485BPOS 1 w33526e485bpos.txt 485BPOS As filed with the Securities and Exchange Commission on April 25, 2007 FILE NO. 2-77284 (811-03459) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. ___ [ ] Post-Effective Amendment No. 58 [X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 38 [X] PENN SERIES FUNDS, INC. (Exact Name of Registrant as Specified in Charter) 600 Dresher Road Horsham, Pennsylvania 19044 (Address of Principal Executive Offices) Registrant's Telephone Number: 215-956-8000 PETER M. SHERMAN President Penn Series Funds, Inc. Philadelphia, Pennsylvania 19172 (Name and Address of Agent for Service) Copy to: MICHAEL BERENSON Morgan, Lewis & Bockius LLP 1111 Pennsylvania Avenue, NW Washington, DC 20004 Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 2007 pursuant to paragraph (b) of Rule 485 [ ] 60 days after filing pursuant to paragraph a (1) of Rule 485 [ ] on [date] pursuant to paragraph (a) (1) of Rule 485 [ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485 [ ] on [date] pursuant to paragraph (a)(2) of Rule 485 PROSPECTUS -- MAY 1, 2007 PENN SERIES FUNDS, INC. 600 DRESHER ROAD, HORSHAM, PA 19044 - TELEPHONE 800-523-0650 MONEY MARKET FUND LIMITED MATURITY BOND FUND QUALITY BOND FUND HIGH YIELD BOND FUND FLEXIBLY MANAGED FUND GROWTH STOCK FUND LARGE CAP VALUE FUND LARGE CAP GROWTH FUND INDEX 500 FUND MID CAP GROWTH FUND MID CAP VALUE FUND STRATEGIC VALUE FUND SMALL CAP GROWTH FUND SMALL CAP VALUE FUND INTERNATIONAL EQUITY FUND REIT 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. [THIS PAGE INTENTIONALLY LEFT BLANK] Penn Series Funds, Inc. ("Penn Series" or the "Company") is an investment company that provides investment options 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"). Shares of each Fund (as defined below) may be purchased only by insurance companies for the purpose of funding variable annuity contracts and variable life insurance policies and by qualified pension plans. Penn Series offers 16 different portfolios (each a "Fund" and, collectively, the "Funds") advised by Independence Capital Management, Inc. ("ICMI") and, in the case of certain Funds, sub-advised by T. Rowe Price Associates, Inc., ABN AMRO Asset Management, Inc., Lord, Abbett & Co. LLC, Heitman Real Estate Securities LLC, Goldman Sachs Asset Management, L.P., Vontobel Asset Management, Inc., Bjurman, Barry & Associates, Neuberger Berman Management Inc., Turner Investment Partners, Inc. and Wells Capital Management Incorporated.
PROSPECTUS CONTENTS PAGE ------------------- ---- INVESTMENT SUMMARY....................................................... 4 MONEY MARKET FUND..................................................... 4 LIMITED MATURITY BOND FUND............................................ 7 QUALITY BOND FUND..................................................... 10 HIGH YIELD BOND FUND.................................................. 13 FLEXIBLY MANAGED FUND................................................. 16 GROWTH STOCK FUND..................................................... 19 LARGE CAP VALUE FUND.................................................. 22 LARGE CAP GROWTH FUND................................................. 25 INDEX 500 FUND........................................................ 28 MID CAP GROWTH FUND................................................... 31 MID CAP VALUE FUND.................................................... 34 STRATEGIC VALUE FUND.................................................. 37 SMALL CAP GROWTH FUND................................................. 40 SMALL CAP VALUE FUND.................................................. 43 INTERNATIONAL EQUITY FUND............................................. 47 REIT FUND............................................................. 50 ADDITIONAL INFORMATION................................................... 53 MANAGEMENT............................................................... 53 Investment Adviser.................................................... 53 Sub-Advisers.......................................................... 54 Expenses and Limitations.............................................. 58 ACCOUNT POLICIES......................................................... 59 Purchasing and Selling Fund Shares.................................... 59 Frequent Trading Policies & Risks..................................... 60 How the Funds Calculate NAV........................................... 61 Portfolio Holdings Information........................................ 61 Dividends and Distributions........................................... 62 Taxes................................................................. 62 FINANCIAL HIGHLIGHTS..................................................... 63
3 INVESTMENT SUMMARY: MONEY MARKET FUND 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, capital adequacy, and liquidity of the investment. The Fund will invest only in securities that mature in 397 days or less, as calculated in accordance with applicable law. The Fund's policy is to seek to maintain a stable price of $1.00 per share. 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. 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.
4 For years ended December 31 1997 5.15% 1998 5.00% 1999 4.66% 2000 5.99% 2001 4.00% 2002 1.65% 2003 0.86% 2004 0.96% 2005 2.81% 2006 4.66% BEST QUARTER WORST QUARTER ------------ ------------- 1.57% 0.15% (12/31/00) (12/31/03) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) MONEY MARKET FUND ----------------- 1 Year.... 4.66% 5 Years... 2.18% 10 Years.. 3.56%
The current yield of the Money Market Fund for the seven-day period ended December 31, 2006 was 4.93%. FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.............. 0.20% Distribution (12b-1) Fees............. None Other Expenses........................ 0.30% TOTAL ANNUAL FUND OPERATING EXPENSES.. 0.50%
5 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 51 3 Years $160 5 Years $280 10 Years $628
6 INVESTMENT SUMMARY: LIMITED MATURITY BOND FUND 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: Under normal conditions, the Fund invests at least 80% of its net assets in debt securities, commonly referred to as bonds. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. The Fund will invest primarily in short- to intermediate-term investment grade debt securities (those securities rated BBB or above by S&P or Baa or above by Moody's (or determined to be of equivalent quality by the Adviser)) of the U.S. government and corporate issuers. The Adviser uses an active bond management approach. It seeks to find securities that are under-valued 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 under-valued based on their quality, maturity, and sector in the marketplace. The Adviser 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). The Adviser will seek to opportunistically purchase securities to take advantage of inefficiencies of prices in the securities markets. The Adviser 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," which are those rated below BBB by S&P and those rated below Baa by Moody's (or determined to be of equivalent quality by the Adviser). Sectors: The Fund will invest primarily in corporate bonds and U.S. government bonds, including mortgage-backed and asset-backed securities. Turnover: Because the Adviser will look for inefficiencies in the market and sell when it feels a security is fully priced, portfolio turnover can be expected to be relatively high, which may result in increased transaction costs and may lower fund performance. 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
7 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. Investing in junk bonds involves additional risks, including credit risk. Companies issuing junk 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. 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 bar chart and table below show the performance of the Fund both year-by-year and as an average over different periods of time. 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. For year ended December 31 2001 6.64% 2002 6.25% 2003 2.90% 2004 2.32% 2005 2.14% 2006 4.49% BEST QUARTER WORST QUARTER ------------ ------------- 2.82% (1.39)% (09/30/02) (06/30/04)
8 AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) CITIGROUP LIMITED TREASURY/AGENCY MATURITY 1 TO 5 YEAR BOND FUND INDEX(1/) --------- --------------- 1 Year.................. 4.49% 4.02% 5 Years................. 3.61% 3.37% Since May 1, 2000(2/)... 4.77% 4.93% (1/) The Citigroup Treasury/Agency 1 to 5 Year Index is an unmanaged index that is a widely recognized benchmark of the market performance of short- to intermediate-term bonds. 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 returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees................ 0.30% Distribution (12b-1) Fees............... None Other Expenses.......................... 0.32% TOTAL ANNUAL FUND OPERATING EXPENSES.... 0.62%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 63 3 Years $199 5 Years $346 10 Years $774
9 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: Under normal conditions, the Fund invests at least 80% of its net assets in debt securities, commonly referred to as bonds. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. The Fund will invest primarily in marketable investment grade debt securities (those securities rated BBB or above by S&P or Baa or above by Moody's (or determined to be of equivalent quality by the Adviser)). The portfolio manager heads up a team of analysts that uses an active bond-management approach. The Adviser seeks to find securities that are under-valued 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 under-valued based on their quality, maturity, and sector in the marketplace. The Adviser 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 Adviser will seek to opportunistically purchase securities to take advantage of inefficiencies of prices in the securities markets. The Adviser 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 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," which are those rated below BBB by S&P and those rated below Baa by Moody's (or determined to be of equivalent quality by the Adviser). 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 is fully priced, portfolio turnover can be relatively high, which may result in increased transaction costs and may lower fund performance. The Fund's annual portfolio turnover rates for 2006, 2005, and 2004 were 139%, 614%, and 230%, 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
10 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. Investing in junk bonds involves additional risks, including credit risk. Companies issuing junk 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. 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 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. For years ended December 31 1997 8.03% 1998 10.17% 1999 0.00% 2000 12.00% 2001 8.91% 2002 5.28% 2003 6.18% 2004 4.59% 2005 2.50% 2006 5.25% BEST QUARTER WORST QUARTER ------------ ------------- 5.53% (2.23)% (09/30/98) (06/30/04) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) CITIGROUP BROAD INVESTMENT GRADE QUALITY BOND FUND BOND INDEX(1)/ ----------------- ---------------- 1 Year..... 5.25% 4.33% 5 Years.... 4.75% 5.10% 10 Years... 6.24% 6.26%
(1/) The Citigroup Broad Investment Grade Bond Index is an unmanaged index that is a widely recognized benchmark of general investment grade 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 returns. 11 FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees................. 0.33% Distribution (12b-1) Fees................ None Other Expenses........................... 0.28% TOTAL ANNUAL FUND OPERATING EXPENSES..... 0.61%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 62 3 Years $195 5 Years $340 10 Years $762
12 INVESTMENT SUMMARY: HIGH YIELD BOND FUND 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: Under normal conditions, the Fund invests at least 80% of its net assets in a widely diversified portfolio of high yield corporate bonds, often called "junk bonds," income-producing convertible securities and preferred stocks. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. High yield bonds are rated below investment grade (BB and lower by S&P and Ba and lower by Moody's or determined to be of equivalent quality by the Sub-Adviser) 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 six- to twelve-year range. In selecting investments for the Fund, the Sub-Adviser relies extensively on its research analysts. When the Sub-Adviser's outlook for the economy is positive, it may purchase slightly lower rated bonds in an effort to secure additional income and appreciation potential. When the Sub-Adviser's outlook for the economy is less positive, the Fund may gravitate toward higher rated junk bonds. The Fund may also invest in other securities, including futures and options, as well as loan assignments and participations, in keeping with its objective. In pursuing the investment objective, the Sub-Adviser has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the Sub-Adviser believes a security could increase in value for a variety of reasons, including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Fund may sell holdings for a variety of reasons, such as to adjust a portfolio's average maturity or quality, or to shift assets into higher yielding securities or to reduce marginal quality 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 shorter term securities because they are more sensitive to interest rate changes. 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
13 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. 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. To the extent the Fund holds foreign bonds, it will be subject to special risks whether the bonds are denominated in U.S. dollars or foreign currencies. 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. For years ended December 31 1997 15.78% 1998 4.75% 1999 4.24% 2000 -3.69% 2001 6.92% 2002 3.41% 2003 23.13% 2004 10.71% 2005 3.11% 2006 9.97% BEST QUARTER WORST QUARTER ------------ ------------- 7.38% (4.48)% (06/30/03) (09/30/98)
14 AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) HIGH YIELD CS BOSTON GLOBAL BOND FUND HIGH YIELD INDEX(1/) ---------- -------------------- 1 Year.... 9.97% 11.92% 5 Years... 9.83% 11.06% 10 Years.. 7.61% 7.09% (1/) The CS First Boston Global High Yield 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 returns.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.................................. 0.50% Distribution (12b-1) Fees................................. None Other Expenses............................................ 0.35% TOTAL ANNUAL FUND OPERATING EXPENSES...................... 0.85%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 87 3 Years $ 271 5 Years $ 471 10 Years $1,049
15 INVESTMENT SUMMARY: FLEXIBLY MANAGED FUND 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 Fund 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, foreign securities, futures and options, 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 under-valued 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 Sub-Adviser's ability to find companies that meet valuation criteria rather than its 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 considerations. There is no limit on the Fund's investments in convertible securities. In pursuing the investment objective, the Sub-Adviser has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the Sub-Adviser believes a security could increase in value for a variety of reasons including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. 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
16 the individual companies that 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. If the Fund has large holdings in a relatively small number of companies, disappointing performance by those companies will have a more adverse impact on the Fund than would be the case with a more diversified fund. 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. To the extent the Fund invests in foreign securities, some holdings may lose value because of declining foreign currencies or adverse political or economic events overseas. 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. For years ended December 31 1997 15.65% 1998 6.09% 1999 7.15% 2000 22.22% 2001 10.34% 2002 0.87% 2003 29.92% 2004 18.58% 2005 7.84% 2006 15.37% BEST QUARTER WORST QUARTER ------------ ------------- 14.45% (8.84)% (06/30/03) (09/30/02)
17 AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) FLEXIBLY MANAGED FUND S&P 500 INDEX(1/) ------------ ----------------- 1 Year...... 15.37% 15.80% 5 Years..... 14.11% 6.19% 10 Years.... 13.11% 8.42% (1/) The S&P 500 Index is an unmanaged index that is a widely recognized benchmark of general stock market performance. The index is an unmanaged capitalization-weighted index of 500 stocks representing all major industries. It does not factor in the costs of buying, selling and holding securities -- costs which are reflected in the Fund's returns.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.................................. 0.60% Distribution (12b-1) Fees................................. None Other Expenses............................................ 0.24% TOTAL ANNUAL FUND OPERATING EXPENSES...................... 0.84%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.83% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 86 3 Years $ 268 5 Years $ 466 10 Years $1,037
18 INVESTMENT SUMMARY: GROWTH STOCK FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: T. Rowe Price Associates, Inc. INVESTMENT OBJECTIVE: The investment objective of the Fund is to achieve long-term growth of capital and increase of future income. INVESTMENT STRATEGY: Under normal market conditions, the Fund invests at least 80% of its net assets in common stocks of a diversified group of growth companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. The Fund will invest primarily in common stocks of well established companies that the Sub-Adviser believes have long-term growth potential. In selecting the Fund's investments, the Sub-Adviser seeks investments in companies that have the ability to pay increasing dividends through strong cash flow. The Sub-Adviser's approach looks for companies with an above-average rate of earnings growth and a lucrative niche in the economy that gives them the ability to sustain earnings momentum even during times of slow economic growth. The Sub-Adviser believes that when a company increases its earnings faster than both inflation and the overall economy, the market will eventually reward it with a higher stock price. The Fund may sell securities for a variety of reasons, such as to secure gains, limit losses, or redeploy assets into more promising opportunities. In pursuing its investment objective, the Sub-Adviser has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. Those special situations might arise when the Sub-Adviser believes a security could increase in value for a variety of reasons, including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. While most assets will be invested in U.S. common stocks, other securities may also be purchased, including foreign stocks (up to 30% of total assets), futures, and options, in keeping with Fund objectives. 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 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 that issued the common stocks. In general, common stocks are more volatile than other investments, such as fixed income securities. By investing in the common stocks of larger, well established companies, the Sub-Adviser seeks to avoid some of the volatility associated with investment in smaller, less well established companies. Growth stocks can be volatile for several reasons. Since those companies usually invest a high portion of earnings in their businesses, they may lack the dividends of value stocks that can cushion stock prices in a falling market. The prices of growth stocks are based largely on projections of the issuer's future earnings and revenues. If a company's earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks may be more expensive relative to their
19 earnings or assets compared to value or other stocks. The Fund is also subject to the risk that its principal market segment, growth companies, may underperform compared to other market segments or the equity markets as a whole. 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. Further, in addition to the typical risks that are associated with investing in foreign countries, companies in developing countries generally do not have lengthy operating histories. Securities traded in foreign markets may be subject to more substantial volatility and price fluctuations than securities traded in more developed markets. 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. Investments in futures and options, if any, are subject to additional volatility and potential losses. 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. The information presented prior to August 1, 2004, represents the performance of Independence Capital Management, Inc., the Fund's current investment adviser. Since August 1, 2004, T. Rowe Price 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. For years ended December 31 1997 26.74% 1998 41.67% 1999 34.10% 2000 -26.10% 2001 -25.34% 2002 -34.90% 2003 12.36% 2004 11.90% 2005 6.14% 2006 13.01%
20 BEST QUARTER WORST QUARTER ------------ ------------- 27.93% (21.47)% (12/31/99) (12/31/00) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) GROWTH STOCK RUSSELL 1000 FUND GROWTH INDEX(1/) ------------ ---------------- 1 Year ..... 13.01% 9.07% 5 Years .... (0.37)% 2.69% 10 Years ... 2.69% 5.44% (1/) The Russell 1000 Growth Index is a widely-recognized, capitalization-weighted index of the 1000 largest U.S. companies with higher growth rates and price-to-book ratios. 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 returns.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.64% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.33% TOTAL ANNUAL FUND OPERATING EXPENSES... 0.97%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.96% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 99 3 Years $ 309 5 Years $ 536 10 Years $1,190
21 INVESTMENT SUMMARY: LARGE CAP VALUE FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Lord, Abbett & Co. LLC INVESTMENT OBJECTIVE: The investment objective of the Fund is to maximize total return (capital appreciation and income). INVESTMENT STRATEGY: The Fund primarily invests in equity securities of large, seasoned U.S. and multinational companies that the Sub-Adviser believes are undervalued. Under normal conditions, the Fund invests at least 80% of its net assets in equity securities of large capitalization companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. For this Fund, large capitalization companies are those with market capitalizations, at the time of purchase, that fall within the market capitalization range of companies in the Russell 1000 Index. Equity securities in which the Fund may invest may include common stocks, preferred stocks, convertible securities, warrants, American Depositary Receipts ("ADRs"), and similar instruments. The Sub-Adviser considers multinational companies to be companies that conduct their business operations and activities in more than one country. The Sub-Adviser also considers seasoned companies to be established companies whose securities have gained a reputation for quality with the investing public and enjoy liquidity in the market. In selecting investments for the Fund, the Sub-Adviser seeks to invest in securities selling at reasonable prices in relation to its assessment of their potential value. The Sub-Adviser generally sells a security when it thinks the security seems less likely to benefit from the current market and/or economic environment, shows deteriorating fundamentals, or has reached the Sub-Adviser's valuation target. In addition, the Fund may also invest up to 10% of its net assets in foreign securities. The Fund's investments in ADRs are not subject to this limitation. 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 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. Because of its "value" style of investing, the Fund could suffer losses or produce poor performance relative to other funds, even in a rising market, if the Sub-Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong. 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. 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. Further, in addition to the typical risks that are associated with investing in foreign countries, companies in developing countries generally do not have lengthy
22 operating histories. Securities traded in foreign markets may be subject to more substantial volatility and price fluctuations than securities traded in more developed markets. 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 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 managers for the period prior to August 1, 2004. Since August 1, 2004, Lord, Abbett & Co. LLC 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. For years ended December 31 1997 24.98% 1998 9.59% 1999 -0.80% 2000 12.64% 2001 -2.40% 2002 -14.96% 2003 27.76% 2004 12.85% 2005 3.00% 2006 18.27% BEST QUARTER WORST QUARTER ------------ ------------- 17.98% (19.52)% (06/30/03) (09/30/02)
23 AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) LARGE CAP RUSSELL 1000 VALUE FUND VALUE INDEX(1)/ ---------- --------------- 1 Year.... 18.27% 22.25% 5 Years... 8.35% 10.86% 10 Years.. 8.35% 11.00% (1/) The Russell 1000 Value Index is a widely-recognized, capitalization-weighted index of the 1000 largest U.S. companies with lower price-to-book ratios and lower forecasted growth values. 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 returns.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.60% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.28% TOTAL ANNUAL FUND OPERATING EXPENSES... 0.88%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.87% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 90 3 Years $ 281 5 Years $ 488 10 Years $1,084
24 INVESTMENT SUMMARY: LARGE CAP GROWTH FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: ABN AMRO Asset Management, Inc. INVESTMENT OBJECTIVE: The investment objective of the Fund is to achieve long-term growth of capital (capital appreciation). INVESTMENT STRATEGY: Under normal conditions, the Fund invests at least 80% of its net assets in investments of large capitalization companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. For this Fund, large capitalization companies are those with market capitalizations above $3 billion at the time of purchase by the Fund, although this market capitalization threshold may vary in response to changes in the market. The Sub-Adviser uses a bottom-up approach and invests in a combination of securities that offer potential for growth, including primarily large cap dividend and non-dividend paying common stocks, preferred stocks and convertible securities. The Sub-Adviser then identifies stocks of companies with the following characteristics compared to the S&P 500 Index averages: higher sales and operating earnings growth, more stable earnings growth rates, lower debt-to-capital ratio and higher return on equity. The Sub-Adviser will also consider the quality of company management and the strength of the company's position among its competitors. Additionally, the Sub-Adviser will assess the long-term economic outlook and the risk/return of securities in allocated investments among industry sectors. 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. The Fund's value will change primarily with changes in the prices of the common 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 that issued the common stocks. In general, common stocks are more volatile than other investments, such as fixed income securities. Growth stocks can be volatile for several reasons. Since those companies usually invest a high portion of earnings in their businesses, they may lack the dividends of value stocks that can cushion stock prices in a falling market. The prices of growth stocks are based largely on projections of the issuer's future earnings and revenues. If a company's earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks may be more expensive relative to their earnings or assets compared to value or other stocks. The Fund is also 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. 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 for the period prior to August 1, 2004. Since August 1, 2004, ABN AMRO Asset Management, 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
25 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. For year ended December 31 2003 25.61% 2004 8.66% 2005 1.20% 2006 3.70% BEST QUARTER WORST QUARTER ------------ ------------- 15.36% (5.99)% (06/30/03) (06/30/06) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) LARGE CAP RUSSELL 1000 GROWTH FUND GROWTH INDEX(1/) ----------- ---------------- 1 Year.................. 3.70% 9.07% Since May 1, 2002(2/)... 4.14% 5.37% (1/) The Russell 1000 Growth Index is a widely-recognized, capitalization-weighted index of the 1000 largest U.S. companies with higher growth rates and price-to-book ratios. 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 returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.55% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.33% TOTAL ANNUAL FUND OPERATING EXPENSES... 0.88%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.86% of net assets of the Fund. 26 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 90 3 Years $ 281 5 Years $ 488 10 Years $1,084
27 INVESTMENT SUMMARY: INDEX 500 FUND 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 at least 80% of its net assets in securities listed in the S&P 500 Index which is comprised of 500 selected securities (mostly common stocks). This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. Under normal circumstances, however, the Fund intends to invest substantially of its assets in securities included in the S&P 500 Index. 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 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. 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 bar chart and table below show the performance of the Fund both year-by-year and as an average over different periods of time. 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.
28 For year ended December 31 2001 -11.98% 2002 -22.28% 2003 28.41% 2004 10.47% 2005 4.48% 2006 15.37% BEST QUARTER WORST QUARTER ------------ ------------- 15.36% (17.23)% (06/30/03) (09/30/02) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) S&P 500 INDEX 500 FUND INDEX(1/) -------------- --------- 1 Year................. 15.37% 15.80% 5 Years................ 5.85% 6.19% Since May 1, 2000(2/).. 1.02% 1.30% (1/) The S&P 500 Index is an unmanaged index that is a widely recognized benchmark of general stock market performance. The index is an unmanaged capitalization-weighted index of 500 stocks representing all major industries. It does not factor in the costs of buying, selling and holding securities -- costs which are reflected in the Fund's returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 29 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.07% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.30% TOTAL ANNUAL FUND OPERATING EXPENSES... 0.37%*
---------- * The Fund's actual total operating expenses for the most recent year were less than the amount shown above because the Administrative and Corporate Services Agent (the "Agent") has voluntarily agreed to waive fees and reimburse expenses to the extent that total operating expenses exceed 0.35%. With these voluntary waivers, the Fund's actual total operating expenses for the most recent fiscal year were 0.35%. The Agent may change or eliminate all or part of this voluntary waiver at any time. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 38 3 Years $119 5 Years $208 10 Years $468
30 INVESTMENT SUMMARY: MID CAP GROWTH FUND 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: Under normal conditions, the Fund invests at least 80% of its net assets in equity securities of mid-cap companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. Mid-cap companies have market capitalization in the range of those companies included in the Russell Mid Cap Index. The Fund will invest in securities of U.S. companies that the Sub-Adviser believes have strong earnings growth potential and that are diversified across economic sectors. The Fund will attempt to maintain sector concentrations that approximate those of the Russell Mid Cap Growth Index. The Fund's exposure is generally limited to 5% of assets in any single issuer, subject to exceptions for the most heavily-weighted securities in the Russell Mid Cap Growth Index. Due to its investment strategy, the Fund may buy and sell securities frequently, which may result in higher transaction costs and may lower fund performance. 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. In particular, these medium sized companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, the prices of mid-cap stocks may be more volatile than investments in larger, more established companies. In addition, the Fund is subject to the risk that its principal market segment, medium capitalization growth companies, may underperform compared to other market segments or the equity markets as a whole. As with investing in other securities whose prices increase and decrease in market value, you may lose money by investing in the Fund. PERFORMANCE INFORMATION: The bar chart and table below show the performance of the Fund both year-by-year and as an average over different periods of time. 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.
31 For year ended December 31 2001 -28.11% 2002 -32.59% 2003 49.29% 2004 11.37% 2005 12.48% 2006 6.81% BEST QUARTER WORST QUARTER ------------ ------------- 25.80% (32.07)% (12/31/01) (09/30/01) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) RUSSELL MID CAP MID CAP GROWTH GROWTH FUND INDEX(1/) ------- --------- 1 Year.................. 6.81% 10.66% 5 Years................. 6.13% 8.22% Since May 1, 2000(2/)... (2.46)% (0.67)% (1/) The Russell Mid Cap Growth Index is a capitalization-weighted index of the 800 smallest U.S. companies out of the 1,000 largest companies with higher growth rates and price-to-book ratios. 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 returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 32 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.............. 0.70% Distribution (12b-1) Fees............. None Other Expenses........................ 0.32% TOTAL ANNUAL FUND OPERATING EXPENSES.. 1.02%* Less Fee Waivers...................... 0.02% NET ANNUAL FUND OPERATING EXPENSES.... 1.00%**
---------- * The Administrative and Corporate Services Agent has contractually agreed under the administrative and corporate services agreement to waive a portion of its fees and/or reimburse expenses to the extent necessary to keep total operating expenses of the Fund from exceeding 1.00% of average daily net assets per year. This agreement continues indefinitely so long as the Board of Directors, including a majority of the Directors who are not "interested persons" of the Company, approves it at least annually. ** A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.96% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 102 3 Years $ 318 5 Years $ 552 10 Years $1,225
33 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: Under normal conditions, the Fund invests at least 80% of its net assets in equity securities of mid-cap companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. Mid-cap companies have capitalization in the range of the Russell Mid Cap Index. In selecting individual securities, the Sub-Adviser seeks well-managed companies whose stock prices are under-valued. 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. In particular, these medium sized companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, the prices of mid-cap stocks may be more volatile than investments in larger, more established companies. Because of its "value" style of investing, the Fund could suffer losses or produce poor performance relative to other funds, even in a rising market, if the Sub-Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong. In addition, the Fund is subject to the risks that its 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 bar chart and table below show the performance of the Fund both year-by-year and as an average over different periods of time. 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
34 performance information does not include the impact of any charges deducted under your insurance contract. If it did, returns would be lower. For year ended December 31 2001 -3.17% 2002 -9.42% 2003 36.84% 2004 23.17% 2005 12.33% 2006 11.41% BEST QUARTER WORST QUARTER ------------ ------------- 15.02% (14.30)% (06/30/03) AND (09/30/02) (12/31/03) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) RUSSELL MID CAP MID CAP VALUE VALUE FUND INDEX(1/) ------- --------- 1 Year.................. 11.41% 20.22% 5 Years................. 13.83% 15.88% Since May 1, 2000(2/)... 13.25% 14.82% (1/) The Russell Mid Cap Value Index measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values. 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 returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 35 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.................................. 0.55% Distribution (12b-1) Fees................................. None Other Expenses............................................ 0.29% TOTAL ANNUAL FUND OPERATING EXPENSES...................... 0.84%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 0.81% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 86 3 Years $ 268 5 Years $ 466 10 Years $1,037
36 INVESTMENT SUMMARY: STRATEGIC VALUE FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Lord, Abbett & Co. LLC INVESTMENT OBJECTIVE: The investment objective of the Fund is to achieve capital appreciation. INVESTMENT STRATEGY: Under normal conditions, the Fund invests its net assets primarily in equity securities of mid-cap companies with market capitalizations that generally fall within the market capitalization range of companies in the Russell Mid Cap Index, a widely used benchmark for mid-cap stock performance, as of its most recent reconstitution. Equity securities in which the Fund may invest include common stocks, convertible bonds, convertible preferred stocks and warrants. In selecting investments, the Sub-Adviser seeks well-managed companies whose stock prices are under-valued. Generally, the Sub-Adviser, using a value approach, tries to identify stocks of companies that have the potential for significant market appreciation, due to growing recognition of improvement in their financial results, or increasing anticipation of such improvement. To identify these companies, the Sub-Adviser looks for changes in economies and financial environment, new or improved products or services, new or rapidly expanding markets, changes in management or structure of the company, price increases for a company's products or services, improved efficiencies resulting from new technologies or changes in distribution and changes in government regulation, political climate or competitive condition. 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. In particular, these medium sized companies may have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, the prices of mid-cap stocks may be more volatile than investments in larger, more established companies. Because of its "value" style of investing, the Fund could suffer losses or produce poor performance relative to other funds, even in a rising market, if the Sub-Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong. In addition, the Fund is subject to the risks that its 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.
37 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. 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. For year ended December 31 2003 25.13% 2004 24.25% 2005 8.20% 2006 12.23% BEST QUARTER WORST QUARTER ------------ ------------- 15.52% (7.96)% (06/30/03) (03/31/03) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) STRATEGIC RUSSELL MID CAP VALUE FUND VALUE INDEX(1/) ---------- --------------- 1 Year................... 12.23% 20.22% Since May 1, 2002(2/).... 10.86% 15.23% (1/) The Russell Mid Cap Value Index measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values. 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 returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 38 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.72% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.35% TOTAL ANNUAL FUND OPERATING EXPENSES... 1.07%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 1.06% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 109 3 Years $ 340 5 Years $ 590 10 Years $1,306
39 INVESTMENT SUMMARY: SMALL CAP GROWTH FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Bjurman, Barry & Associates INVESTMENT OBJECTIVE: The investment objective of the Fund is capital appreciation. INVESTMENT STRATEGY: Under normal conditions, the Fund will invest at least 80% of its net assets in equity securities of small capitalization companies. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. For purposes of this policy, small capitalization companies have market capitalizations within the range of the Russell 2000 Growth Index. 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's approach emphasizes companies in those sectors of the economy that are experiencing rapid growth. Due to its investment strategy, the Fund may buy and sell securities frequently, which may result in higher transaction costs and may lower fund performance. 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 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 that 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 its principal market segment, small capitalization small cap 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.
40 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 for the period prior to August 1, 2004. Since August 1, 2004, Bjurman, Barry & Associates 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. For years ended December 31 1998 35.70% 1999 185.03% 2000 -28.54% 2001 -15.84% 2002 -42.08% 2003 47.51% 2004 9.50% 2005 6.27% 2006 -1.23% BEST QUARTER WORST QUARTER ------------ ------------- 76.17% (30.68)% (12/31/99) (09/30/01) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) RUSSELL SMALL CAP 2000 GROWTH GROWTH FUND Index(1/) ----------- ----------- 1 Year................. (1.23)% 13.35% 5 Years................ (0.36)% 6.93% Since May 1, 1997(2/).. 12.71% 6.39% (1/) The Russell 2000 Growth Index is a widely-recognized, capitalization-weighted index that measures the performance of the smallest 2,000 companies in the Russell 3000 Index with higher growth rates and price-to-book ratios. 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 returns. (2/) Inception date of the Fund.
41 FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.73% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.29% TOTAL ANNUAL FUND OPERATING EXPENSES... 1.02%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. This reimbursement had no material effect on the operating expenses of the Fund borne by investors in calendar (fiscal) year 2006. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 104 3 Years $ 325 5 Years $ 563 10 Years $1,248
42 INVESTMENT SUMMARY: SMALL CAP VALUE FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Goldman Sachs Asset Management, L.P. INVESTMENT OBJECTIVE: The investment objective of the Fund is to seek capital appreciation. INVESTMENT STRATEGY: Under normal circumstances, the Fund invests at least 80% of its net assets plus any borrowings for investment purposes (measured at time of purchase) ("Net Assets") in a diversified portfolio of equity investments in small-cap issuers with public stock market capitalizations (based upon shares available for trading on an unrestricted basis) within the range of the market capitalization of companies constituting the Russell 2000 Value Index at the time of investment. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. If the market capitalization of a company held by the Fund moves outside this range, the Fund may, but is not required to, sell the securities. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price to book ratio and lower forecasted growth values. Through fundamental proprietary research the Fund will attempt to take advantage of what the Sub-Adviser believes to be well-positioned cash generating businesses run by shareholder-orientated managements. The Sub-Adviser will seek to buy these companies opportunistically at a price low enough to provide a healthy margin of safety. Under normal circumstances, the Fund's investment horizons for ownership of stocks will be two to three years. Although the Fund will invest primarily in publicly traded U.S. securities, it may invest up to 15% of its Net Assets in foreign securities, including securities of issuers in emerging countries and securities quoted in foreign currencies. The Fund may also invest in the aggregate up to 20% of its Net Assets in companies with public stock market capitalizations outside the range of companies constituting the Russell 2000 Value Index at the time of investment. 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 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. Because of its "value" style of investing, the Fund could suffer losses or produce poor performance relative to other funds, even in a rising market, if the Sub-Adviser's assessment of a company's value or prospects for exceeding earnings expectations or market conditions is wrong. 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
43 developments. These risks are even greater for the micro-cap companies that the Fund may own. 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. 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. Further, in addition to the typical risks that are associated with investing in foreign countries, companies in developing countries generally do not have lengthy operating histories. Securities traded in foreign markets may be subject to more substantial volatility and price fluctuations than securities traded in more developed markets. Any investments made by the Fund in emerging market countries are subject to all the risks of foreign investing generally, and have additional, heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets. 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. The Fund's ability to achieve its goal will depend largely on the Sub-Adviser's 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 under perform 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 managers for the period prior to August 1, 2004. Since August 1, 2004, Goldman Sachs Asset Management, L.P. 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.
44 For years ended December 31 1997 23.02% 1998 -9.16% 1999 -1.33% 2000 13.73% 2001 16.75% 2002 -16.76% 2003 74.85% 2004 14.88% 2005 3.67% 2006 17.43% BEST QUARTER WORST QUARTER ------------ ------------- 31.40% (28.29)% (06/30/03) (09/30/02) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) SMALL CAP VALUE RUSSELL 2000 FUND VALUE INDEX(1/) --------------- --------------- 1 Year.... 17.43% 23.48% 5 Years... 15.27% 15.37% 10 Years.. 11.54% 13.27% (1/) The Russell 2000 Value Index is a widely-recognized, capitalization-weighted index that measures the performance of the smallest 2,000 companies in the Russell 3000 Index with lower forecasted growth values and lower price-to-book ratios. 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 returns.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 45 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.............. 0.85% Distribution (12b-1) Fees............. None Other Expenses........................ 0.29% TOTAL ANNUAL FUND OPERATING EXPENSES.. 1.14%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 116 3 Years $ 362 5 Years $ 628 10 Years $1,386
46 INVESTMENT SUMMARY: INTERNATIONAL EQUITY FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Vontobel Asset Management, Inc. INVESTMENT OBJECTIVE: The investment objective of the Fund is to achieve capital appreciation. INVESTMENT STRATEGY: Under normal conditions, the Fund invests at least 80% of its net assets in equity securities, such as common stocks, preferred stocks, convertible bonds, and warrants. This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. The Fund will invest primarily in companies operating in the countries in Europe and the Pacific Basin. The countries 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. The Sub-Adviser employs bottom-up stock and business analysis to identify high-quality growth companies. Typically, these companies tend to be well managed with the following attributes: consistent operating histories and financial performance; favorable long-term economic prospects; free cash flow generation; and competent management that can be counted on to use cash flow wisely, and channel the reward from the business back to its shareholders. The Sub-Adviser's goal is to construct a portfolio of high-quality growth companies in the developed markets of Europe and the Pacific Basin. With approximately 40-60 stocks, the Fund seeks to be well diversified and will have investments in at least 10 countries and 5 sectors at all times. The Fund may also invest in securities of companies in emerging and developing markets. 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 that 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. Further, in addition to the typical risks that are associated with investing in foreign countries, companies in developing countries generally do not have lengthy operating histories. Securities traded in foreign markets may be subject to more substantial volatility and price fluctuations than securities traded in more developed markets. 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
47 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. For years ended December 31 1997 10.41% 1998 18.85% 1999 45.78% 2000 -18.67% 2001 -28.12% 2002 -9.94% 2003 32.85% 2004 30.01% 2005 16.77% 2006 30.34% BEST QUARTER WORST QUARTER ------------ ------------- 32.31% (18.69)% (12/31/99) (03/31/01) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) INTERNATIONAL MSCI EAFE EQUITY FUND INDEX(1/) ------------- --------- 1 Year.... 30.34% 26.86% 5 Years... 18.81% 15.43% 10 Years.. 10.22% 8.06% (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 international equity market returns. It does not factor in the costs of buying, selling and holding securities -- costs which are reflected in the Fund's returns.
48 FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees.............. 0.85% Distribution (12b-1) Fees............. None Other Expenses........................ 0.35% TOTAL ANNUAL FUND OPERATING EXPENSES.. 1.20%*
---------- * A portion of the brokerage expenses are recaptured by the Fund and used to pay operating expenses. After this reimbursement, expenses borne by investors in calendar (fiscal) year 2006 were 1.19% of net assets of the Fund. EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 122 3 Years $ 381 5 Years $ 660 10 Years $1,455
49 INVESTMENT SUMMARY: REIT FUND INVESTMENT ADVISER: Independence Capital Management, Inc. SUB-ADVISER: Heitman Real Estate Securities LLC INVESTMENT OBJECTIVE: The investment objective of the Fund is to achieve a high total return consistent with reasonable investment risks. INVESTMENT STRATEGY: Under normal conditions, the Fund invests at least 80% of its net assets in equity securities of real estate investment trusts ("REITs"). This policy may be changed without the vote of shareholders but shareholders will be given 60 days' advance notice of any change. A REIT is a separately managed trust that makes investments in various real estate businesses. A REIT may invest in real estate such as shopping centers, office buildings, apartment complexes, hotels and casinos. In addition, the Fund may invest up to 20% of its total assets in equity securities of (i) companies not principally engaged in the real estate business, but which are engaged in businesses related to real estate, such as manufacturers and distributors of building supplies, financial institutions that make or service mortgages; and (ii) companies whose real estate assets are substantial relative to the companies' stock market valuations, such as retailers, railroads and paper and forest products companies. The Sub-Adviser seeks to buy securities that are selling at a discount to its underlying market value of the underlying real estate. The Sub-Adviser will re-evaluate and consider selling securities that become overvalued or no longer contain these fundamental characteristics. The Fund anticipates that approximately 10% to 15% of the REITs it holds may have operating histories of less than three years. RISKS OF INVESTING: An investment in the Fund may be appropriate for investors who are willing to accept the risks and uncertainties of real estate and real estate related investing in the hope of realizing capital appreciation while diversifying their investment portfolio. The prices of the securities held in the Fund will fluctuate. Price movements may occur because of changes in the financial markets, the company's individual situation or industry changes. These risks are greater for companies with small or medium market capitalizations because they tend to have more limited product lines, markets and financial resources and may be dependent on a smaller management group than larger, more established companies. REITs may expose the Fund to risks similar to those associated with direct investment in real estate. REITs are more dependent upon specialized management skills, have limited diversification and are, therefore, generally dependent on their ability to generate cash flow to make distributions to shareholders. The Fund is concentrated, which means compared to a non-concentrated fund, it invests a higher percentage of its assets in the real estate sector of the market. As a result, the economic, political and regulatory developments in that industry have a greater impact on the Fund's net asset value and will cause its shares to fluctuate more that if the Fund did not concentrate its investments. Although the Fund strives to achieve its goal, it cannot guarantee that the goal will be achieved. As with investing in other securities whose prices increase and decrease in market value, you may lose money by investing in the Fund.
50 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. For year ended December 31 2003 35.49% 2004 35.53% 2005 12.97% 2006 32.41% BEST QUARTER WORST QUARTER ------------ ------------- 16.34% (6.98)% (12/31/04) (03/31/05) AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 2006) DJ WILSHIRE REAL ESTATE SECURITIES REIT FUND INDEX(1/) --------- ----------------- 1 Year.................. 32.41% 35.86% Since May 1, 2002(2/)... 22.08% 23.50% (1/) The DJ Wilshire Real Estate Securities Index is a broad, passive measure of the performance of publicly traded real estate securities, such as REITs. The index is capitalization-weighted. It does not factor in the costs of buying, selling and holding securities -- costs which are reflected in the Fund's returns. (2/) Inception date of the Fund.
FUND FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The information in this table and the Example that follows does not reflect charges and fees deducted under your insurance contract. These charges and fees will increase expenses. 51 ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets) Investment Advisory Fees............... 0.70% Distribution (12b-1) Fees.............. None Other Expenses......................... 0.30% TOTAL ANNUAL FUND OPERATING EXPENSES... 1.00%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs and returns might be higher or lower, based on these assumptions your costs would be: 1 Year $ 102 3 Years $ 318 5 Years $ 552 10 Years $1,225
52 PENN SERIES FUNDS, INC. 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. When a Fund engages in such activities, it may not achieve its investment objective. If a Fund incorrectly predicts the effects of these changes, such defensive investments may adversely affect Fund performance. INDEX 500 FUND: "S&P 500 Index" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Penn Series Funds, Inc. The Index 500 Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Index 500 Fund. INVESTMENT OBJECTIVES OF THE FUNDS: Each Fund's investment objective may be changed by the Company's Board of Directors without the approval of shareholders. 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 $58.6 billion. ICMI was organized in June 1989 and its offices are located at 600 Dresher Road, Horsham, Pennsylvania 19044 and Five Radnor Corporate Center, Suite 450, Radnor, Pennsylvania 19087. As of December 31, 2006, ICMI serves as investment adviser for about $3.3 billion of investment assets. ICMI provides day-to-day portfolio management services for the MONEY MARKET, LIMITED MATURITY BOND, and QUALITY BOND FUNDS. Peter M. Sherman, President and Portfolio Manager of Independence Capital Management, Inc., is the lead manager for 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. Mr. Sherman, with over 29 years of investment experience, also serves as Executive Vice President and Chief Investment Officer of The Penn Mutual Life Insurance Company. Assisting Mr. Sherman with his portfolio management responsibilities are the following team members: Joshua J. Myers, Vice President and Portfolio Manager of ICMI, oversees the Asset Backed, Commercial Mortgage Backed and Residential Mortgage Backed holdings. Mr. Myers, who also serves as Assistant Vice President of The Penn Mutual Life Insurance Company, has ten years of investment experience. Mr. Myers, who joined Penn Mutual in 2000, has been responsible for managing the structured products portfolio for the last six years; prior to that he spent one year as an assistant portfolio manager. Before joining Penn Mutual, Mr. Myers worked for Market Street Securities & Susquehanna Investment Group specializing in trading and analyzing equity derivatives. John H. Donaldson, Vice President and Portfolio Manager of ICMI, oversees the corporate bond holdings. Mr. Donaldson, who has over thirty years of experience in the investment business, also serves as Assistant Vice President of The Penn Mutual Life Insurance Company, which he joined in November 2006. Prior to joining Penn Mutual, Mr. Donaldson worked for Logan Capital Management and 1838 Investment Advisors managing client portfolios. Jennifer S. Ripper, Vice President and Portfolio Manager of ICMI, oversees the day-to-day management of the Asset Backed, Commercial Mortgage Backed and Residential Mortgage Backed holdings. Ms. Ripper, who also serves as Portfolio Manager of The Penn Mutual Life Insurance Company, has ten years of investment experience. Prior to joining Penn Mutual in 2005, Ms. Ripper worked at Radian Group as a portfolio manager. 53 PENN SERIES FUNDS, INC. Christopher M. Beaulieu, Vice President and Assistant Portfolio Manager of ICMI, oversees the day-to-day management of the Money Market Fund as well as the corporate bond holdings. Mr. Beaulieu also serves as Assistant Portfolio Manager of The Penn Mutual Life Insurance Company, which he joined in March 2006. Prior to joining Penn Mutual, he was a trader at Citadel Investments on their Convertible Bond Arbitrage Team. Additionally, he spent time with both UBS and JP Morgan in Fixed Income Sales. In addition, ICMI provides investment management services to the HIGH YIELD BOND, FLEXIBLY MANAGED, GROWTH STOCK, LARGE CAP VALUE, LARGE CAP GROWTH, INDEX 500, MID CAP GROWTH, MID CAP VALUE, STRATEGIC VALUE, SMALL CAP VALUE, SMALL CAP GROWTH, INTERNATIONAL EQUITY and REIT FUNDS through sub-advisers that are selected 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, GROWTH STOCK, LARGE CAP VALUE, LARGE CAP GROWTH, INDEX 500, MID CAP GROWTH, MID CAP VALUE, STRATEGIC VALUE, SMALL CAP VALUE, SMALL CAP GROWTH, INTERNATIONAL EQUITY and REIT 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 oversees the sub-advisers to ensure compliance with the Fund's investment policies and guidelines, and monitors each sub-adviser's adherence to its investment style. Shareholders of the HIGH YIELD BOND, FLEXIBLY MANAGED, GROWTH STOCK, LARGE CAP VALUE, LARGE CAP GROWTH, SMALL CAP GROWTH, STRATEGIC VALUE, SMALL CAP VALUE, INTERNATIONAL EQUITY, INDEX 500, MID CAP GROWTH, MID CAP VALUE and REIT 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 LIMITED MATURITY BOND FUNDS. Shareholders of these Funds have also authorized ICMI, subject to the supervision and approval of the Company's Board of Directors, to hire 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, HIGH YIELD BOND and GROWTH STOCK 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. T. Rowe Price Group, Inc. owns 100% of the stock of Price Associates. 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, 2006, Price Associates and its affiliates managed more than $334.7 billion of assets for individual and institutional investors, retirement plans and financial intermediaries. Currently, David Giroux and Jeffrey Arricale serve as Co-Chairman of the Flexibly Managed Fund's Investment Advisory Committee. Effective on or about July 1, 2007, David Giroux will assume sole responsibility as the Chairman of the Fund's Investment Advisory Committee. Mr. Arricale will continue to contribute to the portfolio management of the Fund as a member of the Fund's Investment Advisory Committee. Jeff Arricale is a Vice President of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc., and a Portfolio Manager and Research Analyst in the Equity Division following life assurance, asset managers, and investment banks under the financial services industry. Jeff joined the firm in January 2001 after serving as a summer intern at T. Rowe Price in 2000, covering technology companies. Prior to this, Jeff was a Manager in the auditing division of KPMG LLP. David Giroux is a Vice President of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc., and a Portfolio Manager and Research Analyst in the Equity Division following the automotive, electrical equipment, industrial manufacturing and building materials/products industries. Prior to joining the firm in 1998, he worked as a Commercial Credit Analyst with Hillsdale National Bank. 54 PENN SERIES FUNDS, INC. Mark J. Vaselkiv is Chairman of the Investment Advisory Committee for the High Yield Bond Fund. He is a Vice President of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc., and a Portfolio Manager in the Fixed Income Group, heading taxable high-yield bond management. Prior to joining the firm in 1988, Mark was employed as a Vice President, analyzing and trading high-yield debt securities for Shenkman Capital Management, Inc., New York, and a Private Placement Credit Analyst in the Capital Markets Group of Prudential Insurance Company. Mark earned a B.A. in Political Science from Wheaton College, Illinois, and an M.B.A. in finance from New York University. Robert W. Smith is Chairman of the Investment Advisory Committee for the Growth Stock Fund. He is a Vice President of T. Rowe Price Group, Inc., T. Rowe Price Associates, Inc., and T. Rowe Price International, Inc. He is also a Portfolio Manager in the Equity Division. Bob joined the firm in 1992 as a Research Analyst and previously served for five years as an Investment Analyst for Massachusetts Financial Services. Bob earned a B.S. in Finance and Economics from the University of Delaware and an M.B.A. from the Darden Graduate School of Business, University of Virginia. Effective on or about October 1, 2007, P. Robert Bartolo will become Chairman of the Investment Advisory Committee for the Growth Stock Fund. Mr. Bartolo currently serves as a member of the Growth Stock Fund's Investment Advisory Committee. Mr. Bartolo is a vice president of T. Rowe Price Group, Inc. and is an analyst in the Equity Division. Mr. Bartolo has nine years of investment experience, four of which have been at T. Rowe Price. He joined the firm in August 2002 after serving as a summer intern in 2001, analyzing satellite communications companies. Prior to this, Mr. Bartolo was director of finance for MGM Mirage, Inc. Mr. Bartolo earned a B.S. in Accounting from the University of Southern California and an M.B.A. from The Wharton School of the University of Pennsylvania. Mr. Bartolo is a Certified Public Accountant and has also earned the Chartered Financial Analyst accreditation. LORD, ABBETT & CO. LLC. Lord, Abbett & Co. LLC ("Lord Abbett") is sub-adviser to the STRATEGIC VALUE and LARGE CAP VALUE FUNDS. As sub-adviser, Lord Abbett provides day-to-day portfolio management services to the Funds. Lord Abbett is located at 90 Hudson Street, Jersey City, New Jersey, 07302-3973. Founded in 1929, Lord Abbett manages one of the nation's oldest mutual fund complexes, with approximately $112 billion in more than 55 mutual fund portfolios and other advisory accounts as of January 31, 2007. Lord Abbett uses a team of investment managers and analysts acting together to manage the Strategic Value Fund's investments. Edward K. von der Linde heads the team and the other senior member of the team is Howard E. Hansen. Messrs. von der Linde and Hansen are primarily and jointly responsible for the day-to-day management of the Strategic Value Fund. Mr. von der Linde is a Partner and joined Lord Abbett in 1988. Mr. Hansen, Partner and Investment Manager, joined Lord Abbett in 1995. Lord Abbett uses a team of investment managers and analysts acting together to manage the Large Cap Value Fund's investments. Eli M. Salzmann and Sholom Dinsky head the team and have joint and primary responsibility for the day-to-day management of the Large Cap Value Fund. The other senior member of the team is Kenneth G. Fuller. Messrs. Salzmann and Dinsky are Partners of Lord Abbett. Messrs. Salzmann and Dinsky have been with Lord Abbett since 1997 and 2000, respectively. Mr. Fuller, Partner and Investment Manager - Large Cap Value, joined Lord Abbett in 2002 from Pioneer Investment Management, Inc., where he served as Portfolio Manager and Senior Vice President from 1999 to 2002. ABN AMRO ASSET MANAGEMENT, INC. ABN AMRO Asset Management, Inc. ("ABN AMRO") is sub-adviser to the LARGE CAP GROWTH FUND. As sub-adviser, ABN AMRO provides day-to-day portfolio management services to the Fund. ABN AMRO is located at 161 North Clark Street, Chicago, IL 60601. ABN AMRO is an indirect and wholly-owned subsidiary of ABN AMRO Holding N.V. As of December 31, 2006, ABN AMRO and its affiliates had approximately $15 billion in assets under management. Richard S. Drake, CFA, is primarily responsible for the day-to-day management of the Fund. Steven G. Sherman, CFA, assists Richard with the management of the Fund. Richard S. Drake, CFA, Senior Managing Director, Director of Equity Research, has been associated with ABN AMRO and its predecessors and/or affiliates since 1999 and previously from 1986-1994 as assistant vice president, senior investment analyst. Additional experience includes: Duff & Phelps Investment Management Company, 55 PENN SERIES FUNDS, INC. senior vice president, portfolio manager; Society Asset Management, Keycorp, vice president, senior research investment officer. Steven G. Sherman, CFA, Senior Portfolio Manager/Sector Analyst for Technology and Health Care, has been associated with ABN AMRO and its predecessors and/or affiliates since 2000. Previously, Mr. Sherman was an equity research associate at Duff & Phelps Investment Management Company. HEITMAN REAL ESTATE SECURITIES LLC. Heitman Real Estate Securities LLC ("Heitman") is sub-adviser to the REIT FUND. As sub-adviser, Heitman provides day-to-day portfolio management services to the Fund. Heitman is located at 191 North Wacker Drive, Suite 2500, Chicago, Illinois, 60606. Heitman is a wholly-owned subsidiary of Heitman LLC, a limited liability company owned 50% by senior executives within the Heitman organization and 50% by Old Mutual (HFL) Inc., a wholly-owned subsidiary of Old Mutual (US) Holdings Inc. Heitman has provided investment management services to corporations, foundations, endowments, pension and profit sharing plans, trusts, estates and other institutions as well as individuals since 1987. As of December 31, 2006, Heitman had approximately $5.079 billion in assets under management. Timothy J. Pire and Larry S. Antonatos are equally and primarily responsible for the day-to-day management of the Fund. Timothy J. Pire, CFA, is Managing Director of Heitman with responsibility for Fund management, research and analysis of the publicly traded real estate securities and implementation of the investment strategy through Fund management. Larry S. Antonatos is Executive Vice President of Heitman with responsibility for Fund management, research and analysis of the publicly traded real estate securities and implementation of the investment strategy through Fund management. Mr. Antonatos also oversees Heitman's trading positions. 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. Wells is a wholly-owned subsidiary of Wells Fargo Bank, N.A., which in turn is wholly-owned by Wells Fargo & Company, a diversified financial services company. As of December 31, 2006, Wells and its affiliates had approximately $189 billion in assets under management. Gregory T. Genung, CFA, has primary responsibility for the day-to-day management of the Index 500 Fund. Mr. Genung is a Principal and Portfolio Manager at Wells and has been affiliated with Wells or its affiliates since 1994. 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 1205 Westlakes Drive, Suite 100, Berwyn, Pennsylvania, 19312. As of December 31, 2006, Turner had approximately $22.8 billion in assets under management. Christopher McHugh, Jason Schrotberger, CFA, and Tara Hedlund, CFA and CPA, are primarily responsible for the day-to-day portfolio management of the Mid Cap Growth Fund. Mr. McHugh acts as the lead manager for the Fund and Mr. Schrotberger and Ms. Hedlund act as co-managers for the Fund. Mr. McHugh is Senior Equity Portfolio Manager of Turner and joined Turner in 1990. Mr. McHugh is Vice President and Senior Equity Portfolio Manager of Turner and joined Turner is 1990. Mr. Schrotberger is a Security Analyst/Portfolio Manager of Turner and joined Turner in 2001. Ms. Hedlund is a Security Analyst/Portfolio Manager of Turner and joined Turner in 2000. 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, 2006, Neuberger Berman and its affiliates had approximately $126.9 billion in assets under management. Neuberger Berman is a wholly-owned subsidiary of Neuberger Berman Inc. and an indirect wholly-owned subsidiary of Lehman Brothers Holdings, Inc. S. Basu Mullick is a Vice President of Neuberger Berman and a Managing Director of Neuberger Berman, LLC. Mr. Mullick has managed the Fund since 2005 and has been a portfolio manager at Neuberger Berman since 1998. 56 PENN SERIES FUNDS, INC. GOLDMAN SACHS ASSET MANAGEMENT, L.P. Goldman Sachs Asset Management, L.P. ("GSAM") is sub-adviser to the SMALL CAP VALUE FUND. As sub-adviser, GSAM provides day-to-day portfolio management services to the Fund. GSAM is located at 32 Old Slip, New York, New York 10005 and was registered as an investment adviser in 1990. GSAM is wholly-owned by The Goldman Sachs Group, Inc. GSAM serves as investment manager for a wide range of clients including pension funds, foundations and insurance companies and individual investors. GSAM, along with units of the Investment Management Division of Goldman, Sachs & Co. ("Goldman Sachs"), managed approximately $627.6 billion in assets as of December 31, 2006. GSAM's U.S. Value Team is responsible for the day-to-day management of the Fund. Dolores Bamford, CFA, Managing Director and Portfolio Manager, is a portfolio manager for the US Value Team, where she has broad research responsibility across the value portfolios. Prior to her arrival at GSAM in 2002, Dolores was a Portfolio Manager at Putnam Investments for various products since 1992. Scott Carroll, CFA, Vice President and Portfolio Manager, is a portfolio manager on the US Value Team, where he has broad research responsibilities across the value portfolios. Before joining GSAM in 2002, Scott spent over five years at Van Kampen Funds, where he had portfolio management and analyst responsibilities for a Growth and Income and Equity Income funds. James (Chip) B. Otness, CFA, Managing Director and Portfolio Manager, is a portfolio manager on the US Value Team, where he oversees the portfolio construction and investment research for the firm's small cap value accounts. Chip joined GSAM in 2000. Lisa Parisi, CFA, Managing Director and Portfolio Manager, is a portfolio manager on the US Value Team, where she has broad research responsibilities across the value strategies. Lisa joined GSAM in 2001. Previously, Lisa started a small cap value strategy for John A. Levin & Co. In addition, she was a managing director at Valenzuela Capital, where she developed a small cap value product and co-managed a mid cap value product. Kelly Flynn, Vice President and Portfolio Manager, is a portfolio manager for the US Value Team, where he has broad research responsibilities across value the strategies. Prior to joining GSAM in 2002, Kelly spent 3 years at Lazard Asset Management as a portfolio manager for small cap/SMID cap value products. Edward Perkin, Vice President and Portfolio Manager, is a portfolio manager on the US Value Team, where he has broad research responsibilities across the value strategies. Edward joined GSAM in 2002. Previously, Edward worked in research at Fidelity Investments and Gabelli Asset Management while attending business school. Prior to that, he worked as a Senior Research Analyst at Fiserv. GSAM's portfolio managers, aided by research analysts, are organized by industry, focusing on a particular area of expertise. While the entire team debates investment ideas and overall portfolio structure, the final buy/sell decision for a particular security resides primarily with the portfolio manager responsible for that particular industry. James Otness, with over 30 years of investment experience, has oversight for the Small Cap Value Fund's portfolio composition at the stock and industry level. BJURMAN, BARRY & ASSOCIATES. Bjurman, Barry & Associates ("BB&A") is sub-adviser to the SMALL CAP GROWTH FUND. As sub-adviser, BB&A provides day-to-day portfolio management services to the Fund. BB&A is located at 10100 Santa Monica Boulevard, Suite 1200, Los Angeles, California 90067. As of December 31, 2006, BB&A managed more than $1.04 billion for individual and institutional clients. Investment decisions for the Fund are made by BB&A's Investment Policy Committee. Management of the Fund is done on a team basis, with O. Thomas Barry, III, CFA, CIC, as the lead manager. Mr. Barry, Chief Investment Officer and Senior Executive Vice President of BB&A, joined the firm in 1978 after serving as Senior Investment Officer at Security Pacific National Bank. The Investment Policy Committee is comprised of BB&A's portfolio managers and analysts. While investment decisions are made on a team basis, individual portfolio managers are responsible for implementation and monitoring of the accounts assigned to them. The Investment Policy Committee consists of three principal members and two non-principal members: O. Thomas Barry III, CFA, CIC and Principal Member, G. Andrew Bjurman, CFA, CIC and Principal Member, Stephen W. Shipman, CFA and Principal Member, Patrick T. Bradford and Roberto P. Wu, CFA. Mr. Barry normally chairs all Investment Policy Committee meetings. 57 PENN SERIES FUNDS, INC. A consensus amongst members is generally reached before any decisions are implemented which include final review and approval from the Principal members, although Mr. Barry retains ultimate authority on all investment decisions. Mr. Bjurman, CFA, CIC, President and Chief Executive Officer is a founding member of BB&A. Mr. Shipman, CFA, Executive Vice President and Director of Research of BB&A, joined the firm in 1997 after serving as Chief Executive Officer for Spot Magic, Incorporated. Mr. Bradford, Assistant Vice President and Head Equity-Fixed Income Trader of BB&A, joined the firm in 1993. Mr. Wu, CFA and Senior Research Analyst of BB&A, joined the firm in 1997. VONTOBEL ASSET MANAGEMENT, INC. Vontobel Asset Management, 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, 2006, Vontobel managed assets of over $7 billion, a substantial part of which was invested outside of the United States. The Vontobel group of companies has investments in excess of $58 billion under management. Rajiv Jain is responsible for the day-to-day investment management of the International Equity Fund. Mr. Jain is a Managing Director of Vontobel, having joined Vontobel in November of 1994 as an equity analyst and Associate Manager of Vontobel's global equity portfolios. Additional information about each Fund's portfolio managers' compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of securities in each Fund (if any) is available in the Statement of Additional Information. EXPENSES AND LIMITATIONS The Funds bear all expenses of their 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 fees, 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. The investment adviser, the investment sub-advisers and/or Penn Mutual have contractually agreed to waive fees or reimburse expenses to the extent a Fund's total expense ratio (excluding interest, taxes, brokerage, other expenses which are capitalized in accordance with accounting principles generally accepted in the United States, and extraordinary expenses, but including investment advisory and administrative and corporate services fees) exceeds the expense limitation for the Fund. The contractual 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 Stock 1.00% Large Cap Growth 1.00% Strategic Value 1.25%
FUND EXPENSE LIMITATION ---- ------------------ Large Cap Value 1.00% Index 500 0.40%** Mid Cap Growth 1.00% Mid Cap Value 1.00% Small Cap Growth 1.15% Small Cap Value 1.15% International Equity 1.50% REIT Fund 1.25%
58 PENN SERIES FUNDS, INC. * Penn Mutual currently intends to voluntarily waive its administrative and corporate services fees and reimburse expenses so that the Limited Maturity Bond Fund's total expenses do not exceed 0.65%. Penn Mutual may change or eliminate all or part of this voluntary waiver at any time. ** Penn Mutual currently intends to voluntarily waive its administrative and corporate services fees and reimburse expenses so that the Index 500 Fund's total expenses do not exceed 0.35%. Penn Mutual may change or eliminate all or part of this voluntary waiver at any time. All waivers of fees or reimbursements of expenses with respect to the Flexibly Managed and High Yield Bond Funds will be shared equally by the sub-adviser and Penn Mutual. For the Money Market, Quality Bond, Growth Stock, 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, Large Cap Growth, Index 500, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Strategic Value and REIT Funds, Penn Mutual will waive fees or reimburse expenses for the entirety of any excess above the expense limitations. Under Penn Mutual's administrative and corporate services agreement, to the extent Penn Mutual does not have an obligation to waive its fees or reimburse expenses of a Fund (e.g., the Fund is operating at or below its expense limitation), the Fund will reimburse Penn Mutual for amounts previously waived or reimbursed by Penn Mutual, if any, during the Fund's preceding three fiscal years. Penn Mutual, however, shall not be entitled to any reimbursement that would cause the Fund to exceed its expense limitation. For the year ended December 31, 2006, each Fund paid ICMI a fee based on the average daily assets of the Fund, at the following annual rate: Money Market Fund: 0.20%; Limited Maturity Bond Fund: 0.30%; Quality Bond Fund: 0.33%; High Yield Bond Fund: 0.50%; Flexibly Managed Fund: 0.60%; Growth Stock Fund 0.64%; Large Cap Value Fund: 0.60%; Large Cap Growth Fund: 0.55%; Index 500 Fund: 0.07%; Mid Cap Growth Fund: 0.70%; Mid Cap Value Fund: 0.55%; Strategic Value Fund 0.72%; Small Cap Growth Fund: 0.73%; Small Cap Value Fund: 0.85%; International Equity Fund: 0.85%; and REIT Fund: 0.70%. ICMI pays the sub-advisers out of the investment advisory fee it receives. A discussion regarding the basis for the Board of Directors' approval of the Funds' investment advisory and sub-advisory agreements is available in the Funds' June 30, 2006 Semi-Annual Report, which covers the period January 1, 2006 through June 30, 2006. 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 a Fund. Each Fund (except for the Money Market Fund) determines its NAV 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. 59 PENN SERIES FUNDS, INC. FREQUENT TRADING POLICIES & RISKS The Funds presently are available only as investment options for certain variable annuity and variable life insurance contracts (collectively, the "variable contracts") issued by The Penn Mutual Life Insurance Company and its subsidiary, The Penn Insurance & Annuity Company (collectively, the "Insurance Company"). The Funds are intended for long-term investment through these variable contracts, and not as short-term trading vehicles. Accordingly, contract owners that use market timing investment strategies or make frequent transfers should not choose the Funds as investment options under their variable contracts. The trading activity of individual contract owners generally is not known to the Funds because, on a daily basis, the Insurance Company aggregates the orders of its contract owners and submits net purchase or redemption orders to each Fund. As a result, the Funds' ability to monitor the purchase, redemption, and exchange transactions of contract owners is severely limited. Consequently, the Funds must rely on the Insurance Company, as the issuer and administrator of the variable contracts, to monitor contract owner transaction activity involving the Funds. Because the Funds are available only through variable contracts issued by the Insurance Company, and because the Funds rely on the Insurance Company to apply limitations on trading activity, the Company's Board of Directors has not adopted separate policies and procedures for the Funds with respect to frequent trading. However, because the Insurance Company serves as an administrator to the Funds, the Board has reviewed and approved the Insurance Company's policies and procedures regarding frequent trading by contract owners. As required by those policies and procedures, the Insurance Company discourages frequent trading by monitoring contract owner trading activity and imposing transaction or order submission limitations on the variable contracts. However, despite its efforts, there is no guarantee that the Insurance Company will be able to identify individual contract owners who may be engaging in frequent trading in the Funds. In addition, legal and technological limitations and provisions of the variable contracts themselves may hinder the ability of the Insurance Company to curtail the frequent trading of certain contract owners. As a result, the Funds cannot assure that the Insurance Company will be able to prevent all instances of frequent trading of Fund shares. The Funds do, however, reserve the right to reject any purchase order at any time in their sole discretion. If frequent trading does occur, it could adversely affect the Funds and their long-term shareholders. Frequent trading can reduce the long-term returns of a Fund by: increasing costs paid by the Fund (such as brokerage commissions); disrupting the Fund's portfolio management strategies; and requiring the Fund to maintain higher cash balances to meet redemption requests. Frequent trading also can have the effect of diluting the value of the shares of long-term shareholders in cases in which fluctuations in markets are not fully priced into the Fund's net asset value. With respect to a Fund that invests in foreign securities that trade primarily on markets that close prior to the time the Fund determines its NAV, frequent trading may have a greater potential to dilute the value of the Fund's shares as compared to a fund investing in U.S. securities. In instances where a significant event that affects the value of one or more foreign securities held by the Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as "price" or "time zone" arbitrage). This type of arbitrage may dilute the value of the Fund's shares if the prices of the Fund's foreign securities do not reflect their fair value. The Company has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV when such an event has occurred. However, because fair value pricing involves judgments which are inherently subjective, the use of fair value pricing may not always eliminate the risk of price arbitrage. Like all mutual funds that invest in foreign securities, the International Equity, Growth Stock, Flexibly Managed, Large Cap Value and Small Cap Value Funds may be susceptible to the risks described above because they may invest a portion of their assets in such securities. In addition, a Fund that invests in small/mid cap securities or high yield debt securities ("junk bonds"), which often trade in lower volumes and may be less liquid, may be more susceptible to the risks posed by frequent trading because frequent transactions in the Fund's shares may have a greater impact on the market prices of these types of securities. Like all mutual funds that invest in small/mid cap securities, the Small Cap Growth, Small Cap Value, Mid Cap Growth, Mid Cap Value, Strategic Value and REIT Funds may be susceptible to the risks described above 60 PENN SERIES FUNDS, INC. because they invest in such securities. The Limited Maturity Bond, Quality Bond and High Yield Bond Funds invest in junk bonds and, therefore, they, like other mutual funds investing in such securities, also may be susceptible to the risks described above. Please see the prospectuses of the relevant variable contracts for more information about the Insurance Company's frequent trading policies and procedures. HOW THE FUNDS CALCULATE NAV In calculating NAV, the Funds (except for the Money Market Fund) generally value their portfolio securities at their market prices. If market prices are not readily available or they are determined to be unreliable, the Funds may determine fair value prices using methods approved by the Board of Directors. The Funds' determination of a security's fair value price often involves the consideration of a number of subjective factors, and is therefore subject to the unavoidable risk that the value that a Fund assigns to a security may be higher or lower than the security's value would be if a reliable market quotation for the security was readily available. Although the Funds primarily value stocks of U.S. companies traded on U.S. exchanges at their market prices, there may be limited circumstances in which a Fund would price securities at fair value - for example, if the exchange on which a portfolio security is principally traded closed early or if trading in a particular security was halted during the day and did not resume prior to the time the Fund calculated its NAV. With respect to any non-U.S. securities held by a Fund, the Fund may take factors influencing specific markets or issuers into consideration in determining the fair value of a non-U.S. security. International securities markets may be open on days when the U.S. markets are closed. In such cases, the value of any international securities owned by the Fund may be significantly affected on days when investors cannot buy or sell shares. In addition, due to the difference in times between the close of the international markets and the time the Fund prices its shares, the value the Fund assigns to securities generally will not be the same as the quoted or published prices of those securities on their primary markets or exchanges. In determining fair value prices, the Fund may consider the performance of securities on their primary exchanges, foreign currency appreciation/depreciation, securities market movements in the U.S., or other relevant information as related to the securities. When valuing fixed income securities with remaining maturities of more than 60 days, the Funds use the value of the security provided by pricing services. The values provided by a pricing service may be based upon market quotations for the same security, securities expected to trade in a similar manner or a pricing matrix. When valuing fixed income securities with remaining maturities of 60 days or less, the Funds use the security's amortized cost. Amortized cost and the use of a pricing matrix in valuing fixed income securities are forms of fair value pricing. The Money Market Fund values its assets by the amortized cost method, which approximates market value. Fund portfolio securities that are listed on foreign exchanges 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. PORTFOLIO HOLDINGS INFORMATION The Company makes available quarterly on Penn Mutual's website - www.pennmutal.com - a Quarterly Investment Update ("Quarterly Update"), which includes certain portfolio holdings information for each Fund. The Quarterly Update can be found by clicking on the "Investment Tracker" link on Penn Mutual's website and then the "Investment Options" link. The Quarterly Update includes each Fund's top ten holdings and, as applicable, information regarding a Fund's asset and sector allocation, property types, and/or bond quality. The Quarterly Update is made available five weeks after the end of each quarter and is publicly available to all persons. The Quarterly Update generally remains accessible at least until the Company files its Form N-CSR or N-Q with the Securities and Exchange Commission for the period that includes the date as of which the website information is current (expected to be at least three months). A description of the Funds' policy and procedures with respect to the circumstances under which the Funds disclose their portfolio securities is available in the Statement of Additional Information. 61 PENN SERIES FUNDS, INC. DIVIDENDS AND DISTRIBUTIONS The Funds distribute their net investment income annually as dividends and make distributions of net realized capital gains, if any, at least annually except for distributions from the Money Market Fund which will be made monthly. TAXES Below is a summary of some important tax issues that affect the Funds and their shareholders. This summary is based on current tax laws, which may change. The Funds expect all net investment income and net realized capital gains of the Funds to be distributed at least annually and that the Funds will not pay federal income taxes. The Funds do not expect to 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 investment income and net 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 or under a qualified pension or retirement plan. 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 variable annuity or variable life insurance 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, local and foreign income tax consequences applicable to your investment. MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION. 62 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS The following tables are intended to help you understand the Funds' financial performance for the past five years, or, if shorter, the period of a Fund's operations. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in a Fund, assuming you reinvested all of your dividends and distributions. The information provided below for the periods ended December 31, 2006, December 31, 2005 and December 31, 2004 has been audited by KPMG LLP, independent registered public accounting firm. The information provided below for the periods ended December 31, 2003 and prior has been audited by another independent registered public accounting firm. KPMG LLP's report, along with each Fund's financial statements and related notes thereto, for each such period appear in the Funds' Statement of Additional Information. You can obtain the Statement of Additional Information at no charge by calling 1-800-523-0650. The total return information shown does not reflect expenses that apply to the separate account or the related insurance contracts. Inclusion of these charges would reduce the total return figures for all periods shown. MONEY MARKET FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------ 2006 2005 2004 2003 2002 ------- ------- ------- ------- -------- Net asset value, beginning of period ............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ............................ 0.05 0.03 0.01 0.01 0.02 ------- ------- ------- ------- -------- Total from investment operations .............. 0.05 0.03 0.01 0.01 0.02 ------- ------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income ............................ (0.05) (0.03) (0.01) (0.01) (0.02) Net realized gains ............................... -- -- -- -- -- ------- ------- ------- ------- -------- Total distributions ........................... (0.05) (0.03) (0.01) (0.01) (0.02) ------- ------- ------- ------- -------- Net asset value, end of period ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======== Total return(1) ............................... 4.66% 2.81% 0.96% 0.86% 1.65% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ......... $76,350 $72,885 $81,743 $99,949 $149,429 ======= ======= ======= ======= ======== Ratio of total expenses to average net assets .... 0.50% 0.50% 0.53% 0.50% 0.47% ======= ======= ======= ======= ======== Ratio of net investment income (loss) to average net assets ............................ 4.57% 2.74% 0.92% 0.89% 1.62% ======= ======= ======= ======= ========
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 63 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS LIMITED MATURITY BOND FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period ............. $ 10.25 $ 10.45 $ 10.57 $ 10.70 $ 10.35 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ............................ 0.45 0.37 0.37 0.43 0.24 Net realized and unrealized gain (loss) on investment transactions ....................... 0.01 (0.15) (0.12) (0.12) 0.41 ------- ------- ------- ------- ------- Total from investment operations .............. 0.46 0.22 0.25 0.31 0.65 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income ............................ (0.43) (0.42) (0.37) (0.43) (0.24) Net realized gains ............................... -- -- -- (0.01) (0.06) ------- ------- ------- ------- ------- Total distributions ........................... (0.43) (0.42) (0.37) (0.44) (0.30) ------- ------- ------- ------- ------- Net asset value, end of period ................... $ 10.28 $ 10.25 $ 10.45 $ 10.57 $ 10.70 ======= ======= ======= ======= ======= Total return (1) ............................. 4.49% 2.14% 2.32% 2.90% 6.25% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ......... $42,867 $60,979 $46,219 $43,545 $42,941 ======= ======= ======= ======= ======= Ratio of total expenses to average net assets .... 0.62% 0.61% 0.62% 0.60% 0.63% ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets ....................................... 3.91% 3.42% 3.52% 3.62% 3.16% ======= ======= ======= ======= ======= Portfolio turnover rate .......................... 78% 300% 35% 27% 224% ======= ======= ======= ======= =======
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 64 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS QUALITY BOND FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 10.18 $ 10.54 $ 10.51 $ 10.50 $ 10.39 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ........ 0.46 0.40 0.45 0.48 0.42 Net realized and unrealized gain (loss) on investment transactions ... (0.08) (0.14) 0.03 0.16 0.13 -------- -------- -------- -------- -------- Total from investment operations ............. 0.54 0.26 0.48 0.64 0.55 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income ........ (0.41) (0.45) (0.45) (0.48) (0.42) Net realized gains ........... -- (0.17) --(a) (0.15) (0.02) -------- -------- -------- -------- -------- Total distributions ....... (0.41) (0.62) (0.45) (0.63) (0.44) -------- -------- -------- -------- -------- Net asset value, end of period $ 10.31 $ 10.18 $ 10.54 $ 10.51 $ 10.50 ======== ======== ======== ======== ======== Total return (1) .......... 5.25% 2.50% 4.59% 6.18% 5.28% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................ $160,670 $161,265 $172,734 $172,099 $156,206 ======== ======== ======== ======== ======== Ratio of total expenses to average net assets ........ 0.61% 0.62% 0.62% 0.62% 0.62% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets ................ 4.43% 3.72% 4.07% 4.36% 4.19% ======== ======== ======== ======== ======== Portfolio turnover rate ...... 139% 614% 230% 215% 499% ======== ======== ======== ======== ========
