio Management, Penn Mutual.
-37-
<PAGE>
In addition, ICMI provides investment management services to the High Yield
Bond, Flexibly Managed, Large Cap Value, Index 500, Mid Cap Growth, Mid Cap
Value, Small Cap Value, Emerging Growth and International Equity Funds through
Sub-Advisers that are specially selected and qualified to manage the Funds.
Manager of Managers Structure. ICMI acts as "manager of manager" for the Funds.
In this capacity, ICMI has hired sub-advisers to manage the assets of the High
Yield Bond, Flexibly Managed, Large Cap Value, Index 500, Mid Cap Growth, Mid
Cap Value, Emerging Growth, Small Cap Value and International Equity Funds. ICMI
remains responsible for the performance of these Funds as it recommends hiring
or changing sub-advisers to the Company's Board of Directors. Each Sub-Adviser
makes investment decisions for the Fund it manages. ICMI over-sees the
sub-advisers to ensure compliance with the Fund's investment policies and
guidelines, and monitors each sub-adviser's adherence to its investment style.
Shareholders of the High Yield Bond, Flexibly Managed, Growth and Income, Large
Cap Value, Emerging Growth, Small Cap Value and International Equity Funds have
authorized ICMI, subject to the supervision and approval of the Company's Board
of Directors, to hire and terminate sub-advisers without shareholder approval.
ICMI currently manages the assets of the Money Market, Quality Bond and Growth
Equity Funds. While it has no present intention to do so, shareholders of these
Funds have authorized ICMI, subject to the supervision and approval of the
Company's Board of Directors, to hire sub-advisers without shareholder
approval.
Shareholders of the Limited Maturity Bond, Index 500, Mid Cap Growth and Mid Cap
Value Funds may, in the future, be asked to approve a proposal authorizing ICMI
subject to the supervision and approval of the Company's Board of Directors, to
hire, terminate and replace sub-advisers without shareholder approval.
Sub-Advisers
T. Rowe Price Associates, Inc. T. Rowe Price Associates, Inc. ( "Price
Associates") is sub-adviser to the Flexibly Managed and the High Yield Bond
Funds. As sub-adviser, Price Associates provides day-to-day portfolio management
services to the Funds. Price Associates was incorporated in 1947 as successor to
the investment counseling firm founded by the late Mr. Thomas Rowe Price, Jr. in
1937. Its corporate home office is located at 100 East Pratt Street, Baltimore,
Maryland 21202. Price Associates serves as investment adviser to a variety of
individual and institutional investors accounts, including other mutual funds.
As of December 31, 1999, Price Associates and its affiliates, managed more than
$179 billion of assets for over eight million individual and institutional
accounts.
Richard P. Howard, Vice President of Price Associates, has been primarily
responsible for the day-to-day investment management of the Flexibly Managed
Fund since 1989. During the past five years, he has served as a Vice President
and an Equity Portfolio Manager of Price Associates.
-38-
<PAGE>
Mark J. Vaselkiv, Vice President of Price Associates, has been primarily
responsible for the day-to-day investment management of the High Yield Bond
Fund since 1996. During the past five years, he has been a Vice President and a
portfolio manager in the taxable bond department of Price Associates.
Putnam Investment Management, Inc. Putnam Investment Management, Inc. ("Putnam")
is sub-adviser to the Large Cap Value Fund. As sub-adviser, Putnam provides
investment management services to the Fund. Putnam is located at One Post Office
Square, Boston, MA 02109. As of December 31, 1999, Putnam and its affiliates had
approximately $391 billion in assets under management.
Deborah F. Kuenster is primarily responsible for the day-to-day portfolio
management of the Large Cap Value Fund. Ms. Kuenster is Managing Director, Chief
Investment Officer of the Large Cap Value Equities Group of Putnam and joined
Putnam in 1997. Prior to joining Putnam, Ms. Kuenster was a Senior Portfolio
Manager of DuPont Pension Fund Investment from 1989 to 1997. Ms. Kuenster has
more than 20 years of investment experience and is a Chartered Financial
Analyst.
Wells Capital Management Incorporated. Wells Capital Management Incorporated
("Wells") is sub-adviser to the Index 500 Fund. As sub-adviser, Wells provides
day-to-day portfolio management services to the Fund. Wells is located at 525
Market Street, 10th Floor, San Francisco, California 94105. As of December 31,
1999, Wells and its affiliates had approximately $71 billion in assets under
management.
David D. Sylvester and Laurie R. White have primary responsibility for the
day-to-day management of the Index 500 Fund. Mr. Sylvester is an Executive Vice
President at Wells and has been affiliated with Wells or its affiliates since
1979. Ms. White has been a Managing Director at Wells and has been affiliated
with Wells or its affiliates since 1991.
Turner Investment Partners, Inc. Turner Investment Partners, Inc. ("Turner") is
sub-adviser to the Mid Cap Growth Fund. As sub-adviser, Turner provides
investment management services to the Fund. Turner is located at 1235 Westlakes
Drive, Suite 350, Berwyn, Pennsylvania 19312. As of December 31, 1999, Turner
had approximately $5.6 billion in assets under management.
Chris McHugh, Bill McVail and Robert Turner are primarily responsible for the
day-to-day portfolio management of the Mid Cap Growth Fund. Mr. McHugh is Senior
Equity Fund Portfolio Manager of Turner and joined Turner in 1990. Mr. McVail is
Senior Equity Portfolio Manager of Turner and joined Turner in 1998. Prior to
1998, Mr. McVail was Portfolio Manager at PNC Equity Advisors. Mr. Turner
founded Turner in 1990 and serves as Turner's Chairman and Chief Investment
Officer.
-39-
<PAGE>
Neuberger Berman Management Inc. Neuberger Berman Management, Inc. ("Neuberger
Berman") is sub-adviser to the Mid Cap Value Fund. As sub-adviser, Neuberger
Berman provides investment management services to the Fund. Neuberger Berman is
located at 605 Third Avenue, 2nd Floor, New York, New York 10158. As of December
31, 1999, Neuberger Berman and its affiliates had approximately $54.4 billion in
assets under management.
Robert I. Gendelman and S. Basu Mullick have primary responsibility for managing
the Mid Cap Value Fund's assets. Messrs. Gendelman and Mullick are Vice
Presidents of Neuberger Berman and are Managing Directors of Neuberger Berman,
LLC. Mr. Gendelman has been a portfolio manager with Neuberger Berman since
1994. Mr. Mullick joined Neuberger Berman in 1998. Prior to joining Neuberger
Berman, he was a portfolio manager of at ARK Asset Management Corporation from
1993 to 1998.
Royce & Associates, Inc. Royce & Associates, Inc. ("Royce") is sub-adviser to
the Small Cap Value Fund. As sub-adviser, Royce provides investment management
services to the Fund. Royce is located at 1414 Avenue of the Americas, New York,
New York 10019. As of December 31, 1999, Royce had approximately $3 billion in
assets under management.
Boniface A. Zaino has primary responsibility for the day-to-day investment
management of the Fund. Mr. Zaino is a Managing Director and Senior Portfolio
Manager at Royce. He has joined Royce in 1998 from Trust Company of the West
where he was Group Managing director since 1984.
RS Investment Management , Inc. (formerly, Robertson Stephens Investment
Management, Inc.) RS Investment Management, Inc. ("RSIM") is sub-adviser to the
Emerging Growth Fund. As sub-adviser, RSIM provides day-to-day portfolio
management services to the Fund. RSIM is located at 388 Market Street, San
Francisco, CA 94111. As of December 31, 1999, RSIM managed more than $8.3
billion for individual and institutional clients.
James Callinan, Portfolio Manager of RSIM, is responsible for managing the
Emerging Growth Fund. Mr. Callinan has more than ten years of investment
research and management experience. From 1986 until June 1996, Mr. Callinan was
employed by Putnam Investments, where, beginning in June 1994, he served as
portfolio manager of the Putnam OTC Emerging Growth Fund. Mr. Callinan received
an A.B. in economics from Harvard College, and M.S. in accounting from New York
University, and an M.B.A. from Harvard Business School, and is a Chartered
Financial Analyst.
Vontobel USA Inc. Vontobel USA Inc. ("Vontobel") is sub-adviser to the
International Equity Fund. As sub-adviser, Vontobel provides day-to-day
portfolio services to the Fund. Vontobel is a wholly owned subsidiary of
Vontobel Holding AG, and an affiliate of Bank Vontobel AG, one of the largest
private banks and brokerage firms in Switzerland. Its principal place of
business is located at 450 Park Avenue, New York, New York 10022. As of December
31, 1999, Vontobel managed assets of over $2.1 billion, a substantial part of
which was invested outside of the United States. The Vontobel group of companies
has investments in excess of $44 billion under management.
-40-
<PAGE>
Fabrizio Pierallini and Rajiv Jain are responsible for the day-to-day investment
management of the International Equity Fund. Mr. Pierallinini is the Chief
Investment Officer of and a Managing Director and Senior Vice President at
Vontobel. Mr. Pierallini has more than 19 years of investment research and
management experience. Mr. Pierallini joined Vontobel in April 1994 with
responsibilities for managing international equities. Prior thereto, he served
as Associate Director/Portfolio Manager, Swiss Bank Corporation, New York. Mr.
Jain is a First Vice President of Vontobel and an Associate Portfolio Manager of
the International Equity Fund. Mr. Jain has over nine years of experience. Mr.
Jain joined Vontobel in November of 1994. Prior thereto, he served as an equity
analyst with Swiss Bank Corporation, New York.
Expenses and Limitations
The Funds bear all expenses of its operations other than those incurred by its
investment adviser and sub-advisers under the investment advisory agreement and
investment sub-advisory agreements and those incurred by Penn Mutual under its
administrative and corporate services agreement. In particular, each Fund pays
investment advisory fees, administrator's fee, shareholder servicing fees and
expenses, custodian and accounting fees and expenses, legal and auditing fees,
expenses of printing and mailing prospectuses and shareholder reports,
registration fees and expenses, proxy and annual meeting expenses, and
directors' fees and expenses.
As explained below, the investment adviser, the investment sub-advisers and/or
Penn Mutual have agreed to waive fees or reimburse expenses to the extent the
Fund's total expense ratio (excluding interest, taxes, brokerage, other expenses
which are capitalized in accordance with generally accepted accounting
principles, and extraordinary expenses, but including investment advisory and
administrative and corporate services fees) exceeds the expense limitation for
the Fund. The expense limitations for the Funds are as follows:
- --------------------------------------------------------------------------------
Fund Expense Limitation
- --------------------------------------------------------------------------------
Money Market 0.80%
- --------------------------------------------------------------------------------
Limited Maturity Bond 0.90%
- --------------------------------------------------------------------------------
Quality Bond 0.90%
- --------------------------------------------------------------------------------
High Yield Bond 0.90%
- --------------------------------------------------------------------------------
Flexibly Managed 1.00%
- --------------------------------------------------------------------------------
Growth and Income 1.00%
- --------------------------------------------------------------------------------
Growth Equity 1.00%
- --------------------------------------------------------------------------------
-41-
<PAGE>
- --------------------------------------------------------------------------------
Fund Expense Limitation
- --------------------------------------------------------------------------------
Large Cap Value 1.00%
- --------------------------------------------------------------------------------
Index 500 0.40%*
- --------------------------------------------------------------------------------
Mid Cap Growth 1.00%
- --------------------------------------------------------------------------------
Mid Cap Value 1.00%
- --------------------------------------------------------------------------------
Emerging Growth 1.15%
- --------------------------------------------------------------------------------
Small Cap Value 1.15%
- --------------------------------------------------------------------------------
International Equity 1.50%
- --------------------------------------------------------------------------------
*Penn Mutual currently intends to voluntarily waive its fees and reimburse
expenses so that the Index 500 Fund's total expenses do not exceed 0.25%.
All waivers of fees or reimbursements of expenses with respect to the Flexibly
Managed, High Yield Bond, and Emerging Growth Funds will be shared equally by
the sub-advisers and Penn Mutual. For the Money Market, Quality Bond, Growth
Equity, Large Cap Value and Small Cap Value Funds, the Adviser will waive fees
with regard to the entirety of the first 0.10% of excess above the expense
limitations; Penn Mutual will waive fees or reimburse expenses for the entirety
of any additional excess above the first 0.10%. For the International Equity
Fund, the sub-adviser will waive fees with regard to the entirety of the first
0.10% of excess above the expense limitations; Penn Mutual will waive fees or
reimburse expenses for the entirety of any additional excess above the first
0.10%. For the Limited Maturity Bond, Growth and Income, Index 500, Mid Cap
Growth and Mid Cap Value, Penn Mutual will waive fees or reimburse expenses for
the entirety of any excess above the expense limitation.
For the year ended December 31, 1999, the Funds paid ICMI a fee based on the
average daily net assets of the Fund, at the following annual rate; Money Market
Fund: 0.40%; Quality Bond Fund: 0.45%; High Yield Bond Fund: 0.50%; Flexibly
Managed Fund: 0.50%; Growth Equity Fund: 0.47%; Large Cap Value Fund: 0.50%;
Emerging Growth Fund: 0.74%; Small Cap Value Fund: 0.50%; and International
Equity Fund: 0.75%.
For providing investment management services to the Limited Maturity Bond,
Growth and Income, Index 500 and Mid Cap Growth Funds, the Funds pay ICMI, on a
monthly basis, a fee based on the average daily net assets of the Fund, at the
following annual rate: Limited Maturity Bond Fund: 0.30%; Growth and Income
Fund: 0.50%; Index 500 Fund: 0.07%; and Mid Cap Growth Fund: 0.70%. For
providing investment management services to the Mid Cap Value Fund, the Fund
pays ICMI, on a monthly basis, a fee based on the average daily net assets of
the Fund, at the following annual rate: 0.55% of the first $250 million; 0.525%
of the next $250 million; 0.50% of the next $250 million; 0.475% of the next
$250 million; and 0.425% of average daily net assets in excess of $1.5 billion.
-42-
<PAGE>
ACCOUNT POLICIES
Purchasing and Selling Fund Shares
Shares are offered on each day that the New York Stock Exchange ("NYSE") is open
for business (a "Business Day").
The Funds offer their shares only to Penn Mutual and PIA for separate accounts
they establish to fund variable life insurance and variable annuity contracts.
Penn Mutual or PIA purchases or redeems shares of the Funds based on, among
other things, the amount of net contract premiums or purchase payments allocated
to a separate account investment division, transfers to or from a separate
account investment division, contract loans and repayments, contract withdrawals
and surrenders, and benefit payments. The contract prospectus describes how
contract owners may allocate, transfer and withdraw amounts to, and from,
separate accounts.
The price per share will be the net asset value per share ("NAV") next
determined after receipt of the purchase order. NAV for one share is the value
of that share's portion of all of the assets in the Portfolio. The Fund
determines the net asset value for the Funds (except for the Money Market Fund)
as of the close of business of the NYSE (normally 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business. The NAV of the Money Market Fund is
calculated at Noon (Eastern Time) on each day that the NYSE is open.
How the Funds Calculate NAV
In calculating NAV, the Funds (except for the Money Market Portfolio) generally
value their portfolio securities at their market price. If market prices are
unavailable or the Funds think that they are unreliable, the Funds may determine
fair value prices using methods approved by the Board of Directors. Some Funds
hold portfolio securities that are listed on foreign exchanges. These securities
may trade on weekends or other days when the Funds do not calculate NAV. As a
result, the value of these Funds' investments may change on days when you cannot
purchase or sell Fund shares. The Money Market Portfolio values its assets by
the amortized cost method, which approximates market value.
Dividends, Distributions and Taxes
Dividends and Distributions
The Funds distribute their investment income annually as dividends and make
distributions of capital gains, if any, at least annually except for
distributions from the Money Market Portfolio which will be made monthly.
-43-
<PAGE>
Taxes
The Funds expect that they will not have to pay federal income taxes if they
distribute annually all of their net investment income and net capital gains.
The Funds will not be subject to federal excise taxes with respect to
undistributed income.
Special tax rules apply to life insurance companies, variable annuity contracts
and variable life insurance contracts. Net income and realized capital gains
that the Funds distribute are not currently taxable to owners of variable
annuity or variable life insurance contracts when left to accumulate in the
contracts.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Funds and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.
Because each investor's tax circumstances are unique and the tax laws may
change, you should consult your tax advisor about the federal, state and local
tax consequences applicable to your investment.
-44-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE MONEY MARKET FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- --------
Income from investment operations:
- ----------------------------------
Net investment income............................ 0.0456 0.0489 0.0503 0.0489 0.0538
--------- --------- --------- --------- --------
Total from investment operations.............. 0.0456 0.0489 0.0503 0.0489 0.0538
--------- --------- --------- --------- --------
Less dividends:
- ---------------
Dividends from net investment income............. (0.0456) (0.0489) (0.0503) (0.0489) (0.0538)
--------- --------- --------- --------- --------
Total dividends.................................. (0.0456) (0.0489) (0.0503) (0.0489) (0.0538)
--------- --------- --------- --------- --------
Net asset value, end of year..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========
Total return................................. 4.66% 5.00% 5.15% 5.00% 5.51%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)........... $ 86,581 $ 53,626 $ 37,476 $ 34,501 $ 24,726
========= ========= ========= ========= ========
Ratio of expenses to average net assets.......... 0.72% 0.72% 0.70% 0.73%(a) 0.69%(a)
========= ========= ========= ========= ========
Ratio of net investment income to average net assets 4.60% 4.88% 5.04% 4.88%(a) 5.37%(a)
========= ========= ========= ========= ========
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been .74% and
.74%, and the ratios of net investment income to average net assets would
have been 4.87% and 5.32% for the years ended December 31, 1996 and 1995,
respectively.
-45-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE QUALITY BOND FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 10.40 $ 10.20 $ 10.00 $ 10.24 $ 9.04
-------- ------- ------- ------- --------
Income from investment operations:
- ----------------------------------
Net investment income.................................. 0.54 0.51 0.60 0.66 0.61
Net realized and unrealized gain on investment
transactions......................................... (0.54) 0.53 0.20 (0.24) 1.21
-------- ------- ------- ------- --------
Total from investment operations.................... 0.00 1.04 0.80 0.42 1.82
-------- ------- ------- ------- --------
Less distributions:
- -------------------
Dividend from net investment income.................... 0.00 (0.51) (0.60) (0.66) (0.61)
Distribution from net realized gain.................... 0.00 (0.33) 0.00 0.00 0.00
Distribution in excess of net investment income........ 0.00 0.00 0.00 0.00 (0.01)
-------- ------- ------- ------- --------
Total distributions................................. 0.00 (0.84) (0.60) (0.66) (0.62)
-------- ------- ------- ------- --------
Net asset value, end of year........................... $ 10.40 $ 10.40 $ 10.20 $ 10.00 $ 10.24
======== ======= ======= ======= ========
Total return........................................ 0.00% 10.17% 8.03% 4.14% 20.14%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)................. $ 55,975 $53,505 $40,077 $37,611 $ 38,048
======== ======= ======= ======= ========
Ratio of expenses to average net assets................ 0.77% 0.77% 0.75% 0.77%(a) 0.73%
======== ======= ======= ======= ========
Ratio of net investment income to average net assets... 5.21% 5.26% 5.87% 6.03%(a) 6.20%
======== ======= ======= ======= ========
Portfolio turnover rate................................ 815.1% 477.2% 317.3% 107.6% 449.2%
======== ======= ======= ======= ========
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratio of expenses to average net assets would have been .78% and
.78%, and the ratio of net investment income to average net assets would
have been 6.02% and 6.15%, for the years ended December 31, 1996 and 1995,
respectively.
-46-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................... $ 9.19 $ 9.52 $ 8.91 $ 8.44 $ 7.94
-------- -------- -------- -------- --------
Income from investment operations:
- ----------------------------------
Net investment income................................ 0.89 0.79 0.80 0.70 0.80
Net realized and unrealized gain (loss) on
investment transactions............................ (0.50) (0.33) 0.61 0.47 0.50
-------- -------- -------- -------- --------
Total from investment operations ................. 0.39 0.46 1.41 1.17 1.30
-------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividend from net investment income.................. 0.00 (0.79) (0.80) (0.70) (0.80)
Distribution in excess of net investment income...... 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions............................... 0.00 (0.79) (0.80) (0.70) (0.80)
-------- -------- -------- -------- --------
Net asset value, end of year......................... $ 9.58 $ 9.19 $ 9.52 $ 8.91 $ 8.44
======== ======== ======== ======== ========
Total return...................................... 4.24% 4.79% 15.78% 13.87% 16.41%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)............... $ 69,928 $ 69,003 $ 59,138 $ 44,042 $ 36,442
======== ======== ======== ======== ========
Ratio of expenses to average net assets.............. 0.85% 0.82% 0.81% 0.84% 0.87%
======== ======== ======== ======== ========
Ratio of net investment income to average net assets. 9.11% 8.30% 8.96% 8.14% 9.20%
======== ======== ======== ======== ========
Portfolio turnover rate.............................. 78.2% 82.7% 111.3% 118.5% 84.3%
======== ======== ======== ======== ========
</TABLE>
-47-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 18.31 $ 19.83 $ 18.74 $ 17.40 $ 15.19
Income from investment operations:
- ----------------------------------
Net investment income....................................... 0.67 0.60 0.61 0.65 0.53
Net realized and unrealized gain on investment transactions. 0.64 0.61 2.33 2.19 2.86
-------- -------- -------- -------- --------
Total from investment operations......................... 1.31 1.21 2.94 2.84 3.39
-------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividend from net investment income......................... 0.00 (0.60) (0.61) (0.65) (0.53)
Distribution in excess of net investment income............. 0.00 (0.00) 0.00 0.00 (0.01)
Distribution from net realized gains........................ 0.00 (2.13) (1.24) (0.85) (0.64)
-------- -------- -------- -------- --------
Total distributions ..................................... 0.00 (2.73) (1.85) (1.50) (1.18)
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 19.62 $ 18.31 $ 19.83 $ 18.74 $ 17.40
======== ======== ======== ======== ========
Total return............................................. 7.15% 6.09% 15.65% 16.37% 22.28%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)...................... $482,856 $545,486 $516,139 $398,544 $266,556
======== ======== ======== ======== ========
Ratio of expenses to average net assets..................... 0.76% 0.76% 0.76% 0.77% 0.79%
======== ======== ======== ======== ========
Ratio of net investment income to average net assets........ 3.25% 2.78% 3.10% 3.90% 3.45%
======== ======== ======== ======== ========
Portfolio turnover rate..................................... 31.0% 48.0% 37.1% 32.9% 37.2%
======== ======== ======== ======== ========
</TABLE>
-48-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE GROWTH EQUITY FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year....................... $ 30.88 $ 24.37 $ 21.46 $ 20.00 $ 18.30
-------- -------- -------- -------- --------
Income from investment operations:
- ----------------------------------
Net investment income.................................... (0.05) 0.02 0.10 0.11 0.09
Net realized and unrealized gain (loss) on investment
transactions........................................... 10.58 10.12 5.64 3.85 4.75
-------- -------- -------- -------- --------
Total from investment operations...................... 10.53 10.14 5.74 3.96 4.84
-------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividend from net investment income...................... 0.00 (0.02) (0.10) (0.11) (0.09)
Distribution from net realized gains..................... 0.00 (3.61) (2.73) (2.39) (3.05)
-------- -------- -------- -------- --------
Total distributions................................... 0.00 (3.63) (2.83) (2.50) (3.14)
-------- -------- -------- -------- --------
Net asset value, end of year............................. $ 41.41 $ 30.88 $ 24.37 $ 21.46 $ 20.00
======== ======== ======== ======== ========
Total return.......................................... 34.10% 41.67% 26.74% 19.76% 26.45%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)................... $284,263 $195,692 $136,058 $106,039 $ 95,593
======== ======== ======== ======== ========
Ratio of expenses to average net assets.................. 0.73% 0.76% 0.77% 0.80%(a) 0.77%
======== ======== ======== ======== ========
Ratio of net investment income to average net assets.... (0.14%) 0.08% 0.39% 0.48%(a) 0.43%
======== ======== ======== ======== ========
Portfolio turnover rate.................................. 209.1% 161.3% 169.1% 177.1% 169.8%
======== ======== ======== ======== ========
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratio of expenses to average net assets would have been .81% and
.82%, and the ratio of net investment income to average net assets would
have been .47% and .38%, for the years ended December 31, 1996 and 1995,
respectively.
-49-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE LARGE CAP VALUE FUND*
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 22.39 $ 22.55 $ 19.32 $ 16.28 $ 12.67
-------- -------- -------- -------- --------
Income from investment operations:
- ----------------------------------
Net investment income.................................. 0.21 0.31 0.29 0.22 0.25
Net realized and unrealized gain on investment
transactions........................................ (0.39) 1.85 4.53 3.88 4.50
-------- -------- -------- -------- --------
Total from investment operations.................... (0.18) 2.16 4.82 4.10 4.75
-------- -------- -------- -------- --------
Less distributions:
- -------------------
Dividend from net investment income.................... 0.00 (0.31) (0.29) (0.22) (0.25)
Distribution from net realized gains................... 0.00 (2.01) (1.30) (0.84) (0.89)
-------- -------- -------- -------- --------
Total distributions................................. 0.00 (2.32) (1.59) (1.06) (1.14)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 22.21 $ 22.39 $ 22.55 $ 19.32 $ 16.28
======== ======== ======== ======== ========
Total return........................................ (0.80)% 9.59% 24.98% 25.19% 37.48%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands)................. $290,937 $335,479 $302,960 $200,674 $127,260
======== ======== ======== ======== ========
Ratio of expenses to average net assets................ 0.76% 0.76% 0.76% 0.78% 0.80%
======== ======== ======== ======== ========
Ratio of net investment income to average net assets... 0.88% 1.27% 1.43% 1.38% 1.71%
======== ======== ======== ======== ========
Portfolio turnover rate................................ 67.6% 24.0% 18.7% 25.0% 34.3%
======== ======== ======== ======== ========
</TABLE>
* Prior to May 1, 2000, the Large Cap Value Fund was the Value Equity Fund.
-50-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE EMERGING GROWTH FUND
The following table includes selected data for a share outstanding throughout
each period or year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Period
ended
Year ended December 31, December 31,
--------------------------- ------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period or year.................................... $ 17.43 $ 12.85 $ 10.00
-------- --------- ---------
Income from investment operations:
- ----------------------------------
Net investment loss............................................................. (0.11) (0.06) 0.00
Net realized and unrealized gain (loss) on investment transactions............. 32.36 4.65 3.92
-------- --------- ---------
Total from investment operations............................................. 32.25 4.59 3.92
-------- --------- ---------
Less distributions:
- -------------------
Distribution from net realized gains............................................ 0.00 (0.01) (1.07)
-------- --------- ---------
Total distributions.......................................................... 0.00 (0.01) (1.07)
-------- --------- ---------
Net asset value, end of period or year.......................................... $ 49.68 $ 17.43 $ 12.85
======== ========= ========
Total return................................................................. 185.03% 35.70% 39.22%(c)
Ratios/Supplemental data:
- -------------------------
Net assets, end of period or year (in thousands)................................ $183,413 $ 38,664 $ 17,942
======== ========= ========
Ratio of expenses to average net assets......................................... 1.04% 1.15%(b) 1.15%(a)(b)
======== ========= ========
Ratio of net investment income to average net assets........................... (0.68)% (0.66)%(b) (0.73)%(a)(b)
======== ========= ========
Portfolio turnover rate......................................................... 172.4% 240.9% 392.3%
======== ========= ========
</TABLE>
(a) Annualized.
(b) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been 1.21% and
1.41%, and the ratios of net investment loss to average net assets would
have been (0.73)% and (0.99)%, respectively, for the periods ended December
31, 1998 and December 31, 1997.
(c) Not annualized.
* For the period from May 1, 1997 (commencement of operations) through December
31, 1997.
-51-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE SMALL CAP VALUE FUND*
The following table includes selected data for a share outstanding throughout
each period or year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997 1996 1995**
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period or year................ $ 12.81 $ 14.43 $ 12.53 $ 10.96 $ 10.00
------ ------- ------ ------ ------
Income from investment operations:
- ----------------------------------
Net investment income....................................... 0.08 0.08 0.07 0.07 0.09
Net realized and unrealized gain (loss) on investment
transactions............................................. (0.25) (1.41) 2.81 2.09 1.19
------ ------- ------ ------ ------
Total from investment operations......................... (0.17) (1.33) 2.88 2.16 1.28
------ ------- ------ ------ ------
Less distributions:
- -------------------
Dividend from net investment income......................... 0.00 (0.08) (0.07) (0.07) (0.09)
Distribution from net realized gains........................ 0.00 (0.21) (0.91) (0.52) (0.23)
------ ------- ------ ------ ------
Total distributions...................................... 0.00 (0.29) (0.98) (0.59) (0.32)
------ ------- ------ ------ ------
Net asset value, end of period or year...................... $ 12.64 $ 12.81 $ 14.43 $ 12.53 $ 10.96
====== ======= ====== ====== ======
Total return............................................. 1.33)% (9.16)% 23.02% 19.76% 12.76%(b)
Ratios/Supplemental data:
- -------------------------
Net assets, end of period or year (in thousands)............ $44,939 $ 43,635 $38,726 $16,134 $ 4,828
====== ======= ====== ====== ======
Ratio of expenses to average net assets..................... 0.81% 0.82% 0.85% 0.99%(a) 1.00%(a)(c)
====== ======= ====== ====== ======
Ratio of net investment income to average net assets........ 0.65% 0.65% 0.66% 0.85%(a) 1.53%(a)(c)
====== ======= ====== ====== ======
Portfolio turnover rate..................................... 102.8% 61.9% 71.1% 39.2% 64.3%
====== ======= ====== ====== ======
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been 1.06% and
1.29%, and the ratios of net investment loss to average net assets would
have been 0.78% and 1.24%, respectively, for the year ended December 31,
1996 and the period ended December 31, 1995.
(b) Not annualized.
(c) Annualized.
* Prior to May 1, 2000, the Small Cap Value Fund was the Small Capitalization
Fund.
** For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.
-52-
<PAGE>
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY FUND
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................ $ 18.37 $ 16.13 $ 15.61 $ 14.47 $ 13.01
------- ------- ------- ------- -------
Income from investment operations:
- ----------------------------------
Net investment income..................................... 0.03 0.10 0.58 0.63 0.13
Net realized and unrealized gain (loss) on investment
transactions and foreign related transaction............ 8.38 2.93 1.04 1.81 1.67
------- ------- ------- ------- -------
Total from investment operations....................... 8.41 3.03 1.62 2.44 1.80
------- ------- ------- ------- -------
Less distributions:
- -------------------
Dividend from net investment income....................... 0.00 (0.10) (0.53) (0.56) (0.12)
Distribution in excess of net investment income .......... 0.00 (0.08) 0.00 (0.74) (0.22)
Distribution from net realized gains...................... 0.00 (0.61) (0.57) 0.00 0.00
------- ------- ------- ------- -------
Total distributions.................................... 0.00 (0.79) (1.10) (1.30) (0.34)
------- ------- ------- ------- -------
Net asset value, end of year.............................. $ 26.78 $ 18.37 $ 16.13 $ 15.61 $ 14.47
======= ======= ======= ======= =======
Total return........................................... 45.78% 18.85% 10.41% 16.87% 13.80%
Ratios/Supplemental data:
- -------------------------
Net assets, end of year (in thousands).................... $215,312 $153,822 129,638 104,418 $ 69,531
======= ======= ======= ======= =======
Ratio of expenses to average net assets................... 1.08% 1.08% 1.13% 1.17% 1.23%
======= ======= ======= ======= =======
Ratio of net investment income to average net assets...... .20% 0.45% 0.62% 0.66% 0.91%
======= ======= ======= ======= =======
Portfolio turnover rate................................... 45.0% 43.5% 35.7% 54.8% 62.5%
======= ======= ======= ======= =======
</TABLE>
-53-
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Statement of Additional Information
In addition to this Prospectus, Penn Series has a Statement of Additional
Information ("SAI"), dated May 1, 2000, which contains additional, more detailed
information about the Funds. The SAI is incorporated by reference into this
Prospectus and, therefore, legally forms a part of this Prospectus.
Shareholder Reports
Penn Series publishes annual and semi-annual reports containing additional
information about each Fund's investments. In Penn Series' shareholder reports,
you will find a discussion of the market conditions and the investment
strategies that significantly affected each Fund's performance during that
period.
You may obtain the SAI and shareholder reports without charge by contacting the
Fund at 1-800-523-0650.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Securities and Exchange Commission in any of
the following ways: (1) In person: you may review and copy documents in the
Commission's Public Reference Room in Washington, D.C. (for information call
1-202-942-8090); (2) On-line: you may retrieve information from the
Commission's web site at "http://www.sec.gov"; or (3) By mail; you may request
documents, upon payment of a duplicating fee, by electronic request at
[email protected] or by writing to Securities Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102. To aid you in obtaining this
information, Penn Series' Investment Company Act registration number is
811-03459.
-54-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PENN SERIES FUNDS, INC.
600 Dresher Road
Horsham, Pennsylvania 19044
Penn Series Funds, Inc. ("Penn Series") is a no-load mutual fund with fourteen
separate investment portfolios (the "Funds").
MONEY MARKET FUND
LIMITED MATURITY BOND FUND
QUALITY BOND FUND
HIGH YIELD BOND FUND
FLEXIBLY MANAGED FUND
GROWTH AND INCOME FUND
GROWTH EQUITY FUND
LARGE CAP VALUE FUND
INDEX 500 FUND
MID CAP GROWTH FUND
MID CAP VALUE FUND
EMERGING GROWTH FUND
SMALL CAP VALUE FUND
INTERNATIONAL EQUITY FUND
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Penn Series prospectus dated May 1, 2000. A copy of the
prospectus is available, without charge, by writing to The Penn Mutual Life
Insurance Company, Customer Service Group - H3F, Philadelphia, PA, 19172. Or,
you may call, toll free, 1-800-548-1119.
The date of this Statement of Additional Information is May 1, 2000.
<PAGE>
TABLE OF CONTENTS
Penn Series ............................................................... 3
Investment Objectives...................................................... 3
Investment Policies........................................................ 4
Securities and Investment Techniques....................................... 12
Investments in Debt Securities.................................... 12
Investments in Foreign Equity Securities.......................... 15
Investments in Smaller Companies.................................. 16
Foreign Currency Transactions..................................... 16
Repurchase Agreements............................................. 18
Lending of Portfolio Securities................................... 18
Illiquid Securities............................................... 19
Warrants ......................................................... 19
When-Issued Securities............................................ 19
The Quality Bond Fund's Policy Regarding Industry Concentration... 20
Options ......................................................... 20
Futures Contracts................................................. 21
Investment Companies.............................................. 22
Loan Participations and Assignments............................... 22
Trade Claims...................................................... 23
Investment Restrictions.................................................... 24
Money Market Fund................................................. 24
Limited Maturity Bond Fund........................................ 25
Quality Bond Fund ................................................ 26
High Yield Bond Fund.............................................. 27
Flexibly Managed Fund............................................. 28
Growth and Income Fund............................................ 29
Growth Equity Fund................................................ 30
Large Cap Value Fund.............................................. 31
Index 500 Fund.................................................... 32
Mid Cap Growth Fund............................................... 33
Mid Cap Value Fund ............................................... 34
Emerging Growth Fund.............................................. 34
Small Cap Value Fund.............................................. 35
International Equity Fund......................................... 36
General Information........................................................ 38
Investment Advisory Services...................................... 38
Administrative and Corporate Services............................. 40
Accounting Services............................................... 41
Limitation on Fund Expenses....................................... 42
Portfolio Transactions............................................ 42
Directors and Officers............................................ 44
Custodial Services................................................ 46
Independent Auditors.............................................. 46
Legal Matters..................................................... 46
Net Asset Value of Shares......................................... 47
Ownership of Shares............................................... 47
Tax Status........................................................ 48
Voting Rights .................................................... 50
Performance Information.................................................... 50
Total Return...................................................... 51
Ratings of Commercial Paper................................................ 52
Ratings of Corporate Debt Securities....................................... 53
Financial Statements of Penn Series........................................ 54
Report of Independent Auditors............................................. 55
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES
- --------------------------------------------------------------------------------
Penn Series is an open-end management investment company that offers
shares of diversified portfolios for variable annuity and variable life
insurance contracts issued by The Penn Mutual Life Insurance Company ("Penn
Mutual") and its subsidiary, The Penn Insurance and Annuity Company ("PIA").
Penn Series was established as a Maryland corporation pursuant to Articles of
Incorporation dated April 21, 1982.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The investment objectives of the Funds are as follows. There can be no
assurance that these objectives will be achieved.
- --------------------------------------------------------------------------------
Money Market Fund preserve shareholder capital, maintain liquidity
and achieve the highest possible level of current
income consistent therewith;
- --------------------------------------------------------------------------------
Limited Maturity Bond Fund highest available current income consistent with
liquidity and low risk to principal; total return
is secondary;
- --------------------------------------------------------------------------------
Quality Bond Fund the highest income over the long term consistent
with the preservation of principal;
- --------------------------------------------------------------------------------
High Yield Bond Fund high current income;
- --------------------------------------------------------------------------------
Flexibly Managed Fund maximize total return (capital appreciation and
income);
- --------------------------------------------------------------------------------
Growth and Income Fund provide total return through a combination of
current income and capital appreciation;
- --------------------------------------------------------------------------------
Growth Equity Fund long-term growth of capital and increase of future
income;
- --------------------------------------------------------------------------------
Large Cap Value Fund maximize total return (capital appreciation and
income);
- --------------------------------------------------------------------------------
Index 500 Fund total return (capital appreciation and income)
which corresponds to that of the Standard & Poor's
Composite Index of 500 stocks;
- --------------------------------------------------------------------------------
Mid Cap Growth Fund maximize capital appreciation;
- --------------------------------------------------------------------------------
Mid Cap Value Fund growth of capital;
- --------------------------------------------------------------------------------
Emerging Growth Fund capital appreciation;
- --------------------------------------------------------------------------------
Small Cap Value Fund capital appreciation;
- --------------------------------------------------------------------------------
International Equity Fund capital appreciation.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
Information in this Statement of Additional Information supplements the
discussion in the Penn Series Prospectus regarding investment policies and
restrictions of the Funds. Unless otherwise specified, the investment policies
and restrictions are not fundamental policies and may be changed by the Board of
Directors without shareholder approval. Fundamental policies and restrictions of
each Fund may not be changed without the approval of at least a majority of the
outstanding shares of that Fund or, if it is less, 67% of the shares represented
at a meeting of shareholders at which the holders of 50% or more of the shares
are represented.
- --------------------------------------------------------------------------------
Money Market Fund
Investment Program. The Fund invests in a diversified portfolio of money
market securities, limited to those described below, which are rated within the
two highest credit categories assigned by nationally recognized statistical
rating organizations, or, if not rated, are of comparable investment quality as
determined by Independence Capital Management, Inc. and approved by the Penn
Series Board of Directors. Such securities include: (i) U.S. Government
Obligations; (ii) U.S. Government Agency Securities; (iii) Bank Obligations;
(iv) Commercial Paper; (v) Short-Term Corporate Debt Securities; (vi) Canadian
Government Securities, limited to 10% of the Fund's assets; (vii) Savings and
Loan Obligations; (viii) Securities of Certain Supranational Organizations; (ix)
Repurchase Agreements involving these securities other than Foreign Securities;
(x) Foreign Securities--U.S. dollar-denominated money market securities issued
by foreign issuers, foreign branches of U.S. banks and U.S. branches of foreign
banks; and (xi) Asset Backed Securities. Certain of the securities may have
adjustable rates of interest with periodic demand features. The Fund may also
invest in securities of investment companies that invest in money market
securities meeting the foregoing criteria.
Portfolio Quality. The Fund will invest in U.S. dollar-denominated money
market instruments determined by Independence Capital Management, under
guidelines adopted by the Penn Series Board of Directors, to present minimum
credit risk. This determination will take into consideration such factors as
liquidity, profitability, ability to generate funds and capital adequacy. In
addition, the Fund will observe investment restrictions contained in Rule 2a-7
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940, including the following: (a) the Fund will not invest in a
money market instrument if, as a result, more than the greater of 1% of the
Fund's total assets or $1,000,000 would be invested in securities of that issuer
which are not rated in the highest rating category of nationally recognized
statistical rating organizations (or, if not rated, are not of comparable
quality); and (b) the Fund will not invest in a money market instrument if, as a
result, more than 5% of the Fund's total assets would be invested in securities
which are not rated in the highest rating category of nationally recognized
statistical rating organizations (or, if not rated, are not of comparable
quality).
- --------------------------------------------------------------------------------
Limited Maturity Bond Fund
The Fund invests in a diversified portfolio of short to intermediate
term debt securities. The Fund will invest primarily in investment grade
securities (e.g., AAA, AA, A or BBB by S&P) by at least one of the established
rating agencies (S&P, Moody's, Duff & Phelps, Inc., Fitch Investors Service,
Inc., or McCarthy, Crisanti & Maffei, Inc.) or, if not rated, are of equivalent
investment quality as determined by the investment adviser. The Fund may also
invest up to 10% of its net assets in "high yield" securities which are rated BB
or B by S&P (or securities with a comparable rating by another established
rating agency), and are sometimes referred to as "junk bonds." In normal times,
at least 80% of the Fund's total assets will be invested in income producing
securities. At least 75% of the value of the Fund's total assets (not including
cash) will be invested in one or more of the following categories of
investments: (i) Marketable Corporate Debt Securities; (ii) U.S. Government
Obligations; (iii) U.S. Government Agency Securities; (iv) Bank Obligations; (v)
Savings and Loan Obligations; (vi) Commercial Paper; (vii) Collateralized
Mortgage Obligations; (viii) Securities of Certain Supranational Organizations;
(ix) Repurchase Agreements involving these securities; (x) Private Placements
(restricted securities); (xi) Asset Backed Securities; and (xii) Municipal
Obligations. In addition, the Fund may, as part of this minimum 75% of its
assets, write covered call options and purchase put options on its portfolio
securities, purchase call or put options on securities indices and invest in
interest rate futures contracts (and options thereon) for hedging purposes.
Without regard to the above described quality of investments, the Fund may
invest up to 25% of the value of its total assets (not including cash) in
convertible securities, which can be converted into or which carry warrants to
purchase common stock or other equity interests, and preferred and common
stocks. The Fund may from time to
3
<PAGE>
time purchase these securities on a when-issued basis; the value of such
income-producing securities may decline or increase prior to settlement date.
- --------------------------------------------------------------------------------
Quality Bond Fund
The Fund invests in a diversified portfolio primarily consisting of long,
intermediate, and short-term marketable (i.e., securities for which market
quotations are readily available) debt securities. Except as provided below, the
Fund will only purchase debt securities that are considered investment grade
securities (e.g., AAA, AA, A, or BBB by S&P) by at least one of the established
rating agencies (S&P, Moody's, Duff & Phelps, Inc., Fitch Investors Service,
Inc., or McCarthy, Crisanti & Maffei, Inc.) or, if not rated, are of equivalent
investment quality as determined by the investment adviser. The Fund may also
invest up to 10% of its net assets in securities rated BB or B by S&P (or
securities with a comparable rating by another established rating agency), which
are sometimes referred to as "junk bonds." In normal times, at least 80% of the
Fund's total assets will be invested in income producing securities. At least
75% of the value of the Fund's total assets (not including cash) will be
invested in one or more of the following categories of investments: (i)
Marketable Corporate Debt Securities; (ii) U.S. Government Obligations; (iii)
U.S. Government Agency Securities; (iv) Bank Obligations; (v) Savings and Loan
Obligations; (vi) Commercial Paper; (vii) Collateralized Mortgage Obligations;
(viii) Securities of Certain Supranational Organizations; (ix) Repurchase
Agreements involving these securities; (x) Private Placements (restricted
securities); (xi) Asset Backed Securities; and (xii) Municipal Obligations. In
addition, the Fund may, as part of this minimum 75% of its assets, write covered
call options and purchase put options on its portfolio securities, purchase call
or put options on securities indices and invest in interest rate futures
contracts (and options thereon) for hedging purposes. Without regard to the
above described quality of investments, the Fund may invest up to 25% of the
value of its total assets (not including cash) in Convertible Securities, which
can be converted into or which carry warrants to purchase common stock or other
equity interests, and Preferred and Common Stocks. The Fund may from time to
time purchase these securities on a when-issued basis; the value of such
income-producing securities may decline or increase prior to settlement date.
- --------------------------------------------------------------------------------
High Yield Bond Fund
The Fund will invest at least 80% of the value of its total assets in a
widely diversified portfolio of high-yield corporate bonds, often called "junk"
bonds, income-producing convertible securities and preferred stocks. The Fund
seeks to invest its assets in securities rated Ba or lower by Moody's, or BB or
lower by S&P, or, if not rated, of comparable investment quality as determined
by the Sub-Adviser.
Because high yield bonds involve greater risks than higher quality bonds,
they are referred to as "junk bonds." The Fund may, from time to time, purchase
bonds that are in default, rated Ca by Moody's or D by S&P, if, in the opinion
of the Sub-Adviser, there is potential for capital appreciation. Such bonds are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation (see "Ratings of Corporate Debt Securities"). In addition, the Fund
may invest its portfolio in medium quality investment grade securities (rated
Baa by Moody's or BBB by S&P) which provide greater liquidity than lower quality
securities. Moreover, the Fund may, for temporary defensive purposes under
extraordinary economic or financial market conditions, invest in higher quality
securities.
Investments in the Fund's portfolio may include: (i) Corporate Debt
Securities; (ii) U.S. Government Obligations; (iii) U.S. Government Agency
Securities; (iv) Bank Obligations; (v) Savings and Loan Obligations; (vi)
Commercial Paper; (vii) Securities of Certain Supranational Organizations;
(viii) Repurchase Agreements involving these securities; (ix) Private Placements
(restricted securities); (x) Foreign Securities; (xi) Convertible
Securities--debt securities convertible into or exchangeable for equity
securities or debt securities that carry with them the right to acquire equity
securities, as evidenced by warrants attached to such securities or acquired as
part of units of the securities; (xii) Preferred Stocks--securities that
represent an ownership interest in a corporation and that give the owner a prior
claim over common stock on the company's earnings and assets; (xiii) Loan
Participation and Assignments; (xiv) Trade Claims; (xv) Deferrable Subordinate
Securities and (xvi) Zero Coupon and Pay-in-Kind Bonds. Zero Coupon and
Pay-in-Kind Bonds can be more volatile than coupon bonds. There is no limit on
the Fund's investment in these securities. The Fund may purchase securities,
from time to time, on a when-issued basis; the value of such securities may
decline or increase prior to settlement date.
Credit Analysis. Because investment in lower and medium quality
fixed-income securities involves greater investment risk, including the
possibility of default or bankruptcy, achievement of the Fund's investment
objectives will be more dependent on the Sub-Adviser's credit analysis than
would be the case if the Fund were investing in
4
<PAGE>
higher quality fixed-income securities. Although the ratings of Moody's or S&P
are used as preliminary indicators of investment quality, a credit rating
assigned by such a commercial rating service will not measure the market risk of
lower quality bonds and may not be a timely reflection of the condition and
economic viability of an individual issuer.
The Sub-Adviser places primary significance on its own in-depth credit
analysis and security research. The Fund's investments will be selected from an
approved list of securities deemed appropriate for the Fund by the Sub-Adviser,
which maintains a credit rating system based upon comparative credit analyses of
issuers within the same industry and individual credit analysis of each company.
These analyses take into consideration such factors as a corporation's present
and potential liquidity, profitability, internal capability to generate funds,
and adequacy of capital. Although some issuers do not seek to have their
securities rated by Moody's or S&P, such unrated securities will also be
purchased by the Fund only after being subjected to analysis by the Sub-Adviser.
Unrated securities are not necessarily of lower quality than rated securities,
but the market for rated securities is usually broader.
Maturity. The maturity of debt securities may be considered long (10 plus
years), intermediate (1 to 10 years), or short-term (12 months or less). The
proportion invested by the Fund in each category can be expected to vary
depending upon the evaluation of market patterns and trends by the Sub-Adviser.
The Fund's dollar weighted average maturity is expected to be in the 8 to 12
year range.
Yield and Price. Lower to medium quality, long-term fixed-income
securities typically yield more than higher quality, long-term fixed-income
securities. Thus, the Fund's yield normally can be expected to be higher than
that of a fund investing in higher quality debt securities. The yields and
prices of lower quality fixed income securities may tend to fluctuate more than
those for higher rated securities. In the lower quality segments of the fixed
income markets, changes in perception of issuers' creditworthiness tend to occur
more frequently and in a more pronounced manner than do changes in higher
quality securities, which may result in greater price and yield volatility. For
a given period of time, the Fund may have a high yield but a negative total
return.
Deferrable Subordinated Securities. Recently, securities have been issued
which have long maturities and are deeply subordinated in the issuer's capital
structure. They generally have 30-year maturities and permit the issuer to defer
distributions for up to five years. These characteristics give the issuer more
financial flexibility than is typically the case with traditional bonds. As a
result, the securities may be viewed as possessing certain "equity-like"
features by rating agencies and bank regulators. However, the securities are
treated as debt securities by market participants, and the fund intends to treat
them as such as well. These securities may offer a mandatory put or remarketing
option that creates an effective maturity date significantly shorter than the
stated one. The High Yield Bond Fund will invest in these securities to the
extent their yield, credit, and maturity characteristics are consistent with the
Fund's investment objective and program.
Other Investments. The Fund may invest up to 20% of its total assets in
dividend-paying preferred or common stocks (including up to 10% in warrants to
purchase common stocks) that are considered by the Sub-Adviser to be consistent
with the Fund's current income and capital appreciation investment objectives.
In seeking higher income or a reduction in principal volatility, the Fund may
write covered call options and purchase covered put options and spreads and
purchase uncovered put options and uncovered call options; and the Fund may
invest in interest rate futures contracts (and options thereon) for hedging
purposes. There are also special risks associated with investments in foreign
securities whether denominated in U.S. dollars or foreign currencies. These
risks include potentially adverse political and economic developments overseas,
greater volatility, less liquidity and the possibility that foreign currencies
will decline against the dollar, lowering the value of securities denominated in
those currencies. Currency risk affects the Fund to the extent that it holds
nondollar foreign bonds.
Additional Risks of High Yield Investing. There can be no assurance that
the High Yield Bond Fund will achieve its investment objective. The high yield
securities in which the Fund may invest are predominantly speculative with
regard to the issuer's continuing ability to meet principal and interest
payments. The value of the lower quality securities in which the Fund may invest
will be affected by the creditworthiness of individual issuers, general economic
and specific industry conditions, and will fluctuate inversely with changes in
interest rates. Furthermore, the share price and yield of the Fund are expected
to be more volatile than the share price and yield of a fund investing in higher
quality securities, which react primarily to movements in the general level of
interest rates. The Sub-Adviser carefully considers these factors and the Fund
attempts to reduce risk by diversifying its portfolio, by analyzing the
creditworthiness of individual issuers, and by monitoring trends in the economy,
financial markets, and specific industries. Such efforts, however, will not
eliminate risk. High yield bonds may be more susceptible than investment grade
bonds to real or perceived adverse economic and competitive industry
5
<PAGE>
conditions. High yield bond prices may decrease in response to a projected
economic downturn because the advent of a recession could lessen the ability of
highly leveraged issuers to make principal and interest payments on their debt
securities. Highly leveraged issuers also may find it difficult to obtain
additional financing during a period of rising interest rates. In addition, the
secondary trading market for lower quality bonds may be less active and less
liquid than the trading market for higher quality bonds. As such, the prices at
which lower quality bonds can be sold may be adversely affected and valuing such
lower quality bonds can be a difficult task. If market quotations are not
available, these securities will be valued by a method that, in the good faith
belief of the Fund's Board of Directors, accurately reflects fair value. The
judgment of the Penn Series Board of Directors plays a greater role in valuing
high yield securities than is the case with respect to securities for which more
objective market data are available.
During 1999 the dollar weighted average ratings (computed monthly) of the
debt obligations held by the Fund (excluding equities and reserves), expressed
as a percentage of the Fund's total net investments, were as follows:
Standard and Poor's Ratings Percentage of Total Net Investments**
AAA 0.0
AA 0.0
A 0.1
BBB 2.4
BB 13.3
B 60.2
CCC 5.7
CC 0.1
C 0.0
D 0.1
Unrated* 4.7
* T. Rowe Price Associates, Inc. has advised that in its view the unrated debt
obligations were comparable in quality to debt obligations rated in the S&P
categories as follows: AAA: 0.1%; BBB: 0.0%; BB: 0.1%; B: 3.5%; CCC: 0.9%;
CC: 0.0%; C: 0.0%; D: 0.0%; Unrated: 4.7%.
** Unaudited.
- --------------------------------------------------------------------------------
Flexibly Managed Fund
In addition to investing in common stocks, the Fund may invest in the
following securities:
o Equity-related securities, such as convertible securities (i.e., bonds
or preferred stock convertible into or exchangeable for common stock),
preferred stock, warrants, futures, and options.
o Corporate debt securities within the four highest credit categories
assigned by established rating agencies, which include both high and
medium-quality investment grade bonds. The Fund may also invest in non-
investment grade corporate debt securities, which are sometimes
referred to as "junk bonds," if immediately after such investment the
Fund would not have more than 15% of its total assets invested in such
securities. The Fund's investment in all corporate debt securities will
be limited to 35% of net assets. The Fund's convertible bond holdings
will not be subject to these debt limits, but rather, will be treated
as equity-related securities. Medium-quality investment grade bonds are
regarded as having an adequate capacity to pay principal and interest
although adverse economic conditions or changing circumstances are more
likely to lead to a weakening of such capacity than that for higher
grade bonds.
o Short-term reserves (i.e., money market instruments), which may be used
to reduce downside volatility during uncertain or declining equity
market conditions. The Fund's reserves will be invested in shares of
internally managed fund of the Sub-Adviser or the following high-grade
money market instruments: U.S. Government obligations, certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate
debt securities and repurchase agreements.
If the Fund's position in money market securities maturing in one year or
less equals 35% or more of the Fund's total assets, the Fund will normally have
25% or more of its assets concentrated in securities of the banking
6
<PAGE>
industry. Investments in the banking industry may be affected by general
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers. In addition, the profitability of the
banking industry is largely dependent upon the availability and cost of funds
for the purpose of financing lending operations under prevailing money market
conditions. The adviser believes that any risk to the Fund which might result
from concentrating in the banking industry will be minimized by diversification
of the Fund's investments, the short maturity of money market instruments, and
the Sub-Advisers' credit research.
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Growth and Income Fund
The Fund will invest at least 65% of its assets in equity securities of
U.S. issuers. The Fund will invest primarily in common stocks of issuers with
above-average growth potential. The Fund may also invest in convertible
securities, preferred stocks, foreign securities and ADRs. The Fund's holdings
are generally listed on a national securities exchange. While the Fund may
invest in unlisted securities, such securities will usually have an established
over-the-counter market. In addition, the Fund may increase its reserves for
temporary defensive purposes or to enable it to take advantage of buying
opportunities. The Fund's reserves will be invested in money market instruments,
such as U.S. Government obligations, certificates of deposit, bankers'
acceptances, commercial paper, and short-term corporate debt securities or
shares of investment companies that invest in such instruments. The Fund may
write covered call options and purchase put options on its portfolio securities,
purchase call or put options on securities indices and invest in stock index
futures contracts (and options thereon) for hedging purposes. As a matter of
fundamental policy, the Fund will not purchase the securities of any company if,
as a result, more than 25% of its total assets would be concentrated in any one
industry.
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Growth Equity Fund
Ordinarily, the Fund's assets will be invested primarily in common stocks,
but the Fund may also invest in convertible securities, preferred stocks, and
securities of foreign issuers which hold the prospect of contributing to the
achievement of the Fund's objectives. The Fund's holdings are generally listed
on a national securities exchange. While the Fund may invest in unlisted
securities, such securities will usually have an established over-the-counter
market. In addition, the Fund may increase its reserves for temporary defensive
purposes or to enable it to take advantage of buying opportunities. The Fund's
reserves will be invested in money market instruments, such as U.S. Government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
and short-term corporate debt securities or shares of investment companies that
invest in such instruments. The Fund may write covered call options and purchase
put options on its portfolio securities, purchase call or put options on
securities indices and invest in stock index futures contracts (and options
thereon) for hedging purposes. As a matter of fundamental policy, the Fund will
not purchase the securities of any company if, as a result, more than 25% of its
total assets would be concentrated in any one industry.
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Large Cap Value Fund
Prior to May 1, 2000, the Large Cap Value Fund was named the Value Equity
Fund.
The Fund will invest at least 65% of its assets in equity securities of
U.S. issuers. The Fund's assets will be invested primarily in common stocks of
issuers that the Sub-Adviser believes are undervalued. The Fund may also invest
in convertible securities, preferred stocks, and securities of foreign issuers
which hold the prospect of contributing to the achievement of the Fund's
objectives. The Fund may invest an unlimited amount in foreign securities.
Generally, the Fund will not invest more than 20% of its assets in foreign
securities. The Fund's holdings are generally listed on a national securities
exchange. In addition, the Fund may increase its reserves for temporary
defensive purposes or to enable it to take advantage of buying opportunities.
The Fund's reserves will be invested in money market instruments, such as U.S.
Government obligations, certificates of deposit, bankers' acceptances,
commercial paper, and short-term corporate debt securities or shares of
investment companies that invest in such instruments. The Fund may invest in
derivatives including covered call options and purchase put options on its
portfolio securities, purchase call or put options on securities indices and
invest in stock index futures contracts (and options thereon) for hedging
purposes. As a matter of fundamental policy, the Fund will not purchase the
securities of any company if, as a result, more than 25% of its total assets
would be concentrated in any one industry.
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Index 500 Fund
The Fund seeks to replicate the return of the S&P 500 Index, which is
comprised of approximately 500 securities selected by Standards & Poor's (most
of which are common stocks listed on the New York Stock Exchange). The Fund will
normally invest in all of the stocks and other securities which comprise the S&P
500 Index. The Fund's policy is to be substantially invested in common stocks
included in the S&P 500 Index, and it is expected that cash reserves items held
to accommodate shareholder transactions would be hedged with S&P 500 Index
Futures. Over time, the correlation between the performance of the Fund and the
S&P 500 Index is expected to be over 0.95. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net asset value of the
Fund, including the value of its dividend and capital gains distributions,
increasing or decreasing in exact proportion to changes in the S&P 500 Index.
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Mid Cap Growth Fund
The Fund will invest at least 65% of the value of its total assets in a
diversified portfolio of equity securities of U.S. issuers. The Fund will
primarily invest in common stocks of issuers, that have market capitalizations
between $1 billion and $10 billion at the time of purchase that the Sub-Adviser
believes to have strong earnings growth potential. Any remaining assets may be
invested in securities issued by smaller capitalization companies and larger
capitalization companies, warrants and rights to purchase common stocks, ADRs
and foreign securities. The Fund seeks to purchase securities that are well
diversified across economic sectors and to maintain sector concentrations that
approximate the economic sector weightings comprising the Russell Midcap Growth
Index (or such other appropriate index selected by the Sub-Adviser). In
addition, the Fund may increase its reserves for temporary defensive purposes or
to enable it to take advantage of buying opportunities. The Fund's reserves will
be invested in money market instruments, such as U.S. Government obligations,
certificates of deposit, bankers' acceptances, commercial paper, and short-term
corporate debt securities or shares of investment companies that invest in such
instruments. The Fund may invest in derivatives including covered call options
and purchase put options on its portfolio securities, purchase call or put
options on securities indices and invest in stock index futures contracts (and
options thereon) for hedging purposes. As a matter of fundamental policy, the
Fund will not purchase the securities of any company if, as a result, more than
25% of its total assets would be concentrated in any one industry.
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Mid Cap Value Fund
The Fund will invest at least 65% of the value of its assets in equity
securities of U.S. issuers. The Fund will primarily invest in common stocks
issued by medium capitalization companies. Any remaining assets may be invested
in securities issued by smaller capitalization companies and larger
capitalization companies, warrants and rights to purchase common stocks, foreign
securities and ADRs. The Fund will invest primarily in a diversified portfolio
of common stocks of issuers that have market capitalizations between $1 billion
and $8 billion that the Sub-Adviser believes to be undervalued relative to the
stock market. The Sub-Adviser selects securities that are undervalued in the
marketplace either in relation to strong fundamentals, such as a low
price-to-earnings ratio, consistent with cash flow, and successful track records
through all parts of the market cycles. In addition, the Fund may increase its
reserves for temporary defensive purposes or to enable it to take advantage of
buying opportunities. The Fund's reserves will be invested in money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers' acceptances, commercial paper, and short-term corporate debt securities
or shares of investment companies that invest in such instruments. The Fund may
invest in derivatives including covered call options and purchase put options on
its portfolio securities, purchase call or put options on securities indices and
invest in stock index futures contracts (and options thereon) for hedging
purposes. As a matter of fundamental policy, the Fund will not purchase the
securities of any company if, as a result, more than 25% of its total assets
would be concentrated in any one industry.
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Emerging Growth Fund
The Fund will invest primarily in common stocks, and may also invest in
bonds, convertible securities, preferred stocks and securities of foreign
issuers which hold the prospect of contributing to the achievement of the Fund's
objective. The Fund may also invest in bonds rated below Baa by Moody's or BBB
by S&P (sometimes referred to as "junk bonds"), but presently does not expect
such investments in any such bonds to exceed 5% of the Fund's assets. The Fund
may write covered call options and purchase put options on its portfolio
securities, purchase put and call options on securities indices and invest in
stock index futures contracts (and options thereon) for hedging and other
non-speculative purposes.
8
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Small Cap Value Fund
Prior to May 1, 2000, the Small Cap Value Fund was named the Small
Capitalization Fund.
The Fund will invest at least 65% of its assets in common stocks and
convertible securities. The Fund will primarily invest in companies with less
than $1.5 billion in market capitalization. The Sub-Adviser may also invest in
companies with market capitalizations above $1.5 billion, non-convertible
preferred stocks and debt securities. The Fund uses a "value" method in managing
the Fund's assets, by identifying and investing in securities of companies which
the Fund believes are trading significantly below its estimate of the company's
current worth, with the expectation that the market price of its securities
should increase over a three- to five-year period. In addition, the Fund may
invest in short-term fixed income securities for temporary defensive purposes.
The Fund may invest up to 5% of its total assets in warrants, rights or options.
As a matter of fundamental policy, the Fund will not purchase the securities of
any company if, as a result, more than 25% of its total assets would be
concentrated in any one industry.
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International Equity Fund
Under normal circumstances the Fund will have at least 65% of its assets
invested in European and Pacific Basin equity securities. The Fund intends to
diversify investment broadly among countries and to invest in the securities of
companies in not less than three different countries, in addition to the United
States.
The Fund may not always purchase securities on the principal market. For
example, American Depository Receipts ("ADRs") may be purchased if trading
conditions make them more attractive than the underlying security. ADRs are
registered receipts typically issued in the U.S. by a bank or trust company
evidencing ownership of an underlying foreign security. The Fund may invest in
ADRs which are structured by a U.S. bank without the sponsorship of the
underlying foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADRs may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may not
be current. The Fund may likewise utilize European Depository Receipts ("EDRs"),
which are receipts typically issued in Europe by a bank or trust company
evidencing ownership of an underlying foreign security. Unlike ADRs, EDRs are
issued in bearer form. For purposes of determining the country of origin, ADRs
and EDRs will not be deemed to be domestic securities.
The Fund may also acquire fixed income investments where these fixed income
securities are convertible into equity securities (and which may therefore
reflect appreciation in the underlying equity security), and where anticipated
interest rate movements, or factors affecting the degree of risk inherent in a
fixed income security, are expected to change significantly so as to produce
appreciation in the security consistent with the objective of the Fund. Fixed
income securities in which the Fund may invest will be rated at the time of
purchase Baa or higher by Moody's Investor Service, Inc., or BBB or higher by
Standard and Poor's Ratings Group or, if they are foreign securities which are
not subject to standard credit ratings, the fixed income securities will be
"investment grade" issues (in the judgment of the Sub-Adviser) based on
available information.
The Fund may invest in securities which may be considered to be
"thinly-traded" if they are deemed to offer the potential for appreciation, but
does not presently intend to invest more than 5% of its total assets in such
securities. The trading volume of such securities is generally lower and their
prices may be more volatile as a result, and such securities are less likely to
be exchange-listed securities. The Fund may also invest, subject to
restrictions, in options (puts and calls) and restricted securities.
Additional Risk Considerations. Investments in foreign securities involve
sovereign risk in addition to the credit and market risks normally associated
with domestic securities. Such foreign investments may also be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
the financial markets on which they are traded may be subject to less strict
governmental supervision, and foreign brokerage commissions and custodian fees
are generally higher than in the United States. Investments in foreign
securities may also be subject to other risks different from those affecting
U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the
9
<PAGE>
United States). A contract owner who selects this Fund will incur the risks
generally associated with investment in equity securities and, in addition, the
risk of losses attributable to changes in currency exchange rates to the extent
that those risks are not adequately hedged by the Sub-Adviser.
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SECURITIES AND INVESTMENT TECHNIQUES
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Investments in Debt Securities
Debt securities in which one or more of the Funds may invest in include
those described below.
U.S. Government Obligations. The Funds may invest in bills, notes, bonds,
and other debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in the length of their
maturities.
U.S. Government Agency Securities. The Funds may invest in debt securities
issued or guaranteed by U.S. Government sponsored enterprises, federal agencies,
and international institutions. These include securities issued by Fannie Mae,
the Government National Mortgage Association, Federal Home Loan Bank, Federal
Land Banks, Farmers Home Administration, Banks for Cooperatives, Federal
Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks, and the
Tennessee Valley Authority. Some of these securities are supported by the full
faith and credit of the U.S. Treasury, others are supported by the right of the
issuer to borrow from the Treasury, and the remainder are supported only by the
credit of the instrumentality.
Long-Term, Medium to Lower Quality Corporate Debt Securities. The High
Yield Bond Fund will invest in outstanding convertible and nonconvertible
corporate debt securities (e.g., bonds and debentures) that generally have
maturities between 8 and 12 years. This Fund will generally invest in long-term
corporate obligations which are rated BBB or lower by Standard & Poor's Ratings
Group ("Standard & Poor's") or Baa or lower by Moody's Investors Service, Inc.
("Moody's"), or, if not rated, are of equivalent quality as determined by the
Fund 's investment adviser. Other Funds may invest limited amounts in medium to
lower quality corporate debt securities in accordance with their stated
investment policies. The Flexibly Managed Fund may invest up to 15% of its
assets in lower quality corporate debt.
Investment Grade Corporate Debt Securities. The Limited Maturity Bond and
Quality Bond Funds will invest principally in corporate debt securities of
various maturities that are considered investment grade securities by at least
one of the established rating services (e.g., AAA, AA, A, or BBB by Standard &
Poor's) or, if not rated, are of equivalent quality as determined by the Fund's
investment adviser, Independence Capital Management, Inc. ("ICMI").
Bank Obligations. The Funds may invest in certificates of deposit,
bankers' acceptances, and other short-term debt obligations. Certificates of
deposit are short-term obligations of commercial banks. A bankers' acceptance is
a time draft drawn on a commercial bank by a borrower, usually in connection
with international commercial transactions.
No Fund will invest in any security issued by a commercial bank unless:
(i) the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank by any
one Income Fund is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation, (ii)
in the case of a U.S. Bank, it is a member of the Federal Deposit Insurance
Corporation, and (iii) in the case of foreign banks, the security is, in the
opinion of the Fund's investment adviser, of an investment quality comparable
with other debt securities which may be purchased by the Fund. These limitations
do not prohibit investments in securities issued by foreign branches of U.S.
banks, provided such U.S. banks meet the foregoing requirements.
Commercial Paper. The Funds may invest in short-term promissory notes
issued by corporations primarily to finance short-term credit needs. The Money
Market Fund will only invest in commercial paper which is rated A-2 or better by
Standard & Poor's, Prime-2 or better by Moody's or, if not rated, is of
equivalent quality as determined by the investment adviser, and further will
invest only in instruments permitted under the SEC Rule 2a-7 which governs money
market fund investing.
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<PAGE>
Canadian Government Securities. The Funds may invest in debt securities
issued or guaranteed by the Government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof. However, the Money Market Fund
will only purchase these securities if they are marketable and payable in U.S.
dollars. The Money Market Fund will not purchase any such security if, as a
result, more than 10% of the value of its total assets would be invested in such
securities.
Savings and Loan Obligations. The Limited Maturity Bond, Quality Bond, High
Yield Bond, and Money Market Funds may invest in negotiable certificates of
deposit and other debt obligations of savings and loan associations. They will
not invest in any security issued by a savings and loan association unless: (i)
the savings and loan association has total assets of at least $1 billion, or, in
the case of savings and loan associations which do not have total assets of at
least $1 billion, the aggregate investment made in any one savings and loan
association is limited to $100,000 and the principal amount of such investment
is insured in full by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation; (ii) the savings and loan association issuing the
security is a member of the Federal Home Loan Bank System; and (iii) the
security is insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation.
No Fund will purchase any security of a small bank or savings and loan
association which is not readily marketable if, as a result, more than 10% of
the value of its total assets would be invested in such securities, other
illiquid securities, and securities without readily available market quotations,
such as restricted securities and repurchase agreements maturing in more than
seven days.
Municipal Obligations. The Limited Maturity Bond, Quality Bond and Large
Cap Value Funds may invest in Municipal Obligations that meet the Fund's quality
standards. The two principal classifications of Municipal Obligations are
"general obligation" securities and "revenue" securities. General obligation
securities are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue securities are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.
Municipal Obligations may include variable and floating rate instruments.
If such instruments are unrated, they will be determined by the adviser to be of
comparable quality at the time of the purchase to rated instruments purchasable
by a Fund.
To the extent a Fund's assets are to a significant extent invested in
Municipal Obligations that are payable from the revenues of similar projects,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects to a greater extent than it would
be if its assets were not so invested.
Foreign Debt Securities. Subject to the particular Fund's quality and
maturity standards, the Limited Maturity Bond, Quality Bond, High Yield Bond and
Money Market Funds may invest without limitation in the debt securities (payable
in U.S. dollars) of foreign issuers in developed countries and in the securities
of foreign branches of U.S. banks such as negotiable certificates of deposit
(Eurodollars). The High Yield Bond Fund may also invest up to 20% of its assets
in non-U.S. dollar--denominated fixed-income securities principally traded in
financial markets outside the United States.
The International Equity Fund may invest in debt securities of foreign
issuers. The securities will be rated Baa or higher by Moody's Investor
Services, Inc. or BBB or higher by Standard and Poor's Ratings Group or, if they
have not been so rated, will be the equivalent of investment grade (Baa or BBB)
as determined by the adviser or sub-adviser. The Large Cap Value Fund may also
invest up to 15% of its assets in U.S.-traded dollar denominated debt securities
of foreign issuers, and up to 5% of its assets in non-dollar denominated fixed
income securities issued by foreign issuers.
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<PAGE>
The Emerging Growth Fund may also invest up to 15% of its assets in
U.S.-traded dollar denominated debt securities of foreign issuers, and up to 5%
of its assets in non-dollar denominated fixed income securities issued by
foreign issuers.
For information on risks involved in investing in foreign securities, see
information on "Investments in Foreign Equity Securities" below.
Prime Money Market Securities Defined. Prime money market securities
include: U.S. Government obligations; U.S. Government agency securities; bank or
savings and loan association obligations issued by banks or savings and loan
associations whose debt securities or parent holding companies' debt securities
or affiliates' debt securities guaranteed by the parent holding company are
rated AAA or A-1 or better by Standard & Poor's, AAA or Prime-1 by Moody's, or
AAA by Fitch; commercial paper rated A-1 or better by Standard & Poor's, Prime-1
by Moody's, or, if not rated, issued by a corporation having an outstanding debt
issue rated AAA by Standard & Poor's, Moody's, or Fitch; short-term corporate
debt securities rated AAA by Standard & Poor's, Moody's, or Fitch; Canadian
Government securities issued by entities whose debt securities are rated AAA by
Standard & Poor's, Moody's, or Fitch; and repurchase agreements where the
underlying security qualifies as a prime money market security as defined above.
Collateralized Mortgage Obligations. The Limited Maturity Bond, Quality
Bond and High Yield Bond Funds may invest in collateralized mortgage obligations
("CMS"). CMS are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMS on the same schedule as they are
received, although certain classes of CMS have priority over others with respect
to the receipt of prepayments on the mortgages. Therefore, depending on the type
of CMS in which the Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related securities. CMS
may also be less marketable than other securities.
Asset-Backed Securities. The Limited Maturity Bond, Quality Bond, High
Yield Bond and Money Market Funds may invest a portion of their assets in debt
obligations known as "asset-backed securities." The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified as "pass through
certificates" or "collateralized obligations."
"Pass through certificates" are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets. Pass
through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are pledged
to a trustee or custodian for the benefit of the holders thereof. Such issuers
generally hold no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event of defaults
on the underlying assets not covered by any credit support, the issuing entities
are unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
Zero Coupon and Pay-in-Kind Bonds. The High Yield Bond and Flexibly
Managed Funds may invest in zero coupon and pay-in-kind bonds. A zero coupon
security has no cash coupon payments. Instead, the issuer sells the security at
a substantial discount from its maturity value. The interest received by the
investor from holding this security to maturity is the difference between the
maturity value and the purchase price. The advantage to the investor is that
reinvestment risk of the income received during the life of the bond is
eliminated. However, zero coupon bonds like other bonds retain interest rate and
credit risk and usually display more price volatility than those securities that
pay a cash coupon.
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Pay-in-Kind (PIK) Instruments are securities that pay interest in either
cash or additional securities, at the issuer's option, for a specified period.
PIK's, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. PIK bonds can be either senior or subordinated debt and
trade flat (i.e., without accrued interest). The price of PIK bonds is expected
to reflect the market value of the underlying debt plus an amount representing
accrued interest since the last payment. PIK's are usually less volatile than
zero coupon bonds, but more volatile than cash pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless be
required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce the
amount of cash available for investment by the Fund.
Convertible Securities. The Funds may invest in debt securities or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertible securities have developed which combine higher or
lower current income with options and other features.
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Investments in Foreign Equity Securities
The Growth and Income, Growth Equity, Large Cap Value, Mid Cap Growth, Mid
Cap Value, Small Cap Value, Emerging Growth and Flexibly Managed Funds may
invest in the equity securities of foreign issuers, subject to the following
limitations based upon the total assets of each Fund: Growth and Income - 30%,
Growth Equity - 30%; Large Cap Value - 25%; Small Cap Value Fund - 15%; Mid Cap
Growth Fund -25%; Mid Cap Value Fund - 25%; Emerging Growth Fund - 10%; and
Flexibly Managed Fund - 25%. The International Equity Fund, under normal
circumstances, will have at least 65% of its assets in such investments. Because
these Funds may invest in foreign securities, selection of these Funds involves
risks that are different in some respects from an investment in a fund which
invests only in securities of U.S. domestic issuers. Foreign investments may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing, and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities may also be
subject to other risks different from those affecting U.S. investments,
including local political or economic developments, expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from being
brought back to the United States).
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Investments in Smaller Companies
The Small Cap Value and Emerging Growth Funds may invest a substantial
portion of their assets in securities issued by smaller companies. Such
companies may offer greater opportunities for capital appreciation than larger
companies, but investments in such companies may involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. While the markets in
securities of such companies have grown rapidly in recent years, such securities
may trade less frequently and in smaller volume than more widely held
securities. The values of these securities may fluctuate more sharply than those
of other securities, and a Fund may experience some difficulty in establishing
or closing out positions in these securities at prevailing market prices. There
may be less publicly available information about the issuers of these securities
or less market interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such securities to
reflect the full value of their issuers' underlying earnings potential or
assets. Some securities of smaller issuers may be restricted as to resale or may
otherwise be highly illiquid. The ability of a Fund to dispose of such
securities may be greatly limited, and a Fund may have to continue to hold such
securities during periods when they would otherwise be sold.
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Foreign Currency Transactions
As a means of reducing the risks associated with investing in
securities denominated in foreign currencies, a Fund, other than the Money
Market Fund, may purchase or sell foreign currency on a forward basis ("forward
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<PAGE>
contracts"), enter into foreign currency futures and options on futures
contracts ("forex futures") and foreign currency options ("forex options").
These investment techniques are designed primarily to hedge against anticipated
future changes in currency prices that otherwise might adversely affect the
value of the Fund's investments.
Forward contracts involve an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
Forex futures are standardized contracts for the future delivery of a
specified amount of a foreign currency at a future date at a price set at the
time of the contract. Forex futures traded in the United States are traded on
regulated futures exchanges. A Fund will incur brokerage fees when it purchases
or sells forex futures and it will be required to maintain margin deposits.
Parties to a forex future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the contract
price. There also are requirements to make "variation" margin deposits as the
value of the futures contract fluctuates. Forex futures and forex options will
be used only to hedge against anticipated future changes in exchange rates that
might otherwise adversely affect the value of the Fund's securities or adversely
affect the prices of the securities the Fund intends to purchase at a later
date.