(a) Distributions were less than one penny per share. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 65 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS HIGH YIELD BOND FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------ 2006 2005 2004 2003 2002 -------- ------- ------- ------- ------- Net asset value, beginning of period .................... $ 7.59 $ 7.91 $ 7.70 $ 6.78 $ 7.25 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ........ 0.55 0.57 0.61 0.64 0.70 Net realized and unrealized gain (loss) on investment transactions .............. 0.20 (0.33) 0.21 0.92 (0.46) ------- ------- ------- ------- ------- Total from investment operations ............. 0.75 0.24 0.82 1.56 0.24 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income ........ (0.46) (0.56) (0.61) (0.64) (0.71) Net realized gains ........... -- -- -- -- -- ------- ------- ------- ------- ------- Total distributions ....... (0.46) (0.56) (0.61) (0.64) (0.71) ------- ------- ------- ------- ------- Net asset value, end of period $ 7.88 $ 7.59 $ 7.91 $ 7.70 $ 6.78 ======= ======= ======= ======= ======= Total return (1) .......... 9.97% 3.11% 10.71% 23.13% 3.41% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............ $88,203 $85,520 $85,957 $82,316 $63,212 ======= ======= ======= ======= ======= Ratio of total expenses to average net assets ........ 0.85% 0.86% 0.86% 0.86% 0.83% ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets ................ 6.91% 7.01% 7.35% 8.55% 9.29% ======= ======= ======= ======= ======= Portfolio turnover rate ...... 65% 64% 68% 88% 80% ======= ======= ======= ======= =======
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 66 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS FLEXIBLY MANAGED FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006 2005 2004 2003 2002 ---------- ---------- -------- -------- -------- Net asset value, beginning of period ..................... $ 25.59 $ 25.96 $ 23.64 $ 18.75 $ 20.03 ---------- ---------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ......... 0.54 0.40 0.47 0.42 0.56 Net realized and unrealized gain (loss) on investment transactions .. 3.33 1.65 3.83 5.17 (0.39) ---------- ---------- -------- -------- -------- Total from investment operations .............. 3.87 2.05 4.30 5.59 0.17 ---------- ---------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income ......... (0.44) (0.40) (0.47) (0.42) (0.56) Net realized gains ............ (3.90) (2.02) (1.51) (0.28) (0.89) ---------- ---------- -------- -------- -------- Total distributions ........ (4.34) (2.42) (1.98) (0.70) (1.45) ---------- ---------- -------- -------- -------- Net asset value, end of period .................. $ 25.12 $ 25.59 $ 25.96 $ 23.64 $ 18.75 ========== ========== ======== ======== ======== Total return (1) ........... 15.37% 7.84% 18.58% 29.92% 0.87% (a) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................. $1,330,977 $1,080,197 $929,480 $705,627 $526,569 ========== ========== ======== ======== ======== Ratio of net expenses to average net assets ......... 0.83% 0.84% 0.85% 0.86% 0.85% ========== ========== ======== ======== ======== Ratio of total expenses to average net assets......... 0.84% 0.84% 0.85% 0.86% 0.85% ========== ========== ======== ======== ======== Ratio of net investment income (loss) to average net assets...................... 2.16% 1.56% 2.02% 2.11% 2.71% (a) ========== ========== ======== ======== ======== Portfolio turnover rate ....... 57% 30% 22% 25% 31% ========== ========== ======== ======== ========
(a) The presented total return and ratio of net investment income to average net assets are inclusive of payments made by affiliates on investment transactions. Before consideration of such payments, the total return would have been 0.77% and the ratio of net investment income to average net assets would have been 2.62%, for the year ended December 31, 2002. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 67 PENN SERIES FUND, INC FINANCIAL HIGHLIGHTS GROWTH STOCK FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, -------------------------------------------------- 2006 2005 2004* 2003 2002 -------- -------- ------- ------- -------- Net asset value, beginning of period ................. $ 13.02 $ 12.28 $ 11.02 $ 9.81 $ 15.07 -------- -------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... 0.05 0.02 0.05 -- (0.03) Net realized and unrealized gain (loss) on investment transactions .............. 1.64 0.73 1.26 1.21 (5.23) -------- -------- ------- ------- -------- Total from investment operations ............. 1.69 0.75 1.31 1.21 (5.26) -------- -------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income ........ (0.03) (0.01) -- -- -- Net realized gains ........... -- -- (0.05) -- -- -------- -------- ------- ------- -------- Total distributions ....... (0.03) (0.01) (0.05) -- -- -------- -------- ------- ------- -------- Net asset value, end of period .................... $ 14.68 $ 13.02 $ 12.28 $ 11.02 $ 9.81 -------- -------- ------- ------- -------- Total return (1) .......... 13.01% 6.14% 11.90% 12.36% (34.90)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............ $132,371 $107,195 $95,242 $97,751 $102,418 ======== ======== ======= ======= ======== Ratio of net expenses to average net assets ........ 0.96% 0.98% 0.97% 0.97% 0.92% ======== ======== ======= ======= ======== Ratio of total expenses to average net assets ........ 0.97% 0.98% 0.97% 0.97% 0.93% ======== ======== ======= ======= ======== Ratio of net investment income (loss) to average net assets ................ 0.40% 0.15% 0.47% 0.02% (0.21)% ======== ======== ======= ======= ======== Portfolio turnover rate ...... 43% 44% 185% 578% 774%
* Prior to August 1, 2004, the Growth Stock Fund was named Growth Equity Fund. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 68 PENN SERIES FUND, INC. FINANCIAL HIGHLIGHTS LARGE CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period ................. $ 17.56 $ 18.45 $ 17.59 $ 13.97 $ 16.97 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ........ 0.27 0.23 0.26 0.25 0.25 Net realized and unrealized gain (loss) on investment transactions .............. 2.93 0.33 1.98 3.62 (2.80) -------- -------- -------- -------- -------- Total from investment operations ............. 3.20 0.56 2.24 3.87 (2.55) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income ........ (0.21) (0.21) (0.26) (0.25) (0.24) Net realized gains ........... (0.95) (1.24) (1.12) -- (0.21) -------- -------- -------- -------- -------- Total distributions ....... (1.16) (1.45) (1.38) (0.25) (0.45) -------- -------- -------- -------- -------- Net asset value, end of period ............. $ 19.60 $ 17.56 $ 18.45 $ 17.59 $ 13.97 ======== ======== ======== ======== ======== Total return (1) .......... 18.27% 3.00% 12.85% 27.76% (14.96)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............ $234,269 $215,319 $224,481 $227,906 $188,246 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets ........ 0.87% 0.88% 0.89% 0.90% 0.88% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets ........ 0.88% 0.89% 0.89% 0.90% 0.88% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets ........ 1.37% 1.15% 1.38% 1.62% 1.51% ======== ======== ======== ======== ======== Portfolio turnover rate ...... 45% 45% 105% 40% 38% ======== ======== ======== ======== ========
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 69 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS LARGE CAP GROWTH FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, ----------------------------------------------- 2006 2005 2004 2003 2002* ------- ------- ------- ------- ------- Net asset value, beginning of period ....... $ 10.79 $ 10.76 $ 10.53 $ 8.41 $ 10.00 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ............. 0.04 0.02 0.06 0.03 0.03 Net realized and unrealized gain (loss) on investment transactions ... 0.36 0.11 0.85 2.12 (1.59) ------- ------- ------- ------- ------- Total from investment operations ............. 0.40 0.13 0.91 2.15 (1.56) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income ........ (0.03) (0.02) (0.06) (0.03) (0.03) Net realized gains ........... (0.11) (0.08) (0.62) -- -- ------- ------- ------- ------- ------- Total distributions ....... (0.14) (0.10) (0.68) (0.03) (0.03) ------- ------- ------- ------- ------- Net asset value, end of period ............. $ 11.05 $ 10.79 $ 10.76 $ 10.53 $ 8.41 ======= ======= ======= ======= ======= Total return (1) .......... 3.70% 1.20% 8.66% 25.61% 15.60%# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ..... $29,982 $27,247 $24,072 $16,099 $ 5,090 ======= ======= ======= ======= ======= Ratio of net expenses to average net assets ........ 0.86% 0.89% 0.96% 1.00% 0.98%(a) ======= ======= ======= ======= ======= Ratio of total expenses to average net assets ........ 0.88% 0.89% 0.96% 1.27% 2.11%(a) ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets ........ 0.35% 0.19% 0.59% 0.51% 0.70%(a) ======= ======= ======= ======= ======= Portfolio turnover rate ...... 38% 21% 114% 28% 35% ======= ======= ======= ======= =======
* For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (a) Annualized. # Not annualized. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 70 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS INDEX 500 FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 8.58 $ 8.34 $ 7.67 $ 6.05 $ 7.90 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ........ 0.15 0.14 0.13 0.10 0.09 Net realized and unrealized gain (loss) on investment transactions .............. 1.17 0.24 0.67 1.62 (1.85) -------- -------- -------- -------- -------- Total from investment operations ............. 1.32 0.38 0.80 1.72 (1.76) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income ........ (0.12) (0.14) (0.13) (0.10) (0.09) -------- -------- -------- -------- -------- Net realized gains ........... -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions ....... (0.12) (0.14) (0.13) (0.10) (0.09) -------- -------- -------- -------- -------- Net asset value, end of period .................... $ 9.78 $ 8.58 $ 8.34 $ 7.67 $ 6.05 ======== ======== ======== ======== ======== Total return (1) .......... 15.37% 4.48% 10.47% 28.41% (22.28)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ............ $250,174 $234,122 $257,637 $234,020 $174,429 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets ........ 0.35% 0.35% 0.29% 0.25% 0.25% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets ........ 0.37% 0.37% 0.37% 0.38% 0.36% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets .................... 1.61% 1.52% 1.70% 1.47% 1.35% ======== ======== ======== ======== ======== Portfolio turnover rate ...... 6% 5% 1% 1% 3% ======== ======== ======== ======== ========
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 71 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS MID CAP GROWTH FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 7.93 $ 7.05 $ 6.33 $ 4.24 $ 6.29 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .................... (0.01) (0.03) (0.04) (0.03) (0.03) Net realized and unrealized gain (loss) on investment transactions .............. 0.55 0.91 0.76 2.12 (2.02) ------- ------- ------- ------- ------- Total from investment operations ............. 0.54 0.88 0.72 2.09 (2.05) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income ........ -- -- -- -- -- Net realized gains ........... -- -- -- -- -- ------- ------- ------- ------- ------- Net asset value, end of period .................... $ 8.47 $ 7.93 $ 7.05 $ 6.33 $ 4.24 ======= ======= ======= ======= ======= Total return (1) .......... 6.81% 12.48% 11.37% 49.29% (32.59)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................ $85,414 $81,174 $70,793 $65,052 $34,424 ======= ======= ======= ======= ======= Ratio of net expenses to average net assets ........ 0.96% 1.00% 1.00% 1.00% 0.99% ======= ======= ======= ======= ======= Ratio of total expenses to average net assets ........ 1.02% 1.02% 1.03% 1.05% 1.05% ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets .................... (0.09)% (0.43)% (0.56)% (0.59)% (0.57)% ======= ======= ======= ======= ======= Portfolio turnover rate ...... 153% 156% 169% 154% 230% ======= ======= ======= ======= =======
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 72 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS MID CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period .................... $ 12.97 $ 13.77 $ 13.05 $ 9.75 $ 10.83 -------- -------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ........ 0.11 0.09 0.05 0.04 0.06 Net realized and unrealized gain (loss) on investment transactions .............. 1.36 1.63 2.88 3.55 (1.08) -------- -------- ------- ------- ------- Total from investment operations ............. 1.47 1.72 2.93 3.59 (1.02) -------- -------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income ........ (0.09) (0.09) (0.05) (0.04) (0.06) Net realized gains ........... (0.76) (2.43) (2.16) (0.25) -- -------- -------- ------- ------- ------- Total distributions ....... (0.85) (2.52) (2.21) (0.29) (0.06) -------- -------- ------- ------- ------- Net asset value, end of period .................... $ 13.59 $ 12.97 $ 13.77 $ 13.05 $ 9.75 ======== ======== ======= ======= ======= Total return (1) .......... 11.41% 12.33% 23.17% 36.84% (9.42)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ................ $125,362 $112,301 $98,448 $81,042 $58,330 ======== ======== ======= ======= ======= Ratio of net expenses to average net assets ........ 0.81% 0.85% 0.86% 0.86% 0.85% ======== ======== ======= ======= ======= Ratio of total expenses to average net assets ........ 0.84% 0.85% 0.86% 0.86% 0.85% ======== ======== ======= ======= ======= Ratio of net investment income (loss) to average net assets .................... 0.82% 0.67% 0.40% 0.39% 0.55% ======== ======== ======= ======= ======= Portfolio turnover rate ...... 62% 100% 68% 64% 91% ======== ======== ======= ======= =======
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 73 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS STRATEGIC VALUE FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, ----------------------------------------------- 2006 2005 2004 2003 2002* ------- ------- ------- ------- ------- Net asset value, beginning of period ........... $ 13.15 $ 12.91 $ 10.57 $ 8.54 $ 10.00 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income .......................... 0.08 0.07 0.05 0.07 0.03 Net realized and unrealized gain (loss) on investment transactions ..................... 1.48 1.00 2.51 2.07 (1.46) ------- ------- ------- ------- ------- Total from investment operations ............ 1.56 1.07 2.56 2.14 (1.43) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income .......................... (0.06) (0.06) (0.05) (0.07) (0.03) Net realized gains ............................. (1.42) (0.77) (0.17) (0.04) -- ------- ------- ------- ------- ------- Total distributions ......................... (1.48) (0.83) (0.22) (0.11) (0.03) ------- ------- ------- ------- ------- Net asset value, end of period ................. $ 13.23 $ 13.15 $ 12.91 $ 10.57 $ 8.54 ======= ======= ======= ======= ======= Total return (1) ............................ 12.23% 8.20% 24.25% 25.13% (14.25)%# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ....... $43,616 $45,096 $30,485 $16,025 $ 7,417 ======= ======= ======= ======= ======= Ratio of net expenses to average net assets .... 1.06% 1.07% 1.14% 1.25% 1.24%(a) ======= ======= ======= ======= ======= Ratio of total expenses to average net assets .. 1.07% 1.07% 1.14% 1.26% 2.24%(a) ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets .......................... 0.56% 0.58% 0.47% 0.54% 0.82%(a) ======= ======= ======= ======= ======= Portfolio turnover rate ........................ 28% 25% 18% 17% 21% ======= ======= ======= ======= =======
* For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (a) Annualized. # Not annualized. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 74 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS SMALL CAP GROWTH FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004* 2003 2002 -------- -------- -------- -------- ------- Net asset value, beginning of period ........... $ 20.34 $ 19.14 $ 17.48 $ 11.85 $ 20.46 -------- -------- -------- -------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ................... (0.06) (0.13) (0.16) (0.13) (0.14) Net realized and unrealized gain (loss) on investment transactions ..................... (0.19) 1.33 1.82 5.76 (8.47) -------- -------- -------- -------- ------- Total from investment operations ............ (0.25) 1.20 1.66 5.63 (8.61) -------- -------- -------- -------- ------- LESS DISTRIBUTIONS: Net realized gains ............................. -- -- -- -- -- Return of capital .............................. -- -- -- -- -- -------- -------- -------- -------- ------- Total distributions ......................... -- -- -- -- -- -------- -------- -------- -------- ------- Net asset value, end of period ................. $ 20.09 $ 20.34 $ 19.14 $ 17.48 $ 11.85 ======== ======== ======== ======== ======= Total return (1) ............................ (1.23%) 6.27% 9.50% 47.51% (42.08%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ....... $106,380 $111,029 $113,579 $111,360 $74,681 ======== ======== ======== ======== ======= Ratio of net expenses to average net assets .... 1.02% 1.02% 1.06% 1.09% 1.05% ======== ======== ======== ======== ======= Ratio of total expenses to average net assets .. 1.02% 1.02% 1.06% 1.09% 1.06% ======== ======== ======== ======== ======= Ratio of net investment income (loss) to average net assets .......................... (0.27)% (0.67)% (0.87)% (0.94)% (0.87)% ======== ======== ======== ======== ======= Portfolio turnover rate ........................ 126% 137% 195% 191% 164% ======== ======== ======== ======== =======
* Prior to August 1, 2004, the Small Cap Growth was named Emerging Growth Fund. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 75 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS SMALL CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- ------- Net asset value, beginning of period ........... $ 16.37 $ 16.95 $ 18.20 $ 11.00 $ 14.38 -------- -------- -------- -------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) ................... 0.05 0.07 0.01 (0.08) (0.05) Net realized and unrealized gain (loss) on investment transactions ..................... 2.77 0.56 2.55 8.29 (2.37) -------- -------- -------- -------- ------- Total from investment operations ............ 2.82 0.63 2.56 8.21 (2.42) -------- -------- -------- -------- ------- LESS DISTRIBUTIONS: Net investment income .......................... (0.05) (0.07) (0.01) -- -- Net realized gains ............................. (1.44) (1.14) (3.80) (1.01) (0.96) -------- -------- -------- -------- ------- Total distributions ......................... (1.49) (1.21) (3.81) (1.01) (0.96) -------- -------- -------- -------- ------- Net asset value, end of period ................. $ 17.70 $ 16.37 $ 16.95 $ 18.20 $ 11.00 ======== ======== ======== ======== ======= Total return (1) ............................ 17.43% 3.67% 14.88% 74.85% (16.76)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) ....... $182,142 $156,605 $165,714 $148,700 $77,491 ======== ======== ======== ======== ======= Ratio of net expenses to average net assets .... 1.14% 1.14% 1.15% 1.15% 1.15% ======== ======== ======== ======== ======= Ratio of total expenses to average net assets .. 1.14% 1.14% 1.17% 1.19% 1.16% ======== ======== ======== ======== ======= Ratio of net investment income (loss) to average net assets .......................... 0.28% 0.40% 0.08% (0.61)% (0.38)% ======== ======== ======== ======== ======= Portfolio turnover rate ........................ 59% 46% 142% 61% 54% ======== ======== ======== ======== =======
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 76 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period ...................... $ 20.91 $ 17.98 $ 13.91 $ 10.53 $ 11.71 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ..................................... 0.28 0.15 0.24 0.19 0.15 Net realized and unrealized gain (loss) on investments and foreign currency related transactions .............. 5.98 2.86 3.92 3.27 (1.31) -------- -------- -------- -------- -------- Total from investment operations ....................... 6.26 3.01 4.16 3.46 (1.16) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income ..................................... (0.38) (0.08) (0.09) (0.08) (0.02) Net realized gains ........................................ (2.52) -- -- -- -- -------- -------- -------- -------- -------- Total distributions .................................... (2.90) (0.08) (0.09) (0.08) (0.02) -------- -------- -------- -------- -------- Net asset value, end of period ............................ $ 24.27 $ 20.91 $ 17.98 $ 13.91 $ 10.53 ======== ======== ======== ======== ======== Total return (1) ....................................... 30.34% 16.77% 30.01% 32.85% (9.94)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) .................. $294,499 $200,947 $165,509 $133,603 $104,645 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets ............... 1.19% 1.21% 1.22% 1.19% 1.23% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets ............. 1.20% 1.21% 1.22% 1.19% 1.23% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets ................................................. 1.10% 1.47% 1.61% 1.63% 1.35% ======== ======== ======== ======== ======== Portfolio turnover rate ................................... 52% 40% 40% 59% 106% ======== ======== ======== ======== ========
1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 77 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS REIT FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, ---------------------------------------------- 2006 2005 2004 2003 2002* ------- ------- ------- ------- ------ Net asset value, beginning of period ...................... $ 14.92 $ 14.33 $ 11.53 $ 9.00 $10.00 ------- ------- ------- ------- ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income ..................................... 0.24 0.20 0.37 0.36 0.25 Net realized and unrealized gain (loss) on investment transactions ........................................... 4.57 1.66 3.69 2.83 (1.01) ------- ------- ------- ------- ------ Total from investment operations ....................... 4.81 1.86 4.06 3.19 (0.76) ------- ------- ------- ------- ------ LESS DISTRIBUTIONS: Net investment income ..................................... (0.19) (0.30) (0.41) (0.37) (0.24) Net realized gains ........................................ (1.44) (0.97) (0.85) (0.29) -- ------- ------- ------- ------- ------ Total distributions .................................... (1.63) (1.27) (1.26) (0.66) (0.24) ------- ------- ------- ------- ------ Net asset value, end of period ............................ $ 18.10 $ 14.92 $ 14.33 $ 11.53 $ 9.00 ======= ======= ======= ======= ====== Total return (1) ....................................... 32.41% 12.97% 35.53% 35.49% (7.55)%# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) .................. $71,790 $43,122 $31,247 $16,881 $5,507 ======= ======= ======= ======= ====== Ratio of net expenses to average net assets ............... 1.00% 1.02% 1.10% 1.25% 1.22%(a) ======= ======= ======= ======= ====== Ratio of total expenses to average net assets ............. 1.00% 1.02% 1.10% 1.34% 2.25%(a) ======= ======= ======= ======= ====== Ratio of net investment income to average net assets ...... 1.56% 1.41% 3.06% 4.87% 5.31%(a) ======= ======= ======= ======= ====== Portfolio turnover rate ................................... 53% 54% 80% 69% 45% ======= ======= ======= ======= ======
* For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (a) Annualized. # Not annualized. 1. Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods shown. 78 [THIS PAGE INTENTIONALLY LEFT BLANK] 79 STATEMENT OF ADDITIONAL INFORMATION In addition to this Prospectus, Penn Series has a Statement of Additional Information ("SAI"), dated May 1, 2007, 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 or by visiting Penn Mutual's website at www.pennmutual.com. PROXY VOTING POLICY AND PROXY VOTING RECORDS You may obtain a description of the Company's Proxy Voting Policies and Procedures and a description of the Proxy Voting Policies and Procedures of the investment adviser and each sub-adviser to the Company, free of charge, by calling (800) 523-0650, or by visiting the website of The Penn Mutual Life Insurance Company at www.pennmutual.com, clicking on the Investment Options and Performance Tab at the top of the page and, under Related Information, clicking on the Penn Series Proxy Voting tab. You may obtain the voting record of each Fund for the most recent twelve-month period ended June 30, free of charge, by visiting the website of The Penn Mutual Life Insurance Company at www.pennmutual.com and following the instructions noted above. The voting record will be made available on the website of The Penn Mutual Life Insurance Company as soon as reasonably practicable after the information is filed by the Company with the SEC on Form N-PX. The voting record will also be available on the website of the U. S. Securities and Exchange Commission at www.sec.gov. 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 1-202-551-8090); (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 publicinfo@sec.gov or by writing to Securities Exchange Commission, Public Reference Section, Washington, D.C. 20549-0102. To aid you in obtaining this information, Penn Series Funds, Inc.'s Investment Company Act registration number is 811-03459. 80 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 sixteen separate investment portfolios (the "Funds"). MONEY MARKET FUND LIMITED MATURITY BOND FUND QUALITY BOND FUND HIGH YIELD BOND FUND FLEXIBLY MANAGED FUND GROWTH STOCK FUND LARGE CAP VALUE FUND LARGE CAP GROWTH FUND INDEX 500 FUND MID CAP GROWTH FUND MID CAP VALUE FUND STRATEGIC VALUE FUND SMALL CAP GROWTH FUND SMALL CAP VALUE FUND INTERNATIONAL EQUITY FUND REIT FUND This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Penn Series prospectus dated May 1, 2007. 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, 2007. 1 TABLE OF CONTENTS Penn Series.......................................... 3 Investment Objectives................................ 3 Investment Policies.................................. 4 Securities and Investment Techniques................. 13 Investments in Debt Securities................ 13 Investments in Foreign Equity Securities...... 16 Investments in Smaller Companies.............. 16 Investments in Unseasoned Companies........... 17 Foreign Currency Transactions................. 17 Repurchase Agreements......................... 19 Lending of Portfolio Securities............... 19 Illiquid Securities........................... 19 Warrants...................................... 20 When-Issued Securities........................ 20 The Quality Bond Fund's Policy Regarding Industry Concentration .................... 20 Options....................................... 21 Futures Contracts............................. 22 Investment Companies.......................... 23 Real Estate Investment Trusts................. 23 Loan Participations and Assignments........... 23 Trade Claims.................................. 24 Investment Restrictions................................ 25 Money Market Fund............................. 25 Limited Maturity Bond Fund.................... 26 Quality Bond Fund............................. 27 High Yield Bond Fund.......................... 28 Flexibly Managed Fund......................... 29 Growth Stock Fund............................. 30 Large Cap Value Fund.......................... 31 Large Cap Growth Fund......................... 32 Index 500 Fund................................ 32 Mid Cap Growth Fund........................... 33 Mid Cap Value Fund............................ 34 Strategic Value Fund.......................... 34 Small Cap Growth Fund......................... 35 Small Cap Value Fund.......................... 36 International Equity Fund..................... 37 REIT Fund..................................... 38 General Information.................................... 39 Investment Advisory Services.................. 39 Portfolio Managers............................ 42 Administrative and Corporate Services......... 53 Accounting Services........................... 54 Limitation on Fund Expenses................... 55 Portfolio Transactions........................ 55 Portfolio Turnover............................ 58 Directors and Officers........................ 58 Code of Ethics................................ 60 Proxy Voting Policy .......................... 61 Net Asset Value of Shares..................... 61 Ownership of Shares........................... 63 Tax Status.................................... 63 Voting Rights................................. 65 Custodial Services............................ 66 Independent Registered Public Accounting Firm ....................................... 66 Legal Matters................................. 66 Portfolio Holdings Information................ 67 Ratings of Commercial Paper............................ 67 Ratings of Corporate Debt Securities................... 68 Financial Statements of Penn Series.................... 70 Appendix............................................... Proxy Voting Procedures ...................... Appendix A
2 PENN SERIES Penn Series is an open-end management investment company that offers shares of diversified portfolios (each, a "Fund," and collectively, the "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"). Shares of each Fund will be purchased by Penn Mutual and PIA for the purpose of funding variable annuity contracts and variable life insurance policies and by qualified pension plans. 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. Each Fund's investment objective may be changed by the Penn Series Board of Directors without the approval of shareholders. 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 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 STOCK FUND Long-term growth of capital and increase of future income LARGE CAP VALUE FUND Maximize total return (capital appreciation and income) LARGE CAP GROWTH FUND Capital appreciation INDEX 500 FUND Total return (capital appreciation and income) which corresponds to that of the Standard & Poor's Composite Index of 500 stocks MID CAP GROWTH FUND Maximize capital appreciation MID CAP VALUE FUND Growth of capital STRATEGIC VALUE FUND Capital appreciation SMALL CAP GROWTH FUND Capital appreciation SMALL CAP VALUE FUND Capital appreciation INTERNATIONAL EQUITY FUND Capital appreciation REIT FUND High total return consistent with reasonable investment risks, through both current income and capital appreciation
3 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. ("Investment Adviser") which serves as investment adviser to the Fund. 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 the Investment Adviser, 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, as amended, 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) rated by at least one of the nationally recognized statistical rating organizations (S&P, Moody's, Fitch Investors Service, Inc., or Dominion Bond Rating Service) 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 nationally recognized statistical rating organization), and are sometimes referred to as "junk bonds." Under normal circumstances, 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. 4 In addition to the investments described above, 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. 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 nationally recognized statistical rating organizations (S&P, Moody's, Fitch Investors Service, Inc., or Dominion Bond Rating Service) 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 nationally recognized statistical rating organization), which are sometimes referred to as "junk bonds." Under normal circumstances, at least 80% of the Fund's total assets will be invested in debt 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. In addition to the above, 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 investment 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 5 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 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. Normally, the Fund's dollar weighted average maturity is expected to be in the 6 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. HYBRID INSTRUMENTS. The Fund may invest up to 10% of its total assets in hybrid instruments. These instruments (a type of potentially high-risk derivative) can combine the characteristics of securities futures and options. For example, the principal amount or interest rate of a hybrid could be tied (positively or negatively) to the price of some commodity, currency, or securities index or another interest rate (each a "benchmark"). Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. Hybrids may or may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of 6 interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrid. These risks may cause significant fluctuations in the net asset value of the Fund. OTHER INVESTMENTS. The Fund may invest up to 20% of its total assets in dividend-paying preferred or common stocks (including up to 10% of net assets 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 non-dollar 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 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. During 2006 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 0.00 AA 0.00 A 0.78% BBB 0.99% BB 21.86% B 57.69% CCC 10.60% CC 0.00 C 0.00 D 0.07% Unrated** 2.02%
---------------- * Unaudited. The portfolio also included 2.54% of its net assets in cash and 3.45% of its net assets in equity securities. ** 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: A: 0%; BBB: 0%; BB: 0.18%; B+: 0.49%; B: 0.10%; B-: 0.46; CCC+: 0.71%; CCC: 0.33%; CC: 0%; C: 0%; D: 0%; Unrated: 0%. 7 FLEXIBLY MANAGED FUND In addition to investing in common stocks, the Fund may invest in the following securities: - Equity-related securities, such as convertible securities (i.e., bonds or preferred stock convertible into or exchangeable for common stock), preferred stock, warrants, futures, and options. - Corporate debt securities within the four highest credit categories assigned by nationally recognized statistical rating organizations, 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. There is no limit on the Fund's investments in convertible 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. - 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 an 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. - The Fund may invest up to 10% of its total assets in hybrid instruments. These instruments (a type of potentially high-risk derivative) can combine the characteristics of futures and options. For example, the principal amount or interest rate of a hybrid could be tied (positively or negatively) to the price of some commodity, currency, or securities index or another interest rate (each a "benchmark"). Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. Hybrids may or may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the fund to the credit risk of the issuer of the hybrid. These risks may cause significant fluctuations in the net asset value of the Fund. If the Fund's position in money market securities maturing in one year or less equals 35% or more of the Fund's total assets, the Fund will normally have 25% or more of its assets concentrated in securities of the banking industry. Investments in the banking industry may be affected by general economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers. In addition, the profitability of the banking industry is largely dependent upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. The sub-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-adviser's credit research. GROWTH STOCK FUND Under normal market conditions, the Fund invests at least 80% of its net assets in a diversified group of growth companies. 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 8 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. LARGE CAP VALUE FUND 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. LARGE CAP GROWTH FUND Under normal conditions, the Fund will invest at least 80% of its net assets in investments of large capitalization companies. The sub-adviser is a research driven, fundamental investor, pursuing a growth strategy. As a "bottom-up" investor focusing primarily on individual securities, the sub-adviser chooses companies that it believes are positioned for growth in revenues, earnings or assets. In choosing investments, the sub-adviser will focus on large-cap companies that have exhibited above average growth, strong financial records, or compelling valuations. In addition, the sub-adviser also considers management expertise, industry leadership, growth in market share and sustainable competitive advantage. Although the sub-adviser will search for investments across a large number of industries, it may have from time to time significant positions in particular sectors such as the technology sector (including health technology, electronic technology and technology services), communications, and financial services companies. The Fund may invest up to 25% of its total assets in foreign securities. In addition to its main investments, the Fund may invest up to 20% of its net assets in investments of small to medium capitalization companies. To the extent the Fund invests in debt securities and convertible debt securities, it does not intend to invest more than 5% in those rated Ba or lower by Moody's or BB or lower by S&P(R) or unrated securities that the manager determines are of comparable quality. The Fund also may: write covered call options, purchase put options on securities, enter into repurchase agreements, and invest in restricted or illiquid securities. The Fund's investments may include zero coupon, deferred interest or pay-in-kind bonds, or preferred stocks. The Fund currently does not intend to invest more than 5% of its assets in loan participations and other related direct or indirect bank securities and it may invest up to 5% of its assets in trade claims. Both loan participation and trade claims carry a high degree or risk. The Fund may also lend its portfolio securities up to 30% of its assets and borrow up to 5% of the value of its total assets (excluding borrowing from banks for temporary or emergency purposes, and not for direct investments in securities). 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 9 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. The Index 500 Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the Index 500 Fund or any member of the public regarding the advisability of investing in securities generally or in the Index 500 Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to Penn Mutual is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to Penn Mutual or the Index 500 Fund. S&P has no obligation to take the needs of Penn Mutual or the owners of the Index 500 Fund into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Index 500 Fund or the timing of the issuance or sale of the Index 500 Fund or in the determination or calculation of the equation by which the Index 500 Fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Index 500 Fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY PENN MUTUAL, OWNERS OF THE INDEX 500 FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. MID CAP GROWTH FUND 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. MID CAP VALUE FUND 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 that fall in the range of the Russell Mid-Cap Index 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 10 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. STRATEGIC VALUE FUND The Fund will be subject to the risks associated with its investments. The Fund may, but is not required to, use various strategies to change its investment exposure to adjust to changes in economic, social, political, and general market conditions, which affect security prices, interest rates, currency exchange rates, commodity prices and other factors. For example, the Fund may seek to hedge against certain market risks. These strategies may involve, with board approval, effecting transactions in derivative and similar instruments, including but not limited to options, futures, forward contracts, swap agreements, warrants, and rights. If the sub-adviser judges market conditions incorrectly or uses a hedging strategy that does not correlate well with the Fund's investments, it could result in a loss, even if the sub-adviser intended to lessen risk or enhance returns. These strategies may involve a small investment of cash compared to the magnitude of the risk assumed, and could produce disproportionate gains or losses. Also, these strategies could result in losses if the counterparty to a transaction does not perform as promised. The Fund may also purchase convertible securities, depository receipts and foreign securities and is subject to the risks associated with such investing. The Fund may invest in stock index future contracts in an effort to reduce volatility. The Fund may also invest in debt securities. The Fund may invest in securities of other investment companies subject to limitations prescribed by the Investment Company Act of 1940, as amended. The sub-adviser selects securities that it believes 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. SMALL CAP 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. SMALL CAP VALUE FUND The Small Cap Value Fund is managed using a value oriented approach. The Sub-Adviser evaluates securities using fundamental analysis and intends to purchase equity investments that are, in its view, underpriced relative to a combination of such companies' long term earnings prospects, growth rate, free cash flow and/or dividend-paying ability. Consideration will be given to the business quality of the issuer. Factors positively affecting the Sub-Adviser's view of that quality include the competitiveness and degree of regulation in the markets in which the company operates, the existence of a management team with a record of success, the position of the company in the markets in which it operates, the level of the company's financial leverage and the sustainable return on capital invested in the business. The Fund may also purchase securities of companies that have experienced difficulties and that, in the opinion of the Sub-Adviser, are available at attractive prices. 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. 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 seeks to be well diversified and will have investments in at least ten countries and five sectors at all times. The Fund may not always purchase securities on the principal market. For example, American Depositary Receipts ("ADRs") may be purchased if trading conditions make them more attractive than the underlying security. 11 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 Depositary 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 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. REIT FUND The Fund invests primarily in securities of real estate investment trusts ("REITs"). The sub-adviser analyzes and selects investments that it believes will provide a relatively high and stable yield and are good prospects for future growth in dividends. Most REITs specialize in one or two product types, such as office buildings, shopping centers, industrial complexes, and hotels, or specialize in a particular geographic region. The sub-adviser believes that, over the long term, publicly traded real estate securities' performance is determined by the underlying real estate assets, real estate market cycle and management's ability to operate and invest in these assets during each market cycle. The sub-adviser's primary objective is to generate long-term, superior, risk-adjusted returns by identifying and investing in publicly traded real estate companies which demonstrate the highest probability or growing cash flow per share without undue risk to achieve such growth. As a value-oriented manager, the sub-adviser is committed to a strategy of investing in companies that offer growth at a reasonable price. 12 SECURITIES AND INVESTMENT TECHNIQUES INVESTMENTS IN DEBT SECURITIES Debt securities in which one or more of the Funds may invest in include those described below. U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in bills, notes, bonds, and other debt securities issued by the U.S. Treasury. These are direct obligations of the U.S. Government and differ mainly in the length of their maturities. U.S. GOVERNMENT AGENCY SECURITIES. The Funds may invest in debt securities issued or guaranteed by U.S. Government sponsored enterprises, federal agencies, and international institutions. These include securities issued by Fannie Mae, 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 6 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 sub-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 Funds' 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. 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 13 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 15% 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 such 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. 14 The Small Cap 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 obligers 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 15 coupon bonds like other bonds retain interest rate and credit risk and usually display more price volatility than those securities that pay a cash coupon. Pay-in-Kind (PIK) Instruments are securities that pay interest in either cash or additional securities, at the issuer's option, for a specified period. PIK's, like zero coupon bonds, are designed to give an issuer flexibility in managing cash flow. PIK bonds can be either senior or subordinated debt and trade flat (i.e., without accrued interest). The price of PIK bonds is expected to reflect the market value of the underlying debt plus an amount representing accrued interest since the last payment. PIK's are usually less volatile than zero coupon bonds, but more volatile than cash pay securities. For federal income tax purposes, these types of bonds will require the recognition of gross income each year even though no cash may be paid to the Fund until the maturity or call date of the bond. The Fund will nonetheless be required to distribute substantially all of this gross income each year to comply with the Internal Revenue Code, and such distributions could reduce the amount of cash available for investment by the Fund. 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. INVESTMENTS IN FOREIGN EQUITY SECURITIES The Growth Stock, Large Cap Value, Large Cap Growth, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap Value, Small Cap Growth, Flexibly Managed and REIT Funds may invest in the equity securities of foreign issuers including in the case of the Small Cap Value Fund securities of foreign issuers in emerging countries, subject to the following limitations based upon the total assets of each Fund: Growth Stock - 30%; Large Cap Value - 25%; Large Cap Growth - 25%, Mid Cap Growth Fund - 25%; Mid Cap Value - 25%, Strategic Value Fund - 10%, Small Cap Value - 15%; Small Cap Growth - 10%; Flexibly Managed Fund - 25% and REIT - 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). The sub-advisers for the Strategic Value, Large Cap Value and the Mid-Cap Value Funds do not consider ADRs and securities of companies domiciled outside the U.S. but whose principal trading market is in the U.S. to be "foreign securities." INVESTMENTS IN SMALLER COMPANIES The Small Cap Value and Small Cap Growth Funds may invest a substantial portion of their assets in securities issued by smaller capitalization 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 16 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. INVESTMENTS IN UNSEASONED COMPANIES The Small Cap Value Fund may invest in companies (including predecessors) which have operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in unseasoned companies are more speculative and entail greater risk than do investments in companies with an established operating record. 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 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 17 portfolio to the consummation of forward contracts. The Growth Stock Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, Small Cap Value Fund, Small Cap 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 REIT Fund may use currency forward contracts to manage risks and to facilitate transactions in foreign securities. 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 or "earmark" such securities 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 "earmarked" or placed in the separate account declines, additional cash or securities will be "earmarked" or placed in the account on a daily basis so that the value of the "earmarked" cash or securities or the separate account will equal the amount of the Fund's commitments with respect to such contracts. At the maturity of a forward contract, a Fund may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of the contract. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. If a Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If a Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent that the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. It also should be realized that this method of protecting the value of a Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange which one can achieve at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain which might result from the value of such currency increase. Although the International Equity, Growth Stock, Large Cap Value, Small Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Flexibly Managed, REIT 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. 18 REPURCHASE AGREEMENTS Each Fund may enter into repurchase agreements through which an investor (such as a Fund) purchases a security (known as the "underlying security") from a well-established securities dealer or a bank that is a member of the Federal Reserve System. Concurrently, the bank or securities dealer agrees to repurchase the underlying security at a future point at the same price, plus specified interest. Repurchase agreements are generally for a short period of time, often less than a week. A Fund will not enter into a repurchase agreement with a maturity of more than seven business days if, as a result, more than 10% of the value of its total assets would then be invested in such repurchase agreements. The Limited Maturity Bond 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, as amended. In addition, each Fund will only enter into a repurchase agreement where (i) the market value of the underlying security, including interest accrued, will be at all times equal to or exceed the value of the repurchase agreement, and (ii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the custodian or a bank acting as agent. In the event of a bankruptcy or other default of a seller of a repurchase agreement, a Fund could experience both delays in liquidating the underlying security and losses, including: (a) possible decline in the value of the underlying security during the period while a Fund seeks to enforce its rights thereto; (b) possible subnormal levels of income and lack of access to income during this period; and (c) expenses of enforcing its rights. LENDING OF PORTFOLIO SECURITIES For the purpose of realizing additional income, each Fund may make secured loans of portfolio securities amounting to not more than 30% of its total assets. This policy is a fundamental policy for all the Funds. Securities loans are made to unaffiliated broker-dealers or institutional investors pursuant to agreements requiring that the loans be continuously secured by collateral at least equal at all times to the value of the securities lent. The collateral received will consist of government securities, letters of credit or such other collateral as may be permitted under its investment program and by regulatory agencies and approved by the Board of Directors. While the securities are being lent, the Fund will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. Each Fund has a right to call each loan and obtain the securities within such period of time which coincides with the normal settlement period for purchases and sales of such securities in the respective markets. No Fund will have the right to vote securities while they are being lent, but it will call a loan in anticipation of any material vote. Efforts to recall such securities promptly may be unsuccessful, especially for foreign securities or thinly traded securities such as small-cap stocks. In addition, because recalling a security may involve expenses to a Fund, it is expected that a Fund will do so only where the items being voted upon are, in the judgment of the investment adviser or sub-adviser, either material to the economic value of the security or threaten to materially impact the issuer's corporate governance policies or structure. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will only be made to firms deemed by the adviser to be of good standing and will not be made unless, in the judgment of the adviser, the consideration to be earned from such loans would justify the risk. ILLIQUID SECURITIES Illiquid securities generally are those which may not be sold in the ordinary course of business within seven days at approximately the value at which the Fund has valued them. The Funds may purchase securities which are not registered under the Securities Act of 1933 but which can be sold to qualified institutional buyers in accordance with Rule 144A under that Act or with respect to the Small Cap 19 Value Fund, securities that are offered in an exempt non-public offering under the Act, including unregistered equity securities offered at a discount in a private placement that are issued by companies that have outstanding, publicly traded equity securities of the same class (a "private investment in public equity," or a "PIPE"). Any such security will not be considered illiquid so long as it is determined by the adviser or sub-adviser, acting under guidelines approved and monitored by the Board of Directors, that an adequate trading market exists for that security. In making that determination, the adviser or sub-adviser will consider, among other relevant factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers willing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades. A Fund's treatment of Rule 144A securities as liquid could have the effect of increasing the level of fund illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing these securities. The adviser or sub-adviser will continue to monitor the liquidity of any Rule 144A security which has been determined to be liquid. If a security is no longer liquid because of changed conditions, the holdings of illiquid securities will be reviewed to determine if any steps are required to assure compliance with applicable limitations on investments in illiquid securities. WARRANTS The Limited Maturity Bond, 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, Growth Stock 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, Strategic Value, Small Cap Growth, International Equity, Quality Bond and Money Market Funds may invest in warrants; however, not more than 5% of any such Fund's assets (measured 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. WHEN-ISSUED SECURITIES The Limited Maturity Bond, Quality Bond, High Yield Bond, Flexibly Managed, Growth Stock, Large Cap Value, Index 500, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap 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 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. 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 20 for such investment (i.e., will not sell portfolio securities to raise cash) and, if in Independence Capital Management, Inc.'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, Inc. 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, Inc. 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. OPTIONS Each Fund, other than the Money Market Fund, may write covered call and buy put options on its portfolio securities and purchase call or put options on securities indices. The aggregate market value of the portfolio securities covering call or put options will not exceed 25% of a Fund's total assets. Such options may be exchange-traded or dealer options. An option gives the owner the right to buy or sell securities at a predetermined exercise price for a given period of time. Although options will primarily be used to minimize principal fluctuations, or to generate additional premium income for the Funds, they do involve certain risks. Writing covered call options involves the risk of not being able to effect closing transactions at a favorable price or participate in the appreciation of the underlying securities or index above the exercise price. 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 earmark or segregate cash, U.S. Government securities or other liquid debt obligations having a value equal to the fluctuating market value of the optioned securities. Options trading is a highly specialized activity which entails greater than ordinary investment risks. Options on particular securities may be more volatile than the underlying securities, and therefore, on a percentage basis, more risky than an investment in the underlying securities themselves. There are several risks associated with transactions in options on securities and indices. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on a national securities exchange ("Exchange"), may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding 21 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. 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. When buying or selling futures contracts, a Fund must place a deposit with its broker equal to a fraction of the contract amount. This amount is known as "initial margin" and must be in the form of liquid debt instruments, including cash, cash-equivalents and U.S. government securities. Subsequent payments to and from the broker, known as "variation margin" may be made daily, if necessary, as the value of the futures contracts fluctuates. This process is known as "marking-to-market." The margin amount will be returned to a Fund upon termination of the futures contracts assuming all contractual obligations are satisfied. Because margin requirements are normally only a fraction of the amount of the futures contracts in a given transaction, futures trading can involve a great deal of leverage. In order to avoid this, a Fund will earmark or segregate assets for any outstanding futures contracts as may be required under the federal securities laws. Successful use of futures by a Fund is subject, first, to the investment adviser's or sub-adviser's ability to correctly predict movements in the direction of the market. For example, if a Fund has hedged against the possibility of a decline in the market adversely affecting securities held by it and securities prices increase instead, the Fund will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have approximately equal offsetting losses in its futures positions. Even if the investment adviser or sub-adviser has correctly predicted market movements, the success of a futures position may be affected by imperfect correlations between the price movements of the futures contract and the securities being hedged. A Fund may purchase or sell futures contracts on any stock index or interest rate index or instrument whose movements will, in the investment adviser's or sub-adviser's judgment, have a significant correlation with movements in the prices of all or portions of the Fund's portfolio securities. The correlation between price movements in the futures contract and in the portfolio securities probably will not be perfect, however, and may be affected by differences in historical volatility or temporary price distortions in the futures markets. To attempt to compensate for such differences, the Fund could purchase or sell futures contracts with a greater or lesser value than the securities it wished to hedge or purchase. Despite such efforts, the correlation between price movements in the futures contract and the portfolio securities may be worse than anticipated, which could cause the Fund to suffer losses even if the investment adviser had correctly predicted the general movement of the market. A Fund which engages in the purchase or sale of futures contracts may also incur risks arising from illiquid markets. The ability of a Fund to close out a futures position depends on the availability of a liquid market in the futures contract, and such a market may not exist for a variety of reasons, including daily limits on price movements in futures markets. In the event a Fund is unable to close out a futures position because of illiquid markets, it would be required to continue to make daily variation margin payments, and could suffer losses due to market changes in the period before the futures position could be closed out. The trading of futures contracts is also subject to the risks of trading halts, suspensions, exchange or clearing house equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other disruptions of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments. Options on futures contracts are subject to risks similar to those described above, and also to a risk of loss due to an imperfect correlation between the option and the underlying futures contract. 22 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 Bond, Growth Stock 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. The High Yield Bond, Growth Stock, Small Cap Value and Flexibly Managed Funds may invest in Exchange Traded Funds ("ETFs"). These are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to track a particular market index. The fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. REAL ESTATE INVESTMENT TRUSTS The REIT and Small Cap Value Funds may invest in shares of REITs. REITs are pooled investment vehicles which invest primarily in real estate or real estate related loans. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment companies such as the Funds, REITs are not taxed on income distributed to shareholders provided they comply with certain requirements under the Internal Revenue Code. The REIT and Small Cap Value Funds will indirectly bear their proportionate share of any expenses paid by REITs in which they invest in addition to the expenses paid by the Funds. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and failing to maintain their exemptions from the Act. REITs (especially mortgage REITs) are also subject to interest rate risks. LOAN PARTICIPATIONS AND ASSIGNMENTS The Large Cap Growth and High Yield Bond Funds 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 Large Cap Growth and 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 23 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 Large Cap Growth and High Yield Bond Funds are 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 may not be a liquid public market for the loan participations. Hence, the Funds may be required to consider loan participations as illiquid securities and subject them to the Funds' restriction on investing no more than 15% of assets in securities for which there is no readily available market. The Funds would initially impose a limit of no more than 5% of total assets in illiquid loan participations. The Large Cap Growth Fund currently does not intend to invest more than 5% of its assets in loan participations. Where required by applicable SEC positions, the Funds will treat both the corporate borrower and the bank selling the participation interest as an issuer for purposes of its fundamental investment restriction which prohibits investing more than 5% of Fund assets in the securities of a single issuer. Various service fees received by the High Yield Bond and Large Cap Growth Funds 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. TRADE CLAIMS The Large Cap Growth and High Yield Bond Funds may invest up to 5% of their 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. 24 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 bankruptcy filing. These payments are presumed to have benefited 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. Accordingly, trade claims may be illiquid investments. NO CURRENT YIELD/ULTIMATE RECOVERY. Trade claims are almost never entitled to earn interest. As a result, the return on such an investment is very sensitive to the length of the bankruptcy, which is uncertain. Although not unique to trade claims, it is worth noting that the ultimate recovery on the claim is uncertain and there is no way to calculate a conventional yield to maturity on this investment. Additionally, the exit for this investment is a plan of reorganization which may include the distribution of new securities. These securities may be as illiquid as the original trade claim investment. TAX ISSUE. Although the issue is not free from doubt, it is likely that trade claims would be treated as non-securities investments. As a result, any gains would be considered "non-qualifying" under the Internal Revenue Code. The High Yield Bond Fund and Large Cap Growth Fund may have up to 10% of its gross income (including capital gains) derived from non-qualifying sources. INVESTMENT RESTRICTIONS Except as otherwise specified, the investment restrictions described below have been adopted as fundamental policies of the sixteen 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. 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 ISSUER. 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 25 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 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. 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 26 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. QUALITY BOND FUND Investment restrictions (1), (2), (4) through (9), (13) and (14) have been adopted by the Quality Bond Fund as fundamental policies, except as otherwise indicated. Restrictions (3) and (10) through (12) are operating policies subject to change by the Board of Directors without shareholder approval. The Fund may not: (1)(A) 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; (B) 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; (C) UNSEASONED ISSUERS. More than 5% of the value of the Fund's total assets would be invested in the securities (taken at cost) of issuers which at the time of purchase had been in operation less than three years (for this purpose, the period of operation of any issuer shall include the period of operation of any predecessor or unconditional guarantor of the issuer) and in equity securities which are not readily marketable for reasons other than restrictions against sale to the public without registration under the Securities Act of 1933; (D) 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 (E) 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 (14) 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 (14) 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) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of exercising management or control; (11) PUTS, CALLS, ETC. Invest in puts, calls, straddles, spreads, or any combination thereof, except the Fund reserves the right to write 27 covered call options and purchase put and call options; (12) OIL AND GAS PROGRAMS. Purchase participations or other direct interests in oil, gas, or other mineral exploration or development programs; (13) SENIOR SECURITIES. Issue any class of securities senior to any other class of securities; or (14) FUTURES CONTRACTS. Enter into an interest rate futures contract if, as a result thereof, (i) the then current aggregate futures market prices of financial instruments required to be delivered under open futures contract sales plus the then current aggregate purchase prices of financial instruments required to be purchased under open futures contract purchases would exceed 30% of the Fund's total assets (taken at market value at the time of entering into the contract); or (ii) more than 5% of the Fund's total assets (taken at market value at the time of entering into the contract) would be committed to margin on such futures contracts or to premiums on options thereon. HIGH YIELD BOND FUND Investment restrictions (1), (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 (19) 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 ISSUER. 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 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 and any rules adopted thereunder or (ii) securities of the T. Rowe Price 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 (16) 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 (16) 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 (16) 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. 28 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 BORROWINGS 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. 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 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 ISSUER. 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 T. Rowe Price 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 29 paid on any such borrowings 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. GROWTH STOCK FUND Investment restrictions (1) through (14) and (19) and (20) described below have been adopted by the Growth Stock Fund and are fundamental policies, except as otherwise indicated. Restrictions (15) through (18) are operating policies which are subject to change by the Board of Directors without shareholder approval. 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) UNSEASONED ISSUERS. Purchase the securities of any issuer engaged in continuous operation for less than three years; (3) 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; (4) 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; (5) COMMODITIES. Purchase or sell commodities or commodity contracts; except that it may enter into futures contracts subject to (20) below; (6) 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); (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, and except for margin deposits made in connection with futures contracts, subject to (20) below; (8) 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; (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 such borrows will reduce net investment income. The Fund may also enter into futures contracts as set forth in (20) below; (10) 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; (11) 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; (12) ALLOCATION OF PRINCIPAL BUSINESS TO OFFICERS AND DIRECTORS. Deal with any of its officers or directors, or with any firm of which any of its officers or directors is a member, as principal in the purchase or sale of portfolio securities; (13) 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; (14) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of exercising management or control; (15) ILLIQUID SECURITIES. Purchase a security if, as a result, more than 15% of its 30 net assets would be invested in illiquid securities; (16) 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; (17) OIL AND GAS PROGRAMS. Purchase participations or other direct interests in oil, gas, or other mineral exploration or development programs; (18) MORTGAGING. Mortgage, pledge, or hypothecate or, in any other manner, transfer as security for indebtedness any security owned by the Growth Stock 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; (19) SENIOR SECURITIES. Issue any class of securities senior to any other class of securities; or (20) 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. LARGE CAP VALUE FUND Investment restrictions (1), (2), (3), (5), (7) through (11), and (14) 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) (A) 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; (B) 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; (C) 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 (14) 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 (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 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 (14) 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 31 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. LARGE CAP GROWTH FUND Investment restrictions (1) through (7) have been adopted by the Large 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) 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; (5) 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; (6) SENIOR SECURITIES. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowing as described in (4) 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 (7) LENDING. Make loans, except that the Fund may purchase or hold debt instruments and may enter into repurchase agreements and make loans of portfolio securities in accordance with its investment objectives and policies. INDEX 500 FUND Investment restrictions (1) through (9) have been adopted by the Index 500 Fund as fundamental policies. The Fund may not: (1) DIVERSIFICATION. With respect to 75% of its assets, invest more than 5% of the value of the Fund's total assets in the securities of a single issuer or purchase more than 10% of the outstanding voting securities of any one issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities; (2) INDUSTRY CONCENTRATION. Purchase 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 32 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 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. 33 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 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. STRATEGIC VALUE FUND Investment restrictions (1) through (3), (5) and (7) through (9) have been adopted by the Strategic Value Fund as fundamental policies. Restrictions (4) (6) and (10) through (15) are operating policies and are subject to change by the Board of Directors without shareholder approval. 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 34 companies, except to the extent permitted by the Investment Company Act of 1940 and any rules adopted thereunder; (5) 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 (the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities); (6) SHORT SALES. Make short sales of securities or maintain a short position except to the extent permitted by applicable law; (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 or in connection with a merger or acquisition; (8) SENIOR SECURITIES. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowing as described in (5) 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; (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; (10) ILLIQUID SECURITIES. Invest more than 15% of its net assets (at the time of investment) in illiquid securities, except for qualifying for resale under Rule 144 of the Securities Act of 1933; (11) UNSEASONED ISSUERS. Purchase the securities of any issuer engaged in continuous operation for less than three years; (12) WARRANTS. Invest in warrants if, at the time of the acquisition, its investment in warrants would exceed 5% of the Fund's total assets; (13) REAL ESTATE. Invest in real estate limited partnership interests or interests in oil, gas or other mineral leases; (14) DERIVATIVES. Write, purchase or sell puts, calls, straddles, spreads or combination thereof; and (15) TRANSACTION WITH FUND OFFICERS. Buy from or sell to any of its officers, trustees, employees, or its investment adviser or any of its officers, trustees, partners or employees, any securities other than shares of the Fund. SMALL CAP GROWTH FUND Investment restrictions (1) through (9) are fundamental policies of the Small Cap Growth Fund, except as otherwise indicated. Restrictions (10) through (14) 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) OIL AND 35 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; (12) ILLIQUID SECURITIES. Purchase a security if, as a result, more than 15% of its net assets would be invested in illiquid securities; (13) SHORT SALES. Effect short sales of securities, except short sales "against the box;" (14) 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. 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 (14) 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) 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; (12) ILLIQUID SECURITIES. Purchase a security if, as a result, more than 15% of its net assets would be invested in illiquid securities; (13) SHORT SALES. Effect short sales of securities, except short sales "against the box;" (14) 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. 36 INTERNATIONAL EQUITY FUND Investment restrictions (1), (2), (3), (5), (7) through (11), (13), and (14) are fundamental policies of the International Equity Fund, except as otherwise indicated. Restrictions (4), (6) and (12) are operating policies and are subject to change by the Board of Directors without shareholder approval. The Fund may not: (1) (A) 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; (B) 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; (C) UNSEASONED ISSUERS. More than 5% of the value of the Fund's total assets would be invested in the securities of issuers which at the time of purchase had been in operation for less than three years, including predecessors and unconditional guarantors; (2) RESTRICTED OR NOT READILY MARKETABLE SECURITIES. Purchase a security if, as a result, more than 10% of the Fund's total assets would be invested in: (a) securities with legal or contractual restrictions on resale; (b) repurchase agreements maturing in more than seven (7) days; and (c) other securities that are not readily marketable; (3) REAL ESTATE. Purchase or sell real estate (although it may purchase money market securities secured by real estate or interests therein, or issued by companies which invest in real estate or interests therein); (4) INVESTMENT COMPANIES. Purchase securities of open-end and closed-end investment companies, except to the extent permitted by the Investment Company Act of 1940 and any rules adopted thereunder; (5) COMMODITIES. Purchase or sell commodities or commodity contracts; except that it may enter into futures contracts subject to (14) 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 (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 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 (14) 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) 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. 37 REIT FUND Investment restrictions (1) through (8) have been adopted by the REIT Fund as fundamental policies. Restriction (9) is a non-fundamental operating policy and is subject to change by the Board of Directors without shareholder approval. 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) 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 (including securities issued by real estate investment trusts) and may purchase and sell securities that are secured by interests in 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, 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); (5) 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; (6) 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; (7) SENIOR SECURITIES. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowing as described in (5) 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; (8) 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, any applicable exemptive orders; and (9) ILLIQUID SECURITIES AND RESTRICTED SECURITIES. Invest more than 15% of its net assets in illiquid or restricted securities (this restriction does not apply to any Rule 144A restricted security). 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. 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. 38 GENERAL INFORMATION INVESTMENT ADVISORY SERVICES INDEPENDENCE CAPITAL MANAGEMENT, INC. Independence Capital Management, Inc. ("ICMI"), a wholly-owned Penn Mutual subsidiary, serves as investment adviser to all of the Funds and performs day-to-day investment management services for the Money Market, Limited Maturity Bond and Quality Bond 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, and Growth Stock 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%; and Growth Stock Fund, 0.65%. The advisory fees for the Money Market, Quality Bond, and Growth Stock 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, Large Cap Growth, Index 500, Mid Cap Growth, Strategic Value Fund, Small Cap Value, International Equity and REIT 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%; Large Cap Growth, 0.55%; Index 500, 0.07%; Mid Cap Growth, 0.70%; Strategic Value Fund, 0.72%; Small Cap Value, 0.85%; International Equity, 0.85%; and REIT, 0.70%. 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 Small Cap 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. Wells Capital Management is a wholly-owned subsidiary of Wells Fargo Bank, N.A. which in turn is wholly-owned by Wells Fargo & Company, a diversified financial services company. For providing sub-advisory services to the 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 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 Fund, ICMI pays Neuberger Berman, on a monthly basis, a sub-advisory fee based on average daily net assets of the Fund, at an annual rate of 0.43%. 39 GOLDMAN SACHS ASSET MANAGEMENT, L.P. Goldman Sachs Asset Management, L.P. ("GSAM") serves as sub-adviser to the SMALL CAP VALUE FUND and performs day-to-day investment management services for the Fund. GSAM is wholly-owned by The Goldman Sachs Group, Inc. 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 Fund, ICMI pays GSAM, on a monthly basis, a sub-advisory fee based on average daily net assets of the Fund, at an annual rate of 0.75% of the first $50,000,000 of average daily net assets; 0.70% with respect to the next $50,000,000 of average daily net assets; and 0.65% of average daily net assets in excess of $100,000,000. T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as sub-adviser to the FLEXIBLY MANAGED, GROWTH STOCK, 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 Funds, ICMI pays T. Rowe Price, on a monthly basis, fees based on the average daily net assets of each Fund. The fees for the Flexibly Managed and High Yield Bond Funds 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 $250,000,000 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 $500,000,000. The fees for the Growth Stock Fund are paid at the following rates: 0.40% with respect to the first $500,000,000 of the average daily net assets of the Fund; and 0.35% of the average daily net assets of the Fund in excess of $500,000,000. T. ROWE Price has agreed to waive its monthly compensation due it under the Investment Sub-Advisory Agreement to the extent necessary to reduce its effective monthly sub-advisory fees for the Funds by the following percentages based on the combined average daily net assets of the Funds, and the certain other Penn Mutual accounts sub-advised by T. Rowe Price:
COMBINED ASSET LEVELS PERCENTAGE FEE WAIVER ------------------------------------- --------------------- Between $750 million and $1.5 billion 5% fee reduction Between $1.5 billion and $3 billion 7.5% fee reduction Above $3 billion 10% fee reduction
ABN AMRO ASSET MANAGEMENT, INC. ABN AMRO Asset Management, Inc. ("ABN AMRO") serves as sub-adviser to the LARGE CAP 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. For providing sub-advisory services to the Fund, ICMI pays ABN AMRO, on a monthly basis, fees based on the average daily net assets of the Fund. The fees are paid at the following rates: 0.425% with respect to the first $50,000,000 of the average daily net assets of the Fund; and 0.40% of the average daily net assets of the Fund in excess of $50,000,000. LORD, ABBETT & CO. LLC. Lord, Abbett & Co. LLC ("Lord Abbett") serves as sub-adviser to the STRATEGIC VALUE AND LARGE CAP VALUE 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 Funds, ICMI pays Lord Abbett, on a monthly basis, fees based on the average daily net assets of the Funds. The fees for the Strategic Value Fund are paid at the following rates: 0.45% with respect to the first $200,000,000 of the average daily net assets of the Fund; 0.40% with respect to the next $300,000,000 of the average daily net assets of the Fund; and 0.375% with respect to the average daily net assets of the Fund in excess of $500,000,000. The fees paid for the Large Cap Value Fund are paid at the following rates: 0.35% with respect to the first $200,000,000 of the average daily net assets of the Fund; 0.30% with respect to the next $200,000,000 of the average daily net assets of the Fund; and 0.25% with respect to the average daily net assets of the Fund in excess of $400,000,000. HEITMAN REAL ESTATE SECURITIES LLC. Heitman Real Estate Securities LLC ("Heitman") serves as sub-adviser to the REIT 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 40 provided to the Fund. For providing sub-advisory services to the Fund, ICMI pays Heitman, on a monthly basis, an advisory fee based on the average daily net assets of the Fund, at an annual rate of 0.40%. VONTOBEL ASSET MANAGEMENT, INC. Vontobel Asset Management, Inc. ("Vontobel") serves as sub-adviser 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 Fund, ICMI pays Vontobel, on a monthly basis, an advisory fee based on average daily net assets of the Fund. The fees are paid at the following rates: 0.50% with respect to the first $227,000,000 of the average daily net assets of the Fund; and 0.35% with respect to the average daily net assets of the Fund in excess of $227,000,000. BJURMAN, BARRY & ASSOCIATES. Bjurman, Barry & Associates ("BBA") serves as sub-adviser to the SMALL CAP 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 BBA, 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 rate: 0.50% of the average daily net assets of the Fund. In the years 2006, 2005, and 2004, the advisory fees paid to ICMI by each of the Funds were as follows:
FUND 2006 2005 2004 --------------------------- ---------- ---------- ---------- Money Market Fund $ 152,089 $ 152,510 $ 186,947 Limited Maturity Bond Fund 136,823 177,497 134,663 Quality Bond Fund 515,353 518,483 567,590 High Yield Bond Fund (1) 426,811 427,488 416,394 Flexibly Managed Fund (2) 7,148,637 5,944,673 4,749,993 Growth Stock Fund (3) 746,440 631,560 604,522 Large Cap Value Fund (4) 1,347,741 1,292,566 1,282,843 Large Cap Growth Fund (5) 156,698 137,453 112,558 Index 500 Fund (6) 165,732 166,421 167,979 Mid Cap Growth Fund (7) 601,379 510,092 460,201 Mid Cap Value Fund (8) 663,207 565,592 481,673 Strategic Value Fund (9) 310,417 270,906 157,552 Small Cap Growth Fund (10) 834,488 787,528 809,297 Small Cap Value Fund (11) 1,439,203 1,329,365 1,310,735 International Equity Fund (12) 2,070,977 1,477,794 1,182,076 REIT Fund (13) 394,416 251,604 152,951
---------- 1. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to T. Rowe Price Associates, Inc. of $333,566, $335,840, and $330,511, respectively. 2. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to T. Rowe Price Associates, Inc. of $4,655,437, $3,891,584, and $3,140,537, respectively. 3. In 2006, 2005 and the period August 1, 2004 through December 31, 2004, ICMI paid sub-advisory fees to T. Rowe Price Associates, Inc. of $453,537, $382,067 and $148,849, respectively. 4. For the period January 1, 2004 through July 31, 2004 ICMI paid sub-advisory fees to Putnam Investment Management LLC of $574,321. In 2006, 2005 and for the period August 1, 2004 through December 31, 2004, ICMI paid sub-advisory fees to Lord, Abbett & Co. LLC of $773,870, $746,283, and $308,632, respectively. 5. For the period January 1, 2004 through July 31, 2004, ICMI paid sub-advisory fees to Franklin Advisers, Inc. of $48,242. In 2006, 2005, and for the period August 1, 2004 through December 31, 2004, ICMI paid sub-advisory fees to ABN AMRO Asset Management Inc. of $121,085, $106,214, and 38,735, respectively. 6. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Wells Capital Management Incorporated of $111,028, $111,323, and $111,991, respectively. 7. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Turner Investment Partners, Inc. of $429,557, $364,351, and $328,715, respectively. 8. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Neuberger Berman Management Inc. of $518,507, $442,190, and $376,581, respectively. 9. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Lord, Abbett & Co. LLC of $194,011, $169,316, and $98,470, respectively. 10. For the period January 1, 2004 through July 31, 2004, ICMI paid sub-advisory fees to RS Investment Management, Inc. of $417,869. In 2006, 2005 and for the period August 1, 2004 through December 31, 2004, ICMI paid sub-advisory fees to Bjurman, Barry & Associates of $569,277, $535,734 and $221,246, respectively. 41 11. For the period January 1, 2004 through July 31, 2004, ICMI paid sub-advisory fees to Royce & Associates, LLC of $577, 270. In 2006, 2005 and for the period August 1, 2004 through December 31, 2004, ICMI paid sub-advisory fees to Goldman Sachs Asset Management, L.P. of $1,175,567, $1,091,573 and $447,708, respectively. The advisory fees paid are before a contractual waiver of $0, $0, and $30,102, for 2006, 2005, and 2004, respectively. 12. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Vontobel Asset Management, Inc. of $1,195,792, $869,290, and $695,339, respectively. 13. In 2006, 2005, and 2004, ICMI paid sub-advisory fees to Heitman Real Estate Securities LLC of $239,605, $154,557, and $93,956, respectively. PORTFOLIO MANAGERS This section includes information about the Funds' portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they own (if any) and how they are compensated. INDEPENDENCE CAPITAL MANAGEMENT, INC.: INVESTMENT ADVISER TO THE MONEY MARKET, LIMITED MATURITY AND QUALITY BOND FUNDS (COLLECTIVELY, THE "FUNDS"). COMPENSATION. The portfolio managers for the Quality Bond, Limited Maturity Bond and Money Market Funds are compensated by the Funds' adviser, Independence Capital Management, Inc. and its parent, The Penn Mutual Life Insurance Company. Each portfolio manager's compensation consists of three components. The first component is base salary, which is fixed and reviewed annually. The second component of compensation is in the form of a performance bonus which is based upon relative performance of the individual portfolios managed by the portfolio managers versus an appropriate market benchmark for each portfolio measured over both a one- and three- year time period (pre-tax). The third component of compensation is in the form of a bonus based upon a multiple of base salary and tied to specific measures of profitability goals, sales goals and expense management goals of The Penn Mutual Life Insurance Company. Peter M. Sherman, in his capacity as Executive Vice President and Chief Investment Officer of Penn Mutual, is also eligible to participate in a deferred compensation plan that is only made available to certain individuals. Participation in the deferred compensation plan, while exclusive to only some individuals at Penn Mutual, is not solely related to fund management. FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar amount range of the portfolio managers' "beneficial ownership" of shares of the Funds as of December 31, 2006. Dollar amount ranges disclosed are established by the SEC. "Beneficial ownership" is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
PORTFOLIO MANAGER FUND DOLLAR RANGE OF FUND SHARES --------------------- -------------------------- --------------------------- Peter M. Sherman Quality Bond Fund $50,001 - $100,000 Money Market Fund None Limited Maturity Bond Fund None Joshua J. Myers Quality Bond Fund $10,001 - $50,000 Money Market None Limited Maturity Bond Fund None Jennifer S. Ripper Quality Bond Fund $1 - $10,000 Money Market Fund None Limited Maturity Bond Fund None John H. Donaldson Quality Bond Fund None Money Market Fund None Limited Maturity Bond Fund None Christopher Beaulieu Quality Bond Fund None Money Market Fund None Limited Maturity Bond Fund None
OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of December 31, 2006. 42
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS -------------------- -------------------- -------------------------- NUMBER OF TOTAL NUMBER OF TOTAL NUMBER OF NAME ACCOUNTS ASSETS ACCOUNTS ASSETS ACCOUNTS TOTAL ASSETS -------------------- --------- ------ --------- ------ --------- ------------ Peter M. Sherman 0 0 0 0 1 $6.1 billion Joshua J. Myers 0 0 0 0 1 $6.1 billion John H. Donaldson 0 0 0 0 1 $6.1 billion Jennifer S. Ripper 0 0 0 0 1 $6.1 billion Christopher Beaulieu 0 0 0 0 1 $6.1 billion
CONFLICTS OF INTERESTS. The Portfolio Managers manage multiple accounts, including the Funds. The Portfolio Managers make decisions for each portfolio taking into account the investment objectives, policies, guidelines and other relevant considerations that are applicable to that portfolio. Independence Capital Management, Inc. believes that its written policies and procedures are reasonably designed to minimize potential conflicts of interest and to prevent material conflicts of interest that may arise when managing portfolios for multiple accounts with similar investment objectives, including the management of the Funds and the Penn Mutual Consolidated General Account, which is the account listed in the Table above under the column "Other Accounts". Independence Capital Management, Inc. does not believe that any material conflicts of interest exist in connection with the Portfolio Managers' management of the investments of the Funds and the investments of the Other Account referenced in the Table above. T. ROWE PRICE ASSOCIATES ("T. ROWE PRICE"): INVESTMENT SUB-ADVISER TO THE FLEXIBLY MANAGED, HIGH YIELD AND GROWTH STOCK FUNDS (COLLECTIVELY, THE "FUNDS"). COMPENSATION. T. Rowe Price compensates each Fund's portfolio manager. Portfolio manager compensation consists primarily of a base salary, a cash bonus, and an equity incentive that usually comes in the form of a stock option grant. Occasionally, portfolio managers will also have the opportunity to participate in venture capital partnerships. Compensation is variable and is determined based on the following factors: Investment performance over one-, three-, five-, and 10-year periods is the most important input. We evaluate performance in absolute, relative, and risk-adjusted terms. Relative performance and risk-adjusted performance are determined with reference to the broad based index (ex. S&P 500) and an applicable Lipper index (ex. Large-Cap Growth), though other benchmarks may be used as well. Investment results are also compared to comparably managed funds of competitive investment management firms. Performance is primarily measured on a pre-tax basis though tax-efficiency is considered and is especially important for tax efficient funds. Compensation is viewed with a long term time horizon. The more consistent a manager's performance over time, the higher the compensation opportunity. The increase or decrease in a fund's assets due to the purchase or sale of fund shares is not considered a material factor. In reviewing relative performance for fixed-income funds, a fund's expense ratio is usually taken into account. Contribution to our overall investment process is an important consideration as well. Sharing ideas with other portfolio managers, working effectively with and mentoring our younger analysts, and being good corporate citizens are important components of our long term success and are highly valued. All employees of T. Rowe Price, including portfolio managers, participate in a 401(k) plan sponsored by T. Rowe Price Group. In addition, all employees are eligible to purchase T. Rowe Price common stock through an employee stock purchase plan that features a limited corporate matching contribution. Eligibility for and participation in these plans is on the same basis as for all employees. Finally, all vice presidents of T. Rowe Price Group, including all portfolio managers, receive supplemental medical/hospital reimbursement benefits. This compensation structure is used for all portfolios managed by the portfolio manager. FUND SHARES OWNED BY PORTFOLIO MANAGERS. The portfolio managers did not beneficially own any shares of the Funds, as of December 31, 2006. 43 OTHER ACCOUNTS. In addition to the Funds, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of December 31, 2006. Total assets are based on T. Rowe Price internal records as of December 31, 2006.