The Funds may enter into forward foreign contracts only under two
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received. Second, when the adviser or sub-adviser to
one of these Funds believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, the Fund may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
the foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. The International Equity Fund may enter into a
forward contract to buy or sell foreign currency (or another currency which acts
as a proxy for that currency) approximating the value of some or all of the
Fund's portfolio securities denominated in such currency. In certain
circumstances the adviser or sub-adviser to the International Equity Fund may
commit a substantial portion of the portfolio to the consummation of forward
contracts. The Growth and Income Fund, Growth Equity Fund, Large Cap Value Fund,
Mid Cap Growth Fund, Mid Cap Value Fund, Small Cap Value Fund, Emerging Growth
Fund and High Yield Bond Fund do not intend to enter into such forward contracts
under this second circumstance on a regular or continuous basis, and will not do
so if, as a result, the Fund will have more than 15% of the value of its total
assets committed to the consummation of such contracts. The Funds will also not
enter into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate them to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. A Fund's custodian bank will place cash or liquid equity or debt
securities in a separate account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of forward foreign
currency exchange contracts entered into under the second circumstance, as set
forth above. If the value of the securities placed in the separate account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts.
At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
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It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent that the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell.
It also should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which one can achieve at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time, they
tend to limit any potential gain which might result from the value of such
currency increase.
Although the International Equity Fund, Growth and Income, Growth Equity
Fund, Large Cap Value Fund, Small Cap Value Fund, Mid Cap Growth, Mid Cap
Equity, Emerging Growth Fund, Flexibly Managed Fund and High Yield Bond Funds
value their assets daily in terms of U.S. dollars, they do not intend to convert
their holdings of foreign currencies into U.S. dollars on a daily basis. They
will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
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Repurchase Agreements
Each Fund, other than the Growth Equity Fund, may enter into repurchase
agreements through which an investor (such as a Fund) purchases a security
(known as the "underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Concurrently, the bank
or securities dealer agrees to repurchase the underlying security at a future
point at the same price, plus specified interest. Repurchase agreements are
generally for a short period of time, often less than a week. A Fund will not
enter into a repurchase agreement with a maturity of more than seven business
days if, as a result, more than 10% of the value of its total assets would then
be invested in such repurchase agreements. The Limited Maturity Bond and Quality
Bond Funds will only enter into a repurchase agreement where the underlying
securities are (excluding maturity limitations) rated within the four highest
credit categories assigned by established rating services (AAA, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by Standard & Poor's), or, if not rated, of
equivalent investment quality as determined by the investment adviser. With the
exception of the Money Market Fund, the underlying security must be rated within
the top three credit categories, or, if not rated, must be of equivalent
investment quality as determined by the investment adviser or sub-adviser. In
the case of the Money Market Fund, the underlying security must be rated within
the top credit category or, if not rated, must be of comparable investment
quality as determined by the investment adviser and the repurchase agreement
must meet the other quality and diversification standards of Rule 2a-7 under the
Investment Company Act of 1940. In addition, each Fund will only enter into a
repurchase agreement where (i) the market value of the underlying security,
including interest accrued, will be at all times equal to or exceed the value of
the repurchase agreement, and (ii) payment for the underlying security is made
only upon physical delivery or evidence of book-entry transfer to the account of
the custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, a Fund could experience both
delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period while
a Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
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Lending of Portfolio Securities
For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. This policy is a fundamental policy for all the Funds. Securities loans
are made to unaffiliated broker-dealers or institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent. The collateral
received will consist of government securities, letters of credit or such other
collateral as may be permitted under its investment program and by regulatory
agencies and approved by the Board of Directors. While the securities are being
lent, the Fund will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has a right
to call each loan and obtain the securities on five business days' notice. No
Fund will have the right to vote securities while they are being lent, but it
will call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed by the adviser to be of
good standing and will not be made unless, in the judgment of the adviser, the
consideration to be earned from such loans would justify the risk.
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Illiquid Securities
Illiquid securities generally are those which may not be sold in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued them.
The Funds may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser or sub-adviser,
acting under guidelines approved and monitored by the Board of Directors, that
an adequate trading market exists for that security. In making that
determination, the adviser or sub-adviser will consider, among other relevant
factors: (1) the frequency of trades and quotes for the security; (2) the number
of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the marketplace trades. A
Fund's treatment of Rule 144A securities as liquid could have the effect of
increasing the level of fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. The adviser or sub-adviser will continue to monitor the liquidity of
any Rule 144A security which has been determined to be liquid. If a security is
no longer liquid because of changed conditions, the holdings of illiquid
securities will be reviewed to determine if any steps are required to assure
compliance with applicable limitations on investments in illiquid securities.
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Warrants
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds may, consistent with their investment objectives and
policies invest an unlimited amount in warrants. The Flexibly Managed and High
Yield Bond Funds may invest in warrants if, after such investment, no more than
10% of the value of a Fund's net assets would be invested in warrants. The Large
Cap Value, Small Cap Value, Emerging Growth, International Equity, Quality Bond
and Money Market Funds may invest in warrants; however, not more than 5% of any
such Fund's assets (at the time of purchase) will be invested in warrants other
than warrants acquired in units or attached to other securities. Of such 5% not
more than 2% of such assets at the time of purchase may be invested in warrants
that are not listed on the New York or American Stock Exchange. Warrants
basically are options to purchase equity securities at a specific price valid
for a specific period of time. They do not represent ownership of the
securities, but only the right to buy them. They have no voting rights, pay no
dividends and have no rights with respect to the assets of the corporation
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
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When-Issued Securities
The Limited Maturity Bond, Quality Bond, High Yield Bond, Flexibly Managed,
Growth and Income, Large Cap Value, Index 500, Mid Cap Growth, Mid Cap Value,
Emerging Growth, Small Cap Value and International Equity Funds may from time to
time purchase securities on a "when-issued" basis. The price of such securities,
which may be expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and
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payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund purchasing the when-issued security. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of the Fund's other assets. While when-issued securities may be
sold prior to the settlement date, the Funds intend to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the particular Fund makes the commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
advisers do not believe that the net asset value or income of the Funds will be
adversely affected by the respective Fund's purchase of securities on a
when-issued basis. The Funds will maintain cash and marketable securities equal
in value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
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The Quality Bond Fund's Policy Regarding Industry Concentration
When the market for corporate debt securities is dominated by issues in the
gas utility, gas transmission utility, electric utility, telephone utility, or
petroleum industries, the Quality Bond Fund will as a matter of fundamental
policy concentrate 25% or more, but not more than 50%, of its assets in any one
such industry, if the Fund has cash for such investment (i.e., will not sell
portfolio securities to raise cash) and, if in Independence Capital Management's
judgment, the return available and the marketability, quality, and availability
of the debt securities of such industry justifies such concentration in light of
the Fund's investment objective. Domination would exist with respect to any one
such industry, when, in the preceding 30-day period, more than 25% of all
new-issue corporate debt offerings (within the four highest grades of Moody's or
S&P and with maturities of 10 years or less) of $25,000,000 or more consisted of
issues in such industry. Although the Fund will normally purchase corporate debt
securities in the secondary market as opposed to new offerings, Independence
Capital Management believes that the new issue-based dominance standard, as
defined above, is appropriate because it is easily determined and represents an
accurate correlation to the secondary market. Investors should understand that
concentration in any industry may result in increased risk. Investments in any
of these industries may be affected by environmental conditions, energy
conservation programs, fuel shortages, difficulty in obtaining adequate return
on capital in financing operations and large construction programs, and the
ability of the capital markets to absorb debt issues. In addition, it is
possible that the public service commissions which have jurisdiction over these
industries may not grant future increases in rates sufficient to offset
increases in operating expenses. These industries also face numerous legislative
and regulatory uncertainties at both federal and state government levels.
Independence Capital Management believes that any risk to the Fund which might
result from concentration in any industry will be minimized by the Fund's
practice of diversifying its investments in other respects. The Quality Bond
Fund's policy with respect to industry concentration is a fundamental policy.
See INVESTMENT RESTRICTIONS below.
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Options
Each Fund, other than the Money Market Fund, may write covered call (except
for Small Cap Value Fund) and buy put options on its portfolio securities and
purchase call or put options on securities indices. The aggregate market value
of the portfolio securities covering call or put options will not exceed 25% of
a Fund's total assets. Such options may be exchange-traded or dealer options. An
option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time. Although options will primarily be
used to minimize principal fluctuations, or to generate additional premium
income for the Funds, they do involve certain risks. Writing covered call
options involves the risk of not being able to effect closing transactions at a
favorable price or participate in the appreciation of the underlying securities
or index above the exercise price. The High Yield Bond Fund may engage in other
options transactions described in INVESTMENT RESTRICTIONS below, including the
purchase of spread options, which give the owner the right to sell a security
that it owns at a fixed dollar spread or yield spread in relation to another
security that the owner does not own, but which is used as a benchmark.
A Fund will write call options only if they are "covered." This means that
a Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities.
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Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, more risky
than an investment in the underlying securities themselves.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
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Futures Contracts
Each Fund, other than the Money Market Fund, may invest in futures
contracts and options thereon (interest rate futures contracts, currency futures
or stock index futures contracts, as applicable). Each Fund will limit its use
of futures contracts so that: (i) no more than 5% of the Fund's total assets
will be committed to initial margin deposits or premiums on options and (ii)
immediately after entering into such contracts, no more than 30% of the Fund's
total assets would be represented by such contracts. Such futures contracts
would not be entered into for speculative purposes, but to hedge risks
associated with the Fund's securities investments or to provide an efficient
means of regulating its exposure to the market. To enter into a futures
contract, a Fund must make a deposit of initial margin with its custodian in a
segregated account in the name of its futures broker. Initial margin on futures
contracts is in the nature of a performance bond or good faith deposit.
Subsequent payments to or from the broker, called variation margin, will be made
on a daily basis as the price of the underlying index or instrument fluctuates,
making the long and short positions in the futures contracts more or less
valuable.
Successful use of futures by a Fund is subject, first, to the investment
adviser's or sub-adviser's ability to correctly predict movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit of the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions.
Even if the investment adviser or sub-adviser has correctly predicted
market movements, the success of a futures position may be affected by imperfect
correlations between the price movements of the futures contract and the
securities being hedged. A Fund may purchase or sell futures contracts on any
stock index or interest rate index or instrument whose movements will, in the
investment adviser's or sub-adviser's judgment, have a significant correlation
with movements in the prices of all or portions of the Fund's portfolio
securities. The correlation between price movements in the futures contract and
in the portfolio securities probably will not be perfect, however, and may be
affected by differences in historical volatility or temporary price distortions
in the futures markets. To attempt to compensate for such differences, the Fund
could purchase or sell futures contracts with a greater or lesser value than the
securities it wished to hedge or purchase. Despite such efforts, the correlation
between price movements in the futures contract and the portfolio securities may
be worse than anticipated, which could cause the Fund to suffer losses even if
the investment adviser had correctly predicted the general movement of the
market.
A Fund which engages in the purchase or sale of futures contracts may also
incur risks arising from illiquid markets. The ability of a Fund to close out a
futures position depends on the availability of a liquid market in the futures
contract, and such a market may not exist for a variety of reasons, including
daily limits on price movements in futures markets. In the event a Fund is
unable to close out a futures position because of illiquid markets, it would be
required to continue to make daily variation margin payments, and could suffer
losses due to market changes in the period before the futures position could be
closed out.
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The trading of futures contracts is also subject to the risks of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Options on futures contracts are subject to risks similar to those
described above, and also to a risk of loss due to an imperfect correlation
between the option and the underlying futures contract.
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Investment Companies
Each Fund may invest in securities issued by other investment companies
which invest in short-term, high quality debt securities and which determine
their net asset value per share based on the amortized cost or penny-rounding
method of valuation. The International Equity Fund may invest in securities of
mutual funds that invest in foreign securities. Securities of investment
companies will be acquired by a Fund within the limits prescribed by the 1940
Act. The High Yield and Flexibly Managed Funds may invest cash reserves in
shares of the T. Rowe Price Reserve Investment Fund, an internally-managed money
market fund. In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses.
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Loan Participations and Assignments
The High Yield Bond Fund may invest in loan participations and assignments
(collectively "participations"). Such participations will typically be
participating interests in loans made by a syndicate of banks, represented by an
agent bank which has negotiated and structured the loan, to corporate borrowers
to finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buyouts and other corporate activities. Such loans may also have been made to
governmental borrowers, especially governments of developing countries (LDC
debt). LDC debt will involve the risk that the governmental entity responsible
for the repayment of the debt may be unable or unwilling to do so when due. The
loans underlying such participations may be secured or unsecured, and the Fund
may invest in loans collateralized by mortgages on real property or which have
no collateral. The loan participations themselves may extend for the entire term
of the loan or may extend only for short "strips" that correspond to a quarterly
or monthly floating rate interest period on the underlying loan. Thus, a term or
revolving credit that extends for several years may be subdivided into shorter
periods.
The loan participations in which the High Yield Bond Fund will invest will
also vary in legal structure. Occasionally, lenders assign to another
institution both the lender's rights and obligations under a credit agreement.
Since this type of assignment relieves the original lender of its obligations,
it is called a novation. More typically, a lender assigns only its right to
receive payments of principal and interest under a promissory note, credit
agreement or similar document. A true assignment shifts to the assignee the
direct debtor-creditor relationship with the underlying borrower. Alternatively,
a lender may assign only part of its rights to receive payments pursuant to the
underlying instrument or loan agreement. Such partial assignments, which are
more accurately characterized as "participating interests," do not shift the
debtor-creditor relationship to the assignee, who must rely on the original
lending institution to collect sums due and to otherwise enforce its rights
against the agent bank which administers the loan or against the underlying
borrower.
Because the High Yield Bond Fund is allowed to purchase debt securities,
including debt securities at private placement, the Fund will treat loan
participations as securities and not subject to its fundamental investment
restriction prohibiting the Fund from making loans.
There is not a recognizable, liquid public market for the loan participations.
Hence, the High Yield Bond Fund would consider loan participations as illiquid
securities and subject them to the Fund's restriction on investing no more than
10% of assets in securities for which there is no readily available market. The
Fund would initially impose a limit of no more than 5% of total assets in
illiquid loan participations.
Where required by applicable SEC positions, the Fund will treat both the
corporate borrower and the bank selling the participation interest as an issuer
for purposes of its fundamental investment restriction which prohibits investing
more than 5% of Fund assets in the securities of a single issuer.
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Various service fees received by the High Yield Bond Fund from loan
participations may be treated as non-interest income depending on the nature of
the fee (commitment, takedown, commission, service or loan origination). To the
extent the service fees are not interest income, they will not qualify as income
under Section 851(b) of the Internal Revenue Code. Thus the sum of such fees
plus any other non-qualifying income earned by the Fund cannot exceed 10% of
total income.
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Trade Claims
The High Yield Bond Fund may invest up to 5% of its total assets in trade
claims. Trade claims are non-securitized rights of payment arising from
obligations other than borrowed funds. Trade claims typically arise when, in the
ordinary course of business, vendors and suppliers extend credit to a company by
offering payment terms. Generally, when a company files for bankruptcy
protection payments on these trade claims cease and the claims are subject to a
compromise along with the other debts of the company. Trade claims typically are
bought and sold at a discount reflecting the degree of uncertainty with respect
to the timing and extent of recovery. In addition to the risks otherwise
associated with low-quality obligations, trade claims have other risks,
including the possibility that the amount of the claim may be disputed by the
obligor.
Over the last few years a market for the trade claims of bankrupt companies
has developed. Many vendors are either unwilling or lack the resources to hold
their claim through the extended bankruptcy process with an uncertain outcome
and timing. Some vendors are also aggressive in establishing reserves against
these receivables, so that the sale of the claim at a discount may not result in
the recognition of a loss.
Trade claims can represent an attractive investment opportunity because
these claims typically are priced at a discount to comparable public securities.
This discount is a reflection of a less liquid market, a smaller universe of
potential buyers and the risks peculiar to trade claim investing. It is not
unusual for trade claims to be priced at a discount to public securities that
have an equal or lower priority claim.
As noted above, investing in trade claims does carry some unique risks
which include:
Establishing the Amount of the Claim. Frequently, the supplier's estimate
of its receivable will differ from the customer's estimate of its payable.
Resolution of these differences can result in a reduction in the amount of the
claim. This risk can be reduced by only purchasing scheduled claims (claims
already listed as liabilities by the debtor) and seeking representations from
the seller.
Defenses to Claims. The debtor has a variety of defenses that can be
asserted under the bankruptcy code against any claim. Trade claims are subject
to these defenses, the most common of which for trade claims relates to
preference payments. (Preference payments are all payments made by the debtor
during the 90 days prior to the filing. These payments are presumed to have
benefitted the receiving creditor at the expense of the other creditors. The
receiving creditor may be required to return the payment unless it can show the
payments were received in the ordinary course of business.) While none of these
defenses can result in any additional liability of the purchaser of the trade
claim, they can reduce or wipe out the entire purchased claim. This risk can be
reduced by seeking representations and indemnification from the seller.
Documentation/Indemnification. Each trade claim purchased requires
documentation that must be negotiated between the buyer and seller. This
documentation is extremely important since it can protect the purchaser from
losses such as those described above. Legal expenses in negotiating a purchase
agreement can be fairly high. Additionally, it is important to note that the
value of an indemnification depends on the seller's credit.
Volatile Pricing Due to Illiquid Market. There are only a handful of
brokers for trade claims and the quoted price of these claims can be volatile.
All trade claims would be considered illiquid investments.
No Current Yield/Ultimate Recovery. Trade claims are almost never entitled
to earn interest. As a result, the return on such an investment is very
sensitive to the length of the bankruptcy, which is uncertain. Although not
unique to trade claims, it is worth noting that the ultimate recovery on the
claim is uncertain and there is no way to calculate a conventional yield to
maturity on this investment. Additionally, the exit for this investment is a
plan of reorganization which may include the distribution of new securities.
These securities may be as illiquid as the original trade claim investment.
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Tax Issue. Although the issue is not free from doubt, it is likely that
trade claims would be treated as non-securities investments. As a result, any
gains would be considered "non-qualifying" under the Internal Revenue Code. The
High Yield Bond Fund may have up to 10% of its gross income (including capital
gains) derived from non-qualifying sources.
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INVESTMENT RESTRICTIONS
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Except as otherwise specified, the investment restrictions described below
have been adopted as fundamental policies of the fourteen respective Funds.
Fundamental policies may not be changed without the approval of the lesser of:
(1) 67% of a Fund's shares present at a meeting if the holders of more than 50%
of the outstanding shares are present in person or by proxy; or (2) more than
50% of the Fund's outstanding shares. Operating policies are subject to change
by Penn Series' Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrows by, a Fund.
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Money Market Fund
Investment restrictions (1) through (4), (6), (8) through (12), and (16)
described below have been adopted by the Money Market Fund and are fundamental
policies, except as otherwise indicated. Restrictions (5), (7), and (13) through
(15) are operating policies subject to change by the Board of Directors without
shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (a) Percent Limit on Assets Invested in Any
One Issuer. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (b) Percent Limit on Share Ownership of Any One Issue.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (c) Industry Concentration. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; provided that
this limitation does not apply to obligations issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities, or to certificates of deposit,
or bankers' acceptances; (d) Unseasoned Issuers. More than 5% of the value of
the Fund's total assets would be invested in the securities of issuers which at
the time of purchase had been in operation for less than three years, including
predecessors and unconditional guarantors; (2) Equity Securities. Purchase any
common stocks or other equity securities, or securities convertible into equity
securities; (3) Restricted or Illiquid Securities. Purchase restricted
securities, illiquid securities, or securities without readily available market
quotations, or invest more than 10% of the value of its total assets in
repurchase agreements maturing in more than seven days and in the obligations of
small banks and savings and loan associations which do not have readily
available market quotations; (4) Real Estate. Purchase or sell real estate
(although it may purchase money market securities secured by real estate or
interests therein, or issued by companies which invest in real estate or
interests therein); (5) Investment Companies. Purchase securities of open-end
and closed-end investment companies, except to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder; (6)
Commodities. Purchase or sell commodities or commodity contracts; (7) Oil and
Gas Programs. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (8) Purchases on Margin.
Purchase securities on margin, except for use of short-term credit necessary for
clearance of purchases of portfolio securities; (9) Loans. Make loans, although
the Fund may (i) purchase money market securities and enter into repurchase
agreements, and (ii) lend portfolio securities provided that no such loan may be
made if, as a result, the aggregate of such loans would exceed 30% of the value
of the Fund's total assets; (10) Borrowing. Borrow money, except that the Fund
may borrow from banks as a temporary measure for extraordinary or emergency
purposes, and then only from banks in amounts not exceeding the lesser of 10% of
its total assets valued at cost or 5% of its total assets valued at market. The
Fund will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities. Interest paid on any such borrows will
reduce net investment income; (11) Mortgaging. Mortgage, pledge, hypothecate or,
in any other manner, transfer as security for indebtedness any security owned by
the Fund, except as may be necessary in connection with permissible borrows, in
which event such mortgaging, pledging, or hypothecating may not exceed 15% of
the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market; (12) Underwriting. Underwrite
21
<PAGE>
securities issued by other persons, except to the extent that the Fund may be
deemed to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
(13) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control; (14) Puts, Calls, Etc. Invest in puts, calls,
straddles, spreads, or any combination thereof; or (15) Senior Securities. Issue
any class of securities senior to any other class of securities.
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Limited Maturity Bond Fund
Investment restrictions (1) through (9) have been adopted by the Limited
Maturity Bond Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its assets,
invest more than 5% of the value of the Fund's total assets in the securities of
a single issuer or purchase more than 10% of the outstanding voting securities
of any one issuer, except securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities; (2) Industry Concentration.
Purchase securities of any issuer if, as a result, more than twenty-five
percent of the value of the Fund's total assets would be invested in the
securities of issuers having their principal activities in the same industry;
provided, however, that (i) there are no limitations on the amount that may be
invested in the securities of the U.S. Government and instrumentalities; (ii)
the Fund may invest in the securities of open-end management investment
companies to the extent permitted by applicable law; (iii) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (iv)
financial services companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (v) asset backed
securities will be classified according to the underlying assets securing such
securities; (3) Real Estate. Purchase or sell real estate although it may
purchase or sell securities of companies whose business involves the purchase or
sale of real estate and may purchase and sell securities that are secured by
interests in real estate; (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts, unless
acquired as a result of ownership of securities or other instruments (except
this shall not prevent the Fund from entering into interest rate futures
contracts or options thereon or from investing in securities or other
instruments backed by the physical commodities); (6) Borrowing. Borrow money
except to the extent permitted by the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended from time to time; (7) Underwriting. Act as an underwriter of
securities within the meaning of the Federal securities laws, except insofar as
it might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;
(8) Senior Securities. Issue senior securities (as defined in the 1940 Act)
except in connection with permitted borrowing as described in (6) above or as
permitted by rule, regulation or order of the SEC. Restrictions on senior
securities do not apply to certain techniques (such as reverse repurchase
agreements) entered into in compliance with applicable laws and interpretations
thereof; and (9) Lending. Make loans, except that the Fund may purchase or hold
debt instruments and may enter into repurchase agreements and make loans of
portfolio securities in accordance with its investment objectives and policies.
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Quality Bond Fund
Investment restrictions (1), (2), (4) through (9), (14) and (15) have been
adopted by the Quality Bond Fund as fundamental policies, except as otherwise
indicated. Restrictions (3) and (10) through (13) are operating policies subject
to change by the Board of Directors without shareholder approval.
The Fund may not: (1) purchase a security if, as a result: (a) Percent
Limit on Assets Invested in Any One Issuer. More than 5% of the value of the
Fund's total assets would be invested in the securities of a single issuer,
except securities issued or guaranteed by the U.S. Government, or any of its
agencies or instrumentalities; (b) Percent Limit on Share Ownership of Any One
Issue. More than 10% of the outstanding voting securities of any issuer would be
held by the Fund, except securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities; (c) Industry Concentration.
Twenty-five percent or more of the value of the Fund's total assets would be
invested in the securities of issuers having their principal activities in the
same industry; provided, however, that the Fund will invest 25% or more of its
assets, but not more than 50%, in any one of the gas utility, gas transmission
utility, electric utility, telephone utility, and petroleum industries under
certain circumstances (see The Quality Bond Fund's Policy Regarding Industry
Concentration above), but this limitation does not apply to bank certificates of
deposit; (d) Unseasoned Issuers. More than 5% of the value of the
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<PAGE>
Fund's total assets would be invested in the securities (taken at cost) of
issuers which at the time of purchase had been in operation less than three
years (for this purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor of the issuer)
and in equity securities which are not readily marketable for reasons other than
restrictions against sale to the public without registration under the
Securities Act of 1933; (e) Restricted Securities. More than 10% of the value of
the total assets of the Fund would be invested in securities which are subject
to legal or contractual restrictions on resale; or (f) Warrants. More than 2% of
the value of the total assets of the Fund would be invested in warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange, or
more than 5% of the value of the total assets of the Fund would be invested in
warrants whether or not so listed, such warrants in each case to be valued at
the lesser of cost or market, but assigning no value to warrants acquired by the
Fund in units with or attached to debt securities; (2) Real Estate. Purchase or
sell real estate (although it may purchase securities of companies whose
business involves the purchase or sale of real estate); (3) Investment
Companies. Purchase securities of open-end and closed-end investment companies,
except to the extent permitted by the Investment Company Act of 1940 and any
rules adopted thereunder; (4) Commodities. Purchase or sell commodities or
commodity contracts, except that the Fund may enter into interest rate futures
contracts, subject to (15) below; (5) Short Sales and Purchases on Margin.
Purchase securities on margin or effect short sales of securities, but the Fund
may make margin deposits in connection with interest rate futures transactions
subject to (15) below; (6) Loans. Make loans (although it may acquire
publicly-distributed bonds, debentures, notes, and other debt securities, may
enter into repurchase agreements, may lend portfolio securities, and may
purchase debt securities at private placement within the limits imposed above on
the acquisition of restricted securities); (7) Borrowing. Borrow money, except
the Fund may (i) borrow money for temporary administrative purposes and then
only in amounts not exceeding the lesser of 10% of its total assets valued at
cost, or 5% of its total assets valued at market and, in any event, only if
immediately thereafter there is an asset coverage of at least 300%, and (ii)
enter into interest rate futures contracts; (8) Mortgaging. Mortgage, pledge, or
hypothecate securities, except (i) in connection with permissible borrows where
the market value of the securities mortgaged, pledged, or hypothecated does not
exceed 15% of the Fund's assets taken at cost; provided, however, that as a
matter of operating policy, the Fund will limit any such mortgaging, pledging,
or hypothecating to 10% of its net assets, taken at market, in order to comply
with certain state investment restrictions, and (ii) interest rate futures
contracts; (9) Underwriting. Act as an underwriter of securities, except insofar
as it might be deemed to be such for purposes of the Securities Act of 1933 upon
the disposition of certain portfolio securities acquired within the limitations
of restriction (e) above; (10) Ownership of Portfolio Securities by Officers and
Directors. Purchase or retain securities of any issuer if, to the knowledge of
the Fund's management or investment adviser, those officers or directors of Penn
Series, or of its investment adviser, who each owns beneficially more than .5%
of the outstanding securities of such issuer, together own beneficially more
than 5% of such securities; (11) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management or control; (12) Puts, Calls,
Etc. Invest in puts, calls, straddles, spreads, or any combination thereof,
except the Fund reserves the right to write covered call options and purchase
put and call options; (13) Oil and Gas Programs. Purchase participations or
other direct interests in oil, gas, or other mineral exploration or development
programs; (14) Senior Securities. Issue any class of securities senior to any
other class of securities; or (15) Futures Contracts. Enter into an interest
rate futures contract if, as a result thereof, (i) the then current aggregate
futures market prices of financial instruments required to be delivered under
open futures contract sales plus the then current aggregate purchase prices of
financial instruments required to be purchased under open futures contract
purchases would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract); or (ii) more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to margin on such futures contracts or to premiums on options
thereon.
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High Yield Bond Fund
Investment restrictions (1), (2), (4), (6), (8) through (12), and (15)
through (16) have been adopted by the High Yield Bond Fund as fundamental
policies, except as otherwise indicated. Restrictions (3), (5), (7), (13)
through (14), and (17) through (18) are operating policies subject to change by
the Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (a) Percent Limit on Assets Invested in Any
One Issuer. With respect to 75% of the Fund's total assets, more than 5% of the
value of the Fund's total assets would be invested in the securities of a single
issuer (including repurchase agreements with any one issuer); (b) Percent Limit
on Share Ownership of Any One Issue. With respect to 75% of the Fund's total
assets, more than 10% of the outstanding voting securities of any issuer would
be held by the Fund; (c) Industry Concentration. Twenty-five percent or more of
the value of the Fund's total assets would be invested in the securities of
issuers
23
<PAGE>
having their principal business activities in the same industry; provided,
however, that the Fund will normally concentrate 25% or more of its assets in
the securities of the banking industry when the Fund's position in issues
maturing in one year or less equals 35% or more of the Fund's total assets; (2)
Equity Securities. Invest more than 20% of the Fund's total assets in common
stocks (including up to 10% in warrants); (3) Restricted or Illiquid Securities.
Invest more than 15% of its net assets in repurchase agreements maturing in more
than seven days and restricted securities, illiquid securities and securities
without readily available market quotations; (4) Real Estate. Purchase or sell
real estate, including limited partnership interests therein, unless acquired as
a result of ownership of securities or other instruments (this restriction shall
not prevent the Fund from investing in securities of other instruments backed by
real estate or in securities of companies engaged in the real estate business);
(5) Investment Companies. Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the Investment Company Act of
1940 or (ii) securities of the Reserve Investment Fund, an internally-managed
money market fund of T. Rowe Price; (6) Commodities. Purchase or sell
commodities or commodity contracts, except that it may enter into interest rate
futures contracts, subject to (17) below; (7) Oil and Gas Programs. Purchase
participations or other direct interests in or enter into leases with respect to
oil, gas, or other mineral exploration or development programs if, as a result,
more than 5% of the Fund's total assets would be invested in such programs; (8)
Purchases on Margin. Purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases of portfolio securities; except that
it may make margin deposits in connection with interest rate futures contracts,
subject to (17) below; (9) Loans. Make loans, although the Fund may (i) purchase
money market securities and enter into repurchase agreements, and (ii) lend
portfolio securities provided that no such loan may be made if as a result the
aggregate of such loans would exceed 30% of the value of the Fund's total
assets; provided, however, that the Fund may acquire publicly distributed bonds,
debentures, notes and other debt securities and may purchase debt securities at
private placement within the limits imposed on the acquisition of restricted
securities; (10) Borrowing. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 15% of its total assets valued at market; the Fund will
not borrow in order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrows will reduce net
investment income; the Fund may enter into interest rate futures contracts as
set forth in (17) below; (11) Mortgaging. Mortgage, pledge, hypothecate or, in
any other manner, transfer as security for indebtedness any security owned by
the Fund, except (i) as may be necessary in connection with permissible borrows,
in which event such mortgaging, pledging, or hypothecating may not exceed 15% of
the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market, and (ii) it may enter into interest rate futures
contracts; (12) Underwriting. Underwrite securities issued by other persons,
except: (i) to the extent that the Fund may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 in connection with the purchase
of government securities directly from the issuer in accordance with the Fund's
investment objectives, program, and restrictions; and (ii) the later disposition
of restricted securities acquired within the limits imposed on the acquisition
of restricted securities; (13) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management or control; (14) Puts, Calls,
Etc. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the prospectus and Statement of Additional
Information; (15) Senior Securities. Issue any class of securities senior to any
other class of securities; (16) Futures Contracts. Enter into an interest rate
futures contract if, as a result thereof, (i) the then current aggregate futures
market prices of financial instruments required to be delivered under open
futures contract sales plus the then current aggregate purchase prices of
financial instruments required to be purchased under open futures contract
purchases would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract) or (ii) more than 5% of the Fund's total
assets (taken at market value at the time of entering into the contract) would
be committed to margin on such futures contracts or to premiums on options
thereon; (17) Purchases when Borrows Outstanding. Purchase additional securities
when money borrowed exceeds 5% of the Fund's total assets; (18) Short Sales.
Effect short sales of securities; or (19) Warrants. Invest in warrants if, as a
result, more than 10% of the value of the net assets of the Fund would be
invested in warrants.
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Flexibly Managed Fund
Investment restrictions (1), (3), (5), (7) through (11), (13), and (14) are
fundamental policies of the Flexibly Managed Fund, except as otherwise
indicated. Restrictions (2), (4), (6) and (12) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Flexibly Managed Fund may not: (1) purchase the securities of any
issuer (other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) if, as a result: (a) Percent Limit on Assets
Invested in Any One Issuer. With respect to 75% of the Fund's total assets, more
than 5% of the value of the
24
<PAGE>
Fund's total assets would be invested in the securities of a single issuer
(including repurchase agreements with any one issuer); (b) Percent Limit on
Share Ownership of Any One Issue. With respect to 75% of the Fund's total
assets, more than 10% of the outstanding voting securities of any issuer would
be held by the Fund; (c) Industry Concentration. Twenty-five percent or more of
the value of the Fund's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
provided, however, that the Fund will normally concentrate 25% or more of its
assets in the banking industry when the Fund's position in issues maturing in
one year or less equals 35% or more of the Fund's total assets; (2) Restricted
or Illiquid Securities. Purchase a security if, as a result, more than 15% of
the value of the Fund's net assets would be invested in repurchase agreements
maturing in more than seven days and restricted securities, illiquid securities,
and securities without readily available market quotations; (3) Real Estate.
Purchase or sell real estate, including limited partnership interests therein,
unless acquired as a result of ownership of securities or other instruments
(this restriction shall not prevent the Fund from investing in securities of
other instruments backed by real estate or in securities of companies engaged in
the real estate business); (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except (i) to the extent permitted
by the Investment Company Act of 1940 and any rules adopted thereunder, or (ii)
securities of the Reserve Investment Fund, an internally-managed money market
fund of T. Rowe Price; (5) Commodities. Purchase or sell commodities or
commodity contracts; except that it may enter into futures contracts, subject to
(14) below; (6) Oil and Gas Programs. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs if,
as a result thereof, more than 5% of its total assets would be invested in such
programs; (7) Short Sales and Purchases on Margin. Effect short sales of
securities or purchase securities on margin, except for use of short-term credit
necessary for clearance of purchases of portfolio securities; except that it may
make margin deposits in connection with futures contracts, subject to (14)
below; (8) Loans. Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii) lend portfolio
securities provided that no such loan may be made if, as a result, the aggregate
of such loans would exceed 30% of the value of the Fund's total assets;
provided, however, that the Fund may acquire publicly distributed bonds,
debentures, notes and other debt securities and may purchase debt securities at
private placement within the limits imposed on the acquisition of restricted
securities; (9) Borrowing. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 15% of its total assets valued at market; the Fund will
not borrow in order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrows will reduce net
investment income. The Fund may enter into futures contracts as set forth in
(14) below; (10) Mortgaging. Mortgage, pledge, hypothecate or, in any other
manner, transfer as security for indebtedness any security owned by the Fund,
except (i) as may be necessary in connection with permissible borrows, in which
event such mortgaging, pledging, or hypothecating may not exceed 15% of the
Fund's assets, valued at cost; provided, however, that as a matter of operating
policy, which may be changed without shareholder approval, the Fund will limit
any such mortgaging, pledging, or hypothecating to 10% of its net assets, valued
at market, and (ii) it may enter into futures contracts; (11) Underwriting.
Underwrite securities issued by other persons, except: (i) to the extent that
the Fund may be deemed to be an underwriter within the meaning of the Securities
Act of 1933 in connection with the purchase of government securities directly
from the issuer in accordance with the Fund's investment objectives, program,
and restrictions; and (ii) the later disposition of restricted securities
acquired within the limits imposed on the acquisition of restricted securities;
(12) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control; (13) Senior Securities. Issue any class of
securities senior to any other class of securities; or (14) Futures Contracts.
Enter into a futures contract if, as a result thereof, (i) the then current
aggregate futures market prices of securities required to be delivered under
open futures contract sales plus the then current aggregate purchase prices of
securities required to be purchased under open futures contract purchases would
exceed 30% of the Fund's total assets (taken at market value at the time of
entering into the contract) or (ii) more than 5% of the Fund's total assets
(taken at market value at the time of entering into the contract) would be
committed to margin on such futures contracts or to premiums on options thereon.
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Growth and Income Fund
Investment restrictions (1) through (9) have been adopted by the Growth and
Income Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its assets,
invest more than 5% of the value of the Fund's total assets in the securities of
a single issuer or purchase more than 10% of the outstanding voting securities
of any one issuer, except securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities; (2) Industry Concentration.
Purchase securities of any issuer if, as a result, more than twenty-five
percent of the value of the Fund's total assets would be invested in the
securities of issuers having their
25
<PAGE>
principal activities in the same industry; provided, however, that (i) there are
no limitations on the amount that may be invested in the securities of the U.S.
Government and instrumentalities; (ii) the Fund may invest in the securities of
open-end management investment companies to the extent permitted by applicable
law; (iii) utility companies will be divided according to their services, for
example, gas, gas transmission, electric and telephone will each be considered a
separate industry; (iv) financial services companies will be classified
according to the end users of their services, for example, automobile finance,
bank finance and diversified finance will each be considered a separate
industry; and (v) asset backed securities will be classified according to the
underlying assets securing such securities; (3) Real Estate. Purchase or sell
real estate although it may purchase or sell securities of companies whose
business involves the purchase or sale of real estate and may purchase and sell
securities that are secured by interests in real estate; (4) Investment
Companies. Purchase securities of open-end and closed-end investment companies,
except to the extent permitted by the Investment Company Act of 1940 and any
rules adopted thereunder; (5) Commodities. Purchase or sell commodities or
commodity contracts, unless acquired as a result of ownership of securities or
other instruments (except this shall not prevent the Fund from entering into
interest rate futures contracts or options thereon or from investing in
securities or other instruments backed by the physical commodities); (6)
Borrowing. Borrow money except to the extent permitted by the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended from time to time; (7) Underwriting. Act as
an underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
described in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
- --------------------------------------------------------------------------------
Growth Equity Fund
Investment restrictions (1) through (14) and (20) through (22) described
below have been adopted by the Growth Equity Fund and are fundamental policies,
except as otherwise indicated. Restrictions (15) through (19) are operating
policies which are subject to change by the Board of Directors without
shareholder approval.
The Fund may not: (1) Percent Limit on Assets Invested in Any One Issuer.