REGISTERED INVESTMENT OTHER POOLED INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS --------------------------- --------------------------- ---------------------------- TOTAL ASSETS NUMBER [NOTE: NOT OF INCLUDING NUMBER OF NUMBER OF NAME ACCOUNTS FUNDS] ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ------------------ -------- ---------------- --------- --------------- --------- --------------- David Giroux* 2 $ 12,511,209,234 1 $ 106,932,415 0 $ 0 Jeffrey Arricale* 2 $ 12,511,209,234 1 $ 106,932,415 0 $ 0 Robert Smith 10 $ 23,035,037,434 1 $ 113,408,350 5 $ 368,132,318 Mark Vaselkiv 9 $ 5,979,558,879 7 $ 2,688,561,987 13 $ 1,748,257,091 P. Robert Bartolo** 0 $ 0 0 $ 0 0 $ 0
---------- * Currently, David Giroux and Jeffrey Arricale serve as Co-Chairmen of the Flexibly Managed Fund's Investment Advisory Committee. Effective on or about June 1, 2007, David Giroux will assume sole responsibility as the Chairman of the Fund's Investment Advisory Committee. Mr. Arricale will continue to contribute to the portfolio management of the Fund as a member of the Fund's Investment Advisory Committee. ** Effective on or about October 1, 2007, P. Robert Bartolo will become Chairman of the Investment Advisory Committee for the Growth Stock Fund. CONFLICTS OF INTERESTS. T. Rowe Price is not aware of any material conflicts of interest that may arise in connection with a portfolio manager's management of a Fund's investments and the investments of the other accounts listed above. Portfolio managers at T. Rowe Price typically manage multiple accounts. These accounts may include, among others, mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, colleges and universities, foundations), and commingled trust accounts. Portfolio managers make investment decisions for each portfolio based on the investment objectives, policies, practices and other relevant investment considerations that the managers believe are applicable to that portfolio. Consequently, portfolio managers may purchase (or sell) securities for one portfolio and not another portfolio. T. Rowe Price has adopted brokerage and trade allocation policies and procedures which it believes are reasonably designed to address any potential conflicts associated with managing multiple accounts for multiple clients. Also, as disclosed in the "Compensation" section above, our portfolio managers' compensation is determined in the same manner with respect to all portfolios managed by the portfolio manager. LORD, ABBETT & CO. LLC ("LORD ABBETT"): INVESTMENT SUB-ADVISER TO THE STRATEGIC VALUE AND LARGE CAP VALUE FUNDS (COLLECTIVELY, THE "FUNDS"). COMPENSATION: Lord Abbett compensates each Fund's investment managers. Lord Abbett compensates its investment managers on the basis of salary, bonus and profit sharing plan contributions. The level of compensation takes into account the investment manager's experience, reputation and competitive market rates. Fiscal year-end bonuses, which can be a substantial percentage of base level compensation, are determined after an evaluation of various factors. These factors include the investment manager's investment results and style consistency, the dispersion among funds with similar objectives, the risk taken to achieve the fund returns, and similar factors. Investment results are evaluated based on an assessment of the investment manager's three- and five-year investment returns on a pre-tax basis vs. both the appropriate style benchmarks and the appropriate peer group rankings. Finally, there is a component of the bonus that reflects leadership and management of the investment team. The evaluation does not follow a formulaic approach, but rather is reached following a review of these factors. No part of the bonus payment is based on the investment manager's assets under management, the 44 revenues generated by those assets, or the profitability of the investment manager's unit. Lord Abbett does not manage hedge funds. Lord Abbett may designate a bonus payment of a manager for participation in the firm's senior incentive compensation plan, which provides for a deferred payout over a five-year period. The plan's earnings are based on the overall asset growth of the firm as a whole. Lord Abbett believes this incentive focuses investment managers on the impact their fund's performance has on the overall reputation of the firm as a whole and encourages exchanges of investment ideas among investment professionals managing different mandates. Lord Abbett provides a 401(k) profit-sharing plan for all eligible employees. Contributions to an investment manager's profit-sharing account are based on a percentage of the investment manager's total base and bonus paid during the fiscal year, subject to a specified maximum amount. The assets of this profit-sharing plan are entirely invested in Lord Abbett-sponsored funds. FUND SHARES OWNED BY PORTFOLIO MANAGERS. The investment managers did not beneficially own any shares of the Funds as of December 31, 2006. OTHER ACCOUNTS. The following table indicates for each Fund as of December 31, 2006: (1) the number of other accounts managed by each investment manager who is primarily and jointly responsible for the day-to-day management of that Fund within certain categories of investment vehicles; and (2) the total assets in such accounts managed within each category. For each of the categories a footnote to the table also provides the number of accounts and the total assets in the accounts with respect to which the management fee is based on the performance of the account. Included in the Registered Investment Companies or mutual funds category are those U.S. registered funds managed or sub-advised by Lord Abbett, including funds underlying variable annuity contracts and variable life insurance policies offered through insurance companies. The Other Pooled Investment Vehicles category includes collective investment funds, offshore funds and similar non-registered investment vehicles. Lord Abbett does not manage any hedge funds. The Other Accounts category encompasses Retirement and Benefit Plans (including both defined contribution and defined benefit plans) sponsored by various corporations and other entities, individually managed institutional accounts of various corporations, other entities and individuals, and separately managed accounts in so-called wrap fee programs sponsored by financial intermediaries (which include broker-dealers, registered investment advisers, banks, trust companies, certified financial planners, third-party administrators, recordkeepers, trustees, custodians, financial consultants and insurance companies) unaffiliated with Lord Abbett. (The data shown below is approximate.)
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS ------------------------- -------------------------- -------------------------- NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NAME ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ----------------------- --------- ------------- --------- ------------- --------- ------------- Large Cap Value Fund Eli M. Salzmann 10 $ 28,213.6 9 $ 791.8 45,132* $ 19,032.7* Sholom Dinsky 10 $ 28,213.6 9 $ 791.8 45,132* $ 19,032.7* Strategic Value Fund Edward K. von der Linde 11 $ 14,717.7 1 $ 35.5 3,106 $ 1,853.2 Howard E. Hansen 12 $ 17,117.6 2 $ 266.3 3,117** $ 2,688.1**
---------- * Included in the number of accounts and total assets is 1 account with respect to which the management fee is based on the performance of the account; such account totals approximately $262.9 million in total assets. ** Included in the number of accounts and total assets is 1 account with respect to which the management fee is based on the performance of the account; such account totals approximately $451.2 million in total assets. CONFLICTS OF INTEREST: Conflicts of interest may arise in connection with the investment managers' management of the investments of each Fund and the investments of the other accounts included in the table above. Such conflicts may arise with respect to the allocation of investment opportunities among the Funds and other accounts with similar investment objectives and policies. An investment manager potentially could use information concerning a Fund's transactions to the advantage of other accounts and to the detriment of the Fund. To address these potential conflicts of interest, Lord Abbett has adopted and implemented a number of policies and procedures. Lord Abbett 45 has adopted Policies and Procedures for Evaluating Best Execution of Equity Transactions, as well as Trading Practices/Best Execution Procedures. The objective of these policies and procedures is to ensure the fair and equitable treatment of transactions and allocation of investment opportunities on behalf of all accounts managed by Lord Abbett. In addition, Lord Abbett's Code of Ethics sets forth general principles for the conduct of employee personal securities transactions in a manner that avoids any actual or potential conflicts of interest with the interests of Lord Abbett's clients including the Funds. Moreover, Lord Abbett's Statement of Policy and Procedures on Receipt and Use of Inside Information sets forth procedures for personnel to follow when they have inside information. Lord Abbett is not affiliated with a full service broker-dealer and therefore does not execute any fund transactions through such an entity, a structure that could give rise to additional conflicts. Lord Abbett does not conduct any investment bank functions and does not manage any hedge funds. Lord Abbett does not believe that any material conflicts of interest exist in connection with the investment managers' management of the investments of the Fund and the investments of the other accounts referenced in the table above. ABN AMRO ASSET MANAGEMENT, INC. ("ABN AMRO"): INVESTMENT SUB-ADVISER TO THE LARGE CAP GROWTH FUND (THE "FUND"). COMPENSATION. ABN AMRO compensates the Fund's portfolio managers. As of December 31, 2006 base salaries for portfolio managers are benchmarked against industry-specific surveys of leading compensation consultants to ensure our ranges are in-line with our industry peers. Each professional participates in an annual incentive, which is based primarily on relative investment performance rankings versus the appropriate peer universes. In the near term, professionals are incented based upon performance over three-year periods. In the longer term, senior professionals are eligible for additional compensation, which is based off of the team's revenue growth. FUND SHARES OWNED BY PORTFOLIO MANAGER. The portfolio managers did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio manager is responsible for the day-to-day management of certain other accounts, as listed below. The account listed below is not subject to a performance-based advisory fee. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS ------------------------ ------------------------ ------------------------ NUMBER OF NUMBER OF NUMBER OF NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ----------------- -------- ------------- --------- ------------ --------- ------------ Richard Drake 2 $ 873,848,076 0 $ 0 19 $381,714,909 Steven G. Sherman 2 $ 873,848,076 0 $ 0 19 $381,714,909
CONFLICTS OF INTERESTS. The portfolio manager manages multiple accounts, including the Fund. The portfolio manager makes decisions for each account based on a model portfolio. Therefore all portfolios should hold similar securities, taking into account the investment objectives, policies, guidelines and other relevant investment considerations that are applicable to that account. ABN AMRO has adopted policies and procedures that it believes address the conflicts associated with managing multiple accounts for multiple clients, although there is no assurance that such policies and procedures will adequately address such conflicts. HEITMAN REAL ESTATE SECURITIES LLC ("HEITMAN"): INVESTMENT SUB-ADVISER TO THE REIT FUND (THE "FUND"). COMPENSATION. Heitman compensates the Fund's portfolio managers. The portfolio managers are a part of the 20 senior employees of Heitman and Heitman LLC who hold a 50% equity interest in the business. The expansion of the firm's equity ownership group was done to accomplish two goals: to put in place incentives for peak client service and portfolio performance and to provide the basis for retention of key personnel. The total compensation of these partners is tied directly to the performance of the investments under their individual management and the degree to which client objectives have been met. Compensation for the portfolio management team is aligned with the interests of Heitman's clients. Compensation comes in the form of salaries, set to market at least annually, and bonus compensation drawn from the profits of the enterprise. Bonuses for Heitman's publicly traded real estate securities investment professionals are determined 46 according to the following criteria: performance versus benchmark, performance versus peer group managers, stock selection ability, and subjective review of performance. These measures are evaluated over one and three year periods and the resulting bonuses have typically ranged from 0% to 150% of base salary. Heitman participates in several annual compensation surveys including, the McClagan, NAREIM and FPL surveys. Based on these studies, Heitman's compensation structure is competitive with the industry standard. FUND SHARES OWNED BY PORTFOLIO MANAGERS. The portfolio managers did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS ------------------------ ------------------------- --------------------------- NUMBER OF NUMBER OF NUMBER OF NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS -------------------- --------- ------------ --------- ------------- --------- -------------- Larry S. Antonatos** 6 611,222,688 9 1,931,520,080 4,738* 2,464,467,473* Timothy J. Pire** 6 611,222,688 9 1,931,520,080 4,738* 2,464,467,473*
---------- * Two separate accounts, with assets of approximately $95 million, are subject to a performance-based advisory fee. ** Portfolio management is performed by a team of two portfolio managers, Timothy J. Pire and Larry S. Antonatos, each of whom has equal responsibility for the $5.079 billion in total assets under management. CONFLICTS OF INTERESTS. Heitman attempts to minimize conflicts of interest. Heitman's portfolio trading policy prohibits any allocation of trades in a manner that proprietary accounts, affiliated accounts or any particular client or group of clients receives more favorable treatment than other clients. Heitman often purchases and sells the same security at the same price and time for more than one client because (i) Heitman generally recommends similar strategies for its various accounts, (ii) Heitman only recommends a limited number of real estate related securities, and (iii) numerous clients have similar investment objectives and similar portfolios. Heitman typically allocates trades among the client accounts on a pro-rata basis. GOLDMAN SACHS ASSET MANAGEMENT, L.P. ("GSAM"): INVESTMENT SUB-ADVISER TO THE SMALL CAP VALUE FUND (THE "FUND"). COMPENSATION: GSAM compensates the Fund's portfolio managers. GSAM and the GSAM Value Team's (the "Value Team") compensation package for its portfolio mangers is comprised of a base salary and a performance bonus. The performance bonus is a function of each portfolio manager's individual performance and his or her contribution to overall team performance. Portfolio Managers are rewarded for their ability to outperform a benchmark while managing risk appropriately. Compensation is also influenced by the Value Team's total revenues for the past year which in part is derived from advisory fees and for certain accounts, performance based fees. Anticipated compensation levels among competitor firms may also be considered, but is not a principal factor. The performance bonus is significantly influenced by 3 Year period of investment performance. The following criteria are considered: individual performance (relative, absolute), team performance (relative, absolute), consistent performance that aligns with clients' objectives, and achievement of top rankings (relative and competitive). The investment performance mentioned above is considered only on a pre-tax basis. As it relates to relative performance, the benchmark for this Fund is the Russell 2000 Value Index. As mentioned above, performance is measured on a 3 Year basis. 47 Other Compensation. In addition to base salary and performance bonus, GSAM has a number of additional benefits/deferred compensation programs for all portfolio managers in place including (i) a 401K program that enables employees to direct a percentage of their pretax salary and bonus income into a tax-qualified retirement plan; (ii) a profit sharing program to which Goldman Sachs makes a pretax contribution; and (iii) investment opportunity programs in which certain professionals are eligible to participate subject to certain net worth requirements. Portfolio Managers may also receive grants of restricted stock units and/or stock options as part of their compensation. Certain GSAM Portfolio Managers may also participate in the firm's Partner Compensation Plan, which covers many of the firm's senior executives. In general, under the Partner Compensation Plan, participants receive a base salary and a bonus (which may be paid in cash or in the form of an equity-based award) that is linked to Goldman Sachs' overall financial performance. FUND SHARES OWNED BY PORTFOLIO MANAGERS: The portfolio managers did not beneficially own any shares of the Fund, as of December 31, 2006. Due to GSAM's internal policies, GSAM portfolio managers are generally prohibited from purchasing shares of sub-advised funds for which they have primary responsibility. OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of December 31, 2006.
# OF ACCOUNTS MANAGED TOTAL THAT TOTAL ASSETS NAME OF PORTFOLIO # OF ADVISORY FEE THAT ADVISORY MANAGER OR TEAM ACCOUNTS BASED ON FEE BASED ON MEMBER TYPE OF ACCOUNTS MANAGED TOTAL ASSETS PERFORMANCE PERFORMANCE ----------------- --------------------------------- -------- -------------- ------------- -------------- Dolores Bamford Registered Investment Companies: 26 $ 16.7 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 284 $ 10.3 billion 2 $ 347 million Lisa Parisi Registered Investment Companies: 26 $ 16.7 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 284 $ 10.3 billion 2 $ 347 million Chip Otness Registered Investment Companies: 4 $ 2.6 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 22 $ 869 million 1 $137.5 million J. Kelly Flynn Registered Investment Companies: 26 $ 16.7 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 284 $ 10.3 billion 2 $ 347 million Scott Carroll Registered Investment Companies: 26 $ 16.7 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 284 $ 10.3 billion 2 $ 347 million Edward Perkin Registered Investment Companies: 26 $ 16.7 billion 0 $ 0 Other Pooled Investment Vehicles: 2 $ 316 million 2 $ 316 million Other Accounts: 284 $ 10.3 billion 2 $ 347 million
CONFLICTS OF INTERESTS. GSAM's portfolio managers are often responsible for managing one or more funds as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered hedge funds. A portfolio manager may manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. 48 The side-by-side management of these funds may raise potential conflicts of interest relating to cross trading, the allocation of investment opportunities and the aggregation and allocation of trades. GSAM has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. To this end, GSAM has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. In addition, GSAM has adopted policies limiting the circumstances under which cross-trades may be effected between a fund and another client account. GSAM conducts periodic reviews of trades for consistency with these policies. VONTOBEL ASSET MANAGEMENT, INC. ("VONTOBEL"): INVESTMENT SUB-ADVISER TO THE INTERNATIONAL EQUITY FUND. COMPENSATION. The portfolio manager for the International Equity Fund ("Fund") is compensated by the Fund's sub-adviser, Vontobel. The firm's portfolio managers have been strong contributors to the growth of the firm given their long tenure and the investment results they have produced. In recognition of their long-standing contribution to the growth of the business they receive a base salary which is excess of market averages. In addition, they receive a percentage share in the advisory fee revenue that the assets under management in their strategies generate. The firm renegotiated the terms of employment with the Fund's portfolio manager in 2005. As a result, part of his revenue share is now deferred for a period of three years. The portfolio manager does not receive any compensation directly from the Fund or the Fund's investment adviser. FUND SHARES OWNED BY PORTFOLIO MANAGER. The portfolio manager did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio manager is responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS -------------------------- -------------------------- ----------------------- NUMBER OF NUMBER OF NUMBER OF NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ---------- --------- -------------- --------- -------------- --------- ------------ Rajiv Jain 5 $1,056,396,093 15 $3,983,290,522 4 $851,434,451
CONFLICTS OF INTERESTS. The portfolio manager is responsible for the day-to-day management of all international equity products which Vontobel Asset Management, Inc. offers. The portfolio manager has a team of analysts that conduct screening of companies that must meet Vontobel's strict investment criteria. This screening process yields an investment universe of approximately 250 companies. Each portfolio is built using the aforementioned investment universe of companies. Vontobel sees no conflicts of interest in managing the above mentioned portfolios within the guidelines set forth by the Fund. BJURMAN, BARRY & ASSOCIATES ("BB&A"): INVESTMENT SUB-ADVISER TO THE SMALL CAP GROWTH FUND (THE "FUND"). COMPENSATION. The portfolio manager for the Fund is compensated by the Fund's sub-adviser. BB&A compensates its investment professionals with salaries, year-end profit sharing, bonuses, account retention commissions, and performance bonuses based upon account performance. Salaries are competitive with industry standards and are generally set annually. Bonuses are discretionary and are based on a number of subjective factors such as term of employment, level of demonstrated effort, and attitude. Account retention commissions paid to an account manager are a specific percentage of the account fees paid to the Adviser with respect to accounts managed by that manager. Performance bonuses paid to an account manager are a percentage of the account fees paid to BB&A with respect to accounts managed by that manager when that account's pre-tax annual returns are in the top quartile of the returns achieved by other managers in the advisory industry having the same investment objective. 49 FUND SHARES OWNED BY PORTFOLIO MANAGERS. The portfolio managers did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS ------------------------ --------------------- ------------------------ TOTAL ASSETS IN MILLIONS [NOTE: NOT TOTAL NUMBER OF INCLUDING NUMBER OF ASSETS IN NUMBER OF TOTAL ASSETS NAME ACCOUNTS FUND] ACCOUNTS MILLIONS ACCOUNTS IN MILLIONS ------------------- --------- ------------ --------- --------- --------- ------------ O. Thomas Barry III 5 $ 643.27 0 $0 18 $ 184.29 G. Andrew Bjurman 0 $ 0 0 $0 17 $ 124.76 Stephen W. Shipman* 1 $ 16.49 0 $0 51 $ 66.38 Patrick T. Bradford 1 $ 6.39 0 $0 0 $ 0 Roberto P. Wu 0 $ 0 0 $0 3 $ 4.4
---------- * STEPHEN W. SHIPMAN is responsible for the implementation and monitoring of the Small Cap Absolute Return Strategy (SCAR) accounts. The Small Cap Absolute Return Strategy may be subject to a performance fee in addition to the annual management fee. As of December 31, 2006, there were 12 accounts (having total assets of $8.13 million) in the SCAR strategy. CONFLICTS OF INTERESTS. BB&A is a sub-adviser and adviser to other accounts whose investment focus may be similar to those of the Fund. BB&A currently has the capacity to manage the Fund and these other accounts, and believes that the performance of the Fund should not be adversely affected by its multiple responsibilities. Management of multiple funds and accounts may create potential conflicts of interest relating to the allocation of portfolio manager time and attention and investment opportunities, and the aggregation and allocation of trades. BB&A endeavors at all times to manage all accounts in a fair and equitable manner by maintaining policies and procedures relating to allocation and brokerage practices. BB&A seeks to manage mutual funds, separate accounts, wrap accounts and sub-advised accounts so as not to exceed its ability to actively and proficiently manage all accounts. NEUBERGER BERMAN MANAGEMENT INC. ("NEUBERGER BERMAN"): INVESTMENT SUB-ADVISER TO THE MID CAP VALUE FUND (THE "FUND"). COMPENSATION. Neuberger Berman compensates the Fund's portfolio manager. A portion of the compensation paid to the portfolio manager is determined by comparisons to pre-determined peer groups and benchmarks, as opposed to a system dependent on a percent of management fees. The portfolio manager is paid a base salary that is not dependent on performance. The portfolio manager also has a "target bonus," which is set each year and can be increased or decreased prior to payment based in part on performance measured against the relevant peer group and benchmark. Performance is measured on a three-year rolling average in order to emphasize longer-term performance. There is also a subjective component to determining the bonus, which consists of the following factors: (i) the individual's willingness to work with the marketing and sales groups; (ii) his or her effectiveness in building a franchise; and (iii) client servicing. Senior management determines this component in appropriate cases. There are additional components that comprise the portfolio manager's compensation package, including: (i) whether the manager was a partner/principal of Neuberger Berman prior to Neuberger Berman Inc.'s initial public offering; (ii) for more recent hires, incentives that may have been negotiated at the time the portfolio manager joined the Neuberger Berman complex; and (iii) the total amount of assets for which the portfolio manager is responsible. FUND SHARES OWNED BY PORTFOLIO MANAGER. The portfolio manager did not beneficially own any shares of the Fund, as of December 31, 2006. 50 OTHER ACCOUNTS. In addition to the Fund, the portfolio manager is responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS -------------------------- ------------------------- ------------------------ NUMBER OF NUMBER OF NUMBER OF NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS --------------- --------- -------------- ---------- ------------ --------- ------------ S. Basu Mullick 12 $8.862 billion 0 $0 0 $0
CONFLICT OF INTEREST: While the portfolio manager's management of other accounts may give rise to the conflicts of interest discussed below, Neuberger Berman believes that it has designed policies and procedures to appropriately address those conflicts. From time to time, potential conflicts of interest may arise between a portfolio manager's management of the investments of the Fund and the management of other accounts, which might have similar investment objectives or strategies as the Fund or track the same index the Fund tracks. Other accounts managed by the portfolio manager may hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Fund. The other accounts might also have different investment objectives or strategies than the Fund. As a result of the portfolio manager's day-to-day management of the Fund, the portfolio manager knows the size, timing and possible market impact of the Fund's trades. While it is theoretically possible that the portfolio manager could use this information to the advantage of other accounts they manage and to the possible detriment of the Fund, Neuberger Berman has policies and procedures to address such a conflict. From time to time, a particular investment opportunity may be suitable for both the Fund and other types of accounts managed by the portfolio manager, but may not be available in sufficient quantities for both the Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the Fund and another account. Neuberger Berman has adopted policies and procedures reasonably designed to fairly allocate investment opportunities. Typically, when the Fund and one or more of the other mutual funds or other accounts managed by Neuberger Berman are contemporaneously engaged in purchasing or selling the same securities from or to third parties, transactions are averaged as to price and allocated, in terms of amount, in accordance with a formula considered to be equitable to the funds and accounts involved. Although in some cases this arrangement may have a detrimental effect on the price or volume of the securities as to the Fund, in other cases it is believed that the Fund's ability to participate in volume transactions may produce better executions for it. TURNER INVESTMENT PARTNERS, INC. ("TURNER"): INVESTMENT SUB-ADVISER TO THE MID CAP GROWTH FUND (THE "FUND"). COMPENSATION. Turner compensates the Fund's portfolio managers. Turner's investment professionals receive a base salary commensurate with their level of experience. Turner's goal is to maintain competitive base salaries through review of industry standards, market conditions, and salary surveys. Bonus compensation, which is a multiple of base salary, is based on the performance of each individual's sector and portfolio assignments relative to appropriate market benchmarks. In addition, each employee is eligible for equity ownership and equity owners share the firm's profits. Most of the members of the Investment Team and all Portfolio Managers for the Fund, are equity owners of Turner. This compensation and ownership structure provides incentive to attract and retain highly qualified people, as each member of the firm has the opportunity to share directly in the accomplishments of the business. The objective performance criteria noted above accounts for 90% of the bonus calculation. The remaining 10% is based upon subjective, "good will" factors including teamwork, interpersonal relations, the individual's contribution to overall success of the firm, media and client relations, presentation skills, and professional development. Portfolio managers/analysts are reviewed on an annual basis. The Chief Investment Officer is responsible for setting base salaries, bonus targets, and making all subjective judgments related to an investment professionals' compensation. The Chief Investment Officer is also responsible for identifying investment professionals that should be considered for equity ownership on an annual basis. 51 FUND SHARES OWNED BY PORTFOLIO MANAGERS. The portfolio managers did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts, as listed below. The information below is provided as of December 31, 2006.
REGISTERED INVESTMENT OTHER POOLED INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS -------------------------- ------------------------- -------------------------- TOTAL ASSETS [NOTE: NOT NUMBER OF INCLUDING NUMBER OF NUMBER OF NAME ACCOUNTS FUNDS] ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ------------------ --------- -------------- --------- ------------- --------- -------------- Christopher McHugh 16 $ 4 billion 33 $ 691 million 77 $ 5.5 billion 3* $ 817 million* None* $ 0* 5* $ 240 million* Jason Schrotberger 13 $ 3.1 billion 26 $ 501 million 55 $ 2.9 billion 1* $ 24 million* None* $ 0* 5* $ 240 million* Tara Hedlund 9 $ 2.7 billion 22 $ 413 million 18 $ 957 million 1* $ 24 million* None* $ 0* 2* $ 121 million*
---------- * These accounts are subject to performance-based advisory fees. CONFLICTS OF INTERESTS. As is typical for many money managers, potential conflicts of interest may arise related to Turner's management of accounts including the Fund where not all accounts are able to participate in a desired IPO, or other limited opportunity, relating to use of soft dollars and other brokerage practices, related to the voting of proxies, employee personal securities trading, and relating to a variety of other circumstances. In all cases, however, Turner believes it has written policies and procedures in place reasonably designed to prevent violations of the federal securities laws and to prevent material conflicts of interest from arising. WELLS CAPITAL MANAGEMENT INCORPORATED ("WELLS CAPITAL"): INVESTMENT SUB-ADVISER TO THE INDEX 500 FUND (THE "FUND"). COMPENSATION. Wells Capital compensates the Fund's portfolio manager. Wells Capital believes that the quality of an investment firm is derived from the intelligence, experience and leadership capabilities of its people. Recruitment and retention are therefore key components of a firm's success. Wells Capital has designed compensation programs to be competitive with those offered by our key competitors in the investment industry. Compensation for portfolio managers is focused on annual and historical portfolio performance as compared to the portfolio's objectives, and by contribution to client retention, asset growth and business relationships. Research analysts are also evaluated based on the performance of the sectors that they cover in the portfolio and their security recommendations. Investment team compensation structure is directly linked to the value added to clients' portfolios as measured by the performance metrics described here. Long-tenured investment professionals with proven success may also participate in a revenue sharing program that is tied to the success of their respective investment portfolios, which we believe provides direct participation in the growth and success of the company and its clients. Revenue sharing is one example of a powerful incentive program which helps retain and attract the caliber of investment talent that we believe characterizes Wells Capital's investment teams. Wells Capital encourages professional development of all its employees to enhance their knowledge and expertise and further their value to our firm. We encourage our professionals to pursue their Masters in Business Administration, the Chartered Financial Analyst designation and other recognized industry programs, where employees may be rewarded for their achievements and reimbursed for their educational fees. Executives also participate in executive/management training seminars and conferences. 52 FUND SHARES OWNED BY PORTFOLIO MANAGER. The portfolio manager did not beneficially own any shares of the Fund, as of December 31, 2006. OTHER ACCOUNTS. In addition to the Fund, the portfolio manager is responsible for the day-to-day management of certain other accounts, as listed below. None of the accounts listed below are subject to a performance-based advisory fee. The information below is provided as of December 31, 2006.
REGISTERED OTHER POOLED INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS ------------------------ ----------------------- -------------------------- NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NAME ACCOUNTS IN MILLIONS ACCOUNTS IN MILLIONS ACCOUNTS IN MILLIONS ----------------- --------- ------------ --------- ------------ --------- -------------- Gregory T. Genung 5 $4,947.1 4 $1,292.8 3 $368.6
CONFLICTS OF INTERESTS. Wells Capital's portfolio managers often provide investment management for separate accounts advised in the same or similar investment style as that provided to mutual funds. While management of multiple accounts could potentially lead to conflicts of interest over various issues such as trade allocation, fee disparities and research acquisition, Wells Capital has implemented policies and procedures for the express purpose of ensuring that clients are treated fairly and that potential conflicts of interest are minimized. 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 or sub-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 or sub-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 or sub-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. For fiscal years 2006, 2005, and 2004, the administrative fees paid to Penn Mutual by each of the Funds were as follows:
FUND 2006 2005 2004 -------------------------- ---------- ---------- ---------- Money Market Fund $ 114,067 $ 114,383 $ 140,488 Limited Maturity Bond Fund 68,411 88,748 67,331 Quality Bond Fund 232,676 234,241 258,795 High Yield Bond Fund 128,043 128,247 124,918 Flexibly Managed Fund 1,787,159 1,486,168 1,187,498 Growth Stock Fund 174,110 145,910 139,511 Large Cap Value Fund 336,935 323,141 320,711 Large Cap Growth Fund 42,736 37,487 30,698 Index 500 Fund 355,139 356,617 359,955 Mid Cap Growth Fund 128,867 109,305 98,615 Mid Cap Value Fund 180,875 154,252 131,365
53 Strategic Value Fund 64,670 56,439 32,823 Small Cap Growth Fund 170,783 160,720 165,385 Small Cap Value Fund 253,977 234,594 231,306 International Equity Fund 365,467 260,787 208,602 REIT Fund 84,518 53,915 32,775
In 2006, 2005, and 2004, administrative fees were waived pursuant to the terms of the administrative and corporate service agreement as follows:
FUND 2006 2005 2004 -------------------------- ---------- ---------- ---------- Money Market Fund N/A N/A N/A Limited Maturity Bond Fund N/A N/A N/A Quality Bond Fund N/A N/A N/A High Yield Bond Fund N/A N/A N/A Flexibly Managed Fund N/A N/A N/A Growth Stock Fund N/A N/A N/A Large Cap Value Fund N/A N/A N/A Large Cap Growth Fund N/A N/A N/A Index 500 Fund $ 39,449 $ 41,547 $172,264 Mid Cap Growth Fund 17,492 17,814 19,596 Mid Cap Value Fund N/A N/A N/A Strategic Value Fund N/A N/A 2,078 Small Cap Growth Fund N/A N/A N/A Small Cap Value Fund N/A N/A 15,086 International Equity Fund N/A N/A N/A REIT Fund N/A N/A N/A
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. For fiscal years 2006, 2005, and 2004, the accounting fees paid by each of the Funds were as follows:
FUND 2006 2005 2004 -------------------------- -------- -------- -------- Money Market Fund $ 56,304 $ 57,191 $ 70,059 Limited Maturity Bond Fund 33,995 44,374 33,666 Quality Bond Fund 101,613 103,080 111,265 High Yield Bond Fund 63,194 64,123 62,459 Flexibly Managed Fund 382,343 343,156 303,333 Growth Stock Fund 82,092 72,597 69,743 Large Cap Value Fund 136,366 132,714 131,904 Large Cap Growth Fund 27,499 27,499 27,501 Index 500 Fund 142,434 143,872 144,985 Mid Cap Growth Fund 63,625 54,653 49,307
54 Mid Cap Value Fund 84,346 76,162 65,683 Strategic Value Fund 31,928 29,626 27,501 Small Cap Growth Fund 80,982 78,555 80,060 Small Cap Value Fund 108,714 103,198 102,102 International Equity Fund 170,241 129,315 108,377 REIT Fund 41,602 28,683 27,501
LIMITATION ON FUND EXPENSES See "EXPENSES AND LIMITATIONS" in the prospectus for information on limitations on expenses of the Funds. PORTFOLIO TRANSACTIONS Decisions with respect to the purchase and sale of portfolio securities on behalf of each Fund 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. With respect to the Flexibly Managed, Growth Stock, Large Cap Value, Large Cap Growth, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap Growth and International Equity Funds, at the request of Penn Series the investment adviser or sub-adviser (as appropriate) has agreed to place a portion of the Fund's portfolio transactions with a broker-dealer who has agreed to refund commissions credits directly back to the Fund or alternatively pay designated Fund expenses. The arrangement is intended to benefit investors by reducing Fund expenses borne by investors. Portfolio transactions will not be placed with the broker-dealer selected by Penn Series unless the purchase or sale transaction initiated by the investment adviser or sub-adviser is consistent with its obligation to seek best execution and is based on its normal negotiated commission schedule. 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 and sub-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 55 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 and sub-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 brokerage business the advisers and sub-advisers annually assess the contribution of the brokerage and research services provided by broker-dealers, and allocate a portion of the brokerage business of their clients on the basis of these assessments. The advisers and sub-advisers seek to evaluate the brokerage and research services they receive from broker-dealers and make judgements as to the level of business which would recognize such services. In addition, broker-dealers sometimes suggest a level of business they would like to receive in return for the various brokerage and research services they provide. Actual brokerage received by any firm may be less than the suggested allocations, but can (and often does) exceed the suggestions because total brokerage is allocated on the basis of all the considerations described above. In no instance is a broker-dealer excluded from receiving business because it has not been identified as providing research services. The advisers and sub-advisers cannot readily determine the extent to which net prices or commission rates charged by broker-dealers reflect the value of their research services. However, commission rates are periodically reviewed to determine whether they are reasonable in relation to the services provided. In some instances, the advisers and sub-advisers receive research services they might otherwise have had to perform for themselves. The advisers and sub-advisers may use research services furnished by broker-dealers in servicing all of their investment advisory accounts, including the Funds, and accordingly, not all such services may necessarily be used by the advisers and sub-advisers in connection with the Funds. For fiscal years 2006, 2005, and 2004, the Quality Bond Fund engaged in portfolio transactions involving broker-dealers totaling $1,877,401,856, $8,505,786,193, and $4,263,762,027, respectively. For fiscal years 2006, 2005, and 2004, the High Yield Bond Fund engaged in portfolio transactions involving broker-dealers totaling $103,643,717, $94,836,000, and $92,530,000, respectively, and the Money Market Fund engaged in portfolio transactions involving broker-dealers totaling $441,182,652, $473,297,734, and $1,506,025,104, respectively. For fiscal years 2006, 2005, and 2004, the Limited Maturity Bond Fund engaged in portfolio transactions involving broker-dealers totaling $1,348,132,075, $3,997,249,555, and $242,083,523. 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. For fiscal years 2006, 2005, and 2004, the total brokerage commissions paid by the Flexibly Managed Fund, including the discounts received by securities dealers in connection with underwritings, were $1,594,534, $1,207,322, and $1,164,277, respectively. Also, during 2006, 2005, and 2004, of the total brokerage commissions paid by the Flexibly Managed Fund, $8,289, $1,640, and $4,430, respectively, were paid to Janney Montgomery Scott LLC, an affiliate of The Penn Mutual Life Insurance Company. Brokerage commissions paid to Janney Montgomery Scott LLC represented 0.005% of the Fund's total commissions and involved 0.014% of the dollar amount of total brokerage transactions in 2006. For fiscal years 2006, 2005, and 2004, the total brokerage commissions paid by the Growth Stock Fund, including the discounts received by securities dealers in connection with underwritings, were $100,009, $102,757, and $352,608, respectively. Also, during 2006 and 2005, of the total brokerage commissions paid by the Growth Stock Fund, $32 and $40, respectively, was paid to Janney Montgomery Scott LLC, an affiliate of The Penn Mutual Life Insurance Company. Brokerage commissions paid to Janney Montgomery Scott LLC represented 0.0003% of the Fund's total commissions and involved 0.0006% of the dollar amount of total brokerage transactions in 2006. 56 For fiscal years 2006, 2005, and 2004, the total brokerage commissions paid by the Large Cap Value Fund were $116,982, $161,546, and $248,493, respectively. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Large Cap Growth Fund, including the discounts received by securities dealers in connection with underwritings, were $28,984, $17,445, and $76,612, respectively. During 2006, the sub-adviser directed transactions of $20,476,950 (with related commissions of $27,757) to brokers who provided research services. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Index 500 Fund, including the discounts received by securities dealers in connection with underwritings, were $8,152, $15,239, and $3,539, respectively. Also, during 2006, of the total brokerage commissions paid by the Index 500 Fund, $5.75 was paid to Janney Montgomery Scott LLC, an affiliate of The Penn Mutual Life Insurance Company. Brokerage commissions paid to Janney Montgomery Scott LLC represented 0.07% of the Fund's total commissions and involved 0.00002% of the dollar amount of total brokerage transactions in 2006. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Mid Cap Growth Fund, including the discounts received by securities dealers in connection with underwritings, were $222,155, $214,045, and $391,013, respectively. During 2006, the sub-adviser directed transactions of $22,821,395 (with related commissions of $26,569) to brokers who provided research services. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Mid Cap Value Fund were $202,192, $160,279, and $163,196 of which $17,822, $17,903, and $27,702 were paid to Neuberger Berman, LLC and Lehman Brothers Inc., affiliates of the sub-adviser. Brokerage commissions paid to Neuberger Berman, LLC and Lehman Brothers Inc. represented 8.81% of the Fund's total commissions and involved 10.52% of the dollar amount of total brokerage transactions in 2006. During 2006, the sub-adviser directed transactions of $12,090,292 (with related commissions of $17,557) to brokers who provided research services. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Strategic Value Fund were $27,941, $28,818, and $18,366, respectively. For fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Small Cap Growth Fund, including the discounts received by securities-dealers in connection with underwritings, were $472,911, $531,283, and $858,703, respectively. During 2006, the sub-advisers directed transactions of $6,255,961(with related commissions of $22,071) to brokers who provided research services. For fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the Small Cap Value Fund, including the discounts received by securities dealers in connection with underwritings, were $457,313, $485,882, and $985,066, respectively. During 2006 and 2005, of the total brokerage commissions paid by the Small Cap Value Fund, $1,296 and $13,671, respectively, was paid to Goldman Sachs & Co., an affiliate of Goldman Sachs Asset Management, L.P. Brokerage commissions paid to Goldman Sachs & Co. represented 0.3% of the Fund's total commissions and involved 0.28% of the dollar amount of total brokerage transactions in 2006. For fiscal years 2006, 2005, and 2004, the total brokerage commissions paid by the International Equity Fund, including the discounts received by securities dealers in connection with underwritings, were $553,226, $332,100, and $279,461, respectively. During 2006, the sub-adviser allocated transactions of $2,904,670 (with related commissions of $3,470) to brokers who provided research services. For the fiscal years ended December 31, 2006, 2005, and 2004, the total brokerage commissions paid by the REIT Fund, including the discounts received by securities dealers in connection with underwritings, were $75,473, $61,855, and $63,530, respectively. During 2006, the sub-adviser directed transactions of $7,328,869, (with related commissions of $7,804) to brokers who provided research services. Some of the investment adviser's and sub-adviser's 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 57 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. PORTFOLIO TURNOVER For reporting purposes, a fund's portfolio turnover rate is calculated by dividing the value of purchases or sales of portfolio securities for the fiscal year, whichever is less, by the monthly average value of portfolio securities the fund owned during the fiscal year. When making the calculation, all securities whose maturities at the time of acquisition were one year or less ("short-term securities") are excluded. A 100% portfolio turnover rate would occur, for example, if all portfolio securities (aside from short-term securities) were sold and either repurchased or replaced once during the fiscal year. Typically, funds with high turnover (such as 100% or more) tend to generate higher transaction costs, such as brokerage commissions, which may lower fund performance. A fund's portfolio turnover rate is in the financial highlights table in its prospectus. With respect to the increase in the portfolio turnover rates for the Limited Maturity and Quality Bond Funds in the fiscal year end 2005 as compared to the fiscal year end 2004, the investment adviser attempted to take advantage of certain inefficiencies in the market that were present during the year, which ultimately lead to a large rebalancing of each Fund's portfolio towards the end of 2005. These events, along with each Fund's investments in certain mortgage-backed securities, were largely responsible for the higher portfolio turnover during 2005. DIRECTORS AND OFFICERS The business and affairs of Penn Series, which include all sixteen portfolios, are managed under the direction of its Board of Directors. The Board of Directors currently has five members. Four of the members are not "interested persons" of Penn Series as defined in the Investment Company Act of 1940, as amended. One of the members is an employee of Penn Mutual and is, therefore, an "interested person." The address for each Penn Series Director and Officer is c/o The Penn Mutual Life Insurance Company, 600 Dresher Road, Horsham, PA 19044. Directors Who Are Not Interested Persons of Penn Series
Number of Term of Office Funds Other Position with and Length of Principal Occupation During Overseen by Directorships Name and Year of Birth Penn Series Time Served Past Five Years Director Held by Director ---------------------- ------------- ------------------- -------------------------------- ----------- --------------- Eugene Bay Director No set term; served President, Colgate Rochester 16 N/A (born 1937) since 1993. Crozer Divinity School; Pastor Emeritus, Bryn Mawr Presbyterian Church, Bryn Mawr, PA (1987 - October 2004). James S. Greene Director No set term; served Retired. 16 N/A (born 1929) since 1992. Charles E. Mather III Director No set term; served Insurance Broker/Consultant, 16 Director, The (born 1934) since 2002. Mather & Co., a division of Finance Company Bollinger Inc.; Insurance of Pennsylvania Broker, Mather & Co. (1960 - (investment Nov. 2006). company)
58 Number of Term of Office Funds Other Position with and Length of Principal Occupation During Overseen by Directorships Name and Year of Birth Penn Series Time Served Past Five Years Director Held by Director ---------------------- ------------- ------------------- -------------------------------- ----------- --------------- M. Donald Wright Director No set term; served Accountant, Wright Consultants, 16 N/A (born 1935) since 1988. Bryn Mawr, PA (financial planning and consulting).
Directors Who Are Interested Persons of Penn Series
Number of Term of Office Funds Other Position with and Length of Principal Occupation During Overseen by Directorships Name and Year of Birth Penn Series Time Served Past Five Years Director Held by Director -------------------------- ------------ ------------------- ------------------------------ ----------- --------------- Robert E. Chappell Director No set term; served Chairman of the Board (since 16 Director, Quaker (born 1944) since 1998. 1997) and Chief Executive Chemical Officer (since 1995), The Penn Corporation Mutual Life Insurance Company.
Officers of Penn Series
Term of Office Position with and Length of Name and Year of Birth Penn Series Time Served Principal Occupation During Past Five Years ------------------------- ------------ ------------------- ----------------------------------------------------------- Peter M. Sherman President No set term; served Chairman and President of Independence Capital Management Inc.; (born 1952) since 2000. Executive Vice President and Chief Investment Officer, The Penn Mutual Life Insurance Company (since 1998). Franklin L. Best, Jr. Secretary No set term; served Managing Corporate Counsel and Secretary, The Penn Mutual Life (born 1945) since 2004. Insurance Company (since 1974). Barbara S. Wood Chief No set term; served Senior Vice President, Treasurer, and Chief Compliance Officer (born 1952) Compliance since 2004. of Independence Capital Management, Inc. (since 1989); Senior Officer Vice President and Treasurer of the Pennsylvania Trust Company (since 1991). Jill Bukata Controller No set term; served Manager, Variable Products Financial Reporting, The Penn Mutual (born 1951) since 2005. Life Insurance Company (since 2005); Senior Manager, Fund Accounting & Administration, PFPC Inc. (1999-2005). John Heiple Assistant No set term; served Supervisor, Variable Products Financial Reporting (since 2003), (born 1973) Controller since 2004. Senior Accountant (2000 - 2003) The Penn Mutual Life Insurance Company. Patricia M. Chiarlanza Assistant No set term; served Assistant Treasurer (since May 2001), Intermediate/Senior (born 1965) Treasurer since 2001. Supervisor/Manager (May 1991 - present) The Penn Mutual Life Insurance Company.
Standing Committees of Board of Directors The Board of Directors has an Executive Committee currently consisting of Messrs. Chappell and Greene. Subject to limits under applicable law, during intervals between meetings of the Board, the Committee may exercise the powers of the Board. The Executive Committee did not meet during the Company's last fiscal year and did not exercise any power of the Board. The Board of Directors has an Audit Committee currently consisting of Messrs. Wright, Greene and Mather. The Audit Committee is charged with exercising vigilant and informed oversight of Penn Series' financial reporting process, including internal controls, and reporting its findings to the Board. The Audit Committee held 4 meetings during the Company's last fiscal year. 59 The Board of Directors has a Nominating Committee currently consisting of Messrs. Wright, Greene and Bay. The principal responsibility of the Nominating Committee is to consider the qualifications of and to nominate qualified individuals to stand for election to the Board. The Nominating Committee does not have specific procedures in place to consider nominees recommended by shareholders, but would consider such nominees if submitted in accordance with Rule 14a-8 of the Securities Exchange Act of 1934 in conjunction with a shareholder meeting to consider the election of Directors. The Nominating Committee meets periodically, as necessary, and did not meet during the Company's last fiscal year. Beneficial Ownership of Equity Securities of Penn Series Funds The following table provides information on beneficial ownership of shares of funds of the Company by members of the Board of Directors (by virtue of their owning or having an interest in variable annuity contracts or variable life insurance policies issued by Penn Mutual and its subsidiary, The Penn Insurance and Annuity Company). This information is provided as of December 31, 2006.
Aggregate Dollar Range of Name of Director Dollar Range of Fund Shares (Fund) All Fund Shares (Funds) -------------------------------------------------------------------------------------------------------- Independent Director -------------------------------------------------------------------------------------------------------- Eugene Bay None None James S. Greene None None Charles E. Mather III None None M. Donald Wright None None -------------------------------------------------------------------------------------------------------- Interested Director -------------------------------------------------------------------------------------------------------- Robert E. Chappell Over $100,000 Flexibly Managed Over $100,000 $10,001 - $50,000 Growth Stock $10,001 - $50,000 Large Cap Value $10,001 - $50,000 International Equity $50,001-$100,000 Mid Cap Value Fund $10,001 - $50,000 Small Cap Value
Compensation of Directors for Fiscal Year Ended December 2006
Pension or Retirement Estimated Annual Total Compensation Aggregate Compensation Benefits Accrued as Benefits Upon from Penn Series to Name and Position from Penn Series Part of fund Expenses Retirement Directors ------------------------------- --------------------- -------------------------- ----------------- -------------------- Eugene Bay $19,000 None None $19,000 Director James S. Greene $20,000 None None $20,000 Director Charles E. Mather III $20,000 None None $20,000 Director M. Donald Wright $23,000 None None $23,000 Director
Interested Directors and Officers of Penn Series receive no compensation from Penn Series for their services. 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 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. In compliance with Rule 17j-1, Penn Series' 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 60 securities transactions for monitoring purposes and are prohibited from engaging in transactions during certain periods of time. In addition, certain access persons are required to obtain approval before investing in private placements and are not permitted to purchase securities in initial public offerings. Copies of the current Codes of Ethics for Penn Series, ICMI and each sub-adviser are on file with the SEC. PROXY VOTING POLICY The Board of Directors has delegated proxy voting responsibilities with respect to securities held by each Fund to such Fund's investment adviser/sub-adviser, subject to the Board's general oversight. Each investment adviser/sub-adviser has adopted its own proxy voting policies and procedures for this purpose (the "Procedures"), which are attached to this Statement of Additional Information as Appendix A. The Procedures may be changed as necessary to remain current with regulatory requirements and internal policies and procedures. Variable annuity contract and variable life insurance policy owners that participate in the investment results of the Funds may obtain the voting record of a Fund for the most recent twelve-month period ended June 30, free of charge by visiting the website of The Penn Mutual Life Insurance Company at www.pennmutual.com, clicking on the Investment Options and Performance Tab at the top of the page and, under Related Information, clicking on the Penn Series Proxy Voting tab and you will be directed to each Fund's proxy voting record. The voting record will be made available on the website of The Penn Mutual Life Insurance Company as soon as reasonably practicable after the information is filed by the Company with the SEC on SEC Form N-PX. The voting record will also be available on the website of the U. S. Securities and Exchange Commission ("SEC") at www.sec.gov. 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, Thanksgiving Day, and Christmas Day. Securities listed on a securities exchange or an automated quotation system for which quotations are readily available, including securities traded over the counter, are valued at the last quoted sale price on the principal exchange or market on which they are traded on the valuation date or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. Debt securities held in the Funds may be valued on the basis of valuations provided by a pricing service when such prices are believed to reflect the fair value of such securities. Use of the pricing service may be determined without exclusive reliance on quoted prices and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Securities for which market quotations are not readily available or they are determined to be unreliable are valued at fair value under procedures approved by the Board of Directors. 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 61 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, each as calculated in accordance with Rule 2a-7. 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. 62 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 March 31, 2007, the outstanding shares of Penn Series were owned as follows:*
Percentage of Percentage of Percentage of Outstanding Shares Outstanding Shares Outstanding Shares Owned by Penn Owned by Penn Owned by Penn Insurance and Mutual and Held in Mutual and Held in Annuity and Held Percentage of Separate Accounts a Separate Account in a Separate Outstanding Shares Pursuant to Pursuant to Account Pursuant Owned by Penn Variable Life Variable Annuity to Variable Annuity Mutual and Held in Insurance Contracts Contracts Contracts a General Account ---------------------------------- --------------------- ------------------ -------------------- --------------------- MONEY MARKET FUND 46% 50% 4% 0% LIMITED MATURITY BOND FUND 22% 75% 3% 0% QUALITY BOND FUND 25% 72% 3% 0% HIGH YIELD BOND FUND 26% 69% 5% 0% FLEXIBLY MANAGED FUND 18% 77% 5% 0% GROWTH STOCK FUND 24% 73% 3% 0% LARGE CAP VALUE FUND 31% 63% 6% 0% LARGE CAP GROWTH FUND 31% 67% 2% 0% INDEX 500 FUND 48% 49% 3% 0% MID CAP GROWTH FUND 40% 57% 3% 0% MID CAP VALUE FUND 35% 60% 5% 0% STRATEGIC VALUE FUND 24% 74% 2% 0% SMALL CAP GROWTH FUND 39% 56% 5% 0% SMALL CAP VALUE FUND 32% 64% 4% 0% INTERNATIONAL EQUITY FUND 31% 65% 4% 0% REIT FUND 26% 72% 2% 0%
--------- * Unaudited 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 Penn 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 Penn 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 63 variable life insurance contracts when left to accumulate in the contracts or under a qualified pension or retirement plan. Section 817(h) of the Code provides that the investments of a separate account underlying a variable insurance contract (or the investments of a mutual fund, the shares of which are owned by the variable separate account) must be "adequately diversified" in order for the contract to be treated as an annuity or as life insurance for federal income tax purposes. The Treasury Department has issued regulations explaining these diversification requirements. Each Fund intends to comply with such requirements. 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 realized 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 net income derived from an interest in a qualified publicly traded partnership; 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, the securities of two or more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships. 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, and in such event, may have an effect on the ability of variable separate accounts which invest in such a Fund to meet the diversification tests of Section 817(h) of the Code. It is expected that none of the Funds 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 or pension plans. 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 64 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. In general, gains from "foreign currencies" and from foreign currency options, foreign currency futures, and forward foreign exchange contracts ("forward contracts") relating to investments in stock, securities, or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument for purposes of the RIC diversification requirements applicable to a Fund. Under the Code, special rules are provided for certain transactions in a foreign currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the U.S. Dollar). In general, foreign currency gains or losses from forward contracts, from futures contracts that are not "regulated futures contracts," and from unlisted options will be treated as ordinary income or loss under the Code. Also, certain foreign exchange gains derived with respect to foreign fixed-income securities are also subject to special treatment. In general, any such gains or losses will increase or decrease the amount of a Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of a Fund's net capital gain. Additionally, if such losses exceed other investment company taxable income during a taxable year, a Fund would not be able to make any ordinary dividend distributions. 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. Funds investing in foreign securities may incur a liability for foreign withholding taxes as a result of investment in stock or securities of foreign corporations. If, at any year-end, more than 50% of the assets of a Fund are comprised of stock or securities of foreign corporations, the Fund may elect to "pass through" to shareholders the amount of foreign taxes paid by that Fund. The International Equity Fund may be eligible to make such an election but, if eligible, will make such an election only if that Fund deems this to be in the best interests of its shareholders. If a Fund does not qualify to make this election or does qualify, but does not choose to do so, the imposition of such taxes would directly reduce the return to an investor from an investment in that Fund. With respect to investments in zero coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because each Fund distributes all of its net investment income to its shareholders, a Fund may have to sell Fund securities to distribute such imputed income which may occur at a time when the Adviser would not have chosen to sell such securities and which may result in taxable gain or loss. 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 65 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 semi-annual 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. CUSTODIAL SERVICES PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809, is custodian of the assets of the Funds of Penn Series. The custodial services performed by PFPC Trust Company are those customarily performed for registered investment companies by qualified financial institutions. Penn Series has authorized PFPC Trust Company to deposit certain portfolio securities in a central depository system as allowed by federal law. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP serves as the independent registered public accounting firm of Penn Series. Their offices are located at 1601 Market Street, Philadelphia, Pennsylvania 19103. 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. 66 PORTFOLIO HOLDINGS INFORMATION The Board of Directors has approved a policy and procedures that govern the timing and circumstances regarding the disclosure of Fund portfolio holdings information to contract/policy owners and third parties. These policies and procedures recognize the conflict of interest that exists between the Fund's shareholders, and those of the Advisor and/or any affiliated persons of the Fund. Therefore, except as noted below, the Company does not disclose a Fund's portfolio holdings nor does the Company have any on-going arrangement with any party to make such information available on a selective basis. The Company's Chief Compliance Officer reports as necessary to the Board regarding the implementation of the Company's policies and procedures. Only the Company's Chief Compliance Officer may authorize the disclosure of portfolio holdings information. Upon receipt of a request for portfolio holdings information, the Chief Compliance Officer must determine that (i) disclosure is in the best interests of the Fund and its shareholders and (ii) there is a legitimate business purpose for the disclosure. Any authorized disclosure of portfolio holdings information must be subject to the recipient's agreement to keep that information confidential and refrain from trading on that information. The Company makes available quarterly on Penn Mutual's website - www.pennmutal.com - a Quarterly Investment Update ("Quarterly Update"), which includes certain portfolio holdings information for each Fund. The Quarterly Update can be found by clicking on the "Investment Tracker" link on Penn Mutual's website and then the "Investment Options" link. The Quarterly Update includes each Fund's top ten holdings and, as applicable, information regarding a Fund's asset and sector allocation, property types, and/or bond quality. The Quarterly Update is made available five weeks after the end of each quarter and is publicly available to all persons. The Quarterly Update generally remains accessible at least until the Company files its Form N-CSR or N-Q with the Securities and Exchange Commission for the period that includes the date as of which the website information is current (expected to be at least three months). Pursuant to applicable law, the Funds are required to disclose their complete portfolio holdings quarterly, within 60 days of the end of each fiscal quarter (currently, each March 31, June 30, September 30, and December 31). The Funds disclose a complete schedule of investments in each Semi-Annual Report and Annual Report to Fund shareholders or, following the first and third fiscal quarters, in quarterly holdings reports filed with the SEC on Form N-Q. Semi-Annual and Annual Reports are distributed to Fund shareholders. Quarterly holdings reports filed with the SEC on Form N-Q are not distributed to Fund shareholders, but are available, free of charge, on the EDGAR database on the SEC's website at www.sec.gov. In addition, the Company's service providers, such as the investment adviser, investment sub-advisers, custodian and Penn Mutual, may receive portfolio holdings information as frequently as daily in connection with their services to the Funds. Financial printers, proxy voting service providers and pricing information vendors may receive portfolio holdings information, as necessary, in connection with their services to the Funds. No compensation or other consideration will be paid to or received by any party, including the Company, its investment advisers and its affiliates or the recipient of a portfolio holdings information, in connection with the disclosure of a Fund's portfolio holdings information. 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 67 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 are currently vulnerable to nonpayment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. FITCH INVESTORS SERVICE, INC.: Fitch 1 -- Highest grade. Commercial paper assigned this rating is regarded as having the strongest degree of assurance for timely payment. Fitch 2 -- Very good grade. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than the strongest issues. RATINGS OF CORPORATE DEBT SECURITIES The quality of a bond is measured by credit risk -- the continuing ability of the issuer to meet interest and principal payments. Issuers who are believed to be good credit risks receive high quality ratings, and those believed to be poor credit risks receive low quality ratings. As a result of the greater credit risk involved, medium and low quality bonds typically offer a higher yield than bonds of high quality. MOODY'S INVESTORS SERVICE, INC. AAA Bonds which are rated AAA are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA Bonds which are rated Aa are judged to be of high quality by all standards. Together with the AAA group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in AAA securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term 68 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 shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through B. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a rating in the lower end of the generic rating category. STANDARD & POOR'S RATINGS GROUP AAA This is the highest rating assigned by Standard & Poor's to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only to a small degree. A Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB Bonds rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than in higher rated categories. Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major risk exposures to adverse conditions. 69 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 an obligation are jeopardized. FINANCIAL STATEMENTS OF PENN SERIES The following pages include audited financial statements and financial highlights as of December 31, 2006 for the Penn Series Funds consisting of the Money Market Fund, Limited Maturity Bond Fund, Quality Bond Fund, High Yield Bond Fund, Flexibly Managed Fund, Growth Stock Fund, Large Cap Value Fund, Large Cap Growth Fund, Index 500 Fund, Mid Cap Growth Fund, Mid Cap Value Fund, Strategic Value Fund, Small Cap Growth Fund, Small Cap Value Fund, International Equity Fund and REIT Fund. 70 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MONEY MARKET FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- COMMERCIAL PAPER -- 27.3% ----------------------------------------------------- AGRICULTURAL PRODUCTS -- 1.0% Cargill Inc. 5.350%, 01/03/07 $ $800 $ $799 ------- CHEMICALS -- 3.2% BASF AG 5.280%, 01/02/07 2,500 2,499 ------- ENERGY RESOURCES & SERVICES -- 3.3% Wisconsin Electric Power 5.330%, 01/02/07 1,600 1,600 5.330%, 01/12/07 1,000 998 ------- 2,598 ------- FINANCE -- 15.4% Genworth Finance Inc., 5.300%, 01/04/07 485 485 HBOS Treasury Services PLC 144A @ 5.280%, 01/16/07 400 399 5.250%, 02/15/07 1,500 1,490 ING (US) Funding Inc., 5.350%, 01/08/07 135 135 5.300%, 01/22/07 2,000 1,994 5.320%, 01/29/07 493 491 UBS Finance Inc. 5.350%, 01/03/07 939 939 5.320%, 01/04/07 136 136 5.320%, 01/11/07 300 300 5.350%, 01/11/07 256 256 5.310%, 01/18/07 1,800 1,795 Westpac Bank 5.270%, 01/18/07 300 299 5.260%, 01/24/07 800 797 Westpac Security 5.250%, 02/16/07 2,500 2,483 ------- 11,999 ------- TELECOMMUNICATIONS -- 4.4% Telstra Corp. 5.280%, 03/14/07 3,500 3,463 ------- TOTAL COMMERCIAL PAPER (COST $21,358) 21,358 ------- ----------------------------------------------------- CORPORATE BONDS -- 57.5% ----------------------------------------------------- BANKING -- 4.4% HBOS PLC 144A @ 3.125%, 01/12/07 1,000 999 5.452%, 01/12/07 800 800 US Bank National Association 5.337%, 01/25/07 1,050 1,050 2.400%, 03/12/07 380 378 Wachovia Corp. 5.428%, 02/06/07 200 200 ------- 3,427 ------- ENERGY RESOURCES & SERVICES -- 4.6% FPL Group Capital Inc. 4.086%, 02/16/07 3,637 3,631 ------- FINANCE -- 26.5% Bear Stearns Cos., Inc. 5.700%, 01/15/07 3,050 3,050 5.534%, 01/16/07 250 250 7.000%, 03/01/07 100 100 Boeing Capital Corp. 5.750%, 02/15/07 1,300 1,300 Canadian Imperial Bank of Commerce 5.432%, 04/02/07 1,000 1,000 CIT Group Inc. 5.574%, 02/15/07 2,000 2,001 Citi Group, Inc. 5.442%, 01/12/07 70 70 7.375%, 04/02/07 1,500 1,507 Deutsche Bank AG 5.340%, 03/15/07 975 975 Goldman Sachs Group Inc. 5.510%, 01/09/07 495 495 7.200%, 03/01/07 144A @ 3,000 3,008 HSBC Finance Corp. 6.875%, 03/01/07 100 100 7.875%, 03/01/07 822 825 International Lease Finance Corp. 5.750%, 02/15/07 800 800 JPMorgan Chase & Co. 7.125%, 02/01/07 430 431 Key Bank NA 5.415%, 02/09/07 500 500 M&I Marshall & Ilsley Bank 2.625%, 02/09/07 300 299 Merrill Lynch & Co., Inc. 7.000%, 01/15/07 50 50 5.500%, 02/27/07 2,500 2,501 Morgan Stanley 5.800%, 04/01/07 334 334 National Rural Utilities 6.500%, 03/01/07 1,100 1,102 SLMA Corp. 5.625%, 04/10/07 50 50 ------- 20,748 ------- FINANCE -- BANKS -- 2.8% Nationwide Building Society 144A @ 2.625%, 01/30/07 2,150 2,146 ------- FINANCIAL SERVICES -- 3.8% General Electric Capital Corp. 2.800%, 01/15/07 2,000 1,998 JPMorgan & Co., Inc. 6.875%, 01/15/07 1,000 1,000 ------- 2,998 ------- HEALTHCARE -- 4.6% Unitedhealth Group, Inc. 5.200%, 01/17/07 3,610 3,610 ------- INDUSTRIAL -- 2.6% Caterpillar Finance Services Corp. 3.000%, 02/15/07 2,000 1,994 -------
28 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MONEY MARKET FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- INSURANCE -- 3.7% AIG Sunamer Global Financial, Inc. 144A @ 5.100%, 01/17/07 $ 100 $ 100 ASIF Global Financing XXVI 144A @ 2.500%, 01/30/07 2,100 2,096 Met Life Global Funding I 144A @ 5.431%, 03/16/07 700 700 ------- 2,896 ------- PHARMACEUTICALS -- 0.4% Glaxosmithkline Capital 2.375%, 04/16/07 190 189 Merck & Co, Inc. 2.500%, 03/30/07 150 149 ------- 338 ------- TELECOMMUNICATIONS -- 4.1% SBC Communications 144A @ 4.214%, 06/05/07 1,000 995 AT&T Corp. 7.750%, 03/01/07 2,201 2,209 ------- 3,204 ------- TOTAL CORPORATE BONDS (COST $44,992) 44,992 ------- ----------------------------------------------------- VARIABLE RATE DEMAND NOTES -- 12.2% ----------------------------------------------------- HEALTHCARE -- 0.6% Barton Healthcare, LLC 5.410%, 02/15/25 155 155 Fairview Hospital & Healthcare Services 5.380%, 11/01/15 300 300 ------- 455 ------- MUNICIPAL BONDS -- 9.1% Berks County, PA, Industrial Development Authority 5.500%, 06/01/15 450 450 Columbia County, GA, Development Authority 5.400%, 03/01/10 800 800 Harris County, TX, Sports Authority Special Revenue 5.380%, 11/15/30 2,100 2,100 Illinois Development Finance Authority 5.370%, 11/01/14 600 600 Montgomery County, PA, Industrial Development Authority 5.450%, 03/01/10 540 540 New York, NY -- Subseries-A-9 5.350%, 11/01/23 2,000 2,000 Philadelphia Authority-For Industrial Development-Marketplace 5.350%, 07/01/10 670 670 ------- 7,160 ------- PARKING FACILITIES -- 2.5% Liliha Parking LP 5.850%, 08/01/24 1,960 1,960 ------- TOTAL VARIABLE RATE DEMAND NOTES (COST $9,575) 9,575 -------
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 3.0% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempFund 1,031,445 $ 1,031 Evergreen Prime Cash Management Money Market Fund 1,274,835 1,275 ------- TOTAL SHORT-TERM INVESTMENTS (COST $2,306) 2,306 ------- TOTAL INVESTMENTS -- 100.0% (COST $78,231) $78,231 =======
---------------------- + See Note 1 to Financial Statements. @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other "accredited investors". Unless otherwise indicated, the security is considered liquid.