Purchase any securities which would cause more than 5% of its total assets at
the time of such purchase to be invested in the securities of any issuer, except
for securities issued or guaranteed by the U.S. Government; (2) Percent Limit on
Share Ownership of Any One Issue. Purchase any securities which would cause the
Fund at the time of such purchase to own more than 10% of the outstanding
securities of any class of any issuer; (3) Unseasoned Issuers. Purchase the
securities of any issuer engaged in continuous operation for less than three
years; (4) Industry Concentration. Purchase any securities which would cause
more than 25% of its total assets at the time of such purchase to be
concentrated in the securities of issuers engaged in any one industry; (5) Real
Estate. Purchase or sell real estate, although it may invest in the securities
of companies whose business involves the purchase or sale of real estate; (6)
Commodities. Purchase or sell commodities or commodity contracts; except that it
may enter into futures contracts subject to (22) below; (7) Investment
Companies. Acquire the securities of any investment company, except securities
purchased in regular transactions in the open market or acquired pursuant to a
plan of merger or consolidation (to the extent permitted by the Investment
Company Act of 1940 and any rules adopted thereunder); (8) Short Sales and
Purchases on Margin. Effect short sales of securities or purchase securities on
margin, except for use of short-term credit necessary for clearance of purchases
of portfolio securities, and except for margin deposits made in connection with
futures contracts, subject to (22) below; (9) Loans. Make loans, except that it
may (i) acquire publicly distributed bonds, debentures, notes, and other debt
securities, and (ii) lend portfolio securities provided that no such loan may be
made if as a result the aggregate of such loans would exceed 30% of the value of
the Fund's total assets; (10) Borrowing. Borrow money, except the Fund may
borrow from banks as a temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding 15% of its total assets valued
at market. The Fund will not borrow in order to increase income (leveraging),
but only to facilitate redemption requests which might otherwise require
untimely disposition of portfolio securities. Interest paid on such borrows will
reduce net investment income. The Fund may also enter into futures contracts as
set forth in (22) below; (11) Underwriting. Act as an underwriter of securities,
except insofar as it might technically be deemed to be an underwriter for
purposes of the Securities Act of 1933 upon disposition of certain securities;
(12) Securities of Adviser. Purchase or retain the securities of its investment
adviser, or of any corporation of which any officer, director, or member of the
investment committee of the investment adviser is a director; (13) Allocation of
Principal Business to Officers and Directors. Deal with any of its officers or
directors, or with any firm of which
26
<PAGE>
any of its officers or directors is a member, as principal in the purchase or
sale of portfolio securities; (14) Allocation of Brokerage Business to Adviser.
Pay commissions on portfolio transactions to its investment adviser or to any
officer or director of its investment adviser; (15) Control of Portfolio
Companies. Invest in companies for the purpose of exercising management or
control; (16) Restricted and Illiquid Securities. Purchase any securities which
would cause more than 5% of its total assets at the time of such purchase to be
invested in securities which may not be publicly sold without registration under
the Securities Act of 1933, or are otherwise illiquid or not readily marketable;
(17) Puts, Calls, Etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except that the Fund reserves the right to write covered
call options and purchase put and call options; (18) Oil and Gas Programs.
Purchase participations or other direct interests in oil, gas, or other mineral
exploration or development programs; (19) Ownership of Portfolio Securities by
Officers and Directors. Purchase or retain the securities of any issuer if those
officers or directors of Penn Series, or of its investment adviser, who each
owns beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities; (20) Mortgaging.
Mortgage, pledge, or hypothecate or, in any other manner, transfer as security
for indebtedness any security owned by the Growth Equity Fund, except (i) as may
be necessary in connection with permissible borrows, in which event such
mortgaging, pledging, or hypothecating may not exceed 15% of the Fund's assets,
valued at cost; provided, however, that as a matter of operating policy, which
may be changed without shareholder approval, the Fund will limit any such
mortgaging, pledging, or hypothecating to 10% of its net assets, valued at
market, and (ii) it may enter into futures contracts; (21) Senior Securities.
Issue any class of securities senior to any other class of securities; or (22)
Futures Contracts. Enter into a futures contract if, as a result thereof, (i)
the then current aggregate futures market prices of securities required to be
delivered under open futures contract sales plus the then current aggregate
purchase prices of securities required to be purchased under open futures
contract purchases would exceed 30% of the Fund's total assets (taken at market
value at the time of entering into the contract) or (ii) more than 5% of the
Fund's total assets (taken at market value at the time of entering into the
contract) would be committed to margin on such futures contracts or to premiums
on options thereon.
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Large Cap Value Fund
Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and
(15) are fundamental policies of the Large Cap Value Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (a) Percent Limit on Assets Invested in Any
One Issuer. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (b) Percent Limit on Share Ownership of Any One Issue.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (c) Industry Concentration. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; (d) Unseasoned
Issuers. More than 5% of the value of the Large Cap Value Fund's total assets
would be invested in the securities of issuers which at the time of purchase had
been in operation for less than three years, including predecessors and
unconditional guarantors; (2) Restricted or Not Readily Marketable Securities.
Purchase a security if, as a result, more than 10% of the Fund's total assets
would be invested in: (a) securities with legal or contractual restrictions on
resale, (b) repurchase agreements maturing in more than seven (7) days, and (c)
other securities that are not readily marketable; (3) Real Estate. Purchase or
sell real estate (although it may purchase money market securities secured by
real estate or interests therein, or issued by companies which invest in real
estate or interests therein); (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts; except that it
may enter into futures contracts subject to (15) below; (6) Oil and Gas
Programs. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (7) Short Sales and Purchases
on Margin. Effect short sales of securities or purchase securities on margin,
except for use of short-term credit necessary for clearance of purchases of
portfolio securities, except that it may make margin deposits in connection with
futures contracts, subject to (15) below; (8) Loans. Make loans, although the
Fund may (i) purchase money market securities and enter into repurchase
agreements, and (ii) lend portfolio securities provided that no such loan may be
made if, as a result, the aggregate of such loans would exceed 30% of the value
of the Fund's total assets; provided, however, that the Fund may acquire
publicly distributed bonds, debentures, notes and other debt securities and may
purchase debt securities at private placement within the limits imposed on the
acquisition of restricted securities; (9) Borrowing. Borrow money, except from
banks as a temporary measure for extraordinary or emergency purposes, and then
only in amounts not exceeding 15% of its total assets valued at market. The Fund
will not borrow in order to increase income (leveraging), but only
27
<PAGE>
to facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities; interest paid on any such borrows will
reduce net investment income; the Fund may also enter into futures contracts as
set forth in (15) below; (10) Mortgaging. Mortgage, pledge, or hypothecate or,
in any other manner, transfer as security for indebtedness any security owned by
the Fund, except (i) as may be necessary in connection with permissible borrows,
in which event such mortgaging, pledging, or hypothecating may not exceed 15% of
the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market; and (ii) it may enter into futures contracts; (11)
Underwriting. Underwrite securities issued by other persons except: (i) to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the acquisition of
restricted securities; (12) Control of Portfolio Companies. Invest in companies
for the purpose of exercising management or control; (13) Ownership of Portfolio
Securities by Officers and Directors. Purchase or retain the securities of any
issuer if, to the knowledge of the Fund's management or investment adviser,
those officers and directors of Penn Series, and of its investment adviser, who
each owns beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities; (14) Senior
Securities. Issue any class of securities senior to any other class of
securities; or (15) Futures Contracts. Enter into a futures contract if, as a
result thereof, (i) the then current aggregate futures market prices of
securities required to be delivered under open futures contract sales plus the
then current aggregate purchase prices of securities required to be purchased
under open futures contract purchases would exceed 30% of the Fund's total
assets (taken at market value at the time of entering into the contract) or (ii)
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin on such futures
contracts or to premiums on options thereon.
- --------------------------------------------------------------------------------
Index 500 Fund
Investment restrictions (1) through (9) have been adopted by the Index
500 Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase securities of any issuer if, as a result, more than
twenty-five percent of the value of the Fund's total assets would be invested
in the securities of issuers having their principal activities in the same
industry; provided, however, that (i) there are no limitations on the amount
that may be invested in the securities of the U.S. Government and
instrumentalities; (ii) the Fund may invest in the securities of open-end
management investment companies to the extent permitted by applicable law; (iii)
utility companies will be divided according to their services, for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (iv) financial services companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (v) asset
backed securities will be classified according to the underlying assets securing
such securities; (3) Real Estate. Purchase or sell real estate although it may
purchase or sell securities of companies whose business involves the purchase or
sale of real estate and may purchase and sell securities that are secured by
interests in real estate; (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts, unless
acquired as a result of ownership of securities or other instruments (except
this shall not prevent the Fund from entering into interest rate futures
contracts or options thereon or from investing in securities or other
instruments backed by the physical commodities); (6) Borrowing. Borrow money
except to the extent permitted by the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended from time to time; (7) Underwriting. Act as an underwriter of
securities within the meaning of the Federal securities laws, except insofar as
it might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;
(8) Senior Securities. Issue senior securities (as defined in the 1940 Act)
except in connection with permitted borrowing as described in (6) above or as
permitted by rule, regulation or order of the SEC. Restrictions on senior
securities do not apply to certain techniques (such as reverse repurchase
agreements) entered into in compliance with applicable laws and interpretations
thereof; and (9) Lending. Make loans, except that the Fund may purchase or hold
debt instruments and may enter into repurchase agreements and make loans of
portfolio securities in accordance with its investment objectives and policies.
28
<PAGE>
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Mid Cap Growth Fund
Investment restrictions (1) through (9) have been adopted by the Mid
Cap Growth Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase securities of any issuer if, as a result, more than
twenty-five percent of the value of the Fund's total assets would be invested
in the securities of issuers having their principal activities in the same
industry; provided, however, that (i) there are no limitations on the amount
that may be invested in the securities of the U.S. Government and
instrumentalities; (ii) the Fund may invest in the securities of open-end
management investment companies to the extent permitted by applicable law; (iii)
utility companies will be divided according to their services, for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (iv) financial services companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (v) asset
backed securities will be classified according to the underlying assets securing
such securities; (3) Real Estate. Purchase or sell real estate although it may
purchase or sell securities of companies whose business involves the purchase or
sale of real estate and may purchase and sell securities that are secured by
interests in real estate; (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts, unless
acquired as a result of ownership of securities or other instruments (except
this shall not prevent the Fund from entering into interest rate futures
contracts or options thereon or from investing in securities or other
instruments backed by the physical commodities); (6) Borrowing. Borrow money
except to the extent permitted by the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or regulations may
be amended from time to time; (7) Underwriting. Act as an underwriter of
securities within the meaning of the Federal securities laws, except insofar as
it might be deemed to be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of restricted securities;
(8) Senior Securities. Issue senior securities (as defined in the 1940 Act)
except in connection with permitted borrowing as described in (6) above or as
permitted by rule, regulation or order of the SEC. Restrictions on senior
securities do not apply to certain techniques (such as reverse repurchase
agreements) entered into in compliance with applicable laws and interpretations
thereof; and (9) Lending. Make loans, except that the Fund may purchase or hold
debt instruments and may enter into repurchase agreements and make loans of
portfolio securities in accordance with its investment objectives and policies.
- --------------------------------------------------------------------------------
Mid Cap Value Fund
Investment restrictions (1) through (9) have been adopted by the Mid
Cap Value Fund Bond Fund as fundamental policies.
The Fund may not: (1) Diversification. With respect to 75% of its
assets, invest more than 5% of the value of the Fund's total assets in the
securities of a single issuer or purchase more than 10% of the outstanding
voting securities of any one issuer, except securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities; (2) Industry
Concentration. Purchase securities of any issuer if, as a result, more than
twenty-five percent of the value of the Fund's total assets would be invested
in the securities of issuers having their principal activities in the same
industry; provided, however, that (i) there are no limitations on the amount
that may be invested in the securities of the U.S. Government and
instrumentalities; (ii) the Fund may invest in the securities of open-end
management investment companies to the extent permitted by applicable law; (iii)
utility companies will be divided according to their services, for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (iv) financial services companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (v) asset
backed securities will be classified according to the underlying assets securing
such securities; (3) Real Estate. Purchase or sell real estate although it may
purchase or sell securities of companies whose business involves the purchase or
sale of real estate and may purchase and sell securities that are secured by
interests in real estate; (4) Investment Companies. Purchase securities of
open-end and closed-end investment companies, except to the extent permitted by
the Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts, unless
acquired as a result of ownership of securities or other instruments (except
this shall not prevent the Fund from entering into interest rate futures
contracts or options thereon or from investing in securities or other
instruments backed by the physical commodities); (6) Borrowing. Borrow money
except to the extent permitted by the 1940 Act, the rules or
29
<PAGE>
regulations thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended from time to time; (7) Underwriting. Act as an
underwriter of securities within the meaning of the Federal securities laws,
except insofar as it might be deemed to be an underwriter upon disposition of
certain portfolio securities acquired within the limitation on purchases of
restricted securities; (8) Senior Securities. Issue senior securities (as
defined in the 1940 Act) except in connection with permitted borrowing as
described in (6) above or as permitted by rule, regulation or order of the SEC.
Restrictions on senior securities do not apply to certain techniques (such as
reverse repurchase agreements) entered into in compliance with applicable laws
and interpretations thereof; and (9) Lending. Make loans, except that the Fund
may purchase or hold debt instruments and may enter into repurchase agreements
and make loans of portfolio securities in accordance with its investment
objectives and policies.
- --------------------------------------------------------------------------------
Emerging Growth Fund
Investment restrictions (1) through (9) are fundamental policies of the
Emerging Growth Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.
The Fund may not: (1) Diversification. Make an investment unless, when
considering all its other investments, 75% of the value of the Fund's assets
would consist of cash, cash items, obligations of the U.S. Government, its
agencies or instrumentalities and other securities; for purposes of this
restriction, "other securities" are limited for each issuer to not more than 5%
of the value of the Fund's assets and to not more than 10% of the issuer's
outstanding voting securities held by Penn Series as a whole; (2) Industry
Concentration. Invest more than twenty-five percent or more of the value of the
Fund's total assets in the securities of issuers having their principal business
activities in the same industry; (3) Real Estate. Invest in real estate or
interests in real estate, but may purchase readily marketable securities of
companies holding real estate or interests therein, and securities which are
secured by real estate or interests therein; (4) Commodities. Invest in physical
commodities or physical commodity contracts, but it may purchase and sell
financial futures contracts and options thereon; (5) Purchases on Margin.
Purchase securities on margin, except that it may make margin deposits in
connection with financial futures contracts or options; (6) Loans. Make loans,
although the Fund may (i) purchase money market securities and enter into
repurchase agreements, and (ii) lend portfolio securities provided that no such
loan may be made if, as a result, the aggregate of such loans would exceed 30%
of the value of the Fund's total assets; provided, however, that the Fund may
acquire publicly distributed bonds, debentures, notes and other debt securities
and may purchase debt securities at private placement within the limits imposed
on the acquisition of restricted securities; (7) Borrowing. Borrow money, except
the Fund may borrow from banks as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 15% of its total
assets valued at market; the Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities; (8) Underwriting.
Underwrite securities issued by other persons except: (i) to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in connection with the purchase of government securities directly from
the issuer in accordance with the Fund's investment objectives, program, and
restrictions; and (ii) the later disposition of restricted securities acquired
within the limits imposed on the acquisition of restricted securities; (9)
Senior Securities. Issue any class of securities senior to any other class of
securities. Entering into repurchase agreements, borrowing money in accordance
with restriction (7) above, or lending portfolio securities in accordance with
restriction (6) above, shall not be considered for purposes of the present
restriction a senior security; (10) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management or control; (11) Ownership of
Portfolio Securities by Officers and Directors. Invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
any officer or director of the adviser or sub-adviser, owns more than .5% of the
outstanding securities of such issuer, and such officers and directors who own
more than .5% own in the aggregate more than 5% of such securities; (12) Oil and
Gas Programs. Invest in oil, gas or mineral exploration or developmental
programs, except that it may invest in the securities of companies which
operate, invest in, or sponsor such programs; (13) Restricted or Not Readily
Marketable Securities. Purchase a security if, as a result, more than 10% of the
Fund's total assets would be invested in illiquid securities; (14) Short Sales.
Effect short sales of securities, except short sales "against the box;" (15)
Mortgaging. Mortgage, pledge, hypothecate or, in any other manner, transfer as
security for indebtedness any security owned by the Fund, except as may be
necessary in connection with permissible borrows (including reverse repurchase
agreements), financial options and other hedging activities.
30
<PAGE>
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Small Cap Value Fund
Investment restrictions (1) through (9) are fundamental policies of the
Small Cap Value Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.
The Fund may not: (1) Diversification. Make an investment unless, when
considering all its other investments, 75% of the value of the Fund's assets
would consist of cash, cash items, obligations of the U.S. Government, its
agencies or instrumentalities and other securities; for purposes of this
restriction, "other securities" are limited for each issuer to not more than 5%
of the value of the Fund's assets and to not more than 10% of the issuer's
outstanding voting securities held by Penn Series as a whole; (2) Industry
Concentration. Invest more than twenty-five percent or more of the value of the
Fund's total assets in the securities of issuers having their principal business
activities in the same industry; (3) Real Estate. Invest in real estate or
interests in real estate, but may purchase readily marketable securities of
companies holding real estate or interests therein, and securities which are
secured by real estate or interests therein; (4) Commodities. Invest in physical
commodities or physical commodity contracts, but it may purchase and sell
financial futures contracts and options thereon; (5) Purchases on Margin.
Purchase securities on margin, except that it may make margin deposits in
connection with financial futures contracts or options; (6) Loans. Make loans,
although the Fund may (i) purchase money market securities and enter into
repurchase agreements, and (ii) lend portfolio securities provided that no such
loan may be made if, as a result, the aggregate of such loans would exceed 30%
of the value of the Fund's total assets; provided, however, that the Fund may
acquire publicly distributed bonds, debentures, notes and other debt securities
and may purchase debt securities at private placement within the limits imposed
on the acquisition of restricted securities; (7) Borrowing. Borrow money, except
the Fund may borrow from banks as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 15% of its total
assets valued at market; the Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities; (8) Underwriting.
Underwrite securities issued by other persons except: (i) to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in connection with the purchase of government securities directly from
the issuer in accordance with the Fund's investment objectives, program, and
restrictions; and (ii) the later disposition of restricted securities acquired
within the limits imposed on the acquisition of restricted securities; (9)
Senior Securities. Issue any class of securities senior to any other class of
securities. Entering into repurchase agreements, borrowing money in accordance
with restriction (7) above, or lending portfolio securities in accordance with
restriction (6) above, shall not be considered for purposes of the present
restriction a senior security; (10) Control of Portfolio Companies. Invest in
companies for the purpose of exercising management or control; (11) Ownership of
Portfolio Securities by Officers and Directors. Invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
any officer or director of the adviser or sub-adviser, owns more than .5% of the
outstanding securities of such issuer, and such officers and directors who own
more than .5% own in the aggregate more than 5% of such securities; (12) Oil and
Gas Programs. Invest in oil, gas or mineral exploration or developmental
programs, except that it may invest in the securities of companies which
operate, invest in, or sponsor such programs; (13) Restricted or Not Readily
Marketable Securities. Purchase a security if, as a result, more than 10% of the
Fund's total assets would be invested in illiquid securities; (14) Short Sales.
Effect short sales of securities, except short sales "against the box;" (15)
Mortgaging. Mortgage, pledge, hypothecate or, in any other manner, transfer as
security for indebtedness any security owned by the Fund, except as may be
necessary in connection with permissible borrows (including reverse repurchase
agreements), financial options and other hedging activities.
- --------------------------------------------------------------------------------
International Equity Fund
Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and
(15) are fundamental policies of the International Equity Fund, except as
otherwise indicated. Restrictions (4), (6), (12) and (13) are operating policies
and are subject to change by the Board of Directors without shareholder
approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (a) Percent Limit on Assets Invested in Any
One Issuer. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (b) Percent Limit on Share Ownership of Any One Issue.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (c) Industry Concentration. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; (d) Unseasoned
Issuers. More
31
<PAGE>
than 5% of the value of the Fund's total assets would be invested in the
securities of issuers which at the time of purchase had been in operation for
less than three years, including predecessors and unconditional guarantors; (2)
Restricted or Not Readily Marketable Securities. Purchase a security if, as a
result, more than 10% of the Fund's total assets would be invested in: (a)
securities with legal or contractual restrictions on resale; (b) repurchase
agreements maturing in more than seven (7) days; and (c) other securities that
are not readily marketable; (3) Real Estate. Purchase or sell real estate
(although it may purchase money market securities secured by real estate or
interests therein, or issued by companies which invest in real estate or
interests therein); (4) Investment Companies. Purchase securities of open-end
and closed-end investment companies, except to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder; (5)
Commodities. Purchase or sell commodities or commodity contracts, except that it
may enter into futures contracts subject to (15) below; (6) Oil and Gas
Programs. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (7) Short Sales and Purchases
on Margin. Effect short sales of securities or purchase securities on margin,
except for use of short-term credit necessary for clearance of purchases of
portfolio securities, except that it may make margin deposits in connection with
futures contracts, subject to (15) below; (8) Loans. Make loans, although the
Fund may (i) purchase money market securities and enter into repurchase
agreements, and (ii) lend portfolio securities provided that no such loan may be
made if, as a result, the aggregate of such loans would exceed 30% of the value
of the Fund's total assets; provided, however, that the Fund may acquire
publicly distributed bonds, debentures, notes and other debt securities and may
purchase debt securities at private placement within the limits imposed on the
acquisition of restricted securities; (9) Borrowing. Borrow money, except from
banks as a temporary measure for extraordinary or emergency purposes, and then
only in amounts not exceeding 15% of its total assets valued at market. The Fund
will not borrow in order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely disposition of
portfolio securities. Interest paid on any such borrows will reduce net
investment income. The Fund may also enter into futures contracts as set forth
in (15) below; (10) Mortgaging. Mortgage, pledge, or hypothecate or, in any
other manner, transfer as security for indebtedness any security owned by the
Fund, except (i) as may be necessary in connection with permissible borrows, in
which event such mortgaging, pledging, or hypothecating may not exceed 15% of
the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market; and (ii) it may enter into futures contracts; (11)
Underwriting. Underwrite securities issued by other persons except: (i) to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the acquisition of
restricted securities; (12) Control of Portfolio Companies. Invest in companies
for the purpose of exercising management or control; (13) Ownership of Portfolio
Securities by Officers and Directors. Purchase or retain the securities of any
issuer if, to the knowledge of the Fund's management or investment adviser,
those officers and directors of Penn Series, and of its investment adviser, who
each owns beneficially more than .5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such securities; (14) Senior
Securities. Issue any class of securities senior to any other class of
securities; or (15) Futures Contracts. Enter into a futures contract if, as a
result thereof, (i) the then current aggregate futures market prices of
securities required to be delivered under open futures contract sales plus the
then current aggregate purchase prices of securities required to be purchased
under open futures contract purchases would exceed 30% of the Fund's total
assets (taken at market value at the time of entering into the contract) or (ii)
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to margin on such futures
contracts or to premiums on options thereon.
In addition to the restrictions set forth above each Fund may be subject to
investment restrictions imposed under the insurance laws and regulations of
Pennsylvania and other states. These restrictions are non-fundamental and, in
the event of amendments to the applicable statutes or regulations, each Fund
will comply, without the approval of the shareholders, with the requirements as
so modified.
Section 817(h) of the Internal Revenue Code requires that the assets of
each Fund be adequately diversified so that Penn Mutual or its affiliated
insurance companies, and not the variable contract owners, are considered the
owners for federal income tax purposes of the assets held in the separate
accounts. Each Fund ordinarily must satisfy the diversification requirements
within one year after contract owner funds are first allocated to the particular
Fund. In order to meet the diversification requirements of regulations issued
under Section 817(h), each Fund will meet the following test: no more than 55%
of the assets will be invested in any one investment; no more than 70% of the
assets will be invested in any two investments; no more than 80% of the assets
will be invested in any three investments; and no more than 90% will be invested
in any four investments. Each Fund must meet the above diversification
requirements within 30 days of the end of each calendar quarter.
32
<PAGE>
In addition to the foregoing, the Money Market Fund will restrict its
investments in accordance with the portfolio quality, diversification and
maturity standards contained in Rule 2a-7 under the Investment Company Act of
1940. See "Investment Policies -- Money Market Fund" above for certain of the
restrictions contained in the Rule.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
Investment Advisory Services
Independence Capital Management, Inc. Independence Capital Management, Inc.
("ICMI") serves as investment adviser to all of the Funds and performs
day-to-day investment management services for the Money Market, Limited Maturity
Bond, Quality Bond, Growth and Income and Growth Equity Funds. See "INVESTMENT
ADVISER" in the prospectus for information regarding ICMI and investment
advisory and management services provided to the Funds by ICMI.
The Money Market, Limited Maturity Bond, Quality Bond, Growth and Income
and Growth Equity Funds pay ICMI, on a monthly basis, an advisory fee based on
the average daily net assets of each Fund at the following annual rates: Money
Market Fund, 0.20%; Limited Maturity Bond Fund, 0.30%; Quality Bond Fund, 0.35%;
Growth and Income Fund, 0.50%; and Growth Equity Fund, 0.65%. The advisory fees
for the Money Market, Quality Bond, and Growth Equity Funds will be reduced by
0.05% with respect to average daily net assets in excess of $100,000,000.
For providing investment advisory and management services to the High Yield
Bond, Flexibly Managed, Large Cap Value, Index 500, Mid Cap Growth, Small Cap
Value, and International Equity Funds, the Funds pay ICMI, on a monthly basis,
an advisory fee based on average daily net assets of each Fund, at the following
annual rates: High Yield Bond, 0.50%; Flexibly Managed, 0.60%; Large Cap Value,
0.60%; Index 500, 0.07%, Mid Cap Growth, 0.70%; Small Cap Value, 0.85%; and
International Equity Fund, 0.85%.
For providing investment advisory and management services to the Mid Cap
Value 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: 0.55% of
the first $250,000,000; 0.525% of the next $250,000,000; 0.50% of the next
$250,000,000; 0.475% of the next $250,000,000; 0.45% of the next $500,000,000;
and 0.425% of average daily net assets in excess of $1,500,000,000.
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.
Wells Capital Management Incorporated. Wells Capital Management
Incorporated ("Wells") serves as sub-adviser to the Index 500 Fund and performs
day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for more information regarding the investment
advisory services provided to the Fund. For providing sub-advisory services to
the Index 500 Fund, ICMI pays Wells, on a monthly basis, a sub-advisory fee
based on average daily net assets of the Fund, at an annual rate of 0.07% of the
first $100,000,000 of average daily net assets and 0.03% of average daily net
assets in excess of $100,000,000.
Turner Investment Partners, Inc. Turner Investment Partners, Inc.
("Turner") serves as sub-adviser to the Mid Cap Growth Fund and performs
day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for information regarding the investment
advisory services provided to the Fund. For providing sub-advisory services to
the Mid Cap Growth Fund, ICMI pays Turner, on a monthly basis, based on the
average daily net assets of the Fund, a sub-advisory fee at an annual rate of
0.50%.
Neuberger Berman Management, Inc. Neuberger Berman Management, Inc.
("Neuberger Berman") serves as sub-adviser to the Mid Cap Value Fund and
performs day-to-day investment management services to the Fund. See "INVESTMENT
SUB-ADVISERS" in the Prospectus for more information regarding the investment
advisory services provided to the Fund. For providing sub-advisory service to
the Mid Cap Value Fund, ICMI pays
33
<PAGE>
Neuberger Berman, on a monthly basis, a sub-advisory fee based on average daily
net assets of the Fund, at an annual rate of 0.43%.
Putnam Investment Management, Inc. ("Putnam") serves as sub-adviser to
the Large Cap Value Fund and performs day-to-day investment management services
to the Fund. See "INVESTMENT SUB-ADVISERS" in the Prospectus for more
information regarding the investment advisory services provided to the Fund. For
providing sub-advisory services to the Large Cap Value Fund, ICMI pays Putnam,
on a monthly basis, based on the average daily net assets of the Fund, a
sub-advisory fee at an annual rate of 0.475% of the first $150,000,000 of
average daily net assets; 0.425% of the next $150,000,000 of average daily net
assets; and 0.35% of average daily net assets of the Fund in excess of
$300,000,000.
Royce Associates, Inc. Royce Associates Inc.("Royce") serves as
sub-adviser to the Small Cap Value Fund and performs day-to-day investment
management services for the Fund. See "INVESTMENT SUB-ADVISERS" in the
prospectus for more information regarding the sub-advisory services provided to
the Fund. For providing sub-advisory service to the Small Cap Value Fund, ICMI
pays Royce, on a monthly basis, a sub-advisory fee based on average daily net
assets of the Fund, at an annual rate of 0.70% of the first $25,000,000 of
average daily net assets; 0.65% with respect to the next $75,000,000 of average
daily net assets; and 0.60% of average daily net assets in excess of
$100,000,000.
T. Rowe Price Associates, Inc. T. Rowe Price Associates, Inc. ("Price
Associates") serves as sub-adviser to the Flexibly Managed and High Yield Bond
Funds and performs day-to-day investment management services for the Funds. See
"INVESTMENT SUB-ADVISERS" in the prospectus for more information regarding the
sub-advisory services provided to the Funds. For providing sub-advisory
services to the Flexibly Managed and High Yield Bond Funds, ICMI pays Price
Associates, on a monthly basis, fees based on the average daily net assets of
each Fund. The fees are paid at the following rates: 0.50% with respect to the
first $250,000,000 of the combined total average daily net assets of the two
Funds and 0.40% with respect to the next $500,000,000 of combined total average
daily net assets of the two Funds; provided, that the fees shall be paid at the
rate of 0.40% with respect to all average daily net assets of the two Funds at
such time as the combined total average daily net assets of the two Funds exceed
$750,000,000.
Vontobel USA Inc. Vontobel USA Inc. ("Vontobel") serves as subadviser
to the International Equity Fund and performs the day-to-day investment
management services for the Fund. See "INVESTMENT SUB-ADVISERS" in the
prospectus for information regarding the sub-advisory services provided to the
Fund. For providing sub-advisory services to the International Equity Fund, ICMI
pays Vontobel, on a monthly basis, an advisory fee based on average daily net
assets of the Fund, at the annual rate of 0.50%.
RS Investment Management, Inc. RS Investment Management, Inc. (formerly
"Robertson Stephens Investment Management, Inc.") ("RSIM") serves as sub-adviser
to the Emerging Growth Fund and performs day-to-day investment management
services for the Fund. See "INVESTMENT SUB-ADVISERS" in the prospectus for more
information regarding the sub-advisory services provided to the Fund. ICMI pays
RSIM, on a monthly basis, a sub-advisory fee based on average daily net assets
of the Fund. The sub-advisory fee is paid at the following rates: (i) 0.70% of
the first $25,000,000 of average daily net assets of the Fund; (ii) 0.65% of the
next $25,000,000 of average daily net assets of the Fund; and (iii) 0.60% of
average daily net assets of the Fund in excess of $50,000,000.
In the years 1999, 1998, and 1997, the Funds paid advisory fees to each
Fund's investment adviser as set forth in the following table.
<TABLE>
<CAPTION>
Fund 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $ 263,557 $ 181,722 $ 148,226
- -------------------------------------------------------------------------------------------------------------------------
Quality Bond Fund 251,361 206,065 164,758
- -------------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund 355,521 326,267(2) 254,474
- -------------------------------------------------------------------------------------------------------------------------
Flexibly Managed Fund 2,531,597 2,719,881(3) 2,310,427
- -------------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 1,076,233 753,060 600,772
- -------------------------------------------------------------------------------------------------------------------------
Large Cap Value Fund 1,591,815 1,651,501(4) 1,279,429
- -------------------------------------------------------------------------------------------------------------------------
Emerging Growth Fund(1) 623,468 208,963(5) 50,608(8)
- -------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 214,871 210,456(6) 137,566
- -------------------------------------------------------------------------------------------------------------------------
International Equity Fund 1,234,994 1,071,377(7) 912,368
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
- ------------------
(1) The Emerging Growth Fund commenced operations on May 1, 1997.
(2) For the period from January 1, 1998 to April 30, 1998, the High Yield Bond
Fund paid $102,744 to Price Associates. For the period from May 1, 1998 to
December 31, 1998, the High Yield Bond Fund paid $223,523 to ICMI. For the
period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory fees of
$197,064 to Price Associates.
(3) For the period January 1, 1998 to April 30, 1998, the Flexibly Managed Fund
paid $887,116 to Price Associates. For the period from May 1, 1998 to
December 31, 1998, the Flexibly Managed Fund paid $1,832,765 to ICMI. For
the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory
fees of $1,615,755 to Price Associates.
(4) For the period from January 1, 1998 to April 30, 1998, the Large Cap Value
Fund paid $534,722 to OpCap Advisors. For the period from May 1, 1998 to
December 31, 1998, the Large Cap Value Fund paid $1,116,779 to ICMI. For
the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory
fees of $759,501 to OpCap.
(5) For the period ended December 31, 1998, ICMI paid subadvisory fees of
$175,491 to R.S. Investment Management.
(6) For the period from January 1, 1998 to April 30, 1998, the Small Cap Value
Fund paid $69,824 to OpCap. For the period from May 1, 1998 to December 31,
1998, the Small Cap Value Fund paid $140,632 to ICMI. For the period from
May 1, 1998 to December 31, 1998, ICMI paid subadvisory fees of $95,631 to
OpCap.
(7) For the period from January 1, 1998 to April 30, 1998, the International
Equity Fund paid $342,141 to Vontobel. For the period from May 1, 1998 to
December 31, 1998, the International Equity Fund paid $729,236 to ICMI. For
the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory
fees of $486,157 to Vontobel.
(8) For the eight months ended December 31, 1997, ICMI paid subadvisory fees
to RSIM in the amount of $45,346.
In 1999, High Yield Bond, Flexibly Managed, Large Cap Value, Emerging
Growth, Small Cap Value and International Funds paid subadvisory fees of
$315,214, $2,244,480, $1,087,228, $539,665, $146,784 and $823,329, respectively.
In 1998, the advisory fee paid by the Emerging Growth Fund is after a
voluntary fee waiver of $8,604. In 1997, the advisory fee paid by the Emerging
Growth Fund is after a voluntary fee waiver of $9,862.
In 1998, ICMI paid subadvisory fees to OpCap, Price Associates, Vontobel
and RSIM in the amounts of $855,132, $1,812,839, $486,157, and $175,491
respectively. For the eight months ended December 31, 1997, ICMI paid
subadvisory fees to RSIM in the amount of $45,346.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds were not in existence during the fiscal years ended December
31, 1999, 1998 or 1997.
- --------------------------------------------------------------------------------
Administrative and Corporate Services
Penn Mutual provides administrative and corporate services to Penn Series
and receives a fee from Penn Series for those services equal to the annual rate
of 0.15% of each Fund's average daily net assets. The administrative and
corporate services include: (a) maintenance of records pertaining to Penn
Series' affairs, except those that are required to be maintained by Penn Series'
investment adviser, accounting services agent, custodian, or transfer agent; (b)
preparation of certain filings, reports and proxy statements required by the
federal securities laws; (c) preparation of Penn Series' federal and state tax
returns and any other filings required for tax purposes other than those
required to be made by Penn Series' custodian, transfer agent, accounting
services agent, or investment adviser; (d) such services as Penn Series' Board
of Directors may require in connection with its oversight of Penn Series'
investment adviser, accounting services agent, custodian, or transfer agent,
including the periodic collection and presentation of data concerning the
investment performance of Penn Series' various investment portfolios; (e) the
organization of all meetings of Penn Series' Board of Directors; (f) the
organization of all meetings of Penn Series' shareholders; (g) the collection
and presentation of any financial or other data required by Penn Series' Board
of Directors, accountants, or counsel; and (h) the preparation and negotiation
of any amendments to, or substitutes for, the present agreements with Penn
Series' investment adviser, accounting services agent, custodian, or transfer
agent. Penn Mutual also bears certain expenses in connection with the services
it renders as administrative and corporate services agent, including all rent
and other expense involved in the provision of office space for Penn Series and
in connection with Penn Mutual's performance of its services as administrative
and corporate services agent.
35
<PAGE>
For fiscal years 1999, 1998, and 1997 the administrative fees paid to Penn
Mutual by each of the Funds then in existence were as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $ 98,834 $ 68,174 $ 56,455
- -----------------------------------------------------------------------------------------------------
Quality Bond Fund 83,787 68,688 56,299
- -----------------------------------------------------------------------------------------------------
High Yield Bond Fund 106,656 97,880 76,344
- -----------------------------------------------------------------------------------------------------
Flexibly Managed Fund 759,479 815,964 693,190
- -----------------------------------------------------------------------------------------------------
Growth Equity Fund 342,077 234,353 186,580
- -----------------------------------------------------------------------------------------------------
Large Cap Value Fund 477,544 495,450 383,864
- -----------------------------------------------------------------------------------------------------
Emerging Growth Fund* 125,665 39,416 1,483
- -----------------------------------------------------------------------------------------------------
Small Cap Value Fund 64,461 63,137 41,270
- -----------------------------------------------------------------------------------------------------
International Equity Fund 246,999 214,275 182,487
- -----------------------------------------------------------------------------------------------------
* The Emerging Growth Fund commenced operations on May 1, 1997.
- -----------------------------------------------------------------------------------------------------
</TABLE>
In 1998, the administration fees paid by the Emerging Growth Fund is after
a voluntary fee waiver of $8,603. In 1997, the administration fees paid by the
Emerging Growth Fund is after a voluntary fee waiver of $9,862.
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and
Mid Cap Value Funds were not active in the fiscal year ended December 31, 1999.
- --------------------------------------------------------------------------------
Accounting Services
PFPC Inc. ("PFPC") serves as the accounting services agent to Penn Series.
PFPC provides certain accounting and related services to Penn Series, including:
(a) the maintenance for each Fund's daily trial balance, general ledger,
subsidiary records, capital stock accounts (other than those maintained by the
transfer agent for Penn Series), investment ledger and all other books, accounts
and other documents which Penn Series is required to maintain and keep current
pursuant to Rule 31a-1(a) and (b) under the 1940 Act (other than those documents
listed in subparagraph (4) of Rule 31a-1(b)); (b) the daily valuation of the
securities held by, and the net asset value per share of, each Fund; (c) the
preparation of such financial information as may reasonably be necessary for
reports to shareholders, the Board of Directors and officers, the Securities and
Exchange Commission and other federal and state regulatory agencies; and (d) the
maintenance of all records for each Fund that may reasonably be required in
connection with the audits of such Fund. The fee for the accounting services is
based on a predetermined percentage of daily average net assets of each Fund.
<PAGE>
For fiscal years 1999, 1998, and 1997, the accounting fees paid by each of
the Funds then in existence were as follows:
<TABLE>
<CAPTION>
Fund 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Fund $ 49,417 $ 34,073 $ 28,227
- -----------------------------------------------------------------------------------------------------
Quality Bond Fund 41,893 34,344 28,211
- -----------------------------------------------------------------------------------------------------
High Yield Bond Fund 53,328 48,940 38,169
- -----------------------------------------------------------------------------------------------------
Flexibly Managed Fund 236,896 248,193 223,627
- -----------------------------------------------------------------------------------------------------
Growth Equity Fund 139,026 103,118 87,177
- -----------------------------------------------------------------------------------------------------
Large Cap Value Fund 180,216 183,900 152,928
- -----------------------------------------------------------------------------------------------------
Emerging Growth Fund* 60,554 26,161 6,127
- -----------------------------------------------------------------------------------------------------
Small Cap Value Fund 32,231 31,608 27,518
- -----------------------------------------------------------------------------------------------------
International Equity Fund 123,799 110,710 97,981
- -----------------------------------------------------------------------------------------------------
* The Emerging Growth Fund commenced operations on May 1, 1997.