----------------------------------------------------------- MATURITY SCHEDULE MARKET % OF (UNAUDITED) VALUE (000) PORTFOLIO (CUMULATIVE) ----------------------------------------------------------- 1 -- 7 days $18,339 23.4% 23.4% 8 -- 14 days 2,689 3.4% 26.8% 15 -- 30 days 17,568 22.5% 49.3% 31 -- 60 days 15,379 19.6% 68.9% 61 -- 90 days 21,032 26.9% 95.8% 91 -- 120 days 2,229 2.9% 98.7% 121 -- 150 days 0 0.0% 98.7% over 150 days 995 1.3% 100.0% ------------------------------------------- $78,231 100.0% ======= ======
Average Weighted Maturity -- 41 days The accompanying notes are an integral part of these financial statements. 29 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 LIMITED MATURITY BOND FUND
PAR VALUE (000) (000)+ ------------------------------------------------------ U.S. TREASURY NOTES -- 13.7% ------------------------------------------------------ U.S. TREASURY INFLATION INDEXED NOTES -- 4.0% 3.375%, 01/15/07# $$ 1,500 $$1,908 ------- U.S. TREASURY OBLIGATIONS -- 9.7% 4.125%, 08/15/08# 2,400 2,374 4.875%, 05/31/11# 1,000 1,007 5.125%, 06/30/11 1,250 1,271 ------- 4,652 ------- TOTAL U.S. TREASURY NOTES (COST $6,344) 6,560 ------- ------------------------------------------------------ AGENCY OBLIGATIONS -- 17.5% ------------------------------------------------------ FEDERAL HOME LOAN MORTGAGE CORPORATION -- 3.1% 5.000%, 06/15/31 1,500 1,474 ------- FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 14.4% 6.850%, 09/15/19 338 328 4.384%, 12/01/33 2,503 2,483 3.500%, 04/01/34 1,207 1,174 6.014%, 07/01/36 1,402 1,420 6.100%, 09/01/36 1,478 1,496 ------- 6,901 ------- TOTAL AGENCY OBLIGATIONS (COST $8,436) 8,375 ------- ------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS -- 27.4% ------------------------------------------------------ Asset Securitization Corp. 7.400%, 10/13/26 146 150 ------- Atherton Franchisee Loan Funding 6.720%, 05/15/20 666 666 ------- Banc of America Commercial Mortgage, Inc. 5.039%, 11/10/42 2,660 2,641 ------- Bear Stearns Commercial Mortgage Securities, Inc. 6.080%, 02/15/35 596 603 5.395%, 12/11/40 1,500 1,509 4.521%, 11/11/41 1,000 967 ------- 3,079 ------- Conseco Finance Securitizations Corp. 5.790%, 04/01/24 143 143 ------- Green Tree Financial Corp. 7.650%, 04/15/19 377 390 7.250%, 09/15/26 319 327 7.330%, 03/01/30 65 65 6.500%, 02/01/31 1,120 1,123 ------- 1,905 ------- JPMorgan Chase Commercial Mortgage Security Corp. 5.464%, 10/12/35 694 692 4.545%, 01/15/42 1,500 1,450 ------- 2,142 ------- LB-UBS Commercial Mortgage Trust 4.821%, 04/15/30 2,000 1,975 ------- NationsLink Funding Corp. 7.229%, 06/20/31 46 46 ------- PNC Mortgage Acceptance Corp. 5.910%, 03/12/34 350 352 ------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $13,159) 13,099 -------
NUMBER OF SHARES ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 30.0% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempFund 1,789 1,789 Evergreen Prime Cash Management Money Market Fund 1,867 1,867 PAR (000) --------- Federal Home Loan Bank 5.015%, 01/02/07 10,700 10,699 ------- TOTAL SHORT-TERM INVESTMENTS (COST $14,355) 14,355 ------- ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 11.4% ------------------------------------------------------ Bank of Montreal Time Deposit 5.25%, 01/02/2007 30 30 Deutsche Bank Time Deposit 4.75%, 01/02/2007 89 89 Institutional Money Market Trust 5.302%, 01/02/2007 5,185 5,185 IXIS Time Deposit 5.30%, 01/02/2007 121 121 National Bank Canada Time Deposit 5.32%, 01/02/2007 30 30 ------- TOTAL SECURITIES LENDING COLLATERAL (COST $5,455) 5,455 ------- TOTAL INVESTMENTS -- 100.0% (COST $47,749) $47,844 =======
---------------------- + See Note 1 to Financial Statements. # Security position is either entirely or partially on loan. The accompanying notes are an integral part of these financial statements. 30 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 QUALITY BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- 7.8% ----------------------------------------------------- AEROSPACE & DEFENSE -- 1.0% United Technologies Corp. 5.400%, 05/01/35 $ 1,000 $ 966 6.050%, 06/01/36 1,000 1,053 ------- 2,019 ------- AGRICULTURAL PRODUCTS -- 0.5% Cargill Inc. 144A @ 6.125%, 09/15/36 1,000 1,026 ------- AUTOMOBILES & RELATED -- 0.4% Ford Motor Co. 7.450%, 07/16/31# 1,000 785 ------- CABLE OPERATORS -- 0.7% Tele-Communications, Inc. 9.875%, 06/15/22 1,000 1,316 ------- COMPUTERS & OFFICE EQUIPMENT -- 0.6% IBM Corp. 6.500%, 01/15/28 1,000 1,092 ------- DIVERSIFIED OPERATIONS -- 1.0% Siemens Financieringsmat 144A@ 6.125%, 08/17/26 2,000 2,044 ------- FOOD & BEVERAGES -- 1.0% Anheuser-Busch Co., Inc. 5.750%, 04/01/36 2,000 1,918 ------- PHARMACEUTICALS -- 2.1% Genentech, Inc.* 144A@ 5.250%, 07/15/35 1,000 930 Glaxosmithkline Capital, Inc. 5.375%, 04/15/34 1,000 969 Merck & Co., Inc. 6.400%, 03/01/28 2,000 2,137 ------- 4,036 ------- RETAIL -- 0.5% Wal-Mart Stores, Inc. 5.250%, 09/01/35 1,000 918 ------- TOTAL CORPORATE BONDS (COST $14,869) 15,154 ------- ----------------------------------------------------- U.S. TREASURY OBLIGATIONS -- 21.9% ----------------------------------------------------- U.S. TREASURY BONDS -- 1.6% 5.375%, 02/15/31 3,000 3,214 ------- U.S. TREASURY NOTES -- 20.3% 4.375%, 12/15/10 2,500 2,471 4.750%, 03/31/11# 10,000 10,017 4.875%, 04/30/11# 3,000 3,019 4.875%, 05/31/11# 14,000 14,096 3.875%, 02/15/13 2,500 2,393 4.250%, 11/15/13# 2,500 2,434 4.875%, 08/15/16# 5,000 5,060 ------- 39,490 ------- TOTAL U.S. TREASURY OBLIGATIONS (COST $42,135) 42,704 ------- AGENCY OBLIGATIONS -- 13.0% ----------------------------------------------------- FEDERAL HOME LOAN MORTGAGE CORPORATION -- 2.5% 5.00%, 06/15/31 5,000 4,914 ------- FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 10.4% 6.850%, 09/15/19 2,479 2,406 3.500%, 04/01/34 3,620 3,522 6.014%, 07/01/36 4,674 4,732 5.983%, 08/01/36 4,603 4,647 6.100%, 09/01/36 4,926 4,986 ------- 20,293 ------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 0.1% 9.000%, 10/15/30 9 10 9.000%, 11/15/30 16 17 9.000%, 11/15/30 78 85 ------- 112 ------- TOTAL AGENCY OBLIGATIONS (COST $25,407) 25,319 ------- ----------------------------------------------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 22.5% ----------------------------------------------------- Atherton Franchisee Loan Funding 7.230%, 04/15/12 1,917 1,964 ------- Banc of America Commercial Mortgage, Inc. 4.885%, 11/10/42 10,000 9,930 ------- Bear Stearns Commercial Mortgage Securities, Inc. 4.830%, 08/15/38 4,000 3,916 5.395%, 12/11/40 5,000 5,030 4.521%, 11/11/41 5,000 4,834 ------- 13,780 ------- Conseco Finance Securitizations Corp. 7.730%, 04/01/32 94 94 5.790%, 05/01/33 572 573 ------- 667 ------- Green Tree Financial Corp. 7.240%, 11/15/28 785 336 7.330%, 04/01/31 258 259 ------- 595 ------- JPMorgan Chase Commercial Mortgage Securities Corp. 5.464%, 10/12/35 2,775 2,770 4.545%, 01/15/42 5,000 4,832 ------- 7,602 ------- LB-UBS Commercial Mortgage Trust 4.821%, 04/15/30 3,000 2,961 ------- Morgan Stanley Capital 4.590%, 04/14/40 5,000 4,859 ------- PNC Mortgage Acceptance Corp. 5.910%, 03/12/34 1,399 1,408 ------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $43,716) 43,766 -------
31 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 QUALITY BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- ASSET BACKED SECURITIES -- 1.0% ----------------------------------------------------- Railcar Leasing L.L.C. 7.125%, 01/15/13 $ 1,900 $ 1,976 ------- (COST $1,908)
NUMBER OF SHARES ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 15.1% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempFund 7,478,458 7,478 Evergreen Prime Cash Management Money Market Fund 7,858,509 7,859
PAR (000) ------ Federal Home Loan Bank 4.780%, 01/02/07 14,200 14,198 -------- TOTAL SHORT-TERM INVESTMENTS (COST $29,535) 29,535 -------- ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 18.7% ----------------------------------------------------- Bank of Montreal Time Deposit 5.25%, 01/02/2007 301 301 Deutsche Bank Time Deposit 4.75%, 01/02/2007 887 887 Institutional Money Market Trust 5.302%, 01/02/2007 33,773 33,773 IXIS Time Deposit 5.30%, 01/02/2007 1,199 1,199 National Bank Canada Time Deposit 5.32%, 01/02/2007 301 301 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $36,461) 36,461 -------- TOTAL INVESTMENTS -- 100.0% (COST $194,031) $194,915 ========
---------------------- + See Note 1 to Financial Statements. * Non-Income Producing Security. # Security position is either entirely or partially on loan. @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other "accredited investors". Unless otherwise indicated, the security is considered liquid. The accompanying notes are an integral part of these financial statements. 32 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- 92.4% ----------------------------------------------------- ADVERTISING -- 2.0% Advanstar Communications, Inc. 10.750%, 08/15/10 $ 300 $ 322 Advanstar, Inc. 15.000%, 10/15/11 150 155 Affinity Group, Inc.+++ 10.875%, 02/15/12 87 85 Lamar Advertising Co. CONV 2.875%, 12/31/10 300 406 Lamar Media Corp. 6.625%, 08/15/15 175 172 R.H. Donnelley Finance Corp. 10.875%, 12/15/12 175 190 RH Donnelley Corp. 8.875%, 01/15/16 375 393 ------- 1,723 ------- AEROSPACE & DEFENSE -- 1.2% GenCorp, Inc. 144A @+++ 9.500%, 08/15/13 497 526 Moog, Inc. 6.250%, 01/15/15 225 217 Sequa Corp. 9.000%, 08/01/09 50 53 Transdigm Inc. 7.750%, 07/15/14 200 205 ------- 1,001 ------- AUTOMOBILES & RELATED -- 3.4% Commercial Vehicle Group, Inc. 8.000%, 07/01/13 50 48 Cooper Standard Automotive Corp. 8.375%, 12/15/14 175 137 Ford Motor Co. CONV 4.250%, 12/15/36 97 103 General Motors Corp. 8.375%, 07/15/33 500 462 Goodyear Tire & Rubber Co. 7.857%, 08/15/11 75 74 8.625%, 12/01/11 144A @ 400 413 H&E Equipment Services 8.375%, 07/15/16 200 210 Hertz Corporation 144A @ 8.875%, 01/01/14 250 262 Lear Corporation 144A @ 8.750%, 12/01/16 300 290 Neff Rental/Neff Finance 11.250%, 06/15/12 200 218 Rental Service Corp. 144A @ 9.500%, 12/01/14 225 232 Sunstate Equipment Co LLC 144A @ 10.500%, 04/01/13 200 212 Tenneco, Inc. 8.625%, 11/15/14 275 281 ------- 2,942 ------- BROADCAST/MEDIA -- 4.0% Barrington Broadcasting, 144A @ 10.500%, 08/15/14 75 75 EchoStar Communications Corp. CONV 5.750%, 05/15/08 125 126 Echostar DBS Corp. 7.000%, 10/01/13 25 25 6.625%, 10/01/14 300 293 Fisher Communications, Inc. 8.625%, 09/15/14 50 53 Gray Television, Inc. 9.250%, 12/15/11 250 262 Haights Cross+++ 11.750%, 08/15/11 200 205 18.737%, 08/15/11+ 100 63 Liberty Media Holding Corp. CONV 4.000%, 11/15/29 425 284 Lighthouse International Co. SA 144A @ 8.000%, 04/30/14 275 397 Lin Television Corp., CONV 2.500%, 05/15/33 38 36 Medianews Group, Inc. 6.875%, 10/01/13 175 158 6.375%, 04/01/14 50 43 Nexstar Finance Inc. 10.730%, 04/01/13+ 300 269 7.000%, 01/15/14 150 141 Shaw Communications Inc. 8.250%, 04/11/10 75 80 Sinclair Broadcast Group 8.000%, 03/15/12 525 542 Videotron Ltee 6.875%, 01/15/14 175 176 6.375%, 12/15/15 50 49 XM Satellite Radio Inc. 9.750%, 05/01/14 225 225 ------- 3,502 ------- BUILDING & BUILDING SUPPLIES -- 1.2% Associated Materials, Inc. 13.910%, 03/01/14+ 50 34 Building Materials Corp. of America 7.750%, 08/01/14 325 294 Dycom Industries, Inc. 8.125%, 10/15/15 175 180 Esco Corp. 144A @ 8.388%, 12/15/13 100 101 8.625%, 12/15/13 200 205 Interline Brands Inc. 8.125%, 06/15/14 250 257 ------- 1,071 ------- BUILDING & REAL ESTATE -- 0.4% Brand Services, Inc. 12.000%, 10/15/12 225 249 Mobile Mini, Inc. 9.500%, 07/01/13 81 86 ------- 335 ------- BUILDING PRODUCTS & SUPPLIES -- 0.3% Texas Industries, Inc. 7.250%, 07/15/13 275 279 ------- CABLE OPERATORS -- 1.2% Charter Communications Operating LLC 144A @ 8.000%, 04/30/12 650 675
33 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- CABLE OPERATORS -- (CONTINUED) CSC Holdings, Inc. 7.250%, 07/15/08 $ 225 $ 227 Kabel Deutschland 10.625%, 07/01/14 125 139 ------- 1,041 ------- CHEMICALS -- 1.5% Hercules, Inc. 6.750%, 10/15/29 150 146 Huntsman International LLC 144A @ 7.875%, 11/15/14 350 352 Ineos Group Holdings Plc 144A @ 8.500%, 02/15/16 300 286 Koppers, Inc. 9.875%, 10/15/13 100 108 Rhodia, SA 144A @ 6.238%, 10/15/13 100 131 Rockwood Specialties Group, Inc. 10.625%, 05/15/11 50 52 Terra Capital 11.500%, 06/01/10 200 215 ------- 1,290 ------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 0.3% Juniper Networks, Inc. CONV (0.532%), 06/15/08+ 150 162 SS&C Technologies, Inc. 11.750%, 12/01/13 75 82 ------- 244 ------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 0.5% Intel Corp. CONV 2.950%, 12/15/35 144A @ 125 113 2.950%, 12/15/35 25 22 UGS Corp. 10.000%, 06/01/12 275 300 ------- 435 ------- COMPUTER SERVICES & SOFTWARE -- 1.4% Serena Software Inc. 10.375%, 03/15/16 75 80 Sungard Data Systems, Inc. 9.125%, 08/15/13 375 394 9.973%, 08/15/13 125 130 UGS Capital Corp. II 144A @ 10.348%, 06/01/11 263 269 Unisys Corp. 7.875%, 04/01/08 150 150 6.875%, 03/15/10 100 98 8.000%, 10/15/12 75 74 ------- 1,195 ------- COMPUTERS & OFFICE EQUIPMENT -- 0.5% Xerox Corp. 7.625%, 06/15/13 100 105 6.400%, 03/15/16 151 154 6.750%, 02/01/17 150 157 ------- 416 ------- CONSUMER PRODUCTS -- 2.4% Acco Brands Corp. 7.625%, 08/15/15 175 172 American Greetings Corp. 7.375%, 06/01/16 50 51 FTD, Inc. 7.750%, 02/15/14 294 295 Gregg Appliances 9.000%, 02/01/13 25 24 Jostens Holdings Corp. 9.854%, 12/01/13+ 550 485 Jostens IH Corp. 7.625%, 10/01/12 175 177 Leslie's Poolmart 7.750%, 02/01/13 275 274 Sealy Mattress Co. 8.250%, 06/15/14 275 287 Simmons Bedding Co. 7.875%, 01/15/14 75 76 12.037%, 12/15/14+ 275 216 ------- 2,057 ------- CONTAINERS -- 2.0% Ball Corp. 6.875%, 12/15/12 75 77 Berry Plastics Holding Corp. 144A @ 8.875%, 09/15/14 150 152 9.235%, 09/15/14 75 76 Bway Corp. 10.000%, 10/15/10 150 157 Graham Packaging Co. 8.500%, 10/15/12 50 51 Graphic Packaging International Corp. 8.500%, 08/15/11 75 78 9.500%, 08/15/13 125 132 Greif Brothers Corp. 8.875%, 08/01/12 100 105 Owens-Brockway Glass Container, Inc. 8.875%, 02/15/09 325 332 8.750%, 11/15/12 250 265 8.250%, 05/15/13 100 103 Owens-Illinois, Inc. 7.350%, 05/15/08 75 75 Stone Container Corp. 8.375%, 07/01/12 100 98 ------- 1,701 ------- COSMETICS & TOILETRIES -- 0.1% Chattem, Inc. 7.000%, 03/01/14 50 49 ------- DISTRIBUTION SERVICES -- 0.2% ADESA Corp. 7.625%, 06/15/12 200 207 ------- DIVERSIFIED OPERATIONS -- 1.4% Bombardier, Inc. 144A @ 6.750%, 05/01/12 100 98 Covalence Specialty Material 144A @ 10.250%, 03/01/16 125 114 Festival Fun Pk LLC 10.875%, 04/15/14 75 75 Fisher Scientific International, Inc. 6.125%, 07/01/15 250 247
34 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- DIVERSIFIED OPERATIONS -- (CONTINUED) Leucadia National Corp. 7.000%, 08/15/13 $ 275 $ 279 Nell AF Sarl 144A @ 8.375%, 08/15/15 350 360 ------- 1,173 ------- ELECTRONIC COMPONENTS -- 0.7% NXP BV 144A @ 8.118%, 10/15/13 175 178 9.500%, 10/15/15 425 436 ------- 614 ------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 2.6% Celestica Inc. 7.875%, 07/01/11 225 223 Conexant Systems Inc. 9.126%, 11/15/10+ 144A @ 175 178 4.000%, 03/21/26 CONV 100 91 Flextronics International Ltd. 6.250%, 11/15/14 125 121 Freescale Semiconductor 144A @ 8.875%, 12/15/14 350 349 9.195%, 12/15/14 125 124 10.125%, 12/15/16 450 451 L-3 Communications Corp. 6.375%, 10/15/15 325 322 Spansion LLC 144A @ 11.250%, 01/15/16 150 158 Stats Chippac, Inc. 6.750%, 11/15/11 100 98 Superior Essex, Inc. 9.000%, 04/15/12 125 130 ------- 2,245 ------- ENERGY RESOURCES & SERVICES -- 6.9% AES Corp. 9.375%, 09/15/10 275 299 8.875%, 02/15/11 300 322 7.750%, 03/01/14 75 79 9.000%, 05/15/15 144A @ 250 269 Allegheny Energy Supply Co. LLC 7.800%, 03/15/11 50 54 8.250%, 04/15/12 144A @ 25 27 Alpha Natural Resources LLC 10.000%, 06/01/12 200 217 CMS Energy Corp. 8.500%, 04/15/11 50 54 Copano Energy LLC 8.125%, 03/01/16 150 155 Hilcorp Energy Co. 144A @ 10.500%, 09/01/10 250 268 7.750%, 11/01/15 50 49 Invensys Plc 144A @ 9.875%, 03/15/11 260 279 Midwest Generation LLC 8.750%, 05/01/34 425 461 Mirant Americas Generation, LLC 8.300%, 05/01/11 200 205 Mirant North America LLC 7.375%, 12/31/13 850 863 Mission Energy Holding Co. 13.500%, 07/15/08 200 221 NRG Energy, Inc. 7.250%, 02/01/14 100 101 7.375%, 02/01/16 775 779 Orion Power Holdings, Inc. 12.000%, 05/01/10 300 341 Peabody Energy Corp. 7.375%, 11/01/16 125 133 Petrohawk Energy Corp. 9.125%, 07/15/13 175 184 Sierra Pacific Resources 7.803%, 06/15/12+++ 25 26 8.625%, 03/15/14 250 268 Stone Energy Corp. 144A @ 8.124%, 07/15/10 200 198 Utilicorp Canada Finance Corp. 7.750%, 06/15/11 150 158 ------- 6,010 ------- ENTERTAINMENT & LEISURE -- 2.3% AMC Entertainment, Inc. 11.000%, 02/01/16 300 337 AMF Bowling Worldwide, Inc. 10.000%, 03/01/10 200 207 Cinemark, Inc. 9.000%, 02/01/13 100 106 9.391%, 03/15/14+ 625 537 K2, Inc. 7.375%, 07/01/14 200 202 MTR Gaming Group, Inc. 144A @ 9.000%, 06/01/12 50 51 Pokagon Gaming Authority 144A @ 10.375%, 06/15/14 250 274 Speedway Motorsports Inc. 6.750%, 06/01/13 50 50 Town Sports International, Inc. 9.625%, 04/15/11 80 85 Tunica-Biloxi Gaming AU 144A @ 9.000%, 11/15/15 125 129 ------- 1,978 ------- FINANCE -- 7.5% BCP Caylux Holdings Luxembourg SCA 9.625%, 06/15/14 385 425 Couche-Tard U.S./Finance 7.500%, 12/15/13 325 332 FBOP Capital Trust II 144A @+++ 10.000%, 01/15/09 150 160 Ford Motor Credit Co. 9.957%, 04/15/12 1,125 1,192 FTI Consulting Inc. 7.625%, 06/15/13 200 207 7.750%, 10/01/16 144A @ 150 156 General Motors Acceptance Corp. 6.750%, 12/01/14 725 745 8.000%, 11/01/31 1,350 1,550 Global Cash Access LLC 8.750%, 03/15/12 204 214 IAAI Finance Corp. 11.000%, 04/01/13 200 226
35 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- FINANCE -- (CONTINUED) iPayment, Inc. 9.750%, 05/15/14 $ 250 $ 257 iPayment Investors LP 144A @+++ 12.750%, 07/15/14 175 176 Poster Financial Group Inc. 8.750%, 12/01/11 250 260 Rafealla Apparel Group 144A @ 11.250%, 06/15/11 201 205 Rainbow National Services 144A @ 8.750%, 09/01/12 75 79 Stone Container Finance 7.375%, 07/15/14 325 302 ------- 6,486 ------- FOOD & BEVERAGES -- 1.2% B&G Foods, Inc. 8.000%, 10/01/11 275 278 Del Monte Corp. 8.625%, 12/15/12 275 290 Reynolds American, Inc. 7.250%, 06/01/13 275 286 7.625%, 06/01/16 150 159 ------- 1,013 ------- HEALTHCARE -- 3.2% Community Health Systems, Inc. 6.500%, 12/15/12 200 197 Concentra Operating Corp. 9.500%, 08/15/10 100 105 9.125%, 06/01/12 175 184 CRC Health Corp. 10.750%, 02/01/16 175 188 Fresenius Medical Care Capital Trust II 7.875%, 02/01/08 25 26 Genesis HealthCare Corp. 8.000%, 10/15/13 225 235 HCA Inc. 144A @ 9.250%, 11/15/16 575 616 HCA-The Healthcare Corp. 8.750%, 09/01/10 375 391 Team Health Inc. 11.250%, 12/01/13 175 181 Triad Hospitals, Inc. 7.000%, 11/15/13 225 226 Vanguard Health Holding Co. II LLC 9.000%, 10/01/14 275 278 Ventas Realty Ltd. Partnership 6.750%, 06/01/10 75 77 6.500%, 06/01/16 100 103 ------- 2,807 ------- HOTELS & GAMING -- 1.5% American Casino & Entertainment Properties LLC 7.850%, 02/01/12 200 204 Boyd Gaming Corp. 8.750%, 04/15/12 25 26 Buffalo Thunder, 144A @ 9.375%, 12/15/14 225 229 Felcor Lodging LP 8.500%, 06/01/11 75 80 MGM Mirage, Inc. 8.500%, 09/15/10 100 107 6.625%, 07/15/15 225 214 Penn National Gaming Inc. 6.750%, 03/01/15 275 270 Pinnacle Entertainment 8.250%, 03/15/12 25 25 Trump Entertainment Resorts 8.500%, 06/15/15 175 174 ------- 1,329 ------- HOTELS & RESORTS -- 1.2% Host Marriott LP 7.125%, 11/01/13 75 77 6.375%, 03/15/15 25 25 6.750%, 06/01/16 775 776 Little Trav Bay Odawa Inc. 144A @+++ 10.250%, 02/15/14 125 126 ------- 1,004 ------- INDUSTRIAL -- 0.6% Abitibi Consolidated, Inc. 5.250%, 06/20/08 125 120 8.550%, 08/01/10 100 95 American Commercial Lines/ACL Finance 9.500%, 02/15/15 200 222 Chukchansi Economic Development Authority 144A @+++ 8.780%, 11/15/12 125 129 ------- 566 ------- MACHINERY & HEAVY EQUIPMENT -- 1.0% Case New Holland, Inc. 9.250%, 08/01/11 225 238 Columbus McKinnon Corp. 8.875%, 11/01/13 300 317 Stewart & Stevenson LLC, 144A @ 10.000%, 07/15/14 200 210 Terex Corp. 7.375%, 01/15/14 75 76 ------- 841 ------- MANUFACTURING -- 2.2% Accuride Corp. 8.500%, 02/01/15 200 193 AGY Holding Corp. 144A @ 11.000%, 11/15/14 125 125 Broder Bros. Co. 11.250%, 10/15/10 175 170 Foundation PA Coal Co. 7.250%, 08/01/14 250 254 General Cable Corp. 9.500%, 11/15/10 225 239 Indalex Holdings 144A @ 11.500%, 02/01/14 125 131 Nutro Products, Inc., 144A @ 9.230%, 10/15/13 150 155 10.750%, 04/15/14 200 219
36 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- MANUFACTURING -- (CONTINUED) RBS Global & Rexnord Corp., 144A @ 9.500%, 08/01/14 $ 375 $ 390 11.750%, 08/01/16 50 52 ------- 1,928 ------- MEDICAL SERVICES & EQUIPMENT -- 0.7% DaVita, Inc. 6.625%, 03/15/13 150 150 7.250%, 03/15/15 150 153 U.S. Oncology, Inc. 9.000%, 08/15/12 125 132 10.750%, 08/15/14 75 83 Warner Chilcott Corp. 8.750%, 02/01/15 81 83 ------- 601 ------- MEDICAL SUPPLIES & EQUIPMENT -- 0.4% Biovail Corp. 7.875%, 04/01/10 175 179 VWR International, Inc. 8.000%, 04/15/14 150 155 ------- 334 ------- METAL COMPONENTS & PRODUCTS -- 0.7% Century Aluminum Co. 7.500%, 08/15/14 125 127 Gerdau AmeriSteel Corp. 10.375%, 07/15/11 100 107 Metals USA Inc. 11.125%, 12/01/15 150 165 Novelis, Inc. 144A @ 7.250%, 02/15/15 225 218 ------- 617 ------- METALS & MINING -- 0.7% Aleris International, Inc. 144A @ 10.000%, 12/15/16 175 176 Arch Western Finance LLC 6.750%, 07/01/13 150 149 Gibraltar Industries, Inc. 8.000%, 12/01/15 275 271 ------- 596 ------- OFFICE EQUIPMENT & SERVICES -- 0.2% IKON Office Solutions, Inc. 7.750%, 09/15/15 200 210 ------- OFFICE PROPERTY -- 0.2% Saul Centers, Inc. 7.500%, 03/01/14 150 152 ------- OIL & GAS -- 5.5% AmeriGas Partners L.P. 7.250%, 05/20/15 150 152 ANR Pipeline Co. 8.875%, 03/15/10 50 52 Atlas Pipeline Partners 8.125%, 12/15/15 125 128 Chaparral Energy Inc. 8.500%, 12/01/15 275 274 Chesapeake Energy Corp. 6.500%, 08/15/17 250 244 6.875%, 11/15/20 450 442 Clayton William Emergy 7.750%, 08/01/13 175 161 Colorado Interstate Gas 6.800%, 11/15/15 125 130 Complete Product Services 144A @ 8.000%, 12/15/16 175 179 Compton Petroleum Corp. 7.625%, 12/01/13 325 314 Denbury Resources, Inc. 7.500%, 04/01/13 200 203 7.500%, 12/15/15 75 77 Dynegy Roseton/Danskammer LLC 7.270%, 11/08/10 175 179 Encore Acquisition Co. 7.250%, 12/01/17 225 218 Ferrellgas Partners LP 8.750%, 06/15/12 225 231 Forest Oil Corp. 8.000%, 12/15/11 100 104 Hanover Compressor Co. 7.500%, 04/15/13 225 227 9.000%, 06/01/14 75 81 Magnum Hunter Resources, Inc. 9.600%, 03/15/12 32 34 OPTI Canada Inc.,144A @ 8.250%, 12/15/14 225 231 Range Resources Corp. 6.375%, 03/15/15 200 195 7.500%, 05/15/16 150 154 Southern Natural Gas Co. 8.875%, 03/15/10 100 105 Swift Energy Co. 9.375%, 05/01/12 50 53 Williams Cos., Inc. 8.125%, 03/15/12 225 244 7.625%, 07/15/19 50 54 7.500%, 01/15/31 150 156 7.750%, 06/15/31 100 105 ------- 4,727 ------- PAPER & RELATED PRODUCTS -- 2.9% Boise Cascade LLC 7.125%, 10/15/14 325 314 Domtar Inc. 7.875%, 10/15/11 125 130 5.375%, 12/01/13 75 68 9.500%, 08/01/16 25 27 Georgia Pacific Corp. 8.125%, 05/15/11 150 158 7.000%, 01/15/15 144A @ 100 100 7.700%, 06/15/15 150 153 7.125%, 01/15/17 144A @ 350 349 MDP Acquisitions Plc 9.625%, 10/01/12 350 371 Newpage Corp. 10.000%, 05/01/12 25 26 11.621%, 05/01/12 150 162 12.000%, 05/01/13 125 132 Norske Skog Canada Ltd 7.375%, 03/01/14 175 166
37 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- PAPER & RELATED PRODUCTS -- (CONTINUED) Verso Paper Holdings LLC 144A @ 9.121%, 08/01/14 $ 50 $ 51 9.125%, 08/01/14 100 104 11.375%, 08/01/16 225 236 ------- 2,547 ------- PHARMACEUTICALS -- 0.6% Amerisourcebergen Corp. 5.625%, 09/15/12 225 221 Mylan Laboratories, Inc. 5.750%, 08/15/10 175 175 Omnicare, Inc. 6.750%, 12/15/13 100 99 6.875%, 12/15/15 50 49 ------- 544 ------- PHOTOGRAPHY EQUIPMENT & SUPPLIES -- 0.3% Eastman Kodak Co. 7.250%, 11/15/13 225 224 ------- PRINTING & PUBLISHING -- 2.5% Dex Media Inc. 8.064%, 11/15/13+ 25 22 Dex Media East LLC 12.125%, 11/15/12 292 322 Dex Media Finance/West 9.875%, 08/15/13 225 245 Idearc, Inc. 144A @ 8.000%, 11/15/16 800 812 Morris Publishing 7.000%, 08/01/13 275 261 Nebraska Book Co., Inc. 8.625%, 03/15/12 375 360 Quebecor World Inc. 144A @ 9.750%, 01/15/15 125 126 ------- 2,148 ------- RESTAURANTS -- 0.6% O'Charley's, Inc. 9.000%, 11/01/13 200 210 Real Mex Restaurants Inc. 10.000%, 04/01/10 125 132 The Restaurant Company 10.000%, 10/01/13 225 212 ------- 554 ------- RETAIL -- 2.7% Amerigas Part/Eagle Fin 7.125%, 05/20/16 275 275 AutoNation, Inc. 7.374%, 04/15/13 75 75 7.000%, 04/15/14 75 76 Bon-ton Dept Stores Inc. 10.250%, 03/15/14 200 205 General Nutrition Center 8.500%, 12/01/10 175 180 8.625%, 01/15/11 50 53 GSC Holdings Corp. 8.000%, 10/01/12 750 784 Pathmark Stores, Inc. 8.750%, 02/01/12 225 225 Payless Shoesource, Inc. 8.250%, 08/01/13 25 26 Sally Holdings LLC 144A @ 9.250%, 11/15/14 225 229 The Pantry, Inc. 7.750%, 02/15/14 200 201 ------- 2,329 ------- SERVICES -- COMMERCIAL -- 1.9% Brickman Group Ltd. 11.750%, 12/15/09 100 106 Digicel Limited 144A @+++ 9.250%, 09/01/12 300 320 Education Management LLC 144A @ 10.250%, 06/01/16 550 582 Interface, Inc. 10.375%, 02/01/10 350 387 9.500%, 02/01/14 25 26 Mac-Gray Corp. 7.625%, 08/15/15 200 203 ------- 1,624 ------- SPECIAL PURPOSE ENTITY -- 0.9% AAC Group Holding Corp. 10.755%, 10/01/12+ 150 131 12.750%, 10/01/12 130 138 Canwest Media Inc. 8.000%, 09/15/12 287 300 JSG Funding PLC 7.750%, 04/01/15 100 96 Stripes Acq/Susser Financial 144A @ 10.625%, 12/15/13 123 134 ------- 799 ------- TELECOMMUNICATIONS -- 14.5% Allbritton Communications Co. 7.750%, 12/15/12 425 429 American Tower Corp. 7.250%, 12/01/11 50 52 3.000%, 08/15/12 CONV 150 285 7.125%, 10/15/12 100 103 Broadview Networks Holdings 144A @ 11.375%, 09/01/12 125 130 Canadian Satellite Radio+++ 12.750%, 02/15/14 125 126 Centennial Communication 10.000%, 01/01/13 75 80 10.125%, 06/15/13 275 296 Citizens Communications Co. 6.250%, 01/15/13 125 123 7.875%, 01/15/27 144A @ 125 126 9.000%, 08/15/31 500 543 Cricket Communications Corp. 144A @ 9.375%, 11/01/14 325 343 DirecTV Holdings 8.375%, 03/15/13 350 364 Dobson Cellular Systems 9.875%, 11/01/12 150 164 Dobson Communications Corp. 8.875%, 10/01/13 225 229
38 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- CORPORATE BONDS -- (CONTINUED) ---------------------------------------------------- TELECOMMUNICATIONS -- (CONTINUED) GCI Inc., 7.250%, 02/15/14 $ 225 $ 223 Hellas II 144A @ 11.110%, 01/15/15 225 226 Horizon PCS, Inc. 11.375%, 07/15/12 100 112 Insight Midwest LP/Insight Capital, Inc. 9.750%, 10/01/09 52 53 Intelsat Bermuda Co., Ltd. 9.614%, 01/15/12 200 202 Intelsat Sub Holding Co., Ltd. 8.250%, 01/15/13 125 127 IPCS, Inc. 11.500%, 05/01/12 125 139 Level 3 Communications, Inc. CONV 6.000%, 09/15/09 52 49 11.500%, 03/01/10 200 212 6.000%, 03/15/10 48 44 Level 3 Financing, Inc. 144A @ 9.250%, 11/01/14 125 128 Lucent Technologies, Inc. 6.500%, 01/15/28 150 138 6.450%, 03/15/29 25 23 Metropcs Wireless Inc., 144A @ 9.250%, 11/01/14 400 418 Mobile Services Group Inc., 144A @ 9.750%, 08/01/14 200 209 Nextel Partners, Inc. 8.125%, 07/01/11 200 208 Nordic Tel Co., Holdings 144A @ 8.875%, 05/01/16 675 722 Nortel Networks Ltd. 144A @ 9.730%, 07/15/11 275 290 Panamsat Corp. 9.000%, 08/15/14 262 277 Qwest Corp. 7.875%, 09/01/11 250 266 8.875%, 03/15/12 225 251 8.640%, 06/15/13 225 244 7.500%, 10/01/14 375 398 Rogers Cable, Inc. 6.750%, 03/15/15 150 155 Rogers Wireless Communications, Inc. 9.625%, 05/01/11 250 284 8.000%, 12/15/12 825 881 7.500%, 03/15/15 100 109 Rural Cellular Corp. 9.875%, 02/01/10 125 133 10.899%, 11/01/12 75 78 Sirus Satellite Radio 9.625%, 08/01/13 225 221 Syniverse Technologies Inc. 7.750%, 08/15/13 225 224 Time Warner Telecom Holdings 9.250%, 02/15/14 25 27 US LEC Corp. 13.870%, 10/01/09 100 106 Valor Telecomm LLC 7.750%, 02/15/15 150 161 West Corp. 144A @ 9.500%, 10/15/14 75 75 11.000%, 10/15/16 300 303 Wind Acquisition Fin SA 144A @ 10.750%, 12/01/15 325 370 Windstream Corp. 144A @ 8.625%, 08/01/16 1,000 1,095 ------- 12,574 ------- TEXTILES & APPAREL -- 0.6% Invista 144A @ 9.250%, 05/01/12 225 241 Tandus Group 9.750%, 02/15/10 250 256 ------- 497 ------- TRANSPORTATION & RELATED SERVICES -- 1.2% CHC Helicopter Corp. 7.375%, 05/01/14 150 145 Continental Airlines, Inc. 8.750%, 12/01/11 175 177 Delta Air Lines, Inc. 27.525%, 12/15/09+ ++++ 275 184 Offshore Logistics, Inc. 6.125%, 06/15/13 225 213 Travelport Inc. 144A @ 11.875%, 09/01/16 225 231 Tfm Sa De Cv 9.375%, 05/01/12 100 107 ------- 1,057 ------- WASTE MANAGEMENT -- 0.4% Allied Waste North America, Inc. 9.250%, 09/01/12 25 27 Casella Waste Systems, Inc. 9.750%, 02/01/13 325 341 ------- 368 ------- TOTAL CORPORATE BONDS (COST $78,079) 79,984 -------
NUMBER OF SHARES ----------------------------------------------------- COMMON STOCK -- 2.6% ----------------------------------------------------- ENERGY RESOURCES & SERVICES -- 0.2% Reliant Energy, Inc.* 9,375 133 ------- ENTERTAINMENT & LEISURE -- 0.4% Progressive Gaming International*+++ 1,200 11 Regal Entertainment Group 15,625 333 ------- 344 ------- HOTELS & GAMING -- 0.1% Lakes Entertainment, Inc.* 10,925 118 ------- OIL & GAS -- 0.2% PNM Resources Inc.+++ 21 1 Williams Cos., Inc. 8,000 209 ------- 210 ------- RETAIL -- 0.0% Pathmark Stores, Inc.*+++ 1,532 17 -------
39 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 HIGH YIELD BOND FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCK -- (CONTINUED) ---------------------------------------------------- TELECOMMUNICATIONS -- 1.6% Citizens Communications Co. 9,400 $ 135 Crown Castle International Corp.* 4,775 154 Dobson Communications Corp.* 1 0 Geoeye, Inc.*+++ 3,277 63 Loral Space & Communications Ltd.* 6,856 279 Rogers Wireless Communications, Inc. 7,125 425 Telus Corp. 3,625 162 Windstream Corp. 9,725 138 ------- 1,356 ------- WASTE MANAGEMENT -- 0.1% Synagro Technologies, Inc. 24,100 107 ------- TOTAL COMMON STOCKS (COST $2,215) 2,285 ------- ----------------------------------------------------- PREFERRED STOCK -- 2.1% ----------------------------------------------------- AUTOMOBILES & RELATED -- 1.0% Ford Motor Co. Cap TR II 4,650 159 General Motors Corp. 31,725 672 ------- 831 ------- BROADCAST/MEDIA -- 0.2% Ion Media Networks 16 1 Spanish Broadcasting System+++ 178 196 ------- 197 ------- ENERGY RESOURCES & SERVICES -- 0.8% Lucent Technologies Capital Trust 425 438 NRG Energy, Inc. 175 260 ------- 698 ------- TELECOMMUNICATIONS -- 0.1% Loral Skynet Corp.+++ 413 85 ------- TEXTILES & APPAREL -- 0.0% Anvil Holdings, Inc.*+++ 13,020 13 ------- TOTAL PREFERRED STOCKS (COST $1,790) 1,824 ------- ----------------------------------------------------- WARRANTS -- 0.2% ----------------------------------------------------- Geoeye Inc. Warrant*+++ 612 6 IPCS, Inc. 144A @*+++ 300 -- KMC Telecom Holdings, Inc. 144A @*+++ 200 -- MDP Acquisitions Plc 144A @*+++ 100 2 Pathmark Stores, Inc.*+++ 2,350 1 SW Acquisition*+++ 1 -- TravelCenters of America, Inc.*+++ 1,800 92 TravelCenters of America, Inc.*+++ 500 25 UbiquiTel, Inc. 144A @*+++ 900 -- ------- TOTAL WARRANTS (COST $94) 126 ------- SHORT-TERM INVESTMENTS -- 2.7% ----------------------------------------------------- T. Rowe Price Reserve Investment Fund (COST $2,370) 2,370,202 2,370 ------- TOTAL INVESTMENTS -- 100.0% (COST $84,548) $86,589 =======
---------------------- + See Note 1 to Financial Statements. * Non-Income Producing Security. CONV -- Convertible + Effective Yield. For those bonds that become coupon paying at a future date, the interest rate disclosed represents that annualized effective yield from the date of acquisition to maturity. +++ Illiquid security. The total market value of illiquid securities at December 31, 2006 is $2,454,000. ++++ Defaulted security. @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other "accredited investors". Unless otherwise indicated, the security is considered liquid. The accompanying notes are an integral part of these financial statements. 40 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 FLEXIBLY MANAGED FUND
NUMBER VALUE OF SHARES (000)+ ------------------------------------------------------- COMMON STOCKS -- 50.3% ------------------------------------------------------- BANKING -- 3.5% Banco Popolare di Verona e Novara Scrl 288,700 $ 8,289 First Horizon National Corp.# 154,000 6,434 Royal Bank of Scotland Group Plc 331,653 12,942 SunTrust Banks, Inc.# 154,100 13,014 U.S. Bancorp# 402,800 14,577 -------- 55,256 -------- BROADCAST/MEDIA -- 3.0% Comcast Corp.*# 129,800 5,494 EchoStar Communications Corp.*# 232,600 8,846 Liberty Media Holding Corp. -- Capital Series A* 84,800 8,309 Liberty Media Holding Corp. -- Interactive A* 361,000 7,787 Meredith Corp. 14,100 794 Time Warner, Inc.# 718,900 15,658 -------- 46,888 -------- BUILDING PRODUCTS & SUPPLIES -- 0.8% American Standard Cos., Inc.# 128,200 5,878 Centex Corp.# 113,200 6,370 -------- 12,248 -------- CHEMICALS -- 0.8% Du Pont (E.I.) De Nemours and Co.# 258,700 12,601 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 0.4% Juniper Networks, Inc.*# 299,700 5,676 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 1.3% Intel Corp.# 979,800 19,841 -------- COMPUTER SERVICES & SOFTWARE -- 3.1% First Data Corp. 360,800 9,208 Microsoft Corp. 1,296,400 38,710 -------- 47,918 -------- CONSUMER PRODUCTS -- 0.8% Fortune Brands, Inc. 62,000 5,294 Newell Rubbermaid, Inc. 238,200 6,896 -------- 12,190 -------- DIVERSIFIED OPERATIONS -- 5.2% General Electric Co. 767,000 28,540 Honeywell International, Inc. 310,300 14,038 Tyco International Ltd. 1,255,000 38,152 -------- 80,730 -------- ENERGY RESOURCES & SERVICES -- 1.9% Entergy Corp. 127,600 11,780 PPL Corp. 523,100 18,748 -------- 30,528 -------- FINANCE -- 3.7% Ameriprise Financial, Inc. 230,000 12,535 H&R Block, Inc.# 562,700 12,964 JPMorgan Chase & Co. 280,800 13,563 Legg Mason, Inc.# 105,300 10,009 Prudential Financial, Inc. 104,300 8,955 -------- 58,026 -------- FINANCIAL SERVICES -- 0.2% Western Union Co. 139,700 3,132 -------- FOOD & BEVERAGES -- 2.9% Anheuser-Busch Co., Inc. 267,600 13,166 Coca-Cola Co. 440,500 21,254 General Mills, Inc. 188,000 10,829 -------- 45,249 -------- INSURANCE -- 6.1% American International Group, Inc.# 370,800 26,572 Aon Corp.# 220,300 7,785 CIGNA Corp. 31,400 4,131 Genworth Financial, Inc.# 331,500 11,341 Hartford Financial Services Group, Inc.# 147,300 13,745 Marsh & McLennan Cos., Inc.# 556,400 17,059 White Mountains Insurance Group Ltd. 17,500 10,140 XL Capital Ltd. 74,400 5,358 -------- 96,131 -------- MANUFACTURING -- 0.2% Chemtura Corp.# 366,041 3,525 -------- MEDICAL SERVICES & EQUIPMENT -- 1.1% Baxter International, Inc. 179,800 8,341 Cardinal Health, Inc. 138,500 8,923 -------- 17,264 -------- MEDICAL SUPPLIES & EQUIPMENT -- 0.5% Boston Scientific Corp.* 412,400 7,085 -------- METAL COMPONENTS & PRODUCTS -- 0.2% Alcoa, Inc. 108,700 3,262 -------- METALS & MINING -- 0.9% Newmont Mining Corp.# 184,500 8,330 Teck Cominco Ltd. Class B 78,084 5,884 -------- 14,214 -------- OIL & GAS -- 3.4% Baker Hughes, Inc. 73,900 5,517 Chevron Corp. 66,480 4,888 CNX Gas Corp.*# 184,700 4,710 Murphy Oil Corp.# 570,400 29,005 Total SA -- ADR 130,500 9,386 -------- 53,506 -------- PAPER & RELATED PRODUCTS -- 1.5% Bowater, Inc.# 223,200 5,022 International Paper Co.# 556,500 18,977 -------- 23,999 -------- PHARMACEUTICALS -- 3.5% Merck & Co., Inc. 183,300 7,992 Pfizer, Inc. 837,900 21,701 Wyeth 492,100 25,058 -------- 54,751 -------- PRINTING & PUBLISHING -- 0.5% Idearc, Inc.* 12,890 369 New York Times Co.# 309,000 7,528 -------- 7,897 --------
41 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 FLEXIBLY MANAGED FUND
NUMBER VALUE OF SHARES (000)+ ------------------------------------------------------- COMMON STOCKS -- (CONTINUED) ------------------------------------------------------ RETAIL -- 1.5% CVS Corp. 121,300 $ 3,749 Home Depot, Inc.# 481,100 19,321 -------- 23,070 -------- SERVICES -- COMMERCIAL -- 0.3% ServiceMaster Co. 396,700 5,201 -------- TELECOMMUNICATIONS -- 3.0% AT&T, Inc.# 474,400 16,960 BellSouth Corp. 203,000 9,563 Sprint Nextel Corp.# 687,000 12,978 Telus Corp. 700 31 Verizon Communications, Inc.# 214,800 7,999 -------- 47,531 -------- TOTAL COMMON STOCKS (COST $635,691) 787,719 --------
PAR (000) ------------------------------------------------------ CORPORATE BONDS -- 11.2% ------------------------------------------------------ ADVERTISING -- 0.3% Lamar Advertising Co. CONV 2.875%, 12/31/10 $ 3,400 4,611 -------- AEROSPACE & DEFENSE -- 0.1% Alliant Techsystems, Inc. CONV 3.000%, 08/15/24 579 683 -------- APARTMENTS -- 0.3% United Dominion Realty Trust, Inc. 144A @+++ CONV 4.000%, 12/15/35 4,165 4,889 -------- BROADCAST/MEDIA -- 1.4% Echostar Communications Corp. CONV 5.750%, 05/15/08 8,239 8,393 Liberty Media Holding Corp. CONV 3.250%, 03/15/31 16,175 13,486 -------- 21,879 -------- DIVERSIFIED OPERATIONS -- 0.3% Tyco International Ltd. CONV 3.125%, 01/15/23 3,503 4,961 -------- ENERGY RESOURCES & SERVICES -- 0.1% Teco Energy, Inc. 7.000%, 05/01/12 1,675 1,763 -------- FOOD & BEVERAGES -- 0.7% General Mills, Inc. CONV (0.0693%), 10/28/22+ 13,643 10,113 -------- HEALTHCARE -- 0.3% LifePoint Hospitals, Inc. CONV 3.250%, 08/15/25 5,003 4,497 -------- INSURANCE -- 0.3% USF&G Corp. CONV 6.088%, 03/03/09+ 4,784 4,401 -------- MEDICAL SERVICES & EQUIPMENT -- 1.0% Amgen, Inc. CONV 0.375%, 02/01/13# 4,084 4,013 0.375%, 02/01/13 144A @+++ 9,453 9,288 Beckman Coulter, Inc.# 144A @+++ CONV 2.500%, 12/15/36 2,388 2,427 -------- 15,728 -------- MEDICAL SUPPLIES & EQUIPMENT -- 0.2% Invitrogen Corp. CONV 3.250%, 06/15/25 3,717 3,499 -------- OIL & GAS -- 1.5% Peabody Energy CONV 4.750%, 12/15/36 8,900 8,488 Schlumberger Ltd. CONV 1.500%, 06/01/23 2,934 5,175 2.125%, 06/01/23 4,326 7,100 Williams Cos, Inc. 8.125%, 03/15/12 2,800 3,031 -------- 23,794 -------- PHARMACEUTICALS -- 1.2% Omnicare Inc. CONV 3.250%, 12/15/35 1,476 1,280 Roche Holdings, Inc. 144A @+++ CONV 3.618%, 07/25/21+ 12,200 11,691 Valeant Pharmaceuticals International CONV 4.000%, 11/15/13 5,990 5,705 -------- 18,676 -------- RETAIL -- 0.7% Amazon.com, Inc. CONV 4.750%, 02/01/09 4,892 4,800 The TJX Companies, Inc. CONV (0.666%), 02/13/21+ 6,977 6,576 -------- 11,376 -------- TELECOMMUNICATIONS -- 2.8% Crown Castle International Corp. CONV 4.000%, 07/15/10 1,580 4,712 Lucent Technologies, Inc. CONV 2.750%, 06/15/23 2,700 2,902 2.750%, 06/15/25 11,023 12,456 8.000%, 08/01/31# 10,200 10,200 Nextel Communications, Inc. 7.375%, 08/01/15 13,750 14,100 -------- 44,370 -------- TOTAL CORPORATE BONDS (COST $159,537) 175,240 --------
NUMBER OF SHARES -------------------------------------------------------- PREFERRED STOCKS -- 5.3% -------------------------------------------------------- AUTOMOBILES & RELATED -- 1.7% General Motors Corp. 1,023,700 $ 25,879 -------- CHEMICAL & FERTILIZER -- 0.2% Hercules, Inc. 4,083 3,491 -------- CONSUMER PRODUCTS -- 0.9% Newell Financial Trust I 5.250% 299,300 14,254 -------- CONTAINERS -- 0.1% Owens-Illinois, Inc. 48,400 1,791 --------
42 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 FLEXIBLY MANAGED FUND
NUMBER OF VALUE SHARES (000)+ -------------------------------------------------------- PREFERRED STOCKS -- (CONTINUED) ------------------------------------------------------- ENERGY RESOURCES & SERVICES -- 0.3% NRG Energy, Inc. $ 3,300 $ 4,900 -------- FINANCE -- 1.2% Affiliated Managers Group, Inc. 144A @+++ 150,000 7,856 E*TRADE Financial Corp. 111,100 3,233 Federal National Mortgage Association 70 6,984 -------- 18,073 -------- INSURANCE -- 0.7% Aspen Insurance Holdings, Ltd. 94,900 5,191 Genworth Financial, Inc. 156,000 5,721 -------- 10,912 -------- TELECOMMUNICATIONS -- 0.2% IPC Holdings Ltd. 115,600 3,396 -------- TOTAL PREFERRED STOCKS (COST $70,827) 82,696 -------- -------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS -- 0.3% -------------------------------------------------------- PAPER & RELATED PRODUCTS -- 0.3% Potlatch Holding Corp.# 104,521 4,580 -------- (COST $2,606) -------------------------------------------------------- SHORT-TERM INVESTMENTS -- 15.7% -------------------------------------------------------- T. Rowe Price Reserve Investment Fund 245,260,594 245,261 -------- (COST $245,261)
PAR (000) ------------------------------------------------------- U.S. TREASURY NOTES -- 1.5% ------------------------------------------------------- U.S. Treasury Note# 4.875%, 05/31/08 $ 11,815 11,809 4.875%, 05/15/09 11,815 11,841 ---------- TOTAL U.S. TREASURY NOTES (COST $23,602) 23,650 ---------- ------------------------------------------------------- SECURITIES LENDING COLLATERAL -- 15.7% ------------------------------------------------------- Bank of Montreal Time Deposit 5.25%, 01/02/2007 1,788 1,788 Bear Stearns Variable Rate Commercial Paper 5.372%, 01/02/2007 6,155 6,155 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 6,850 6,850 Cullinan Financial Corp Variable Rate Bank Deposit 5.32%, 01/22/2007 13,371 13,371 Deutsche Bank Time Deposit 4.75%, 01/02/2007 9,509 9,509 Institutional Money Market Trust 5.302%, 01/02/2007 155,953 155,953 IXIS Time Deposit 5.30%, 01/02/2007 7,119 7,119 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 24,680 24,680 National Bank of Canada Time Deposit 5.32%, 01/02/2007 1,788 1,788 Sedna Financial Floating Rate Note 5.29%, 01/25/2007 19,296 19,296 ---------- TOTAL SECURITIES LENDING COLLATERAL (COST $246,509) 246,509 ---------- TOTAL INVESTMENTS -- 100.0% (COST $1,384,033) $1,565,655 ==========
---------------------- + See Note 1 to Financial Statements. * Non-Income Producing Security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt CONV -- Convertible + Effective Yield. For those bonds that become coupon paying at a future date, the interest rate disclosed represents that annualized effective yield from the date of acquisition to maturity. +++ Illiquid security. The total market value of illiquid securities at December 31, 2006 is $36,151,000. @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other "accredited investors". Unless otherwise indicated, the security is considered liquid. The accompanying notes are an integral part of these financial statements. 43 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 GROWTH STOCK FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 80.5% ------------------------------------------------------ AEROSPACE & DEFENSE -- 0.4% General Dynamics Corp. 8,400 $ 624 -------- AGRICULTURAL PRODUCTS -- 0.5% Monsanto Co. 14,400 756 -------- BANKING -- 2.6% Anglo Irish Bank Corp. Plc 54,544 1,129 Erste Bank der oesterreichischen Sparkassen AG 16,165 1,238 Northern Trust Corp. 15,700 953 UniCredito Italiano SpA 99,700 872 -------- 4,192 -------- BROADCAST/MEDIA -- 3.4% EchoStar Communications Corp.*# 11,300 430 Grupo Televisa S.A. ADR 30,900 834 Harman International Industries, Inc. 12,700 1,269 Liberty Media Holding Corp. -- Capital Series A* 11,530 1,130 Liberty Media Holding Corp. -- Interactive A* 31,750 685 Viacom, Inc., Class B* 27,300 1,120 -------- 5,468 -------- BUILDING & REAL ESTATE -- 0.5% Lennar Corp.# 16,100 844 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 2.9% eBay, Inc.*# 18,300 550 Google, Inc.*# 5,100 2,348 Juniper Networks, Inc.*# 50,000 947 Yahoo!, Inc.*# 34,100 871 -------- 4,716 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 1.8% Cisco Systems, Inc.* 59,600 1,629 Intel Corp.# 19,600 397 International Game Technology, Inc. 18,600 859 -------- 2,885 -------- COMPUTER SERVICES & SOFTWARE -- 4.6% Adobe Systems, Inc.* 20,800 855 Affiliated Computer Services, Inc.* 1,700 83 Autodesk, Inc.* 23,500 951 Automatic Data Processing, Inc. 31,600 1,556 EMC Corp.* 50,900 672 Intuit, Inc.* 15,000 458 Microsoft Corp. 81,975 2,448 Oracle Corp.* 25,500 437 -------- 7,460 -------- COMPUTERS & OFFICE EQUIPMENT -- 0.7% Apple Computer, Inc.* 9,000 764 Dell, Inc.*# 16,700 419 -------- 1,183 -------- CONSUMER PRODUCTS -- 0.8% NIKE, Inc. 6,700 664 Reckitt Benckiser Plc 13,600 620 -------- 1,284 -------- COSMETICS & TOILETRIES -- 0.9% Procter & Gamble Co. 21,312 1,370 -------- DISTRIBUTION SERVICES -- 0.2% Fastenal Co. 10,300 369 -------- DIVERSIFIED OPERATIONS -- 4.2% General Electric Co. 150,900 5,615 Tyco International Ltd.# 38,700 1,176 -------- 6,791 -------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 3.9% Analog Devices, Inc. 29,700 976 Applied Materials, Inc.# 42,400 782 ASML Holding NV*# 11,300 278 Marvell Technology Group, Ltd.* 75,900 1,457 Maxim Integrated Products, Inc. 37,900 1,160 Samsung Electronics Co. 556 365 Texas Instruments, Inc. 13,100 377 Xilinx, Inc. 40,100 955 -------- 6,350 -------- ENTERTAINMENT & LEISURE -- 0.3% Carnival Corp.# 10,900 535 -------- FINANCE -- 12.2% American Express Co. 34,600 2,100 Charles Schwab Corp. 58,400 1,129 Chicago Mercantile Exchange Holdings, Inc.# 600 306 Citigroup, Inc. 37,500 2,089 Countrywide Financial Corp.# 23,800 1,010 Deutsche Boerse AG 2,302 423 E*TRADE Financial Corp.* 54,300 1,217 Franklin Resources, Inc. 11,100 1,223 Goldman Sachs Group, Inc. 4,500 897 Legg Mason, Inc.# 10,500 998 Morgan Stanley 15,200 1,238 Prudential Financial, Inc. 16,500 1,417 SLM Corp. 25,300 1,234 State Street Corp. 25,800 1,740 UBS AG 44,216 2,676 -------- 19,697 -------- FOOD & BEVERAGES -- 1.3% InBev NV 8,878 584 PepsiCo, Inc. 17,400 1,088 Sysco Corp. 13,200 485 -------- 2,157 -------- HEALTHCARE -- 2.9% Humana, Inc.* 8,300 459 Medco Health Solutions, Inc.* 18,900 1,010 UnitedHealth Group, Inc. 59,600 3,202 -------- 4,671 -------- HOTELS & GAMING -- 1.1% MGM Mirage, Inc.* 13,600 780 Wynn Resorts, Ltd.# 10,000 939 -------- 1,719 -------- HOTELS & RESORTS -- 0.3% Marriott International, Inc.# 10,900 520 --------
44 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 GROWTH STOCK FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- INSURANCE -- 3.5% Aetna, Inc. 19,200 $ 829 American International Group, Inc.# 29,600 2,121 Hartford Financial Services Group, Inc.# 5,000 467 WellPoint, Inc.* 27,100 2,132 -------- 5,549 -------- MACHINERY & HEAVY EQUIPMENT -- 1.9% Danaher Corp. 27,200 1,970 Deere & Co.# 4,800 456 Joy Global Inc.# 12,900 624 -------- 3,050 -------- MEDICAL SERVICES & EQUIPMENT -- 4.0% Amgen, Inc.* 31,600 2,159 Celgene Corp.*# 13,400 771 Medtronic, Inc.# 30,200 1,616 St. Jude Medical, Inc.* 12,000 439 Stryker Corp. 15,300 843 Zimmer Holdings, Inc.*# 7,100 556 -------- 6,384 -------- MEDICAL SUPPLIES & EQUIPMENT -- 0.4% Sepracor, Inc.*# 11,400 702 -------- METALS & MINING -- 0.6% BHP Billiton, Ltd. 50,095 996 -------- OIL & GAS -- 5.1% Baker Hughes, Inc. 19,600 1,464 EOG Resources, Inc. 11,900 743 Exxon Mobil Corp. 18,000 1,379 Murphy Oil Corp.# 12,200 620 Schlumberger Ltd. 39,700 2,508 Total SA 20,640 1,485 -------- 8,199 -------- PHARMACEUTICALS -- 5.5% Caremark Rx, Inc. 38,900 2,222 Eli Lilly & Co. 10,700 557 Genentech, Inc.* 12,400 1,006 Gilead Sciences, Inc.* 18,500 1,201 Novartis AG 28,994 1,666 Roche Holding AG 7,817 1,399 Wyeth# 16,500 840 -------- 8,891 -------- RETAIL -- 6.3% Amazon.com, Inc.*# 30,700 1,212 Best Buy Co., Inc. 6,650 327 CVS Corp. 24,700 763 Home Depot, Inc.# 14,500 582 Kohl's Corp.*# 26,500 1,813 PETsMART, Inc. 30,200 872 Target Corp. 29,900 1,706 Walgreen Co.# 15,000 688 Wal-Mart de Mexico SA de CV ADR 8,800 386 Wal-Mart Stores, Inc.# 28,400 1,312 Whole Foods Market, Inc.# 9,800 460 -------- 10,121 -------- SERVICES -- COMMERCIAL -- 1.5% Accenture Ltd.* 63,500 2,345 -------- TELECOMMUNICATIONS -- 5.0% AMDOCS Ltd.* 32,700 1,267 America Movil S.A.B. de C.V. ADR Series L 32,200 1,456 Corning, Inc.* 22,700 424 Crown Castle International Corp.*# 42,100 1,360 Qualcomm, Inc.# 12,200 461 Rogers Wireless Communications, Inc. 27,500 1,640 Telefonaktiebolaget LM Ericsson, Class B 251,600 1,012 Telus Corp. 8,700 389 -------- 8,009 -------- TRANSPORTATION & RELATED SERVICES -- 1.2% Expeditors International of Washington, Inc. 17,000 689 Southwest Airlines Co. 84,400 1,293 -------- 1,982 -------- TOTAL COMMON STOCKS (COST $108,530) 129,819 -------- ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 1.7% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempCash 604,550 605 BlackRock Provident Institutional Funds -- TempFund 604,550 605 T. Rowe Price Reserve Investment Fund 1,541,001 1,541 -------- TOTAL SHORT-TERM INVESTMENTS (COST $2,751) 2,751 --------
PAR (000) ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 17.8% ------------------------------------------------------ Bank of Montreal Time Deposit, 5.25%, 01/02/2007 $ $238 238 Bear Stearns Variable Rate Commercial Paper 5.372%, 01/02/2007 385 385 Citigroup Variable Rate Master Note 5.382%, 01/02/2007 827 827 Deutsche Bank Time Deposit 4.75%, 01/02/2007 1,119 1,119 Institutional Money Market Trust 5.302%, 01/02/2007 18,182 18,182 IXIS Time Deposit 5.30%, 01/02/2007 950 950 Morgan Stanley Floating Rate Note 5.362%, 01/02/2007 161 161 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 4,918 4,918 National Bank of Canada Time Deposit 5.32%, 01/02/2007 239 238
45 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 GROWTH STOCK FUND
PAR VALUE (000) (000)+ ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- (CONTINUED) ----------------------------------------------------- Sedna Financial Floating Rate Note 5.29%, 01/25/2007 $ 839 $ 839 Tango Finance Corp. Floating Rate Note 5.32%, 01/29/2007 766 766 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $28,623) 28,623 -------- TOTAL INVESTMENTS -- 100.0% (COST $139,904) $161,193 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt
------------------------------------------------------ COMMON STOCKS % OF MARKET VALUE COUNTRY DIVERSIFICATION VALUE (000)+ ------------------------------------------------------- United States 86.9% $112,785 Switzerland 4.4% 5,740 France 1.1% 1,485 Bermuda 1.1% 1,457 Austria 1.0% 1,238 Ireland 0.9% 1,129 Sweden 0.8% 1,012 Australia 0.8% 996 Italy 0.7% 872 Mexico 0.6% 835 United Kingdom 0.5% 620 Belgium 0.4% 584 Germany 0.3% 423 Korea 0.3% 365 Netherlands 0.2% 278 ---------------------- 100.0% $129,819 ======================
The accompanying notes are an integral part of these financial statements. 46 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 LARGE CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 76.0% ------------------------------------------------------ AEROSPACE & DEFENSE -- 2.5% General Dynamics Corp. 28,600 $ 2,126 Lockheed Martin Corp. 10,200 939 Raytheon Co.# 68,300 3,606 Rockwell Collins, Inc. 15,300 968 -------- 7,639 -------- AGRICULTURAL PRODUCTS -- 0.8% Monsanto Co. 42,700 2,243 -------- BANKING -- 4.9% Bank of America Corp. 81,640 4,359 Bank of New York Co., Inc. 53,480 2,106 BB&T Corp. 5,700 251 Fifth Third Bancorp 9,900 405 Marshall & Ilsley Corp.# 28,900 1,390 Mellon Financial Corp.# 33,200 1,399 Regions Financial Corp. 15,300 572 SunTrust Banks, Inc.# 24,100 2,035 U.S. Bancorp# 48,100 1,741 Zions Bancorporation 3,800 313 -------- 14,571 -------- BROADCAST/MEDIA -- 2.3% Comcast Corp.* 102,500 4,293 Gannett Co., Inc. 3,900 236 Liberty Media Corp. -- Capital A* 2,700 265 News Corp. -- Class B 34,300 764 Time Warner, Inc.# 54,700 1,191 -------- 6,749 -------- CHEMICALS -- 0.6% Air Products & Chemicals, Inc. 5,000 352 Praxair, Inc. 22,300 1,323 -------- 1,675 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 0.1% Symantec Corp.* 14,200 296 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 0.6% Sun Microsystems, Inc.* 334,900 1,815 -------- COMPUTER SERVICES & SOFTWARE -- 0.6% Automatic Data Processing, Inc. 38,497 1,896 -------- COMPUTERS & OFFICE EQUIPMENT -- 1.0% Hewlett-Packard Co. 54,200 2,232 International Business Machines Corp. 6,200 602 Pitney Bowes, Inc. 4,900 226 -------- 3,060 -------- CONSUMER PRODUCTS -- 0.8% Clorox Co. 39,000 2,502 -------- COSMETICS & TOILETRIES -- 4.2% Colgate-Palmolive Co. 8,900 581 Kimberly-Clark Corp. 34,883 2,370 Procter & Gamble Co. 151,863 9,760 -------- 12,711 -------- DIVERSIFIED OPERATIONS -- 2.4% 3M Co. 2,200 171 Eaton Corp. 2,844 214 General Electric Co. 166,200 6,184 Illinois Tool Works, Inc.# 13,200 610 -------- 7,179 -------- ENERGY RESOURCES & SERVICES -- 6.6% Ameren Corp.# 24,400 1,311 Consolidated Edison, Inc.# 15,900 764 Dominion Resources, Inc.# 21,600 1,811 DTE Energy Co. 2,000 97 Duke Energy Corp. 34,400 1,142 Dynegy Inc. Class A* 8,518 62 Emerson Electric Co. 53,400 2,354 Entergy Corp. 5,100 471 FPL Group, Inc.# 53,643 2,919 PG&E Corp.# 77,400 3,663 PPL Corp. 52,400 1,878 Progress Energy, Inc. 27,800 1,364 Southern Co. 54,500 2,009 -------- 19,845 -------- FINANCE -- 7.4% American Express Co. 4,000 243 Capital One Financial Corp. 7,500 576 Citigroup, Inc. 159,247 8,870 Countrywide Financial Corp.# 11,000 467 Federal National Mortgage Association 60,700 3,605 Freddie Mac# 50,200 3,409 JP Morgan Chase & Co. 82,200 3,970 Mitsubishi UFJ Financial Group, Inc. -- ADR 45,800 570 Morgan Stanley 7,300 594 -------- 22,304 -------- FINANCIAL SERVICES -- 0.3% MBIA, Inc.# 12,400 906 -------- FOOD & BEVERAGES -- 7.0% Anheuser-Busch Co., Inc. 19,810 975 Campbell Soup Co.# 79,700 3,100 Coca-Cola Co. 44,300 2,137 Coca-Cola Enterprises, Inc. 61,321 1,252 Diageo Plc ADR 49,502 3,926 Kellogg Co. 17,900 896 Kraft Foods, Inc.# 157,300 5,616 PepsiCo, Inc. 49,900 3,121 -------- 21,023 -------- HEALTHCARE -- 0.1% Medco Health Solutions, Inc.* 8,000 428 -------- INSTRUMENTS -- CONTROLS -- 0.3% Parker Hannifin Corp.# 11,243 864 -------- INSURANCE -- 3.6% ACE Ltd. 20,600 1,248 Aetna, Inc. 9,400 406 American International Group, Inc.# 67,910 4,866 Hartford Financial Services Group, Inc.# 1,800 168 Lincoln National Corp. 14,500 963 MetLife, Inc.# 11,600 685 St. Paul Travelers Cos., Inc. 4,700 252 The Allstate Corp. 14,900 970 XL Capital Ltd 16,448 1,185 -------- 10,743 -------- MACHINERY & HEAVY EQUIPMENT -- 0.3% Caterpillar, Inc. 16,800 1,030 -------- MEDICAL SERVICES & EQUIPMENT -- 1.2% Baxter International, Inc. 79,994 3,711 --------
47 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 LARGE CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- MEDICAL SUPPLIES & EQUIPMENT -- 2.2% AstraZeneca Plc -- ADR# 25,800 $ 1,382 Boston Scientific Corp.* 173,100 2,974 Sanofi-Aventis ADR# 46,500 2,147 -------- 6,503 -------- METAL COMPONENTS & PRODUCTS -- 0.3% Phelps Dodge Corp. 7,800 934 -------- METALS & MINING -- 2.3% Barrick Gold Corp.# 136,200 4,181 Newmont Mining Corp.# 61,700 2,786 -------- 6,967 -------- OIL & GAS -- 8.1% Chesapeake Energy Corp.# 27,800 808 Chevron Corp. 28,800 2,118 Devon Energy Corp. 19,800 1,328 El Paso Energy Corp. 92,500 1,413 Exxon Mobil Corp. 181,000 13,870 Occidental Petroleum Corp. 4,600 225 Schlumberger Ltd. 66,300 4,188 Williams Cos Inc. 15,300 400 -------- 24,350 -------- PAPER & RELATED PRODUCTS -- 1.0% International Paper Co.# 83,980 2,864 -------- PHARMACEUTICALS -- 7.0% Abbott Laboratories 34,500 1,680 Bristol-Myers Squibb Co.# 65,400 1,721 Johnson & Johnson 21,400 1,413 MedImmune, Inc.*# 34,107 1,104 Merck & Co., Inc. 20,900 911 Novartis AG ADR 87,700 5,037 Pfizer, Inc. 36,973 958 Schering-Plough Corp.# 57,400 1,357 Teva Pharmaceutical Industries Ltd. ADR# 55,800 1,734 Wyeth# 96,200 4,899 -------- 20,814 -------- RETAIL -- 2.2% CVS Corp. 23,200 717 Federated Department Stores, Inc.# 18,300 698 Kroger Co. 162,300 3,744 Wal-Mart Stores, Inc.# 29,300 1,353 -------- 6,512 -------- SERVICES -- COMMERCIAL -- 1.3% Fluor Corp. 10,400 849 IAC/InterActiveCorp.*# 77,800 2,891 -------- 3,740 -------- TELECOMMUNICATIONS -- 2.8% AT&T, Inc.# 175,520 6,275 BellSouth Corp. 46,700 2,200 -------- 8,475 -------- WASTE MANAGEMENT -- 1.2% Waste Management, Inc. 94,572 3,478 -------- TOTAL COMMON STOCKS (COST $188,851) 227,827 -------- SHORT-TERM INVESTMENTS -- 1.9% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempCash 2,858,772 2,859 BlackRock Provident Institutional Funds -- TempFund 2,858,772 2,859 -------- TOTAL SHORT-TERM INVESTMENTS (COST $5,718) 5,718 --------
PAR (000) ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 22.1% ------------------------------------------------------ Bank of Montreal Time Deposit 5.25%, 01/02/2007 $ 742 742 Bear Stearns Variable Rate Commercial Paper 5.372%, 01/02/2007 814 814 5.382%, 01/02/2007 4,287 4,287 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 698 698 CitiGroup Variable Rate Master Note 5.382%, 01/02/2007 91 91 Cullinan Financial Corp. Variable Rate Bank Deposit 5.32%, 01/22/2007 500 500 Deutsche Bank Time Deposit 4.75%, 01/02/2007 2,920 2,920 Institutional Money Market Trust 5.302%, 01/02/2007 46,949 46,949 IXIS Time Deposit 5.30%, 01/02/2007 2,954 2,954 Morgan Stanley Floating Rate Commercial Paper 5.372%, 01/02/2007 248 248 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 3,859 3,859 National Bank of Canada Time Deposit 5.32%, 01/02/2007 742 742 Sedna Financial Floating Rate Note 5.29%, 01/25/2007 10 10 Tango Financial Corp. Floating Rate Note 5.32%, 01/29/2007 1,521 1,521 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $66,335) 66,335 -------- TOTAL INVESTMENTS -- 100.0% (COST $260,904) $299,880 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt The accompanying notes are an integral part of these financial statements. 48 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 LARGE CAP GROWTH FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCKS -- 77.2% ----------------------------------------------------- ADVERTISING -- 1.7% Omnicom Group, Inc. 6,170 $ 645 ------- AUTOMOBILES & RELATED -- 3.1% Harley-Davidson, Inc.# 7,860 554 Rockwell Automation, Inc. 10,040 613 ------- 1,167 ------- BANKING -- 4.2% Fifth Third Bancorp# 22,143 906 Wachovia Corp.# 11,640 663 ------- 1,569 ------- CHEMICALS -- 3.3% Ecolab, Inc. 11,540 522 Praxair, Inc. 11,860 704 ------- 1,226 ------- COMPUTER SERVICES & SOFTWARE -- 5.5% Electronic Arts, Inc.* 20,965 1,056 Microsoft Corp. 34,520 1,031 ------- 2,087 ------- COMPUTERS & OFFICE EQUIPMENT -- 1.7% Dell, Inc.*# 25,160 631 ------- COSMETICS & TOILETRIES -- 1.6% Procter & Gamble Co. 9,130 587 ------- DIVERSIFIED OPERATIONS -- 5.7% General Electric Co. 32,490 1,209 Illinois Tool Works, Inc.# 19,920 920 ------- 2,129 ------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 4.2% Linear Technology Corp. 17,765 539 Texas Instruments, Inc. 36,510 1,051 ------- 1,590 ------- FINANCE -- 8.7% CIT Group, Inc. 14,490 808 Merrill Lynch & Co., Inc.# 6,450 600 SLM Corp. 18,740 914 State Street Corp. 7,740 522 T. Rowe Price Group, Inc. 9,770 428 ------- 3,272 ------- FOOD & BEVERAGES -- 2.2% Sysco Corp. 22,660 833 ------- INSTRUMENTS -- CONTROLS -- 2.2% Johnson Controls, Inc. 9,460 813 ------- INSURANCE -- 4.5% AFLAC, Inc.# 15,420 710 American International Group, Inc.# 13,470 965 ------- 1,675 ------- MACHINERY & HEAVY EQUIPMENT -- 1.5% Dover Corp. 11,530 565 ------- MEDICAL SERVICES & EQUIPMENT -- 4.2% Amgen, Inc.* 14,570 995 Medtronic, Inc.# 11,260 603 ------- 1,598 ------- OIL & GAS -- 1.6% Exxon Mobil Corp. 7,820 599 ------- PHARMACEUTICALS -- 7.3% Alcon, Inc. 6,560 733 Express Scripts, Inc.* 10,115 724 Gilead Sciences, Inc.* 13,730 892 Pfizer, Inc. 15,480 401 ------- 2,750 ------- RESTAURANTS -- 2.0% Starbucks Corp.*# 21,240 752 ------- RETAIL -- 7.2% Kohl's Corp.*# 14,990 1,026 The TJX Companies, Inc. 20,510 585 Walgreen Co.# 23,660 1,086 ------- 2,697 ------- SERVICES -- COMMERCIAL -- 1.5% Cintas Corp. 14,680 583 ------- TELECOMMUNICATIONS -- 1.9% Qualcomm, Inc. 19,350 731 ------- TRANSPORTATION & RELATED SERVICES -- 1.4% Southwest Airlines Co. 33,320 510 ------- TOTAL COMMON STOCKS (COST $26,268) 29,009 ------- ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 2.0% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempCash 385,136 385 BlackRock Provident Institutional Funds -- TempFund 385,136 385 ------- TOTAL SHORT-TERM INVESTMENTS (COST $770) 770 -------
PAR (000) ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 20.8% ----------------------------------------------------- Bear Stearns Variable Rate Commercial Paper 5.372%, 01/02/2007 $ 979 979 Bank of Montreal Time Deposit 5.25%, 01/02/2007 78 78 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 585 585 Deutsche Bank Time Deposit 4.75%, 01/02/2007 563 563 Institutional Money Market Trust 5.302%, 01/02/2007 4,673 4,673 IXIS Time Deposit 5.30%, 01/02/2007 312 312
49 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 LARGE CAP GROWTH FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- (CONTINUED) ---------------------------------------------------- Morgan Stanley Floating Rate Commercial Paper 5.362%, 01/02/2007 $ 531 $ 531 National Bank of Canada Time Deposit 5.32%, 01/02/2007 78 78 ------- TOTAL SECURITIES LENDING COLLATERAL (COST $7,799) 7,799 ------- TOTAL INVESTMENTS -- 100.0% (COST $34,837) $37,578 =======
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. The accompanying notes are an integral part of these financial statements. 50 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 81.0% ------------------------------------------------------ ADVERTISING -- 0.2% Interpublic Group of Cos., Inc.* 8,550 $ 105 Monster Worldwide, Inc.* 2,487 116 Omnicom Group, Inc. 3,312 346 -------- 567 -------- AEROSPACE & DEFENSE -- 1.6% Boeing Co. 15,324 1,362 General Dynamics Corp. 7,842 583 Lockheed Martin Corp. 6,900 635 Northrop Grumman Corp. 6,694 453 Raytheon Co.# 8,617 455 Rockwell Collins, Inc. 3,240 205 United Technologies Corp. 19,451 1,216 -------- 4,909 -------- AGRICULTURAL PRODUCTS -- 0.3% Archer-Daniels Midland Co. 12,737 407 Monsanto Co. 10,529 553 -------- 960 -------- AUTOMOBILES & RELATED -- 0.6% Ford Motor Co.*# 36,607 275 General Motors Corp. 10,961 337 Genuine Parts Co.# 3,302 157 Goodrich Corp. 2,417 110 Goodyear Tire & Rubber Co.* 3,439 72 Harley-Davidson, Inc.# 5,022 354 PACCAR, Inc. 4,812 312 Rockwell Automation, Inc. 3,298 201 -------- 1,818 -------- BANKING -- 4.6% Bank of America Corp. 87,032 4,647 Bank of New York Co., Inc. 14,810 583 BB&T Corp. 10,483 460 Comerica, Inc. 3,078 181 Commerce Bancorp, Inc. 3,634 128 Compass Bancshares, Inc. 2,516 150 Fifth Third Bancorp 10,815 443 First Horizon National Corp.# 2,412 101 Huntington Bancshares, Inc. 4,605 109 KeyCorp# 7,782 296 M&T Bank Corp. 1,501 183 Marshall & Ilsley Corp.# 4,944 238 Mellon Financial Corp. 7,982 336 National City Corp.# 12,240 447 Northern Trust Corp. 3,633 220 PNC Financial Services Group, Inc. 5,694 422 Regions Financial Corp. 14,129 528 Sovereign Bancorp, Inc.# 6,965 177 SunTrust Banks, Inc.# 6,863 580 U.S. Bancorp# 34,068 1,233 Wachovia Corp. 36,939 2,104 Zions Bancorp 2,072 171 -------- 13,737 -------- BROADCAST/MEDIA -- 2.3% CBS Corp., Class B# 15,146 472 Clear Channel Communications, Inc. 9,570 340 Comcast Corp.*# 40,333 1,707 Gannett Co., Inc.# 4,541 275 Harman International Industries, Inc. 1,264 126 McGraw-Hill Cos., Inc. 6,864 467 Meredith Corp. 750 42 News Corp. -- Class A 45,364 975 Time Warner, Inc.# 77,374 1,685 Univision Communications, Inc.*# 4,889 173 Viacom, Inc., Class B* 13,552 556 -------- 6,818 -------- BUILDING & REAL ESTATE -- 0.2% CB Richard Ellis Group, Inc.* 3,581 119 D.R. Horton, Inc. 5,348 141 KB Home# 1,522 78 Lennar Corp.# 2,671 140 Pulte Homes, Inc.# 4,095 136 -------- 614 -------- BUILDING PRODUCTS & SUPPLIES -- 0.2% American Standard Cos., Inc. 3,361 154 Centex Corp.# 2,300 130 Masco Corp.# 7,639 228 Vulcan Materials Co. 1,829 164 -------- 676 -------- CABLE OPERATORS -- 0.1% The DIRECTV Group, Inc.* 14,939 372 -------- CHEMICALS -- 1.0% Air Products & Chemicals, Inc. 4,270 300 Dow Chemical Co. 18,512 739 Du Pont (E.I.) De Nemours and Co.# 17,826 868 Eastman Chemical Co. 1,594 95 Ecolab, Inc. 3,455 156 Hercules, Inc.* 2,200 43 Pall Corp. 2,372 82 PPG Industries, Inc. 3,202 206 Praxair, Inc. 6,257 371 Rohm & Haas Co.# 2,751 141 Sigma-Aldrich Corp. 1,277 99 -------- 3,100 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 1.3% eBay, Inc.*# 22,425 674 Google, Inc.*# 4,153 1,912 Juniper Networks, Inc.*# 10,964 208 Symantec Corp.* 18,179 379 Yahoo!, Inc.*# 23,725 606 -------- 3,779 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 2.2% Cisco Systems, Inc.* 117,693 3,216 Intel Corp.# 111,748 2,263 International Game Technology, Inc. 6,577 304 Network Appliance, Inc.* 7,245 284 Sun Microsystems, Inc.* 68,211 370
51 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- (CONTINUED) Symbol Technologies, Inc.* 4,936 $ 74 VeriSign, Inc.* 4,750 114 -------- 6,625 -------- COMPUTER SERVICES & SOFTWARE -- 3.6% Adobe Systems, Inc.* 11,305 465 Affiliated Computer Services, Inc.* 2,297 112 Autodesk, Inc.* 4,490 182 Automatic Data Processing, Inc. 10,671 525 BMC Software, Inc.* 3,974 128 CA Inc. 7,959 180 Citrix Systems, Inc.* 3,499 95 Cognizant Technology Solutions Inc.* 2,748 212 Computer Sciences Corp.* 3,328 178 Compuware Corp.* 6,826 57 Electronic Arts, Inc.*# 5,978 301 Electronic Data Systems Corp.# 10,024 276 EMC Corp.* 42,683 563 First Data Corp. 14,841 379 Intuit, Inc.* 6,757 206 Lexmark International, Inc.*# 1,897 139 Microsoft Corp. 167,657 5,006 NCR Corp.*# 3,453 148 Novell, Inc.* 6,570 41 Oracle Corp.* 77,532 1,329 Sabre Group Holdings Corp. 2,565 82 Unisys Corp.* 6,678 52 -------- 10,656 -------- COMPUTERS & OFFICE EQUIPMENT -- 2.6% Apple Computer, Inc.* 16,483 1,399 Dell, Inc.*# 44,025 1,105 Hewlett-Packard Co.# 53,082 2,186 International Business Machines Corp. 29,194 2,836 Xerox Corp.* 18,707 317 -------- 7,843 -------- CONSUMER PRODUCTS -- 1.8% Altria Group, Inc. 40,619 3,486 Brunswick Corp.# 1,779 57 Clorox Co. 2,942 189 Fortune Brands, Inc.# 2,933 251 Hasbro, Inc. 3,078 84 Mattel, Inc. 7,391 167 Newell Rubbermaid, Inc. 5,372 156 NIKE, Inc. 3,644 361 Reynolds American, Inc. 3,322 217 UST, Inc. 3,118 181 V.F. Corp. 1,732 142 Whirlpool Corp.# 1,519 126 -------- 5,417 -------- CONTAINERS -- 0.1% Ball Corp. 2,019 88 Bemis Co., Inc. 2,031 69 Pactiv Corp.* 2,578 92 -------- 249 -------- COSMETICS & TOILETRIES -- 1.9% Avon Products, Inc. 8,615 285 Colgate-Palmolive Co. 9,967 650 Estee Lauder Cos., Inc. 2,468 101 Kimberly-Clark Corp. 8,882 603 Procter & Gamble Co. 61,412 3,947 -------- 5,586 -------- DIVERSIFIED OPERATIONS -- 3.9% 3M Co. 14,271 1,112 Ashland Inc. 1,108 77 Eaton Corp. 2,887 217 General Electric Co. 199,777 7,434 Honeywell International, Inc. 15,824 716 Illinois Tool Works, Inc. 8,129 375 International Flavors & Fragrances, Inc. 1,512 74 ITT Corp. 3,579 203 Leggett & Platt, Inc. 3,468 83 Patterson Companies, Inc.* 2,693 96 Textron, Inc. 2,431 228 Tyco International Ltd.# 38,545 1,172 -------- 11,787 -------- EDUCATION -- 0.0% Apollo Group, Inc.*# 2,712 106 -------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 1.5% Advanced Micro Devices, Inc.* 10,632 216 Agilent Technologies, Inc.* 7,920 276 Altera Corp.* 7,012 138 Analog Devices, Inc. 6,628 218 Applied Materials, Inc.# 26,918 496 Broadcom Corp.* 9,088 294 Jabil Circuit, Inc. 3,579 88 KLA-Tencor Corp.# 3,858 192 Linear Technology Corp. 5,793 176 LSI Logic Corp.*# 7,764 70 Maxim Integrated Products, Inc. 6,215 190 Micron Technology, Inc.* 14,620 204 Molex, Inc. 2,747 87 National Semiconductor Corp. 5,592 127 Novellus Systems, Inc.*# 2,395 82 NVIDIA Corp.* 6,890 255 PMC-Sierra, Inc.*# 4,066 27 QLogic Corp.* 3,055 67 SanDisk Corp.* 4,361 188 Sanmina-SCI Corp.* 10,326 36 Solectron Corp.* 17,724 57 Tektronix, Inc. 1,598 47 Teradyne, Inc.* 3,678 55 Texas Instruments, Inc. 28,758 828 Xilinx, Inc. 6,516 155 -------- 4,569 -------- ENERGY RESOURCES & SERVICES -- 3.2% AES Corp.* 12,872 284 Allegheny Energy, Inc.* 3,202 147 Ameren Corp.# 3,997 215 American Electric Power Co., Inc. 7,666 326 American Power Conversion Corp. 3,276 100 Centerpoint Energy, Inc.# 6,063 101
52 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- ENERGY RESOURCES & SERVICES -- (CONTINUED) CMS Energy Corp.*# 4,310 $ 72 CONSOL Energy, Inc. 3,539 114 Consolidated Edison, Inc.# 4,976 239 Constellation Energy Group, Inc.# 3,488 240 Cooper Industries Ltd. 1,761 159 Dominion Resources, Inc.# 6,855 575 DTE Energy Co. 3,449 167 Duke Energy Corp. 24,336 808 Dynegy, Inc., Class A* 7,336 53 Edison International 6,314 287 Emerson Electric Co. 15,550 686 Entergy Corp. 4,009 370 Exelon Corp. 13,003 805 FirstEnergy Corp. 6,186 373 FPL Group, Inc.# 7,834 426 KeySpan Corp. 3,397 140 NiSource, Inc. 5,290 127 Peabody Energy Corp. 5,112 207 PG&E Corp. 6,760 320 Pinnacle West Capital Corp.# 1,935 98 PPL Corp. 7,394 265 Progress Energy, Inc. 4,926 242 Public Service Enterprise Group, Inc.# 4,887 324 Questar Corp. 1,664 138 Southern Co. 14,394 531 Teco Energy, Inc. 4,054 70 TXU Corp. 8,900 482 Xcel Energy, Inc. 7,885 182 -------- 9,673 -------- ENTERTAINMENT & LEISURE -- 0.7% Carnival Corp.# 8,624 423 Harrah's Entertainment, Inc. 3,605 298 The Walt Disney Co. 40,087 1,374 -------- 2,095 -------- FIBER OPTICS -- 0.0% JDS Uniphase Corp.* 4,073 68 -------- FINANCE -- 9.1% Ambac Financial Group, Inc. 2,056 183 American Express Co. 23,349 1,416 Ameriprise Financial, Inc. 4,689 256 Bear Stearns Cos., Inc.# 2,273 370 Capital One Financial Corp. 7,906 607 Charles Schwab Corp. 19,823 383 CIT Group, Inc. 3,843 214 Citigroup, Inc. 95,229 5,304 Countrywide Financial Corp.# 12,036 511 E*TRADE Financial Corp.* 8,274 186 Equifax, Inc. 2,425 99 Federal National Mortgage Association 18,897 1,122 Federated Investors, Inc. 1,750 59 Fidelity National Information Services, Inc. 3,154 126 Franklin Resources, Inc. 3,230 356 Freddie Mac# 13,430 912 Goldman Sachs Group, Inc. 8,252 1,645 H&R Block, Inc.# 6,246 144 Janus Capital Group, Inc. 3,841 83 JPMorgan Chase & Co. 67,230 3,247 Legg Mason, Inc.# 2,546 242 Lehman Brothers Holdings, Inc.# 10,272 802 MBIA, Inc.# 2,612 191 Merrill Lynch & Co., Inc. 17,131 1,595 Moody's Corp.# 4,555 315 Morgan Stanley 20,515 1,671 Paychex, Inc. 6,561 259 Prudential Financial, Inc. 9,244 794 SLM Corp. 7,922 386 State Street Corp. 6,435 434 Synovus Financial Corp. 6,298 194 T. Rowe Price Group, Inc. 5,109 224 Washington Mutual, Inc. 18,318 833 Wells Fargo Co.# 65,428 2,327 -------- 27,490 -------- FINANCIAL SERVICES -- 0.2% Chicago Mercantile Exchange Holdings, Inc.# 674 344 Western Union Co. 14,854 333 -------- 677 -------- FOOD & BEVERAGES -- 2.6% Anheuser-Busch Co., Inc. 14,900 733 Brown-Forman Corp. 1,526 101 Campbell Soup Co.# 4,220 164 Coca-Cola Co. 39,519 1,907 Coca-Cola Enterprises, Inc. 5,371 110 ConAgra Foods, Inc. 9,875 267 Constellation Brands, Inc.*# 4,071 118 Dean Foods Co.* 2,592 110 General Mills, Inc. 6,648 383 Heinz (H.J.) Co.# 6,385 287 Kellogg Co. 4,863 243 McCormick & Co., Inc. 2,546 98 Molson Coors Brewing Co. 886 68 PepsiCo, Inc. 31,824 1,991 Sara Lee Corp. 14,474 246 Sysco Corp. 11,979 440 The Hershey Co.# 3,369 168 The Pepsi Bottling Group, Inc. 2,652 82 Tyson Foods, Inc. 4,883 80 Wm. Wrigley Jr., Co.# 4,254 220 -------- 7,816 -------- FOREST PRODUCTS -- 0.1% Plum Creek Timber Co. 3,431 137 -------- HEALTHCARE -- 0.9% Coventry Health Care, Inc.* 3,088 154 Health Management Associates, Inc. 4,662 98 Humana, Inc.* 3,221 178 IMS Health, Inc. 3,845 106 McKesson Corp. 5,736 291 Medco Health Solutions, Inc.* 5,686 304 Tenet Healthcare Corp.* 9,134 64 UnitedHealth Group, Inc. 26,105 1,403 -------- 2,598 --------
53 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- HOTELS & RESORTS -- 0.2% Hilton Hotels Corp.# 7,492 $ 261 Marriott International, Inc.# 6,513 311 Wyndham Worldwide Corp.* 3,840 123 -------- 695 -------- HUMAN RESOURCES -- 0.0% Robert Half International, Inc. 3,247 121 -------- INSTRUMENTS -- CONTROLS -- 0.4% Johnson Controls, Inc. 3,794 326 Millipore Corp.*# 1,035 69 Parker Hannifin Corp.# 2,285 176 PerkinElmer, Inc. 2,383 53 Thermo Fisher Scientific, Inc.* 7,908 358 Waters Corp.* 1,966 96 -------- 1,078 -------- INSURANCE -- 4.2% ACE Ltd. 6,309 382 Aetna, Inc. 10,116 437 AFLAC, Inc.# 9,583 441 American International Group, Inc. 50,384 3,610 Aon Corp.# 6,001 212 Chubb Corp. 7,977 422 CIGNA Corp. 1,987 261 Cincinnati Financial Corp. 3,357 152 Genworth Financial, Inc.# 8,589 294 Hartford Financial Services Group, Inc.# 6,142 573 Lincoln National Corp. 5,564 369 Loews Corp. 8,855 367 Marsh & McLennan Cos., Inc.# 10,681 327 MetLife, Inc.# 14,733 869 MGIC Investment Corp. 1,608 101 Principal Financial Group, Inc. 5,228 307 Progressive Corp. 14,761 358 SAFECO Corp. 2,039 128 St. Paul Cos., Inc. 13,372 718 The Allstate Corp. 12,111 789 Torchmark Corp. 1,900 121 UnumProvident Corp. 6,638 138 WellPoint, Inc.* 12,016 946 XL Capital Ltd 3,499 252 -------- 12,574 -------- MACHINERY -- 0.1% Terex Corp.* 1,971 127 -------- MACHINERY & HEAVY EQUIPMENT -- 0.8% Black & Decker Corp. 1,318 105 Caterpillar, Inc. 12,607 773 Cummins, Inc.# 1,016 120 Danaher Corp. 4,593 333 Deere & Co.# 4,480 426 Dover Corp. 3,956 194 Ingersoll-Rand Co. 5,942 233 Snap-On, Inc. 1,131 54 Stanley Works# 1,575 79 -------- 2,317 -------- MEDICAL SERVICES -- 0.0% Manor Care, Inc. 1,433 67 -------- MEDICAL SERVICES & EQUIPMENT -- 2.2% Amgen, Inc.* 22,607 1,544 Bausch & Lomb, Inc.# 1,042 54 Baxter International, Inc. 12,683 588 Becton, Dickinson & Co. 4,779 335 Biomet, Inc. 4,746 196 C.R. Bard, Inc. 1,995 166 Cardinal Health, Inc. 7,849 506 Celgene Corp.*# 7,218 415 Genzyme Corp.* 5,094 314 Laboratory Corp. of America Holdings* 2,430 179 Medtronic, Inc.# 22,309 1,194 Quest Diagnostics, Inc. 3,099 164 St. Jude Medical, Inc.* 6,850 250 Stryker Corp. 5,760 317 Zimmer Holdings, Inc.*# 4,625 363 -------- 6,585 -------- MEDICAL SUPPLIES & EQUIPMENT -- 0.1% Boston Scientific Corp.* 22,853 393 -------- METAL COMPONENTS & PRODUCTS -- 0.5% Alcoa, Inc. 16,804 505 Allegheny Technologies, Inc.# 1,952 177 Nucor Corp.# 5,855 320 Phelps Dodge Corp. 3,953 473 United States Steel Corp. 2,296 168 -------- 1,643 -------- METALS & MINING -- 0.2% Freeport-McMoRan Copper & Gold, Inc. 3,816 213 Newmont Mining Corp.# 8,725 394 -------- 607 -------- OFFICE EQUIPMENT & SERVICES -- 0.1% Pitney Bowes, Inc. 4,300 199 -------- OFFICE SUPPLIES -- 0.0% Avery Dennison Corp. 1,829 124 -------- OIL & GAS -- 8.1% Anadarko Petroleum Corp. 8,910 388 Apache Corp. 6,384 424 Baker Hughes, Inc. 6,216 464 BJ Services Co. 5,681 166 Chesapeake Energy Corp.# 8,060 234 Chevron Corp. 42,249 3,107 ConocoPhillips 31,896 2,295 Devon Energy Corp. 8,566 575 El Paso Energy Corp. 13,670 209 EOG Resources, Inc. 4,718 295 Exxon Mobil Corp. 113,037 8,662 Halliburton Co. 19,487 605 Hess Corp.# 5,246 260 Kinder Morgan, Inc. 2,078 220 Marathon Oil Corp. 6,812 630 Murphy Oil Corp.# 3,625 184 Nabors Industries Ltd.* 5,801 173 National-Oilwell Varco, Inc.* 3,401 208