</TABLE>
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth and Mid
Cap Value Funds were not in existence during the fiscal years ended December 31,
1999, 1998 and 1997.
- --------------------------------------------------------------------------------
Limitation on Fund Expenses
See "EXPENSES AND LIMITATIONS" in the prospectus for information on
limitations on expenses of the Funds.
36
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Transactions
Decisions with respect to the purchase and sale of portfolio securities on
behalf of each Fund that makes up Penn Series are made by the respective
investment adviser or sub-adviser of that Fund. Each Fund's adviser or sub-
adviser is responsible for implementing these decisions, including the
negotiation of commissions and the allocation of principal business and
portfolio brokerage. Most purchases and sales of portfolio debt securities are
transacted with the issuer or with a primary market maker acting as principal
for the securities on a net basis, with no brokerage commission being paid by a
Fund. Transactions placed through dealers serving as primary market makers
reflect the spread between the bid and the asked prices. Occasionally, a Fund
may make purchases of underwritten debt issues at prices which include
underwriting fees.
In purchasing and selling portfolio securities, the policies of the
investment advisers and sub-adviser are to seek quality execution at the most
favorable prices through responsible broker-dealers and, in the case of agency
transactions, at competitive commission rates. In selecting broker-dealers to
execute a Fund's portfolio transactions, the investment advisers will consider
such factors as the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services they provide to the adviser, sub-adviser or
the Fund.
Any of the investment advisers or sub-advisers may effect principal
transactions on behalf of a Fund with a broker-dealer who furnishes brokerage
and/or research services, designate any such broker-dealer to receive selling
concessions, discounts or other allowances, or otherwise deal with any such
broker-dealer in connection with the acquisition of securities in underwritings.
Additionally, purchases and sales of fixed income securities may be transacted
with the issuer, the issuer's underwriter, or with a primary market maker acting
as principal or agent. A Fund does not usually pay brokerage commissions for
these purchases and sales, although the price of the securities generally
includes compensation which is not disclosed separately. The prices the Fund
pays to underwriters of newly-issued securities usually include a commission
paid by the issuer to the underwriter. Transactions placed through dealers who
are serving as primary market makers reflect the spread between the bid and
asked prices.
The investment advisers and sub-advisers may receive a wide range of
research services from broker-dealers, including information on securities
markets, the economy, individual companies, statistical information, accounting
and tax law interpretations, technical market action, pricing and appraisal
services, and credit analyses. Research services are received primarily in the
form of written reports, telephone contacts, personal meetings with security
analysts, corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-generated data.
Research services received from broker-dealers are supplemental to each
investment adviser's and sub-adviser's own research efforts and, when utilized,
are subject to internal analysis before being incorporated into the investment
process.
With regard to payment of brokerage commissions, the investment advisers
and sub-advisers have adopted brokerage allocation policies embodying the
concepts of Section 28(e) of the Securities Exchange Act of 1934, as amended,
which permit investment advisers to cause a fund or portfolio to pay a
commission in excess of the rate another broker or dealer would have charged for
the same transaction, if the adviser determines in good faith that the
commission paid is reasonable in relation to the value of the brokerage and
research services provided. The determination to pay commissions may be made in
terms of either the particular transaction involved or the overall
responsibilities of the adviser or sub-adviser with respect to the accounts over
which it exercises investment discretion. In some cases, research services are
generated by third parties, but are provided to the advisers by or through
brokers and dealers. The advisers and sub-advisers may receive research service
in connection with selling concessions and designations in fixed price offerings
in which the Fund participates.
In allocating to brokers purchase and sale orders for portfolio securities,
the investment advisers and sub-advisers may take into account the sale of Penn
Mutual variable annuity contracts and variable life insurance policies that
invest in those Funds. Before brokerage business may be allocated on the basis
of those sales, the investment adviser or sub-adviser must be satisfied that the
quality of the transaction and commission payable are comparable to what they
would have been had other qualified brokers been selected to execute the
transaction.
In allocating brokerage business the advisers and sub-advisers annually
assesses the contribution of the brokerage and research services provided by
broker-dealers, and allocate a portion of the brokerage business of their
clients on the basis of these assessments. The advisers and sub-advisers seek to
evaluate the brokerage and research services they receive from broker/dealers
and make judgements as to the level of business which would recognize such
services. In addition, broker-dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and research services
they provide. Actual brokerage received by any firm may be less
37
<PAGE>
than the suggested allocations, but can (and often does) exceed the suggestions
because total brokerage is allocated on the basis of all the considerations
described above. In no instance is a broker-dealer excluded from receiving
business because it has not been identified as providing research services. The
advisers and sub-advisers cannot readily determine the extent to which net
prices or commission rates charged by broker-dealers reflect the value of their
research services. However, commission rates are periodically reviewed to
determine whether they are reasonable in relation to the services provided. In
some instances, the advisers and sub-advisers receive research services they
might otherwise have had to perform for themselves. The research services
provided by broker-dealers can be useful to the advisers and sub-advisers in
serving the Funds, as well as its other clients.
For fiscal years 1999, 1998, and 1997, the Quality Bond Fund engaged in
portfolio transactions involving broker-dealers totaling $1,285,970,834,
$1,548,170,055 and $1,504,902,144, respectively. For fiscal years 1999, 1998,
and 1997, the High Yield Bond Fund engaged in portfolio transactions involving
broker-dealers totaling $404,166,000, $737,865, and $362,910,185, respectively,
and the Money Market Fund engaged in portfolio transactions involving
broker-dealers totaling $308,916,271, $479,932,894, and $337,784,744,
respectively. The entire amounts for each of these years represented principal
transactions as to which the Funds have no knowledge of the profits or losses
realized by the respective broker-dealers. Of all such portfolio transactions,
none were placed with firms which provided research, statistical, or other
services to the Funds or its adviser.
For fiscal years 1999, 1998, and 1997, the total brokerage commissions paid
by the Flexibly Managed Fund, including the discounts received by securities
dealers in connection with underwritings, were $798,529, $1,259,520 and
$368,415, respectively. During 1999, the adviser directed transactions of
$25,676,793 (with related commissions of $41,017) to brokers who provided
research services.
For fiscal years 1999, 1998, and 1997, the total brokerage commissions paid
by the Growth Equity Fund, including the discounts received by securities
dealers in connection with underwritings, were $1,142,502, $731,672, and
$595,881, respectively. During 1999, the adviser directed transactions of
$307,126, 361(with related commissions of $1,142,502) to brokers who provided
research services.
For fiscal years 1999, 1998, and 1997, the total brokerage commissions paid
by the Large Cap Value Fund, including discounts received by securities dealers
in connection with underwritings, were $507,935, $195,772 and $111,699,
respectively. During 1999, the adviser directed transactions of $65,500,991
(with related commissions of $86,255) to brokers who provided research services.
For fiscal years 1999, 1998 and the period May 1, 1997 (commencement of
operations) through December 31, 1997, the total brokerage commissions paid by
the Emerging Growth Fund, including the discounts received by the Securities
division in connection with underwritings were $859,021, $112,916 and $32,800.
During 1999, the adviser directed transactions of $23,178,627 (with related
commissions of $51,740) to brokers who provide research services.
For fiscal years 1999, 1998, and 1997, the total brokerage commissions paid
by the Small Cap Value Fund, including the discounts received by the Securities
division in connection with underwritings, were $164,484, $107,030 and $82,820,
respectively. During 1999, the adviser directed transactions of $1,890,754 (with
related commissions of $5,005) to brokers who provided research services.
For fiscal years 1999, 1998, and 1997, the total brokerage commissions paid
by the International Equity Fund, including the discounts received by the
securities dealers in connection with underwritings, were $350,279, $305,099,
and $248,517, respectively. During 1999, the adviser allocated transactions of
$15,247,793 (with related commissions of $30,227) to brokers who provided
research services.
Some of the investment advisers' and sub-advisers' other clients have
investment objectives and programs similar to those of the Funds. An investment
adviser or sub-adviser may occasionally make recommendations to other clients
which result in their purchasing or selling securities simultaneously with a
Fund. As a result, the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an adverse effect on the
price of those securities. It is each of the investment adviser's and
sub-adviser's policy not to favor one client over another in making
recommendations or in placing orders. If two or more of an investment adviser's
or sub-adviser's clients are purchasing a given security at the same time from
the same broker-dealer, the investment adviser or sub-adviser will average the
price of the transactions and allocate the average among the clients
participating in the transaction. In addition, the advisers and sub-advisers in
general follow the policy that
38
<PAGE>
they will ordinarily not make additional purchases of a common stock for its
clients (including the Penn Series) if, as a result of such purchases, 10% or
more of the outstanding common stock of such company would be held by its
clients in the aggregate.
- --------------------------------------------------------------------------------
Directors and Officers
The affairs of Penn Series are managed under the direction of its Board of
Directors. The directors decide upon matters of general policy and review the
actions of Penn Series' investment advisers and sub-advisers and its
administrative and corporate services agent, as set forth below. The Penn
Series' officers conduct and supervise the daily business operations of Penn
Series.
The directors and principal officers of Penn Series, their business
addresses and principal occupations during the past five years are set forth in
the following table.
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address Penn Series During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eugene Bay Director Senior Pastor, Bryn Mawr Presbyterian Church, Bryn Mawr, PA.
121 Fishers Road
Bryn Mawr, PA 19010
- ------------------------------------------------------------------------------------------------------------------------------------
James S. Greene Director Retired; Vice President and Director, International Raw Materials, Inc.,
P.O. Box 3761 Philadelphia, PA (commodities trading), prior to September 1990.
Vero Beach, FL 32964-3761
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Chappell* Director Chairman of the Board and Chief Executive Officer (since December 1996), President
The Penn Mutual Life and Chief Executive Officer (April 1995 - December 1996), President and Chief
Insurance Company Operating Officer (prior thereto), The Penn Mutual Life Insurance Company.
600 Dresher Road
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
Larry L. Mast* Director Executive Vice President, The Penn Mutual Life Insurance Company May 1997 to present;
The Penn Mutual Life formerly Senior Vice President, Lafayette Life Insurance Company September 1994 to
Insurance Company May 1997; prior thereto Vice President, Security Benefit Insurance Company May 1993
600 Dresher Road to September 1994.
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran* Director President and Chief Operating Officer, (January 1997 to present), Executive Vice
The Penn Mutual Life President, Sales and Marketing (May 1996 to January 1997), The Penn Mutual Life
Insurance Company Insurance Company; Executive Vice President, The New England Mutual Life Insurance
600 Dresher Road Company, (prior thereto).
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Loesche, Jr. Director Retired; Adviser (since April 1988); Director (prior thereto), Keystone Insurance
100 Gray's Lane Company and Keystone Automobile Club, Philadelphia, PA.
Apt. 101
Haverford, PA 19041
- ------------------------------------------------------------------------------------------------------------------------------------
M. Donald Wright Director President, M. Donald Wright Professional Corporation, Bryn Mawr, PA (financial
100 Chetwynd Drive planning and consulting); Director, Graduate School of Financial Services, The
Rosemont, PA 19010 American College, since April 1991.
- ------------------------------------------------------------------------------------------------------------------------------------
Peter M. Sherman President Chairman and President of Independence Capital Management Inc.; Executive Vice
600 Dresher Road President and Chief Investment Officer (since 1998), Senior Vice President and Chief
Horsham, PA 19044 Investment Officer (from 1996 to 1998), Head of Fixed Income Investments (from 1995
to 1996) of The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard F. Plush Vice President Vice President and Senior Actuary, The Penn Mutual Life Insurance Company (1973 to
600 Dresher Road present).
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius LLP, Philadelphia, PA (since January 1996);
1701 Market Street Associate General Counsel, The Penn Mutual Life Insurance Company, (prior thereto).
Philadelphia, PA 19103
- ------------------------------------------------------------------------------------------------------------------------------------
Steven M. Herzberg Treasurer Assistant Vice President and Treasurer, (December 1997 to present); Director of
600 Dresher Road Financial Planning and Treasurer (November 1995 to December 1997): Director, Cost and
Horsham, PA 19044 Budget (November 1991 to November 1995); Director, Benefits Administration, (prior
thereto), The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Ann M. Strootman Controller Vice President and Controller (since January 1996), Assistant Vice President,
600 Dresher Road Financial and Management Accounting (since 1994), Director of Financial Accounting
Horsham, PA 19044 (prior thereto), The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
* Director is an "interested person" of Penn Series, as defined in the Investment Company Act of 1940, as amended.
</TABLE>
39
<PAGE>
Directors and officers of Penn Series who are employed by Penn Mutual will
not receive any special compensation for serving in such capacities. Penn Series
has made no provision for the payment of retirement or pension benefits to any
director or officer. In 1999, Penn Series paid directors' fees in the aggregate
amount of $32,513 to directors who are not "interested persons" of Penn Series.
The Board of Directors has an Executive Committee currently consisting of
Messrs. Chappell, Toran and Greene. Subject to limits under applicable law,
during intervals between meetings of the Board, the Committee may exercise the
powers of the Board.
- --------------------------------------------------------------------------------
Code of Ethics
Rule 17j-1 under the 1940 Act governs personal securities activities of
directors, officers and employees ("access persons") of investment companies,
its investment advisers and/or sub-advisers. Under amended Rule 17j-1, Penn
Series, ICMI and each sub-adviser are required to adopt Codes of Ethics in order
to ensure that the interests of shareholders are placed ahead of personal
interests. Penn Series has revised its Code of Ethics to comply with amended
Rule 17j-1. This revised Code of Ethics is designed to prevent unlawful
practices in connection with the purchase and sale of securities by access
persons. Access persons are permitted to engage in personal securities
transactions, but are required to report their personal securities transactions
for monitoring purposes. In addition, certain access persons are required to
obtain approval before investing in initial public offerings or private
placements.
Penn Series, ICMI and the sub-advisers each propose to submit their
revised Code of Ethics to the Penn Series' Board in the coming months for
adoption of these Codes of Ethics by the Board. Copies of the current Codes of
Ethics for Penn Series, ICMI and each sub-adviser are on file with the SEC.
- --------------------------------------------------------------------------------
Custodial Services
PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107, is custodian of
the assets of the Funds of Penn Series. The custodial services performed by PNC
Bank are those customarily performed for registered investment companies by
qualified financial institutions. Penn Series has authorized the Bank to deposit
certain portfolio securities in a central depository system as allowed by
federal law.
- --------------------------------------------------------------------------------
Independent Auditors
Ernst & Young LLP serves as the independent auditors of Penn Series. Their
offices are located at 2001 Market Street, Suite 4000, Philadelphia, PA 19103.
Ernst & Young LLP also serves as the independent auditors of Penn Mutual.
- --------------------------------------------------------------------------------
Legal Matters
Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relative to the federal securities laws and the
offering of shares of Penn Series.
- --------------------------------------------------------------------------------
Net Asset Value of Shares
The following information supplements the information on net asset value of
shares set forth in "Account Policies" in the Prospectus.
The purchase and redemption price of each Fund's shares is equal to that
Fund's net asset value per share. Each Fund determines its net asset value per
share by subtracting the Fund's liabilities (including accrued expenses and
dividends payable) from its total assets (the market value of the securities the
Fund holds plus cash and other assets, including income accrued but not yet
received) and dividing the result by the total number of shares outstanding. The
net asset value per share of each Fund is calculated every day the New York
Stock Exchange ("Exchange") is open for trading. The Exchange is closed when the
following holidays are observed: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Presidential Election Day, Thanksgiving Day, and Christmas Day.
Debt securities held in the Funds may be valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Use of the pricing service may be determined
40
<PAGE>
without exclusive reliance on quoted prices and may take into account
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.
The Money Market Fund uses the amortized cost method of valuation. Under
the amortized cost method of valuing portfolio securities, the security is
valued at cost on the date of purchase and thereafter a proportionate
amortization of any discount or premium until maturity of the security is
assumed. The value of the security for purposes of determining net asset value
normally does not change in response to fluctuating interest rates. While the
amortized cost method is believed to provide certainty in portfolio valuation,
it may result in periods during which values are higher or lower than the amount
the Money Market Fund would receive if the security was sold.
In accordance with Rule 2a-7 under the Investment Company Act of 1940, the
Penn Series Board of Directors has established procedures reasonably designed,
taking into account current conditions and the Money Market Fund's objectives,
to stabilize the net asset value per share of the Fund, as computed for purposes
of distribution and redemption, at $1.00. Penn Series will maintain a dollar
weighted average portfolio maturity in the Money Market Fund appropriate to the
objective of maintaining a stable net asset value per share, and to that end the
Fund will neither purchase any instrument with a remaining maturity of more than
397 days nor maintain a dollar weighted average portfolio maturity which exceeds
90 days. The Board of Directors will review, at such intervals as it determines
appropriate, the extent, if any, to which the net asset value per share
calculated by using available market quotations deviates from the $1.00 per
share. In the event such deviation exceeds 1/2 of 1%, the Board will promptly
consider what action, if any, should be initiated. If the Board believes that
the extent of any deviation from the Money Market Fund's $1.00 amortized cost
price per share may result in material dilution or other unfair results to
prospective or existing shareholders or contract holders, it has agreed to take
such steps as it considers appropriate to eliminate or reduce to the extent
reasonably practicable any such dilution or unfair results. These steps may
include redeeming shares in kind; selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten the average portfolio
maturity of the Money Market Fund; reducing or withholding dividends; utilizing
a net asset value per share as determined by using available market quotations;
or reducing the number of shares outstanding by requesting shareholders to
contribute to capital shares of the Money Market Fund.
- --------------------------------------------------------------------------------
Ownership of Shares
The outstanding shares of each of the Funds of Penn Series are owned by
Penn Mutual and its subsidiary, PIA and are held in their Separate Accounts
pursuant to variable annuity contracts and variable life insurance policies.
On April 5, 2000, the outstanding shares of Penn Series were owned as
follows:*
<TABLE>
<CAPTION>
Money Quality Flexibly Growth Large Cap Emerging Small
Market Bond High Yield Managed Equity Value Growth Cap Value International
Fund Fund Bond Fund Fund Fund Fund Fund Fund Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in Separate
Accounts Pursuant to
Variable Annuity Contracts 55.3% 66.7% 67.8% 70.5% 80.1% 72.0% 67.6% 54.7% 71.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by PIA and
Held in a Separate Account
Pursuant to Variable Annuity
Contracts 14.5% 17.5% 17.6% 16.4% 9.1% 13.3% 15.1% 21.5% 12.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in a Separate
Account Pursuant to Variable
Life Insurance Contracts 30.2% 15.8% 14.6% 13.1% 10.8% 14.7% 17.3% 23.8% 16.6%
- ------------------------------------------------------------------------------------------------------------------------------------
* Unaudited.
</TABLE>
41
<PAGE>
- --------------------------------------------------------------------------------
Tax Status
The following is only a summary of certain federal income and excise tax
considerations generally affecting the Funds and their shareholders that are not
described in the Funds' prospectus. No attempt is made to present a detailed
explanation of the tax treatment of Funds or their shareholders and the
discussion here and in the Funds' prospectus is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisers with
specific reference to their own tax situations, including their state and local
tax liabilities.
The following general discussion of certain Federal income and excise tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, certain administrative
changes, or court decisions may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Each Fund within the Series is generally treated as a separate corporation
for federal income tax purposes, and thus the provisions of the Code generally
will be applied to each Fund separately, rather than to the Series as a whole.
Shares of the Funds will be purchased by Penn Mutual and PIA for their
separate accounts under variable annuity contracts and variable life insurance
policies. Under the provisions of the Code currently in effect, net income and
realized capital gains that the Funds distribute are not currently taxable to
owners of variable annuity or variable life insurance contracts when left to
accumulate in the contracts. For information on federal income taxation of a
life insurance company with respect to its receipt of distributions from a Fund
and federal income taxation of owners of variable life insurance contracts or
variable life insurance policies, please refer to the contract prospectus.
It is the policy of each of the Funds to continue to qualify for and to
elect the favorable tax treatment accorded regulated investment companies under
Subchapter M of the Code. By following such policy, each of the Funds expects
that it will not be subject to Federal income taxes on net investment income and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to shareholders.
In order to continue to qualify as a regulated investment company each Fund
must, among other things, (1) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in stock,
securities or currencies; and (2) diversify its holdings so that at the end of
each quarter of each taxable year (i) at least 50% of the market value of the
Fund's total assets is represented by cash or cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to a value not greater than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer or of two or more issuers that
the Fund controls and that are engaged in the same, similar, or related trades
or businesses. For purposes of the 90% of gross income requirement described
above, foreign currency gains which are not directly related to a Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities) may be excluded from income that qualifies
under the 90% requirement. These requirements may restrict the degree to which
the Funds may engage in short-term trading and in certain hedging transactions
and may limit the range of the Fund's investments.
If a Fund qualifies as a regulated investment company under the Code, it
will not be subject to Federal income tax on the part of its net investment
income and net realized capital gains, if any, which it distributes each year to
the shareholders, provided the Fund distributes at least (a) 90% of its net
investment income (generally, dividends, taxable interest, and the excess, if
any, of net short-term capital gains over net long-term capital losses less
certain operating expenses) and (b) 90% of its net tax exempt interest income
(the excess of its tax-exempt interest income over certain deductions
attributable to that income) (the "Distribution Requirement").
Although each Fund intends to distribute substantially all of its net
investment income and capital gains for any taxable year, a Fund will be subject
to federal income taxation to the extent any such income or gains are not
distributed.
If for any taxable year, a Fund does not qualify as a regulated investment
company under Subchapter M of the Code, all of its taxable income will be
subject to tax at regular corporate tax rates without any deduction for
distributions to shareholders and all such distributions will be treated as
ordinary dividends to the extent of the fund's current or accumulated earnings
and profits.
42
<PAGE>
No Fund will be subject to the 4% excise tax normally imposed on regulated
investment companies that do not distribute substantially all of their income
and gains each calendar year, because that tax does not apply to a regulated
investment company whose only shareholders are segregated asset accounts of life
insurance companies held in connection with variable annuity accounts and/or
variable life insurance policies.
A Fund's transactions in certain futures contracts, options, forward
contracts, foreign currencies, foreign debt securities, and certain other
investment and hedging activities will be subject to special tax rules. In a
given case, these rules may accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's assets, convert
short-term capital losses into long-term capital losses, or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing, and character of income earned and in turn, affect the application of
the Distribution Requirement to a particular Fund. Further, because a Fund may
be required to recognize income without a corresponding receipt of cash, a Fund
may be required, in order to satisfy the Distribution Requirement, to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources. Each Fund will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interest of the Fund.
Each Fund that invests in foreign securities may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, thus reducing the net amount available for distribution to a Fund's
shareholders. The United States has entered into tax treaties with many foreign
countries that may entitle a Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance because the amount of a Fund's assets to be invested within various
countries is not known.
Rules relating to U.S. state and local taxation of dividend and capital
gains distributions from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult with their tax advisers as to the consequences of these and other
U.S. state and local tax rules regarding an investment in a Fund.
- --------------------------------------------------------------------------------
Voting Rights
Penn Series is an open end management investment company. Each Fund is
"diversified" as defined in the 1940 Act. The shares of the Funds have equal
voting rights, except that certain issues will be voted on separately by the
shareholders of each Fund. Penn Mutual and PIA own all the outstanding shares of
Penn Series, either in their separate accounts registered under the 1940 Act or
in their unregistered separate accounts or general accounts. Pursuant to the
1940 Act, however, Penn Mutual and PIA will vote the shares held in registered
separate accounts in accordance with voting instructions received from variable
contract owners or payees having the right to give such instructions. Fund
shares for which contract owners or payees are entitled to give voting
instructions, but as to which no voting instructions are received, and shares
owned by Penn Mutual and PIA in their general and unregistered separate
accounts, will be voted in proportion to the shares for which voting
instructions have been received. Under state insurance law and federal
regulations, there are certain circumstances under which Penn Mutual and PIA may
disregard such voting instructions. If voting instructions are ever so ignored,
contract owners will be advised of that action in the next semiannual report.
Penn Series currently does not intend to hold annual meetings of
shareholders unless required to do so under applicable law. The law provides
shareholders with the right under certain circumstances to call a meeting of
shareholders to consider removal of one or more directors. As required by law,
Penn Series will assist in variable contract owner and payee communication on
such matters.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual compounded total return quotations
43
<PAGE>
used by the Fund are based on the standardized methods of computing performance
mandated by the Commission. An explanation of those and other methods used by
the Company to compute or express performance follows.
- --------------------------------------------------------------------------------
Total Return
From time to time each Fund, except the Money Market Fund, may advertise
total return. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1-, 5-,
and 10-year period (or over the life of the Fund) and the deduction of all
applicable Company expenses on an annual basis.
The average annual compounded rates of return (unless otherwise noted) for
the Funds for the periods ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Average Average Average
Inception One Annual Annual Annual Since
Name of Fund Date Year Five Years Ten Years Inception
- ------------ ---------- ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Quality Bond 11/1/92* 0.00% 8.29% N/A 6.82%
High Yield Bond 7/23/84 4.24% 10.87% 10.38% 10.04%
Flexibly Managed 7/23/84 7.15% 13.34% 11.54% 14.08%
Growth Equity 11/1/92* 34.10% 29.53% N/A 21.41%
Large Cap Value 11/1/92** -0.80% 18.52% N/A 14.75%
Emerging Growth 5/1/97 185.03% N/A N/A 87.87%
Small Cap Value 3/1/95 -1.33% N/A N/A 8.58%
International Equity 11/2/92 45.78% 20.53% N/A 18.42%
- ------------------------------------------------------------------------------------------------------------------
* Date ICMI began managing the Fund's investments.
** Date OpCap Advisors, the Fund's previous manager, began managing the Fund's investments.
</TABLE>
These figures were calculated according to the following formula:
P(1 +T)n=ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical
$1,000 payment made at the beginning of the
l-, 5-, or 10-year periods at the end of the
l-, 5-, or 10-year periods (or fractional
portion thereof).
- --------------------------------------------------------------------------------
The Limited Maturity Bond, Growth and Income, Index 500, Mid Cap Growth
and Mid Cap Value Funds were not in existence during the fiscal years ending
December 31, 1999, 1998 and 1997.
44
<PAGE>
- --------------------------------------------------------------------------------
RATINGS OF COMMERCIAL PAPER
- --------------------------------------------------------------------------------
Moody's Investor Services, Inc. Commercial paper ratings:
PRIME-1 Issues rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the
following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Board margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- --------------------------------------------------------------------------------
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
- --------------------------------------------------------------------------------
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
- --------------------------------------------------------------------------------
Standard & Poor's Rating Group commercial paper ratings:
A-1 This is the highest category and indicates that the degree of
safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
- --------------------------------------------------------------------------------
A-2 Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories.
- --------------------------------------------------------------------------------
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
- --------------------------------------------------------------------------------
B Issues rated B are regarded as having significant speculative
characteristics for timely payment.
- --------------------------------------------------------------------------------
C This rating is assigned to short-term debt obligations that is
currently vulnerable to nonpayment.
- --------------------------------------------------------------------------------
D Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments
on an obligation are jeopardized.
- --------------------------------------------------------------------------------
Fitch Investors Service, Inc.:
Fitch 1--Highest grade. Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment. Fitch 2--Very good
grade. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than the strongest issues.
45
<PAGE>
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT SECURITIES
- --------------------------------------------------------------------------------
The quality of a bond is measured by credit risk--the continuing ability of
the issuer to meet interest and principal payments. Issuers who are believed to
be good credit risks receive high quality ratings, and those believed to be poor
credit risks receive low quality ratings. As a result of the greater credit risk
involved, medium and low quality bonds typically offer a higher yield than bonds
of high quality.
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc.
AAA Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
- --------------------------------------------------------------------------------
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in AAA securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk
appear somewhat larger than AAA securities.
- --------------------------------------------------------------------------------
A Bonds which are rated A possess many favorable investment attributes
and are generally considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
- --------------------------------------------------------------------------------
Baa Bonds which are rated Baa are considered medium-grade obligations i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
- --------------------------------------------------------------------------------
Ba Bonds which are rated Ba are judged to have the following speculative
elements: their future cannot be considered as well-assured; the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future; and uncertainty of position characterizes bonds in this class.
- --------------------------------------------------------------------------------
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance
of other terms of the contract over any long period of time may be
small.
- --------------------------------------------------------------------------------
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
- --------------------------------------------------------------------------------
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
short-comings.
- --------------------------------------------------------------------------------
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
- --------------------------------------------------------------------------------
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a rating in the lower end of
the generic rating category.
46
<PAGE>
- --------------------------------------------------------------------------------
Standard & Poor's Ratings Group
AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
- --------------------------------------------------------------------------------
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only to a small degree.
- --------------------------------------------------------------------------------
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
- --------------------------------------------------------------------------------
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
- --------------------------------------------------------------------------------
Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major risk exposures to adverse conditions.
The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing of
a bankruptcy petition of the taking of a similar action if payments on a
obligation are jeopardized.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF PENN SERIES
- --------------------------------------------------------------------------------
The following pages include audited financial statements and financial
highlights as of December 31, 1999 for the Money Market Fund, Quality Bond Fund,
High Yield Bond Fund, Flexibility Managed Fund, Growth Equity Fund, Large Cap
Value Fund, Emerging Growth Fund, Small Cap Value Fund, and International Equity
Fund.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
47
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS -- DECEMBER 31, 1999
THE MONEY MARKET FUND
Par
(000) Value
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 50.9%
- --------------------------------------------------------------------------------
Albertson's, Inc.
5.850%, 01/18/00 2,000 $ 1,994,475
American Express Credit Corp.
6.500%, 01/26/00 500 497,743
AT&T Corp.
6.380%, 01/11/00 2,000 1,996,456
5.750%, 01/27/00 555 552,695
Carolina Power & Light Co.
6.070%, 01/28/00 2,000 1,990,895
Caterpillar Financial Service Corp.
5.900%, 01/14/00 2,500 2,494,674
5.550%, 03/06/00 1,000 989,979
Coca-Cola Co.
5.850%, 01/14/00 493 491,959
5.850%, 02/11/00 500 496,669
Countrywide Home Loans
5.500%, 01/06/00 1,000 999,236
Daimlerchrysler NA Holdings Corp.
5.680%, 02/04/00 1,475 1,467,087
5.850%, 02/08/00 500 496,912
Disney (Walt) Co.
5.750%, 03/15/00 186 183,802
Duke Capital Corp.
6.250%, 01/14/00 500 498,872
5.850%, 01/25/00 1,000 996,100
Duke Energy Corp.
5.100%, 01/05/00 271 270,846
Fleet Funding Corp.
6.000%, 01/31/00 367 365,165
5.930%, 02/16/00 1,000 992,423
Ford Motor Credit Corp.
5.720%, 01/03/00 314 313,900
General Electric Capital Corp.
6.500%, 01/18/00 981 977,989
5.980%, 01/20/00 500 498,422
5.550%, 01/25/00 100 996,300
5.930%, 01/31/00 500 497,529
General Electric Capital Services
5.840%, 01/21/00 500 498,378
General Mills, Inc.
5.870%, 01/05/00 1,000 999,348
General Motors Acceptance Corp.
5.950%, 01/27/00 800 796,562
5.680%, 02/04/00 178 177,045
Gillette Co.
6.400%, 01/14/00 2,200 2,194,916
5.850%, 01/28/00 1,000 995,612
GTE Corp.
5.980%, 01/18/00 1,000 997,176
6.000%, 01/18/00 1,000 997,167
6.060%, 01/24/00 1,000 996,128
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Hasbro, Inc.
5.000%, 01/03/00 735 $ 734,796
IBM Credit Corp.
5.720%, 02/09/00 1,000 993,803
Kimberly-Clark WW
5.830%, 01/21/00 1,000 996,761
Merrill Lynch & Co.
6.000%, 01/18/00 500 498,583
5.600%, 01/26/00 260 258,989
5.990%, 01/31/00 302 300,493
5.930%, 02/01/00 2,000 1,989,787
Monsanto Co.
5.550%, 03/06/00 1,250 1,237,474
Motorola Credit Corp.
5.820%, 03/17/00 599 591,640
New York, New York
6.150%, 03/01/00 1,000 1,000,000
6.150%, 03/01/00 600 600,000
PG&E Corp.
5.750%, 01/19/00 480 478,620
5.770%, 01/19/00 1,000 997,115
5.770%, 01/25/00 261 259,996
Procter & Gamble Co.
5.860%, 01/25/00 2,000 1,992,187
5.550%, 02/29/00 200 198,181
5.870%, 01/18/00 1,250 1,246,535
--------------
TOTAL COMMERCIAL PAPER
(Cost $44,087,420) 44,087,420
--------------
- --------------------------------------------------------------------------------
CORPORATE BONDS --19.0%
- --------------------------------------------------------------------------------
Alabama Power Co.
6.000%, 03/01/00 200 200,329
Albertson's, Inc.
6.375%, 06/01/00 250 250,445
Associates Corp. NA
6.000%, 03/15/00 1,170 1,169,377
5.250%, 03/30/00 646 644,617
6.000%, 06/15/00 160 159,779
6.250%, 09/15/00 250 249,873
BellSouth Telecommunications
6.500%, 02/01/00 150 150,165
Carolina Power & Light Co.
6.125%, 02/01/00 525 525,270
Chrysler Financial Co., LLC
6.375%, 01/28/00 200 200,175
6.625%, 08/15/00 562 563,204
Duke Energy Corp.
7.000%, 06/01/00 250 250,742
Fleet Mortgage Group, Inc.
6.500%, 06/15/00 575 576,711
FleetBoston Financial Corp.
7.125%, 05/01/00 1,000 1,006,322
1
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS -- DECEMBER 31, 1999 (Continued)
THE MONEY MARKET FUND
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ford Motor Credit Corp.
8.375%, 01/15/00 1,000 $ 1,001,162
6.850%, 08/15/00 1,000 1,004,046
6.250%, 11/08/00 310 310,077
General Motors Acceptance Corp.
7.000%, 03/01/00 592 593,537
IBM Corp.
6.375%, 06/15/00 2,195 2,198,933
International Lease Finance Corp.
6.375%, 01/18/00 365 365,038
6.200%, 05/01/00 210 210,313
6.625%, 08/15/00 250 250,816
Mellon Financial Co.
6.300%, 06/01/00 205 205,452
Merrill Lynch & Co., Inc.
6.000%, 01/15/01 100 99,243
Morgan Stanley Dean Witter
6.250%, 03/15/00 980 981,744
Norwest Financial, Inc.
7.250%, 03/15/00 1,000 1,003,949
Sherwin-Williams Co.
6.250%, 02/01/00 875 875,521
Southwestern Bell Telephone Co.
6.125%, 03/01/00 495 494,978
Wells Fargo Co.
6.000%, 03/15/00 894 894,741
--------------
TOTAL CORPORATE BONDS
(Cost $16,436,559) 16,436,559
--------------
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES** -- 13.3%
- --------------------------------------------------------------------------------
Alabama State Industrial Development Authority
6.750%, 01/07/00 500 500,000
Barton Healthcare, LLC
6.600%, 01/05/00 410 410,000
Berks County, Pennsylvania,
Industrial Development Authority
6.800%, 01/07/00 535 535,000
Bloomfield, New Mexico
6.600%, 01/07/00 600 600,000
Columbia County, Georgia,
Development Authority
6.600%, 01/07/00 1,290 1,290,000
Community Health Systems, Inc.
6.050%, 01/07/00 1,065 1,065,000
6.050%, 01/07/00 255 255,000
Durham, North Carolina,
Certificates of Participation
5.950%, 01/07/00 500 500,000
Fairview Hospital & Healthcare Services
6.500%, 01/07/00 500 500,000
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GMG Warehouse, LLC
6.600%, 01/05/00 800 $ 800,000
Health Insurance Plan of Greater NY
6.000%, 01/07/00 500 500,000
Illinois Development Finance Authority
6.600%, 01/07/00 600 600,000
Liliha Parking LP
6.050%, 01/05/00 1,755 1,755,000
Montgomery County, Pennsylvania,
Industrial Development Authority
6.800%, 01/07/00 1,060 1,060,000
Silver City, New Mexico
6.600%, 01/07/00 600 600,000
St. Francis Healthcare Foundation
6.050%, 01/07/00 490 490,000
----------
TOTAL VARIABLE RATE DEMAND NOTES
(Cost $11,460,000) 11,460,000
----------
- --------------------------------------------------------------------------------
MEDIUM TERM NOTES -- 7.7%
- --------------------------------------------------------------------------------
Associates Corp. NA
7.750%, 03/14/00 50 50,260
Caterpillar Financial Service Corp.
8.750%, 05/12/00 40 40,411
Chrysler Financial Co., LLC
5.700%, 01/13/00 300 299,965
6.610%, 06/16/00 280 280,655
General Electric Capital Corp.
5.600%, 01/14/00 650 649,988
5.835%, 04/28/00 100 100,200
6.000%, 09/13/00 150 149,625
General Motors Acceptance Corp.
5.750%, 01/05/00 200 200,011
6.250%, 01/06/00 1,040 1,040,153
6.650%, 05/05/00 415 415,742
6.650%, 05/24/00 100 100,542
6.900%, 06/06/00 300 301,963
Honeywell, Inc.
7.350%, 06/01/00 360 362,843
IBM Corp.
6.037%, 08/07/00 300 299,614
International Lease Finance Corp.
6.050%, 02/01/00 150 150,104
6.450%, 09/11/00 100 100,134
6.200%, 11/06/00 150 149,736
Merrill Lynch & Co.
6.475%, 03/01/00 250 250,330
Morgan (JP) & Co., Inc.
5.875%, 05/01/00 419 419,896
Pepsico, Inc.
5.875%, 06/01/00 1,075 1,074,145
2
<PAGE>
Par
(000) Value
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Southwestern Bell Communication
Capital Corp.
6.750%, 02/02/00 250 $ 250,127
-----------
TOTAL MEDIUM TERM NOTES
(Cost $6,686,444) 6,686,444
-----------
Number
of Shares Value
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 9.0%
- ------------------------------------------------------------------------
Janus Money Market Fund, Inc. 4,134,044 4,134,044
Provident Institutional Fund, Inc. 3,664,721 3,664,721
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $7,798,765) 7,798,765
-----------
TOTAL INVESTMENTS--99.9% 86,469,188
(Cost $86,469,188) (a)
OTHER ASSETS IN EXCESS
OF LIABILITIES--0.1% 112,116
-----------
NET ASSETS APPLICABLE TO 86,584,064
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING-- 100.0% $86,581,304
===========
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $1.00
===================
- ------------------------------------------------------------------------
(a) Cost for Federal income tax purposes.
** The rate shown is the rate as of December 31, 1999, and the
maturity is the next interest readjustment date.