54 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- OIL & GAS -- (CONTINUED) NICOR, Inc. 866 $ 41 Noble Corp. 2,627 200 Occidental Petroleum Corp. 16,697 815 Peoples Energy Corp. 745 33 Rowan Cos., Inc. 2,140 71 Schlumberger Ltd. 22,834 1,442 Sempra Energy 5,081 285 Smith International, Inc. 3,864 159 Sunoco, Inc. 2,386 149 Transocean, Inc.* 5,666 458 Valero Energy Corp. 11,717 599 Weatherford International, Ltd.* 6,583 275 Williams Cos., Inc. 11,557 302 XTO Energy, Inc. 7,091 334 -------- 24,262 -------- PAPER & RELATED PRODUCTS -- 0.3% International Paper Co.# 8,817 301 MeadWestvaco Corp. 3,511 106 Sealed Air Corp. 1,562 101 Temple-Inland, Inc. 2,073 95 Weyerhaeuser Co. 4,584 324 -------- 927 -------- PHARMACEUTICALS -- 5.9% Abbott Laboratories 29,746 1,449 Allergan, Inc.# 2,979 357 AmerisourceBergen Corp. 3,722 167 Applera Corp. -- Applied Biosystems Group 3,550 130 Barr Pharmaceuticals, Inc.* 2,061 103 Biogen Idec, Inc.* 6,533 321 Bristol-Myers Squibb Co.# 38,116 1,003 Caremark Rx, Inc. 8,265 472 Eli Lilly & Co. 19,079 994 Express Scripts, Inc.* 2,624 188 Forest Laboratories, Inc.* 6,138 311 Gilead Sciences, Inc.* 8,911 579 Hospira, Inc.* 3,019 101 Johnson & Johnson 56,191 3,710 King Pharmaceuticals, Inc.* 4,711 75 MedImmune, Inc.* 4,635 150 Merck & Co., Inc. 42,075 1,835 Mylan Laboratories, Inc. 4,106 82 Pfizer, Inc. 139,742 3,619 Schering-Plough Corp.# 28,733 679 Watson Pharmaceuticals, Inc.* 1,985 52 Wyeth# 26,099 1,329 -------- 17,706 -------- PHOTOGRAPHY EQUIPMENT & SUPPLIES -- 0.1% Eastman Kodak Co.# 5,567 144 -------- PRINTING & PUBLISHING -- 0.1% Donnelley (R.R.) & Sons Co. 4,201 149 Dow Jones & Co., Inc. 1,261 48 New York Times Co.# 2,786 68 Tribune Co.# 3,694 114 -------- 379 -------- REAL ESTATE -- 0.1% Realogy Corp.* 4,154 126 -------- RESTAURANTS -- 0.7% Darden Restaurants, Inc. 2,845 114 McDonald's Corp. 23,968 1,063 Starbucks Corp.*# 14,653 519 Wendy's International, Inc. 1,852 61 Yum! Brands, Inc. 5,137 302 -------- 2,059 -------- RETAIL -- 4.4% Amazon.com, Inc.* 5,987 236 AutoNation, Inc.* 2,899 62 AutoZone, Inc.* 981 113 Bed Bath & Beyond, Inc.* 5,478 209 Best Buy Co., Inc. 7,818 384 Big Lots, Inc.* 2,122 49 Circuit City Stores, Inc. 2,749 52 Coach, Inc.* 7,121 306 Costco Wholesale Corp. 8,881 470 CVS Corp. 15,961 493 Dillard's, Inc.# 1,179 41 Dollar General Corp. 6,047 97 Family Dollar Stores, Inc.# 2,938 86 Federated Department Stores, Inc.# 10,178 388 Gap, Inc. 10,211 199 Home Depot, Inc.# 39,553 1,588 J.C. Penney Co., Inc.# 4,360 337 Kohl's Corp.*# 6,337 434 Kroger Co. 13,904 321 Limited Brands 6,628 192 Liz Claiborne, Inc. 1,986 86 Lowe's Cos., Inc.# 29,512 919 Nordstrom, Inc.# 4,433 219 Office Depot, Inc.*# 5,395 206 OfficeMax, Inc. 1,443 72 RadioShack Corp. 2,632 44 Safeway, Inc.# 8,591 297 Sears Holding Corp.* 1,610 270 Sherwin-Williams Co. 2,168 138 Staples, Inc. 14,005 374 SUPERVALU, Inc. 3,990 143 Target Corp. 16,645 950 The TJX Companies, Inc. 8,820 252 Tiffany & Co. 2,623 103 Walgreen Co.# 19,447 892 Wal-Mart Stores, Inc.# 47,659 2,201 Whole Foods Market, Inc.# 2,770 130 -------- 13,353 -------- SERVICES -- COMMERCIAL -- 0.2% Cintas Corp. 2,644 105 Convergys Corp.* 2,670 63 Fiserv, Inc.* 3,356 176 Fluor Corp. 1,706 139 IAC/InterActiveCorp*# 4,325 161 -------- 644 --------
55 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- TELECOMMUNICATIONS -- 4.0% ADC Telecommunications, Inc.* 2,272 $ 33 Alltel Corp. 7,241 438 AT&T, Inc.# 74,477 2,663 Avaya, Inc.* 8,800 123 BellSouth Corp. 35,351 1,665 CenturyTel, Inc. 2,224 97 Ciena Corp.* 1,636 45 Citizens Communications Co. 6,238 90 Comverse Technology, Inc.*# 3,914 83 Corning, Inc.* 30,317 567 Embarq Corp. 2,897 152 L-3 Communications Holdings, Inc. 2,421 198 Motorola, Inc. 46,851 963 Qualcomm, Inc.# 32,027 1,210 Qwest Communications International, Inc.*# 31,165 261 Sprint Nextel Corp.# 56,105 1,060 Tellabs, Inc.* 8,562 88 The E.W. Scripps Co. 1,614 81 Verizon Communications, Inc. 56,581 2,107 Windstream Corp. 9,240 131 -------- 12,055 -------- TEXTILES & APPAREL -- 0.0% Jones Apparel Group, Inc. 2,136 71 -------- TRANSPORTATION & RELATED SERVICES -- 1.4% Burlington Northern Santa Fe Corp. 6,961 514 CSX Corp. 8,434 290 FedEx Corp. 5,942 646 Norfolk Southern Corp. 7,692 387 Ryder Systems, Inc. 1,176 60 Southwest Airlines Co. 15,346 235 Union Pacific Corp.# 5,227 481 United Parcel Service, Inc. 20,805 1,560 -------- 4,173 -------- WASTE MANAGEMENT -- 0.1% Allied Waste Industries, Inc.* 4,921 61 Waste Management, Inc. 10,368 381 -------- 442 -------- WHOLESALE DISTRIBUTOR -- 0.0% Grainger (W.W.), Inc. 1,417 99 -------- TOTAL COMMON STOCKS (COST $219,573) 243,712 -------- ------------------------------------------------------ REAL ESTATE INVESTMENT TRUSTS -- 1.0% ------------------------------------------------------ APARTMENTS -- 0.2% Apartment Investment & Management Co. 1,870 105 Archstone-Smith Trust 4,232 246 Equity Residential Properties Trust# 5,661 287 -------- 638 -------- BUILDING & REAL ESTATE -- 0.1% Kimco Realty Corp. 4,380 197 -------- DIVERSIFIED OPERATIONS -- 0.1% Vornado Realty Trust# 2,502 304 -------- HOTELS & RESORTS -- 0.1% Starwood Hotels & Resorts Worldwide, Inc. 4,108 257 -------- INDUSTRIAL -- 0.1% Prologis 4,795 291 -------- OFFICE PROPERTY -- 0.2% Boston Properties, Inc. 2,264 253 Equity Office Properties Trust 6,812 328 -------- 581 -------- REGIONAL MALLS -- 0.1% Simon Property Group, Inc.# 4,288 435 -------- STORAGE -- 0.1% Public Storage, Inc. 2,374 232 -------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $1,894) 2,935 -------- ------------------------------------------------------ RIGHTS -- 0.0% ------------------------------------------------------ Seagate Tax Refund Rights 4,100 0 -------- (COST $0) ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 1.0% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempCash 3,047 3,047 -------- (COST $3,047)
PAR (000) ------------------------------------------------------ U. S. TREASURY OBLIGATIONS -- 0.1% ------------------------------------------------------ U.S. Treasury Bill 4.990%, 02/08/07++++ $ 135 134 U.S. Treasury Bill 4.850%, 05/10/07++++ 15 15 -------- TOTAL U. S. TREASURY OBLIGATIONS (COST $149) 149 -------- ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 16.9% ------------------------------------------------------ Bank of Montreal Time Deposit 5.25%, 01/02/2007 342 342 Bear Stearns Variable Rate Commercial Paper 5.362%, 01/02/2007 176 176 5.382%, 01/02/2007 1,808 1,808 5.372%, 01/02/2007 263 263 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 222 222 CitiGroup Variable Rate Master Note 5.382%, 01/02/2007 1,481 1,481 Cullinan Financial Corp. Variable Rate Bank Deposit 5.32%, 01/22/2007 4,421 4,421 Deutsche Bank Time Deposit 4.75%, 01/02/2007 1,971 1,971 Institutional Money Market Trust 5.302%, 01/02/2007 27,841 27,841 IXIS Time Deposit, 5.30%, 01/02/2007 1,362 1,362 56
PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INDEX 500 FUND
PAR VALUE (000) (000)+ ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- (CONTINUED) ----------------------------------------------------- Morgan Stanley Floating Rate Commercial Paper 5.362%, 01/02/2007 $ 673 $ 673 5.372%, 01/02/2007 1,474 1,474 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 7,881 7,881 National Bank of Canada Time Deposit 5.32%, 01/02/2007 342 342 Sedna Financial Floating Rate Note 5.29%, 01/25/2007 399 399 Tango Financial Corp. Floating Rate Note 5.32%, 01/29/2007 218 218 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $50,874) 50,874 -------- TOTAL INVESTMENTS -- 100.0% (COST $275,537) $300,717 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ++++ Market value held as collateral for the open futures contract. The accompanying notes are an integral part of these financial statements. 57 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MID CAP GROWTH FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCKS -- 75.2% ----------------------------------------------------- ADVERTISING -- 1.3% Focus Mesia Holding Ltd ADR* 7,060 $ 469 Monster Worldwide, Inc.* 19,850 926 ------- 1,395 ------- AGRICULTURAL PRODUCTS -- 0.9% Agrium, Inc.# 13,950 439 Bunge Limited.# 7,370 535 ------- 974 ------- BANKING -- 0.8% Northern Trust Corp. 14,410 875 ------- BROADCASTING/MEDIA -- 1.0% Harman International Industries, Inc. 10,570 1,056 ------- BUILDING & REAL ESTATE -- 0.9% CB Richard Ellis Group, Inc. Class A* 30,840 1,024 ------- COMPUTER INTERNET SERVICES & SOFTWARE -- 1.6% aQuantive, Inc.*# 22,370 552 Digital River, Inc.*# 10,090 563 VeriSign, Inc.* 29,430 708 ------- 1,823 ------- COMPUTER -- NETWORKS & SERVICES -- 5.1% F5 Networks Inc.* 19,940 1,480 International Game Technology, Inc. 45,530 2,104 Network Appliance, Inc.*# 26,430 1,038 Polycom, Inc.*# 36,050 1,114 ------- 5,736 ------- COMPUTER SERVICES & SOFTWARE -- 3.6% Activision, Inc.*# 46,310 798 Akamai Technologies, Inc.*# 24,270 1,289 Electronic Arts, Inc.*# 16,490 831 Salesforce.com, Inc.*# 31,410 1,145 ------- 4,063 ------- COMPUTERS & OFFICE EQUIPMENT -- 0.3% Isilon Systems, Inc. 12,740 352 ------- CONSUMER PRODUCTS -- 1.0% Polo Ralph Lauren Corp. 14,810 1,150 ------- CONTAINERS -- 0.4% Owens-Illinois, Inc.*# 23,060 425 ------- DIVERSIFIED OPERATIONS -- 0.5% Harsco Corp. 7,870 599 ------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 7.0% Altera Corp.* 40,130 790 AMETEK, Inc. 27,135 864 KLA-Tencor Corp. 31,130 1,549 MEMC Electronic Materials, Inc.* 19,890 778 NVIDIA Corp.*# 40,360 1,494 QLogic Corp.* 39,020 855 SanDisk Corp.* 9,890 425 Varian Semiconductor Equipment Associates, Inc.* 24,405 1,111 ------- 7,866 ------- ELECTRONICS -- SEMICONDUCTORS -- 0.7% Integrated Device Technology, Inc.*# 48,830 756 ------- ENERGY RESOURCES & SERVICES -- 2.2% Energy Conversion Devices, Inc.*# 11,420 388 McDermott International, Inc.* 16,670 848 Questar Corp.# 4,830 401 The Williams Companies, Inc. 29,210 763 ------- 2,400 ------- ENTERTAINMENT & LEISURE -- 0.5% GameStop Corp.*# 9,950 548 ------- FIBER OPTICS -- 0.6% JDS Uniphase Corp.*# 37,677 628 ------- FINANCE -- 5.4% Affiliated Managers Group, Inc.*# 9,485 997 Greenhill & Co., Inc.# 8,130 600 Intercontinental Exchange, Inc. 10,450 1,128 Nasdaq Stock Market, Inc.*# 20,070 618 Paychex, Inc. 21,280 841 T. Rowe Price Group, Inc. 31,120 1,362 TD Ameritrade Holding Corp.# 32,690 529 ------- 6,075 ------- FINANCIAL SERVICES -- 0.2% Synovus Financial Corp. 8,430 260 ------- FOOD & BEVERAGES -- 1.9% Hansen Natural Corp.* 14,320 482 McCormick & Co., Inc. 13,430 518 Wm. Wrigley Jr. Co.# 20,590 1,065 ------- 2,065 ------- HOSPITALS -- 0.7% Psychiatric Solutions, Inc. 21,690 814 ------- HOTELS & GAMING -- 3.7% Hilton Hotels Corp.# 43,490 1,518 Pinnacle Entertainment, Inc.* 12,710 421 WMS Industries, Inc.# 23,570 822 Wynn Resorts, Ltd.*# 14,650 1,375 ------- 4,136 ------- INSTRUMENTS -- CONTROLS -- 1.0% Thermo Electron Corp.*# 25,850 1,171 ------- INSURANCE -- 0.4% Arch Capital Group Ltd.* 5,820 393 ------- MANUFACTURING -- 1.1% General Cable Corp.* 12,230 535 Roper Industries, Inc.# 13,820 694 ------- 1,229 ------- MEDICAL SERVICES & EQUIPMENT -- 3.7% Celgene Corp.* 25,790 1,484 DaVita, Inc.*# 5,750 327 Henry Schein, Inc.* 8,490 416 Intuitive Surgical, Inc.*# 7,910 759 New River Pharmaceuticals, Inc.# 7,930 434 St. Jude Medical, Inc.* 19,160 700 ------- 4,120 ------- MEDICAL SUPPLIES & EQUIPMENT -- 0.6% Sepracor, Inc.* 10,490 646 -------
58 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MID CAP GROWTH FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCKS -- (CONTINUED) ---------------------------------------------------- METAL COMPONENTS & PRODUCTS -- 2.0% Allegheny Technologies, Inc.# 8,070 $ 732 Precision Castparts Corp. 19,350 1,515 ------- 2,247 ------- OIL & GAS -- 4.8% Cameron International Corp.* 18,010 955 National-Oilwell Varco, Inc.*# 13,990 856 Quicksilver Resources, Inc.*# 12,680 464 Range Resources Corp.# 44,205 1,213 Smith International, Inc.# 24,280 997 Southwestern Energy Co.*# 10,280 360 Superior Energy Services, Inc.* 17,240 563 ------- 5,408 ------- PHARMACEUTICALS -- 5.4% Alexion Pharmaceuticals, Inc.*# 13,700 553 Allergan, Inc.# 10,980 1,315 Applera Corp. -- Applied Biosystems Group 18,790 689 Forest Laboratories, Inc.* 16,090 814 Medicis Pharmaceutical Corp. 11,550 406 MedImmune, Inc.* 14,670 475 Pharmaceutical Product Development, Inc. 25,670 827 Shire PLC -- ADR 15,580 962 ------- 6,041 ------- PHOTOGRAPHY EQUIPMENT & SUPPLIES -- 0.6% Cymer, Inc.*# 16,340 718 ------- RETAIL -- 3.8% Coach, Inc.* 51,030 2,192 J.C. Penney Company, Inc.# 14,420 1,116 Under Armour, Inc. -- Class A*# 18,460 931 ------- 4,239 ------- SERVICES -- COMMERCIAL -- 3.3% Ctrip.com International Ltd. ADR 8,140 509 Fiserv, Inc.* 20,830 1,092 Nutri/System, Inc.*# 21,880 1,387 VistaPrint Ltd.* 20,810 689 ------- 3,677 ------- TELECOMMUNICATIONS -- 4.2% American Tower Corp.* 33,890 1,264 Crown Castle International Corp.*# 22,770 735 Leap Wireless International, Inc.* 8,310 494 NII Holdings, Inc.*# 33,960 2,188 ------- 4,681 ------- TEXTILES & APPAREL -- 1.4% Guess?, Inc.* 16,810 1,066 The Children's Place Retail Stores, Inc.* 8,170 519 ------- 1,585 ------- TRANSPORTATION & RELATED SERVICES -- 2.6% C.H. Robinson Worldwide, Inc.# 15,980 654 Continental Airlines, Inc.*# 24,710 1,019 CSX Corp. 16,740 576 US Airways Group, Inc.* 12,430 669 ------- 2,918 ------- TOTAL COMMON STOCKS (COST $72,281) 84,093 ------- ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.4% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempCash 1,526,911 1,527 ------- (COST $1,527)
PAR (000) ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 23.4% ------------------------------------------------------ Bank Of Montreal Time Deposit 5.25%, 01/02/2007 $ $334 334 Bear Stearns Variable Rate Commercial Paper 5.382%, 01/02/2007 1,099 1,099 Cullinan Financial Corp Variable Rate Note 5.32%, 01/22/2007 94 94 Deutsche Bank Time Deposit 4.75%, 01/02/2007 1,057 1,057 Institutional Money Market Trust 5.302%, 01/02/2007 21,727 21,727 IXIS Time Deposit 5.30%, 01/02/2007 1,332 1,332 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 10 10 National Bank Canada Time Deposit 5.32%, 01/02/2007 334 334 Tango Financial Corporation Floating Rate Note 5.32%, 01/29/2007 250 250 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $26,237) 26,237 -------- TOTAL INVESTMENTS -- 100.0% (COST $100,045) $111,857 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt The accompanying notes are an integral part of these financial statements. 59 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MID CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 74.6% ------------------------------------------------------ AEROSPACE & DEFENSE -- 1.0% Empresa Brasileira de Aeronautic ADR 39,500 $ 1,636 -------- AUTOMOBILES & RELATED -- 3.2% Advance Auto Parts, Inc. 45,600 1,621 Harley-Davidson, Inc.# 25,100 1,769 United Rentals, Inc.* 72,900 1,854 -------- 5,244 -------- BANKING -- 2.3% Hudson City Bancorp, Inc.# 108,000 1,499 IndyMac Bancorp, Inc.# 49,600 2,240 -------- 3,739 -------- BUILDING & REAL ESTATE -- 10.7% Colonial Properties Trust 29,500 1,383 Developers Diversified Realty Corp. 20,300 1,278 Hovanian Enterprises, Inc.*# 71,000 2,407 iStar Financial, Inc. 44,600 2,133 KB Home# 47,200 2,420 Lennar Corp.# 46,200 2,424 Meritage Homes Corp. 45,000 2,147 NVR, Inc.* 3,700 2,387 The Ryland Group, Inc. 16,300 890 -------- 17,469 -------- BUILDING PRODUCTS & SUPPLIES -- 1.4% Centex Corp.# 41,100 2,313 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 1.1% Check Point Software Technologies, Ltd.*# 66,500 1,458 McAfee, Inc.* 13,200 375 -------- 1,833 -------- COMPUTER SERVICES & SOFTWARE -- 3.7% Activision. Inc.*# 87,000 1,500 Affiliated Computer Services, Inc.* 20,300 991 Lexmark International, Inc.*# 26,600 1,947 Take-Two Interactive Software, Inc.*# 84,400 1,499 -------- 5,937 -------- CONSUMER PRODUCTS -- 1.0% Whirlpool Corp.# 19,100 1,586 -------- DIVERSIFIED OPERATIONS -- 1.3% Eaton Corp. 14,600 1,097 Walter Industries, Inc. 35,200 952 -------- 2,049 -------- ELECTRONIC COMPONENTS -- 0.7% Avnet, Inc.*# 47,300 1,208 -------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 0.8% International Rectifier Corp.* 32,400 1,248 -------- ENERGY RESOURCES & SERVICES -- 5.9% DPL, Inc. 43,600 1,211 Edison International 23,700 1,078 Mirant Corp.* 50,000 1,579 NRG Energy, Inc.*# 37,800 2,117 Peabody Energy Corp 32,800 1,325 TXU Corp. 43,300 2,347 -------- 9,657 -------- FINANCE -- 1.7% Bear Stearns Cos., Inc.# 16,900 2,751 -------- FOOD & BEVERAGES -- 1.8% Constellation Brands, Inc.*# 61,400 1,782 Tyson Foods, Inc. 71,700 1,179 -------- 2,961 -------- HEALTHCARE -- 2.7% Coventry Health Care, Inc.* 37,150 1,859 LifePoint Hospitals, Inc. * 31,600 1,065 NBTY, Inc.* 33,700 1,401 -------- 4,325 -------- INSTRUMENTS -- CONTROLS -- 0.0% Johnson Controls, Inc. 200 17 -------- INSURANCE -- 4.1% Aetna, Inc. 49,600 2,142 CIGNA Corp. 15,800 2,079 Endurance Specialty Holdings Ltd. 41,400 1,514 The PMI Group, Inc. 18,600 877 -------- 6,612 -------- MACHINERY & HEAVY EQUIPMENT -- 1.9% Ingersoll-Rand Co. 16,600 650 Terex Corp.*# 36,800 2,376 -------- 3,026 -------- MANUFACTURING -- 1.4% Chicago Bridge & Iron Company N.V. 82,000 2,242 Mueller Water Products, Inc.* 5,100 76 -------- 2,318 -------- MEDICAL PRODUCTS -- 0.6% The Cooper Companies, Inc.# 21,700 966 -------- METAL COMPONENTS & PRODUCTS -- 4.4% Cleveland Cliffs, Inc. 40,100 1,942 Phelps Dodge Corp. 18,500 2,215 Timken Co. 51,300 1,497 United States Steel Corp. 19,700 1,441 -------- 7,095 -------- METALS & MINING -- 2.7% Arch Coal, Inc.# 61,500 1,847 Joy Global, Inc.# 54,200 2,620 -------- 4,467 -------- OIL & GAS -- 10.2% Canadian Natural Resources Ltd. 38,000 2,023 Denbury Resources, Inc.* 62,300 1,731 National Fuel Gas Co.# 23,900 921 Noble Corp. 24,500 1,866 Oceaneering International, Inc.* 34,000 1,350 Oil States International, Inc.* 41,100 1,325 Quicksilver Resources, Inc.*# 37,200 1,361 Southwestern Energy Co.*# 36,900 1,293 Sunoco, Inc. 13,500 842 Talisman Energy, Inc. 84,295 1,432 Williams Cos., Inc. 45,800 1,196
60 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 MID CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- OIL & GAS -- (CONTINUED) XTO Energy, Inc. 24,942 $ 1,174 -------- 16,514 -------- PHARMACEUTICALS -- 3.2% Endo Pharmaceuticals Holdings, Inc.* 45,800 1,263 Omnicare, Inc.# 39,900 1,541 Shire PLC -- ADR 38,400 2,372 -------- 5,176 -------- RETAIL -- 3.8% Aeropostale, Inc.* 50,100 1,547 Circuit City Stores, Inc.# 75,500 1,433 Hot Topic, Inc.* 73,600 982 Ross Stores, Inc. 21,400 627 The TJX Companies, Inc. 56,500 1,611 -------- 6,200 -------- TELECOMMUNICATIONS -- 2.0% Arris Group, Inc.* 120,400 1,506 L-3 Communications Holdings, Inc. 21,800 1,783 -------- 3,289 -------- TRANSPORTATION & RELATED SERVICES -- 1.0% Frontline, Ltd# 27,600 879 Ship Finance International, Ltd# 30,740 730 -------- 1,609 -------- TOTAL COMMON STOCKS (COST $105,552) 121,245 -------- ------------------------------------------------------ REAL ESTATE INVESTMENT TRUSTS -- 1.9% ------------------------------------------------------ DIVERSIFIED OPERATIONS -- 0.8% First Industrial Realty Trust, Inc. 29,300 1,374 -------- HEALTHCARE -- 0.5% Ventas, Inc. 18,400 779 -------- REAL ESTATE -- 0.6% Annaly Capital Management, Inc.# 65,100 905 -------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $2,731) 3,058 -------- ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 0.2% ------------------------------------------------------ BlackRock Provident Institutional Funds -- FedFund 204,136 204 BlackRock Provident Institutional Funds -- TempFund 204,136 204 -------- TOTAL SHORT-TERM INVESTMENTS (COST $408) 408 --------
PAR (000) ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 23.3% ------------------------------------------------------ Bank of Montreal Time Deposit 5.25%, 01/02/2007 $ 332 332 Bear Stearns Variable Rate Commercial Paper 5.372%, 01/02/2007 378 378 5.382%, 01/02/2007 1,203 1,203 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 1,779 1,779 Deutsche Bank Time Deposit 4.75%, 01/02/2007 1,622 1,622 Institutional Money Market Trust 5.302%, 01/02/2007 22,915 22,915 IXIS Time Deposit 5.30%, 01/02/2007 1,323 1,323 Morgan Stanley Variable Rate Commercial Paper 5.372%, 01/02/2007 2,484 2,484 National Bank of Canada Time Deposit 5.32%, 01/02/2007 332 332 Sedna Financial Floating Rate Note 5.29%, 01/25/2007 5,507 5,507 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $37,875) 37,875 -------- TOTAL INVESTMENTS -- 100.0% (COST $146,566) $162,586 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt The accompanying notes are an integral part of these financial statements. 61 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 STRATEGIC VALUE FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCKS -- 77.5% ----------------------------------------------------- ADVERTISING -- 2.2% Interpublic Group of Cos., Inc.*# 95,600 $ 1,170 ------- AGRICULTURAL PRODUCTS -- 2.9% Monsanto Co. 9,400 494 Potash Corp. of Saskatchewan, Inc. 1,600 230 The Mosaic Co.* 39,500 844 ------- 1,568 ------- AUTOMOBILES & RELATED -- 1.5% Genuine Parts Co.# 16,400 778 ------- BROADCAST/MEDIA -- 1.9% Clear Channel Communications, Inc. 28,600 1,016 ------- CHEMICALS -- 1.6% Eastman Chemical Co. 14,300 848 ------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 1.8% McAfee, Inc.* 31,400 891 Openwave Systems, Inc.* 9,800 90 ------- 981 ------- COMPUTER SERVICES & SOFTWARE -- 5.2% Cadence Design Systems, Inc.* 45,500 815 Sabre Group Holdings Corp. 41,500 1,323 Sybase, Inc.* 25,000 618 ------- 2,756 ------- CONSUMER PRODUCTS -- 2.3% American Greetings Corp. 19,100 456 Newell Rubbermaid, Inc. 14,900 431 Tupperware Brands Corp. 15,700 355 ------- 1,242 ------- CONTAINERS -- 3.0% Ball Corp. 22,400 977 Pactiv Corp.* 18,200 650 ------- 1,627 ------- ENERGY RESOURCES & SERVICES -- 8.6% Ameren Corp.# 15,500 833 CMS Energy Corp.*# 51,500 860 Dynegy, Inc., Class A* 24 0 Hubbell, Inc. 15,600 705 NiSource, Inc. 37,200 897 Northeast Utilities, Inc. 34,100 960 Puget Energy, Inc. 14,600 370 ------- 4,625 ------- FIBER OPTICS -- 0.9% JDS Uniphase Corp.*# 29,775 496 ------- FOOD & BEVERAGES -- 1.9% Coca-Cola Enterprises, Inc. 21,500 439 OSI Restaurant Partners, Inc. 15,100 592 ------- 1,031 ------- INSURANCE -- 8.2% ACE Ltd. 6,800 412 Aetna, Inc. 10,200 440 Conseco, Inc.* 25,900 517 Everest Re Group Ltd. 4,000 392 Genworth Financial, Inc.# 11,500 393 PartnerRe Ltd. 12,000 852 SAFECO Corp. 6,800 425 The PMI Group, Inc. 3,700 175 XL Capital Ltd 11,200 807 ------- 4,413 ------- MACHINERY & HEAVY EQUIPMENT -- 1.9% Cummins, Inc.# 3,200 378 Snap-On, Inc. 13,400 638 ------- 1,016 ------- MANUFACTURING -- 1.0% Chemtura Corp. 52,800 508 ------- METAL COMPONENTS & PRODUCTS -- 1.1% Timken Co. 21,000 612 ------- OIL & GAS -- 4.8% EOG Resources, Inc. 13,300 831 GlobalSantaFe Corp.# 13,700 805 Halliburton Co.# 23,500 730 Southwest Gas Corp. 5,700 219 ------- 2,585 ------- PAPER & RELATED PRODUCTS -- 2.4% Bowater, Inc.# 23,100 520 MeadWestvaco Corp. 25,100 755 ------- 1,275 ------- PHARMACEUTICALS -- 3.4% King Pharmaceuticals, Inc.* 55,900 890 Mylan Laboratories, Inc. 46,900 936 ------- 1,826 ------- PRINTING & PUBLISHING -- 3.9% Donnelley (R.R.) & Sons Co. 28,352 1,008 R.H. Donnelley Corp.*# 17,300 1,085 ------- 2,093 ------- RESTAURANTS -- 1.1% Brinker International, Inc. 18,750 565 ------- RETAIL -- 5.5% Federated Department Stores, Inc.# 9,300 355 Foot Locker, Inc. 25,300 555 Kroger Co. 22,700 524 OfficeMax, Inc. 18,200 904 Safeway, Inc.# 17,500 605 ------- 2,943 ------- TELECOMMUNICATIONS -- 8.6% ADC Telecommunications, Inc.* 38,400 558 Avaya, Inc.* 64,900 907 CenturyTel, Inc. 10,300 450 Embarq Corp. 13,700 720 Level 3 Communications, Inc.*# 25,500 143 Qwest Communications International, Inc.*# 141,900 1,188 Tellabs, Inc.* 63,200 648 ------- 4,614 ------- WASTE MANAGEMENT -- 0.9% Allied Waste Industries, Inc.* 38,900 478 -------
62 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 STRATEGIC VALUE FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- COMMON STOCKS -- (CONTINUED) ---------------------------------------------------- WHOLESALE DISTRIBUTOR -- 0.9% Grainger (W.W.), Inc.# 7,100 $ 497 ------- TOTAL COMMON STOCKS (COST $34,691) 41,563 ------- ----------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS -- 1.0% ----------------------------------------------------- HOTELS & RESORTS -- 1.0% Host Hotels & Resorts, Inc.# 20,800 510 ------- (COST $333) ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 3.2% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempCash 845,705 846 BlackRock Provident Institutional Funds -- TempFund 845,707 846 ------- TOTAL SHORT-TERM INVESTMENTS (COST $1,692) 1,692 -------
PAR (000) ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 18.3% ----------------------------------------------------- Bank of Montreal Time Deposit 5.250%, 01/02/2007 $ $135 135 Deutsche Bank Time Deposit 4.750%, 01/02/2007 399 399 Institutional Money Market Trust 5.302%, 01/02/2007 8,608 8,608 IXIS Time Deposit 5.300%, 01/02/2007 539 539 National Bank of Canada Time Deposit 5.320%, 01/02/2007 135 135 ------- TOTAL SECURITIES LENDING COLLATERAL (COST $9,816) 9,816 ------- TOTAL INVESTMENTS -- 100.0% (COST $46,532) $53,581 =======
---------------------- + See Note 1 to Financial Statements * Non-income producing security. # Security position is either entirely or partially on loan. The accompanying notes are an integral part of these financial statements. 63 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP GROWTH FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 89.4% ------------------------------------------------------ AEROSPACE & DEFENSE -- 0.9% Kaman Corp. 46,500 $ $1,041 -------- AGRICULTURAL PRODUCTS -- 1.0% The Andersons, Inc. 28,600 1,212 -------- BANKING -- 1.0% Greene County Bancshares, Inc. 29,750 1,182 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 2.9% Pc-Tel, Inc.* 20,500 192 Perficient, Inc.* 130,000 2,133 Smith Micro Software, Inc.* 74,200 1,053 -------- 3,378 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 4.5% Atheros Communications* 58,000 1,237 Oplink Communications, Inc.* 66,600 1,369 The Knot, Inc.* 101,000 2,650 -------- 5,256 -------- COMPUTER SERVICES & SOFTWARE -- 11.8% Axcelis Technologies, Inc.* 74,600 435 Comsys It Partners, Inc.* 39,200 792 Concur Technologies, Inc.*# 150,000 2,406 Innerworkings, Inc.* 92,700 1,479 Interactive Intelligence, Inc.* 50,800 1,139 Itron, Inc.*# 40,000 2,074 OPNET Technologies, Inc.* 67,400 974 SimpleTech, Inc.*# 142,700 1,809 Sykes Enterprises, Inc.* 65,700 1,159 Tyler Technologies, Inc.* 102,100 1,436 -------- 13,703 -------- DATE PROCESSING MANAGEMENT -- 0.6% First Consulting Group, Inc.* 46,000 633 -------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 5.6% Diodes, Inc.* 32,950 1,169 NovAtel, Inc.* 48,400 1,931 Nu Horizons Electronics Corp.* 5,300 55 Rudolph Technologies, Inc.* 80,700 1,285 Standard Microsystems Corp.* 25,500 713 Syntax-Brillian Corp.*# 161,700 1,389 -------- 6,542 -------- ELECTRONICS -- SEMICONDUCTORS -- 0.6% Semitool, Inc.* 25,600 341 Ultra Clean Holdings, Inc.* 30,000 371 -------- 712 -------- ENERGY RESOURCES & SERVICES -- 4.5% Advanced Energy Industries, Inc.* 61,800 1,166 Atlas America, Inc.* 45,000 2,294 Fuel Tech, Inc.* 70,000 1,725 -------- 5,185 -------- ENTERTAINMENT & LEISURE -- 2.2% Steiner Leisure Ltd.* 55,000 2,503 -------- FINANCIAL SERVICES -- 1.3% Huron Consulting Group, Inc.* 33,500 1,519 -------- FOOD & BEVERAGES -- 3.8% Boston Beer Company, Inc.* 32,400 1,166 MGP Ingredients, Inc. 53,600 1,212 National Beverage Corp.# 84,700 1,188 SunOpta, Inc.* 95,900 844 -------- 4,410 -------- HEALTHCARE -- 0.9% LHC Group Inc.* 36,700 1,046 -------- HOME FURNISHINGS -- HOUSEWARES -- 2.5% American Woodmark Corp.# 32,800 1,373 Kimball International, Inc. -- Class B 64,200 1,560 -------- 2,933 -------- HUMAN RESOURCES -- 2.8% AMN Healthcare Services, Inc.* 80,400 2,214 Kforce, Inc.* 85,100 1,036 -------- 3,250 -------- INSURANCE -- 5.2% American Physicians Capital, Inc.* 61,950 2,480 CNA Surety Corp.* 37,700 811 Darwin Professional Underwriters, Inc.* 33,000 774 Safety Insurance Group, Inc. 38,000 1,927 -------- 5,992 -------- MACHINERY & HEAVY EQUIPMENT -- 5.1% Applied Industrial Technologies, Inc. 16,650 438 Kadant, Inc.* 52,600 1,282 Newport Corp.* 61,700 1,293 The Gorman-Rupp Co. 36,850 1,362 The Middleby Corp.* 15,000 1,570 -------- 5,945 -------- MANUFACTURING -- 4.0% Brush Engineered Materials, Inc.* 20,500 692 Ceradyne, Inc.* 44,900 2,537 Superior Essex, Inc.* 42,600 1,416 -------- 4,645 -------- MEDICAL PRODUCTS -- 1.1% Bradley Pharmaceuticals, Inc.* 28,400 584 Bruker BioSciences Corp.* 95,800 719 -------- 1,303 -------- MEDICAL SUPPLIES & EQUIPMENT -- 2.8% Allscripts Healthcare Solutions, Inc.* 56,700 1,530 Cutera, Inc.* 40,800 1,102 Somanetics Corp.* 26,400 603 -------- 3,235 -------- MEDICAL SERVICES -- 1.2% ICON Plc. ADR * 37,400 1,410 -------- METAL COMPONENTS & PRODUCTS -- 1.1% LKQ Corp.* 55,000 1,264 --------
64 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP GROWTH FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- OIL & GAS -- 4.4% Allis-Chalmers Energy, Inc.* 25,300 $ 583 Arena Resources, Inc.* 11,900 508 Delek US Holdings, Inc. 26,600 436 Gulf Island Fabrication, Inc. 27,500 1,015 Lufkin Industries, Inc. 18,500 1,074 Matrix Service Co.* 49,500 797 OMNI Energy Services Corp.* 70,800 693 -------- 5,106 -------- PHARMACEUTICALS -- 0.8% PARAXEL International Corp.* 31,900 924 -------- RETAIL -- 6.8% Charlotte Russe Holding, Inc.* 66,000 2,030 EZCORP, Inc.* 150,000 2,438 Movado Group, Inc. 60,200 1,746 PC Connection, Inc.* 43,300 642 Smith & Wesson Holding Corp# 100,000 1,034 -------- 7,890 -------- SECURITY TECHNOLOGY -- 1.8% VASCO Data Security International, Inc.* 170,600 2,022 -------- SERVICES -- COMMERCIAL -- 1.8% Teletech Holdings, Inc.* 87,000 2,078 -------- TELECOMMUNICATIONS -- 2.5% Alaska Communications Systems Group, Inc. 99,500 1,511 Cbeyond, Inc.* 46,400 1,419 -------- 2,930 -------- TEXTILES & APPAREL -- 0.9% Steven Madden, Ltd. 29,989 1,052 -------- TRANSPORTATION & RELATED SERVICES -- 3.0% Celadon Group, Inc.* 120,000 2,010 Hub Group, Inc.* 54,000 1,488 -------- 3,498 -------- TOTAL COMMON STOCKS (COST $88,271) 103,799 -------- ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 1.4% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempCash 812,893 813 BlackRock Provident Institutional Funds -- TempFund 812,894 813 -------- TOTAL SHORT-TERM INVESTMENTS (COST $1,626) 1,626 --------
PAR VALUE (000) (000)+ ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 9.2% ----------------------------------------------------- Bank Of Montreal Time Deposit 5.25%, 01/02/2007 $ $164 $ 164 Deutsche Bank Time Deposit 4.75%, 01/02/2007 485 485 Institutional Money Market Trust 5.302%, 01/02/2007 9,215 9,215 IXIS Time Deposit 5.30%, 01/02/2007 655 655 National Bank Canada Time Deposit 5.32%, 01/02/2007 165 165 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $10,684) 10,684 -------- TOTAL INVESTMENTS -- 100.0% (COST $100,581) $116,109 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt The accompanying notes are an integral part of these financial statements. 65 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- 80.6% ------------------------------------------------------ AEROSPACE & DEFENSE -- 0.8% Ducommun, Inc.* 8,767 $ 201 EDO Corp. 27,681 657 MTC Technologies, Inc.* 26,952 634 -------- 1,492 -------- AUTOMOBILES & RELATED -- 3.1% Commercial Vehicle Group, Inc.* 51,544 1,124 Lithia Motots, Inc. 6,228 179 LoJack Corp.* 28,650 489 Tenneco, Inc.* 65,634 1,623 Wabash National Corp. 171,259 2,586 -------- 6,001 -------- BANKING -- 12.4% Alabama National BanCorporation 24,267 1,668 Alliance Bankshares Corp.* 17,901 280 Bancorp, Inc.* 54,795 1,622 Bank of the Osarks, Inc. 3,070 102 Berkshire Hills Bancorp, Inc. 18,763 628 Brookline Bancorp, Inc.# 56,800 748 Cardinal Financial Corp. 59,030 605 Central Pacific Financial Corp. 28,060 1,088 Chittenden Corp. 18,608 571 Citizens Banking Corp.# 26,943 714 Columbia Banking System Inc. 21,993 772 F.N.B. Corp. 35,152 642 Fidelity Bankshares, Inc. 22,698 900 First Financial Bankshares 5,996 251 Glacier Bancorp Inc. 37,454 915 IBERIABANK Corp. 24,428 1,442 Irwin Financial Corp. 21,240 481 Midwest Banc Holdings, Inc. 35,300 838 Millenium Bankshares Corp. 39,127 365 Nexity Financial Corp.* 15,796 190 PFF Bancorp, Inc. 67,528 2,330 Placer Sierra Bancshares 38,101 906 Prosperity Bancshares, Inc. 24,903 859 Signature Bank* 64,442 1,996 Southcoast Financial Corp.* 15,828 328 Sterling Bancorp 16,516 325 Sterling Financial Corp. 5,802 196 Summit State Bank 11,977 153 Texas United Bancshares, Inc. 15,482 532 United Community Banks, Inc. 40,646 1,314 West Coast Bancorp 12,295 426 -------- 24,187 -------- BUILDING & REAL ESTATE -- 2.2% Beazer Homes USA, Inc.# 22,761 1,070 Hovanian Enterprises, Inc.*# 28,876 979 Modtech Holdings, Inc.* 46,471 230 Ryland Group, Inc. 21,394 1,169 WCI Communities, Inc.*# 42,705 819 -------- 4,267 -------- BUILDING MAINTENANCE & SERVICES -- 0.3% Goodman Global, Inc.* 39,834 685 -------- BUILDING PRODUCTS & SUPPLIES -- 0.8% Builders Firstsource, Inc.* 17,417 311 Universal Forest Products, Inc. 27,709 1,291 -------- 1,602 -------- CABLE OPERATORS -- 1.1% Anixter International, Inc.* 12,758 693 RCN Corp.* 51,349 1,548 -------- 2,241 -------- CHEMICALS -- 3.3% Albemarle Corp. 21,962 1,577 American Vanguard Corp. 12,299 196 H.B. Fuller Co. 24,769 639 KMG Chemicals, Inc. 27,646 276 Minerals Technologies, Inc. 33,339 1,960 Penford Corp. 16,129 279 Uap Holding Corp. 61,658 1,553 -------- 6,480 -------- COMPUTER -- INTERNET SERVICES & SOFTWARE -- 1.2% Blackboard, Inc.*# 18,018 541 eFunds Corp.* 56,847 1,564 Vignette Corp.* 18,115 309 -------- 2,414 -------- COMPUTER -- NETWORK PRODUCTS & SERVICES -- 1.4% Foundry Networks, Inc.* 60,931 913 Hypercom Corp.* 41,453 263 Insight Enterprises, Inc.* 66,379 1,253 Micros Systems, Inc.* 6,784 357 -------- 2,786 -------- COMPUTER SERVICES & SOFTWARE -- 3.8% Electronics For Imaging Inc.* 50,343 1,338 JDA Software Group, Inc.* 83,349 1,148 Lawson Software, Inc.* 223,853 1,654 Parametric Technology, Corp.* 96,488 1,739 The Bisys Group, Inc.* 42,281 546 Transactions Systems Architects, Inc.* 17,584 572 Witness Systems, Inc.* 20,954 367 -------- 7,364 -------- CONSULTING SERVICES -- 0.5% Hewitt Associates, Inc. 15,454 398 MAXIMUS, Inc. 20,341 626 -------- 1,024 -------- CONSUMER PRODUCTS -- 1.8% Fossil, Inc.* 61,051 1,379 Playtex Products, Inc.* 99,807 1,436 Prestige Brands Holdings, Inc.* 28,589 372 Select Comfort Corp.* 23,368 406 -------- 3,593 -------- COSMETICS & TOILETRIES -- 0.8% Elizabeth Arden, Inc.* 79,244 1,510 -------- DATA PROCESSING MANAGEMENT -- 0.3% Intermec, Inc.* 26,119 634 --------
66 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- DISTRIBUTION SERVICES -- 1.3% NuCo2, Inc.* 17,381 $ 427 Owens & Minor, Inc. 28,281 885 Watsco, Inc. 28,071 1,324 -------- 2,636 -------- DIVERSIFIED OPERATIONS -- 0.3% Actuant Corp. 8,764 418 Lydall, Inc.* 20,151 217 -------- 635 -------- EDUCATION -- 0.3% ITT Educational Services, Inc.* 8,830 586 -------- ELECTRONIC COMPONENTS & SEMICONDUCTORS -- 5.4% Aeroflex, Inc* 11,949 140 ATMI, Inc.* 27,893 851 Belden CDT Inc. 31,611 1,236 Brooks Automation, Inc.* 87,269 1,257 CyberOptics Corp.* 14,046 178 Emulex Corp.* 93,102 1,816 Entegris, Inc.* 52,867 572 Formfactor, Inc.* 12,697 473 Franklin Electric Co., Inc. 11,005 566 Integrated Device Technology, Inc.*# 85,556 1,324 IPG Photonics Corp. 3,697 89 ON Semiconductor Corp.*# 18,262 138 Semtech Corp. 36,337 475 Tessera Technologies, Inc.* 35,043 1,414 -------- 10,529 -------- ENERGY RESOURCES & SERVICES -- 5.2% Baldor Electric Co. 10,789 361 Cleco Corp. 41,837 1,056 Comfort Systems USA, Inc. 68,739 869 Dynegy Inc. -- Class A* 31,805 230 El Paso Electric Co.* 106,877 2,605 Empire District Electric Co. 2,342 58 Graftech International Ltd.* 161,821 1,120 ITC Holdings Corp. 3,269 130 MGE Energy, Inc. 4,790 175 Sierra Pacific Resources* 68,498 1,153 South Jersey Industries, Inc. 30,495 1,018 Unisource Energy Corp. 9,796 357 Westar Energy, Inc. 41,142 1,068 -------- 10,200 -------- ENTERTAINMENT & LEISURE -- 0.5% K2, Inc.* 78,182 1,031 -------- FINANCE -- 3.8% Accredited Home Lenders Holding Co.*# 64,266 1,753 Affiliated Managers Group, Inc.*# 7,110 748 Apollo Investment Corp. 20,618 462 Financial Federal Corp. 53,628 1,577 First Niagara Financial Group, Inc. 61,298 911 Knight Capital Group* 28,288 542 Macquarie Infrastucture Co. 23,014 817 Technology Investment Capital Corp. 43,076 695 -------- 7,505 -------- FOOD & BEVERAGES -- 1.0% Nash Finch Co. 22,497 614 RARE Hospitality International, Inc.* 33,865 1,115 Sanderson Farms, Inc. 5,818 176 -------- 1,905 -------- HEALTHCARE -- 0.4% Cardiac Science Corp.* 98,468 795 -------- HOTELS & GAMING -- 1.0% Aztar Corp.* 10,598 577 Boyd Gaming Corp.# 22,756 1,031 Isle of Capri Casinos, Inc.* 14,505 385 -------- 1,993 -------- HUMAN RESOURCES -- 0.3% Resources Connection, Inc.* 21,939 699 -------- INDUSTRIAL -- 0.6% Infrasource Services, Inc.* 30,162 657 Tennant Co. 16,723 485 -------- 1,142 -------- INSTRUMENTS -- CONTROLS -- 0.8% PerkinElmer, Inc. 69,579 1,547 -------- INSURANCE -- 4.4% American Equity Investment Life Holdings Co. 101,745 1,326 Aspen Insurance Holdings, Ltd. 27,169 716 Donegal Group, Inc. 24,661 483 National Atlantic Holdings Corp.* 25,086 293 NYMAGIC, Inc. 14,078 515 ProAssurance Corp.* 28,122 1,404 ProCentury Corp. 56,948 1,054 RLI Corp. 21,023 1,186 StanCorp Financial Group, Inc. 18,566 836 The Navigators Group, Inc.* 17,606 848 -------- 8,661 -------- MACHINERY & HEAVY EQUIPMENT -- 0.5% Applied Industrial Technologies, Inc. 19,609 516 MTS Systems Corp. 11,736 453 -------- 969 -------- MANUFACTURING -- 0.3% Hydril Co.* 6,093 458 Trex Company, Inc.*# 3,372 77 -------- 535 -------- MEDICAL PRODUCTS -- 0.8% American Medical Systems Holdings, Inc.* 76,957 1,425 Greatbatch, Inc.* 5,007 135 -------- 1,560 -------- MEDICAL SERVICES & EQUIPMENT -- 0.6% Symmetry Medical, Inc.* 80,305 1,111 -------- METAL COMPONENTS & PRODUCTS -- 1.8% Commercial Metals Co. 47,471 1,225 Mueller Industries, Inc. 34,116 1,081 Olympic Steel, Inc. 18,687 415 Rbc Bearings, Inc.* 29,171 836 -------- 3,557 --------
67 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP VALUE FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------ COMMON STOCKS -- (CONTINUED) ----------------------------------------------------- OIL & GAS -- 4.7% Geomet, Inc.* 45,033 $ 468 Northwest Natural Gas Co. 29,389 1,247 Oil States International, Inc.* 44,489 1,434 Parallel Petroleum Corp.* 60,057 1,055 Range Resources Corp. 50,778 1,394 SEMCO Energy, Inc.* 28,344 173 Southwest Gas Corp. 22,198 852 Vectren Corp. 3,180 90 W-H Energy Services, Inc.* 17,313 843 Williams Partners LP 40,532 1,569 -------- 9,125 -------- PAPER & RELATED PRODUCTS -- 0.6% Caraustar Industries, Inc.* 139,750 1,131 -------- PHARMACEUTICALS -- 0.8% Medarex, Inc.* 84,656 1,252 Salix Pharmaceuticals Ltd.* 31,438 383 -------- 1,635 -------- RESTAURANTS -- 2.0% Applebee's International, Inc.# 22,227 548 California Pizza Kitchen, Inc.* 30,526 1,017 CEC Entertainment, Inc.* 32,622 1,313 Ruby Tuesday, Inc. 13,426 369 The Steak N Shake Co.* 35,659 628 -------- 3,875 -------- RETAIL -- 3.0% Aaron Rents, Inc.# 33,890 976 Big Lots, Inc.*# 61,226 1,403 Casey's General Stores, Inc. 52,245 1,230 Charming Shoppes, Inc.* 75,667 1,024 Christopher & Banks, Corp. 10,050 188 Gymboree Corp.* 14,705 561 Hot Topic, Inc.* 25,941 346 Sharper Image Corp.*# 6,272 58 -------- 5,786 -------- SERVICES -- COMMERCIAL -- 1.5% Kanbay International Inc.* 17,495 503 Providence Service Corp.* 37,776 949 School Specialty, Inc.* 23,144 868 Unifirst Corp. 15,643 601 -------- 2,921 -------- TELECOMMUNICATIONS -- 2.5% Andrew Corp.* 39,451 403 Dobson Communications Corp.* 166,626 1,451 Knology, Inc.* 28,346 302 Premiere Global Services, Inc.* 147,426 1,392 Tekelec* 85,047 1,261 -------- 4,809 -------- TEXTILES & APPAREL -- 0.7% G & K Services, Inc. 15,385 598 K-Swiss, Inc.# 24,590 756 -------- 1,354 -------- TRANSPORTATION & RELATED SERVICES -- 0.9% AirTran Holdings, Inc.*# 51,438 604 Forward Air Corp. 17,706 512 Heartland Express, Inc. 44,905 675 -------- 1,791 -------- WASTE MANAGEMENT -- 0.8% Waste Connections, Inc.* 36,004 1,496 -------- TOTAL COMMON STOCKS (COST $136,560) 157,799 -------- ------------------------------------------------------ REAL ESTATE INVESTMENT TRUSTS -- 9.9% ------------------------------------------------------ APARTMENTS -- 0.4% American Campus Communities, Inc. 30,751 875 -------- BUILDING & REAL ESTATE -- 0.4% Digital Realty Trust, Inc. 23,703 811 -------- DIVERSIFIED OPERATIONS -- 1.2% Entertainment Properties Trust 20,571 1,202 Lexington Realty Trust# 52,099 1,169 -------- 2,371 -------- FINANCE -- 2.1% Commercial Net Lease Realty# 52,783 1,211 MFA Mortgage Investments, Inc. 145,682 1,120 RAIT Financial Trust 49,119 1,694 -------- 4,025 -------- HEATHCARE -- 1.1% Cogdell Spencer, Inc. 22,051 474 Omega Healthcare Investors, Inc. 89,886 1,593 -------- 2,067 -------- HOTELS & RESORTS -- 0.4% Lasalle Hotel Properties 18,261 837 -------- LOCAL RETAIL -- 0.4% Arcadia Realty Trust 28,693 718 -------- OFFICE PROPERTY -- 3.3% BioMed Realty Trust, Inc. 30,436 871 Brandywine Realty Trust 45,070 1,499 Parkway Properties, Inc. 38,934 1,986 Spirit Finance Corp. 162,823 2,030 -------- 6,386 -------- REGIONAL MALLS -- 0.1% Agree Realty Corp. 6,916 238 -------- STORAGE -- 0.5% U-Store-It Trust 49,465 1,017 -------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $15,689) 19,345 -------- ------------------------------------------------------ SHORT-TERM INVESTMENTS -- 2.2% ------------------------------------------------------ BlackRock Provident Institutional Funds -- TempCash 2,166,062 2,166 RBB Sansom Street Fund Money Market Portfolio 2,166,061 2,166 -------- TOTAL SHORT-TERM INVESTMENTS (COST $4,332) 4,332 --------
68 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 SMALL CAP VALUE FUND
PAR VALUE (000) (000)+ ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 7.3% ----------------------------------------------------- Bank of Montreal Time Deposit 5.25%, 01/02/2007 $ $161 $ 161 Bear Stearns Variable Rate Commercial Paper 5.382%, 01/02/2007 2,201 2,201 CIBC Yankee Certificate of Deposit 5.32%, 01/29/2007 517 517 Deutsche Bank Trade Bank 4.75%, 01/02/2007 687 687 Institutional Money Market Trust 5.302%, 01/02/2007 9,039 9,039 IXIS Time Deposit 5.30%, 01/02/2007 643 643 National Bank of Canada Time Deposit 5.32%, 01/02/2007 162 162 Tango Financial Corp Floating Rate Note 5.32%, 01/29/2007 776 776 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $14,186) 14,186 -------- TOTAL INVESTMENTS -- 100.0% (COST $170,767) $195,662 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. The accompanying notes are an integral part of these financial statements. 69 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INTERNATIONAL EQUITY FUND
NUMBER OF VALUE SHARES (000)+ ------------------------------------------------------- COMMON STOCKS -- 86.8% ------------------------------------------------------- AUSTRALIA -- 6.8% Aristocrat Leisure Ltd. 375,752 $ 4,698 Australia & New Zealand Banking Group Ltd. 173,300 3,847 Macquarie Bank Ltd. 17,400 1,082 Westfield Group 314,774 5,203 Westfield Group 10,220 168 Woolworths Ltd. 316,610 5,964 -------- 20,962 -------- BELGIUM -- 2.9% Colruyt NV 18,925 4,038 InBev NV* 74,600 4,909 -------- 8,947 -------- BRAZIL -- 2.5% Banco Itau Holding Financeira S.A. ADR# 124,850 4,513 Souza Cruz S.A. 185,600 3,305 -------- 7,818 -------- FRANCE -- 2.4% M6 Metropole Television 94,900 3,386 Total S.A. 56,700 4,080 -------- 7,466 -------- INDIA -- 4.4% Bharat Heavy Electricals Ltd. 62,400 3,232 HDFC Bank Ltd. 41,200 989 HDFC Bank Ltd. ADR# 112,350 8,480 Housing Development Finance Corporation Ltd. 24,500 898 -------- 13,599 -------- IRELAND -- 5.9% Allied Irish Banks Plc 128,600 3,817 Anglo Irish Bank Corp. Plc 325,313 6,698 Anglo Irish Bank Corp. Plc 377,353 7,814 -------- 18,329 -------- JAPAN -- 5.1% Daito Trust Construction Co. Ltd. 77,200 3,544 Millea Holdings, Inc. 159,500 5,649 Toyota Motor Corp. 99,000 6,626 -------- 15,819 -------- KOREA -- 3.1% Kangwon Land, Inc. 143,500 3,109 KT&G Corp. 50,100 3,044 S1 Corp. 76,996 3,578 -------- 9,731 -------- MEXICO -- 4.3% America Movil S.A.B. de C.V. ADR Series L 109,500 4,952 America Telecom, S.A. DE C.V.* 134,600 1,220 Grupo Modelo, S.A. de C.V. Series C 1,320,500 7,333 -------- 13,505 -------- NETHERLANDS ANTILLES -- 1.9% TNT Post Group NV 137,300 5,902 -------- NORWAY -- 1.4% Orkla ASA 78,400 4,421 -------- SOUTH AFRICA -- 1.9% Remgro Ltd. 231,300 5,853 -------- SPAIN -- 10.2% Banco Bilbao Vizcaya Argentaria, S.A. 595,800 14,314 Enagas 353,200 8,210 Red Electrica de Espana 215,068 9,208 -------- 31,732 -------- SWITZERLAND -- 10.8% Kuehne & Nagel International AG 100,875 7,328 Lindt & Spruengli AG 688 1,695 Nestle AG 19,065 6,762 Novartis AG ADR 98,400 5,652 Roche Holding AG 61,200 10,950 UBS AG 19,500 1,180 -------- 33,567 -------- TAIWAN -- 1.3% Taiwan Semiconductor Manufacturing Co. Ltd. ADR 375,685 4,106 -------- UNITED KINGDOM -- 21.9% Barratt Developments Plc 122,900 2,963 British American Tobacco Plc 503,899 14,110 Diageo Plc 426,123 8,372 Imperial Tobacco Group Plc 233,150 9,176 Northern Rock Plc 217,700 5,005 Reckitt Benckiser Plc 130,839 5,968 Royal Bank of Scotland Group Plc 188,343 7,330 Tesco Plc 1,922,486 15,192 -------- 68,116 -------- TOTAL COMMON STOCK (COST $186,803) 269,873 -------- ------------------------------------------------------- WARRANTS -- 1.8% ------------------------------------------------------- CLSA Financial -- CW10 Bharti Televentures* 354,500 5,049 CLSA Financial -- CW10 HDFC Bank Ltd.* 21,710 524 -------- TOTAL WARRANTS (COST $4,211) 5,573 -------- ------------------------------------------------------- SHORT TERM INVESTMENTS -- 7.5% ------------------------------------------------------- BlackRock Provident Institutional Funds -- TempCash 11,719,469 11,720 BlackRock Provident Institutional Funds -- TempFund 11,719,470 11,719 -------- TOTAL SHORT TERM INVESTMENTS (COST $23,439) 23,439 --------
PAR (000) ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- 3.9% ------------------------------------------------------ Bank of Montreal Time Deposit 5.25 %, 01/02/2007 $ 186 186 Deutsche Bank Time Deposit 4.75 %, 01/02/2007 547 547 Institutional Money Market Trust 5.302 %, 01/02/2007 10,402 10,402
70 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 INTERNATIONAL EQUITY FUND
PAR VALUE (000) (000)+ ------------------------------------------------------ SECURITIES LENDING COLLATERAL -- (CONTINUED) ----------------------------------------------------- IXIS Time Deposit 5.30 %, 01/02/2007 $ 740 $ 740 National Bank of Canada Time Deposit 5.32 %, 01/02/2007 186 186 -------- TOTAL SECURITIES LENDING COLLATERAL (COST $12,061) 12,061 -------- TOTAL INVESTMENTS -- 100.0% (COST $226,514) $310,946 ========
---------------------- + See Note 1 to Financial Statements. * Non-income producing security. # Security position is either entirely or partially on loan. ADR -- American Depository Receipt
COMMON STOCKS % OF MARKET VALUE INDUSTRY DIVERSIFICATION VALUE (000'S) ------------------------------------------------------- ------------------------------------------------------- Automobiles & Related 2.5% $ 6,626 Banking 23.7% 63,888 Broadcast/Media 1.3% 3,385 Building & Real Estate 4.4% 11,879 Consumer Products 14.5% 39,181 Diversified Operations 3.8% 10,274 Electronic Components & Semiconductors 2.7% 7,338 Energy Resources & Services 6.5% 17,419 Finance 0.8% 2,078 Food & Beverages 10.8% 29,072 Hotels & Gaming 1.1% 3,109 Insurance 2.1% 5,649 Manufacturing 1.7% 4,698 Oil & Gas 1.5% 4,080 Pharmaceuticals 6.1% 16,602 Retail 9.3% 25,194 Telecommunications 2.3% 6,171 Transportation & Related Services 4.9% 13,230 ---------------------- 100.0% $269,873 ======================
The accompanying notes are an integral part of these financial statements. 71 PENN SERIES FUNDS, INC. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2006 REIT FUND
NUMBER OF VALUE SHARES (000)+ ----------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (REITS) -- 74.9% ----------------------------------------------------- APARTMENTS -- 16.1% Archstone-Smith Trust 58,026 $$3,378 Avalonbay Communities, Inc. 24,000 3,121 BRE Properties, Inc. 24,600 1,599 Camden Property Trust 17,600 1,300 Equity Residential Properties Trust# 60,900 3,091 GMH Communities Trust 67,800 688 United Dominion Realty Trust, Inc. 59,200 1,882 ------- 15,059 ------- DIVERSIFIED OPERATIONS -- 4.9% Vornado Realty Trust# 37,900 4,605 ------- HOTELS & RESORTS -- 6.6% DiamondRock Hospitality Co. 1,200 22 Host Hotels & Resorts, Inc.# 136,869 3,360 Lasalle Hotel Properties 24,152 1,107 Starwood Hotels & Resorts Worldwide, Inc.# 13,400 838 Sunstone Hotel Investors Inc. 30,500 815 ------- 6,142 ------- INDUSTRIAL -- 5.2% Eastgroup Properties, Inc. 18,300 980 Prologis 64,200 3,901 ------- 4,881 ------- MANUFACTURED HOMES -- 0.8% Equity Lifestyle Properties, Inc. 13,700 746 ------- MIXED INDUSTRIAL/OFFICE -- 2.7% Digital Realty Trust, Inc. 40,400 1,383 PS Business Parks, Inc. 15,800 1,117 ------- 2,500 ------- OFFICE PROPERTY -- 13.7% Alexandria Real Estate Equities Inc. 21,200 2,128 Boston Properties, Inc.# 29,800 3,334 Corporate Office Properties Trust# 34,000 1,716 Kilroy Realty Corp. 16,100 1,256 Mack-Cali Realty Corp. 27,000 1,377 SL Green Realty Corp.# 22,500 2,988 ------- 12,799 ------- REGIONAL MALLS -- 11.2% Simon Property Group, Inc.# 65,100 6,594 Taubman Centers, Inc. 32,400 1,648 The Maceroch Company 26,300 2,277 ------- 10,519 ------- SELF-STORAGE -- 4.0% Public Storage, Inc. 29,515 2,878 U-Store-It Trust 40,200 826 ------- 3,704 ------- STRIP CENTERS -- 9.7% Developers Diversified Realty Corp. 36,900 2,323 Federal Realty Investment Trust 20,200 1,717 Kimco Realty Corp. 58,800 2,643 Regency Centers Corp. 30,900 2,415 ------- 9,098 ------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $54,362) 70,053 ------- ----------------------------------------------------- SHORT-TERM INVESTMENTS -- 1.9% ----------------------------------------------------- BlackRock Provident Institutional Funds -- TempCash 909,851 910 BlackRock Provident Institutional Funds -- TempFund 909,853 910 ------- TOTAL SHORT-TERM INVESTMENTS (COST $1,820) 1,820 -------
PAR (000) ----------------------------------------------------- SECURITIES LENDING COLLATERAL -- 23.2% ----------------------------------------------------- Bear Stearns Variable Rate Commercial Paper 5.38%, 01/02/2007 $ 1,086 1,086 Bank of Montreal Time Deposit 5.25%, 01/02/2007 167 167 Deutsche Bank Time Deposit 4.75%, 01/02/2007 547 547 Institutional Money Market Trust 5.302%, 01/02/2007 19,085 19,085 IXIS Time Deposit 5.30%, 01/02/2007 666 666 National Bank of Canada Time Deposit 5.32%, 01/02/2007 167 167 ------- TOTAL SECURITIES LENDING COLLATERAL (COST $21,718) 21,718 ------- TOTAL INVESTMENTS -- 100.0% (COST $77,900) $93,591 =======
---------------------- + See Note 1 to Financial Statements. # Security position is either entirely or partially on loan. The accompanying notes are an integral part of these financial statements. 72 PENN SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) --------------------------------------------------------------------------------
LIMITED HIGH MONEY MATURITY QUALITY YIELD MARKET BOND BOND BOND FUND FUND FUND FUND -------- -------- -------- -------- ASSETS Investments at value (including $0, $5,355, $35,747 and $0 of securities on loan, respectively)... $ 78,231 $ 47,844 $194,915 $ 86,589 Interest, dividends and reclaims receivable............................. 761 211 1,095 1,563 Receivable for capital stock sold......... 332 302 1,247 172 Other assets.............................. 2 1 5 3 --- ---- --- ---- --- ---- --- ---- Total Assets......................... 79,326 48,358 197,262 88,327 --- ---- --- ---- --- ---- --- ---- LIABILITIES Obligation to return securities lending collateral............................. -- 5,455 36,461 -- Payable for investment securities purchased.............................. 2,916 -- -- 24 Payable to the investment adviser......... 13 11 45 37 Payable to The Penn Mutual Life Insurance Co. ................................... 29 15 59 33 Other liabilities......................... 18 10 27 30 --- ---- --- ---- --- ---- --- ---- Total Liabilities.................... 2,976 5,491 36,592 124 --- ---- --- ---- --- ---- --- ---- NET ASSETS (NOTE 8)......................... $ 76,350 $ 42,867 $160,670 $ 88,203 === ==== === ==== === ==== === ==== Shares outstanding, $0.10 par value, 500 76,347- million shares authorized................. ,852 === ==== Shares outstanding, $0.10 par value, 250 15,585- 11,199- million shares authorized................. ,288 ,945 === ==== === ==== Shares outstanding, $0.0001 par value, 250 4,170,- million shares authorized................. 039 === ==== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE................ $ 1.00 $ 10.28 $ 10.31 $ 7.88 === ==== === ==== === ==== === ==== Investments at cost......................... $ 78,231 $ 47,749 $194,031 $ 84,548 LARGE LARGE FLEXIBLY GROWTH CAP CAP MANAGED STOCK VALUE GROWTH FUND FUND FUND FUND -------- -------- -------- -------- ASSETS Investments at value (including $237,707, $27,738, $64,126 and $7,534 $1,565,- of securities on loan, respectively)... 655 $161,193 $299,880 $ 37,578 Interest, dividends and reclaims receivable............................. 4,059 165 389 37 Receivable for investment securities sold................................... 11,333 48 1,791 -- Receivable for capital stock sold......... 771 146 4 198 Other assets.............................. 43 5 8 1 --- ---- --- ---- --- ---- --- ---- 1,581,- Total Assets......................... 861 161,557 302,072 37,814 --- ---- --- ---- --- ---- --- ---- LIABILITIES Obligation to return securities lending collateral............................. 246,509 28,623 66,335 7,799 Payable for investment securities purchased.............................. 3,045 403 1,163 -- Payable for capital stock redeemed........ 16 8 61 -- Payable to the investment adviser......... 673 71 120 14 Payable to The Penn Mutual Life Insurance Co. ................................... 487 49 88 11 Other liabilities......................... 154 32 36 8 --- ---- --- ---- --- ---- --- ---- Total Liabilities.................... 250,884 29,186 67,803 7,832 --- ---- --- ---- --- ---- --- ---- $1,330,- NET ASSETS (NOTE 8)......................... 977 $132,371 $234,269 $ 29,982 === ==== === ==== === ==== === ==== Shares outstanding, $0.10 par value, 250 52,981- 9,017,- 11,952- million shares authorized................. ,476 927 ,276 === ==== === ==== === ==== Shares outstanding, $0.0001 par value, 250 2,714,- million shares authorized................. 047 === ==== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE................ $ 25.12 $ 14.68 $ 19.60 $ 11.05 === ==== === ==== === ==== === ==== $1,384,- Investments at cost......................... 033 $139,904 $260,904 $ 34,837
The accompanying notes are an integral part of these financial statements. 73 PENN SERIES FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS) --------------------------------------------------------------------------------
STRATEG- INDEX MID CAP MID CAP IC 500 GROWTH VALUE VALUE FUND FUND FUND FUND -------- -------- -------- -------- ASSETS Investments at value (including $49,119, $25,261, $36,389 and $9,334 of securities on loan, respectively).... $300,717 $111,857 $162,586 $ 53,581 Interest, dividends and reclaims receivable.............................. 356 38 117 63 Receivable for investment securities sold.. 39 355 1,309 -- Receivable for capital stock sold.......... 164 18 6 16 Other assets............................... 12 3 4 2 --- ---- --- ---- --- ---- --- ---- Total Assets.......................... 301,288 112,271 164,022 53,662 --- ---- --- ---- --- ---- --- ---- LIABILITIES Obligation to return securities lending collateral.............................. 50,874 26,237 37,875 9,816 Payable for investment securities purchased............................... -- 463 62 12 Payable for capital stock redeemed......... 72 59 592 163 Future variation margin payable............ 11 -- -- -- Payable to the investment adviser.......... 15 52 60 27 Payable to The Penn Mutual Life Insurance Co. .................................... 87 25 47 16 Other liabilities.......................... 55 21 24 12 --- ---- --- ---- --- ---- --- ---- Total Liabilities..................... 51,114 26,857 38,660 10,046 --- ---- --- ---- --- ---- --- ---- NET ASSETS (NOTE 8).......................... $250,174 $ 85,414 $125,362 $ 43,616 === ==== === ==== === ==== === ==== Shares outstanding, $0.0001 par value, 250 25,574- 10,084- 9,224,- 3,296,- million shares authorized.................. ,989 ,258 533 859 === ==== === ==== === ==== === ==== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE................. $ 9.78 $ 8.47 $ 13.59 $ 13.23 === ==== === ==== === ==== === ==== Investments at cost........................ $275,537 $100,045 $146,566 $ 46,532 SMALL SMALL INTERNA- CAP CAP TIONAL GROWTH VALUE EQUITY REIT FUND FUND FUND FUND -------- -------- -------- -------- ASSETS Investments at value (including $10,235, $13,575, $11,494 and $21,132 of securities on loan, respectively).... $116,109 $195,662 $310,946 $ 93,591 Interest, dividends and reclaims receivable.............................. 54 248 365 443 Receivable for investment securities sold.. 1,043 919 -- 329 Receivable for capital stock sold.......... 355 68 176 38 Net unrealized appreciation of forward foreign currency contracts.............. -- -- 962 -- Other assets............................... 4 6 11 2 --- ---- --- ---- --- ---- --- ---- Total Assets.......................... 117,565 196,903 312,460 94,403 --- ---- --- ---- --- ---- --- ---- LIABILITIES Obligation to return securities lending collateral.............................. 10,684 14,186 12,061 21,718 Payable for investment securities purchased............................... 374 220 3,346 634 Payable for capital stock redeemed......... -- 108 1,065 180 Payable to the investment adviser.......... 67 141 211 42 Payable to The Penn Mutual Life Insurance Co. .................................... 41 68 105 26 Net unrealized depreciation of forward foreign currency contracts.............. -- -- 1,114 -- Other liabilities.......................... 19 38 59 13 --- ---- --- ---- --- ---- --- ---- Total Liabilities..................... 11,185 14,761 17,961 22,613 --- ---- --- ---- --- ---- --- ---- NET ASSETS (NOTE 8).......................... $106,380 $182,142 $294,499 $ 71,790 === ==== === ==== === ==== === ==== Shares outstanding, $0.10 par value, 250 5,295,- 10,293- 12,137- million shares authorized.................. 905 ,127 ,121 === ==== === ==== === ==== Shares outstanding, $0.0001 par value, 250 3,967,- million shares authorized.................. 092 === ==== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE................. $ 20.09 $ 17.70 $ 24.27 $ 18.10 === ==== === ==== === ==== === ==== Investments at cost........................ $100,581 $170,767 $226,514 $ 77,900
The accompanying notes are an integral part of these financial statements. 74 PENN SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
LIMITED HIGH MONEY MATURITY QUALITY YIELD MARKET BOND BOND BOND FUND FUND FUND FUND -------- -------- -------- -------- INVESTMENT INCOME Dividends.................................. -- -- -- $ 127 Interest................................... $3,858 $2,042 $7,746 6,499 Income from securities lending............. -- 20 73 -- Foreign tax withheld....................... -- -- -- (1) ------ ------ ------ ------ Total Investment Income............... 3,858 2,062 7,819 6,625 ------ ------ ------ ------ EXPENSES Investment advisory fees................... 152 137 515 427 Administration fees........................ 114 68 233 128 Accounting fees............................ 56 34 102 63 Director fees.............................. 2 2 4 2 Custodian fees and expenses................ 18 11 23 23 Pricing fees............................... 11 9 12 47 Other expenses............................. 30 20 60 34 ------ ------ ------ ------ Total Expenses........................ 383 281 949 724 ------ ------ ------ ------ NET INVESTMENT INCOME (LOSS)................. 3,475 1,781 6,870 5,901 ------ ------ ------ ------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY Net realized gain (loss) on investment transactions............................ 3 (232) (834) 9 Net realized foreign exchange gain (loss).. -- 19 98 9 Change in net unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... -- 226 1,518 2,224 ------ ------ ------ ------ NET GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY........................... 3 13 782 2,242 ------ ------ ------ ------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................. $3,478 $1,794 $7,652 $8,143 ====== ====== ====== ======
LARGE LARGE FLEXIBLY GROWTH CAP CAP MANAGED STOCK VALUE GROWTH FUND FUND FUND FUND -------- -------- -------- -------- INVESTMENT INCOME Dividends.................................. $ 21,745 $ 1,456 $ 4,619 $309 Interest................................... 13,823 147 391 36 Income from securities lending............. 218 30 44 2 Foreign tax withheld....................... (116) (53) (26) -- --- ---- ------- ------- ---- Total Investment Income............... 35,670 1,580 5,028 347 --- ---- ------- ------- ---- EXPENSES Investment advisory fees................... 7,149 746 1,348 157 Administration fees........................ 1,787 174 337 43 Accounting fees............................ 382 82 136 27 Director fees.............................. 32 3 6 1 Custodian fees and expenses................ 144 46 49 7 Pricing fees............................... 20 27 10 5 Other expenses............................. 440 43 87 12 --- ---- ------- ------- ---- Total Expenses........................ 9,954 1,121 1,973 252 Less: Fees paid indirectly............ 59 4 16 6 --- ---- ------- ------- ---- Net Expenses....................... 9,895 1,117 1,957 246 --- ---- ------- ------- ---- NET INVESTMENT INCOME (LOSS)................. 25,775 463 3,071 101 --- ---- ------- ------- ---- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY Net realized gain (loss) on investment transactions............................ 165,638 5,446 13,472 392 Net realized foreign exchange gain (loss).. (26) (36) -- -- Change in net unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... (18,295) 9,171 21,099 506 --- ---- ------- ------- ---- NET GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY........................... 147,215 14,581 34,571 898 --- ---- ------- ------- ---- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................. $173,092 $15,044 $37,642 $999 === ==== ======= ======= ====
The accompanying notes are an integral part of these financial statements. 75 PENN SERIES FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
STRATEG- INDEX MID CAP MID CAP IC 500 GROWTH VALUE VALUE FUND FUND FUND FUND -------- -------- -------- -------- INVESTMENT INCOME Dividends.................................. $ 4,455 $ 659 $ 1,832 $ 625 Interest................................... 136 50 90 73 Income from securities lending............. 38 37 44 3 Foreign tax withheld....................... -- -- (9) (1) ------- ------- ------- ------- Total Investment Income............... 4,629 746 1,957 700 ------- ------- ------- ------- EXPENSES Investment advisory fees................... 166 601 663 310 Administration fees........................ 355 129 181 65 Accounting fees............................ 142 64 84 32 Director fees.............................. 7 2 3 1 Custodian fees and expenses................ 63 39 33 30 Pricing fees............................... 24 8 7 6 Other expenses............................. 111 33 46 18 ------- ------- ------- ------- Total Expenses........................ 868 876 1,017 462 Less: Expense waivers................. 39 17 -- -- Less: Fees paid indirectly............ -- 32 45 4 ------- ------- ------- ------- Net Expenses....................... 829 827 972 458 ------- ------- ------- ------- NET INVESTMENT INCOME (LOSS)................. 3,800 (81) 985 242 ------- ------- ------- ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY Net realized gain (loss) on investment transactions............................ (3,527) 7,823 8,489 3,610 Change in net unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... 33,685 (2,600) 3,265 922 ------- ------- ------- ------- NET GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY........................... 30,158 5,223 11,754 4,532 ------- ------- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................. $33,958 $ 5,142 $12,739 $ 4,774 ======= ======= ======= ======= SMALL SMALL INTERNA- CAP CAP TIONAL GROWTH VALUE EQUITY REIT FUND FUND FUND FUND -------- -------- -------- -------- INVESTMENT INCOME Dividends.................................. $ 567 $ 2,081 $ 5,907 $ 1,377 Interest................................... 56 296 203 64 Income from securities lending............. 229 39 4 3 Foreign tax withheld....................... -- -- (536) (5) ------- ------- ------- ------- Total Investment Income............... 852 2,416 5,578 1,439 ------- ------- ------- ------- EXPENSES Investment advisory fees................... 834 1,439 2,071 394 Administration fees........................ 171 254 365 85 Accounting fees............................ 81 109 170 42 Director fees.............................. 3 5 6 1 Custodian fees and expenses................ 20 53 199 13 Pricing fees............................... 8 13 34 5 Other expenses............................. 45 66 88 21 ------- ------- ------- ------- Total Expenses........................ 1,162 1,939 2,933 561 Less: Fees paid indirectly............ -- -- 41 -- ------- ------- ------- ------- Net Expenses....................... 1,162 1,939 2,892 561 ------- ------- ------- ------- NET INVESTMENT INCOME (LOSS)................. (310) 477 2,686 878 ------- ------- ------- ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY Net realized gain (loss) on investment transactions............................ 4,036 17,237 36,426 6,265 Net realized foreign exchange gain (loss).. -- -- (1,203) -- Change in net unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... (5,244) 9,404 26,891 8,570 ------- ------- ------- ------- NET GAIN (LOSS) ON INVESTMENT SECURITIES AND FOREIGN CURRENCY........................... (1,208) 26,641 62,114 14,835 ------- ------- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................. $(1,518) $27,118 $64,800 $15,713 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 76 PENN SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
LIMITED MATURITY BOND FUND MONEY MARKET FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/- 12/31/- 12/31/06 12/31/05 06 05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 3,475 $ 2,092 $ 1,781 $ 2,021 Net realized gain (loss) on investment transactions............................ 3 -- (232) (343) Net realized foreign exchange gain (loss).. -- -- 19 -- Net change in unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... -- -- 226 (410) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 3,478 2,092 1,794 1,268 --- ---- --- ---- --- ---- --- ---- DISTRIBUTIONS FROM: Net investment income...................... (3,475) (2,092) (1,697) (2,306) Net short-term gains....................... -- -- -- -- Net long-term gains........................ -- -- -- -- Return of capital.......................... -- -- -- (6) --- ---- --- ---- --- ---- --- ---- TOTAL DISTRIBUTIONS................... (3,475) (2,092) (1,697) (2,312) --- ---- --- ---- --- ---- --- ---- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 57,903 44,213 12,093 25,563 Shares issued in lieu of cash distributions........................... 3,475 2,092 1,697 2,312 Shares redeemed............................ (57,916) (55,163) (31,999) (12,071) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... 3,462 (8,858) (18,209) 15,804 --- ---- --- ---- --- ---- --- ---- TOTAL INCREASE (DECREASE)............. 3,465 (8,858) (18,112) 14,760 NET ASSETS Beginning of Period........................ 72,885 81,743 60,979 46,219 --- ---- --- ---- --- ---- --- ---- End of Period.............................. $ 76,350 $ 72,885 $ 42,867 $ 60,979 === ==== === ==== === ==== === ==== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ -- $ -- $ 303 $ (1) (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 57,903 44,212 1,154 2,446 Shares issued in lieu of cash distributions........................... 3,475 2,093 165 226 Shares redeemed............................ (57,916) (55,163) (3,096) (1,146) --- ---- --- ---- --- ---- --- ---- 3,462 (8,858) (1,777) 1,526 === ==== === ==== === ==== === ====
QUALITY BOND FUND HIGH YIELD BOND FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 6,870 $ 5,809 $ 5,901 $ 5,994 Net realized gain (loss) on investment transactions............................ (834) 984 9 691 Net realized foreign exchange gain (loss).. 98 1 9 13 Net change in unrealized appreciation (depreciation) of investments and contracts and foreign currency.......... 1,518 (2,863) 2,224 (4,111) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 7,652 3,931 8,143 2,587 --- ---- --- ---- --- ---- --- ---- DISTRIBUTIONS FROM: Net investment income...................... (6,033) (6,677) (4,917) (5,977) Net short-term gains....................... -- (1,913) -- -- Net long-term gains........................ -- (545) -- -- Return of capital.......................... -- (8) -- -- --- ---- --- ---- --- ---- --- ---- TOTAL DISTRIBUTIONS................... (6,033) (9,143) (4,917) (5,977) --- ---- --- ---- --- ---- --- ---- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 27,048 28,682 12,250 14,097 Shares issued in lieu of cash distributions........................... 6,033 9,143 4,917 5,977 Shares redeemed............................ (35,295) (44,082) (17,710) (17,121) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... (2,214) (6,257) (543) 2,953 --- ---- --- ---- --- ---- --- ---- TOTAL INCREASE (DECREASE)............. (595) (11,469) 2,683 (437) NET ASSETS Beginning of Period........................ 161,265 172,734 85,520 85,957 --- ---- --- ---- --- ---- --- ---- End of Period.............................. $160,670 $161,265 $ 88,203 $ 85,520 === ==== === ==== === ==== === ==== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ 1,258 $ (2) $ 988 $ -- (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 2,617 2,710 1,563 1,772 Shares issued in lieu of cash distributions........................... 583 896 626 792 Shares redeemed............................ (3,449) (4,166) (2,260) (2,153) --- ---- --- ---- --- ---- --- ---- (249) (560) (71) 411 === ==== === ==== === ==== === ====
The accompanying notes are an integral part of these financial statements. 77 PENN SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND GROWTH STOCK FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 25,775 $ 15,474 $ 463 $ 150 Net realized gain (loss) on investment transactions............................ 165,638 101,718 5,446 3,732 Net realized foreign exchange gain (loss).. (26) (4) (36) (51) Net change in unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... (18,295) (40,527) 9,171 2,245 --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 173,092 76,661 15,044 6,076 --- ---- --- ---- --- ---- --- ---- DISTRIBUTIONS FROM: Net investment income...................... (20,747) (15,577) (300) (115) Net short-term gains....................... (1,908) (6,065) -- -- (177,6- Net long-term gains........................ 75) (71,601) -- -- --- ---- --- ---- --- ---- --- ---- (200,3- TOTAL DISTRIBUTIONS................... 30) (93,243) (300) (115) --- ---- --- ---- --- ---- --- ---- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 145,778 148,535 22,183 17,395 Shares issued in lieu of cash distributions........................... 200,330 93,243 300 115 Shares redeemed............................ (68,090) (74,479) (12,051) (11,518) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... 278,018 167,299 10,432 5,992 --- ---- --- ---- --- ---- --- ---- TOTAL INCREASE (DECREASE)............. 250,780 150,717 25,176 11,953 NET ASSETS 1,080,- Beginning of Period........................ 197 929,480 107,195 95,242 --- ---- --- ---- --- ---- --- ---- $1,330,- $1,080,- End of Period.............................. 977 197 $132,371 $107,195 === ==== === ==== === ==== === ==== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ 5,084 $ 84 $ 148 $ 21 (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 5,422 5,653 1,655 1,409 Shares issued in lieu of cash distributions........................... 7,898 3,596 20 9 Shares redeemed............................ (2,547) (2,840) (889) (943) --- ---- --- ---- --- ---- --- ---- 10,773 6,409 786 475 === ==== === ==== === ==== === ==== LARGE CAP GROWTH LARGE CAP VALUE FUND FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 3,071 $ 2,477 $ 101 $ 48 Net realized gain (loss) on investment transactions............................ 13,472 13,398 392 235 Net change in unrealized appreciation (depreciation) of investments and contracts and foreign currency.......... 21,099 (9,686) 506 106 --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 37,642 6,189 999 389 --- ---- --- ---- --- ---- --- ---- DISTRIBUTIONS FROM: Net investment income...................... (2,403) (2,461) (70) (43) Net short-term gains....................... (882) (6,027) (25) (117) Net long-term gains........................ (10,005) (8,163) (274) (88) --- ---- --- ---- --- ---- --- ---- TOTAL DISTRIBUTIONS................... (13,290) (16,651) (369) (248) --- ---- --- ---- --- ---- --- ---- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 11,420 11,586 6,823 6,389 Shares issued in lieu of cash distributions........................... 13,290 16,651 369 248 Shares redeemed............................ (30,112) (26,937) (5,087) (3,603) --- ---- --- ---- --- ---- --- ---- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... (5,402) 1,300 2,105 3,034 --- ---- --- ---- --- ---- --- ---- TOTAL INCREASE (DECREASE)............. 18,950 (9,162) 2,735 3,175 NET ASSETS Beginning of Period........................ 215,319 224,481 27,247 24,072 --- ---- --- ---- --- ---- --- ---- End of Period.............................. $234,269 $215,319 $ 29,982 $ 27,247 === ==== === ==== === ==== === ==== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ 691 $ 22 $ 40 $ 8 (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 597 642 629 611 Shares issued in lieu of cash distributions........................... 679 935 33 22 Shares redeemed............................ (1,584) (1,483) (473) (344) --- ---- --- ---- --- ---- --- ---- (308) 94 189 289 === ==== === ==== === ==== === ====
The accompanying notes are an integral part of these financial statements. 78 PENN SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
INDEX 500 FUND MID CAP GROWTH FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 3,800 $ 3,625 $ (81) $ (310) Net realized gain (loss) on investment transactions............................ (3,527) (7,149) 7,823 8,280 Net change in unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... 33,685 13,294 (2,600) 861 --- ---- --- ---- --- ---- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 33,958 9,770 5,142 8,831 --- ---- --- ---- --- ---- ------- DISTRIBUTIONS FROM: Net investment income...................... (3,021) (3,629) -- -- Net short-term gains....................... -- -- -- -- Net long-term gains........................ -- -- -- -- --- ---- --- ---- --- ---- ------- TOTAL DISTRIBUTIONS................... (3,021) (3,629) -- -- --- ---- --- ---- --- ---- ------- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 20,110 21,268 13,755 11,389 Shares issued in lieu of cash distributions........................... 3,021 3,629 -- -- Shares redeemed............................ (38,016) (54,553) (14,657) (9,839) --- ---- --- ---- --- ---- ------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... (14,885) (29,656) (902) 1,550 --- ---- --- ---- --- ---- ------- TOTAL INCREASE (DECREASE)............. 16,052 (23,515) 4,240 10,381 NET ASSETS Beginning of Period........................ 234,122 257,637 81,174 70,793 --- ---- --- ---- --- ---- ------- End of Period.............................. $250,174 $234,122 $ 85,414 $81,174 === ==== === ==== === ==== ======= UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ 814 $ 35 $ -- $ -- (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 2,210 2,557 1,636 1,550 Shares issued in lieu of cash distributions........................... 308 416 -- -- Shares redeemed............................ (4,230) (6,588) (1,782) (1,355) --- ---- --- ---- --- ---- ------- (1,712) (3,615) (146) 195 === ==== === ==== === ==== =======
MID CAP VALUE FUND STRATEGIC VALUE FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 985 $ 687 $ 242 $ 218 Net realized gain (loss) on investment transactions............................ 8,489 15,677 3,610 3,188 Net change in unrealized appreciation (depreciation) of investments and contracts and foreign currency.......... 3,265 (4,344) 922 (251) --- ---- --- ---- --- ---- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 12,739 12,020 4,774 3,155 --- ---- --- ---- --- ---- ------- DISTRIBUTIONS FROM: Net investment income...................... (768) (676) (191) (201) Net short-term gains....................... (1,713) (2,472) (223) (238) Net long-term gains........................ (5,051) (15,410) (4,086) (2,215) --- ---- --- ---- --- ---- ------- TOTAL DISTRIBUTIONS................... (7,532) (18,558) (4,500) (2,654) --- ---- --- ---- --- ---- ------- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 16,930 15,064 7,450 15,628 Shares issued in lieu of cash distributions........................... 7,532 18,558 4,500 2,654 Shares redeemed............................ (16,608) (13,231) (13,704) (4,172) --- ---- --- ---- --- ---- ------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... 7,854 20,391 (1,754) 14,110 --- ---- --- ---- --- ---- ------- TOTAL INCREASE (DECREASE)............. 13,061 13,853 (1,480) 14,611 NET ASSETS Beginning of Period........................ 112,301 98,448 45,096 30,485 --- ---- --- ---- --- ---- ------- End of Period.............................. $125,362 $112,301 $ 43,616 $45,096 === ==== === ==== === ==== ======= UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ 228 $ 11 $ 68 $ 17 (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 1,252 1,076 553 1,184 Shares issued in lieu of cash distributions........................... 558 1,382 343 198 Shares redeemed............................ (1,247) (945) (1,028) (314) --- ---- --- ---- --- ---- ------- 563 1,513 (132) 1,068 === ==== === ==== === ==== =======
The accompanying notes are an integral part of these financial statements. 79 PENN SERIES FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS (AMOUNTS IN THOUSANDS) --------------------------------------------------------------------------------
SMALL CAP VALUE SMALL CAP GROWTH FUND FUND ---------------------------------------- --------------- YEAR YEAR YEAR ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ (310) $ (713) $ 477 Net realized gain (loss) on investment transactions............................ 4,036 13,506 17,237 Net change in unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... (5,244) (6,443) 9,404 -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. (1,518) 6,350 27,118 -------- -------- -------- DISTRIBUTIONS FROM: Net investment income...................... -- -- (478) Net short-term gains....................... -- -- (3,175) Net long-term gains........................ -- -- (10,726) -------- -------- -------- TOTAL DISTRIBUTIONS................... -- -- (14,379) -------- -------- -------- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 16,537 9,466 17,144 Shares issued in lieu of cash distributions........................... -- -- 14,379 Shares redeemed............................ (19,668) (18,366) (18,725) -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... (3,131) (8,900) 12,798 -------- -------- -------- TOTAL INCREASE (DECREASE)............. (4,649) (2,550) 25,537 NET ASSETS Beginning of Period........................ 111,029 113,579 156,605 -------- -------- -------- End of Period.............................. $106,380 $111,029 $182,142 ======== ======== ======== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ -- $ -- $ -- (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 793 498 967 Shares issued in lieu of cash distributions........................... -- -- 820 Shares redeemed............................ (956) (972) (1,063) -------- -------- -------- (163) (474) 724 ======== ======== ======== SMALL CAP VALUE FUND --------------- YEAR ENDED 12/31/05 --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 626 Net realized gain (loss) on investment transactions............................ 11,193 Net change in unrealized appreciation (depreciation) of investments, futures contracts and foreign currency.......... (6,843) -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 4,976 -------- DISTRIBUTIONS FROM: Net investment income...................... (625) Net short-term gains....................... (8,301) Net long-term gains........................ (1,909) -------- TOTAL DISTRIBUTIONS................... (10,835) -------- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 15,594 Shares issued in lieu of cash distributions........................... 10,835 Shares redeemed............................ (29,679) -------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... (3,250) -------- TOTAL INCREASE (DECREASE)............. (9,109) NET ASSETS Beginning of Period........................ 165,714 -------- End of Period.............................. $156,605 ======== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ -- (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 948 Shares issued in lieu of cash distributions........................... 653 Shares redeemed............................ (1,810) -------- (209) ========
INTERNATIONAL EQUITY FUND REIT FUND -------------------- -------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 12/31/06 12/31/05 12/31/06 12/31/05 -------- -------- -------- -------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income (loss)............... $ 2,686 $ 2,559 $ 878 $ 508 Net realized gain (loss) on investment transactions............................ 36,426 23,760 6,265 2,960 Net realized foreign exchange gain (loss).. (1,203) (1,157) -- -- Net change in unrealized appreciation (depreciation) of investments and contracts and foreign currency.......... 26,891 3,053 8,570 1,141 --- ---- --- ---- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. 64,800 28,215 15,713 4,609 --- ---- --- ---- ------- ------- DISTRIBUTIONS FROM: Net investment income...................... (3,974) (726) (690) (508) Net short-term gains....................... (1,260) -- (574) (750) Net long-term gains........................ (26,521) -- (4,682) (2,097) --- ---- --- ---- ------- ------- TOTAL DISTRIBUTIONS................... (31,755) (726) (5,946) (3,355) --- ---- --- ---- ------- ------- CAPITAL SHARE TRANSACTIONS (1): Shares issued.............................. 49,258 26,852 18,758 14,259 Shares issued in lieu of cash distributions........................... 31,755 726 5,946 3,355 Shares redeemed............................ (20,506) (19,629) (5,803) (6,993) --- ---- --- ---- ------- ------- NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS....... 60,507 7,949 18,901 10,621 --- ---- --- ---- ------- ------- TOTAL INCREASE (DECREASE)............. 93,552 35,438 28,668 11,875 NET ASSETS Beginning of Period........................ 200,947 165,509 43,122 31,247 --- ---- --- ---- ------- ------- End of Period.............................. $294,499 $200,947 $71,790 $43,122 === ==== === ==== ======= ======= UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)... $ (2,094) $ (167) $ 188 $ -- (1) SHARES ISSUED AND REDEEMED: Shares issued.............................. 2,083 1,424 1,082 970 Shares issued in lieu of cash distributions........................... 1,322 38 331 222 Shares redeemed............................ (877) (1,057) (336) (483) --- ---- --- ---- ------- ------- 2,528 405 1,077 709 === ==== === ==== ======= =======
The accompanying notes are an integral part of these financial statements. 80 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- MONEY MARKET FUND For a share outstanding throughout each period
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- -------- Net asset value, beginning of period..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)............. 0.05 0.03 0.01 0.01 0.02 ------- ------- ------- ------- -------- Total from investment operations....... 0.05 0.03 0.01 0.01 0.02 ------- ------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income.................... (0.05) (0.03) (0.01) (0.01) (0.02) ------- ------- ------- ------- -------- Net asset value, end of period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======== Total return(1)........................ 4.66% 2.81% 0.96% 0.86% 1.65% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................. $76,350 $72,885 $81,743 $99,949 $149,429 ======= ======= ======= ======= ======== Ratio of total expenses to average net assets................................. 0.50% 0.50% 0.53% 0.50% 0.47% ======= ======= ======= ======= ======== Ratio of net investment income (loss) to average net assets..................... 4.57% 2.74% 0.92% 0.89% 1.62% ======= ======= ======= ======= ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- LIMITED MATURITY BOND FUND For a share outstanding throughout each period
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period..... $ 10.25 $ 10.45 $ 10.57 $ 10.70 $ 10.35 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)............. 0.45 0.37 0.37 0.43 0.24 Net realized and unrealized gain (loss) on investment transactions............. 0.01 (0.15) (0.12) (0.12) 0.41 ------- ------- ------- ------- ------- Total from investment operations....... 0.46 0.22 0.25 0.31 0.65 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income.................... (0.43) (0.42) (0.37) (0.43) (0.24) Net realized gains....................... -- -- -- (0.01) (0.06) ------- ------- ------- ------- ------- Total distributions.................... (0.43) (0.42) (0.37) (0.44) (0.30) ------- ------- ------- ------- ------- Net asset value, end of period........... $ 10.28 $ 10.25 $ 10.45 $ 10.57 $ 10.70 ======= ======= ======= ======= ======= Total return(1)........................ 4.49% 2.14% 2.32% 2.90% 6.25% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................. $42,867 $60,979 $46,219 $43,545 $42,941 ======= ======= ======= ======= ======= Ratio of total expenses to average net assets................................. 0.62% 0.61% 0.62% 0.60% 0.63% ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets..................... 3.91% 3.42% 3.52% 3.62% 3.16% ======= ======= ======= ======= ======= Portfolio turnover rate.................. 78% 300% 35% 27% 224% ======= ======= ======= ======= =======
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 81 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- QUALITY BOND FUND For a share outstanding throughout each period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 10.18 $ 10.54 $ 10.51 $ 10.50 $ 10.39 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... 0.46 0.40 0.45 0.48 0.42 Net realized and unrealized gain on investment transactions............. 0.08 (0.14) 0.03 0.16 0.13 -------- -------- -------- -------- -------- Total from investment operations.... 0.54 0.26 0.48 0.64 0.55 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. (0.41) (0.45) (0.45) (0.48) (0.42) Net realized gains.................... -- (0.17) --(a) (0.15) (0.02) -------- -------- -------- -------- -------- Total distributions................. (0.41) (0.62) (0.45) (0.63) (0.44) -------- -------- -------- -------- -------- Net asset value, end of period........ $ 10.31 $ 10.18 $ 10.54 $ 10.51 $ 10.50 ======== ======== ======== ======== ======== Total return(1)..................... 5.25% 2.50% 4.59% 6.18% 5.28% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $160,670 $161,265 $172,734 $172,099 $156,206 ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 0.61% 0.62% 0.62% 0.62% 0.62% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... 4.43% 3.72% 4.07% 4.36% 4.19% ======== ======== ======== ======== ======== Portfolio turnover rate............... 139% 614% 230% 215% 499% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. (a) Distributions were less than one penny per share. -------------------------------------------------------------------------------- HIGH YIELD BOND FUND For a share outstanding throughout each period
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period..... $ 7.59 $ 7.91 $ 7.70 $ 6.78 $ 7.25 ------- ------- ------- ------- ------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income (loss)............. 0.55 0.57 0.61 0.64 0.70 Net realized and unrealized gain (loss) on investment transactions............. 0.20 (0.33) 0.21 0.92 (0.46) ------- ------- ------- ------- ------- Total from investment operations....... 0.75 0.24 0.82 1.56 0.24 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income.................... (0.46) (0.56) (0.61) (0.64) (0.71) ------- ------- ------- ------- ------- Net asset value, end of period........... $ 7.88 $ 7.59 $ 7.91 $ 7.70 $ 6.78 ======= ======= ======= ======= ======= Total return(1)........................ 9.97% 3.11% 10.71% 23.13% 3.41% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................. $88,203 $85,520 $85,957 $82,316 $63,212 ======= ======= ======= ======= ======= Ratio of total expenses to average net assets................................. 0.85% 0.86% 0.86% 0.86% 0.83% ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets..................... 6.91% 7.01% 7.35% 8.55% 9.29% ======= ======= ======= ======= ======= Portfolio turnover rate.................. 65% 64% 68% 88% 80% ======= ======= ======= ======= =======
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 82 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- FLEXIBLY MANAGED FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2006 2005 2004 2003 2002 ---------- ---------- -------- -------- -------- Net asset value, beginning of period............................. $ 25.59 $ 25.96 $ 23.64 $ 18.75 $ 20.03 ---------- ---------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)......... 0.54 0.40 0.47 0.42 0.56 Net realized and unrealized gain (loss) on investment transactions.. 3.33 1.65 3.83 5.17 (0.39) ---------- ---------- -------- -------- -------- Total from investment operations... 3.87 2.05 4.30 5.59 0.17 ---------- ---------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................ (0.44) (0.40) (0.47) (0.42) (0.56) Net realized gains................... (3.90) (2.02) (1.51) (0.28) (0.89) ---------- ---------- -------- -------- -------- Total distributions................ (4.34) (2.42) (1.98) (0.70) (1.45) ---------- ---------- -------- -------- -------- Net asset value, end of period....... $ 25.12 $ 25.59 $ 25.96 $ 23.64 $ 18.75 ========== ========== ======== ======== ======== Total return(1).................... 15.37% 7.84% 18.58% 29.92% 0.87%(a) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)......................... $1,330,977 $1,080,197 $929,480 $705,627 $526,569 ========== ========== ======== ======== ======== Ratio of net expenses to average net assets............................. 0.83% 0.84% 0.85% 0.86% 0.85% ========== ========== ======== ======== ======== Ratio of total expenses to average net assets......................... 0.84% 0.84% 0.85% 0.86% 0.85% ========== ========== ======== ======== ======== Ratio of net investment income (loss) to average net assets.............. 2.16% 1.56% 2.02% 2.11% 2.71%(a) ========== ========== ======== ======== ======== Portfolio turnover rate.............. 57% 30% 22% 25% 31% ========== ========== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. (a) For the year ended December 31, 2002, the presented total return and ratio of net investment income to average net assets are inclusive of payments made by affiliates on investment transactions. Before consideration of such payments, the total return would have been 0.77% and the ratio of net investment income to average net assets would have been 2.62%. -------------------------------------------------------------------------------- GROWTH STOCK FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- ------- ------- -------- Net asset value, beginning of period... $ 13.02 $ 12.28 $ 11.02 $ 9.81 $ 15.07 -------- -------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)........... 0.05 0.02 0.05 -- (0.03) Net realized and unrealized gain (loss) on investment transactions........... 1.64 0.73 1.26 1.21 (5.23) -------- -------- ------- ------- -------- Total from investment operations..... 1.69 0.75 1.31 1.21 (5.26) -------- -------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income.................. (0.03) (0.01) -- -- -- Net realized gains..................... -- -- (0.05) -- -- -------- -------- ------- ------- -------- Total distributions.................. (0.03) (0.01) (0.05) -- -- -------- -------- ------- ------- -------- Net asset value, end of period......... $ 14.68 $ 13.02 $ 12.28 $ 11.02 $ 9.81 ======== ======== ======= ======= ======== Total return(1)...................... 13.01% 6.14% 11.90% 12.36% (34.90%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........................... $132,371 $107,195 $95,242 $97,751 $102,418 ======== ======== ======= ======= ======== Ratio of net expenses to average net assets............................... 0.96% 0.98% 0.97% 0.97% 0.92% ======== ======== ======= ======= ======== Ratio of total expenses to average net assets............................... 0.97% 0.98% 0.97% 0.97% 0.93% ======== ======== ======= ======= ======== Ratio of net investment income (loss) to average net assets................ 0.40% 0.15% 0.47% 0.02% (0.21%) ======== ======== ======= ======= ======== Portfolio turnover rate................ 43% 44% 185% 578% 774% ======== ======== ======= ======= ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 83 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- LARGE CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 17.56 $ 18.45 $ 17.59 $ 13.97 $ 16.97 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... 0.27 0.23 0.26 0.25 0.25 Net realized and unrealized gain (loss) on investment transactions... 2.93 0.33 1.98 3.62 (2.80) -------- -------- -------- -------- -------- Total from investment operations.... 3.20 0.56 2.24 3.87 (2.55) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. (0.21) (0.21) (0.26) (0.25) (0.24) Net realized gains.................... (0.95) (1.24) (1.12) -- (0.21) -------- -------- -------- -------- -------- Total distributions................. (1.16) (1.45) (1.38) (0.25) (0.45) -------- -------- -------- -------- -------- Net asset value, end of period........ $ 19.60 $ 17.56 $ 18.45 $ 17.59 $ 13.97 ======== ======== ======== ======== ======== Total return(1)..................... 18.27% 3.00% 12.85% 27.76% (14.96%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $234,269 $215,319 $224,481 $227,906 $188,246 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets.............................. 0.87% 0.88% 0.89% 0.90% 0.88% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 0.88% 0.88% 0.89% 0.90% 0.88% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... 1.37% 1.15% 1.38% 1.62% 1.51% ======== ======== ======== ======== ======== Portfolio turnover rate............... 45% 45% 105% 40% 38% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- LARGE CAP GROWTH FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002** ------- ------- ------- ------- ------- Net asset value, beginning of period..... $ 10.79 $ 10.76 $ 10.53 $ 8.41 $ 10.00 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)............. 0.04 0.02 0.06 0.03 0.03 Net realized and unrealized gain (loss) on investment transactions............. 0.36 0.11 0.85 2.12 (1.59) ------- ------- ------- ------- ------- Total from investment operations....... 0.40 0.13 0.91 2.15 (1.56) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income.................... (0.03) (0.02) (0.06) (0.03) (0.03) Net realized gains....................... (0.11) (0.08) (0.62) -- -- ------- ------- ------- ------- ------- Total distributions.................... (0.14) (0.10) (0.68) (0.03) (0.03) ------- ------- ------- ------- ------- Net asset value, end of period........... $ 11.05 $ 10.79 $ 10.76 $ 10.53 $ 8.41 ======= ======= ======= ======= ======= Total return(1)........................ 3.70% 1.20% 8.66% 25.61% 15.60%# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................. $29,982 $27,247 $24,072 $16,099 $ 5,090 ======= ======= ======= ======= ======= Ratio of net expenses to average net assets................................. 0.86% 0.89% 0.96% 1.00% 0.98%* ======= ======= ======= ======= ======= Ratio of total expenses to average net assets................................. 0.88% 0.89% 0.96% 1.27% 2.11%* ======= ======= ======= ======= ======= Ratio of net investment income (loss) to average net assets..................... 0.35% 0.19% 0.59% 0.51% 0.70%* ======= ======= ======= ======= ======= Portfolio turnover rate.................. 38% 21% 114% 28% 35% ======= ======= ======= ======= =======
---------------------- (*) Annualized. (#) Non-annualized. (**) For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 84 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- INDEX 500 FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 8.58 $ 8.34 $ 7.67 $ 6.05 $ 7.90 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... 0.15 0.14 0.13 0.10 0.09 Net realized and unrealized gain (loss) on investment transactions... 1.17 0.24 0.67 1.62 (1.85) -------- -------- -------- -------- -------- Total from investment operations.... 1.32 0.38 0.80 1.72 (1.76) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. (0.12) (0.14) (0.13) (0.10) (0.09) Net realized gains.................... -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions................. (0.12) (0.14) (0.13) (0.10) (0.09) -------- -------- -------- -------- -------- Net asset value, end of period........ $ 9.78 $ 8.58 $ 8.34 $ 7.67 $ 6.05 ======== ======== ======== ======== ======== Total return(1)..................... 15.37% 4.48% 10.47% 28.41% (22.28%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $250,174 $234,122 $257,637 $234,020 $174,429 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets.............................. 0.35% 0.35% 0.29% 0.25% 0.25% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 0.37% 0.37% 0.37% 0.38% 0.36% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... 1.61% 1.52% 1.70% 1.47% 1.35% ======== ======== ======== ======== ======== Portfolio turnover rate............... 6% 5% 1% 1% 3% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- MID CAP GROWTH FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- -------- Net asset value, beginning of period... $ 7.93 $ 7.05 $ 6.33 $ 4.24 $ 6.29 ------- ------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)........... (0.01) (0.03) (0.04) (0.03) (0.03) Net realized and unrealized gain (loss) on investment transactions........... 0.55 0.91 0.76 2.12 (2.02) ------- ------- ------- ------- -------- Total from investment operations..... 0.54 0.88 0.72 2.09 (2.05) ------- ------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income.................. -- -- -- -- -- Net realized gains..................... -- -- -- -- -- ------- ------- ------- ------- -------- Net asset value, end of period......... $ 8.47 $ 7.93 $ 7.05 $ 6.33 $ 4.24 ======= ======= ======= ======= ======== Total return(1)...................... 6.81% 12.48% 11.37% 49.29% (32.59%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........................... $85,414 $81,174 $70,793 $65,052 $ 34,424 ======= ======= ======= ======= ======== Ratio of net expenses to average net assets............................... 0.96% 1.00% 1.00% 1.00% 0.99% ======= ======= ======= ======= ======== Ratio of total expenses to average net assets............................... 1.02% 1.02% 1.03% 1.05% 1.05% ======= ======= ======= ======= ======== Ratio of net investment income (loss) to average net assets................ (0.09%) (0.43%) (0.56%) (0.59%) (0.57%) ======= ======= ======= ======= ======== Portfolio turnover rate................ 153% 156% 169% 154% 230% ======= ======= ======= ======= ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 85 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- MID CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- ------- ------- ------- Net asset value, beginning of period... $ 12.97 $ 13.77 $ 13.05 $ 9.75 $ 10.83 -------- -------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)........... 0.11 0.09 0.05 0.04 0.06 Net realized and unrealized gain (loss) on investment transactions........... 1.36 1.63 2.88 3.55 (1.08) -------- -------- ------- ------- ------- Total from investment operations..... 1.47 1.72 2.93 3.59 (1.02) -------- -------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income.................. (0.09) (0.09) (0.05) (0.04) (0.06) Net realized gains..................... (0.76) (2.43) (2.16) (0.25) -- -------- -------- ------- ------- ------- Total distributions.................. (0.85) (2.52) (2.21) (0.29) (0.06) -------- -------- ------- ------- ------- Net asset value, end of period......... $ 13.59 $ 12.97 $ 13.77 $ 13.05 $ 9.75 ======== ======== ======= ======= ======= Total return(1)...................... 11.41% 12.33% 23.17% 36.84% (9.42%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........................... $125,362 $112,301 $98,448 $81,042 $58,330 ======== ======== ======= ======= ======= Ratio of net expenses to average net assets............................... 0.81% 0.85% 0.86% 0.86% 0.85% ======== ======== ======= ======= ======= Ratio of total expenses to average net assets............................... 0.84% 0.85% 0.86% 0.86% 0.85% ======== ======== ======= ======= ======= Ratio of net investment income (loss) to average net assets................ 0.82% 0.67% 0.40% 0.39% 0.55% ======== ======== ======= ======= ======= Portfolio turnover rate................ 62% 100% 68% 64% 91% ======== ======== ======= ======= =======
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- STRATEGIC VALUE FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, -------------------------------------------------------- 2006 2005 2004 2003 2002** ------- ------- ------- ------- -------- Net asset value, beginning of period... $ 13.15 $ 12.91 $ 10.57 $ 8.54 $ 10.00 ------- ------- ------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)........... 0.08 0.07 0.05 0.07 0.03 Net realized and unrealized gain (loss) on investment transactions........... 1.48 1.00 2.51 2.07 (1.46) ------- ------- ------- ------- -------- Total from investment operations..... 1.56 1.07 2.56 2.14 (1.43) ------- ------- ------- ------- -------- LESS DISTRIBUTIONS: Net investment income.................. (0.06) (0.06) (0.05) (0.07) (0.03) Net realized gains..................... (1.42) (0.77) (0.17) (0.04) -- ------- ------- ------- ------- -------- Total distributions.................. (1.48) (0.83) (0.22) (0.11) (0.03) ------- ------- ------- ------- -------- Net asset value, end of period......... $ 13.23 $ 13.15 $ 12.91 $ 10.57 $ 8.54 ======= ======= ======= ======= ======== Total return(1)...................... 12.23% 8.20% 24.25% 25.13% (14.25%)# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)........................... $43,616 $45,096 $30,485 $16,025 $ 7,417 ======= ======= ======= ======= ======== Ratio of net expenses to average net assets............................... 1.06% 1.07% 1.14% 1.25% 1.24%* ======= ======= ======= ======= ======== Ratio of total expenses to average net assets............................... 1.07% 1.07% 1.14% 1.26% 2.24%* ======= ======= ======= ======= ======== Ratio of net investment income (loss) to average net assets................ 0.56% 0.58% 0.47% 0.54% 0.82%* ======= ======= ======= ======= ======== Portfolio turnover rate................ 28% 25% 18% 17% 21% ======= ======= ======= ======= ========
---------------------- (*) Annualized. (#) Non-annualized. (**) For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 86 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- SMALL CAP GROWTH FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 20.34 $ 19.14 $ 17.48 $ 11.85 $ 20.46 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... (0.06) (0.13) (0.16) (0.13) (0.14) Net realized and unrealized gain (loss) on investment transactions... (0.19) 1.33 1.82 5.76 (8.47) -------- -------- -------- -------- -------- Total from investment operations.... (0.25) 1.20 1.66 5.63 (8.61) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. -- -- -- -- -- Net realized gains.................... -- -- -- -- -- Return of capital..................... -- -- -- -- -- -------- -------- -------- -------- -------- Total distributions................. -- -- -- -- -- -------- -------- -------- -------- -------- Net asset value, end of period........ $ 20.09 $ 20.34 $ 19.14 $ 17.48 $ 11.85 ======== ======== ======== ======== ======== Total return(1)..................... (1.23%) 6.27% 9.50% 47.51% (42.08%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $106,380 $111,029 $113,579 $111,360 $ 74,681 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets.............................. 1.02% 1.02% 1.06% 1.09% 1.05% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 1.02% 1.02% 1.06% 1.09% 1.06% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... (0.27%) (0.67%) (0.87%) (0.94%) (0.87%) ======== ======== ======== ======== ======== Portfolio turnover rate............... 126% 137% 195% 191% 164% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- SMALL CAP VALUE FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 16.37 $ 16.95 $ 18.20 $ 11.00 $ 14.38 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... 0.05 0.07 0.01 (0.08) (0.05) Net realized and unrealized gain (loss) on investment transactions... 2.77 0.56 2.55 8.29 (2.37) -------- -------- -------- -------- -------- Total from investment operations.... 2.82 0.63 2.56 8.21 (2.42) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. (0.05) (0.07) (0.01) -- -- Net realized gains.................... (1.44) (1.14) (3.80) (1.01) (0.96) -------- -------- -------- -------- -------- Total distributions................. (1.49) (1.21) (3.81) (1.01) (0.96) -------- -------- -------- -------- -------- Net asset value, end of period........ $ 17.70 $ 16.37 $ 16.95 $ 18.20 $ 11.00 ======== ======== ======== ======== ======== Total return(1)..................... 17.43% 3.67% 14.88% 74.85% (16.76%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $182,142 $156,605 $165,714 $148,700 $ 77,491 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets.............................. 1.14% 1.14% 1.15% 1.15% 1.15% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 1.14% 1.14% 1.17% 1.19% 1.16% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... 0.28% 0.40% 0.08% (0.61%) (0.38%) ======== ======== ======== ======== ======== Portfolio turnover rate............... 59% 46% 142% 61% 54% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 87 PENN SERIES FUNDS, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- INTERNATIONAL EQUITY FUND For a share outstanding throughout the period
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period.. $ 20.91 $ 17.98 $ 13.91 $ 10.53 $ 11.71 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).......... 0.28 0.15 0.24 0.19 0.15 Net realized and unrealized gain (loss) on investments and foreign currency related transactions....... 5.98 2.86 3.92 3.27 (1.31) -------- -------- -------- -------- -------- Total from investment operations.... 6.26 3.01 4.16 3.46 (1.16) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: Net investment income................. (0.38) (0.08) (0.09) (0.08) (0.02) Net realized gains.................... (2.52) -- -- -- -- -------- -------- -------- -------- -------- Total distributions................. (2.90) (0.08) (0.09) (0.08) (0.02) -------- -------- -------- -------- -------- Net asset value, end of period........ $ 24.27 $ 20.91 $ 17.98 $ 13.91 $ 10.53 ======== ======== ======== ======== ======== Total returns(1).................... 30.34% 16.77% 30.01% 32.85% (9.94%) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands).......................... $294,499 $200,947 $165,509 $133,603 $104,645 ======== ======== ======== ======== ======== Ratio of net expenses to average net assets.............................. 1.19% 1.21% 1.22% 1.19% 1.23% ======== ======== ======== ======== ======== Ratio of total expenses to average net assets.............................. 1.20% 1.21% 1.22% 1.19% 1.23% ======== ======== ======== ======== ======== Ratio of net investment income (loss) to average net assets............... 1.10% 1.47% 1.61% 1.63% 1.35% ======== ======== ======== ======== ======== Portfolio turnover rate............... 52% 40% 40% 59% 106% ======== ======== ======== ======== ========
---------------------- (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. -------------------------------------------------------------------------------- REIT FUND For a share outstanding throughout the period
YEAR OR PERIOD ENDED DECEMBER 31, ------------------------------------------------------- 2006 2005 2004 2003 2002** ------- ------- ------- ------- ------- Net asset value, beginning of period.... $ 14.92 $ 14.33 $ 11.53 $ 9.00 $ 10.00 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)............ 0.24 0.20 0.37 0.36 0.25 Net realized and unrealized gain (loss) on investment transactions............ 4.57 1.66 3.69 2.83 (1.01) ------- ------- ------- ------- ------- Total from investment operations...... 4.81 1.86 4.06 3.19 (0.76) ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: Net investment income................... (0.19) (0.30) (0.41) (0.37) (0.24) Net realized gains...................... (1.44) (0.97) (0.85) (0.29) -- ------- ------- ------- ------- ------- Total distributions................... (1.63) (1.27) (1.26) (0.66) (0.24) ------- ------- ------- ------- ------- Net asset value, end of period.......... $ 18.10 $ 14.92 $ 14.33 $ 11.53 $ 9.00 ======= ======= ======= ======= ======= Total return(1)....................... 32.41% 12.97% 35.53% 35.49% (7.55%)# RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands)............................ $71,790 $43,122 $31,247 $16,881 $ 5,507 ======= ======= ======= ======= ======= Ratio of net expenses to average net assets................................ 1.00% 1.02% 1.10% 1.25% 1.22%* ======= ======= ======= ======= ======= Ratio of total expenses to average net assets................................ 1.00% 1.02% 1.10% 1.34% 2.25%* ======= ======= ======= ======= ======= Ratio of net investment income to average net assets.................... 1.56% 1.41% 3.06% 4.87% 5.31%* ======= ======= ======= ======= ======= Portfolio turnover rate................. 53% 54% 80% 69% 45% ======= ======= ======= ======= =======
---------------------- (*) Annualized. (#) Non-annualized. (**) For the period from May 1, 2002 (commencement of operations) through December 31, 2002. (1) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total returns do not reflect expenses associated with variable contracts such as administrative fees, account charges and surrender charges, which if reflected would reduce the total returns for all periods presented. The accompanying notes are an integral part of these financial statements. 88 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- 1 -- ORGANIZATION 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 open only to purchasers of The Penn Mutual Life Insurance Company ("Penn Mutual") and The Penn Insurance and Annuity Company insurance contracts and certain of Penn Mutual's employee benefit plans. Penn Series is presently offering shares in its Money Market, Limited Maturity Bond, Quality Bond, High Yield Bond, Flexibly Managed, Growth Stock, Large Cap Value, Large Cap Growth, Index 500, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap Growth, Small Cap Value, International Equity, and REIT Funds ("the Funds"). It is authorized under its Articles of Incorporation to issue a separate class of shares in four additional funds that would have their own investment objectives and policies. 2 -- SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by Penn Series in the preparation of its financial statements. The preparation of financial statements in accordance with the accounting principles generally accepted in the United States 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 and those differences could be material. SECURITY VALUATION: MONEY MARKET FUND -- Investments in securities are valued using the amortized cost method as permitted by Rule 2a-7 under the Investment Company Act of 1940, which involves initially valuing investments at cost and thereafter assuming a constant amortization to maturity of any premium or discount. This method approximates market value. LIMITED MATURITY BOND, QUALITY BOND, HIGH YIELD BOND, FLEXIBLY MANAGED, GROWTH STOCK, LARGE CAP VALUE, LARGE CAP GROWTH, INDEX 500, MID CAP GROWTH, MID CAP VALUE, STRATEGIC VALUE, SMALL CAP GROWTH, SMALL CAP VALUE, INTERNATIONAL EQUITY, AND REIT FUNDS -- Portfolio securities listed on a securities exchange or an automated quotation system for which quotations are readily available, including securities traded over the counter, are valued at the last quoted sale price on the principal exchange or market on which they are traded on the valuation date or, if there is no such reported sale on the valuation date, at the most recent quoted bid price. Debt and fixed income securities may be valued by recognized independent third-party pricing agents, employing methodologies that utilize actual market transactions, broker-dealer supplied valuations, or other electronic data processing techniques. To the extent that bid prices are provided by the pricing service, the Funds will use the bid price. Debt obligations with remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. The prices for foreign securities are reported in local currency and converted to U.S. dollars using currency exchange rates. Securities for which market quotations are not readily available are valued by methods deemed by the Board of Directors to represent fair value. Reasons for which securities may be valued in this manner include, but are not limited to, trading for a security has been halted or suspended, a security has been de-listed from a national exchange, or trading on a security's primary market is temporarily closed at a time when under normal conditions it would be open. Options and futures contracts are valued at the last sale price on the market where such options or futures contracts are principally traded. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These securities are valued at a fair value utilizing an independent third-party valuation service in accordance with procedures adopted by the Fund's Board of Directors. The valuations obtained may not necessarily be the price that would be obtained upon sale of these securities. 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. 89 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- 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, INVESTMENT INCOME AND EXPENSES: 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. Discounts and premiums are accreted and amortized using the effective interest method. The cost of investment securities sold is determined by using the specific identification method for both financial reporting and income tax purposes. Expenses directly attributable to a Fund are directly charged. Common expenses of the Funds are allocated using methods approved by the Board of Directors, generally based on average net assets. DIVIDENDS TO SHAREHOLDERS: Dividends of investment income and realized capital gains of the Limited Maturity Bond, Quality Bond, High Yield Bond, Flexibly Managed, Growth Stock, Large Cap Value, Large Cap Growth, Index 500, Mid Cap Growth, Mid Cap Value, Strategic Value, Small Cap Growth, Small Cap Value, International Equity, and REIT 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. Upon notification from issuers, some of the dividend income received from a real estate investment trust (REIT) may be redesignated as a reduction of the cost of the related investment and/or realized gain. 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 accounting principles generally accepted in the United States. 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 may involve short-term capital gains, which are included as ordinary income for tax purposes. NEW ACCOUNTING STANDARDS: In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing the Funds' tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the "more-likely-than-not" threshold would be recorded as a tax expense in the current year and recognized as a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (January 1, 2007 for calendar year companies), with early adoption permitted if no interim financial statements have been issued. In December 2006, the SEC issued a letter allowing for an implementation delay for mutual funds until the last NAV calculation in the first required reporting period for fiscal years beginning after December 15, 2006. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. At this time, management is evaluating the implication of FIN 48 and its impact on the financial statements has not yet been determined. Penn Series will adopt FIN 48 effective July 1, 2007. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (FAS) No. 157, "Fair Value Measurements." FAS 57 is effective for fiscal years beginning after November 15, 2007. It defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value 90 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- measurements. Management is currently evaluating the implications of FAS 157. At this time, its impact on the Penn Series financial statements has not been determined. 3 -- INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES INVESTMENT ADVISORY SERVICES Independence Capital Management, Inc. ("ICMI"), a wholly owned subsidiary of The Penn Mutual Life Insurance Company, serves as investment adviser to each of the Funds. To provide investment management services to the Funds, ICMI has entered into sub-advisory agreements as follows:
FUND SUB-ADVISER ---- ----------- High Yield Bond Fund T. Rowe Price Associates, Inc. Flexibly Managed Fund T. Rowe Price Associates, Inc. Growth Stock Fund T. Rowe Price Associates, Inc. Large Cap Value Fund Lord, Abbett & Co. LLC Large Cap Growth Fund ABN AMRO Asset Management, Inc. Index 500 Fund Wells Capital Management, Inc. Mid Cap Growth Fund Turner Investment Partners, Inc. Mid Cap Value Fund Neuberger Berman Management, Inc. Strategic Value Fund Lord, Abbett & Co. LLC Small Cap Growth Fund Bjurman, Barry & Associates Small Cap Value Fund Goldman Sachs Asset Management, LP International Equity Fund Vontobel Asset Management, Inc. REIT Fund Heitman Real Estate Securities LLC
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: 0.20% for first $100 million and 0.15% thereafter; Limited Maturity Bond Fund: 0.30%; Quality Bond Fund: 0.35% for first $100 million and 0.30% thereafter; High Yield Bond Fund: 0.50%; Flexibly Managed Fund: 0.60%; Growth Stock Fund: 0.65% for the first $100 million and 0.60% thereafter; Large Cap Value Fund: 0.60%; Large Cap Growth Fund: 0.55%; Index 500 Fund: 0.07%; Mid Cap Growth Fund: 0.70%; Mid Cap Value Fund: 0.55% for the first $250 million, 0.525% for next $250 million, 0.50% for next $250 million, 0.475% for next $250 million, 0.45% for next $500 million and 0.425% thereafter; Strategic Value Fund: 0.72%; Small Cap Growth Fund: 0.80% for the first $25 million, 0.75% for next $25 million and 0.70% thereafter; Small Cap Value Fund: 0.85%; International Equity Fund: 0.85%; and REIT Fund: 0.70%. 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, 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 Fund's average daily net assets. ACCOUNTING SERVICES Under an accounting services agreement, PFPC Worldwide Inc. ("PFPC") serves as accounting agent for Penn Series. Each of the Funds, except International Equity Fund, pays PFPC, on a monthly basis, an annual fee based on the average daily net assets of each Fund equal to 0.070% for the first $100 million, 0.050% for the next $200 million, 0.030% for the next $300 million and 0.020% thereafter. The minimum annual fee each Fund must pay is $27,500. International Equity Fund pays PFPC 0.080% for the first $100 million, 0.060% for the next $300 million, 0.040% for the next $200 million, and 0.030% thereafter. 91 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- Prior to October 24, 2006, each of the Funds, except International Equity Fund, paid PFPC, on a monthly basis, an annual fee based on the average daily net assets of each Fund equal to 0.075% for the first $100 million, 0.050% for the next $200 million, 0.030% for the next $300 million and 0.020% thereafter. International Equity Fund paid PFPC 0.085% for the first $100 million, 0.060% for the next $300 million, 0.040% for the next $200 million, and 0.030% thereafter. TRANSFER AGENT SERVICES Under a transfer agency agreement, PFPC serves as transfer agent for Penn Series. CUSTODIAL SERVICES Under a custodial agreement, PFPC Trust serves as custodian for Penn Series. In addition to transaction charges and out-of pocket expenses, each of the Funds pays PFPC Trust, on a monthly basis, an annual custody fee of 0.01%. JPMorgan Chase serves as foreign sub-custodian for Penn Series. There is a separate custody fee schedule for foreign securities. EXPENSES AND LIMITATIONS THEREON Each Fund bears all expenses of its operations other than those incurred by its investment adviser and sub-advisers under their respective investment advisory agreements and those incurred by Penn Mutual under its administrative and corporate services agreement. ICMI 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:
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 Stock 1.00% Large Cap Growth 1.00% Strategic Value 1.25% Large Cap Value 1.00% Index 500 0.40% Mid Cap Growth 1.00% Mid Cap Value 1.00% Small Cap Growth 1.15% Small Cap Value 1.15% International Equity 1.50% REIT 1.25%
If, at the end of each month, there is no liability of ICMI and Penn Mutual to pay the Funds such excess amount, and if payments of the advisory fee or administrative and corporate services fee at the end of prior months during the fiscal year have been reduced in excess of that required to maintain expenses within the expense limitation, such excess reduction shall be recaptured by ICMI and Penn Mutual and shall be payable by the Funds to ICMI and Penn Mutual along with the advisory fee or administrative and corporate services fee for that month. Penn Mutual currently intends to voluntarily waive its administrative and corporate services fees and reimburse expenses so that the Index 500 Fund's total expenses do not exceed 0.35%. Penn Mutual may change or eliminate all or part of this voluntary waiver at any time. As of December 31, 2006, the following funds had administrative and corporate services fees that are subject to recapture by Penn Mutual through the periods stated below:
THROUGH VARIOUS MONTHS ENDING MAY 31, 2007 DECEMBER 31, 2009 ------------ --------------------- Index 500 Fund $1,810 $37,639 Mid Cap Growth Fund 3,673 13,819
All waivers of fees or reimbursements of expenses with respect to the Flexibly Managed and High Yield Bond Funds will be shared equally by the sub- advisers and Penn Mutual. For the Money Market, Quality Bond, Growth Stock, 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 92 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- 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 limitation; 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, Large Cap Growth, Index 500, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Strategic Value and REIT Funds, Penn Mutual will waive fees or reimburse expenses for the entirety of any excess above the expense limitations. Effective May 18, 2006, Penn Mutual may recover any administrative and corporate services fees that were waived in a preceding three year period as long as it would not cause the Fund to exceed its expense limitation. This three year "recapture period" is applied prospectively, and not retroactively, from the effective date. Total fees of $82,000 were paid to Directors of Penn Series, who are not interested persons of Penn Series, for the year ended December 31, 2006. 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 -- RELATED PARTY TRANSACTIONS Certain benefit plans of Penn Mutual own annuity contracts that are invested in the Penn Series Funds. The benefit plan assets that are invested in the Penn Series Funds at December 31, 2006 are as follows (amounts in thousands): Money Market Fund $ 635 Quality Bond Fund 3,166 High Yield Bond Fund 1,663 Flexibly Managed Fund 37,473 Growth Stock Fund 25,505 Large Cap Value Fund 6,381 Index 500 Fund 18,031 Mid Cap Growth Fund 5,071 Strategic Value Fund 5,399 Small Cap Growth Fund 5,923 Small Cap Value Fund 7,748 International Equity Fund 33,613 REIT Fund 4,732
Certain Funds effect trades for security purchase and sale transactions through brokers that are affiliates of the adviser or the sub-advisers. Commissions paid on those trades from the Funds for the year ended December 31, 2006 were as follows: Flexibly Managed Fund $ 8,289 Growth Stock Fund 32 Large Cap Value Fund 24 Index 500 Fund 6 Mid Cap Value Fund 17,291 Small Cap Value Fund 1,296
93 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- 5 -- PURCHASES AND SALES OF SECURITIES During the year ended December 31, 2006, the Funds made the following purchases and sales of portfolio securities, other than short-term securities (amounts in thousands):
U.S. GOVERNMENT OTHER INVESTMENT SECURITIES SECURITIES -------------------- -------------------- PURCHASES SALES PURCHASES SALES --------- -------- --------- -------- Limited Maturity Bond $ 16,005 $ 32,413 $ 15,033 $ 20,334 Quality Bond Fund 111,808 105,905 104,025 89,176 High Yield Bond Fund -- -- 54,685 55,513 Flexibly Managed Fund -- -- 585,564 641,232 Growth Stock Fund -- -- 61,927 49,823 Large Cap Value Fund -- -- 98,801 113,470 Large Cap Growth Fund -- -- 12,512 10,423 Index 500 Fund -- -- 13,716 26,024 Mid Cap Growth Fund -- -- 129,443 129,418 Mid Cap Value Fund -- -- 74,965 72,226 Strategic Value Fund -- -- 11,813 17,856 Small Cap Growth Fund -- -- 142,317 147,789 Small Cap Value Fund -- -- 97,360 97,860 International Equity Fund -- -- 138,555 125,407 REIT Fund -- -- 44,331 29,644
6 -- FEES PAID INDIRECTLY Certain subadvisers have directed portfolio trades to a broker designated by Penn Series, consistent with best execution. A portion of the commissions directed to that broker are refunded to Penn Series to pay certain expenses of the Funds. The commissions used to pay expenses of the Funds for the year ended December 31, 2006 were as follows (amounts in thousands): Flexibly Managed Fund $59 Growth Stock Fund 4 Large Cap Value Fund 16 Large Cap Growth Fund 6 Mid Cap Growth Fund 32 Mid Cap Value Fund 45 Strategic Value Fund 4 International Equity Fund 41
7 -- FEDERAL INCOME TAXES The Funds have qualified and intend to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code for federal income tax purposes, and to distribute substantially all of their taxable income and net capital gains to shareholders. Accordingly, no provision has been made for federal income taxes. RECLASSIFICATION OF CAPITAL ACCOUNTS: Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States of America. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in capital or accumulated net realized gain, as appropriate, in the period that the differences arise. Accordingly, the following permanent differences as of December 31, 2006, primarily attributable to the disallowance of net operating losses, Passive Foreign Investment 94 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- Companies, redesignation of dividends and the reclassification of net foreign currency exchange gains or losses, were reclassed between the following accounts:
INCREASE (DECREASE) INCREASE UNDISTRIBUTED (DECREASE) INCREASE NET INVESTMENT ACCUMULATED NET (DECREASE) INCOME REALIZED GAINS PAID-IN CAPITAL -------------- --------------- --------------- Limited Maturity Bond $ 219,225 $(219,225) -- Quality Bond Fund 423,312 (423,312) -- High Yield Bond Fund 4,358 (4,358) -- Flexibly Managed Fund (26,196) 26,196 -- Growth Stock Fund (35,678) (548,256) $ 583,934 Mid Cap Growth Fund 80,926 -- (80,926) Small Cap Growth Fund 310,440 -- (310,440) Small Cap Value Fund 39,827 (39,827) -- International Equity Fund (638,677) 638,677 --
These reclassifications had no effect on net assets or net asset value per share. TAX CHARACTER OF DISTRIBUTIONS: The tax character of dividends and distributions declared and paid during the years ended December 31, 2006 and 2005 were as follows (amounts in thousands):
NET INVESTMENT INCOME AND LONG-TERM RETURN OF SHORT-TERM CAPITAL GAINS CAPITAL GAINS CAPITAL TOTAL ------------------------- ------------- --------- -------- Money Market Fund 2006 $ 3,475 -- -- $ 3,475 2005 2,092 -- -- 2,092 Limited Maturity Bond 2006 1,697 -- -- 1,697 2005 2,306 -- $ 6 2,312 Quality Bond Fund 2006 6,033 -- -- 6,033 2005 8,594 $ 541 8 9,143 High Yield Bond Fund 2006 4,917 -- -- 4,917 2005 5,977 -- -- 5,977 Flexibly Managed Fund 2006 22,655 177,675 -- 200,330 2005 21,642 71,601 -- 93,243 Growth Stock Fund 2006 300 -- -- 300 2005 115 -- -- 115 Large Cap Value Fund 2006 3,285 10,005 -- 13,290 2005 8,488 8,163 -- 16,651 Large Cap Growth Fund 2006 95 274 -- 369 2005 160 88 -- 248 Index 500 Fund 2006 3,021 -- -- 3,021 2005 3,629 -- -- 3,629
95 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 --------------------------------------------------------------------------------
NET INVESTMENT INCOME AND LONG-TERM RETURN OF SHORT-TERM CAPITAL GAINS CAPITAL GAINS CAPITAL TOTAL ------------------------- ------------- --------- -------- Mid Cap Growth Fund 2006 -- -- -- -- 2005 -- -- -- -- Mid Cap Value Fund 2006 $ 2,481 $ 5,051 -- $ 7,532 2005 3,148 15,410 -- 18,558 Strategic Value Fund 2006 414 4,086 -- 4,500 2005 439 2,215 -- 2,654 Small Cap Growth Fund 2006 -- -- -- -- 2005 -- -- -- -- Small Cap Value Fund 2006 3,653 10,726 -- 14,379 2005 8,926 1,909 -- 10,835 International Equity Fund 2006 5,234 26,521 -- 31,755 2005 726 -- -- 726 REIT Fund 2006 1,264 4,682 -- 5,946 2005 1,258 2,097 -- 3,355
Short-term gain distributions to shareholders are treated as ordinary income for tax purposes. COMPONENTS OF DISTRIBUTABLE EARNINGS: As of December 31, 2006, the components of distributable earnings/(accumulated losses) on a tax basis were as follows (amounts in thousands):
TOTAL UNDISTRIBUTED UNDISTRIBUTED CAPITAL NET DISTRIBUTABLE NET INVESTMENT LONG-TERM LOSS EARNINGS INCOME CAPITAL GAINS CARRYFORWARD (ACCUMULATED LOSSES) -------------- ------------- ------------ -------------------- Money Market Fund $ 14 -- -- $ 14 Limited Maturity Bond Fund 303 -- $ (1,254) (951) Quality Bond Fund 1,258 -- (2,429) (1,171) High Yield Bond Fund 988 -- (10,018) (9,030) Flexibly Managed Fund 10,883 $12,743 -- 23,626 Growth Stock Fund 157 -- (132,621) (132,464) Large Cap Value Fund 908 2,884 -- 3,792 Large Cap Growth Fund 40 119 -- 159 Index 500 Fund 814 -- (18,670) (17,856) Mid Cap Growth Fund -- -- (11,302) (11,302) Mid Cap Value Fund 577 2,473 -- 3,050 Strategic Value Fund 69 619 -- 688 Small Cap Growth Fund -- -- (60,821) (60,821) Small Cap Value Fund 1,389 4,739 -- 6,128 International Equity Fund 6,267 5,152 -- 11,419 REIT Fund 737 952 -- 1,689
96 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- The difference between book basis and tax basis appreciation is primarily due to wash sales, paydown reclassifications, real estate investment trust adjustments, and certain net operating losses. CAPITAL LOSS CARRYFORWARDS: For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. At December 31, 2006, the following Funds had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates (amounts in thousands):
EXPIRES ON DECEMBER 31, ----------------------------------------------------------------- 2008 2009 2010 2011 2012 2013 2014 TOTAL ------ ------- ------- ------- ---- ------ ------ -------- Limited Maturity Bond -- -- -- $ 178 $16 $ 415 $ 645 $ 1,254 Quality Bond Fund -- -- -- -- -- -- 2,429 2,429 High Yield Bond Fund $1,435 $ 5,143 $ 3,195 245 -- -- -- 10,018 Growth Stock Fund -- 74,818 46,866 10,937 -- -- -- 132,621 Index 500 Fund -- 350 11,374 -- -- 5,030 1,916 18,670 Mid Cap Growth Fund -- -- 11,302 -- -- -- -- 11,302 Small Cap Growth Fund -- 25,204 35,617 -- -- -- -- 60,821
During the year ended December 31, 2006, the following Funds utilized capital loss carryforwards to offset realized capital gains for federal income tax purposes in the following approximate amounts:
EXPIRES ON DECEMBER 31, -------------------------------------------------------- 2008 2009 2010 2011 2012 2013 TOTAL ---- ------ ---- ---- ---- ---- ------ High Yield Bond Fund $203 -- -- -- -- -- $ 203 Growth Stock Fund -- $5,457 -- -- -- -- 5,457 Mid Cap Growth Fund -- 7,055 $817 -- -- -- 7,872 Small Cap Growth Fund -- 3,988 -- -- -- -- 3,988
POST-OCTOBER LOSSES: The following Funds elected to treat post-October losses incurred in the period November 1, 2006 through December 31, 2006 as having occurred on January 1, 2007 (amounts in thousands):
CURRENCY CAPITAL -------- ------- Money Market Fund -- $ 11 Limited Maturity Bond Fund -- 11 High Yield Bond Fund -- 217 Flexibly Managed Fund $ 35 -- Growth Stock Fund 9 -- Index 500 Fund -- 1,785 International Equity Fund 545 --
TAX COST OF SECURITIES: At December 31, 2006, the total cost of securities and net realized gains or losses on securities sold for federal income tax purposes were different from amounts reported for financial reporting purposes. The federal tax cost, 97 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- aggregate gross unrealized appreciation and depreciation of securities held by each Fund at December 31, 2006 were as follows:
NET UNREALIZED FEDERAL UNREALIZED UNREALIZED APPRECIATION/ TAX COST APPRECIATION DEPRECIATION (DEPRECIATION) -------------- ------------ ------------ -------------- Money Market Fund $ 78,231,224 -- -- -- Limited Maturity Bond 47,945,391 $ 453,399 $ 555,037 $ (101,638) Quality Bond Fund 194,374,129 1,081,338 540,323 541,015 High Yield Bond Fund 84,553,295 3,017,960 982,076 2,035,884 Flexibly Managed Fund 1,384,324,985 189,205,148 7,875,613 181,329,535 Growth Stock Fund 140,063,793 22,679,173 1,549,883 21,129,290 Large Cap Value Fund 261,519,255 39,848,470 1,488,206 38,360,264 Large Cap Growth Fund 34,862,976 3,318,182 603,199 2,714,983 Index 500 Fund 277,742,033 61,847,311 38,872,158 22,975,153 Mid Cap Growth Fund 100,116,777 12,918,308 1,177,837 11,740,471 Mid Cap Value Fund 146,707,549 19,829,129 3,950,813 15,878,316 Strategic Value Fund 46,675,556 7,411,079 505,156 6,905,923 Small Cap Growth Fund 100,586,837 17,855,504 2,333,592 15,521,912 Small Cap Value Fund 171,244,425 29,035,811 4,618,062 24,417,749 International Equity Fund 230,127,394 82,047,561 1,229,437 80,818,124 REIT Fund 77,893,611 15,977,398 280,389 15,697,009
8 -- COMPONENTS OF NET ASSETS At December 31, 2006, net assets consisted of the following (amounts in thousands):
MONEY LIMITED QUALITY HIGH YIELD MARKET MATURITY BOND BOND BOND FUND FUND FUND FUND ------- ------------- -------- ---------- Paid-in capital $76,347 $43,931 $161,300 $ 95,413 Undistributed net investment income (loss) -- 303 1,258 988 Accumulated net realized gain (loss) on investment transactions and foreign exchange 3 (1,265) (2,772) (10,239) Net unrealized appreciation (depreciation) in value of investments, futures contracts and foreign currency related items -- (102) 884 2,041 ------- ------- -------- -------- Total Net Assets $76,350 $42,867 $160,670 $ 88,203 ======= ======= ======== ========
FLEXIBLY GROWTH LARGE CAP LARGE CAP MANAGED STOCK VALUE GROWTH FUND FUND FUND FUND ---------- --------- --------- --------- Paid-in capital $1,126,057 $ 243,715 $192,116 $27,108 Undistributed net investment income (loss) 5,084 148 691 40 Accumulated net realized gain (loss) on investment transactions and foreign exchange 18,214 (132,781) 2,486 93 Net unrealized appreciation (depreciation) in value of investments, futures contracts and foreign currency related items 181,622 21,289 38,976 2,741 ---------- --------- -------- ------- Total Net Assets $1,330,977 $ 132,371 $234,269 $29,982 ========== ========= ======== =======
98 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 --------------------------------------------------------------------------------
INDEX MID CAP MID CAP STRATEGIC 500 GROWTH VALUE VALUE FUND FUND FUND FUND -------- -------- -------- --------- Paid-in capital $246,840 $ 84,975 $106,433 $36,022 Undistributed net investment income (loss) 814 -- 228 68 Accumulated net realized gain (loss) on investment transactions and foreign exchange (22,669) (11,373) 2,681 477 Net unrealized appreciation (depreciation) in value of investments, futures contracts and foreign currency related items 25,189 11,812 16,020 7,049 -------- -------- -------- ------- Total Net Assets $250,174 $ 85,414 $125,362 $43,616 ======== ======== ======== =======
SMALL CAP SMALL CAP INTERNATIONAL GROWTH VALUE EQUITY REIT FUND FUND FUND FUND --------- --------- ------------- ------- Paid-in capital $151,678 $151,598 $202,804 $54,403 Undistributed net investment income (loss) -- -- (2,094) 188 Accumulated net realized gain (loss) on investment transactions and foreign exchange (60,826) 5,649 9,507 1,508 Net unrealized appreciation (depreciation) in value of investments, futures contracts and foreign currency related items 15,528 24,895 84,282 15,691 -------- -------- -------- ------- Total Net Assets $106,380 $182,142 $294,499 $71,790 ======== ======== ======== =======
9 -- DERIVATIVE FINANCIAL INSTRUMENTS The Funds may trade derivative financial instruments in the normal course of investing activities and to assist in managing exposure to market risks such as interest rates and foreign currency exchange rates. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts. The notional or contractual amounts of these instruments represent the investment the Funds have in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. 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 Index 500 Fund has entered into futures contracts during the year ended December 31, 2006. Open futures contracts held by the Index 500 Fund at December 31, 2006 were as follows:
UNREALIZED APPRECIATION FUTURES EXPIRATION UNIT CLOSING (DEPRECIATION) TYPE CONTRACT DATE (AT 250 PER UNIT) PRICE (IN THOUSANDS) -------- ------------- ---------- ----------------- ------- -------------- Buy/Long S&P 500 Index 3/16/07 9 $1,428 $9
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. When the Fund purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Fund 99 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Fund realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is recorded as an adjustment to the proceeds from the sale or the cost basis of the purchase. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or loss on purchased options is included in net realized gain or loss on investment transactions. Gain or loss on written options is presented separately as net realized gain or loss on written options transactions. The Fund, as a writer of an option, may have no control over whether the underlying securities or financial instruments may be sold (called) or purchased (put). As a result, the Fund bears the market risk of an unfavorable change in the price of the security or financial instrument underlying the written option. The Fund, as purchaser of an option, bears the risk of the potential inability of the counterparties to meet the terms of their contracts. There were no option contracts open as of December 31, 2006. 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 that are 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 International Equity Fund has entered into forward foreign currency contracts during the year ended December 31, 2006. Open forward foreign currency contracts held by the International Equity Fund at December 31, 2006 were as follows:
UNREALIZED FOREIGN U.S. U.S. FOREIGN CURRENCY CONTRACT CONTRACT EXCHANGE SETTLEMENT CONTRACT FORWARD AMOUNT VALUE GAIN/(LOSS) CURRENCY DATE (000'S) RATE (000'S) (000'S) (000'S) ------------------ ---------- ---------- --------- -------- -------- ----------- Sell Australian Dollar 6/21/07 $ $12,650 1.27353 $$9,846 $$9,933 $$(87) Buy European Currency 2/28/07 6,710 0.75538 8,597 8,883 286 Sell European Currency 2/28/07 6,710 0.75538 8,645 8,883 (238) Buy Japanese Yen 2/28/07 403,000 118.04335 3,486 3,414 (72) Sell Japanese Yen 2/28/07 403,000 118.04335 3,521 3,414 107 Buy Mexican Peso 6/01/07 66,232 10.88268 6,116 6,086 (30) Sell Mexican Peso 6/01/07 40,257 10.88321 3,480 3,699 (219) Sell Mexican Peso 6/01/07 25,975 10.88186 2,235 2,387 (152) Buy Korean Won 6/11/07 2,700,000 926.56143 2,917 2,914 (3) Buy Korean Won 6/11/07 2,513,000 926.62242 2,712 2,712 -- Buy Korean Won 6/11/07 2,700,000 926.56143 2,921 2,914 (7) Sell Korean Won 6/11/07 5,450,000 926.55559 5,793 5,882 (89) Sell Korean Won 6/11/07 2,463,000 926.63657 2,598 2,658 (60)
100 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 --------------------------------------------------------------------------------
UNREALIZED FOREIGN U.S. U.S. FOREIGN CURRENCY CONTRACT CONTRACT EXCHANGE SETTLEMENT CONTRACT FORWARD AMOUNT VALUE GAIN/(LOSS) CURRENCY DATE (000'S) RATE (000'S) (000'S) (000'S) ------------------ ---------- ---------- --------- -------- -------- ----------- Buy Swiss Franc 2/28/07 $ 14,695 1.21186 $11,913 $12,126 $ 213 Sell Swiss Franc 2/28/07 8,955 1.21177 7,325 7,390 (65) Sell Swiss Franc 2/28/07 5,740 1.21199 4,719 4,736 (17) Buy South African Rand 5/29/07 5,451 7.13482 749 764 15 Buy South African Rand 5/29/07 2,691 7.13793 355 377 22 Buy South African Rand 5/29/07 5,451 7.13482 751 765 14 Buy South African Rand 5/29/07 5,451 7.12549 747 765 18 Sell South African Rand 5/29/07 3,113 7.12357 397 437 (40) Sell South African Rand 5/29/07 31,102 7.12858 4,650 4,363 287 Sell South African Rand 3/05/08 7,470 7.25243 1,014 1,030 (16) Sell South African Rand 3/05/08 7,470 7.25243 1,011 1,030 (19) ----- Total $(152) =====
10 -- SECURITIES LENDING Each portfolio may lend securities for the purpose of realizing additional income. All securities loans are collateralized by cash or securities issued or guaranteed by the U.S. Government or its agencies. The value of the collateral is at least 102% of the market value of the securities loaned. However, due to market fluctuations, the value of the securities loaned may exceed the value of the collateral. On the next business day, the collateral is adjusted based on the prior day's market fluctuations and the current day's lending activity. Lending securities involves certain risk that the Portfolio may be delayed from recovering the collateral if the borrower fails to return the securities. The Funds paid fees for securities lending for the year ended December 31, 2006 to its custodian, which have been netted against Income from Securities Lending in the Statements of Operations. These fees are presented below (amounts in thousands):
MARKET VALUE OF MARKET VALUE OF FEES PAID FOR NET INCOME EARNED SECURITIES ON LOAN COLLATERAL LENDING FROM LENDING ------------------ --------------- ------------- ----------------- Limited Maturity Bond $ 5,355 $ 5,455 $ 13 $ 20 Quality Bond Fund 35,747 36,461 45 73 Flexibly Managed Fund 237,707 246,509 129 218 Growth Stock Fund 27,738 28,623 18 30 Large Cap Value Fund 64,126 66,335 25 44 Large Cap Growth Fund 7,534 7,799 1 2 Index 500 Fund 49,119 50,874 22 38 Mid Cap Growth Fund 25,261 26,237 21 37 Mid Cap Value Fund 36,389 37,875 25 44 Strategic Value Fund 9,334 9,816 1 3 Small Cap Growth Fund 10,235 10,684 137 229 Small Cap Value Fund 13,575 14,186 25 39 International Equity Fund 11,494 12,061 2 4 REIT Fund 21,132 21,718 1 3
101 -------------------------------------------------------------------------------- PENN SERIES FUNDS, INC. NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2006 -------------------------------------------------------------------------------- 11 -- CREDIT AND MARKET RISK The Funds may invest a portion of their assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Funds ability to dispose of them in a timely manner and at a fair price when it is necessary or preferable to do so. 12 -- CONTRACTUAL OBLIGATIONS In the general course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnification. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds and/or their affiliates that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. 102 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Penn Series Funds, Inc: We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Penn Series Funds, Inc., comprising the Money Market Fund, Limited Maturity Bond Fund, Quality Bond Fund, High Yield Bond Fund, Flexibly Managed Fund, Growth Stock Fund, Large Cap Value Fund, Large Cap Growth Fund, Index 500 Fund, Mid Cap Growth Fund, Mid Cap Value Fund, Strategic Value Fund, Small Cap Growth Fund, Small Cap Value Fund, International Equity Fund, and REIT Fund, (collectively, "the "Funds"), as of December 31, 2006, and the related statements of operations for the year then ended, the changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the years ended December 31, 2003, and prior were audited by other auditors, whose report dated February 6, 2004, expressed an unqualified opinion thereon. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. Our procedures included confirmation of securities owned as of December 31, 2006, by correspondence with custodians and brokers. As to securities purchased or sold but not yet received or delivered, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the portfolios constituting Penn Series Funds, Inc. as of December 31, 2006, the results of their operations for the year then ended, the changes in their net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG Philadelphia, Pennsylvania February 21, 2007 103 APPENDIX A PENN SERIES FUNDS, INC. PROXY VOTING POLICIES AND PROCEDURES All voting securities held in each fund or portfolio ("Fund") of Penn Series Funds, Inc. ("Penn Series") shall be voted in the best interest of shareholders of the Fund. In furtherance of this policy, and as provided in the investment advisory agreement between Penn Series and Independence Capital Management, Inc. ("ICMI") and the investment sub-advisory agreements between ICMI and investment sub-advisers, Penn Series has delegated the authority and responsibility to vote securities held in each Fund to the investment adviser or sub-adviser that manages the investments of the Fund on a day-to-day basis. A description of the proxy voting policies and procedures that each investment adviser or sub-adviser uses in voting securities held in a Fund of Penn Series accompanies these policies and procedures as appendices. See the following table.