Percentage of Portfolio
Maturity Amount ----------------------------------
Schedule Par (cum)
- -------------------------------- -----
1 - 7 days $16,020,000 20.3% 20.3%
8 - 14 days 8,643,000 11.0% 31.3%
15 - 30 days 22,152,000 28.1% 59.4%
31 - 60 days 9,972,000 12.7% 72.1%
61 - 90 days 10,912,000 13.8% 85.9%
91 - 120 days 100,000 0.1% 86.0%
121 - 150 days 2,184,000 2.8% 88.8%
over 150 days 8,822,000 11.2% 100.0%
---------------- -------------
$78,805,000 100.0%
Average Weighted Maturity -- 48 days
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE QUALITY BOND FUND
Par
(000) Value
- --------------------------------------------------------------------------------
CORPORATE BONDS-- 20.5%
- --------------------------------------------------------------------------------
Canadian Government Agency--2.1%
Hydro-Quebec
8.050%, 07/07/24 1,000 $1,200,312
-----------
Computers--1.7%
IBM Corp.
6.220%, 08/01/27 1,000 966,250
-----------
Diversified Financial Services--2.7%
Associates Corp. N.A.
7.750%, 02/15/05 500 509,375
General Electric Capital Corp.
6.660%, 05/01/00 1,000 1,001,250
-----------
1,510,625
-----------
Electrical Equipment--4.3%
Cleveland Electric Illuminating Co.
7.880%, 11/01/17 2,500 2,384,375
-----------
Gas Transmission--0.4%
Williams Gas Pipeline
7.375%, 11/15/06 250 244,062
-----------
Retail--0.3%
Penney (J.C.) Co., Inc.
9.450%, 07/15/02 175 176,531
-----------
Services-Equipment Renting & Leasing--0.2%
Service Corp. International
7.000%, 06/01/15 100 83,125
-----------
Telecommunications--7.6%
Qwest Communications International, Inc.
7.250%, 11/01/08 3,000 2,876,250
Teleglobe, Inc.
7.700%, 07/20/29 1,500 1,353,750
-----------
4,230,000
-----------
Transportation--1.2%
CSX Corp.
7.050%, 05/01/02 660 657,525
-----------
TOTAL CORPORATE BONDS
(Cost $11,578,851) 11,452,805
-----------
- ---------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--15.4%
- ---------------------------------------------------------------
Treasury Bonds--8.3%
7.250%, 05/15/16 1,750 1,830,366
5.250%, 02/15/29 3,380 2,800,274
------------
4,630,640
------------
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Treasury Notes--7.1%
4.750%, 02/15/04 700 $ 660,625
7.250%, 05/15/04 380 391,510
6.500%, 10/15/06 1,250 1,247,136
5.625%, 05/15/08 350 329,370
4.750%, 11/15/08 1,550 1,368,307
--------------
3,996,948
--------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $8,971,012) 8,627,588
--------------
- --------------------------------------------------------------------------------
AGENCY OBLIGATIONS--85.0%
- --------------------------------------------------------------------------------
Federal Home Loan Bank Discount Note--35.7%
1.950%, 01/03/00 20,000 19,997,833
--------------
Federal Home Loan Mortgage Corporation--9.2%
8.000%, 12/01/19 5,100 5,149,419
--------------
Federal National Mortgage Association Bonds--40.1%
5.625%, 03/15/01 3,100 3,071,636
8.000%, 04/13/05 3,050 3,074,797
6.825%, 09/01/07 2,660 2,595,501
6.500%, 12/01/26 5,950 5,606,031
7.500%, 12/01/26 5,250 5,192,565
7.000%, 05/01/29 3,000 2,900,610
--------------
22,441,140
--------------
TOTAL AGENCY OBLIGATIONS
(Cost $47,908,675) 47,588,392
--------------
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--1.6%
- --------------------------------------------------------------------------------
Morgan Stanley
6.950%, 12/10/07 455 418,610
Sasco, Series 1996-CFL
6.303%, 02/25/28 500 498,942
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $955,097) 917,552
--------------
- --------------------------------------------------------------------------------
COMMERCIAL ASSET BACKED SECURITIES--6.0%
- --------------------------------------------------------------------------------
Illinois Power Special Purpose Trust
5.380%, 06/25/07 2,500 2,345,600
Railcar Leasing, LLC
7.125%, 01/15/13 1,000 985,000
--------------
TOTAL COMMERCIAL ASSET BACKED SECURITIES
(Cost $3,429,610) 3,330,600
--------------
4
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE QUALITY BOND FUND
Number
of Shares Value
- ---------------------------------------------------------------
SHORT-TERM INVESTMENTS--9.3%
- ---------------------------------------------------------------
Janus Money Market Fund 2,776,573 $2,776,573
Provident Institutional Fund 2,456,221 2,456,221
-------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $5,232,794) 5,232,794
-------------
TOTAL INVESTMENTS--137.8%
(Cost $78,076,039) (a) 77,149,731
PAYABLE FOR SECURITIES
PURCHASED--(39.7%) (22,215,203)
OTHER ASSETS IN EXCESS
OF OTHER LIABILITIES--1.9% 1,040,007
------------
NET ASSETS APPLICABLE TO 5,383,024
SHARES OF COMMON STOCK ISSUED
AND OUTSTANDING--100.0% $ 55,974,535
============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 10.40
============
- -------------------------------------------
(a) At December 31, 1999, the cost for Federal income tax purposes was
$78,162,913. Net unrealized depreciation was $1,013,182. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $56,594 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $1,069,776.
The accompanying notes are an integral part of these financial statements
5
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE HIGH YIELD BOND FUND
Par
(000) Value
- -----------------------------------------------------------
CORPORATE BONDS--86.5%
- -----------------------------------------------------------
Aerospace & Defense--1.4%
Communications & Power Industries
12.000%, 08/01/05 550 $ 448,250
Dyncorp, Inc.
9.500%, 03/01/07 425 376,125
IT Group, Inc.
11.250%, 04/01/09 125 121,875
-------------
946,250
-------------
Automobiles & Related--1.2%
Advance Stores Co., Inc.
10.250%, 04/15/08 150 129,750
Hayes Lemmerz International, Inc.
8.250%, 12/15/08 200 184,000
MSX International, Inc.
11.375%, 01/15/08 200 192,000
Venture Holdings Trust
9.500%, 07/01/05 350 320,250
--------------
826,000
--------------
Broadcast/Media--2.9%
Benedek Communications Corp.
14.153%**, 05/15/06 360 324,000
Chancellor Media Corp.
8.750%, 06/15/07 150 152,250
8.125%, 12/15/07 100 100,625
Citadel Broadcasting Company
9.250%, 11/15/08 350 351,750
Cumulus Media, Inc.
10.375%, 07/01/08 300 315,000
Radio Unica Corp.
13.443%**, 08/01/06 500 323,750
Sinclair Broadcast Group
10.000%, 09/30/05 200 200,000
Spanish Broadcasting System
9.625%, 11/01/09 275 277,750
--------------
2,045,125
--------------
Building Products--1.9%
American Builders & Contractors
Supply Co., Inc.
10.625%, 05/15/07 375 346,875
Associated Materials, Inc.
9.250%, 03/01/08 600 579,750
ISG Resources, Inc.
10.000%, 04/15/08 500 427,500
--------------
1,354,125
--------------
Cable Operators--6.2%
Adelphia Communications Corp.
9.875%, 03/01/07 250 255,000
7.875%, 05/01/09 350 317,625
Century Communications
17.46%**, 01/15/08 500 220,000
Charter Communications
Holdings L.L.C.
9.915%**, 04/01/11 250 147,813
Coaxial Communications, Inc.
10.000%, 08/15/06 200 197,000
Coaxial L.L.C.
11.820%**, 08/15/08 300 193,500
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Falcon Holding Group L.P.
9.857%**, 04/15/10 450 $ 327,938
Frontiervision Holdings L.P.
10.852%**, 09/15/07 400 358,000
Insight Midwest
9.750%, 10/01/09 250 258,125
International Cabletel, Inc.
10.106%**, 02/01/06 200 184,000
Northland Cable Television
10.250%, 11/15/07 250 251,875
NTL, Inc.
9.549%**, 04/01/08 250 176,250
4.302%**, 04/15/09 500 472,475
United International Holdings
11.944%**, 02/15/08 1,150 741,750
United Pan-Europe Com NV
10.875%, 08/01/09 200 203,000
------------
4,304,351
------------
Containers--2.3%
Anchor Advanced Products, Inc.
11.750%, 04/01/04 600 513,000
Consolidated Container Co. L.L.C.
10.125%, 07/15/09 750 766,875
U.S. Can Corp.
10.125%, 10/15/06 350 358,750
------------
1,638,625
------------
Electronic Components--0.7%
Amkor Technologies, Inc.
9.250%, 05/01/06 500 497,500
------------
Energy Services--7.1%
Amerigas Partners L.P.
10.125%, 04/15/07 400 408,000
Canadian Forest Oil Ltd.
8.750%, 09/15/07 300 286,500
Comstock Resources, Inc.
11.250%, 05/01/07 475 489,250
Continental Resources, Inc.
10.250%, 08/01/08 275 243,375
Cross Timbers Oil Co.
8.750%, 11/01/09 100 96,000
Denbury Management, Inc.
9.000%, 03/01/08 250 230,312
Energy Corp. of America
9.500%, 05/15/07 600 423,000
Eott Energy Partners
11.000%, 10/01/09 100 105,000
Forest Oil Corp.
10.500%, 01/15/06 200 205,500
Frontier Oil Corp.
11.750%, 11/15/09 350 346,500
Nuevo Energy Co.
9.500%, 06/01/08 250 247,500
Plains Resources, Inc.
10.250%, 03/15/06 150 147,000
6
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE HIGH YIELD BOND FUND
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pride Petroleum Services, Inc.
9.375%, 05/01/07 425 $ 427,125
Stone Energy Corp.
8.750%, 09/15/07 500 497,500
Swift Energy Corp.
10.250%, 08/01/09 250 255,000
Vintage Petroleum
9.750%, 06/30/09 250 257,500
YPF Sociedad Anonima
10.000%, 11/02/28 300 330,279
------------
4,995,341
------------
Entertainment & Leisure--2.2%
AMC Entertainment, Inc.
9.500%, 02/01/11 325 284,375
Bally Total Fitness Holdings
9.875%, 10/15/07 500 492,500
Cinemark USA, Inc.
8.500%, 08/01/08 150 131,250
Premier Parks, Inc.
9.750%, 06/15/07 250 251,562
9.444%**, 04/01/08 500 347,500
------------
1,507,187
------------
Finance--1.0%
Lodgian Finance Corp.
12.250%, 07/15/09 250 250,000
RBF Finance Co.
11.000%, 03/15/06 400 431,000
------------
681,000
------------
Financial Services--0.2%
Euronet Services, Inc.@
34.891%**, 07/01/06 500 135,174
------------
Food/Tobacco--3.6%
B&G Foods, Inc.
9.625%, 08/01/07 600 543,000
Doane Pet Care Co.
9.750%, 05/15/07 500 501,250
International Home Foods, Inc.
10.375%, 11/01/06 300 312,750
Luigino's, Inc.
10.000%, 02/01/06 150 135,937
Mrs. Fields Original
Cookies, Inc.
10.125%, 12/01/04 75 61,125
New World Pasta Company
9.250%, 02/15/09 500 467,500
Southern Foods Group
9.875%, 09/01/07 500 506,250
------------
2,527,812
------------
Healthcare--3.4%
Dade International, Inc.
11.125%, 05/01/06 525 517,125
Hanger Othopedic Group, Inc.
11.250%, 06/15/09 150 154,875
King Pharmaceutical, Inc.
10.750%, 02/15/09 300 319,500
Lifepoint Hospitals
Holdings, Inc.
10.750%, 05/15/09 350 364,875
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mariner Post-Accute Network, Inc.#
18.591%**, 11/01/07 650 $ 6,500
Quest Diagnostic, Inc.
10.750%, 12/15/06 350 369,250
Tenet Healthcare Corp.
8.000%, 01/15/05 300 290,250
Triad Hospitals Holdings, Inc.
11.000%, 05/15/09 375 390,000
-----------
2,412,375
-----------
Hotels & Gaming--5.6%
Argosy Gaming Co.
10.750%, 06/01/09 375 397,500
Courtyard by Marriott II
10.750%, 02/01/08 600 592,500
Harrahs Operating Co., Inc.
7.875%, 12/15/05 250 245,625
Hollywood Casino Shreveport
13.000%, 08/01/06 350 376,250
Hollywood Park, Inc.
9.250%, 02/15/07 500 498,750
Horseshoe Gaming L.L.C.
9.375%, 06/15/07 300 300,000
8.625%, 05/15/09 350 338,625
Host Marriott Travel Plaza
9.500%, 05/15/05 600 629,484
Isle of Capri Casinos, Inc.
8.750%, 04/15/09 250 233,125
Players International, Inc.
10.875%, 04/15/05 150 158,250
Venetian Casino
14.250%, 11/15/05 200 127,000
-----------
3,897,109
-----------
Internet Service Providers--2.6%
Covad Communications Group
14.715%**, 03/15/08 400 254,000
12.500%, 02/15/09 150 156,750
Cybernet Internet Services
14.000%, 07/01/09 150 130,500
Exodus Communications, Inc.
11.250%, 07/01/08 150 156,375
10.750%, 12/15/09 200 204,500
PSINet, Inc.
10.000%, 02/15/05 150 149,250
11.500%, 11/01/08 450 472,500
Verio, Inc.
11.250%, 12/01/08 300 316,500
-----------
1,840,375
-----------
Long Distance Telecommunication--3.9%
Global Telesystem
11.000%, 12/01/09 250 254,306
Hermes Europe Rail
10.375%, 01/15/09 250 248,125
Metromedia Fiber Network, Inc.
10.000%, 11/15/08 450 463,500
Primus Telecomm Group
12.750%, 10/15/09 250 261,250
7
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE HIGH YIELD BOND FUND
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RSL Communications PLC Co.
9.125%, 03/01/08 200 $ 177,000
12.000%, 11/01/08 400 405,000
Viatel, Inc.
12.220%**, 04/15/08 100 63,500
11.500%, 03/15/09 300 306,000
Williams Communications Group, Inc.
10.875%, 10/01/09 500 526,250
------------
2,704,931
------------
Manufacturing--2.3%
Hawk Corp.
10.250%, 12/01/03 500 487,500
HCC Industries, Inc.@
10.750%, 05/15/07 400 234,000
International Wire Group, Inc.
11.750%, 06/01/05 600 622,500
Panolam Industries Intl
11.500%, 02/15/09 200 205,500
Paragon Corp. Holdings, Inc.@
9.625%, 04/01/08 125 40,625
------------
1,590,125
------------
Metals--0.5%
Golden Northwest Aluminum
12.000%, 12/15/06 350 369,250
------------
Metals & Mining--0.3%
Better Minerals & Aggreg
13.000%, 09/15/09 200 201,500
------------
Miscellaneous Consumer Products--0.7%
Corning Consumer Product
9.625%, 05/01/08 300 237,000
Hedstrom Holdings, Inc.@
14.951%**, 06/01/09 50 750
Holmes Products Corp.
9.875%, 11/15/07 275 202,125
9.875%, 11/15/07 50 36,750
------------
476,625
------------
Paper & Paper Products--4.6%
Kappa Beheer BV
11.360%**, 07/15/09 350 220,314
10.625%, 07/15/09 500 523,750
Packaging Corp. of America
9.625%, 04/01/09 300 309,000
Paperboard Industries
International, Inc.
8.375%, 09/15/07 250 238,750
Repap New Brunswick
9.000%, 06/01/04 125 122,500
11.500%, 06/01/04 375 390,000
10.625%, 04/15/05 400 374,000
Riverwood International Co.
10.250%, 04/01/06 125 128,125
10.625%, 08/01/07 125 130,000
10.875%, 04/01/08 300 298,500
U.S. Timberlands Klam/ Finance
9.625%, 11/15/07 500 468,125
------------
3,203,064
------------
Petroleum--0.3%
PDVSA Finance Ltd.
7.500%, 11/15/28 300 210,501
------------
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Printing & Publishing--1.5%
Hollinger International
Publishing Inc.
9.250%, 03/15/07 400 $ 398,000
Sun Media Corp.
9.500%, 02/15/07 275 274,312
TDL Infomedia Group Ltd.
12.125%, 10/15/09 125 201,660
Transwestern Holdings, L.P.
13.456%**, 11/15/08 100 72,500
Transwestern Publishing
9.625%, 11/15/07 100 100,000
-----------
1,046,472
-----------
Rental Auto - Equipment--1.4%
Avis Rent A Car, Inc.
11.000%, 05/01/09 500 527,500
Universal Compression, Inc.
11.883%**, 02/15/08 700 434,875
-----------
962,375
-----------
Restaurants--0.4%
Sbarro, Inc.
11.000%, 09/15/09 250 260,000
-----------
Retail--1.1%
Petro Shopping Centers
10.500%, 02/01/07 300 279,750
Safelite Glass Corp.
9.875%, 12/15/06 100 5,500
9.875%, 12/15/06 200 11,000
Sleepmaster, Inc.
11.000%, 05/15/09 500 503,125
-----------
799,375
-----------
Satellites--0.5%
Orbital Imaging Corp.
11.625%, 03/01/05 100 67,500
Pegasus Communications Corp.
9.625%, 10/15/05 200 203,000
9.750%, 12/01/06 100 102,250
-----------
372,750
-----------
Savings & Loan--0.3%
Bank United Capital Trust @
10.250%, 12/31/26 250 220,625
-----------
Services--3.2%
AP Holdings, Inc. @
12.473%**, 03/15/08 200 77,000
Coinmach Corp.
11.750%, 11/15/05 307 317,745
Global Imaging Systems
10.750%, 02/15/07 300 291,000
Group Maintenance America Corp.
9.750%, 01/15/09 300 300,000
Intertek Finance PLC
10.250%, 11/01/06 500 462,500
Iron Mountain, Inc.
8.750%, 09/30/09 500 478,750
Mastec, Inc.
7.750%, 02/01/08 200 189,000
8
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE HIGH YIELD BOND FUND
Par
(000) Value
- -----------------------------------------------------------
- -----------------------------------------------------------
Protection One Alarm
13.625%, 06/30/05 200 $ 127,000
-----------
2,242,995
-----------
Specialty Chemicals--3.3%
American Pacific Corp. @
9.250%, 03/01/05 500 505,000
ISP Holdings, Inc.
9.750%, 02/15/02 500 503,750
Koppers Industry, Inc.
9.875%, 12/01/07 500 462,500
Lyondell Chemical Co.
10.875%, 05/01/09 175 185,500
Octel Developments PLC
10.000%, 05/01/06 400 398,000
Sovereign Specialty Chemicals
9.500%, 08/01/07 250 252,500
-----------
2,307,250
-----------
Supermarkets--0.8%
Jitney-Jungle Stores of America, Inc. #
12.000%, 03/01/06 250 51,250
10.375%, 09/15/07 250 3,125
Pantry, Inc.
10.250%, 10/15/07 500 490,000
Pathmark Stores
10.750%, 11/01/03 400 46,000
-----------
590,375
-----------
Textiles & Apparel--0.4%
Delta Mills, Inc.
9.625%, 09/01/07 125 88,125
Dyersburg Corp.
9.750%, 09/01/07 450 182,250
-----------
270,375
-----------
Transportation--1.7%
Greyhound Lines
11.500%, 04/15/07 500 563,125
Travelcenters of America
10.250%, 04/01/07 600 600,000
-----------
1,163,125
-----------
Wireless Telecommunications--9.5%
Airgate PCS, Inc.
12.157%**, 10/01/09 850 476,000
American Cellular Corp.
10.500%, 05/15/08 150 166,125
Centennial Cellular Corp.
10.750%, 12/15/08 500 538,750
Clearnet Communications, Inc.
12.567%, 12/15/05 350 346,500
10.125%, 07/07/07 500 500,156
17.311%**, 02/15/09 250 98,718
10.683%**, 05/01/09 250 150,625
Dobson Communications
11.750%, 04/15/07 100 115,750
Microcell Telecommunications
12.507%**, 06/01/06 250 222,500
Nextel Communications, Inc.
9.993%**, 10/31/07 350 254,625
10.300%**, 02/15/08 370 262,700
Nextel International, Inc.
13.741%**, 04/15/08 450 265,325
<PAGE>
Par
(000) Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Orange PLC
8.750%, 06/01/06 150 $ 157,875
8.000%, 08/01/08 150 151,500
Rogers Cantel, Inc.
9.375%, 06/01/08 250 263,750
9.750%, 06/01/16 350 392,000
Telecorp PCS, Inc.
11.869%**, 04/15/09 950 603,250
Tritel PCS, Inc.
12.428%**, 05/15/09 250 158,750
Triton PCS, Inc.
12.339%**, 05/01/08 1,100 786,500
Voicestream Wireless Holding
11.866%**, 11/15/09 1,000 607,500
10.375%, 11/15/09 150 155,250
-----------
6,674,149
-----------
Wireline Telecommunications--7.5%
21st Century Telecom Group
17.460%**, 02/15/08 450 303,750
Alaska Communications
9.375%, 05/15/09 350 340,375
Allegiance Telecom, Inc.
11.798%**, 02/15/08 525 380,625
Colt Telecom Group PLC
12.219%**, 12/15/06 750 658,125
GST Network Funding, Inc.
11.574%**, 05/01/08 250 122,500
Hyperion Telecommunications, Inc.
12.256%**, 04/15/03 175 158,375
12.000%, 11/01/07 250 267,500
ICG Holdings, Inc.
14.461%**, 09/15/05 350 306,551
Intermedia Communications, Inc.
8.600%, 06/01/08 200 185,500
9.500%, 03/01/09 100 96,750
11.122%**, 03/01/09 250 151,250
Jazztel PLC
13.250%, 12/15/09 150 151,828
KMC Telecom Holdings, Inc.
13.782%**, 02/15/08 350 194,250
McLeodUSA, Inc.
11.276%**, 03/01/07 100 82,500
8.125%, 02/15/09 75 69,938
MetroNet Communications Corp.
12.507%**, 11/01/07 50 41,875
8.723%**, 06/15/08 250 201,875
Netia Holdings II B.V.
13.125%, 06/15/09 200 200,000
NEXTLINK Communications, Inc.
12.500%, 04/15/06 250 268,750
12.248%**, 06/01/09 350 217,000
Tele1 Europe BV
11.875%, 12/01/09 350 356,028
13.000%, 05/15/09 150 158,250
Teligent Inc.
11.500%, 12/01/07 225 221,625
12.898%**, 03/01/08 175 105,875
-----------
5,241,095
-----------
9
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE HIGH YIELD BOND FUND
Par
(000) Value
- -----------------------------------------------------------
- -----------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $63,051,096) $ 60,515,306
------------
- -----------------------------------------------------------
CONVERTIBLE BOND--0.3%
- -----------------------------------------------------------
Hospital Supplies & Hospital Management
Omnicare, Inc.
5.000%, 12/01/07
(Cost $157,500) 250 168,805
------------
- -----------------------------------------------------------
AGENCY OBLIGATION--0.6%
- -----------------------------------------------------------
Federal Farm Credit Banks
5.150%, 01/28/00
(Cost $440,293) 442 440,293
------------
- -----------------------------------------------------------
COMMERCIAL PAPER--0.3%
- -----------------------------------------------------------
AIG Funding, Inc.
4.800%, 01/15/00
(Cost $177,905) 178 177,905
------------
- -----------------------------------------------------------
Number
COMMON STOCK--0.8% of Shares
- -----------------------------------------------------------
AT&T Canada, Inc.--*@ 514 18,591
Dr. Pepper Bottling
Holdings, Inc.*@ 14,800 370,000
Gaylord Container Corp. * 7,500 51,094
Hedstrom Holdings, Inc. * @ 6,065 60
Nextel Communications, Inc. * 232 23,918
Premier Parks, Inc. * 2,800 80,850
Protection One, Inc. * 8,400 16,275
------------
TOTAL COMMON STOCK
(Cost $331,081) 560,788
------------
- -----------------------------------------------------------
PREFERRED STOCK--8.0%
- -----------------------------------------------------------
Broadcast/Media--1.7%
Capstar Broadcasting Partners 4,031 472,656
Citadel Broadcasting Co. 1,788 199,407
Cumulus Media, Inc. 126 141,968
Sinclair Capital 3,250 331,500
------------
1,145,531
------------
Cable Operators--1.9%
CSC Holdings, Inc. 12,179 1,338,203
------------
Computer Services & Software--0.2%
PSINET, Inc. 2,500 146,250
------------
Industrial- Other--0.2%
Anvil Holdings, Inc.@ 5,163 20,652
Clarke USA, Inc. 3,110 141,506
------------
162,158
------------
Long Distance--0.3%
Global Crossing Holdings, LTD. 2,250 227,250
------------
Metals & Mining--0.4%
International Utility
Structures, Inc.* 275 228,938
------------
Satellites--0.1%
Pegasus Communications Corp. 81 89,735
------------
Wireless Communications--2.7%
Dobson Communications Corp.* 563 594,926
Number
of Shares Value
- --------------------------------------------------------------------------------
Nextel Communications, Inc. 4,617 947,568
Rural Cellular Corp. 348 357,570
------------
1,900,064
------------
Wireline Communications--0.5%
E. Spire Communications Inc. 1,963 34,357
Intermedia Communications, Inc. 12,566 123,774
Nextlink Communications 3,748 208,014
------------
366,145
------------
TOTAL PREFERRED STOCK
(Cost $5,887,936) 5,604,274
------------
- --------------------------------------------------------------------------------
Number
WARRANTS--0.3% of Warrants Value
- --------------------------------------------------------------------------------
Allegiance Telecom, Inc. * @ 250 2,250
Cybernet Internet Services* 150 12,000
Globalstar Inc * 350 75,338
ICF Kaiser International, Inc. * 1,575 16
Intermedia Communications, Inc. *@ 50 5,612
KMC Telecom Holdings, Inc. * @ 200 500
Microcell Telecom * @ 800 55,426
Tele1 Europe BV* 250 42,563
UIH Australia *@ 175 5250
Wireless One, Inc.*@ 450 4
Wright Medical Technology, Inc. *@ 2,676 3
-----------
TOTAL WARRANTS (Cost $78,176) 198,962
------------
TOTAL INVESTMENTS--96.8%
(Cost $70,373,987) (a) 67,666,333
OTHER ASSETS IN EXCESS
OF LIABILITIES--3.2% 2,261,587
------------
NET ASSETS APPLICABLE TO 7,300,867
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING--100.0% $69,927,920
============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $9.58
============
- ---------------------------------------
* Non-Income Producing Security
** Effective Yield
@ Restricted Security
# Security in Default
(a) At December 31, 1999, the cost for Federal income tax purposes was
$70,502,908. Net unrealized depreciation was $2,836,574. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $1,660,638 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $4,497,212.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS-- DECEMBER 31, 1999
THE GROWTH EQUITY FUND
Number
of Shares Value
- --------------------------------------------------------
COMMON STOCK--98.4%
- --------------------------------------------------------
Computer - Internet -
Services & Software--1.6%
America Online, Inc. * 60,000 $ 4,526,250
-----------
Computer Services & Software--19.7%
Cisco Systems, Inc. * 160,000 17,135,000
EMC Corp. * 75,000 8,193,750
Microsoft Corp. * 150,000 17,507,812
Sun Microsystems, Inc. * 170,000 13,159,062
-----------
55,995,624
-----------
Computer Systems--2.3%
International Business
Machines Corp. 60,000 6,480,000
-----------
Diversified Operations--12.6%
General Electric Co. 100,000 15,475,000
Procter & Gamble Co. 80,000 8,765,000
Tyco International Ltd. 300,000 11,662,500
-----------
35,902,500
-----------
Electronics--5.1%
Texas Instruments, Inc. 150,000 14,531,250
-----------
Electronics--Semiconductors--4.2%
Intel Corp. 35,000 2,879,844
Xilinx, Inc. * 200,000 9,093,750
-----------
11,973,594
-----------
Financial Services--8.2%
Chase Manhattan Corp. 120,000 9,322,500
Citigroup, Inc. 250,000 13,890,625
-----------
23,213,125
-----------
Insurance--2.9%
American International
Group, Inc. 75,000 8,109,375
-----------
Machinery--3.6%
Applied Materials, Inc. * 80,000 10,132,500
-----------
Media & Communications--4.4%
Clear Channel Communications,
Inc.* 140,000 12,495,000
-----------
Pharmaceuticals--1.6%
Johnson & Johnson 50,000 4,656,250
-----------
Retail--9.1%
The Home Depot, Inc. 225,000 15,426,563
Wal-Mart Stores, Inc. 150,000 10,368,750
-----------
25,795,313
-----------
<PAGE>
Number
of Shares Value
- -----------------------------------------------------------
- -----------------------------------------------------------
Telecommunications--18.9%
General Instrument Corp. * 150,000 $ 12,750,000
Lucent Technologies, Inc. 30,000 2,244,375
MCI WorldCom, Inc. * 225,000 11,932,031
Nextel Communications, Inc. 50,000 5,154,688
Nokia Corp. (ADR) 40,000 7,600,000
QUALCOMM, Inc.* 80,000 14,087,500
------------
53,768,594
------------
Therapeutics--4.2%
Amgen, Inc.* 200,000 12,006,250
------------
TOTAL COMMON STOCK
(Cost $174,186,869) 279,585,625
------------
- -----------------------------------------------------------
SHORT-TERM INVESTMENTS--2.1%
- -----------------------------------------------------------
Temporary Cash Investment
Fund, Inc. 2,918,086 2,918,086
Temporary Investment
Fund, Inc. 2,918,085 2,918,085
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $5,836,171) 5,836,171
------------
TOTAL INVESTMENTS--100.5%
(Cost $180,023,040) (a) 285,421,796
LIABILITIES IN EXCESS
OF OTHER ASSETS--(0.5)% (1,159,252)
------------
NET ASSETS APPLICABLE TO 6,864,202
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING--100.0% $ 284,262,544
=============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 41.41
=============
- ------------------------------------------
* Non-Income Producing Security
ADR - American Depository Receipt
(a) At December 31, 1999, the cost for Federal income tax purposes was
$181,255,311. Net unrealized appreciation was $104,166,485. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess market value over tax cost of $105,083,689 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $917,204.
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE VALUE EQUITY FUND
Number
of Shares Value
- ------------------------------------------------------------
COMMON STOCK--97.6%
- ------------------------------------------------------------
Agricultural Products--1.7%
Monsanto Co. 139,000 $ 4,951,875
-----------
Air Transportation--3.2%
AMR Corp. 139,000 9,313,000
-----------
Broadcast/Media--4.2%
AMFM, Inc.* 74,000 5,790,500
The News Corp., Ltd (ADR) 190,000 6,353,125
-----------
12,143,625
-----------
Chemicals--2.9%
Du Pont (E. I.) de Nemours
and Co. 130,000 8,563,750
-----------
Computer Services & Software--7.5%
Compaq Corp. 210,000 5,683,125
Computer Associates
International, Inc. 231,000 16,155,562
-----------
21,838,687
-----------
Cosmetics & Toiletries--1.1%
Avon Products, Inc. 98,000 3,234,000
-----------
Diversified Operations--4.7%
Canadian Pacific Ltd. 110,000 2,371,875
Minnesota Mining
& Manufacturing Co. (3M) 115,000 11,255,625
-----------
13,627,500
-----------
Electronic Systems--3.4%
Emerson Electric Co. 115,000 6,598,125
Rockwell International Corp. 71,000 3,399,125
-----------
9,997,250
-----------
Financial Services--18.5%
Chase Manhattan Corp. 31,000 2,408,312
Citigroup, Inc. 226,250 12,571,016
Countrywide Credit
Industries, Inc. 190,000 4,797,500
Fleet Boston Financial Corp. 197,794 6,885,704
Freddie Mac 232,000 10,918,500
Household International, Inc. 190,000 7,077,500
Wells Fargo, Co. 228,330 9,233,094
-----------
53,891,626
-----------
Food and Beverages--2.4%
Diageo PLC (ADR) 220,000 7,040,000
-----------
Food & Drug Retailers--4.1%
CVS Corp. 100,000 3,993,750
Kroger Co. 418,000 7,889,750
-----------
11,883,500
-----------
<PAGE>
Number
of Shares Value
- ------------------------------------------------------------
- ------------------------------------------------------------
Insurance--12.6%
Ace Limited 235,000 $ 3,921,562
AFLAC, Inc. 144,750 6,830,391
Conseco, Inc. 311,610 5,570,029
Everest Reinsurance
Holdings, Inc. 250,000 5,578,125
XL Capital Ltd. 283,196 14,690,792
-----------
36,590,899
-----------
Integrated Petrolium -
International--0.5%
Unocal Corp. 45,400 1,523,738
-----------
Machinery-Diversified--2.2%
Caterpillar, Inc. 137,000 6,447,563
-----------
Medical Wholesale Drug
Distribution--1.7%
Cardinal Health, Inc. 100,000 4,787,500
-----------
Medical Supplies & Equipment--1.5%
Becton, Dickinson & Co. 159,000 4,253,250
-----------
Metals--2.9%
Alcoa, Inc. 100,000 8,300,000
-----------
Oil--0.2%
Anadarko Petroleum Corp. 20,000 682,500
-----------
Pharmaceuticals--2.6%
American Home Products Corp. 195,000 7,690,313
-----------
Printing & Publishing--1.2%
Donnelley (R.R.) & Sons Co. 140,000 3,473,750
-----------
Restaurants--3.5%
McDonald's Corp. 252,000 10,158,750
-----------
Retail--1.8%
The May Department Stores Co. 162,000 5,224,500
-----------
Telecommunications--10.9%
Bell Atlantic Corp. 120,000 7,387,500
Ericsson AB (ADR) 105,000 6,893,906
MCI WorldCom, Inc.* 144,450 7,660,364
Sprint Corp. 144,500 9,726,656
-----------
31,668,426
-----------
Waste Management--2.3%
Waste Management, Inc. 394,000 6,771,875
-----------
TOTAL COMMON STOCK
(Cost $245,153,786) 284,057,877
-----------
12
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE VALUE EQUITY FUND
Number
of Shares Value
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.7%
- ------------------------------------------------------------
Temporary Cash Investment
Fund, Inc. 2,492,526 $ 2,492,526
Temporary Investment Fund, Inc. 2,492,526 2,492,526
---------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,985,052) 4,985,052
---------------
TOTAL INVESTMENTS--99.3%
(Cost $250,138,838) (a) 289,042,929
OTHER ASSETS IN EXCESS
OF LIABILITIES--0.7% 1,894,160
---------------
NET ASSETS APPLICABLE TO 13,099,798
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING--100.0% $290,937,089
==============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 22.21
==============
- ---------------------------------------
* Non-Income Producing Security
ADR - American Depository Receipt
(a) At December 31, 1999, the cost for Federal income tax purposes was
$250,434,422. Net unrealized appreciation was $38,608,507. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $67,122,363 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $28,513,856.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE FLEXIBLY MANAGED FUND
Number
of Shares Value
- ----------------------------------------------------------------
COMMON STOCK--53.7%
- ----------------------------------------------------------------
Banking--0.2%
Bank Fuer International Zahlungs 180 $ 1,017,396
------------
Building & Building Supplies--0.8%
Johns Manville Corp. 279,000 3,906,000
------------
Building & Real Estate--1.0%
Rouse Co. 226,900 4,821,625
------------
Chemicals--4.4%
Cabot Corp. 237,000 4,828,875
Great Lakes Chemical Corp. 173,000 6,606,438
Imperial Chemical Industries
PLC (ADR) 123,000 5,235,187
Octel Corp. * 454,000 4,710,250
------------
21,380,750
------------
Consumer Non-Durable--0.5%
Reebok International, Ltd. * 275,000 2,251,562
------------
Electric Utilities--7.0%
FirstEnergy Corp. 330,000 7,486,875
Kansas City Power & Light Co. 187,000 4,125,687
Niagara Mohawk Holdings, Inc. 1,216,100 16,949,394
UniSource Energy Corp. 460,000 5,146,250
------------
33,708,206
------------
Energy & Resources--0.3%
Questar Corp. 88,000 1,320,000
------------
Exploration & Production--1.7%
Mitchell Energy & Development Corp. 373,600 8,056,050
------------
Food Processing--0.4%
McCormick & Co., Inc. 67,000 1,993,250
------------
Holdings Company Diversified--3.7%
Loews Corp. 295,000 17,902,812
Lonrho Africa PLC 305,000 152,727
------------
18,055,539
------------
Hotels & Gaming--1.3%
Mandalay Resort Group * 308,000 6,198,500
------------
Insurance--2.7%
Aetna, Inc. 21,000 1,172,062
Berkley (W.R.) Corp. 35,000 735,000
Leucadia National Corp. 217,000 5,018,125
Unitrin, Inc. 56,000 2,110,500
White Mountains Insurance Group, Inc. 32,500 3,916,250
------------
12,951,937
------------
Media and Communications--3.9%
Chris-Craft Industries, Inc. * 216,300 15,600,638
Meredith Corp. 77,000 3,209,937
------------
18,810,575
------------
Medical--1.1%
Smith and Nephew PLC 1,568,000 5,318,860
------------
Mining--Gold--3.3%
Homestake Mining Co. 372,000 2,906,250
<PAGE>
Number
of Shares Value
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Newmont Mining Corp. 526,000 $ 12,887,000
------------
15,793,250
------------
Oil & Gas--9.7%
Amerada Hess Corp. 430,000 24,402,500
Kerr-McGee Corp. 31,000 1,922,000
Murphy Oil Corp. 184,000 10,557,000
Texaco, Inc. 179,000 9,721,938
------------
46,603,438
------------
Paper & Forest Products--1.7%
Domtar, Inc. 104,000 1,222,000
Plum Creek Timber Co., Inc. 14,000 350,000
Potlatch Corp. 4,600 205,275
Weyerhaeuser Co. 91,000 6,534,937
============
8,312,212
------------
Photography Equipment & Supplies--0.5%
Polaroid Corp. 115,000 2,163,438
------------
Publishing - Newspapers--5.1%
New York Times Co. 226,000 11,102,250
Washington Post Co. 24,700 13,730,113
------------
24,832,363
------------
Publishing- Periodicals--0.1%
Reader's Digest Assn., Inc. 18,000 477,000
------------
Railroads--0.7%
Canadian Pacific, Ltd. 164,000 3,536,250
------------
Real Estate--0.0%
HomeFed Corp.* 130,732 116,433
------------
Retail--1.7%
J.C. Penney Company, Inc. 67,500 1,345,781
Petrie Stores Corp. * 1,373,000 3,432,500
Toys "R" Us, Inc. * 251,000 3,592,438
------------
8,370,719
------------
Tobacco--1.0%
Philip Morris Cos., Inc. 198,000 4,591,125
------------
Transportation-Sea Freight--0.9%
Overseas Shipholding Group, Inc. 303,000 4,488,188
------------
TOTAL COMMON STOCK
(Cost $234,962,329) 259,074,666
------------
- -----------------------------------------------------------------
PREFERRED STOCK--5.5%
- -----------------------------------------------------------------
Cleveland Electric Illum. 7.00% 10,500 1,052,625
Entergy Gulf States, Inc. 7.00% 12,965 645,009
Kemper Corp. 5.75% 79,000 4,175,939
Niagara Mohawk Power Co. 6.50% 16,000 400,000
Niagara Mohawk Power Co. 7.50% 1,500 38,156
Niagara Mohawk Power Co. 7.00% 3,000 74,531
Owens- Illinois, Inc., 4.75% 55,000 1,718,750
Reckson Associates Realty Corp.