PROXY VOTING POLICIES AND PROCEDURES OF ICMI AND SUB-ADVISERS ---------------------------------------------------------------------------- EXHIBIT INVESTMENT ADVISER OR SUB-ADVISER FUNDS(S) ------- ------------------------------------- -------------------------- A Independence Capital Management, Inc. Money Market Fund Limited Maturity Bond Fund Quality Bond Fund B ABN AMRO Asset Management, Inc. Large Cap Growth Fund C Bjurman, Barry and Associates Small Cap Growth Fund D Goldman Sachs Asset Management L. P. Small Cap Value Fund E Heitman Real Estate Securities LLC REIT Fund F Lord, Abbett & Co. LLC Strategic Value Fund Large Cap Value Fund G Neuberger Berman Management Inc. Mid Cap Value Fund H T. Rowe Price Associates, Inc. High Yield Bond Fund Flexibly Managed Fund Growth Stock Fund I Turner Investment Partners, Inc. Mid Cap Growth Fund J Vontobel Asset Management, Inc. International Equity Fund K Wells Capital Management Incorporated Index 500 Fund
Variable annuity contract and variable life insurance policy owners that participate in the investment results of a Fund may obtain a description of these Proxy Voting Policies and Procedures and a description of the Proxy Voting Policies and Procedures of the investment adviser or sub-adviser to the Fund that is responsible for voting the securities of the Fund, free of charge, by calling (800) 523-0650, or by visiting the website of The Penn Mutual Life Insurance Company at www.pennmutual.com, clicking on the Investment Options and Performance Tab at the top of the page and, under Related Information, clicking on the Penn Series Proxy Voting tab and you will be directed to the proxy voting policies as well as each Fund's proxy voting record. Descriptions requested by telephone will be sent to the variable annuity contract or variable life insurance policy owner by first-class mail within three days of receipt of the request. Variable annuity contract and variable life insurance policy owners that participate in the investment results of a Fund may obtain the voting record of the Fund for the most recent twelve-month period ended June 30, free of charge, by visiting the website of The Penn Mutual Life Insurance Company at www.pennmutual.com and following the instructions noted above. The voting record will be made available on the website of The Penn Mutual Life Insurance Company as soon as reasonably practicable after the information is filed by Penn Series with the SEC on SEC Form N-PX. The voting record will also be available on the website of the U. S. Securities and Exchange Commission ("SEC") at www.sec.gov. C-2 EXHIBIT A INDEPENDENCE CAPITAL MANAGEMENT, INC. SUMMARY OF PROXY VOTING POLICIES AND PROCEDURES Independence Capital Management, Inc. ("ICMI") provides day-to-day investment management services to clients, including the voting of securities held in their accounts. The following policies and procedures are reasonably designed to ensure that ICMI votes securities held in those client accounts in the best interest of the client. ICMI has retained an independent firm, Institutional Shareholder Services ("ISS"), to assist it in voting the securities. ISS specializes in providing proxy advisory and voting services. These services include in-depth research, analysis, voting recommendations, as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance. ICMI portfolio managers, who are responsible for purchasing and selling securities for client accounts, along with the ICMI compliance officer, oversee ISS in the voting of proxies held in client accounts. Securities generally will be voted in accordance with the guidelines set forth in Schedule A attached to these policies and procedures, except as ICMI may otherwise determine in the exercise of its fiduciary duty to its clients. The appropriate portfolio manager will review all voting recommendations made by ISS with respect to securities for which ICMI has voting authority, including recommendations on voting for or against proposals described in Schedule A. If the portfolio manager determines that it is in the interest of a client account to vote securities differently than the recommendation made by ISS, the portfolio manager will fully document the reasons for voting the securities differently in a memorandum to the ICMI compliance officer. Upon receipt of the memorandum, the ICMI compliance officer will direct ISS to vote the securities in accordance with the determination made by the portfolio manager. In providing proxy advisory and voting services to ICMI, ISS observes policies and procedures that address potential conflicts between the interests of ICMI client accounts, on the one hand, and the interests of ISS and its affiliates, on the other. ICMI relies, to a large extent, on the independence of ISS, and the polices, procedures and practices it has in place, to avoid voting on any proposal that may be inappropriate because of conflict of interest. In addition, ICMI portfolio managers and the ICMI compliance officer monitor the voting of securities that may present a conflict between the interests of a client, on the one hand, the interest of ICMI and its affiliates, on the other. The portfolio managers and the compliance officer are sensitized to the fact that any business or other relationship between ICMI (or any of its affiliates) and a company whose securities are to be voted could improperly influence a manager's determination to vote the securities differently than recommended by ISS. Any potential conflict of interest identified by a portfolio manager are immediately referred to the compliance officer for immediate resolution. ICMI, acting on its own behalf or acting through ISS, will provide a description of its proxy voting policies and procedures to its clients, and will inform its clients as to how they may obtain information on how ICMI voted their securities. Further, ICMI, acting on its own behalf or acting through ISS, will retain for a period of not less than six years its (i) proxy voting policies and procedures, (ii) proxy statements that ICMI receives regarding client securities, (iii) records of votes casts on behalf of clients, (iv) any document prepared on behalf of ICMI that was material to making the determination of how to vote securities and (v) a copy of each written request for proxy voting information, and a copy of any written response made by or on behalf of ICMI to any request (oral or written) for proxy voting information. SCHEDULE A INDEPENDENCE CAPITAL MANAGEMENT, INC. PROXY VOTING GUIDELINES - SUMMARY The following is a concise summary of ICMI's proxy voting policy guidelines. 1. AUDITORS Vote for proposals to ratify auditors, unless any of the following apply: - An auditor has a financial interest in or association with the company, and is therefore not independent - Fees for non-audit services are excessive, or - There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position. 2. BOARD OF DIRECTORS VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS Votes on director nominees should be made on a case-by-case basis, examining the following factors: independence of the board and key board committees, attendance at board meetings, corporate governance provisions and takeover activity, long-term company performance, responsiveness to shareholder proposals, any egregious board actions, and any excessive non-audit fees or other potential auditor conflicts. CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal classified boards and to elect all directors annually. INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO) Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures in place that counterbalance a combined position, certain factors should be taken into account in determining whether the proposal warrants support. These factors include the presence of a lead director, board and committee independence, governance guidelines, company performance, and annual review by outside directors of CEO pay. MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS's definition of independence. Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard. 3. SHAREHOLDER RIGHTS SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT Vote against proposals to restrict or prohibit shareholder ability to take action by written consent. Vote for proposals to allow or make easier shareholder action by written consent. SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS Vote against proposals to restrict or prohibit shareholder ability to call special meetings. Vote for proposals that remove restrictions on the right of shareholders to act independently of management. SUPERMAJORITY VOTE REQUIREMENTS Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR proposals to lower supermajority vote requirements. CUMULATIVE VOTING Vote against proposals to eliminate cumulative voting. Vote proposals to restore or permit cumulative voting on a case-by-case basis relative to the company's other governance provisions. CONFIDENTIAL VOTING Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived. Vote FOR management proposals to adopt confidential voting. 4. PROXY CONTESTS VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS Votes in a contested election of directors must be evaluated on a CASE-BY-CASE basis, considering the factors that include the long-term financial performance, management's track record, qualifications of director nominees (both slates), and an evaluation of what each side is offering shareholders. REIMBURSING PROXY SOLICITATION EXPENSES Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also recommend voting for reimbursing proxy solicitation expenses. 5. POISON PILLS Vote for shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Review on a case-by-case basis shareholder proposals to redeem a company's poison pill and management proposals to ratify a poison pill. 6. MERGERS AND CORPORATE RESTRUCTURINGS Vote CASE-BY-CASE on mergers and corporate restructurings based on such features as the fairness opinion, pricing, strategic rationale, and the negotiating process. 7. REINCORPORATION PROPOSALS Proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes. 8. CAPITAL STRUCTURE COMMON STOCK AUTHORIZATION Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a CASE-BY-CASE basis using a model developed by ISS. Vote AGAINST proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights. Vote FOR proposals to approve increases beyond the allowable increase when a company's shares are in danger of being delisted or if a company's ability to continue to operate as a going concern is uncertain. DUAL-CLASS STOCK Vote AGAINST proposals to create a new class of common stock with superior voting rights. Vote FOR proposals to create a new class of nonvoting or subvoting common stock if: - It is intended for financing purposes with minimal or no dilution to current shareholders - It is not designed to preserve the voting power of an insider or significant shareholder 9. EXECUTIVE AND DIRECTOR COMPENSATION Votes with respect to compensation plans should be determined on a case-by-case basis. Our methodology for reviewing compensation plans primarily focuses on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders instead of simply focusing on voting power dilution). Using the expanded compensation data disclosed under the SEC's rules, ISS will value every award type. ISS will include in its analyses an estimated dollar cost for the proposed plan and all continuing plans. This cost, dilution to shareholders' equity, will also be expressed as a percentage figure for the transfer of shareholder wealth, and will be considered long with dilution to voting power. Once ISS determines the estimated cost of the plan, we compare it to a company-specific dilution cap. Vote AGAINST equity plans that explicitly permit repricing or where the company has a history of repricing without shareholder approval. MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS Votes on management proposals seeking approval to reprice options are evaluated on a CASE-BY-CASE basis giving consideration to the following: - Historic trading patterns - Rationale for the repricing - Value-for-value exchange - Option vesting - Term of the option - Exercise price - Participation EMPLOYEE STOCK PURCHASE PLANS Votes on employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR employee stock purchase plans where all of the following apply: - Purchase price is at least 85 percent of fair market value - Offering period is 27 months or less, and - Potential voting power dilution (VPD) is ten percent or less. Vote AGAINST employee stock purchase plans where any of the opposite conditions obtain. SHAREHOLDER PROPOSALS ON COMPENSATION Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long term corporate outlook. 10. SOCIAL AND ENVIRONMENTAL ISSUES These issues cover a wide range of topics, including consumer and public safety, environment and energy, general corporate issues, labor standards and human rights, military business, and workplace diversity. In general, vote CASE-BY-CASE. While a wide variety of factors goes into each analysis, the overall principal guiding all vote recommendations focuses on how the proposal will enhance the economic value of the company. C-3 EXHIBIT B ABN AMRO ASSET MANAGEMENT, INC. POLICIES AND PROCEDURES PROXY VOTING POLICY ABN AMRO Asset Management, Inc., as a matter of policy and as a fiduciary to our clients, has responsibility for voting proxies for portfolio securities consistent with the best economic interests of the clients. Our firm maintains written policies and procedures as to the handling, research, voting and reporting of proxy voting and makes appropriate disclosures about our firm's proxy policies and practices. Our policy and practice includes the responsibility to monitor corporate actions, receive and vote client proxies and disclose any potential conflicts of interest as well as making information available to clients about the voting of proxies for their portfolio securities and maintaining relevant and required records. Unless voting authority has been explicitly reserved by the governing documents to the client or another party, the Adviser will exercise discretionary voting authority over proxies issued on securities held in client accounts. It is the policy of the Adviser to vote, focused on the investment implications of each issue and in a manner that the Adviser believes is in the best interest of its clients. BACKGROUND Proxy voting is an important right of shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. Investment advisers registered with the SEC, and which exercise voting authority with respect to client securities, are required by Rule 206(4)-6 of the Advisers Act to (a) adopt and implement written policies and procedures that are reasonably designed to ensure that client securities are voted in the best interests of clients, which must include how an adviser addresses material conflicts that may arise between an adviser's interests and those of its clients; (b) to disclose to clients how they may obtain information from the adviser with respect to the voting of proxies for their securities; (c) to describe to clients a summary of its proxy voting policies and procedures and, upon request, furnish a copy to its clients; and (d) maintain certain records relating to the adviser's proxy voting activities when the adviser does have proxy voting authority. Responsibility The Proxy Voting Policy Committee and its designated service provider, Institutional Shareholder Services ("ISS"), have the responsibility for the implementation and monitoring of our proxy voting policy, practices, disclosures and record keeping, including outlining our voting guidelines in our procedures. Procedure ABN AMRO Asset Management, Inc. has adopted procedures to implement the firm's policy and reviews to monitor and ensure the firm's policy is observed, implemented properly and amended or updated, as appropriate, which may be summarized as follows: PROXY COMMITTEE'S ABN AMRO Asset Management, Inc. has established two Proxy Committee's to oversee the proxy process. The Proxy Voting Policy Committee and the Proxy Voting Procedure Committee. There responsibilities are as follows: C-4 The Proxy Voting Policy Committee will establish guidelines, review special issues and oversee the proxy voting process. The Committee consists at a minimum of the Chief Investment Officer of the unit, the Director of Research for the unit, the Chief Compliance Officer, and the designated Proxy Officer. No less than annually, the Committee is responsible for approving or amending the guidelines it has established and reviewing the performance of its voting agent. Meetings may be called by any Committee member throughout the year, based on issues that arise. The Proxy Voting Procedure Committee will focus on operational and procedural aspects. The Committee consists at a minimum of the Chief Compliance Officer, the designated Proxy Analyst(s), designated Investment Operations personnel, and the Proxy Officer. No less than annually, the committee is responsible for reviewing any operational or procedural issues related to the proxy process. Meetings may be called by any Committee member throughout the year, based on issues that arise. VOTING The Proxy Voting Policy Committee has hired Institutional Shareholder Services (ISS) as its voting agent. ISS provides analysis of proxy proposals, tracks and receives proxies for which ABN AMRO Asset Management, Inc. 's clients are entitled to vote, votes proxies pursuant to agreed upon guidelines and compiles and provides voting records for ABN AMRO Asset Management, Inc. A Proxy Officer has been designated to coordinate communications between the Proxy Analysts, Investment Operations personnel and ISS. The steps for reviewing and submitting votes are as follows: - The Proxy Analysts reviews the ISS system on a weekly basis during proxy season. - The Proxy Analysts print copies of the upcoming voting agendas and the number of shares as noted by ISS as being held by ABN AMRO Asset Management. - The Proxy Analysts review the voting agendas, determine if there are any issues to report to the Head Portfolio Manager, document evidence of their review of the agenda, and maintain the copies in a proxy file. - The Compliance Department will review on a semi-annually basis, the Proxy Analyst's proxy files to ensure there is evidence of review. - For each vote, the Head Portfolio Manager reviews the number of shares held for reasonability to ensure that ISS has an accurate record of the shares ABN AMRO Asset Management is responsible for voting. This process is facilitated by the Proxy Analysts. - Once a month, Investment Operations submits a file of current clients and their holdings to ISS. Only clients that have delegated voting to ABN AMRO Asset Management, Inc. are included in this feed. - ISS matches the client accounts to the applicable proxy and records the vote. VOTING GUIDELINES In the absence of specific voting guidelines from the client, ABN AMRO Asset Management, Inc. will vote proxies in the best interests of each particular client. ABN AMRO Asset Management, Inc.'s policy is to vote all proxies from a specific issuer the same way for each client absent qualifying restrictions from a client. Clients are permitted to place reasonable restrictions on ABN AMRO Asset Management, Inc. 's voting authority in the same manner that they may place such restrictions on the actual selection of account securities. ABN AMRO Asset C-5 Management utilizes the 2007 US Proxy Guidelines, for all clients except for the Taft-Hartley which utilize 2007 U.S.Taft-Hartley Policy Guidelines. CONFLICTS OF INTEREST ABN AMRO Asset Management, Inc. has eliminated most actual or perceived conflicts of interest as the majority of proxy issues are voted by an independent third party, pursuant to the guidelines adopted by the Proxy Committee. In cases where ABN AMRO Asset Management, Inc. believes there may be an actual or perceived conflict of interest the Adviser seeks to address such conflicts in various ways, including the following: - Documenting the investment rationale for the decision using the Proxy Conflict of Interest and Override Form, the conflict of interest and the method in which the conflict was addressed; - Requiring the approval of the Department Head and the Chief Compliance Officer prior to providing voting instructions to the voting agent; - Holding special Committee meetings, where warranted, to determine the steps to be taken, or in cases where special meetings were not deemed warranted, requiring the Committee to review the decisions; - Seeking legal counsel. In situations where ABN AMRO Asset Management, Inc. perceives a material conflict of interest, the Adviser may: - Defer to the voting recommendation of ISS or another independent third party; - Vote pursuant to client direction (following disclosure of the conflict to the client), - Vote reflectively (in the same proportion and manner as other shareholders), - Abstain from voting; or - Take such other action which protects the interests of its clients. Circumstances necessitating such actions may include the voting of proxies on securities issued by ABN AMRO Asset Management, Inc. 's parent corporation or the voting of proxies where the Adviser or its affiliates have a direct financial interest. The Proxy Analyst will identify any conflicts that exist between the interests of the adviser and the client by reviewing the relationship of ABN AMRO Asset Management, Inc. with the issuer of each security to determine if ABN AMRO Asset Management, Inc. or any of its employees has any financial, business or personal relationship with the issuer. If a material conflict of interest exists, the Proxy Voting Policy Committee will determine whether it is appropriate to disclose the conflict to the affected clients, to give the clients an opportunity to vote the proxies themselves, or to address the voting issue through other objective means such as voting in a manner consistent with a predetermined voting policy or receiving an independent third party voting recommendation. ABN AMRO Asset Management, Inc. will maintain a record of the voting resolution of any conflict of interest. RECORDKEEPING ISS and the Proxy Voting Policy Committee shall retain the following proxy records in accordance with the SEC's five-year retention requirement. - These policies and procedures and any amendments; C-6 - Each proxy statement that ABN AMRO Asset Management, Inc. receives; - A record of each vote that ABN AMRO Asset Management, Inc. casts; - Any document ABN AMRO Asset Management, Inc. created that was material to making a decision how to vote proxies, or that memorializes that decision including period reports to the General Manager; - A copy of each written request from a client for information on how ABN AMRO Asset Management, Inc. voted such client's proxies, and a copy of any written response. DISCLOSURE - ABN AMRO Asset Management, Inc. will provide conspicuously displayed information in its Disclosure Document summarizing this proxy voting policy and procedures, including a statement that clients may request information regarding how ABN AMRO Asset Management, Inc. voted a client's proxies, and that clients may request a copy of these policies and procedures. - The Proxy Voting Policy Committee will also send a copy of this summary to all existing clients who have previously received ABN AMRO Asset Management, Inc.'s Disclosure Document; or the Proxy Voting Policy Committee may send each client the amended Disclosure Document. Either mailing shall highlight the inclusion of information regarding proxy voting. CLIENT REQUESTS FOR INFORMATION - All client requests for information regarding proxy votes, or policies and procedures, received by any employee should be forwarded to the CCO. - In response to any request the Proxy Committee and its designated service provider, ISS, will prepare a written response to the client with the information requested, and as applicable will include the name of the issuer, the proposal voted upon, and how ABN AMRO Asset Management, Inc. voted the client's proxy with respect to each proposal about which client inquired. C-7 EXHIBIT C BJURMAN, BARRY & ASSOCIATES POLICIES AND PROCEDURES PROXY VOTING POLICY Release No. IA-2106 www.sec.gov/rules/final/ia-2106.htm Rule 206(4)-6 Advisers must adopt and implement written policies & procedures which are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients, describe its policies & procedures to clients, and disclose to clients how they may obtain information on how the Adviser voted their proxies. Bjurman, Barry & Associates (BB & A) seeks to avoid material conflicts of interests by using an Independent Third Party ("ITP") service provider to vote proxies in accordance with detailed, pre-determined written proxy voting guidelines (the "Voting Guidelines") in an objective and consistent manner across client accounts. The voting process involves an assessment performed by the ITP service provider in accordance with the Voting Guidelines. BB & A reviews all proxies and the recommendations of the ITP service provider in formulating its vote, but the ultimate voting decision belongs to BB & A. In the event that BB & A votes against the ITP recommendations, documentation must be prepared to describe the basis for the decision and to substantiate that BB & A's clients' interests were not subrogated to its own. PROCEDURES BB & A will maintain all documentation in accordance to record keeping requirements. Documentation shall include copies of the Voting Guidelines, records of votes cast on behalf of clients and supporting documentation relating to voting decision(s). Each week, the BB & A will process respective proxies by downloading meeting notices. Senior Management then reviews the ITP service provider recommendations and in the event BB & A agrees with the recommendations and/or with company management, which concurs with recommendations, no further action is necessary. In the event BB & A does not vote in accordance with the ITP service provider recommendations, documentation must be prepared which provides client account numbers and a description of the decision for voting against the recommendations. Client custodians for which BB & A has discretion to vote are notified at the time of account inception to provide ALL proxies and related information to the ITP service provider. Any proxies received directly by BB & A will be forwarded to the ITP service provider, and if time sensitive, proxies may be e-mailed, faxed or sent via overnight delivery. BB & A will attempt to forward an updated "Holdings" list to the ITP service provider on a daily basis but no less frequently than approximately every 30 days. Each quarter BB & A receives a report by client which details the following information: a) Name of issuer b) Cusip Number c) Meeting date, brief description of Agenda C-8 d) The Vote cast e) Whether the vote was "For" or "Against" management INVESTMENT COMPANY REQUIREMENTS www.sec.gov/rules/final/33-8188.htm Whereas BB & A serves as an Adviser to a public investment company, we will disclose in any applicable registration statement & SAI, the policies & procedures for proxy voting. Any requests for information will be fulfilled within (3 business days) and provide the voting information for the preceding 12 month period, beginning 7-1-XX through 6-30-XX. In addition, Annual & Semi-Annual shareholder reports will include the following: 1) Information on how to obtain voting information "free of charge" with a toll free # 2) the website information (if applicable), and on the commissions' website www.sec.gov. BB & A will file Form N-PX with the Securities and Exchange Commission, no later than August 31st of each calendar year. This will contain the complete proxy voting record for the preceding 12 month period ended June, 30th respectively. Form N-PX must be signed by a principal(s) of the investment company and the filing must contain: a) Name of issuer, ticker symbol b) Cusip (if can be practically acquired) c) Meeting date, brief description of agenda d) Whether the topic(s) were proposed by issuer or security holder e) Whether a vote was cast, and the outcome of the vote was "For" or "Against" management C-9 EXHIBIT D OCTOBER 2003 GOLDMAN SACHS ASSET MANAGEMENT POLICY ON PROXY VOTING FOR INVESTMENT ADVISORY CLIENTS Goldman Sachs Asset Management ("GSAM")* has adopted the policies and procedures set out below regarding the voting of proxies on securities held in client accounts (the "Policy"). These policies and procedures are designed to ensure that where GSAM has the authority to vote proxies, GSAM complies with its legal, fiduciary, and contractual obligations. GUIDING PRINCIPLES Proxy voting and the analysis of corporate governance issues in general are important elements of the portfolio management services we provide to our advisory clients who have authorized us to address these matters on their behalf. Our guiding principles in performing proxy voting are to make decisions that (i) favor proposals that tend to maximize a company's shareholder value and (ii) are not influenced by conflicts of interest. These principles reflect GSAM's belief that sound corporate governance will create a framework within which a company can be managed in the interests of its shareholders. PUBLIC EQUITY INVESTMENTS To implement these guiding principles for investments in publicly-traded equities, we follow the Institutional Shareholder Services ("ISS") Standard Proxy Voting Guidelines (the "Guidelines"), except in circumstances as described below. The Guidelines embody the positions and factors GSAM generally considers important in casting proxy votes. They address a wide variety of individual topics, including, among other matters, shareholder voting rights, anti-takeover defenses, board structures, the election of directors, executive and director compensation, reorganizations, mergers, and various shareholder proposals. Recognizing the complexity and fact-specific nature of many corporate governance issues, the Guidelines often do not direct a particular voting outcome, but instead identify factors ISS considers in determining how the vote should be cast. A summary of the Guidelines is attached as Appendix A. ---------- * For purposes of this Policy, "GSAM" refers, collectively, to the Goldman Sachs Asset Management unit of Goldman, Sachs & Co.'s Investment Management Division; Goldman Sachs Asset Management, L.P.; Goldman Sachs Asset Management International; and Goldman Sachs Princeton LLC. In connection with each proxy vote, ISS prepares a written analysis and recommendation (an "ISS Recommendation") that reflects ISS's application of Guidelines to the particular proxy issues. Where the Guidelines do not direct a particular response and instead list relevant factors, the ISS Recommendation will reflect ISS's own evaluation of the factors. As explained more fully below, however, each GSAM equity portfolio management team ("Portfolio Management C-10 Team") may on any particular proxy vote decide to diverge from the Guidelines or an ISS Recommendation. In such cases, our procedures require: (i) the requesting Portfolio Management Team to set forth the reasons for their decision; (ii) the approval of the Local Chief Investment Officer for the requesting Portfolio Management Team; (iii) notification to the Global Chief Investment Officer and other appropriate GSAM personnel; (iv) a determination that the decision is not influenced by any conflict of interest; and (v) the creation of a written record reflecting the process. The principles and positions reflected in this Policy are designed to guide us in voting proxies, and not necessarily in making investment decisions. Portfolio Management Teams base their determinations of whether to invest in a particular company on a variety of factors, and while corporate governance may be one such factor, it may not be the primary consideration. Senior management of GSAM periodically reviews this Policy, including our use of the Guidelines, to ensure it continues to be consistent with our guiding principles. IMPLEMENTATION BY PORTFOLIO MANAGEMENT TEAMS General Overview While it is GSAM's policy generally to follow the Guidelines and the ISS Recommendations, the active-equity and quantitative-equity Portfolio Management Teams have developed different approaches for using the Guidelines and ISS Recommendations in light of their different investment philosophies and processes. Active Equity Our active-equity Portfolio Management Teams view the analysis of corporate governance practices as an integral part of the investment research and stock valuation process. Therefore, on a case-by-case basis and subject to the approval process described above, each active-equity Portfolio Management Team may vote differently from the Guidelines or a particular ISS Recommendation. In forming their views on particular matters, our active-equity Portfolio Management Teams are permitted to consider applicable regional rules and practices, including codes of conduct and other guides, regarding proxy voting, in addition to the Guidelines and ISS Recommendations. In our active-equity investment research process, responsibility for analyzing corporate board structures and the corporate governance practices of portfolio companies in connection with proxy voting decisions lies with the relevant Portfolio Management Team. Accordingly, each active-equity Portfolio Management Team is charged with performing these functions for the portfolio companies as part of the team's research efforts. As part of that research process, each active-equity Portfolio Management Team has regular internal research meetings to discuss the companies held in a particular team's investment portfolio. Among the topics that may be discussed at these meetings are issues pertaining to a portfolio company's record and policies on corporate governance practices that may affect shareholder value. Each active-equity Portfolio Management Team determines how to allocate responsibility for analyzing corporate governance issues and proxy voting decisions among the team's members. C-11 Under each arrangement, the work related to proxy voting is integrated into our research process. Each active-equity Portfolio Management Team remains responsible for ensuring that corporate governance issues are analyzed and proxy votes are cast in a manner consistent with our guiding principles. Quantitative Equity Our quantitative-equity Portfolio Management Teams, by contrast, have decided to follow the Guidelines and ISS Recommendations exclusively, based on such Portfolio Management Teams' investment philosophy and approach to portfolio construction, as well as the evaluation of ISS's services and methodology in analyzing shareholder and corporate governance matters. Nevertheless, our quantitative-equity Portfolio Management Teams retain the authority to revisit this position, with respect to both their general approach to proxy voting (subject to the approval of GSAM senior management) and any specific shareholder vote (subject to the approval process described above). USE OF THIRD-PARTY SERVICE PROVIDERS We utilize independent service providers, such as ISS, to assist us in developing substantive proxy voting positions. ISS also updates and revises the Guidelines on a periodic basis, and any such revisions are reviewed by GSAM to determine whether they are consistent with our guiding principles. In addition, ISS assists us in the proxy voting process by providing operational, recordkeeping and reporting services. GSAM's decision to retain ISS to perform the services described in this Policy is based principally on the view the services ISS provides will result in proxy voting decisions that are consistent with our guiding principles. GSAM management is responsible for reviewing our relationship with ISS and for evaluating the quality and effectiveness of the various services provided by ISS to assist us in satisfying our proxy voting responsibilities. GSAM may hire other service providers to replace or supplement ISS with respect to any of the services GSAM currently receives from ISS. In addition, individual Portfolio Management Teams may supplement the information and analyses ISS provides from other sources. CONFLICTS OF INTEREST Pursuant to this Policy, GSAM has implemented procedures designed to prevent conflicts of interest from influencing its proxy voting decisions. These procedures include our use of the Guidelines and ISS Recommendations. Proxy votes cast by GSAM in accordance with the Guidelines and ISS Recommendations will not present any conflicts of interest because GSAM casts such votes in accordance with a pre-determined policy based upon the recommendations of an independent third party. Our procedures also prohibit the influence of conflicts of interest where an active-equity Portfolio Management Team decides to vote against an ISS Recommendation. In general, conflicts of interest between GSAM and other businesses within Goldman Sachs should not affect GSAM in light of the information barrier policies separating GSAM from those other businesses. In addition, in any particular case, the approval process for a decision to vote against an ISS Recommendation, as described above, includes an inquiry into potential conflicts of interest, and C-12 GSAM senior management will not approve decisions that are based on the influence of such conflicts. FIXED INCOME AND PRIVATE INVESTMENTS Voting decisions with respect to client investments in fixed income securities and the securities of privately-held issuers generally will be made by the relevant portfolio managers based on their assessment of the particular transactions or other matters at issue. EXTERNAL MANAGERS Where GSAM places client assets with managers outside of GSAM, whether through separate accounts, funds-of-funds or other structures, such external managers generally will be responsible for voting proxies in accordance with the managers' own policies. GSAM may, however, retain such responsibilities where it deems appropriate. CLIENT DIRECTION Clients may choose to vote proxies themselves, in which case they must arrange for their custodians to send proxy materials directly to them. GSAM can also accommodate individual clients that have developed their own guidelines with ISS or another proxy service. Clients may also discuss with GSAM the possibility of receiving individualized reports or other individualized services regarding proxy voting conducted on their behalf. APPENDIX A ISS STANDARD PROXY VOTING GUIDELINES SUMMARY The following is a concise summary of the ISS Standard Proxy Voting Guidelines (the "Guidelines"), which form the substantive basis of GSAM's Policy on Proxy Voting for Investment Advisory Clients ("Policy") with respect to public equity investments. As described in the main body of the Policy, GSAM may diverge from the Guidelines and a related ISS recommendation on any particular proxy vote or in connection with any individual investment decision. 1. AUDITORS Vote FOR proposals to ratify auditors, unless any of the following apply: - An auditor has a financial interest in or association with the company, and is therefore not independent, - Fees for non-audit services are excessive, or - There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company's financial position. 2. BOARD OF DIRECTORS A. VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS C-13 Votes on director nominees should be made on a CASE-BY-CASE basis, examining the following factors: independence of the board and key board committees, attendance at board meetings, corporate governance provisions and takeover activity, long-term company performance, responsiveness to shareholder proposals, any egregious board actions, and any excessive non-audit fees or other potential auditor conflicts. B. CLASSIFICATION/DECLASSIFICATION OF THE BOARD Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal classified boards and to elect all directors annually. C. INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO) Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions of chairman and CEO be held separately. Because some companies have governance structures in place that counterbalance a combined position, certain factors should be taken into account in determining whether the proposal warrants support. These factors include the presence of a lead director, board and committee independence, governance guidelines, company performance, and annual review by outside directors of CEO pay. D. MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS's definition of independence. Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard. 3. SHAREHOLDER RIGHTS A. SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT Vote AGAINST proposals to restrict or prohibit shareholder ability to take action by written consent. Vote FOR proposals to allow or make easier shareholder action by written consent. B. SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS Vote AGAINST proposals to restrict or prohibit shareholder ability to call special meetings. Vote FOR proposals that remove restrictions on the right of shareholders to act independently of management. C. SUPERMAJORITY VOTE REQUIREMENTS Vote AGAINST proposals to require a supermajority shareholder vote. C-14 Vote FOR proposals to lower supermajority vote requirements. D. CUMULATIVE VOTING Vote AGAINST proposals to eliminate cumulative voting. Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis relative to the company's other governance provisions. E. CONFIDENTIAL VOTING Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived. Vote FOR management proposals to adopt confidential voting. 4. PROXY CONTESTS A. VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS Votes in a contested election of directors must be evaluated on a CASE-BY-CASE basis, considering the factors that include the long-term financial performance, management's track record, qualifications of director nominees (both slates), and an evaluation of what each side is offering shareholders. B. REIMBURSING PROXY SOLICITATION EXPENSES Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, ISS also recommends voting for reimbursing proxy solicitation expenses. 5. POISON PILLS Vote FOR shareholder proposals that ask a company to submit its poison pill for shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's poison pill and management proposals to ratify a poison pill. 6. MERGERS AND CORPORATE RESTRUCTURINGS Vote CASE-BY-CASE on mergers and corporate restructurings based on such features as the fairness opinion, pricing, strategic rationale, and the negotiating process. 7. REINCORPORATION PROPOSALS Proposals to change a company's state of incorporation should be evaluated on a CASE BY- CASE basis, giving consideration to both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions, and a comparison of C-15 the jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes. 8. CAPITAL STRUCTURE A. COMMON STOCK AUTHORIZATION Votes on proposals to increase the number of shares of common stock authorized for issuance are determined on a CASE-BY-CASE basis using a model developed by ISS. Vote AGAINST proposals at companies with dual-class capital structures to increase the number of authorized shares of the class of stock that has superior voting rights. Vote FOR proposals to approve increases beyond the allowable increase when a company's shares are in danger of being de-listed or if a company's ability to continue to operate as a going concern is uncertain. B. DUAL-CLASS STOCK Vote AGAINST proposals to create a new class of common stock with superior voting rights. Vote FOR proposals to create a new class of non-voting or sub-voting common stock if: - It is intended for financing purposes with minimal or no dilution to current shareholders - It is not designed to preserve the voting power of an insider or significant shareholder 9. EXECUTIVE AND DIRECTOR COMPENSATION Votes with respect to compensation plans should be determined on a CASE-BY-CASE basis. The ISS methodology for reviewing compensation plans primarily focuses on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders instead of simply focusing on voting power dilution). Using the expanded compensation data disclosed under the Securities and Exchange Commission's rules, ISS will value every award type. ISS will include in its analyses an estimated dollar cost for the proposed plan and all continuing plans. This cost, dilution to shareholders' equity, will also be expressed as a percentage figure for the transfer of shareholder wealth, and will be considered along with dilution to voting power. Once ISS determines the estimated cost of the plan, ISS compares it to a company-specific dilution cap. Vote AGAINST equity plans that explicitly permit repricing or where the company has a history of repricing without shareholder approval. A. MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS Votes on management proposals seeking approval to reprice options are evaluated on a CASE-BY-CASE basis giving consideration to the following: - Historic trading patterns - Rationale for the repricing - Value-for-value exchange - Option vesting C-16 - Term of the option - Exercise price - Participation B. EMPLOYEE STOCK PURCHASE PLANS Votes on employee stock purchase plans should be determined on a CASE-BY-CASE basis. Vote FOR employee stock purchase plans where all of the following apply: - Purchase price is at least 85 percent of fair market value; - Offering period is 27 months or less; and - Potential voting power dilution is ten percent or less. Vote AGAINST employee stock purchase plans where any of the opposite conditions obtain. C. SHAREHOLDER PROPOSALS ON COMPENSATION Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook. 10. SOCIAL AND ENVIRONMENTAL ISSUES These issues cover a wide range of topics, including consumer and public safety, environment and energy, general corporate issues, labor standards and human rights, military business, and workplace diversity. In general, vote CASE-BY-CASE. While a wide variety of factors go into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal will enhance the economic value of the company. C-17 EXHIBIT E HEITMAN REAL ESTATE SECURITIES LLC PROXY VOTING POLICIES AND PROCEDURES Heitman Real Estate Securities LLC ("Heitman") provides investment advisory services to its clients with respect to publicly traded real estate securities. It is Heitman's general policy that with respect to all clients where Heitman has authority to vote proxies, such proxies will always be voted, or not voted, in all cases in the best interest of such clients. Heitman utilizes the services of an independent unaffiliated proxy firm, Institutional Shareholder Services ("ISS"). ISS is responsible for: notifying Heitman in advance of the shareholder meeting at which the proxies will be voted; providing the appropriate proxies to be voted; providing independent research on corporate governance, proxy and corporate responsibility issues; recommending actions with respect to proxies which are always deemed by ISS to be in the best interests of the shareholders; and maintaining records of proxy statement received and votes cast. Heitman will consider each corporate proxy statement on a case-by-case basis, and may vote a proxy in a manner different from that recommended by ISS when deemed appropriate by Heitman. There may also be occasions when Heitman determines, contrary to the ISS voting recommendation for a particular proxy, that not voting such proxy may be more in the best interest of clients, such as (i) when the cost of voting such proxy exceeds the expected benefit to the client or (ii) if Heitman is required to re-register shares of a company in order to vote a proxy and that re-registration process imposes trading and transfer restrictions on the shares, commonly referred to as "blocking." Heitman's general guidelines as they relate to voting certain common proxy proposals are described below: Adoption of confidential voting For Adoption of Anti-greenmail charter of bylaw amendments For Amend bylaws or charters for housekeeping changes For Elect Directors annually For Fix the size of the Board For Give Board ability to amend bylaws in addition to Shareholders For Lower supermajority Shareholder vote requirements For Ratify Auditors For Require Majority of Independent Directors For Require Shareholder approval of Golden or Tin Parachutes For Restore or Provide Shareholders with rights of appraisal For Restore Shareholder ability to remove directors with our without cause For Seek reasonable Audit rotation For Shareholders' Right to Act independently of management For Shareholders' Right to Call Special Meeting For Shareholders' Right to Act by Written Consent For Stock Repurchase Plans For
C-18 Stock Splits For Submit Poison Pill for Shareholder ratification For Blank Check Preferred Stock Against Classified Boards Against Dual Classes of Stock Against Give Board exclusive authority to amend bylaws Against Limited Terms for Outside Directors Against Payment of Greenmail Against Provide Management with authority to adjourn an annual or special meeting Against Require Director Stock Ownership Against Restrict or Prohibit Shareholder ability to call special meetings Against Supermajority Vote Requirement Against Supermajority Provisions Against Adopt/Amend Stock Option Plan Case-by-Case Adopt/Amend Employee Stock Purchase Plan Case-by-Case Approve Merger/Acquisition Case-by-Case Authorize Issuance of Additional Common Stock Case-by-Case Consider Non-financial Effects of Merger Case-by-Case Director Indemnification Case-by-Case Election of Directors Case-by-Case Fair Price Requirements Case-by-Case Issuance of authorized Common Stock Case by Case Limitation of Executive/Director Compensation Case-by-Case Reincorporation Case-by-Case Require Shareholder Approval to Issue Preferred Stock Case-by-Case Spin-Offs Case-by-Case Shareholder proposal to redeem Poison Pill Case-by-Case Social and Environmental Issues Case-by-Case
The foregoing are only general guidelines and not rigid policy positions. Heitman has established a Proxy Policies and Procedures Oversight Committee (the "Proxy Committee"), consisting of Heitman's Chief Investment Officer, Chief Financial Officer, General Counsel and Compliance Officer. The Proxy Committee is responsible for (i) designing and reviewing from time to time these Policies and Procedures and (ii) reviewing and addressing all instances where a Heitman portfolio manager determines to respond to an issue in a proxy in a manner inconsistent with this Policy and/or identifies actual or perceived potential conflicts of interests in the context of voting proxies. As a general rule, Heitman's Proxy Voting Clerk votes all U.S. and non-U.S. proxies to which Heitman is entitled to vote. Heitman's proxy voting policy is as follows: (a) Heitman's Proxy Voting Clerk will print a Proxy Analysis Report containing a compilation of "FOR", "AGAINST", "ABSTAIN", and "WITHHOLD" recommendations received from ISS with respect to the issues on a particular proxy; (b) Heitman's Proxy Voting Clerk will send the Proxy Analysis Report to the portfolio manager within Heitman who is responsible for review of the company conducting the proxy; (c) In reviewing the recommendations to determine how to respond to the proxy in the best interest of clients, the Heitman portfolio manager may consider information from various sources, such as another Heitman portfolio manager or research analyst, management of the C-19 company conducting the proxy, and shareholder groups, as well as the possibility of any actual or perceived potential conflicts of interest between Heitman and its clients with respect to such proxy; (d) The Heitman portfolio manager will return the Proxy Analysis Report to Heitman's Proxy Voting Clerk indicating his or her recommendation as to how to respond to such proxy, as well as a description and explanation of any actual or perceived potential conflicts of interest between Heitman and its clients with respect to such proxy. Instances where the Heitman portfolio manager recommends responding to a particular proxy contrary to the general voting guidelines provided in this Policy or contrary to the ISS recommendation with respect to such proxy, and/or perceives an actual or potential conflict of interests are considered "exceptions;" (e) With respect to any proxy, Heitman's Proxy Voting Clerk will compile all exceptions in a written Proxy Vote Exception Report and forward it promptly to the members of Heitman's Proxy Committee. (f) Heitman's Proxy Committee may confirm or overturn any recommendations by Heitman's portfolio manager. In instances where potential conflicts of interest have been highlighted in the Proxy Voting Exception Report, Heitman's Proxy Committee will evaluate whether an actual or potential material conflict of interests exists and, if so, how it should be addressed in voting or not voting the particular proxy; (g) In all instances where a Proxy Vote Exception Report has been generated, Heitman's Compliance Officer or another member of Heitman's Proxy Committee will inform Heitman's Proxy Voting Clerk in writing of the Proxy Committee's determination as to how to respond to such proxy promptly after such Proxy Committee has reached its conclusions (a "Proxy Committee Report"); (h) Wherever a Proxy Committee Report has been generated for a particular proxy, Heitman's Proxy Voting Clerk will respond to the proxy in question in accordance with such Report except to the extent in a non-conflicts of interest situation that a particular Heitman client has advised Heitman in writing that the particular proxy or proxies of that type should be responded to in a particular fashion, in which circumstance Heitman's Proxy Voting Clerk will respond to the proxy in question in accordance with such advice; (i) In all other cases, Heitman's Proxy Voting Clerk will respond to the proxy in accordance with the recommendations of ISS; and (j) The Proxy Voting Clerk will prepare a Proxy Voting Summary for the Proxy Committee on a periodic basis containing all ISS proxy vote recommendations that were overridden during the period and also highlighting any proxy issues that were identified as presenting actual and/or potential conflicts of interest and how they were addressed. The Proxy Committee may decide to take one of the following courses of action with respect to actual or potential conflicts of interest: (1) independently determine that no material conflict of interest exists or will likely potentially exist, (2) respond to such proxy in strict accordance with the recommendations of ISS or (3) take another course of action that, in the opinion of the Proxy Committee, adequately addresses the issue. C-20 The following proxy materials and records are maintained by Heitman for a period of five years in an easily accessible place, the first two years in Heitman's office: - These policies and procedures, and any amendments thereto; - Each proxy statement (maintained on the ISS website); - Record of each vote cast and each abstention (maintained on the ISS website); - Documentation, if any, created by Heitman that was material to making a decision how to respond to proxies memorializing the basis for that decision;. - Any other reports or memorializations prepared according to the above procedures; and - Each written client request for information and a copy of any written response by Heitman to a client's written or oral request for information. Clients may request a copy of these policies and procedures and/or a report on how their individual securities were voted by calling Heitman's Compliance Officer at 1-800-225-5435, ext. 4150. The report will be provided free of charge. July 2003 C-21 EXHIBIT F LORD, ABBETT & CO. LLC PROXY VOTING POLICIES AND PROCEDURES INTRODUCTION Lord Abbett has a Proxy Committee responsible for establishing voting policies and for the oversight of its proxy voting process. Lord Abbett's Proxy Committee consists of the portfolio managers of each investment team and certain members of those teams, the Director of Equity Investments, the Firm's Managing Member and its General Counsel. Once policy is established, it is the responsibility of each investment team leader to assure that each proxy for that team's portfolio is voted in a timely manner in accordance with those policies. In each case where an investment team declines to follow a recommendation of a company's management, a detailed explanation of the reason(s) for the decision is entered into the proxy voting system. Lord Abbett has retained Institutional Shareholder Services ("ISS") to analyze proxy issues and recommend voting on those issues, and to provide assistance in the administration of the proxy process, including maintaining complete proxy voting records. The Boards of Directors of each of the Lord Abbett Mutual Funds established several years ago a Proxy Committee, composed solely of independent directors. The Funds' Proxy Committee Charter provides that the Committee shall (i) monitor the actions of Lord Abbett in voting securities owned by the Funds; (ii) evaluate the policies of Lord Abbett in voting securities; (iii) meet with Lord Abbett to review the policies in voting securities, the sources of information used in determining how to vote on particular matters, and the procedures used to determine the votes in any situation where there may be a conflict of interest. Lord Abbett is a privately-held firm, and we conduct only one business: we manage the investment portfolios of our clients. We are not part of a larger group of companies conducting diverse financial operations. We would therefore expect, based on our past experience, that the incidence of an actual conflict of interest involving Lord Abbett's proxy voting process would be limited. Nevertheless, if a potential conflict of interest were to arise, involving one or more of the Lord Abbett Funds, where practicable we would disclose this potential conflict to the affected Funds' Proxy Committees and seek voting instructions from those Committees in accordance with the procedures described below under "Specific Procedures for Potential Conflict Situations". If it were not practicable to seek instructions from those Committees, Lord Abbett would simply follow its proxy voting policies or, if the particular issue were not covered by those policies, we would follow a recommendation of ISS. If such a conflict arose with any other client, Lord Abbett would simply follow its proxy voting policies or, if the particular issue were not covered by those policies, we would follow the recommendation of ISS. SPECIFIC PROCEDURES FOR POTENTIAL CONFLICT SITUATIONS Situation 1. Fund Independent Board Member on Board (or Nominee for Election to Board) of Publicly Held Company Owned by a Lord Abbett Fund. C-22 Lord Abbett will compile a list of all publicly held companies where an Independent Board Member serves on the board of directors, or has indicated to Lord Abbett that he is a nominee for election to the board of directors (a "Fund Director Company"). If a Lord Abbett Fund owns stock in a Fund Director Company, and if Lord Abbett has decided not to follow the proxy voting recommendation of ISS, then Lord Abbett shall bring that issue to the Fund's Proxy Committee for instructions on how to vote that proxy issue. The Independent Directors have decided that the Director on the board of the Fund Director Company will not participate in any discussion by the Fund's Proxy Committee of any proxy issue for that Fund Director Company or in the voting instruction given to Lord Abbett. Situation 2. Lord Abbett has a Significant Business Relationship with a Company. Lord Abbett will compile a list of all publicly held companies (or which are a subsidiary of a publicly held firm) that have a significant business relationship with Lord Abbett (a "Relationship Firm"). A "significant business relationship" for this purpose means: (a) a broker dealer firm which sells one percent or more of the Lord Abbett Funds' total shares for the last 12 months; (b) a firm which is a sponsor firm with respect to Lord Abbett's Private Advisory Services business; (c) an institutional client which has an investment management agreement with Lord Abbett; (d) an institutional investor having at least $5 million in Class Y shares of the Lord Abbett Funds; and (e) a large plan 401(k) client with at least $5 million under management with Lord Abbett. For each proxy issue involving a Relationship Firm, Lord Abbett shall notify the Fund's Proxy Committee and shall seek voting instructions from the Fund's Proxy Committee only in those situations where Lord Abbett has proposed not to follow the recommendations of ISS. SUMMARY OF PROXY VOTING GUIDELINES Lord Abbett generally votes in accordance with management's recommendations on the election of directors, appointment of independent auditors, changes to the authorized capitalization (barring excessive increases) and most shareholder proposals. This policy is based on the premise that a broad vote of confidence on such matters is due the management of any company whose shares we are willing to hold. ELECTION OF DIRECTORS Lord Abbett will generally vote in accordance with management's recommendations on the election of directors. However, votes on director nominees are made on a case-by- case basis. Factors that are considered include current composition of the board and key- board nominees, long-term company performance relative to a market index, and the directors' investment in the company. We also consider whether the Chairman of the board is also serving as CEO, and whether a retired CEO sits on the board, as these situations may create inherent conflicts of interest. There are some actions by directors that may result in votes being withheld. These actions include: C-23 1) Attending less than 75% of board and committee meetings without a valid excuse. 2) Ignoring shareholder proposals that are approved by a majority of votes for two consecutive years. 3) Failing to act on takeover offers where a majority of shareholders tendered their shares. 4) Serving as inside directors and sit on an audit, compensation, stock option or nomination committee. 5) Failing to replace management as appropriate. We will generally approve proposals to elect directors annually. The ability to elect directors is the single most important use of the shareholder franchise, and all directors should be accountable on an annual basis. The basic premise of the staggered election of directors is to provide a continuity of experience on the board and to prevent a precipitous change in the composition of the board. Although shareholders need some form of protection from hostile takeover attempts, and boards need tools and leverage in order to negotiate effectively with potential acquirers, a classified board tips the balance of power too much toward incumbent management at the price of potentially ignoring shareholder interests. INCENTIVE COMPENSATION PLANS We usually vote with management regarding employee incentive plans and changes in such plans, but these issues are looked at very closely on a case by case basis. We use ISS for guidance on appropriate compensation ranges for various industries and company sizes. In addition to considering the individual expertise of management and the value they bring to the company, we also consider the costs associated with stock-based incentive packages including shareholder value transfer and voting power dilution. We scrutinize very closely the approval of repricing or replacing underwater stock options, taking into consideration the following: 1) The stock's volatility, to ensure the stock price will not be back in the money over the near term. 2) Management's rationale for why the repricing is necessary. 3) The new exercise price, which must be set at a premium to market price to ensure proper employee motivation. 4) Other factors, such as the number of participants, term of option, and the value for value exchange. In large-cap companies we would generally vote against plans that promoted short-term performance at the expense of longer-term objectives. Dilution, either actual or potential, is, of course, a major consideration in reviewing all incentive plans. Team leaders in small- and mid-cap companies often view option plans and other employee incentive plans as a critical component of such companies' compensation structure, and have discretion to approve such plans, notwithstanding dilution concerns. SHAREHOLDER RIGHTS C-24 Cumulative Voting We generally oppose cumulative voting proposals on the ground that a shareowner or special group electing a director by cumulative voting may seek to have that director represent a narrow special interest rather than the interests of the shareholders as a whole. Confidential Voting There are both advantages and disadvantages to a confidential ballot. Under the open voting system, any shareholder that desires anonymity may register the shares in the name of a bank, a broker or some other nominee. A confidential ballot may tend to preclude any opportunity for the board to communicate with those who oppose management proposals. On balance we believe shareholder proposals regarding confidential balloting should generally be approved, unless in a specific case, countervailing arguments appear compelling. Supermajority Voting Supermajority provisions violate the principle that a simple majority of voting shares should be all that is necessary to effect change regarding a company and its corporate governance provisions. Requiring more than this may permit management to entrench themselves by blocking amendments that are in the best interest of shareholders. TAKEOVER ISSUES Votes on mergers and acquisitions must be considered on a case by case basis. The voting decision should depend on a number of factors, including: anticipated financial and operating benefits, the offer price, prospects of the combined companies, changes in corporate governance and their impact on shareholder rights. It is our policy to vote against management proposals to require supermajority shareholder vote to approve mergers and other significant business combinations, and to vote for shareholder proposals to lower supermajority vote requirements for mergers and acquisitions. We are also opposed to amendments that attempt to eliminate shareholder approval for acquisitions involving the issuance of more that 10% of the company's voting stock. Restructuring proposals will also be evaluated on a case by case basis following the same guidelines as those used for mergers. Among the more important issues that we support, as long as they are not tied in with other measures that clearly entrench management, are: 1) Anti-greenmail provisions, which prohibit management from buying back shares at above market prices from potential suitors without shareholder approval. 2) Fair Price Amendments, to protect shareholders from inequitable two-tier stock acquisition offers. 3) Shareholder Rights Plans (so-called "Poison Pills"), usually "blank check" preferred and other classes of voting securities that can be issued without further shareholder approval. However, we look at these proposals on a case by case basis, and we only approve these devices when proposed by companies with strong, effective managements to force corporate raiders to C-25 negotiate with management and assure a degree of stability that will support good long-range corporate goals. We vote for shareholder proposals asking that a company submit its poison pill for shareholder ratification. 4) "Chewable Pill" provisions, are the preferred form of Shareholder Rights Plan. These provisions allow the shareholders a secondary option when the Board refuses to withdraw a poison pill against a majority shareholder vote. To strike a balance of power between management and the shareholder, ideally "Chewable Pill" provisions should embody the following attributes, allowing sufficient flexibility to maximize shareholder wealth when employing a poison pill in negotiations: - Redemption Clause allowing the board to rescind a pill after a potential acquirer has surpassed the ownership threshold. - No dead-hand or no-hand pills. - Sunset Provisions which allow the shareholders to review, and reaffirm or redeem a pill after a predetermined time frame. - Qualifying Offer Clause which gives shareholders the ability to redeem a poison pill when faced with a bona fide takeover offer. SOCIAL ISSUES It is our general policy to vote as management recommends on social issues, unless we feel that voting otherwise will enhance the value of our holdings. We recognize that highly ethical and competent managements occasionally differ on such matters, and so we review the more controversial issues closely. November 8, 2005 C-26 EXHIBIT G NEUBERGER BERMAN MANAGEMENT INC. PROXY SUMMARY Neuberger Berman has implemented written Proxy Voting Policies and Procedures (Proxy Voting Policy) that are designed to reasonably ensure that Neuberger Berman votes proxies prudently and in the best interest of its advisory clients for whom Neuberger Berman has voting authority. The Proxy Voting Policy also describes how Neuberger Berman addresses any conflicts that may arise between its interests and those of its clients with respect to proxy voting. Neuberger Berman's Proxy Committee is responsible for developing, authorizing, implementing and updating the Proxy Voting Policy, overseeing the proxy voting process, and engaging and overseeing any independent third-party vendors as voting delegate to review, monitor and/or vote proxies. In order to apply the Proxy Voting Policy noted above in a timely and consistent manner, Neuberger Berman utilizes Glass, Lewis & Co. LLC (Glass Lewis) to vote proxies in accordance with Neuberger Berman's voting guidelines. For socially responsive clients, Neuberger Berman has adopted socially responsive voting guidelines. For non-socially responsive clients, Neuberger Berman's guidelines adopt the voting recommendations of Glass Lewis. Neuberger Berman retains final authority and fiduciary responsibility for proxy voting. Neuberger Berman believes that this process is reasonably designed to address material conflicts of interest that may arise between Neuberger Berman and a client as to how proxies are voted. In the event that an investment professional at Neuberger Berman believes that it is in the best interest of a client or clients to vote proxies in a manner inconsistent with Neuberger Berman's proxy voting guidelines or in a manner inconsistent with Glass Lewis recommendations, the Proxy Committee will review information submitted by the investment professional to determine that there is no material conflict of interest between Neuberger Berman and the client with respect to the voting of the proxy in that manner. If the Proxy Committee determines that the voting of a proxy as recommended by the investment professional presents a material conflict of interest between Neuberger Berman and the client or clients with respect to the voting of the proxy, the proxy Committee shall: (i) take no further action, in which case Glass Lewis shall vote such proxy in accordance with the proxy voting guidelines or as Glass Lewis recommends; (ii) disclose such conflict to the client or clients and obtain written direction from the client as to how to vote the proxy; (iii) suggest that the client or clients engage another party to determine how to vote the proxy; or (iv) engage another independent third party to determine how to vote the proxy. C-27 EXHIBIT H T. ROWE PRICE PROXY VOTING - PROCESS AND POLICIES T. Rowe Price Associates, Inc. and T. Rowe Price International, Inc. recognize and adhere to the principle that one of the privileges of owning stock in a company is the right to vote on issues submitted to shareholder vote-such as election of directors and important matters affecting a company's structure and operations. As an investment adviser with a fiduciary responsibility to its clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is owned by the investment companies that it sponsors and serves as investment adviser. T. Rowe Price also is involved in the proxy process on behalf of its institutional and private counsel clients who have requested such service. For those private counsel clients who have not delegated their voting responsibility but who request advice, T. Rowe Price makes recommendations regarding proxy voting. PROXY ADMINISTRATION The T. Rowe Price Proxy Committee develops our firm's positions on all major corporate issues, creates guidelines, and oversees the voting process. The Proxy Committee, composed of portfolio managers, investment operations managers, and internal legal counsel, analyzes proxy policies based on whether they would adversely affect shareholders' interests and make a company less attractive to own. In evaluating proxy policies each year, the Proxy Committee relics upon our own fundamental research, independent proxy research provided by third parties such as Institutional Shareholder Services and Glass Lewis, and information presented by company managements and shareholder groups. Once the Proxy Committee establishes its recommendations, they are distributed to the firm's portfolio managers as voting guidelines. Ultimately, the portfolio manager decides how to vote on the proxy proposals of companies in his or her portfolio. Because portfolio managers may have differences of opinion on portfolio companies and their proxies, or their portfolios may have different investment objectives, these factors, among others, may lead to different votes between portfolios on the same proxies. When portfolio managers cast votes that arc counter to the Proxy Committee's guidelines, they are required to document their reasons in writing to the Proxy Committee. Annually, the Proxy Committee reviews T. Rowe Price's proxy voting process, policies, and voting records. T. Rowe Price has retained Institutional Shareholder Services, an expert in the proxy voting and corporate governance area, to provide proxy advisory and voting services. These services include in depth research, analysis, and voting recommendations as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance related efforts. While the Proxy Committee relies upon ISS research in establishing T. Rowe Price's voting guidelines-many of which are consistent with ISS positions-To Rowe Price occasionally may deviate from ISS recommendations on general policy issues or specific proxy proposals. FIDUCIARY CONSIDERATIONS T. Rowe Price's decisions with respect to proxy issues are made in light of the anticipated impact of the issue on the desirability of investing in the portfolio company. Proxies are voted solely in the interests of the client, Price Fund shareholders or, where employee benefit plan assets are C-28 involved, in the interests of plan participants and beneficiaries. Practicalities and costs involved with international investing may make it impossible at times, and at other times disadvantageous, to vote proxies in every instance. For example, we might refrain from voting if we or our agents are required to appear in person at a shareholder meeting or if the exercise of voting rights results in the imposition of trading or other ownership restrictions. CONSIDERATION GIVEN MANAGEMENT RECOMMENDATIONS When determining whether to invest in a particular company, one of the key factors T. Rowe Price considers is the quality and depth of its management. As a result, T. Rowe Price believes that recommendations of management on most issues should be given weight in determining how proxy issues should be voted. T. ROWE PRICE VOTING POLICIES Specific voting guidelines have been established by the Proxy Committee for recurring issues that appear on proxies, which are available to clients upon request. The following is a summary of the more significant T. Rowe Price policies: Election of Directors T. Rowe Price generally supports slates with a majority of independent directors. We withhold votes for outside directors that do not meet certain criteria relating to their independence or their inability to dedicate sufficient time to their board duties due to their commitment to other boards. We also withhold votes for inside directors serving on compensation, nominating and audit committees and for directors who miss more than one-fourth of the scheduled board meetings. We may also withhold votes from inside directors for the failure to establish a formal nominating committee. T. Rowe Price supports shareholder proposals calling for a majority vote threshold for the election of directors. Executive Compensation Our goal is to assure that a company's equity-based compensation plan is aligned with shareholders' long-term interests. While we evaluate most plans on a case-by-case basis, T. Rowe Price generally opposes compensation packages that provide what we view as excessive awards to a few senior executives or that contain excessively dilutive stock option plans. We base our review on criteria such as the costs associated with the plan, plan features, burn rates which are excessive in relation to the company's peers, dilution to shareholders and comparability to plans in the company's peer group. We generally oppose plans that give a company the ability to re-price options or to grant options at below market prices. For companies with particularly egregious pay practices we may withhold votes from compensation committee members, the CEO, or even the entire board. Mergers and Acquisitions - T. Rowe Price considers takeover offers, mergers, and other extraordinary corporate transactions on a case-by-case basis to determine if they are beneficial to shareholders' current and future earnings stream and to ensure that our Price Funds and clients are receiving fair compensation in exchange for their investment. Anti-takeover, Capital Structure and Corporate Governance Issues T. Rowe Price generally opposes anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions. Such anti-takeover mechanisms include classified boards, supermajority voting requirements, dual share classes and poison pills. We also oppose proposals which give management a "blank check" to create new classes of stock with disparate rights and privileges. We generally support proposals to permit cumulative voting and those that seek to prevent potential acquirers from receiving a takeover premium for their shares. C-29 When voting on corporate governance proposals, we will consider the dilutive impact to shareholders and the effect on shareholder rights. We generally support shareholder proposals that call for the separation of the Chairman and CEO positions unless there arc sufficient governance safeguards already in place. With respect to proposals for the approval of a company's auditor, we typically oppose auditors who have a significant non-audit relationship with the company. Social and Corporate Responsibility Issues T. Rowe Price generally votes with a company's management on social, environmental and corporate responsibility issues unless they have substantial economic implications for the company's business and operations that have not been adequately addressed by management. MONITORING AND RESOLVING CONFLICTS OF INTEREST The Proxy Committee is also responsible for monitoring and resolving possible material conflicts between the interests of T. Rowe Price and those of its clients with respect to proxy voting. We believe that due to the client-focused nature of our investment management business that the potential for conflicts of interests are relatively infrequent. Nevertheless, we have adopted safeguards to ensure that Our proxy voting is not influenced by interests other than those of our clients. While membership on the Proxy Committee is diverse, it does not include individuals whose primary duties relate to client relationship management, marketing or sales. Since our voting guidelines are pre-determined by the Proxy Committee using recommendations from ISS, an independent third party, application of the T. Rowe Price guidelines to vote clients' proxies should in most instances adequately address any possible conflicts of interest. However, for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy Committee reviews all such proxy votes in order to determine whether the portfolio manager's voting rationale appears reasonable. The Proxy Committee also assesses whether any business or other relationships between T. Rowe Price and a portfolio company could have influenced an inconsistent vote on that company's proxy. Issues raising possible conflicts of interest are referred to designated members of the Proxy Committee for immediate resolution prior to the time T. Rowe Price casts its vote. With respect to personal conflicts of interest, T. Rowe Price's Code of Ethics requires all employees to avoid placing themselves in a "compromising position" where their interests may conflict with those of our clients and restricts their ability to engage in certain outside business activities. Portfolio managers or Proxy Committee members with a personal conflict of interest regarding a particular proxy vote must recuse themselves and not participate in the voting decisions with respect to that proxy. C-30 T. ROWE PRICE ASSOCIATES, INC T. ROWE PRICE INTERNATIONAL, INC T. ROWE PRICE GLOBAL INVESTMENT SERVICES, LTD T. ROWE PRICE GLOBAL ASSET MANAGEMENT, LTD PROXY VOTING POLICIES AND PROCEDURES RESPONSIBILITY TO VOTE PROXIES T. Rowe Price Associates, Inc., T. Rowe Price International, Inc., T. Rowe Price Global Investment Services Limited, and T. Rowe Price Global Asset Management Limited ("T. ROWE PRICE") recognize and adhere to the principle that one of the privileges of owning stock in a company is the right to vote in the election of the company's directors and on matters affecting certain important aspects of the company's structure and operations that are submitted to shareholder vote. As an investment adviser with a fiduciary responsibility to its clients, T. Rowe Price analyzes the proxy statements of issuers whose stock is owned by the U.S.