7.625% 20,500 407,438
Rouse Co. $3 295,000 9,624,375
Union Pacific Capital Trust 6.25% 202,500 8,429,063
-----------
TOTAL PREFERRED STOCK
(Cost $31,114,414) 26,565,886
-----------
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE FLEXIBLY MANAGED FUND
Number of
Contracts Value
- -------------------------------------------------------------------
OPTIONS--0.0%
- -------------------------------------------------------------------
Motorola, Inc. $110, 01/22/00* 130 $ 5,687
Motorola, Inc. $130, 04/22/00* 60 48,750
Motorola, Inc. $95, 01/22/00* 130 1,625
Weyerhaeuser Co. $65, Call 01/22/00* (135) (104,625)
Weyerhaeuser Co. $75, 01/22/00* 130 56,063
-----------
TOTAL OPTIONS (Cost $628,008) 7,500
-----------
Par
(000)
- -------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--4.8%
- -------------------------------------------------------------------
U.S. Treasury Notes
5.875% [+] 02/15/00 12,900 12,911,868
6.125%, 07/31/00 1,250 1,252,400
6.250%, 04/30/01 2,500 2,503,175
6.250%, 10/31/01 2,500 2,501,300
5.875%, 09/30/02 4,275 4,231,780
TOTAL U.S. TREASURY OBLIGATIONS
-----------
(Cost $23,636,398) 23,400,523
-----------
- -------------------------------------------------------------------
AGENCY OBLIGATIONS--7.1%
- -------------------------------------------------------------------
FNMA
6.375%, 01/16/02 3,200 3,187,712
-----------
Tennessee Valley Authority
5.880%, 04/01/36 17,900 16,826,716
5.980%, 04/01/36 4,600 4,311,856
6.235%, 07/15/45 9,950 9,928,210
-----------
31,066,782
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $36,238,664) 34,254,494
-----------
- ------------------------------------------------------------------
MEDIUM TERM NOTES--0.3%
- ------------------------------------------------------------------
FNMA
5.370%, 02/07/01
(Cost $1,576,000) 1,600 1,581,840
-----------
Value
- ------------------------------------------------------------------
MUNICIPAL BONDS--0.6%
- ------------------------------------------------------------------
California State
5.250%, 10/01/11
(Cost $3,266,640) 2,925 2,949,014
-----------
- ------------------------------------------------------------------
CORPORATE BONDS--0.8%
- ------------------------------------------------------------------
BellSouth Telecommunications
5.850%, 11/15/45
(Cost $3,776,250) 3,800 3,780,088
-----------
<PAGE>
- ------------------------------------------------------------------
CONVERTIBLE BONDS--15.8%
- ------------------------------------------------------------------
Arbor Software
4.500%, 03/15/05 1,350 1,282,500
Ciba Specialty Chemicals
1.250%, 07/24/03 1,630 1,342,713
Exide Corp.
2.900%, 12/15/05 1,250 643,763
Par
(000) Value
- ------------------------------------------------------------------
- ------------------------------------------------------------------
HealthSouth Corp.
3.250%, 04/01/03 6,000 $ 4,650,960
Hilton Hotels Corp.
5.000%, 05/15/06 12,845 9,890,650
Homestake Mining Co.
5.500%, 06/23/00 7,325 7,091,699
5.500%, 06/23/00 2,385 2,309,038
Inco Ltd.
5.750%, 07/01/04 11,475 11,001,656
7.750%, 03/15/16 835 719,144
Kerr-McGee Corp.
7.500%, 05/15/14 540 505,575
Loews Corp.
3.125%, 09/15/07 8,750 7,201,862
Lonmin Finance PLC
6.000%, 02/27/04 4,070 6,685,377
McKesson Corp.
4.500%, 03/01/04 1,500 1,282,500
Ogden Corp.
5.750%, 10/20/02 250 206,562
Phycor, Inc.
4.500%, 02/15/03 3,250 1,706,250
Potomac Electric Power Co.
5.000%, 09/01/02 2,700 2,531,250
Rite Aid Corp.
5.250%, 09/15/02 820 562,208
Sepracor, Inc.
7.000%, 12/15/05 1,650 1,763,206
Teck Corp.
3.750%, 07/15/06 7,250 5,365,000
Texaco Capital, Inc.
3.500%, 08/05/04 1,450 1,432,774
Waste Management, Inc.
4.000%, 02/01/02 9,025 7,903,373
TOTAL CONVERTIBLE BONDS
--------------
(Cost $78,669,146) 76,078,060
--------------
- ------------------------------------------------------------------
ZERO COUPON BONDS **--5.0%
- ------------------------------------------------------------------
Lennar Corp.
4.496%, 07/29/18 4,900 1,885,030
Motorola, Inc.
2.244%, 09/27/13 1,700 2,811,783
Pep Boys, Inc.
4.927%, 09/20/11 5,650 2,853,250
Roche Holdings, Inc. 144A
5.510%, 05/06/12 11,800 6,003,250
Times Mirror Co.
4.461%, 04/15/17 21,800 10,763,750
TOTAL ZERO COUPON BONDS
--------------
(Cost $22,784,871) 24,317,063
--------------
15
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE FLEXIBLY MANAGED FUND
Par
(000) Value
- -------------------------------------------------------------------
COMMERCIAL PAPER--4.6%
- -------------------------------------------------------------------
Ciesco LP
6.050%, 01/18/00 1,300 $ 1,296,286
Fcar Owner Trust
6.400%, 01/11/00 10,000 9,982,222
6.460%, 01/12/00 1,150 1,147,730
General Electric Capital Corp.
6.100%, 01/26/00 5,000 4,978,819
Minnesota Mining & Manufacturing Co.
6.100%, 01/19/00 4,570 4,556,062
-------------
TOTAL COMMERCIAL PAPER
(Cost $21,961,119) 21,961,119
-------------
Number
of Rights
- -------------------------------------------------------------------
RIGHTS--0.0%
- -------------------------------------------------------------------
Hills Stores Co.* (Cost $0) 93,000 --
-------------
Number
of Shares
- -------------------------------------------------------------------
SHORT-TERM INVESTMENTS--0.1%
- -------------------------------------------------------------------
Temporary Investment Fund, Inc.
(Cost $667,464) 667,464 667,464
-------------
TOTAL INVESTMENTS--98.3%
(Cost $459,281,303) (a) 474,637,717
OTHER ASSETS IN EXCESS
OF LIABILITIES--1.7% 8,217,799
-------------
NET ASSETS APPLICABLE TO 24,612,237
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING--100.0% $482,855,516
============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 19.62
============
- ----------------------------------------------
* Non-Income Producing Security
** Effective Yield
[+] - $1,101,012 market value held as collateral for the open option contracts
ADR - American Depository Receipt
(a) At December 31, 1999, the cost for Federal income tax purposes was
$460,216,727. Net unrealized appreciation was $14,420,990. This consisted
of aggregated gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $54,230,510 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $39,809,520.
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE INTERNATIONAL EQUITY FUND
Number
of Shares Value
- --------------------------------------------------------------------------------
COMMON STOCK--96.2%
- --------------------------------------------------------------------------------
Australia--0.5%
Telstra Corporation, Ltd. 188,000 $ 1,022,712
-----------
Finland--3.5%
Nokia Corp. (ADR) 27,800 5,282,000
Sonera Oyj 32,000 2,193,171
-----------
7,475,171
-----------
France--8.6%
Altran Technologies SA 6,500 3,927,888
AXA 17,800 2,481,136
Compagnie Generale D'Industrie
Et de Participations 35,200 2,304,361
Dassault Systemes SA 26,000 1,694,229
L'OREAL 2,000 1,604,391
LVMH (Louis Vuitton Moet Hennessy) 3,520 1,576,537
Scor SA 44,000 1,940,981
Total Fina SA-B 15,035 2,006,383
Valeo SA 14,000 1,080,068
-----------
18,615,974
-----------
Germany--4.0%
Allianz AG 5,508 1,850,053
Bayerische Motoren
Werke (BMW) AG 41,600 1,275,778
Mannesmann AG 17,000 4,116,024
Muenchener Rueckversicherungs
Gesellschaft AG * 5,604 1,427,951
-----------
8,669,806
-----------
Hong Kong--2.0%
Dah Sing Financial Group 172,100 686,319
Smartone Telecommunications
Holdings, Ltd. 315,000 1,519,586
Sun Hung Kai Properties, Ltd. 195,000 2,031,903
-----------
4,237,808
-----------
Ireland--1.7%
Allied Irish Banks PLC 100,290 1,143,401
CRH PLC 49,021 1,055,563
Elan Corp. PLC (ADR) * 50,000 1,475,000
-----------
3,673,964
-----------
Italy--2.4%
ENI SpA 240,000 1,319,771
Pirelli SpA 315,000 864,513
Telecom Italia Mobile SpA 150,000 1,675,395
Telecom Italia SpA 100,000 1,410,011
-----------
5,269,690
-----------
Japan--28.5%
Asatsu-DK, Inc. 22,000 1,485,759
Fuji Photo Film Co. 18,000 657,140
Hikari Tsushin, Inc. 2,000 4,012,920
Honda Motor Co., Ltd. 27,000 1,004,209
Hoya Corp. 20,000 1,575,805
Mikuni Coca-Cola Bottling Co., Ltd . 34,000 595,674
Murata Manufacturing Co., Ltd. 30,000 7,047,078
Nichiei Co., Ltd. 31,800 690,966
Nintendo Co., Ltd. 15,500 2,576,001
Nippon Telegraph & Telephone Corp. 20,000 342,566
Nomura Securities Co., Ltd. 38,000 686,209
NTT Data Corp. 170,000 3,910,150
<PAGE>
Number
of Shares Value
- ----------------------------------------------------------------
- ----------------------------------------------------------------
NTT Mobile Communications
Network, Inc. 180,000 $ 6,923,754
Rohm Co. Ltd. 19,000 7,810,512
Ryohin Keikaku Co., Ltd. 11,500 2,308,554
Secom Co., Ltd. 13,000 1,431,438
Seven-Eleven Japan Co., Ltd. 15,000 2,378,389
Shohkoh Fund & Co.., Ltd. 4,300 1,702,408
Sony Corp. 16,000 4,745,033
Takeda Chemical Industries 62,000 3,064,500
Tokyo Broadcasting System, Inc .62,000 2,099,638
Tokyo Electronics, Ltd. 26,000 3,562,690
Yasuda Fire & Marine
Insurance Co. Ltd. 145,000 820,299
-----------
61,431,692
-----------
Malaysia--0.3%
Malayan Banking Berhad 160,000 568,414
-----------
Netherlands--8.8%
Aegon N.V. 32,840 3,171,876
Aegon N.V. (ARS) 21,126 2,017,533
ASM Lithography Holding N.V. * 31,500 3,499,295
Getronics N.V. 36,400 2,903,495
Heineken N.V. 32,000 1,560,520
Kempen & Co. N.V. 27,000 1,074,126
Philips Electronics N.V. 15,780 2,145,533
Vendex N.V. 46,933 1,247,891
Wolters Kluwer N.V. 39,600 1,340,075
-----------
18,960,344
-----------
Norway--0.5%
Tomra Systems ASA 57,900 982,397
-----------
Singapore--1.7%
Datacraft Asia, Ltd. 110,000 913,000
Singapore Press Holdings, Ltd. 125,000 2,709,397
-----------
3,622,397
-----------
Spain--0.6%
Telefonica SA 50,000 1,248,867
-----------
Sweden--7.3%
A-Com AB* 51,600 1,176,587
Assa Abloy AB 233,580 3,280,772
Connecta AB* 15,000 511,283
Ericsson AB-B 37,600 2,417,395
Framtidsfabriken AB* 7,000 1,267,043
Hennes & Mauritz AB - B 102,000 3,416,784
Modern Times Group MTG AB-B* 25,900 1,284,650
Securitas AB-B 79,700 1,442,619
Svenska Handelsbanken AB-A 72,600 913,047
-----------
15,710,180
-----------
Switzerland--7.4%
Credit Suisse Group 23,000 4,571,689
Nestle SA 1,040 1,905,219
Pharma Vision 2000 AG * 1,000 709,665
Roche Holding AG 83 1,355,272
Roche Holding AG - Genusschein 475 5,638,071
Schweizerische Rueckversicherungs
Gesellschaft 900 1,848,835
-----------
16,028,751
-----------
17
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE INTERNATIONAL EQUITY FUND
Number
of Shares Value
- ------------------------------------------------------------
- ------------------------------------------------------------
United Kingdom--18.4%
Amvescap PLC 200,000 $ 2,326,032
BP Amoco PLC (ADR) 26,934 1,597,523
British Telecommunications PLC 90,000 2,199,554
Capita Group PLC 107,000 1,953,059
CGU PLC 53,941 869,131
Compass Group PLC 272,000 3,734,574
Diageo PLC 76,000 611,359
Dixons Group PLC 95,000 2,284,923
Hays PLC 125,000 1,990,857
HSBC Holdings PLC 190,000 2,648,608
Invensys PLC 296,360 1,613,254
Lloyds TSB Group PLC 125,000 1,563,812
Misys PLC 190,640 2,971,629
Next PLC 113,000 1,084,222
Provident Financial PLC 81,334 893,376
Rentokil Initial PLC 570,000 2,078,528
Schroders PLC 65,000 1,308,232
Securicor PLC 104,000 267,106
Smithkline Beecham PLC 100,000 1,276,087
Vodafone Group PLC 485,095 2,403,613
WPP Group PLC 245,000 3,882,293
------------
39,557,772
TOTAL COMMON STOCK
(Cost $120,614,601) 207,075,939
------------
- ------------------------------------------------------------
PREFERRED STOCK--1.3%
- ------------------------------------------------------------
Germany
SAP AG (Cost $1,335,841) 4,600 2,805,217
-----------
Par
(000) Value
- ------------------------------------------------------------
CONVERTIBLE BONDS--0.4%
- ------------------------------------------------------------
Salomon Smith Barney
0.00%, 05/09/00
(Cost $770,000) 770 771,925
-----------
Number
of Warrants Value
- ------------------------------------------------------------
WARRANTS--0.3%
- ------------------------------------------------------------
Muenchener Rueckversicherungs* 104 5,551
Zuercher Kantonalbank* 900,000 700,873
-----------
TOTAL WARRANTS (Cost $575,866) 706,424
-----------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.2%
- ------------------------------------------------------------
Temporary Cash Investment
Fund, Inc. 2,386,695 2,386,695
Temporary Investment Fund, Inc. 2,386,695 2,386,695
----------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,773,390) 4,773,390
----------------
TOTAL INVESTMENTS--100.4%
(Cost $128,069,698) (a) 216,132,895
LIABILITIES IN EXCESS
OF OTHER ASSETS--(0.4)% (821,200)
----------------
<PAGE>
Value
- ------------------------------------------------------------
- ------------------------------------------------------------
NET ASSETS APPLICABLE TO 8,039,879
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING--100.0% $ 215,311,695
=============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 26.78
=============
- --------------------------------------
*- Non-Income Producing Security
ADR - American Depository Receipt
ARS - American Registered Share
(a) At December 31, 1999, the cost for Federal income tax purposes was
$128,069,698. Net unrealized appreciation was $88,063,197. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $91,007,056 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $2,943,859.
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
% of Market Value
Value (000's)
- --------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK
SECTOR DIVERSIFICATION
- --------------------------------------------------------------------------------
Telecommunications 17.8% $ 37,475
Electronics 12.0% 25,311
Financial Services 8.8% 18,451
Insurance 7.8% 16,428
Pharmaceuticals 6.1% 12,809
Retail Diversified 6.1% 12,721
Computer Services 4.7% 9,886
Computer Software 2.7% 5,766
Metal Processors & Fabricators 2.7% 5,585
Advertising 2.6% 5,368
Oil 2.3% 4,924
Media Communications 2.2% 4,561
Beverages 2.1% 4,344
Diversified Commercial Services 2.1% 4,336
Machinery - General Industry 2.0% 4,116
Publishing 1.9% 4,049
Engineering Services 1.9% 3,928
Catering Services 1.8% 3,735
Automobile Manufacturing 1.6% 3,360
Investment Companies 1.4% 3,036
Toys 1.2% 2,576
Real Estate Development 1.0% 2,032
Human Resources 0.9% 1,953
Diversified Food Products 0.9% 1,905
Diversified Operations 0.8% 1,613
Cosmetics 0.8% 1,604
Optical Equipment 0.8% 1,576
Security Services 0.7% 1,443
Identification Services 0.7% 1,431
Building Materials 0.5% 1,056
Recycling 0.4% 982
Tire & Rubber 0.4% 864
Photographic Equipment 0.3% 657
----- ---------
100.0% $ 209,881
===== =========
18
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE SMALL CAPITALIZATION FUND
Number
of Shares Value
- --------------------------------------------------------------------------------
COMMON STOCK--86.6%
- --------------------------------------------------------------------------------
Aerospace & Defense--0.7%
Alliant Techsystems, Inc.* 5,000 $ 311,562
----------
Chemicals--5.4%
Cambrex Corp. 53,100 1,828,631
H.B. Fuller Company 3,600 201,937
McWhorter Technologies, Inc.* 24,000 384,000
----------
2,414,568
----------
Computer Services & Software--4.7%
Analysts International Corp. 12,600 157,500
Deltek Systems, Inc.* 800 10,850
Policy Management Systems Corp.* 22,100 564,931
Shared Medical Systems Corp. 27,100 1,380,406
----------
2,113,687
----------
Diversified Operations--1.4%
GP Strategies Corp.* 20,600 126,175
Ruddick Corp. 15,000 232,500
Teleflex, Inc. 9,500 297,469
----------
656,144
----------
Electronic Components--10.3%
BMC Industries, Inc. 91,000 443,625
General Semiconductor, Inc.* 52,600 746,262
Harman International Industries, Inc. 29,400 1,650,075
L-3 Communications Holdings, Inc.* 12,900 536,963
Pioneer-Standard Electronics, Inc. 27,100 392,103
Technitrol, Inc. 7,000 311,500
UCAR International, Inc.* 29,900 532,594
----------
4,613,122
----------
Foods--5.8%
Del Monte Foods Co.* 97,700 1,202,931
Earthgrains Co. 40,700 656,288
International Home Foods, Inc. 14,000 243,250
Performance Food Group Co. 20,700 503,269
----------
2,605,738
----------
Gas Transmission--0.6%
Eastern Enterprises 4,500 258,469
----------
Healthcare--7.4%
Corvel Corp.* 44,200 1,041,463
First Health Group Corp.* 62,400 1,688,700
Trigon Healthcare, Inc.* 21,000 619,500
----------
3,349,663
----------
Human Resources--0.9%
Staff Leasing, Inc.* 44,100 416,194
----------
Insurance--8.1%
E. W. Blanch Holdings, Inc. 7,600 465,500
Horace Mann Educators Corp. 44,700 877,238
RenaissanceRe Holdings Ltd. 44,500 1,818,938
Trenwick Group, Inc. 28,380 480,686
----------
3,642,362
----------
<PAGE>
Number
of Shares Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Insurance - Life--1.6%
Annuity and Life Re (Holdings), Ltd. 27,400 $ 714,113
----------
Machinery--6.6%
Albany International Corp.* 26,933 417,463
Baldor Electric Co. 43,700 792,062
Lindsay Manufacturing Co. 51,100 932,575
SPS Technologies, Inc.* 25,900 827,181
----------
2,969,281
----------
Manufacturing--3.5%
Carlisle Companies, Inc. 14,400 518,400
Flowserve Corp. 16,200 275,400
Paxar Corp.* 92,350 779,203
----------
1,573,003
----------
Medical Supplies and Equipment--7.2%
AmeriSource Health Corp.* 90,700 1,377,506
DENTSPLY International, Inc. 70,600 1,672,338
Vital Signs, Inc. 7,700 175,175
----------
3,225,019
----------
Metal Components & Products--4.1%
Kaydon Corp. 24,700 662,269
Precision Castparts Corp. 44,600 1,170,750
----------
1,833,019
----------
Office Equipment & Services--2.4%
Wallace Computer Services, Inc. 64,400 1,070,650
----------
Oil & Gas--3.4%
Cabot Oil & Gas Corp. 42,500 682,656
St. Mary Land & Exploration Co. 34,800 837,375
----------
1,520,031
----------
Publishing--1.1%
Houghton Mifflin Co. 11,500 485,156
----------
Retail--6.9%
MSC Industrial Direct Co. Inc.* 114,500 1,517,125
Regis Corp. 26,400 496,650
ShopKo Stores, Inc.* 48,500 1,115,500
----------
3,129,275
----------
Services--1.3%
Tetra Tech, Inc.* 39,225 605,536
----------
Textiles & Apparel--2.2%
G & K Services, Inc. 30,600 982,069
----------
Transportation--1.0%
Interpool, Inc. 59,200 440,300
----------
TOTAL COMMON STOCK
(Cost $39,596,739) 38,928,961
----------
19
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE SMALL CAPITALIZATION FUND
Par
(000) Value
- --------------------------------------------------------------------------------
AGENCY OBLIGATIONS--6.4%
- --------------------------------------------------------------------------------
Federal Home Loan Bank Discount Notes
5.600%, 01/21/00 1,400 $ 1,395,644
-----------
Freddie Mac Discount Note
5.590%, 01/27/00 1,500 1,493,944
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $2,889,588) 2,889,588
-----------
Number
of Shares
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.5%
- --------------------------------------------------------------------------------
Temporary Investment Fund, Inc.
(Cost $1,997,796) 1,997,796 1,997,796
------------
TOTAL INVESTMENTS--97.5%
(Cost $44,484,123) (a) 43,816,345
OTHER ASSETS IN EXCESS
OF LIABILITIES--2.5% 1,122,473
------------
NET ASSETS APPLICABLE TO 3,554,827
SHARES OF COMMON STOCK ISSUED
AND OUTSTANDING--100.0% $ 44,938,818
============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 12.64
============
- -------------------------------------------------------------
* Non-Income Producing Security
(a) At December 31, 1999, the cost for Federal income tax purposes was
$44,585,053. Net unrealized depreciation was $768,708. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $3,992,717 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $4,761,425.
The accompanying notes are an integral part of these financial statements
20
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999
THE EMERGING GROWTH FUND
Number
of Shares Value
- --------------------------------------------------------------------------------
COMMON STOCK--98.4%
- --------------------------------------------------------------------------------
Advertising--0.8%
Lamar Advertising Co.* 23,500 $ 1,421,016
-----------
Broadcast/Media--7.8%
AMFM, Inc.* 15,700 1,228,525
Citadel Communications Corp.* 24,600 1,595,925
Classic Communications, Inc.* 100 3,669
Cox Radio, Inc. * 16,000 1,596,000
Cumulus Media, Inc. * 3,900 197,681
Entercom Communications Corp. * 24,700 1,630,200
Emmis Communications Corp.* 9,000 1,121,906
Hispanic Broadcasting Corp.* 14,800 1,364,837
Infinity Broadcasting Corp. * 70,600 2,554,837
Spanish Broadcasting System, Inc.* 39,000 1,562,437
Univision Communications, Inc.* 11,500 1,175,156
Wink Communications, Inc. * 2,100 126,066
XM Satellite Radio Holdings, Inc.* 2,250 86,203
-----------
14,243,442
-----------
Brokerage--2.0%
Knight/Trimark Group, Inc.* 79,900 3,672,903
Web Street, Inc.* 2,550 31,556
-----------
3,704,459
-----------
Communications Services--1.5%
American Tower Corp.* 62,700 1,916,269
Metromedia Fiber Network, Inc.* 19,000 910,219
Tritel, Inc. * 200 6,338
-----------
2,832,826
-----------
Computer - Data Processing--0.9%
Acxiom Corp.* 46,700 1,122,259
Fiserv, Inc.* 11,800 451,350
-----------
1,573,609
-----------
Computer - Internet - Content Service--7.0%
Autoweb.com, Inc. * 70,200 763,425
24/7 Media, Inc.* 42,100 2,362,862
About.com, Inc.* 14,750 1,321,047
CMGI, Inc. * 1,800 498,319
Egreetings Network, Inc.* 350 3,555
El Sitio, Inc.* 3,600 132,525
InfoSpace.com, Inc. * 13,300 2,845,784
The Knot, Inc.* 300 2,531
MedicaLogic, Inc.* 400 8,462
MyPoints.com, Inc. * 3,600 267,187
NaviSite, Inc.* 17,350 1,733,916
NBC Internet, Inc.* 7,500 579,375
NetCreations, Inc. * 2,900 125,516
SportsLine USA, Inc.* 43,400 2,172,712
Webstakes.com, Inc. * 4,400 87,313
-----------
12,904,529
-----------
Computer - Internet - Services & Software--20.7%
AppliedTheory Corp. * 10,300 285,181
Bluestone Software, Inc. * 16,400 1,878,312
<PAGE>
Number
of Shares Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Brio Technology, Inc. * 30,700 $ 1,285,562
BroadVision, Inc. * 11,500 1,955,719
C-bridge Internet Solutions, Inc. * 1,400 68,687
Clarent Corp. * 15,700 1,219,694
Concentric Network Corp.* 49,100 1,509,825
Covad Communications Group, Inc.* 23,500 1,310,859
CyberSource Corp.* 8,700 451,856
DSL.net, Inc.* 31,850 460,830
EarthLink Network, Inc.* 13,300 566,497
eCollege.com, Inc.* 1,300 14,259
eSPEED, Inc. * 5,700 203,241
GRIC Communications, Inc.* 2,050 52,083
Internap Network Services Corp. * 5,400 933,525
Intraware, Inc. * 14,900 1,189,206
ITXC Corp.* 26,700 891,112
Liquid Audio, Inc. * 28,900 758,625
Keynote Systems, Inc.* 7,500 545,625
National Information Consortium, Inc. 27,450 885,262
Netcentives, Inc. * 9,600 598,800
Netopia, Inc.* 11,300 616,909
Network Solutions, Inc.* 30,100 6,549,572
pcOrder.com, Inc. * 14,900 758,969
Primus Knowledge Solutions, Inc.* 9,650 436,964
PC-Tel, Inc.* 20,750 1,090,672
Proxicom, Inc. * 15,400 1,912,969
PSINet, Inc.* 15,700 970,947
Ramp Networks, Inc.* 45,800 701,313
RealNetworks, Inc.* 10,600 1,276,306
RSA Security, Inc.* 8,100 627,497
Scient Corp.* 13,800 1,188,094
Silknet Software, Inc. * 13,900 2,291,762
Verio, Inc.* 29,200 1,349,587
Vignette Corp. * 7,050 1,148,930
Xpedior, Inc. * 1,550 44,611
--------------
38,029,862
--------------
Computer - Network Services & Software--2.7%
Cobalt Networks, Inc.* 800 86,150
Extreme Networks, Inc.* 12,300 1,028,587
Foundry Networks, Inc. * 3,300 995,362
Legato Systems, Inc.* 20,800 1,430,650
Network Appliance, Inc.* 11,400 946,556
SanDisk Corp.* 5,100 488,962
--------------
4,976,267
--------------
Computer - Prepackaged Software--1.2%
Informatica Corp. * 12,400 1,305,100
Scientific Learning Corp. * 23,650 867,659
--------------
2,172,759
--------------
Computer Services & Software--23.9%
Activision, Inc. * 109,700 1,686,637
Aspect Development, Inc. * 23,500 1,612,687
21
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE EMERGING GROWTH FUND
Number
of Shares Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BEA Systems, Inc.* 70,600 $ 4,944,206
The BISYS Group, Inc. * 12,400 808,325
Broadbase Software, Inc * 15,700 1,756,437
Business Objects S.A. (ADR)* 15,200 2,020,650
Check Point Software Technologies, Ltd.* 4,900 973,875
Digex, Inc. * 27,300 1,870,050
Exchange Applications, Inc.* 47,900 2,655,456
Extended Systems, Inc. * 6,500 309,156
FileNET Corp.* 13,900 357,925
HNC Software, Inc. * 12,100 1,282,222
Immersion Corporation* 3,350 128,766
Interactive Intelligence, Inc. * 26,500 703,906
ISS Group, Inc.* 32,600 2,316,637
Macromedia, Inc.* 29,200 2,135,250
McAfee.Com Corp. * 450 20,475
Mercury Interactive Corp.* 15,100 1,630,328
NetIQ Corp. * 62,550 3,303,422
NetScout Systems, Inc. * 50,900 1,584,262
OnDisplay, Inc. * 500 45,188
Peregrine Systems, Inc.* 25,600 2,152,800
Research in Motion Ltd. * 6,800 313,438
Sagent Technology, Inc.* 41,000 1,226,156
Sapient Corp. * 9,300 1,310,428
Segue Software, Inc. * 6,600 166,650
Siebel Systems, Inc. * 15,100 1,270,288
Silicon Storage Technology, Inc.* 30,400 1,256,850
TIBCO Software, Inc. * 6,300 964,294
TSI International Software Ltd.* 24,100 1,363,156
VA Linux Systems, Inc. * 600 124,163
VERITAS Software Corp.* 9,900 1,416,628
Vitria Technology, Inc. * 950 222,597
-------------
43,933,308
-------------
Electronic Components--6.0%
Applied Micro Circuits Corp.* 5,300 675,088
Caliper Technologies Corp. * 200 13,338
Conexant Systems, Inc.* 26,200 1,734,931
Cree Research, Inc.* 21,400 1,821,675
Gemstar International Group, Ltd.* 13,200 939,675
Lattice Semiconductor Corp. * 12,900 610,734
Macrovision Corp.* 12,100 892,375
Metalink Ltd. * 950 19,000
MIPS Technologies, Inc.* 19,900 1,036,666
Power Integrations, Inc.* 25,600 1,215,200
RF Micro Devices, Inc.* 6,800 464,313
Sawtek, Inc.* 20,500 1,365,172
Zoran Corp. * 3,250 182,711
-------------
10,970,878
-------------
Financial Services--0.7%
Financial Federal Corp.* 32,300 736,844
NextCard, Inc.* 20,600 593,538
-------------
1,330,382
-------------
<PAGE>
Number
of Shares Value
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Hotels & Motels--0.7%
Four Seasons Hotels, Inc. 24,400 $ 1,299,300
-------------
Human Resources--0.5%
HotJobs.com, Ltd. * 8,050 353,194
On Assignment, Inc.* 21,100 627,066
-------------
980,260
-------------
Manufacturing--0.8%
SurModics, Inc.* 49,400 1,506,700
-------------
Medical - Biomedical--1.4%
Maxygen , Inc. * 150 10,706
Protein Design Labs, Inc. * 15,400 1,078,963
Visible Genetics, Inc. * 50,300 1,496,425
-------------
2,586,094
-------------
Medical Supplies & Equipment--2.8%
Cytyc Corp.* 28,300 1,730,722
MedImmune, Inc.* 11,500 1,906,844
ResMed, Inc. * 34,700 1,448,725
-------------
5,086,291
-------------
Real Estate--0.7%
Pinnacle Holdings, Inc.* 28,600 1,222,650
-------------
Retail--1.7%
American Eagle Outfitters, Inc. * 21,100 949,500
Factory 2-U Stores, Inc. * 33,500 961,031
ValueVision International, Inc.* 19,600 1,123,938
-------------
3,034,469
-------------
Retail - Internet--1.1%
Expedia, Inc. * 11,300 396,206
FreeMarkets, Inc. * 100 34,141
MotherNature.com, Inc. * 2,700 19,575
Ticketmaster Online-CitySearch, Inc 30,400 1,169,450
VitaminShoppe.com, Inc. * 38,700 348,300
-------------
1,967,672
-------------
Retail Merchandising--0.6%
Bed, Bath & Beyond, Inc.* 33,500 1,160,984
-------------
Semiconductors--0.5%
Integrated Device Technology, Inc. 29,500 854,578
-------------
Service - Commercial--1.2%
eBenX, Inc. * 3,000 135,938
MemberWorks, Inc. * 18,400 610,075
Student Advantage, Inc.* 63,500 1,398,984
-------------
2,144,997
-------------
Telecommunications--9.7%
Allegiance Telecom, Inc.* 23,200 2,131,500
Aware, Inc. * 28,200 1,034,588
CapRock Communications Corp.* 26,500 859,594
Copper Mountain Networks, Inc.* 31,400 1,526,825
22
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF NET ASSETS--DECEMBER 31, 1999 (Continued)
THE EMERGING GROWTH FUND
- --------------------------------------------------------------------------------
Number
of Shares Value
- --------------------------------------------------------------------------------
Crown Castle International Corp. * 27,500 $ 881,719
Digital Lightwave, Inc.* 20,200 1,291,538
Ditech Communications Corp.* 11,050 1,031,794
EchoStar Communications Corp.* 19,900 1,937,763
Efficient Networks, Inc.* 12,000 815,625
Electric Lightwave, Inc.* 56,100 1,037,850
iBasis, Inc. * 1,650 47,644
Infonet Services Corp. * 1,300 34,125
Korea Thrunet Co., Ltd. * 150 10,181
KPNQwest N.V.* 150 9,581
McLeodUSA, Inc.* 28,900 1,699,681
PanAmSat Corp.* 17,800 1,054,094
Primus Telecommunications Group, Inc. 26,200 1,002,150
Viatel, Inc.* 19,000 1,017,688
Z-Tel Technologies, Inc. * 8,150 324,472
-------------
17,748,412
-------------
Therapeutics--1.0%
Medarex, Inc. * 27,400 1,021,506
Pharmacyclics, Inc. * 19,300 798,538
Tularik, Inc. * 100 3,241
-------------
1,823,285
-------------
Transportation Services--0.5%
Forward Air Corp. * 22,000 953,563
-------------
TOTAL COMMON STOCK
(Cost $95,631,022) 180,462,592
-------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.0%
- --------------------------------------------------------------------------------
Temporary Cash Investment Fund, Inc. 3,661,370 3,661,370
Temporary Investment Fund, Inc. 3,661,369 3,661,369
-------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $7,332,739) 7,322,739
-------------
TOTAL INVESTMENTS --102.4%
(Cost $102,953,761) (a) 187,785,331
LIABILITIES IN EXCESS
OF OTHER ASSETS --(2.4)% (4,371,839)
-------------
NET ASSETS APPLICABLE TO 3,692,212
SHARES OF COMMON STOCK
ISSUED AND OUTSTANDING-- 100.0% $ 183,413,492
=============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $ 49.68
=============
- ----------------------------------------
* Non-Income Producing Security
ADR - American Depository Receipt
(a) At December 31, 1999, the cost for Federal income tax purposes was
$103,285,947. Net unrealized appreciation was $84,499,385. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $85,634,432 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $1,135,047.
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Quality High Yield
Market Fund Bond Fund Bond Fund
------------- ------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends 0 0 $ 641,974
Interest 3,502,830 3,341,966 6,437,357
Foreign tax withheld -- -- --
----------- ----------- -----------
Total investment income 3,502,830 3,341,966 7,079,331
----------- ----------- -----------
Expenses:
Investment advisory fees 263,557 251,361 355,521
Administration fees 98,834 83,787 106,656
Accounting fees 49,417 41,893 53,328
Custodian fees and expenses 33,233 32,438 30,059
Other expenses 29,346 23,180 56,859
----------- ----------- -----------
Total expenses 474,387 432,659 602,423
----------- ----------- -----------
Net investment income
(loss) 3,028,443 2,909,307 6,476,908
----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investment transactions (11) (1,147,059) (966,001)
Net realized foreign exchange gain (loss) -- -- 10,452
Change in net unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items -- (1,766,359) (2,556,873)
----------- ----------- -----------
Net realized and unrealized gain (loss) on investments (11) (2,913,418) (3,512,422)
----------- ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations $ 3,028,432 ($ 4,111) $ 2,964,486
=========== =========== ===========
</TABLE>
24
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Flexibly
Growth Value Managed
Equity Fund Equity Fund Fund
-------------- -------------- --------------
<S> <C> <C> <C>
Investment Income:
Dividends $ 1,021,901 $ 4,160,521 $ 9,391,491
Interest 331,859 1,104,024 11,002,237
Foreign tax withheld -- (29,256) (87,779)
------------- ------------- -------------
Total investment income 1,353,760 5,235,289 20,305,949
------------- ------------- -------------
Expenses:
Investment advisory fees 1,076,233 1,591,815 2,531,597
Administration fees 342,077 477,544 759,479
Accounting fees 139,026 180,216 236,896
Custodian fees and expenses 38,645 45,422 98,702
Other expenses 75,037 128,443 214,394
------------- ------------- -------------
Total expenses 1,671,018 2,423,440 3,841,068
------------- ------------- -------------
Net investment income (loss) (317,258) 2,811,849 16,464,881
------------- ------------- -------------
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investment transactions 36,418,555 42,805,661 39,424,852
Net realized foreign exchange gain (loss) -- -- (124,109)
Change in net unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items 35,595,833 (47,874,025) (20,796,482)
------------- ------------- -------------
Net realized and unrealized gain (loss) on investments 72,014,388 (5,068,364) 18,504,261
------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations $ 71,697,130 ($ 2,256,515) $ 34,969,142
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Small Emerging
International Capitalization Growth
Equity Fund Fund Fund
-------------- -------------- ------------
<S> <C> <C> <C>
Investment Income:
Dividends $ 2,008,615 $ 356,273 $ 33,100
Interest 211,793 274,668 265,653
Foreign tax withheld (126,000) -- (442)
------------- ------------- -------------
Total investment income 2,094,408 630,941 298,311
------------- ------------- -------------
Expenses:
Investment advisory fees 1,234,994 214,871 623,468
Administration fees 246,999 64,461 125,665
Accounting fees 123,799 32,231 60,554
Custodian fees and expenses 94,627 18,303 39,302
Other expenses 71,645 19,883 22,586
------------- ------------- -------------
Total expenses 1,772,064 349,749 871,575
------------- ------------- -------------
Net investment income
(loss) 322,344 281,192 (573,264)
------------- ------------- -------------
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investment transactions 19,001,539 (1,244,532) 32,707,632
Net realized foreign exchange gain (loss) 1,126,546 -- --
Change in net unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items 49,269,342 447,493 73,393,403
------------- ------------- -------------
Net realized and unrealized gain (loss) on investments 69,397,427 (797,039) 106,101,035
------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from Operations $ 69,719,771 ($ 515,847) $ 105,527,771
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
PENN SERIES FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Market Fund Quality Bond Fund
-------------------------------- ----------------------------------
Year Year Year Year
ended ended ended ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income(loss) $ 3,028,443 $ 2,216,043 $ 2,909,307 $ 2,407,257
Net realized gain (loss) on investment transactions (11) ($ 992) ($ 1,147,059) $ 1,533,022
Net realized foreign exchange gain (loss) -- -- -- --
Net change in unrealized appreciation/depreciation of
investments, futures contracts and
foreign currency related items -- -- ($ 1,766,359) $ 487,720
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations $ 3,028,432 $ 2,215,051 ($ 4,111) $ 4,427,999
------------ ------------ ------------ ------------
Distributions to Shareholders from:
Net investment income ($ 3,028,443) ($ 2,216,043) -- ($ 2,407,257)
Net realized capital gains -- -- -- ($ 1,568,759)
In excess of net investment income -- -- -- ($ 1,623)
------------ ------------ ------------ ------------
Total distributions ($ 3,028,443) ($ 2,216,043) $ -- ($ 3,977,639)
------------ ------------ ------------ ------------
Capital Share Transactions:
Net increase/(decrease) in net assets from
capital share transaction $ 32,954,893 $ 16,151,030 $ 2,473,540 $ 12,977,718
------------ ------------ ------------ ------------
Total Increase/Decrease in Net Assets $ 32,954,882 $ 16,150,038 $ 2,469,429 $ 13,428,078
Net Assets, beginning of year $ 53,626,422 $ 37,476,384 $ 53,505,106 $ 40,077,028
------------ ------------ ------------ ------------
Net Assets, end of year $ 86,581,304 $ 53,626,422 $ 55,974,535 $ 53,505,106
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Value Equity Fund Flexibly Managed Fund
---------------------------------- -----------------------------------
Year Year Year Year
ended ended ended ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income(loss) $ 2,811,849 $ 4,186,893 $ 16,464,881 $ 15,107,764
Net realized gain (loss) on investment transactions $ 42,805,661 $ 27,331,911 $ 39,424,852 $ 55,261,526
Net realized foreign exchange gain (loss) -- -- ($ 124,109) ($ 7,284)
Net change in unrealized appreciation/depreciation of
investments, futures contracts and
foreign currency related items ($47,874,025) ($ 3,543,595) ($ 20,796,482) ($ 39,212,128)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ($2,256,515 ) $ 27,975,209 $ 34,969,142 $ 31,149,878
------------- ------------- ------------- -------------
Distributions to Shareholders from:
Net investment income -- ($ 4,186,893) -- ($ 15,107,764)
Net realized capital gains -- ($ 27,362,963) -- ($ 55,129,786)
In excess of net investment income -- -- -- ($ 363,128)
------------- ------------- ------------- -------------
Total distributions $ -- ($ 31,549,856) $ -- ($ 70,600,678)
------------- ------------- ------------- -------------
Capital Share Transactions:
Net increase/(decrease) in net assets
from capital share transactions ($42,284,926 ) $ 36,092,709 ($ 97,599,198) $ 68,797,648
------------- ------------- ------------- -------------
Total Increase/Decrease in Net Assets ($44,541,441 ) $ 32,518,062 ($ 62,630,056) $ 29,346,848
Net Assets, beginning of year $ 335,478,530 $ 302,960,468 $ 545,485,572 $ 516,138,724
------------- ------------- ------------- -------------
Net Assets, end of year $ 290,937,089 $ 335,478,530 $ 482,855,516 $ 545,485,572
============= ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Bond Fund Growth Equity Fund
------------------------------------- ------------------------------
Year Year Year Year
ended ended ended ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income(loss) $ 6,476,908 $ 5,413,458 ($ 317,258) $ 131,289
Net realized gain (loss) on investment transactions ($ 966,001) ($ 34,795) $ 36,418,555 $ 20,481,154
Net realized foreign exchange gain (loss) $ 10,452 -- -- --
Net change in unrealized appreciation/depreciation of
investments, futures contracts and
foreign currency related items ($ 2,556,873) ($ 2,434,085) $ 35,595,833 $ 36,064,087
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations $ 2,964,486 $ 2,944,578 $ 71,697,130 $ 56,676,530
------------- ------------- ------------- -------------
Distributions to Shareholders from:
Net investment income -- ($ 5,413,458) -- ($ 131,289)
Net realized capital gains -- -- -- ($ 20,497,332)
In excess of net investment income -- ($ 6,598) -- --
------------- ------------- ------------- -------------
Total distributions $ -- ($ 5,420,056) $ -- ($ 20,628,621)
------------- ------------- ------------- -------------
Capital Share Transactions:
Net increase/(decrease) in net assets from
capital share transactions ($ 2,039,800) $ 12,341,048 $ 16,873,525 $ 23,585,734
------------- ------------- ------------- -------------
Total Increase in Net Assets $ 924,686 $ 9,865,570 $ 88,570,655 $ 59,633,643
Net Assets, beginning of year $ 69,003,234 $ 59,137,664 $ 195,691,889 $ 136,058,246
------------- ------------- ------------- -------------
Net Assets, end of year $ 69,927,920 $ 69,003,234 $ 284,262,544 $ 195,691,889
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
International Equity Fund Small Capitalization Fund
--------------------------------- -------------------------------
Year Year Year Year
ended ended ended ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income(loss) $ 322,344 $ 647,444 $ 281,192 $ 274,511
Net realized gain (loss) on investment transactions $ 19,001,539 $ 5,177,853 ($ 1,244,532) $ 712,102
Net realized foreign exchange gain (loss) $ 1,126,546 $ 114,386 -- --
Net change in unrealized appreciation/depreciation of
investments, futures contracts and
foreign currency related items $ 49,269,342 $ 18,456,661 $ 447,493 ($ 5,286,799)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations $ 69,719,771 $ 24,396,344 ($ 515,847) ($ 4,300,186)
------------- ------------- ------------- -------------
Distributions to Shareholders from:
Net investment income -- ($ 647,444) -- ($ 274,511)
Net realized capital gains -- ($ 4,938,505) -- ($ 711,962)
In excess of net investment income -- ($ 769,506) -- --
------------- ------------- ------------- -------------
Total distributions $ -- ($ 6,355,455) $ -- ($ 986,473)
------------- ------------- ------------- -------------
Capital Share Transactions:
Net increase/(decrease) in net assets
from capital share transactions ($ 8,230,284) $ 6,143,763 $ 1,819,825 $ 10,195,405
------------- ------------- ------------- -------------
Total Increase in Net Assets $ 61,489,487 $ 24,184,652 $ 1,303,978 $ 4,908,746
Net Assets, beginning of year $ 153,822,208 $ 129,637,556 $ 43,634,840 $ 38,726,094
------------- ------------- ------------- -------------
Net Assets, end of year $ 215,311,695 $ 153,822,208 $ 44,938,818 $ 43,634,840
============= ============= ============= =============
<PAGE>
Emerging Growth Fund
----------------------------------
Year Year
ended ended
12/31/99 12/31/98
-------- --------
Increase (Decrease) in Net Assets:
Operations:
<S> <C> <C>
Net investment income(loss) ($ 573,264) ($ 174,741)
Net realized gain (loss) on investment transactions $ 32,707,632 ($ 2,191,288)
Net realized foreign exchange gain (loss) -- --
Net change in unrealized appreciation/depreciation of
investments, futures contracts and
foreign currency related items $ 73,393,403 $ 10,934,484
------------- -------------
Net increase (decrease) in net assets
resulting from operations $ 105,527,771 $ 8,568,455
------------- -------------
Distributions to Shareholders from:
Net investment income -- --
Net realized capital gains -- ($ 8,966)
In excess of net investment income -- --
------------- -------------
Total distributions $ -- ($ 8,966)
------------- -------------
Capital Share Transactions:
Net increase/(decrease) in net assets from
capital share transactions $ 39,222,039 $ 12,162,475
------------- -------------
Total Increase in Net Assets $ 144,749,810 $ 20,721,964
Net Assets, beginning of year $ 38,663,682 $ 17,941,718
------------- -------------
Net Assets, end of year $ 183,413,492 $ 38,663,682
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26 & 27
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE MONEY MARKET FUND
For a Share Outstanding During the Year
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.0456 0.0489 0.0503 0.0489 0.0538
------- ------- ------- ------- -------
Total from investment operations 0.0456 0.0489 0.0503 0.0489 0.0538
------- ------- ------- ------- -------
Less dividends:
Dividends from net investment income (0.0456) (0.0489) (0.0503) (0.0489) (0.0538)
------- ------- ------- ------- -------
Total dividends (0.0456) (0.0489) (0.0503) (0.0489) (0.0538)
------- ------- ------- ------- -------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return 4.66% 5.00% 5.15% 5.00% 5.51%
Ratios/Supplemental data:
Net assets, end of year (in
thousands) $86,581 $53,626 $37,476 $34,501 $24,726
======= ======= ======= ======= =======
Ratio of expenses to average net assets 0.72% 0.72% 0.70% 0.73%(a) 0.69%(a)
======= ======= ======= ======= =======
Ratio of net investment income
to average net assets 4.60% 4.88% 5.04% 4.88%(a) 5.37%(a)
======= ======= ======= ======= =======
</TABLE>
- ---------------------------------------------------------------------------
(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
0.74% and 0.74%, and the ratio of net investment income to average net
assets would have been 4.87% and 5.32% for the years ended December 31,
1996 and 1995, respectively.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THE QUALITY BOND FUND
For a Share Outstanding During the Year
Year ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.40 $10.20 $10.00 $10.24 $ 9.04
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.54 0.51 0.60 0.66 0.61
Net realized and unrealized gain (loss)
on investment transactions (0.54) 0.53 0.20 (0.24) 1.21
------- ------- ------- ------- -------
Total from investment operations 0.00 1.04 0.80 0.42 1.82
------- ------- ------- ------- -------
Less distributions:
Dividend from net investment income 0.00 (0.51) (0.60) (0.66) (0.61)
Distribution from net realized gain 0.00 (0.33) 0.00 0.00 0.00
Distribution in excess of net realized
gain 0.00 0.00 0.00 0.00 (0.01)
------- ------- ------- ------- -------
Total distributions 0.00 (0.84) (0.60) (0.66) (0.62)
------- ------- ------- ------- -------
Net asset value, end of year $10.40 $10.40 $10.20 $10.00 $10.24
======= ======= ======= ======= =======
Total return 0.00% 10.17% 8.03% 4.14% 20.14%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $55,975 $53,505 $40,077 $37,611 $38,048
======= ======= ======= ======= =======
Ratio of expenses to average net assets 0.77% 0.77% 0.75% 0.77%(a) 0.73%(a)
======= ======= ======= ======= =======
Ratio of net investment income
to average net assets 5.21% 5.26% 5.87% 6.03%(a) 6.20%(a)
======= ======= ======= ======= =======
Portfolio turnover rate 815.1% 477.2% 317.3% 107.6% 449.2%
======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------
(a) Had fees not been waived by the investment adviser and administrator of the
Fund, the ratio of expenses to average net assets would have been 0.78% and
0.78%, and the ratio of net investment income to average net assets would
have been 6.02% and 6.15% for the years ended December 31, 1996 and 1995,
respectively.
28
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND
For a Share Outstanding During the Year
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.19 $9.52 $8.91 $8.44 $7.94
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.89 0.79 0.80 0.70 0.80
Net realized and unrealized gain
(loss) on investments
and foreign currency related transactions (0.50) (0.33) 0.61 0.47 0.50
------- ------- ------- ------- -------
Total from investment operations 0.39 0.46 1.41 1.17 1.30
------- ------- ------- ------- -------
Less distributions:
Dividend from net investment income 0.00 (0.79) (0.80) (0.70) (0.80)
Distribution in excess of net
investment income 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- -------
Total distributions 0.00 (0.79) (0.80) (0.70) (0.80)
------- ------- ------- ------- -------
Net asset value, end of year $9.58 $9.19 $9.52 $8.91 $8.44
======= ======= ======= ======= =======
Total return 4.24% 4.79% 15.78% 13.87% 16.41%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $69,928 $69,003 $59,138 $44,042 $36,442
======= ======= ======= ======= =======
Ratio of expenses to average net assets 0.85% 0.82% 0.81% 0.84% 0.87%
======= ======= ======= ======= =======
Ratio of net investment income
to average net assets 9.11% 8.30% 8.96% 8.14% 9.20%
======= ======= ======= ======= =======
Portfolio turnover rate 78.2% 82.7% 111.3% 118.5% 84.3%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THE GROWTH EQUITY FUND
For a Share Outstanding During the Year
Year ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $30.88 $24.37 $21.46 $20.00 $18.30
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income (loss) (0.05) 0.02 0.10 0.11 0.09
Net realized and unrealized gain
on investment transactions 10.58 10.12 5.64 3.85 4.75
-------- -------- -------- -------- -------
Total from investment operations 10.53 10.14 5.74 3.96 4.84
-------- -------- -------- -------- -------
Less distributions:
Dividend from net investment income 0.00 (0.02) (0.10) (0.11) (0.09)
Distribution from net realized gains 0.00 (3.61) (2.73) (2.39) (3.05)
-------- -------- -------- -------- -------
Total distributions 0.00 (3.63) (2.83) (2.50) (3.14)
-------- -------- -------- -------- -------
Net asset value, end of year $41.41 $30.88 $24.37 $21.46 $20.00
======== ======== ======== ======== =======
Total return 34.10% 41.67% 26.74% 19.76% 26.45%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $284,263 $195,692 $136,058 $106,039 $95,593
======== ======== ======== ======== =======
Ratio of expenses to average net assets 0.73% 0.76% 0.77% 0.80%(a) 0.77%(a)
======== ======== ======== ======== =======
Ratio of net investment income (loss)
to average net assets (0.14%) 0.08% 0.39% 0.48%(a) 0.43%(a)
======== ======== ======== ======== =======
Portfolio turnover rate 209.1% 161.3% 169.1% 177.1% 169.8%
======== ======== ======== ======== =======
</TABLE>
- -------------------------------------------------------
(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
0.81% and 0.82% and the ratio of net investment income to average net
assets would have been 0.47% and 0.38% for the years ended December 31,
1996 and 1995, respectively.
29
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE VALUE EQUITY FUND
For a Share Outstanding During the Year
Year ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $22.39 $22.55 $19.32 $16.28 $12.67
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.21 0.31 0.29 0.22 0.25
Net realized and unrealized gain (loss)
on investment transactions (0.39) 1.85 4.53 3.88 4.50
-------- -------- -------- -------- --------
Total from investment operations (0.18) 2.16 4.82 4.10 4.75
-------- -------- -------- -------- --------
Less distributions:
Dividend from net investment income 0.00 (0.31) (0.29) (0.22) (0.25)
Distribution from net realized gains 0.00 (2.01) (1.30) (0.84) (0.89)
-------- -------- -------- -------- --------
Total distributions 0.00 (2.32) (1.59) (1.06) (1.14)
-------- -------- -------- -------- --------
Net asset value, end of year $22.21 $22.39 $22.55 $19.32 $16.28
======== ======== ======== ======== ========
Total return (0.80)% 9.59% 24.98% 25.19% 37.48%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $290,937 $335,479 $302,960 $200,674 $127,260
======== ======== ======== ======== ========
Ratio of expenses to average net assets 0.76% 0.76% 0.76% 0.78% 0.80%
======== ======== ======== ======== ========
Ratio of net investment income
to average net assets 0.88% 1.27% 1.43% 1.38% 1.71%
======== ======== ======== ======== ========
Portfolio turnover rate 67.6% 24.0% 18.7% 25.0% 34.3%
======== ======== ======== ======== ========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND
For a Share Outstanding During the Year
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.31 $19.83 $18.74 $17.40 $15.19
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.67 0.60 0.61 0.65 0.53
Net realized and unrealized gain on investments
and foreign currency related transactions 0.64 0.61 2.33 2.19 2.86
-------- -------- -------- -------- --------
Total from investment operations 1.31 1.21 2.94 2.84 3.39
-------- -------- -------- -------- --------
Less distributions:
Dividend from net investment income 0.00 (0.60) (0.61) (0.65) (0.53)
Distribution in excess of net
investment income 0.00 0.00 0.00 0.00 (0.01)
Distribution from net realized gains 0.00 (2.13) (1.24) (0.85) (0.64)
-------- -------- -------- -------- --------
Total distributions 0.00 (2.73) (1.85) (1.50) (1.18)
-------- -------- -------- -------- --------
Net asset value, end of year $19.62 $18.31 $19.83 $18.74 $17.40
======== ======== ======== ======== ========
Total return 7.15% 6.09% 15.65% 16.37% 22.28%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $482,856 $545,486 $516,139 $398,544 $266,556
======== ======== ======== ======== ========
Ratio of expenses to average net assets 0.76% 0.76% 0.76% 0.77% 0.79%
======== ======== ======== ======== ========
Ratio of net investment income
to average net assets 3.25% 2.78% 3.10% 3.90% 3.45%
======== ======== ======== ======== ========
Portfolio turnover rate 31.0% 48.0% 37.1% 32.9% 37.2%
======== ======== ======== ======== ========
</TABLE>
30
<PAGE>
- ------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY FUND
For a Share Outstanding During the Year
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.37 $16.13 $15.61 $14.47 $13.01
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income 0.03 0.10 0.58 0.63 0.13
Net realized and unrealized gain on
investments and foreign currency
related transactions 8.38 2.93 1.04 1.81 1.67
-------- -------- -------- -------- -------
Total from investment operations 8.41 3.03 1.62 2.44 1.80
-------- -------- -------- -------- -------
Less distributions:
Dividend from net investment income 0.00 (0.10) (0.53) (0.56) (0.12)
Distribution in excess of net
investment income 0.00 (0.08) 0.00 (0.74) (0.22)
Distribution from net realized gains 0.00 (0.61) (0.57) 0.00 0.00
-------- -------- -------- -------- -------
Total distributions 0.00 (0.79) (1.10) (1.30) (0.34)
-------- -------- -------- -------- -------
Net asset value, end of year $26.78 $18.37 $16.13 $15.61 $14.47
======== ======== ======== ======== =======
Total return 45.78% 18.85% 10.41% 16.87% 13.80%
Ratios/Supplemental data:
Net assets, end of year (in thousands) $215,312 $153,822 $129,638 $104,418 $69,531
======== ======== ======== ======== =======
Ratio of expenses to average net assets 1.08% 1.08% 1.13% 1.17% 1.23%
======== ======== ======== ======== =======
Ratio of net investment income
to average net assets 0.20% 0.45% 0.62% 0.66% 0.91%
======== ======== ======== ======== =======
Portfolio turnover rate 45.0% 43.5% 35.7% 54.8% 62.5%
======== ======== ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THE SMALL CAPITALIZATION FUND
For a Share Outstanding During the Year or Period
Year ended December 31, Period ended
------------------------------------------------------- December 31,
1999 1998 1997 1996 1995 *
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year or period $12.81 $14.43 $12.53 $10.96 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 0.08 0.08 0.07 0.07 0.09
Net realized and unrealized gain (loss)
on investment transactions (0.25) (1.41) 2.81 2.09 1.19
------ ------ ------ ------ ------
Total from investment operations (0.17) (1.33) 2.88 2.16 1.28
------ ------ ------ ------ ------
Less distributions:
Dividend from net investment income 0.00 (0.08) (0.07) (0.07) (0.09)
Distribution from net realized gains 0.00 (0.21) (0.91) (0.52) (0.23)
------ ------ ------ ------ ------
Total distributions 0.00 (0.29) (0.98) (0.59) (0.32)
------ ------ ------ ------ ------
Net asset value, end of year or period $12.64 $12.81 $14.43 $12.53 $10.96
====== ====== ====== ====== ======
Total return (1.33)% (9.16)% 23.02% 19.76% 12.76%(c)
Ratios/Supplemental data:
Net assets, end of year or period
(in thousands) $44,939 $43,635 $38,726 $16,134 $4,828
======= ======= ======= ======= ======
Ratio of expenses to average net assets 0.81% 0.82% 0.85% 0.99%(b) 1.00%(a)(b)
====== ====== ====== ====== ======
Ratio of net investment income
to average net assets 0.65% 0.65% 0.66% 0.85%(b) 1.53%(a)(b)
====== ====== ====== ====== ======
Portfolio turnover rate 102.8% 61.9% 71.1% 39.2% 64.3%
====== ====== ====== ====== ======
</TABLE>
- ---------------------------------------------
* For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.
(a) Annualized.
(b) Had fees not been waived by the investment adviser and administrator of the
Fund, the ratio of expenses to average net assets would have been 1.06% and
1.29%, and the ratio of net investment income to average net assets would
have been 0.78% and 1.24%, respectively, for the year ended December 31,
1996 and the period ended December 31, 1995.
(c) Not annualized.
31
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE EMERGING GROWTH FUND
For a Share Outstanding During the Year or Period
<TABLE>
<CAPTION>
Year Ended December 31, Period ended
----------------------------- December 31,
1999 1998 1997*
---- ---- -----
<S> <C> <C> <C>
Net asset value, beginning of year or period $17.43 $12.85 $10.00
------- ------- -------
Income from investment operations:
Net investment loss (0.11) (0.06) 0.00
Net realized and unrealized gain
on investment transactions 32.36 4.65 3.92
------- ------- -------
Total from investment operations 32.25 4.59 3.92
------- ------- -------
Less distributions:
Distribution from net realized gains 0.00 (0.01) (1.07)
------- ------- -------
Total distributions 0.00 (0.01) (1.07)
------- ------- -------
Net asset value, end of year or period $49.68 $17.43 $12.85
======= ======= =======
Total return 185.03% 35.70% 39.22%(c)
Ratios/Supplemental data:
Net assets, end of year or period (in thousands) $183,413 $38,664 $17,942
======== ======= =======
Ratio of expenses to average net assets 1.04% 1.15%(b) 1.15%(a)(b)
======= ======= =======
Ratio of net investment loss
to average net assets (0.68)% (0.66)%(b) (0.73)%(a)(b)
======= ======= =======
Portfolio turnover rate 172.4% 240.9% 392.3%
======= ======= =======
</TABLE>
- ---------------------------------------------
* For the period from May 1, 1997 (commencement of operations) through
December 31, 1997.
(a) Annualized.
(b) Had fees not been waived by the investment adviser and administrator of the
Fund, the ratio of expenses to average net assets would have been 1.21% and
1.41%, and the ratio of net investment income to average net assets would
have been (0.73)% and (0.99)%, respectively, for the year ended December
31,1998 and the period ended December 31, 1997.
(c) Not annualized.
32
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 -- SIGNIFICANT ACCOUNTING POLICIES
Penn Series Funds, Inc. (Penn Series) was incorporated in Maryland on April
22, 1982. Penn Series is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company.
Penn Series is presently offering shares in its Money Market, Quality Bond,
High Yield Bond, Growth Equity, Value Equity, Flexibly Managed, International
Equity, Small Capitalization and Emerging Growth Funds (the Funds). It is
authorized under its Articles of Incorporation to issue a separate class of
shares in one additional fund. The Fund would have its own investment objective
and policy.
The following is a summary of significant accounting policies followed by
Penn Series in the preparation of its financial statements. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
INVESTMENT VALUATION:
Money Market Fund -- Investments in securities are valued under the amortized
cost method, which approximates current market value. Under this method,
securities are valued at cost on the date of purchase and thereafter a
proportionate amortization of any discount or premium until maturity is assumed.
Penn Series maintains a dollar weighted average portfolio maturity appropriate
to the objective of maintaining a stable net asset value per share. The Penn
Series Board of Directors (the Board) has established procedures reasonably
designed to stabilize the net asset value per share for purposes of sales and
redemptions at $1.00. The Board performs regular review and monitoring of the
valuation in an attempt to avoid dilution or unfair results to shareholders.
Quality Bond, High Yield Bond, Growth Equity, Value Equity, Flexibly Managed,
International Equity, Small Capitalization and Emerging Growth Funds --
Portfolio securities listed on a national securities exchange are valued at the
last sale price on the securities exchange or securities market on which such
securities primarily are traded or, if there has been no sale on that day, at
the mean between the current closing bid and asked prices. All other securities
for which over-the-counter market quotations are readily available will be
valued on the basis of the mean between the last current bid and asked prices.
When market quotation are not readily available, or when restricted or other
assets are being valued, the securities or assets will be valued at fair value
as determined by the Board.
The high yield securities in which the High Yield Bond Fund may invest are
predominantly speculative as to the issuer's continuing ability to meet
principal and interest payments. The value of the lower quality securities in
which the High Yield Bond Fund may invest will be affected by the credit
worthiness of individual issuers, general economic and specific industry
conditions, and will fluctuate inversely with changes in interest rates. In
addition, the secondary trading market for lower quality bonds may be less
active and less liquid than the trading market for higher quality bonds.
Foreign Currency Translation -- The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis: market value of investment securities, assets
and liabilities at the current rate of exchange, purchases and sales of
investment securities, income and expenses at the relevant rates of exchange
prevailing on the respective dates of such transactions.
The Funds do not isolate the portion of realized and unrealized gains and
losses on investments which is due to changes in the foreign exchange rate from
that which is due to changes in market prices of equity securities. Such
fluctuations are included with net realized and unrealized gain or loss from
investments.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the level of governmental
supervision and regulation of foreign securities markets and the possibility of
political or economic instability.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on the trade date. Dividend income is recorded on the ex-dividend
date and interest income is accrued as earned. The cost of investment securities
sold is determined by using the specific identification method for both
financial reporting and income tax purposes.
<PAGE>
DIVIDENDS TO SHAREHOLDERS: Dividends of investment income and realized
capital gains of the Quality Bond, High Yield Bond, Growth Equity, Value Equity,
Flexibly Managed, International Equity, Small Capitalization and Emerging Growth
Funds will be declared and paid within 30 days of the Funds' year end, December
31, as permitted by federal income tax regulations. Dividends of net investment
income of the Money Market Fund are declared daily and paid monthly.
Dividends from net investment income and distributions from net realized
gains are determined in accordance with federal income tax regulations which may
differ from net investment income and net realized capital gains recorded in
accordance with generally accepted accounting principles. To the extent these
differences are permanent, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences do
not require such reclassification. Distributions from net realized gains for
book purposes may involve short-term capital gains, which are included as
ordinary income for tax purposes.
33
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1999 (Continued)
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES: The Funds intend to continue to qualify as regulated
investment companies under Subchapter M of the Internal Revenue code and to
distribute all of their taxable income, including realized gains, to their
shareholders. Therefore, no federal income tax provision is required.
2 -- DERIVATIVE FINANCIAL INSTRUMENTS
Off-Balance Sheet Risk
The Funds may trade financial instruments with off-balance sheet risk in the
normal course of investing activities and to assist in managing exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency exchange
contracts and futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Funds have in particular classes of financial instruments and do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transaction are considered.
Derivative Financial Instruments Held or Issued for Purposes Other Than
Trading
Futures Contracts -- Each of the Funds, other than Money Market, may enter
into financial futures contracts for the delayed delivery of securities,
currency or contracts based on financial indices on a future date. A Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by a
Fund each day, dependent on daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by a Fund. A Fund's investment in financial futures contracts is
designed only to hedge against anticipated future changes in interest or
exchange rates. Should interest or exchange rates move unexpectedly, a Fund may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The Quality Bond Fund has entered into futures contracts during
the year ended December 31, 1999. There were no open futures contracts at
December 31, 1999.
Options -- Each of the Funds, other than Money Market, may write covered
calls. Additionally, each of the Funds may buy put or call options for which
premiums are paid whether or not the option is exercised. Premiums received from
writing options, which expire, are treated as realized gains. Premiums received
from writing options, which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised the premium increases the cost basis of the
securities purchased by a Fund. As writer of an option, the Fund may have no
control over whether the underlying securities may be sold (call) and, as a
result, bears the market risk of an unfavorable change in the price of the
securities underlying the written option. The Flexibly Managed Fund has entered
into put and call options during the year ended December 31, 1999. Purchased put
and call options open and outstanding at December 31, 1999 are disclosed in the
statement of net assets. Losses on options written during the year ended
December 31, 1999 of $411,819 have been included with those from investment
transactions on the Statement of Operations.
Forward Foreign Currency Contracts -- The Funds may enter into forward
foreign currency exchange contracts as a way of managing foreign exchange rate
risk. A Fund may enter into these contracts to fix the U.S. dollar value of a
security that it has agreed to buy or sell for the period between the date the
trade was entered into and the date the security is delivered and paid for. A
Fund may also use these contracts to hedge the U.S. dollar value of securities
it already owns denominated in foreign currencies.
Forward foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by the Fund as an
unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the Fund's portfolio securities, but it does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result should the value of the currency increase. In addition, the Funds could
be exposed to risks if the counterparties to the contracts are unable to meet
the terms of their contracts. The High Yield Bond, Flexibly Managed and
International Equity Funds have entered into forward foreign currency contracts
during the year ended December 31, 1999. At December 31, 1999 there were no open
contracts in the High Yield Bond, Flexibly Managed and International Equity
Funds.
<PAGE>
3 -- INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES
Investment Advisory Services
Effective May 1, 1998 Independence Capital Management, Inc. ("ICMI") serves
as investment adviser to each of the funds. ICMI is a wholly owned subsidiary of
The Penn Mutual Life Insurance Company.
T. Rowe Price Associates, Inc. ("Price Associates") is sub-adviser to the
Flexibly Managed and the High Yield Bond Funds pursuant to an investment
sub-advisory agreement entered into by ICMI and Price Associates on May 1, 1998.
As sub-adviser, Price Associates provides investment management services to the
Funds.
OpCap Advisers ("OpCap") is sub-adviser to Value Equity and Small
Capitalization Funds pursuant to an investment sub-advisory agreement entered
into by ICMI and OpCap on May 1, 1998. As sub-adviser, OpCap provides investment
management services to the Funds. OpCap is a subsidiary of Oppenheimer Capital.
34
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1999 (Continued)
- --------------------------------------------------------------------------------
Vontobel USA Inc. ("Vontobel") is sub-adviser to the International Equity
Fund pursuant to an investment sub-advisory agreement entered into by ICMI and
Vontobel on May 1, 1998. As sub-adviser, Vontobel provides investment management
services to the Fund. Vontobel is a wholly owned subsidiary of Vontobel Holding
Ltd., and affiliate of Bank J. Vontobel & Co. Ltd.
RS Investment Management, Inc. (formerly Robertson Stephens Investment
Management, Inc.) ("RSIM") is sub-adviser to the Emerging Growth Fund pursuant
to an investment sub-advisory agreement entered into by ICMI and RSIM on April
26, 1998. As sub-adviser, RSIM provides investment management services to the
Fund.
Each of the Funds pay ICMI, on a monthly basis, an advisory fee based on
the average daily net assets of each Fund, at the following rates pursuant to
the investment advisory agreements: Money Market Fund: 0.40% for first $100
million and 0.35% thereafter; Quality Bond Fund: 0.45% for first $100 million
and 0.40% thereafter; Growth Equity Fund: 0.50% for the first $100 million and
0.45% thereafter; Flexibly Managed Fund: 0.50%; High Yield Bond Fund: 0.50%;
International Equity Fund: 0.75%; Value Equity Fund: 0.50%; Small Capitalization
Fund: 0.50; and Emerging Growth Fund: 0.80% for the first $25 million, 0.75% for
next $25 million and 0.70% thereafter.
For providing investment management services to the Funds, ICMI pays the
sub-advisers, on a monthly basis, a sub-advisory fee.
Administrative and Corporate Services
Under an administrative and corporate service agreement, The Penn Mutual
Life Insurance Company ("Penn Mutual") serves as administrative and corporate
services agent for Penn Series. Each of the Funds pays Penn Mutual, on a
quarterly basis, an annual fee equal to 0.15% of each of the Fund's average
daily net assets.
Expenses and Limitations Thereon
Each Fund bears all expenses of its operations other than those incurred by
the investment adviser and sub-advisers under their respective investment
advisory agreements and those incurred by Penn Mutual under its administrative
and corporate service agreement. The investment adviser, sub-advisers and Penn
Mutual have agreed to waive fees or reimburse expenses to the extent the Fund's
total expense ratio (excluding interest, taxes, brokerage, other capitalized
expenses, but including investment advisory and administrative and corporate
services fees) exceeds the applicable expense limitation for the Fund. The
expense limitations for the Funds are as follows: Money Market, 0.80%; Quality
Bond: 0.90%; High Yield Bond: 0.90%; Growth Equity: 1.00%; Value Equity: 1.00%;
Flexibly Managed: 1.00%; International Equity: 1.50%; Small Capitalization
1.00%; and Emerging Growth 1.15%.
Fees were paid to non-affiliated Directors of Penn Series for the year
ended December 31, 1999. However, no person received compensation from Penn
Series who is an officer, director, or employee of Penn Series, the investment
adviser, sub-advisers, administrator, accounting agent or any parent or
subsidiary thereof.
4 -- CAPITAL STOCK
At December 31, 1999, there were one billion shares of $.10 par value
capital stock authorized for Penn Series. The shares are divided into ten
classes of 100 million shares of capital stock. Nine of the classes designated
are Penn Series Money Market Fund Common Stock, Penn Series Quality Bond Fund
Common Stock, Penn Series High Yield Bond Fund Common Stock, Penn Series Growth
Equity Fund Common Stock, Penn Series Value Equity Fund Common Stock, Penn
Series Flexibly Managed Fund Common Stock, Penn Series International Equity Fund
Common Stock, Penn Series Small Capitalization Fund Common Stock and Penn Series
Emerging Growth Fund Common Stock. One of the classes of common stock is
presently designated Class I, and no shares have been issued.
35
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Transactions in capital stock of Penn Series Funds, Inc. were as follows:
<TABLE>
<CAPTION>
The Year Ended December 31, 1999:
----------------------------------------------------------------------------------------
Received for Shares Issued for Paid for
Shares Sold Reinvestment Shares Redeemed
----------- ------------ ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund 188,665,821 $188,665,821 2,908,631 $2,908,631 158,619,559 $158,619,559
Quality Bond Fund 1,479,129 $15,328,780 - - 1,238,959 $12,855,240
High Yield Bond Fund 1,695,470 $15,956,185 - - 1,904,110 $17,995,985
Growth Equity Fund 1,313,023 $43,594,844 - - 785,882 $26,721,319
Value Equity Fund 1,100,517 $24,742,241 - - 2,981,562 $67,027,167
Flexibly Managed Fund 1,513,092 $29,125,418 - - 6,691,288 $126,724,616
International Equity Fund 4,437,623 $89,853,437 - - 4,769,085 $98,083,721
Small Capitalization Fund 877,699 $10,899,623 - - 730,269 $9,079,798
Emerging Growth Fund 2,066,955 $58,019,088 - - 592,924 $18,797,049
The Year Ended December 31, 1998:
----------------------------------------------------------------------------------------
Received for Shares Issued for Paid for
Shares Sold Reinvestment Shares Redeemed
----------- ------------ ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Money Market Fund 84,556,622 $84,556,622 2,176,407 $2,176,407 70,581,999 $70,581,999
Quality Bond Fund 1,642,975 $17,780,630 382,465 $3,977,639 811,620 $8,780,551
High Yield Bond Fund 1,757,800 $17,292,747 589,778 $5,420,056 1,052,320 $10,371,757
Growth Equity Fund 691,494 $19,801,255 669,396 $20,628,621 607,072 $16,844,142
Value Equity Fund 1,671,304 $40,295,090 1,409,105 $31,549,856 1,532,040 $35,752,237
Flexibly Managed Fund 2,831,936 $58,177,184 3,855,202 $70,600,678 2,926,275 $59,980,214
International Equity Fund 1,780,356 $31,336,651 345,781 $6,355,455 1,793,330 $31,548,343
Small Capitalization Fund 1,065,490 $14,767,847 76,921 $986,473 418,401 $5,558,915
Emerging Growth Fund 1,366,179 $20,129,936 638 $8,966 544,610 $7,976,427
</TABLE>
5 - COMPONENTS OF NET ASSETS
At December 31, 1999, Net Assets consisted of the following:
<TABLE>
<CAPTION>
Money Quality High Yield Growth Value
Market Bond Bond Equity Equity
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capital paid in $86,584,064 $55,175,954 $68,741,366 $142,814,652 $206,446,540
Undistributed net investment income (loss) -- 2,912,581 6,503,349 -- 2,811,849
Accumulated net realized gain (loss) on investment
transactions and foreign exchange (2,760) (1,187,692) (2,609,085) 36,049,136 42,774,609
Net unrealized appreciation (depreciation)
in value of investments, futures contracts
and foreign currency related items -- (926,308) (2,707,710) 105,398,756 38,904,091
----------- ----------- ----------- ------------ ------------
Total Net Assets $86,581,304 $55,974,535 $69,927,920 $284,262,544 $290,937,089
=========== =========== =========== ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Flexibly International Small Emerging
Managed Equity Capitalization Growth
Fund Fund Fund Fund
---- ---- ---- ----
<S> <C> <C> <C> <C>
Capital paid in $411,999,519 $108,568,106 $46,578,779 $68,687,189
Undistributed net investment income (loss) 18,517,238 (126,981) 281,192 --
Accumulated net realized gain (loss) on investment
transactions and foreign exchange 36,983,400 18,822,424 (1,253,375) 29,894,732
Net unrealized appreciation (depreciation)
in value of investments, futures contracts
and foreign currency related items 15,355,359 88,048,146 (667,778) 84,831,571
------------ ------------ ----------- ------------
Total Net Assets $482,855,516 $215,311,695 $44,938,818 $183,413,492
============ ============ =========== ============
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1999
- --------------------------------------------------------------------------------
6- PURCHASES AND SALES OF INVESTMENTS
During the year ended December 31, 1999, the Funds made the following purchases
and sales of portfolio securities, excluding U.S. Government and Agency
Obligations and short term securities:
Purchases Sales
--------- -----
Quality Bond Fund $286,248,897 $280,661,407
High Yield Bond Fund $65,576,368 $53,046,844
Growth Equity Fund $490,176,848 $465,434,113
Value Equity Fund $198,702,033 $212,642,951
Flexibly Managed Fund $147,118,601 $194,271,410
International Equity Fund $72,487,885 $77,111,598
Small Capitalization Fund $40,480,611 $38,756,196
Emerging Growth Fund $175,528,607 $138,094,258
7- CAPITAL LOSS CARRYOVERS
Capital loss carryovers expire as follows:
Money Quality High Yield Small
Market Bond Bond Capitalization
Fund Fund Fund Fund
----------------------------------------------------------------
2000 $ 61 $ 0 $ 0 $ 0
2001 183 0 0 0
2003 416 0 1,052,436 0
2004 0 0 525,647 0
2005 225 0 0 0
2006 992 0 14,558 0
2007 0 965,951 861,638 956,303
------ -------- ---------- --------
Total $1,877 $965,951 $2,454,279 $956,303
37
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
PENN SERIES FUNDS, INC.
We have audited the statements of net assets of Penn Series Funds, Inc.
(comprising, respectively, the Money Market Fund, Quality Bond Fund, High Yield
Bond Fund, Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund,
International Equity Fund, Small Capitalization Fund, and Emerging Growth Fund)
as of December 31, 1999, and the related statements of operations for the year
then ended, and the statements of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of Penn Series Funds, Inc. for the
years and periods through December 31, 1996 included herein were audited by
other auditors whose report dated February 11, 1997, expressed an unqualified
opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 1999, by correspondence with
the custodians and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Penn Series Funds, Inc. at December
31, 1999, the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended and their
financial highlights for each of the three years in the period then ended, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 28, 2000
38