-registered investment companies which it sponsors and serves as investment adviser ("T. ROWE PRICE FUNDS") and by institutional and private counsel clients who have requested that T. Rowe Price be involved in the proxy process. T. Rowe Price has assumed the responsibility for voting proxies on behalf of the T. Rowe Price Funds and certain counsel clients who have delegated such responsibility to T. Rowe Price. In addition, T. Rowe Price makes recommendations regarding proxy voting to counsel clients who have not delegated the voting responsibility but who have requested voting advice. T. Rowe Price has adopted these Proxy Voting Policies and Procedures ("POLICIES AND PROCEDURES") for the purpose of establishing formal policies and procedures for performing and documenting its fiduciary duty with regard to the voting of client proxies. FIDUCIARY CONSIDERATIONS. It is the policy of T. Rowe Price that decisions with respect to proxy issues will be made in light of the anticipated impact of the issue on the desirability of investing in the portfolio company from the viewpoint of the particular client or Price Fund. Proxies are voted solely in the interests of the client, Price Fund shareholders or, where employee benefit plan assets are involved, in the interests of plan participants and beneficiaries. Our intent has always been to vote proxies, where possible to do so, in a manner consistent with our fiduciary obligations and responsibilities. Practicalities and costs involved with international investing may make it impossible at times, and at other times disadvantageous, to vote proxies in every instance. CONSIDERATION GIVEN MANAGEMENT RECOMMENDATIONS. One of the primary factors T. Rowe Price considers when determining the desirability of investing in a particular company is the quality and depth of its management. The Policies and Procedures were developed with the recognition that a company's management is entrusted with the day-to-day operations of the company, as well as its long-term direction and strategic planning, subject to the oversight of the company's board of directors. Accordingly, T. Rowe Price believes that the recommendation of management on most issues should be given weight in determining how proxy issues should be voted. However, the position of the company's management will not be supported in any C-31 situation where it is found to be not in the best interests of the client, and the portfolio manager may always elect to vote contrary to management when he or she believes a particular proxy proposal may adversely affect the investment merits of owning stock in a portfolio company. ADMINISTRATION OF POLICIES AND PROCEDURES PROXY COMMITTEE. T. Rowe Price's Proxy Committee ("PROXY COMMITTEE") is responsible for establishing positions with respect to corporate governance and other proxy issues, including those involving social responsibility issues. The Proxy Committee also reviews questions and responds to inquiries from clients and mutual fund shareholders pertaining to proxy issues of corporate responsibility. While the Proxy Committee sets voting guidelines and serves as a resource for T. Rowe Price portfolio management, it does not have proxy voting authority for any Price Fund or counsel client. Rather, this responsibility is held by the Chairperson of the Fund's Investment Advisory Committee or counsel client's portfolio manager. INVESTMENT SERVICES GROUP. The Investment Services Group ("INVESTMENT SERVICES GROUP") is responsible for administering the proxy voting process as set forth in the Policies and Procedures. PROXY ADMINISTRATOR. The Investment Services Group will assign a Proxy Administrator ("PROXY ADMINISTRATOR") who will be responsible for ensuring that all meeting notices are reviewed and important proxy matters are communicated to the portfolio managers and regional managers for consideration. HOW PROXIES ARE REVIEWED, PROCESSED AND VOTED In order to facilitate the proxy voting process, T. Rowe Price has retained Institutional Shareholder Services ("ISS") as an expert in the proxy voting and corporate governance area. ISS specializes in providing a variety of fiduciary-level proxy advisory and voting services. These services include in-depth research, analysis, and voting recommendations as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance-related efforts. While the Proxy Committee relies upon ISS research in establishing T. Rowe Price's proxy voting guidelines, and many of our guidelines are consistent with ISS positions, T. Rowe Price occasionally deviates from ISS recommendations on general policy issues or specific proxy proposals. MEETING NOTIFICATION T. Rowe Price utilizes ISS' voting agent services to notify us of upcoming shareholder meetings for portfolio companies held in client accounts and to transmit votes to the various custodian banks of our clients. ISS tracks and reconciles T. Rowe Price holdings against incoming proxy ballots. If ballots do not arrive on time, ISS procures them from the appropriate custodian or proxy distribution agent. Meeting and record date information is updated daily, and transmitted to T. Rowe Price through Governance Analytics, an ISS web-based application. ISS is also responsible for maintaining copies of all proxy statements received by issuers and to promptly provide such materials to T. Rowe Price upon request. VOTE DETERMINATION C-32 ISS provides comprehensive summaries of proxy proposals (including social responsibility issues), publications discussing key proxy voting issues, and specific vote recommendations regarding portfolio company proxies to assist in the proxy research process. The final authority and responsibility for proxy voting decisions remains with T. Rowe Price. Decisions with respect to proxy matters are made primarily in light of the anticipated impact of the issue on the desirability of investing in the company from the viewpoint of our clients. Portfolio managers may decide to vote their proxies consistent with T. Rowe Price's policies as set by the Proxy Committee and instruct our Proxy Administrator to vote all proxies accordingly. Alternatively, portfolio managers may request to review the vote recommendations and sign-off on all the proxies before the votes are cast, or may choose only to sign-off on those votes cast against management. The portfolio managers are also given the option of reviewing and determining the votes on all proxies without utilizing the vote guidelines of the Proxy Committee. In all cases, the portfolio managers may elect to receive current reports summarizing all proxy votes in his or her client accounts. Portfolio managers who vote their proxies inconsistent with T. Rowe Price guidelines are required to document the rationale for their vote. The Proxy Administrator is responsible for maintaining this documentation and assuring that it adequately reflects the basis for any vote which is cast in opposition to T. Rowe Price policy. T. ROWE PRICE VOTING POLICIES Specific voting guidelines have been adopted by the Proxy Committee for routine anti-takeover, executive compensation and corporate governance proposals, as well as other common shareholder proposals, and are available to clients upon request. The following is a summary of the significant T. Rowe Price policies: Election of Directors - T. Rowe Price generally supports slates with a majority of independent directors. T. Rowe Price withholds votes for outside directors that do not meet certain criteria relating to their independence or their inability to dedicate sufficient time to their board duties due to their commitments to other boards. We also withhold votes for inside directors serving on compensation, nominating and audit committees and for directors who miss more than one-fourth of the scheduled board meetings. We may also withhold votes from inside directors for the failure to establish a formal nominating committee. We vote against management efforts to stagger board member terms by withholding votes from directors because a staggered board may act as a deterrent to takeover proposals. T. Rowe Price supports shareholder proposals calling for a majority vote threshold for the election of directors. Anti-takeover and Corporate Governance Issues - T. Rowe Price generally opposes anti-takeover measures since they adversely impact shareholder rights and limit the ability of shareholders to act on possible transactions. Such anti-takeover mechanisms include classified boards, supermajority voting requirements, dual share classes, and poison pills. We also oppose proposals that give management a "blank check" to create new classes of stock with disparate rights and privileges. We generally support proposals to permit cumulative voting and those that seek to prevent potential acquirers from receiving a takeover premium for their shares. When voting on corporate governance proposals, T. Rowe Price will consider the dilutive impact to shareholders and the effect on shareholder rights. We generally support shareholder proposals C-33 that call for the separation of the Chairman and CEO positions unless there are sufficient governance safeguards already in place. With respect to proposals for the approval of a company's auditor, we typically oppose auditors who have a significant non-audit relationship with the company. Executive Compensation Issues - T. Rowe Price's goal is to assure that a company's equity-based compensation plan is aligned with shareholders' long-term interests. While we evaluate most plans on a case-by-case basis, T. Rowe Price generally opposes compensation packages that provide what we view as excessive awards to a few senior executives or that contain excessively dilutive stock option grants based on a number of criteria such as the costs associated with the plan, plan features, burn rates which are excessive in relation to the company's peers, dilution to shareholders and comparability to plans in the company's peer group. We generally oppose efforts to reprice options in the event of a decline in value of the underlying stock. For companies with particularly egregious pay practices such as excessive severance packages, perks, and bonuses (despite under- performance), or moving performance targets (to avoid poor payouts), we may withhold votes from compensation committee members as well the CEO or even the entire board. Mergers and Acquisitions - T. Rowe Price considers takeover offers, mergers, and other extraordinary corporate transactions on a case-by-case basis to determine if they are beneficial to shareholders' current and future earnings stream and to ensure that our Price Funds and clients are receiving fair compensation in exchange for their investment. Social and Corporate Responsibility Issues - Vote determinations for corporate responsibility issues are made by the Proxy Committee using ISS voting recommendations. T. Rowe Price generally votes with a company's management on the following social, environmental and corporate responsibility issues unless the issue has substantial economic implications for the company's business and operations which have not been adequately addressed by management: - Corporate environmental practices; - Employment practices and employment opportunity; - Military, nuclear power and related energy issues; - Tobacco, alcohol, infant formula and safety in advertising practices; - Economic conversion and diversification; - International labor practices and operating policies; - Genetically-modified foods; and - Animal rights. T. Rowe Price may support the following well-targeted shareholder proposals that call for enhanced disclosure and/or policy changes by companies where relevant to their business: - Political contributions/activities; - Climate change and global warning; and - Board diversity and sexual orientation employment policies. Global Portfolio Companies - ISS applies a two-tier approach to determining and applying global proxy voting policies. The first tier establishes baseline policy guidelines for the most fundamental issues, which span the corporate governance spectrum without regard to a C-34 company's domicile. The second tier takes into account various idiosyncrasies of different countries, making allowances for standard market practices, as long as they do not violate the fundamental goals of good corporate governance. The goal is to enhance shareholder value through effective use of shareholder franchise, recognizing that application of policies developed for U.S. corporate governance issues are not necessarily appropriate for foreign markets. The Proxy Committee has reviewed ISS' general global policies and has developed international proxy voting guidelines which in most instances are consistent with ISS recommendations. Votes Against Company Management - Where ISS recommends a vote against management on any particular proxy issue, the Proxy Administrator ensures that the portfolio manager reviews such recommendations before a vote is cast. Consequently, if a portfolio manager believes that management's view on a particular proxy proposal may adversely affect the investment merits of owning stock in a particular company, he/she may elect to vote contrary to management. Also, our research analysts are asked to present their voting recommendations in such situations to our portfolio managers. Index and Passively Managed Accounts - Proxy voting for index and other passively-managed portfolios is administered by the Investment Services Group using ISS voting recommendations when their recommendations are consistent with T. Rowe Price's policies as set by the Proxy Committee. If a portfolio company is held in both an actively managed account and an index account, the index account will default to the vote as determined by the actively managed proxy voting process. Divided Votes - In the unusual situation where a decision is made which is contrary to the policies established by the Proxy Committee, or differs from the vote for any other client or T. Rowe Price Fund, the Investment Services Group advises the portfolio managers involved of the divided vote. The persons representing opposing views may wish to confer to discuss their positions. Opposing votes will be cast only if it is determined to be prudent to do so in light of each client's investment program and objectives. In such instances, it is the normal practice for the portfolio manager to document the reasons for the vote if it is against T. Rowe Price policy. The Proxy Administrator is responsible for assuring that adequate documentation is maintained to reflect the basis for any vote which is cast in opposition to T. Rowe Price policy. Shareblocking - Shareblocking is the practice in certain foreign countries of "freezing" shares for trading purposes in order to vote proxies relating to those shares. In markets where shareblocking applies, the custodian or sub-custodian automatically freezes shares prior to a shareholder meeting once a proxy has been voted. Shareblocking typically takes place between one and fifteen (15) days before the shareholder meeting, depending on the market. In markets where shareblocking applies, there is a potential for a pending trade to fail if trade settlement takes place during the blocking period. T. Rowe Price's policy is generally to abstain from voting shares in shareblocking countries unless the matter has compelling economic consequences that outweigh the potential loss of liquidity in the blocked shares. Securities on Loan - The T. Rowe Price Funds and our institutional clients may participate in securities lending programs to generate income. Generally, the voting rights pass with the securities on loan; however, lending agreements give the lender the right to terminate the loan and pull back the loaned shares provided sufficient notice is given to the custodian bank in advance of the voting deadline. T. Rowe Price's policy is generally not to vote securities on loan C-35 unless the portfolio manager has knowledge of a material voting event that could affect the value of the loaned securities. In this event, the portfolio manager has the discretion to instruct the Proxy Administrator to pull back the loaned securities in order to cast a vote at an upcoming shareholder meeting. VOTE EXECUTION AND MONITORING OF VOTING PROCESS Once the vote has been determined, the Proxy Administrator enters votes electronically into ISS's Governance Analytics system. ISS then transmits the votes to the proxy agents or custodian banks and sends electronic confirmation to T. Rowe Price indicating that the votes were successfully transmitted. On a daily basis, the Proxy Administrator queries the Governance Analytics system to determine newly announced meetings and meetings not yet voted. When the date of the stockholders' meeting is approaching, the Proxy Administrator contacts the applicable portfolio manager if the vote for a particular client or Price Fund has not yet been recorded in the computer system. Should a portfolio manager wish to change a vote already submitted, the portfolio manager may do so up until the deadline for vote submission, which varies depending on the company's domicile. MONITORING AND RESOLVING CONFLICTS OF INTEREST The Proxy Committee is also responsible for monitoring and resolving possible material conflicts between the interests of T. Rowe Price and those of its clients with respect to proxy voting. We have adopted safeguards to ensure that our proxy voting is not influenced by interests other than those of our fund shareholders. While membership on the Proxy Committee is diverse, it does not include individuals whose primary duties relate to client relationship management, marketing, or sales. Since T. Rowe Price's voting guidelines are pre-determined by the Proxy Committee using recommendations from ISS, an independent third party, application of the T. Rowe Price guidelines by fund portfolio managers to vote fund proxies should in most instances adequately address any possible conflicts of interest. However, the Proxy Committee reviews all proxy votes that are inconsistent with T. Rowe Price guidelines to determine whether the portfolio manager's voting rationale appears reasonable. The Proxy Committee also assesses whether any business or other relationships between T. Rowe Price and a portfolio company could have influenced an inconsistent vote on that company's proxy. Issues raising possible conflicts of interest are referred to designated members of the Proxy Committee for immediate resolution prior to the time T. Rowe Price casts its vote. With respect to personal conflicts of interest, T. Rowe Price's Code of Ethics and Conduct requires all employees to avoid placing themselves in a "compromising position" in which their interests may conflict with those of our clients and restricts their ability to engage in certain outside business activities. Portfolio managers or Proxy Committee members with a personal conflict of interest regarding a particular proxy vote must recuse themselves and not participate in the voting decisions with respect to that proxy. C-36 Specific Conflict of Interest Situations - Voting of T. Rowe Price Group, Inc. common stock (sym: TROW) by certain T. Rowe Price Index Funds will be done in all instances in accordance with T. Rowe Price policy and votes inconsistent with policy will not be permitted. In addition, T. Rowe Price has voting authority for proxies of the holdings of certain T. Rowe Price funds that invest in other T. Rowe Price funds. In cases where the underlying fund of a T. Rowe Price fund-of -funds holds a proxy vote, T. Rowe Price will mirror vote the fund shares held by the fund-of-funds in the same proportion as the votes cast by the shareholders of the underlying funds. REPORTING AND RECORD RETENTION Vote Summary Reports will be generated for each client that requests T. Rowe Price to furnish proxy voting records. The report specifies the portfolio companies, meeting dates, proxy proposals, and votes which have been cast for the client during the period and the position taken with respect to each issue. Reports normally cover quarterly or annual periods. All client requests for proxy information will be recorded and fulfilled by the Proxy Administrator. T. Rowe Price retains proxy solicitation materials, memoranda regarding votes cast in opposition to the position of a company's management, and documentation on shares voted differently. In addition, any document which is material to a proxy voting decision such as the T. Rowe Price voting guidelines, Proxy Committee meeting materials, and other internal research relating to voting decisions will be kept. Proxy statements received from issuers (other than those which are available on the SEC's EDGAR database) are kept by ISS in its capacity as voting agent and are available upon request. All proxy voting materials and supporting documentation are retained for six years. C-37 EXHIBIT I TURNER INVESTMENT PARTNERS, INC. TURNER INVESTMENT MANAGEMENT, LLC TUNER INVESTMENT ADVISORS, LLC PROXY VOTING POLICY AND PROCEDURES Turner Investment Partners, Inc., as well as its investment advisory affiliate, Turner Investment Management, LLC (collectively, Turner), act as fiduciaries in relation to their clients and the assets entrusted by them to their management. Where the assets placed in Turner's care include shares of corporate stock, and except where the client has expressly reserved to itself or another party the duty to vote proxies, it is Turner's duty as a fiduciary to vote all proxies relating to such shares. Duties with Respect to Proxies: Turner has an obligation to vote all proxies appurtenant to shares of corporate stock owned by its client accounts in the best interests of those clients. In voting these proxies, Turner may not be motivated by, or subordinate the client's interests to, its own objectives or those of persons or parties unrelated to the client. Turner will exercise all appropriate and lawful care, skill, prudence and diligence in voting proxies, and shall vote all proxies relating to shares owned by its client accounts and received by Turner. Turner shall not be responsible, however, for voting proxies that it does not receive in sufficient time to respond. Delegation: In order to carry out its responsibilities in regard to voting proxies, Turner must track all shareholder meetings convened by companies whose shares are held in Turner client accounts, identify all issues presented to shareholders at such meetings, formulate a principled position on each such issue and ensure that proxies pertaining to all shares owned in client accounts are voted in accordance with such determinations. Consistent with these duties, Turner has delegated certain aspects of the proxy voting process to Institutional Shareholder Services, and its Proxy Voting Service (PVS) subsidiary. PVS is a separate investment adviser registered under the Investment Advisers Act of 1940, as amended. Under an agreement entered into with Turner, PVS has agreed to vote proxies in accordance with recommendations developed by PVS and overseen by Turner, except in those instances where Turner has provided it with different direction. Review and Oversight: Turner has reviewed the methods used by PVS to identify and track shareholder meetings called by publicly traded issuers throughout the United States and around the globe. Turner has satisfied itself that PVS operates a system reasonably designed to identify all such meetings and to provide Turner with timely notice of the date, time and place of such meetings. Turner has further reviewed the principles and procedures employed by PVS in making recommendations on voting proxies on each issue presented, and has satisfied itself that PVS's recommendations are: (i) based upon an appropriate level of diligence and research, and (ii) designed to further the interests of shareholders and not serve other unrelated or C-38 improper interests. Turner, either directly or through its duly-constituted Proxy Committee, shall review its determinations as to PVS at least annually. Notwithstanding its belief that PVS's recommendations are consistent with the best interests of shareholders and appropriate to be implemented for Turner's client accounts, Turner has the right and the ability to depart from a recommendation made by PVS as to a particular vote, slate of candidates or otherwise, and can direct PVS to vote all or a portion of the shares owned for client accounts in accordance with Turner's preferences. PVS is bound to vote any such shares subject to that direction in strict accordance with all such instructions. Turner, through its Proxy Committee, reviews on a regular basis the overall shareholder meeting agenda, and seeks to identify shareholder votes that warrant further review based upon either (i) the total number of shares of a particular company stock that Turner holds for its clients accounts, or (ii) the particular subject matter of a shareholder vote, such as board independence or shareholders' rights issues. In determining whether to depart from a PVS recommendation, the Turner Proxy Committee looks to its view of the best interests of shareholders, and provides direction to PVS only where in Turner's view departing from the PVS recommendation appears to be in the best interests of Turner's clients as shareholders. The Proxy Committee keeps minutes of its determinations in this regard. Conflicts of Interest: Turner stock is not publicly traded, and Turner is not otherwise affiliated with any issuer whose shares are available for purchase by client accounts. Further, no Turner affiliate currently provides brokerage, underwriting, insurance, banking or other financial services to issuers whose shares are available for purchase by client accounts. Where a client of Turner is a publicly traded company in its own right, Turner may be restricted from acquiring that company's securities for the client's benefit. Further, while Turner believes that any particular proxy issues involving companies that engage Turner, either directly or through their pension committee or otherwise, to manage assets on their behalf, generally will not present conflict of interest dangers for the firm or its clients, in order to avoid even the appearance of a conflict of interest, the Proxy Committee will determine, by surveying the Firm's employees or otherwise, whether Turner, an affiliate or any of their officers has a business, familial or personal relationship with a participant in a proxy contest, the issuer itself or the issuer's pension plan, corporate directors or candidates for directorships. In the event that any such relationship is found to exist, the Proxy Committee will take appropriate steps to ensure that any such relationship (or other potential conflict of interest), does not influence Turner's or the Committee's decision to provide direction to PVS on a given vote or issue. Further to that end, Turner will adhere to all recommendations made by PVS in connection with all shares issued by such companies and held in Turner client accounts, and, absent extraordinary circumstances that will be documented in writing, will not subject any such proxy to special review by the Proxy Committee. Turner will seek to resolve any conflicts of interests that may arise prior to voting proxies in a manner that reflects the best interests of its clients. Obtaining Proxy Voting Information: To obtain information on how Turner voted proxies, please contact: Andrew Mark, Director of Operations and Technology Administration C/o Turner Investment Partners, Inc. 1205 Westlakes Drive, Suite 100 C-39 Berwyn, PA 19312 Recordkeeping: Turner shall retain its (i) proxy voting policies and procedures; (ii) proxy statements received regarding client statements; (iii) records or votes it casts on behalf of clients; (iv) records of client requests for proxy voting information, and (v) any documents prepared by Turner that are material in making a proxy voting decision. Such records may be maintained with a third party, such as PVS, that will provide a copy of the documents promptly upon request. Adopted: July 1, 2003 Last revised: July 15, 2005 C-40 EXHIBIT J VONTOBEL ASSET MANAGEMENT, INC. PROXY VOTING POLICIES AND PROCEDURES (ADOPTED JULY, 2003) Pursuant to the recent adoption by the Securities and Exchange Commission (the "Commission") of Rule 206(4)-6 (17 CFR 275.206(4)-6) and amendments to Rule 204-2 (17 CFR 275.204-2) under the Investment Advisers Act of 1940 (the "Act"), it is a fraudulent, deceptive, or manipulative act, practice or course of business, within the meaning of Section 206(4) of the Act, for an investment adviser to exercise voting authority with respect to client securities, unless (i) the adviser has adopted and implemented written policies and procedures that are reasonably designed to ensure that the adviser votes proxies in the best interests of its clients, (ii) the adviser describes its proxy voting procedures to its clients and provides copies on request, and (iii) the adviser discloses to clients how they may obtain information on how the adviser voted their proxies. In order to fulfill our responsibilities under the Act, Vontobel Asset Management, Inc. (hereinafter "Vontobel") has adopted the following policies and procedures for proxy voting with regard to companies in our clients' investment portfolios. KEY OBJECTIVES The key objectives of these policies and procedures recognize that a company's management is entrusted with the day-to-day operations and longer term strategic planning of the company, subject to the oversight of the company's board of directors. While "ordinary business matters" are primarily the responsibility of management and should be approved solely by the corporation's board of directors, these objectives also recognize that the company's shareholders must have final say over how management and directors are performing, and how shareholders' rights and ownership interests are handled, especially when matters could have substantial economic implications to the shareholders. Therefore, we will pay particular attention to the following matters in exercising our proxy voting responsibilities as a fiduciary for our clients: Accountability. Each company should have effective means in place to hold those entrusted with running a company's business accountable for their actions. Management of a company should be accountable to its board of directors and the board should be accountable to shareholders. Alignment of Management and Shareholder Interests. Each company should endeavor to align the interests of management and the board of directors with the interests of the company's shareholders. For example, we generally believe that compensation should be designed to reward management for doing a good job of creating value for the shareholders of the company. Transparency. Promotion of timely disclosure of important information about a company's business operations and financial performance enables investors to evaluate the performance of a company and to make informed decisions about the purchase and sale of a company's securities. DECISION METHODS C-41 This policy applies only to those Vontobel clients who in their investment advisory contract have chosen to have us vote their proxies. A client can change their proxy-voting decision at any time upon written notice. The sheer number of proxy votes related to client holdings makes it impossible for Vontobel to research each and every proxy issue. Recognizing the importance of informed and responsible proxy voting, we rely on Institutional Shareholder Services (ISS) to provide proxy voting research and guidance. ISS offers two separate policies, one general plan and another for Taft-Hartley clients. In most cases we vote in strict accordance with ISS recommendations, but we reserve the right to change that vote when a majority of the Portfolio Managers disagree with an ISS recommendation or the firm is otherwise advised by the client in writing. In those instances, a memo will be written to document the research presented, discussion points and final decision regarding the vote. Whenever a proxy vote presents a material conflict between the interests of a client, on the one hand, and our interests or the interests of a person affiliated with us, on the other, we will abstain from making a voting decision and will forward all of the necessary proxy voting materials to the client to enable the client to cast the votes. CLIENT INFORMATION A copy of these Proxy Voting Policies and Procedures is available to our clients, without charge, upon request, by calling our Compliance Officer, Joseph Mastoloni at (212) 415-7051. We will send a copy of these Proxy Voting Policies and Procedures within three business days of receipt of a request, by first-class mail or other means designed to ensure equally prompt delivery. Clients may obtain a summary of the proxy votes cast by us for that client's portfolio by requesting a summary from the firm's Operations Manager, Edgar Ruffin at Vontobel Asset Management, Inc., 450 Park Avenue, New York, NY 10022. C-42 EXHIBIT K WELLS CAPITAL MANAGEMENT PROXY VOTING POLICIES AND PROCEDURES 1. Scope of Policies and Procedures. These Proxy Voting Policies and Procedures ("Procedures") are used to determine how to vote proxies relating to portfolio securities held in accounts managed by Wells Capital Management and whose voting authority has been delegated to Wells Capital Management. Wells Capital Management believes that the Procedures are reasonably designed to ensure that proxy matters are conducted in the best interest of clients, in accordance with its fiduciary duties. 2. Voting Philosophy. Wells Capital Management exercises its voting responsibility, as a fiduciary, with the goal of maximizing value to shareholders consistent with the governing laws and investment policies of each portfolio. While securities are not purchased to exercise control or to seek to effect corporate change through share ownership, Wells Capital Management supports sound corporate governance practices within companies in which they invest. Wells Capital Management utilizes Institutional Shareholders Services (ISS), a proxy-voting agent, for voting proxies and proxy voting analysis and research. ISS votes proxies in accordance with the Wells Fargo Proxy Guidelines established by Wells Fargo Proxy Committee and attached hereto as Appendix A. 3. Responsibilities (A) Proxy Administrator Wells Capital Management has designated a Proxy Administrator who is responsible for administering and overseeing the proxy voting process to ensure the implementation of the Procedures. The Proxy Administrator monitors ISS to determine that ISS is accurately applying the Procedures as set forth herein and that proxies are voted in a timely and responsible manner. The Proxy Administrator reviews the continuing appropriateness of the Procedures set forth herein, recommends revisions as necessary and provides an annual update on the proxy voting process. (i) Voting Guidelines. Wells Fargo Proxy Guidelines set forth Wells Fargo's proxy policy statement and guidelines regarding how proxies will be voted on the issues specified. ISS will vote proxies for or against as directed by the guidelines. Where the guidelines specify a "case by case" determination for a particular issue, ISS will evaluate the proxies based on thresholds established in the proxy guidelines. In addition, proxies relating to issues not addressed in the guidelines, especially foreign securities, Wells Capital Management will defer to ISS Proxy Guidelines. Finally, with respect to issues for which a vote for or against is specified by the Procedures, the Proxy Administrator shall have the authority to direct ISS to forward the proxy to him or her for a discretionary vote, in consultation with the Proxy Committee or the portfolio manager covering the subject security if the Proxy Committee or the portfolio manager determines that a case-by-case review of such matter is warranted, provided however, that such authority to deviate from the Procedures shall not be exercised if the Proxy Administrator is aware of any conflict of interest as described further below with respect to such matter. (ii) Voting Discretion. In all cases, the Proxy Administrator will exercise its voting discretion in accordance with the voting philosophy of the Wells Fargo Proxy Guidelines. In cases where a proxy is forwarded by ISS to the Proxy Administrator, the Proxy Administrator may be assisted in its voting decision through receipt of: (i) independent research and voting recommendations provided by ISS or other independent sources; or (ii) information provided by company managements and shareholder groups. In the event that C-43 the Proxy Administrator is aware of a material conflict of interest involving Wells Fargo/Wells Capital Management or any of its affiliates regarding a proxy that has been forwarded to him or her, the Proxy Administrator will return the proxy to ISS to be voted in conformance with the voting guidelines of ISS. Voting decisions made by the Proxy Administrator will be reported to ISS to ensure that the vote is registered in a timely manner. (iii) Securities on Loan. As a general matter, securities on loan will not be recalled to facilitate proxy voting (in which case the borrower of the security shall be entitled to vote the proxy). (iv) Conflicts of Interest. Wells Capital Management has obtained a copy of ISS policies, procedures and practices regarding potential conflicts of interest that could arise in ISS proxy voting services to Wells Capital Management as a result of business conducted by ISS. Wells Capital Management believes that potential conflicts of interest by ISS are minimized by these policies, procedures and practices, a copy of which is attached hereto as Appendix B. In addition, Wells Fargo and/or Wells Capital Management may have a conflict of interest regarding a proxy to be voted upon if, for example, Wells Fargo and/or Wells Capital Management or its affiliates have other relationships with the issuer of the proxy. Wells Capital Management believes that, in most instances, any material conflicts of interest will be minimized through a strict and objective application by ISS of the voting guidelines attached hereto. However, when the Proxy Administrator is aware of a material conflict of interest regarding a matter that would otherwise require a vote by Wells Capital Management, the Proxy Administrator shall defer to ISS to vote in conformance with the voting guidelines of ISS. In addition, the Proxy Administrator will seek to avoid any undue influence as a result of any material conflict of interest that exists between the interest of a client and Wells Capital Management or any of its affiliates. To this end, an independent fiduciary engaged by Wells Fargo will direct the Proxy Administrator on voting instructions for the Wells Fargo proxy. (B) ISS ISS has been delegated with the following responsibilities: (i) Research and make voting determinations in accordance with the Wells Fargo Proxy Guidelines described in Appendix A; 2 (ii) Vote and submit proxies in a timely manner; (iii) Handle other administrative functions of proxy voting; (iv) Maintain records of proxy statements received in connection with proxy votes and provide copies of such proxy statements promptly upon request; (v) Maintain records of votes cast; and (vi) Provide recommendations with respect to proxy voting matters in general. (C) Except in instances where clients have retained voting authority, Wells Capital Management will instruct custodians of client accounts to forward all proxy statements and materials received in respect of client accounts to ISS. (D) Notwithstanding the foregoing, Wells Capital Management retains final authority and fiduciary responsibility for proxy voting. C-44 4. Record Retention. Wells Capital Management will maintain the following records relating to the implementation of the Procedures: (i) A copy of these proxy voting polices and procedures; (ii) Proxy statements received for client securities (which will be satisfied by relying on EDGAR or ISS); (iii) Records of votes cast on behalf of clients (which ISS maintains on behalf of Wells Capital Management); (iv) Records of each written client request for proxy voting records and Wells Capital Management's written response to any client request (written or oral) for such records; and (v) Any documents prepared by Wells Capital Management or ISS that were material to making a proxy voting decision. Such proxy voting books and records shall be maintained at an office of Wells Capital Management in an easily accessible place for a period of five years. 5. Disclosure of Policies and Procedures. Wells Capital Management will disclose to its clients a summary description of its proxy voting policy and procedures via mail. A detail copy of the policy and procedures will be provided to clients upon request by calling 1-800-736-2316. It is also posted on Wells Capital Management website at www.wellscap.com. Wells Capital Management will also provide proxy statements and any records as to how we voted proxies on behalf of client upon request. Clients may contact us at 1-800-736-2316 or by e-mail at http://www.wellscap.com/contactus/index.html to request a record of proxies voted on their behalf. Except as otherwise required by law, Wells Capital Management has a general policy of not disclosing to any issuer or third party how its client proxies are voted. January 21, 2006 APPENDIX A WELLS FARGO BANK PROXY GUIDELINES AND PHILOSOPHY FOR 2006 INTRODUCTION Wells Fargo Trust has adopted a system-wide philosophy statement and guidelines for voting of proxies for fiduciary and agency accounts where we have sole voting authority or joint voting authority (with other fiduciaries or co-actors). The voting of proxies is the responsibility of the Wells Fargo Proxy Committee, which is appointed each year by the Trust Operating Committee (TOC). A monthly review and approval of voting activity is the responsibility of the Trust Investment Committee (TIC). Most Wells Fargo fiduciary entities have appointed Institutional Shareholder Services (ISS) as their agent to vote proxies, following Wells Fargo guidelines to assure consistent application of the philosophy and voting guidelines and for efficiency of operations and processing since we share a single system and processing capability. Wells Fargo Bank administers the proxy voting process, including development and maintenance of proxy voting guidelines. PROXY POLICY STATEMENT C-45 A. Proxies relating to fiduciary accounts must be voted for the exclusive benefit of the trust beneficiary. Proxy votes should be cast based upon an analysis of the impact of any proposal on the economic value of the stock during the time the stock is intended to be held by a fiduciary account. B. Because the acquisition and retention of a security reflects confidence in management's ability to generate acceptable returns for the shareholder, certain proxy issues involving corporate governance should be voted as recommended by management. These issues are listed in the proxy guidelines incorporated in this document. C. We encourage the Board of Directors to request powers which can be used to enhance the economic value of the stock by encouraging negotiation with a potential acquirer or by discouraging coercive and undervalued offers: 1. The decision as to whether or not a Board of Directors should be granted these powers will be based upon: - an evaluation of the independence of the Board, as defined by the stock exchange in which the stock is traded, in its attempt to maximize shareholder value and, - upon an evaluation that the specific power being requested is reasonable in light of our objective to maximize the economic value of the stock and is not, in itself, abusive. Proxy issues that will be evaluated and voted in accordance with this standard are listed in the guidelines. 2. We will evaluate proposals where a Board of Directors has requested a change in their powers of corporate governance that increase the powers of the Board with respect to potential acquisition transactions as follows: a. An evaluation will be made of the Board's independence and performance as determined by a review of relevant factors including: 1. Length of service of senior management 2. Number/percentage of outside directors 3. Consistency of performance (EPS) over the last five years 4. Value/growth of shares relative to industry/market averages 5. Clear evidence of management and/or strategy changes implemented by the Board which are designed to improve company performance and shareholder value b. If the Board is viewed to be independent and the financial performance of the Company has been good: 1. An evaluation will be made as to the appropriateness of the power or change being requested, if properly exercised, to enhance the economic value of the stock. 2. If the provision itself is not viewed to be unnecessary or abusive (irrespective of the manner in which it may be exercised), then the proxy will be voted in favor of such proposal. c. If the Board is not viewed as independent, or the performance of the Company has not been good, or if the proposal is determined to be inappropriate, unnecessary, unusual, or abusive, the proxy will be voted against such proposal. C-46 d. If the Proxy Committee deems it appropriate, the Company may be offered the opportunity to present the Board's and management's position to the Committee. D. Our process for evaluating shareholder proposals will be as follows: 1. If the proposal relates to issues that do not have a material economic impact on the value of the stock, the proxy will be voted as recommended by management. 2. If the proposal has a potential economic impact on the value of the stock, the analysis outlined in paragraph C.2 above will be made. If the Board is viewed as independent and the financial performance of the Company has been good, then the proxy will be voted as recommended by management. 3. Standard shareholder proposals will be voted as indicated on Exhibit C. E. The Proxy Committee will ensure that adequate records are maintained which reflect (i) how and pursuant to which guidelines proxies are voted, (ii) that proxies and holdings are being reconciled, and (iii) whether reasonable efforts are being made to obtain any missing proxies. F. This Proxy Policy Statement may be disclosed to any current or prospective trust customer or beneficiary. Disclosure of proxy voting in specific accounts shall be made when requested by the plan sponsor, beneficiary, grantor, owner, or any other person with a beneficial interest in the account. G. Wells Fargo Bank employs Institutional Shareholder Services (ISS) as its proxy voting agent, responsible for analyzing proxies and recommending a voting position consistent with the Wells Fargo Proxy Guidelines. On issues where the Wells Fargo Proxy Guidelines are silent, Wells Fargo Bank will defer to the ISS Proxy Guidelines, particularly in the case of global proxy issues. The Wells Fargo Proxy Committee is responsible for the final decision on the voting of all proxies for Wells Fargo Bank. H. The Wells Fargo Proxy Committee has taken the following steps to ensure that material conflicts of interest are avoided between the interests of the client (fund shareholders and trust beneficiaries), on the one hand, and the investment adviser, corporation, principal underwriter, or an affiliated person of the trust account, fund, its investment adviser or principal underwriter, on the other hand. 1. The Wells Fargo Proxy Committee requires that all proxies relating to fiduciary accounts must be voted for the exclusive benefit of the fund shareholder and trust beneficiary. 2. The Wells Fargo Proxy Committee has adopted system-wide, written proxy guidelines and procedures for voting proxies to ensure consistency in voting proxies across all accounts. 3. Wells Fargo has hired ISS as our proxy-voting agent in analyzing and recommending a voting position on all proxies (based on the Wells Fargo Proxy Guidelines) to ensure independence and consistency in analysis, interpretation and implementation of the proxy voting process. 4. Wells Fargo hires an independent fiduciary to direct the Wells Fargo Proxy Committee on voting instructions for the Wells Fargo proxy. 5. Proxy guidelines, which are implemented on a case-by-case basis, are evaluated consistently across proxies on the basis of rigid, quantifiable thresholds. 6. The Wells Fargo organization has a wall of confidentiality between the commercial bank and its lending activities and the fiduciary responsibilities within the trust world. C-47 7. Proxy voting recommendations are not shared with senior management of Wells Fargo prior to casting our proxy vote, plus senior management has expressly requested that they not be informed on proxy voting issues. 8. The Wells Fargo Proxy Committee has final authority in exercising our fiduciary responsibility of voting proxies. 9. The Wells Fargo proxy voting record is available for review by the client. C-48 Uncontested Election of Directors or Trustees WFB will generally vote for all uncontested director or trustee FOR nominees. The Nominating Committee is in the best position to select nominees who are available and capable of working well together to oversee management of the company. WFB will not require a performance test for directors. WFB will generally vote for reasonably crafted shareholder FOR proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, unless the company has adopted formal corporate governance principles that present a meaningful alternative to the majority voting standard. WFB will withhold votes for a director if the nominee fails to WITHHOLD attend at least 75% of the board and committee meetings without a valid excuse. WFB will vote against routine election of directors if any of the AGAINST following apply: company fails to disclose adequate information in a timely manner, serious issues with the finances, questionable transactions, conflicts of interest, record of abuses against minority shareholder interests, bundling of director elections, and/or egregious governance practices. WFB will withhold votes from the entire board (except for new WITHHOLD nominees) where the director(s) receive more than 50% withhold votes out of those cast and the issue that was the underlying cause of the high level of withhold votes has not been addressed. WFB will withhold votes from audit committee members when a WITHHOLD material weakness in the effectiveness of their internal controls rises to a level of serious concern, as indicated by disclosures required under Section 404 of the Sarbanes-Oxley Act. Ratification of Auditors WFB will vote against auditors and withhold votes from audit AGAINST/ committee members if non-audit fees are greater than audit fees, WITHHOLD audit-related fees, and permitted tax fees, combined. WFB will follow the disclosure categories being proposed by the SEC in applying the above formula. With the above exception, WFB will generally vote for proposals FOR to ratify auditors unless:
C-49 - an auditor has a financial interest in or association with AGAINST the company, and is therefore not independent, or - there is reason to believe that the independent auditor has AGAINST rendered an opinion that is neither accurate nor indicative of the company's financial position.
C-50 WFB will vote against proposals that require auditors to attend AGAINST annual meetings as auditors are regularly reviewed by the board audit committee, and such attendance is unnecessary. WFB will consider shareholder proposals requiring companies to CASE-BY-CASE prohibit their auditors from engaging in non-audit services on a case-by-case basis (or cap level of non-audit services). WFB will vote for shareholder proposals requesting a shareholder FOR vote for audit firm ratification. WFB will vote against shareholder proposals asking for audit firm AGAINST rotation. This practice is viewed as too disruptive and too costly to implement for the benefit achieved. For foreign corporations, WFB will consider on a case-by-case CASE-BY-CASE basis if the auditors are being changed without an explanation, or if the nonaudit-related fees are substantial or in excess of standard audit fees, as the importance of maintaining the independence of the audit function is important. Specifically for Japan, WFB will consider voting against the AGAINST appointment of independent internal statutory auditors if they have served the company in any executive capacity, or can be considered affiliated in any way. Japan enacted laws in 1993, which call for the establishment of a three-member audit committee of independent auditors. Specifically for Japan, WFB will classify any proposed amendment to companies' articles of incorporation lengthening the internal auditors' term in office to four years from three years as a negative provision. Since this is mandated by law, this amendment would not warrant an automatic vote recommendation against. Directors and Auditor's Reports For foreign corporations, WFB will generally vote for proposals FOR to approve directors' and auditors' reports, unless: - there are concerns about the accuracy of the accounts AGAINST presented or the auditing procedures used; - the company is not responsive to shareholder questions about AGAINST specific items that should be publicly disclosed. The directors' report usually includes a review of the company's
C-51 performance during the year, justification of dividend levels and profits or losses, special events such as acquisitions or disposals, and future plans for the company. Shareholders can find reference to any irregularities or problems with the
C-52 company in the auditors report. Company Name Change/Purpose WFB will vote for proposals to change the company name as FOR management and the board is best suited to determine if such change in company name is necessary. However, where the name change is requested in connection with a CASE-BY-CASE reorganization of the company, the vote will be based on the merits of the reorganization. In addition, WFB will generally vote for proposals to amend the FOR purpose of the company. Management is in the best position to know whether the description of what the company does is accurate, or whether it needs to be updated by deleting, adding or revising language. Employee Stock Purchase Plans/401(k) Employee Benefit Plans WFB will vote for proposals to adopt, amend or increase FOR authorized shares for employee stock purchase plans and 401(k) plans for employees as properly structured plans enable employees to purchase common stock at a slight discount and thus own a beneficial interest in the company, provided that the total cost of the company's plan is not above the allowable cap for the company. Similarly, WFB will generally vote for proposals to adopt or FOR amend thrift and savings plans, retirement plans, pension plans and profit plans. Approve Other Business WFB will generally vote for proposals to approve other business. FOR This transfer of authority allows the corporation to take certain ministerial steps that may arise at the annual or special meeting. However, WFB retains the discretion to vote against such AGAINST proposals if adequate information is not provided in the proxy statement, or the measures are significant and no further approval from shareholders is sought. Independent Board Chairman WFB will vote against proposals requiring that the positions of AGAINST chairman and CEO be held separately. WFB would prefer to see the chairman and chief executive positions be
C-53 held by different individuals. However, separation of the two positions may not be in shareholders' best interests if the company has a limited roster of executive officers, or a recently organized company may need to combine these positions temporarily. It should also be noted that we support independence and would support a lead independent director. However, separating the chairman and CEO in most companies would be too disruptive to the company.
C-54 Specifically in the U.K., WFB will vote against a director AGAINST nominee who is both chairman and CEO if there is no adequate justification provided by the company. Independent Board of Directors/Board Committees WFB will vote for proposals requiring that two-thirds of the FOR board be independent directors, unless the board is effectively in compliance with the request based on the definition of independence established by the stock exchange in which the stock is traded. An independent board faces fewer conflicts and is best prepared to protect stockholders' interests. WFB will withhold votes from insiders and affiliated outsiders on WITHHOLD boards that are not at least majority independent. WFB will withhold votes from compensation committee members where WITHHOLD there is a pay-for-performance disconnect (for Russell 3000 companies). WFB will vote for proposals requesting that the board audit, FOR compensation and/or nominating committees be composed of independent directors, only. Committees should be composed entirely of independent directors in order to avoid conflicts of interest. WFB will withhold votes from any insiders or affiliated outsiders WITHHOLD on audit, compensation or nominating committees. WFB will withhold votes from any insiders or affiliated outsiders on the board if any of these key committees has not been established. Specifically in Canada, WFB will insert strong language in our analyses to highlight our disapproval of the 'single-slate' approach and call on companies to unbundle the director nominees up for election/reelection. Specifically in France, Management may propose a different board CASE-BY-CASE structure. The French Commercial Code gives companies three options in respect to their board structure. WFB will examine these proposals on a case-by-case basis. Specifically in Japan, in cases where a company has committed AGAINST some fraudulent or criminal act, WFB will vote against the representative director(s) and individuals personally implicated in the wrongdoing. In addition, WFB will vote against proposals asking the board to AGAINST address the issue of board diversity.
C-55 WFB will vote against proposals from shareholders requesting an AGAINST independent compensation consultant. Minimum Stock Requirements by Directors
C-56 WFB will vote against proposals requiring directors to own a AGAINST minimum number of shares of company stock in order to qualify as a director, or to remain on the board. Minimum stock ownership requirements can impose an across-the-board requirement that could prevent qualified individuals from serving as directors. Indemnification and Liability Provisions for Directors and Officers WFB will vote for proposals to allow indemnification of directors FOR and officers, when the actions taken were on behalf of the company and no criminal violations occurred. WFB will also vote in favor of proposals to purchase liability insurance covering liability in connection with those actions. Not allowing companies to indemnify directors and officers to the degree possible under the law would limit the ability of the company to attract qualified individuals. Alternatively, WFB will vote against indemnity proposals that are AGAINST overly broad. For example, WFB will oppose proposals to indemnify directors for acts going beyond mere carelessness, such as gross negligence, acts taken in bad faith, acts not otherwise allowed by state law or more serious violations of fiduciary obligations. For foreign corporations, WFB will vote against providing AGAINST indemnity insurance to auditors as payment of such fees by the company on behalf of the auditor calls into question the objectivity of the auditor in carrying out the audit. Board or Management Acts For foreign corporations, WFB will vote for the discharge of the FOR board and management unless: - there are serious questions about actions of the board or AGAINST management for the year in question; - legal action is being taken against the board by AGAINST shareholders. Discharge is a tacit vote of confidence in the company's corporate management and policies and does not necessarily eliminate the possibility of future shareholder action, although it does make such action more difficult to pursue. Nominee Statement in the Proxy WFB will vote against proposals that require board nominees to AGAINST have a statement of candidacy in the proxy, since the proxy statement already provides adequate information pertaining to the election of directors.
C-57 Limitation on Number of Boards a Director May Sit On WFB will withhold votes from non-CEO directors who sit on more WITHHOLD than six boards. WFB does not have a restriction on the number of boards a CEO sits on.
C-58 Director Tenure/Retirement Age WFB will vote against proposals to limit the tenure or retirement AGAINST age of directors as such limitations based on an arbitrary number could prevent qualified individuals from serving as directors. However, WFB is in favor of inserting cautionary language when the average director tenure on the board exceeds 15 years for the entire board. Board Powers/Procedures/Qualifications WFB will consider on a case-by-case basis proposals to amend the CASE-BY-CASE corporation's By-laws so that the Board of Directors shall have the power, without the assent or vote of the shareholders, to make, alter, amend, or rescind the By-laws, fix the amount to be reserved as working capital, and fix the number of directors and what number shall constitute a quorum of the Board. In determining these issues, WFB will rely on the proxy voting Guidelines. Loans to Officers WFB will consider on a case-by-case basis proposals to authorize CASE-BY-CASE the corporation to make loans or to guarantee the obligations of officers of the corporation or any of its affiliates. Adjourn Meeting to Solicit Additional Votes WFB will examine proposals to adjourn the meeting to solicit CASE-BY-CASE additional votes on a case-by-case basis. As additional solicitation may be costly and could result in coercive pressure on shareholders, WFB will consider the nature of the proposal and its vote recommendations for the scheduled meeting. WFB will vote for this item when: WFB is supportive of the underlying merger proposal; the company FOR provides a sufficient, compelling reason to support the adjournment proposal; and the authority is limited to adjournment proposals requesting the authority to adjourn solely to solicit proxies to approve a transaction the WFB supports. Contested Election of Directors or Trustees Reimbursement of Solicitation Expenses WFB will consider contested elections on a case-by-case basis, CASE-BY-CASE considering the following factors: long-term financial performance of
C-59 the target company relative to its industry; management's track record; background of the proxy contest; qualifications of director or trustee nominees (both slates); evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and stock ownership positions. In addition, decisions to provide reimbursement for dissidents waging a proxy contest are made on a case-by-case basis as proxy contests are governed by a
C-60 mix of federal regulation, state law, and corporate charter and CASE-BY-CASE bylaw provisions. Board Structure: Staggered vs. Annual Elections WFB will consider the issue of classified boards on a CASE-BY-CASE case-by-case basis. In some cases, the division of the board into classes, elected for staggered terms, can entrench the incumbent management and make them less responsive to shareholder concerns. On the other hand, in some cases, staggered elections may provide for the continuity of experienced directors on the Board. For foreign corporations, WFB will vote for the elimination of FOR protected board seats, as all directors should be accountable to shareholders. Removal of Directors WFB will consider on a case-by-case basis proposals to eliminate CASE-BY-CASE shareholders' rights to remove directors with or without cause or only with approval of two-thirds or more of the shares entitled to vote. However, a requirement that a 75% or greater vote be obtained for AGAINST removal of directors is abusive and will warrant a vote against the proposal. Board Vacancies WFB will vote against proposals that allow the board to fill AGAINST vacancies without shareholder approval as these authorizations run contrary to basic shareholders' rights. Alternatively, WFB will vote for proposals that permit FOR shareholders to elect directors to fill board vacancies. Cumulative Voting WFB will vote on proposals to permit or eliminate cumulative CASE-BY-CASE voting on a case-by-case basis based upon the existence of a counter balancing governance structure and company performance, in accordance with its proxy voting guideline philosophy. However, if the board is elected annually we will not support cumulative voting. Shareholders' Right To Call A Special Meeting Shareholder Ability to Act by Written Consent Proposals providing that stockholder action may be taken only at an
C-61 annual or special meeting of stockholder and not by written CASE-BY-CASE consent, or increasing the shareholder vote necessary to call a special meeting, will be voted on a case by case basis in accordance with the proxy voting guidelines. Board Size WFB will vote for proposals that seek to fix the size of the FOR board, as the ability for management to increase or decrease the size of the board in the face of a proxy contest may be used as a takeover defense.
C-62 However, if the company has cumulative voting, downsizing the AGAINST board may decrease a minority shareholder's chances of electing a director. By increasing the size of the board, management can make it more difficult for dissidents to gain control of the board. Fixing the size of the board also prevents a reduction in the board size as a means to oust independent directors or those who cause friction within an otherwise homogenous board. Shareholder Rights Plan (Poison Pills) WFB will generally vote for proposals that request a company to FOR submit its poison pill for shareholder ratification. WFB will withhold votes from all directors (except for new WITHHOLD nominees) if the company has adopted or renewed a poison pill without shareholder approval since the company's last annual meeting, does not put the pill to a vote at the current annual meeting, and does not have a requirement or does not commit to put the pill to shareholder vote within 12 months. In addition, WFB will withhold votes on all directors at any company that responds to the majority of the shareholders voting by putting the poison pill to a shareholder vote with a recommendation other than to eliminate the pill. Alternatively, WFB will analyze proposals to redeem a company's CASE-BY-CASE poison pill, or requesting the ratification of a poison pill on a case-by-case basis. Specifically for Canadian companies, WFB will consider on a CASE-BY-CASE case-by-case basis poison pill plans that contain a permitted bid feature as they require shareholder ratification of the pill and a sunset provisions whereby the pill expires unless it is renewed, and they specify that an all cash bid for all shares (or more recently majority of shares) that includes a fairness opinion and evidence of financing does not trigger the bill but forces a special meeting at which the offer is put to a shareholder vote. Also, WFB will also consider the balance of powers granted between the board and shareholders by the poison pill provisions. Poison pills are one of the most potent anti-takeover measures and are generally adopted by boards without shareholder approval. These plans harm shareholder value and entrench management by deterring stock acquisition offers that are not favored by the board.
C-63 Fair Price Provisions WFB will consider fair price provisions on a case-by-case basis, CASE-BY-CASE evaluating factors such as the vote required to approve the proposed mechanism, the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
C-64 WFB will vote against fair price provisions with shareholder vote AGAINST requirements of 75% or more of disinterested shares. Greenmail WFB will generally vote in favor of proposals limiting the FOR corporation's authority to purchase shares of common stock (or other outstanding securities) from a holder of a stated interest (5% or more) at a premium unless the same offer is made to all shareholders. These are known as "anti-greenmail" provisions. Greenmail discriminates against rank-and-file shareholders and may have an adverse effect on corporate image. If the proposal is bundled with other charter or bylaw CASE-BY-CASE amendments, WFB will analyze such proposals on a case-by-case basis. In addition, WFB will analyze restructurings that involve the payment of pale greenmail on a case-by-case basis. Voting Rights WFB will vote for proposals that seek to maintain or convert to a FOR one-share, one-vote capital structure as such a principle ensures that management is accountable to all the company's owners. Alternatively, WFB will vote against any proposals to cap the AGAINST number of votes a shareholder is entitled to. Any measure that places a ceiling on voting may entrench management and lessen its interest in maximizing shareholder value. Dual Class/Multiple-Voting Stock WFB will vote against proposals that authorize, amend or increase AGAINST dual class or multiple-voting stock which may be used in exchanges or recapitalizations. Dual class or multiple-voting stock carry unequal voting rights, which differ from those of the broadly traded class of common stock. Alternatively, WFB will vote for the elimination of dual class or FOR multiple-voting stock, which carry different rights than the common stock. For foreign corporations, WFB will vote for proposals that create FOR preference shares, provided the loss of voting rights is adequately compensated with a higher dividend and the total amount of preference share capital is not greater than 50% of the total outstanding. Preference shares are a common and legitimate form of corporate financing and can enhance shareholder value.
C-65 Supermajority Vote Provisions WFB will generally consider on a case-by-case basis proposals to CASE-BY-CASE increase the shareholder vote necessary to approve mergers, acquisitions, sales of assets etc. and to amend the corporation's charter or by-laws. The factors considered are those specified in the proxy guidelines. However, a supermajority requirement of 75% or more is abusive AGAINST and WFB will vote against proposals that provide for them.
C-66 Supermajority vote provisions require voting approval in excess of a simple majority of the outstanding shares for a proposal. Companies may include supermajority lock-in provisions, which occur when changes are made to a corporation's governing documents, and once approved, a supermajority vote is required to amend or repeal the changes. Confidential Voting WFB will vote for proposals to adopt confidential voting. FOR Vote Tabulations WFB will vote against proposals asking corporations to refrain AGAINST from counting abstentions and broker non-votes in their vote tabulations and to eliminate the company's discretion to vote unmarked proxy ballots. Vote counting procedures are determined by a number of different standards, including state law, the federal proxy rules, internal corporate policies, and mandates of the various stock exchanges. Specifically in Japan, WFB will vote against management proposals AGAINST amending their articles to relax their quorum requirement for special resolutions (including mergers, article amendments, and option plans) from one-half to one-third of issued capital (although such resolutions would still require two-thirds majority of votes cast). Equal Access to the Proxy WFB will evaluate Shareholder proposals requiring companies to CASE-BY-CASE give shareholders access to the proxy ballot for the purpose of nominating board members, on a case-by-case basis taking into account the ownership threshold proposed in the resolution and the proponent's rationale for the proposal at the targeted company in terms of board and director conduct. Disclosure of Information WFB will vote against shareholder proposals requesting fuller AGAINST disclosure of company policies, plans, or business practices. Such proposals rarely enhance shareholder return and in many cases would require disclosure of confidential business information. Annual Meetings WFB will vote for proposals to amend procedures or change date or FOR location of the annual meeting. Decisions as to procedures, dates or
C-67 locations of meetings are best placed with management. Alternatively, WFB will vote against proposals from shareholders AGAINST calling for a change in the location or date of annual meetings as no date or location proposed will be acceptable to all shareholders. WFB will generally vote in favor of proposals to reduce the FOR quorum necessary for shareholders' meetings, subject to a minimum of a simple majority of the
C-68 company's outstanding voting shares. Shareholder Advisory Committees/Independent Inspectors WFB will vote against proposals seeking to establish shareholder AGAINST advisory committees or independent inspectors. The existence of such bodies dilutes the responsibility of the board for managing the affairs of the corporation. Technical Amendments to the Charter of Bylaws WFB will generally vote in favor of charter and bylaw amendments FOR proposed solely to conform with modern business practices, for simplification, or to comply with what management's counsel interprets as applicable law. However, amendments that have a material effect on shareholder's CASE-BY-CASE rights will be considered on a case-by-case basis. Bundled Proposals WFB will vote for bundled or "conditional" proxy proposals on a CASE-BY-CASE case-by-case basis, as WFB will examine the benefits and costs of the packaged items, and determine if the effect of the conditioned items are in the best interests of shareholders. Common Stock Authorizations/Reverse Stock Splits/Forward Stock Splits WFB will follow the ISS capital structure model in evaluating CASE-BY-CASE requested increases in authorized common stock. In addition, even if capital requests of less than or equal to 300% of outstanding shares fail the calculated allowable cap, WFB will evaluate the request on a case-by-case basis, potentially voting for the proposal based on the company's performance and whether the company's ongoing use of shares has shown prudence. Further, the company should identify what the stock increases are to be used for, i.e. a proposed stock split, issuance of shares for acquisitions, or for general business purposes. Also to be considered is whether the purpose of the proposed AGAINST increase is to strengthen takeover defenses, in which case WFB will vote against the proposal. Such increases give management too much power and are beyond what a company would normally need during the course of a year. They may also allow management to freely place the shares with an allied institution or set the terms and prices of the new shares.
C-69 For reverse stock splits, WFB will generally vote for proposals FOR to implement the split provided the number of authorized common shares is reduced to a level that does not represent an unreasonably large increase in authorized but unissued shares. The failure to reduce authorized shares proportionally to any reverse split has potential adverse anti-takeover consequences. However, such circumstances may be warranted if delisting of the company's stock is imminent and would result in greater harm to shareholders than the excessive share authorization. WFB will evaluate "Going Dark" transactions, which allow listed CASE-BY-CASE companies to de-list and terminate the registration of their common stock on a case-by-case basis, determining whether the transaction enhances shareholder value.
C-70 WFB will generally vote in favor of forward stock splits. FOR Dividends WFB will vote for proposals to allocate income and set dividends. FOR WFB will also vote for proposals that authorize a dividend FOR reinvestment program as it allows investors to receive additional stock in lieu of a cash dividend. However, if a proposal for a special bonus dividend is made that AGAINST specifically rewards a certain class of shareholders over another, WFB will vote against the proposal. WFB will also vote against proposals from shareholders requesting AGAINST management to redistribute profits or restructure investments. Management is best placed to determine how to allocate corporate earnings or set dividends. In addition, WFB will vote for proposals to set director fees. FOR Reduce the Par Value of the Common Stock WFB will vote for proposals to reduce the par value of common FOR stock. Preferred Stock Authorization WFB will generally vote for proposals to create preferred stock FOR in cases where the company expressly states that the stock will not be used as a takeover defense or carry superior voting rights, or where the stock may be used to consummate beneficial acquisitions, combinations or financings. Alternatively, WFB will vote against proposals to authorize or AGAINST issue preferred stock if the board has asked for the unlimited right to set the terms and conditions for the stock and may issue it for anti-takeover purposes without shareholder approval (blank check preferred stock). In addition, WFB will vote against proposals to issue preferred AGAINST stock if the shares to be used have voting rights greater than those available to other shareholders. WFB will vote for proposals to require shareholder approval of FOR blank check preferred stock issues for other than general corporate purposes (white squire placements).
C-71 Finally, WFB will consider on a case-by-case basis proposals to CASE-BY-CASE modify the rights of preferred shareholders and to increase or decrease the dividend rate of preferred stock.
C-72 Reclassification of Shares WFB will consider proposals to reclassify a specified class or CASE-BY-CASE series of shares on a case-by-case basis. Preemptive Rights WFB will generally vote for proposals to eliminate preemptive FOR rights. Preemptive rights are unnecessary to protect shareholder interests due to the size of most modern companies, the number of investors and the liquidity of trading. In addition, specifically for foreign corporations, WFB will vote FOR for issuance requests with preemptive rights to a maximum of 100% over current issued capital. In addition, WFB will vote for issuance requests without preemptive rights to a maximum of 20% of currently issued capital. These requests are for the creation of pools of capital with a specific purpose and cover the full range of corporate financing needs. Share Repurchase Plans WFB will vote for share repurchase plans, unless: FOR - there is clear evidence of past abuse of the authority; or AGAINST - the plan contains no safeguards against selective buy-backs. AGAINST Corporate stock repurchases are a legitimate use of corporate funds and can add to long-term shareholder returns. Executive and Director Compensation Plans WFB will analyze on a case-by-case basis proposals on executive CASE-BY-CASE or director compensation plans, with the view that viable compensation programs reward the creation of stockholder wealth by having a high payout sensitivity to increases in shareholder value. Such proposals may seek shareholder approval to adopt a new plan, or to increase shares reserved for an existing plan. WFB will review the potential cost and dilutive effect of the FOR plan. After determining how much the plan will cost, ISS (Institutional Shareholder Services) evaluates whether the cost is reasonable by comparing the cost to an allowable cap. The allowable cap is industry-specific, market cap-base, and pegged to the average amount paid by companies performing in the top quartile of their peer groups. If the proposed cost is below the allowable cap, WFB will vote for the plan. ISS will also apply a pay for
C-73 performance overlay in assessing equity-based compensation plans for Russell 3000 companies. If the proposed cost is above the allowable cap, WFB will vote AGAINST against the plan. Among the plan features that may result in a vote against the AGAINST plan are: - plan administrators are given the authority to reprice or replace underwater options; repricing guidelines will conform to changes in the NYSE and NASDAQ listing rules.
C-74 WFB will vote against equity plans that have high average AGAINST three-year burn rate. (The burn rate is calculated as the total number of stock awards and stock options granted any given year divided by the number of common shares outstanding.) WFB will define a high average three-year burn rate as the following: The company's most recent three-year burn rate exceeds one standard deviation of its four-digit GICS peer group segmented by Russell 3000 index and non-Russell 3000 index; and the company's most recent three-year burn rate exceeds 2% of common shares outstanding. For companies that grant both full value awards and stock options to their employees, WFB shall apply a premium on full value awards for the past three fiscal years. Even if the equity plan fails the above burn rate, WFB will vote FOR for the plan if the company commits in a public filing to a three-year average burn rate equal to its GICS group burn rate mean plus one standard deviation. If the company fails to fulfill its burn rate commitment, WFB will consider withholding from the members of the compensation committee. WFB will calculate a higher award value for awards that have CASE-BY-CASE Dividend Equivalent Rights (DER's) associated with them. WFB will generally vote for shareholder proposals requiring CASE-BY-CASE performance-based stock options unless the proposal is overly restrictive or the company demonstrates that it is using a substantial portion of performance-based awards for its top executives. WFB will vote for shareholder proposals asking the company to FOR expense stock options, as a result of the FASB final rule on expensing stock options. WFB will generally vote for shareholder proposals to exclude FOR pension fund income in the calculation of earnings used in determining executive bonuses/compensation. WFB will withhold votes from compensation committee members if WITHHOLD they fail to submit one-time transferable stock options (TSO's) to shareholders for approval. WFB will generally vote for TSO awards within a new equity plan FOR if the total cost of the equity plan is less than the company's allowable cap. WFB will generally vote against shareholder proposals to ban AGAINST future stock option grants to executives. This may be supportable in extreme
C-75 cases where a company is a serial repricer, has a huge overhang, or has a highly dilutive, broad-based (non-approved) plans and is not acting to correct the situation. WFB will evaluate shareholder proposals asking companies to adopt holding
C-76 periods for their executives on a case-by-case basis taking into CASE-BY-CASE consideration the company's current holding period or officer share ownership requirements, as well as actual officer stock ownership in the company. For certain OBRA-related proposals, WFB will vote for plan CASE-BY-CASE provisions that (a) place a cap on annual grants or amend administrative features, and (b) add performance criteria to existing compensation plans to comply with the provisions of Section 162(m) of the Internal Revenue Code. In addition, director compensation plans may also include stock CASE-BY-CASE plans that provide directors with the option of taking all or a portion of their cash compensation in the form of stock. WFB will consider these plans based on their voting power dilution. WFB will generally vote for retirement plans for directors. FOR Specifically in Japan, WFB will vote against option plans/grants AGAINST to directors or employees of "related companies," even though they meet our criteria for dilution and exercise price, without adequate disclosure and justification. Specifically in the U.K., WFB will vote against directors who AGAINST have service contracts of three years, which exceed best practice and any change-in-control provisions. Management may propose director nominees who have service contracts that exceed the Combined Code's recommendation of one-year. (The exceptions to the code would be in cases of new recruits with longer notice or contract periods, which should, however, be reduced after the initial period.) WFB will evaluate compensation proposals (Tax Havens) requesting CASE-BY-CASE share option schemes or amending an existing share option scheme on a case-by-case basis. Stock options align management interests with those of shareholders by motivating executives to maintain stock price appreciation. Stock options, however, may harm shareholders by diluting each owner's interest. In addition, exercising options can shift the balance of voting power by increasing executive ownership. Bonus Plans WFB will vote for proposals to adopt annual or long-term cash or FOR cash-and-stock bonus plans on a case-by-case basis. These plans enable companies qualify for a tax deduction under the provisions of Section
C-77 162(m) of the IRC. Payouts under these plans may either be in cash or stock and are usually tied to the attainment of certain financial or other performance goals. WFB will consider whether the plan is comparable to plans adopted by companies of similar size in the company's industry and whether it is justified by the company's performance. For foreign companies, proposals to authorize bonuses to directors and statutory
C-78 auditors who are retiring from the board will be considered on a CASE-BY-CASE case-by-case basis. Deferred Compensation Plans WFB will generally vote for proposals to adopt or amend deferred FOR compensation plans as they allow the compensation committee to tailor the plan to the needs of the executives or board of directors, unless - the proposal is embedded in an executive or director compensation plan that is contrary to guidelines Disclosure on Executive or Director Compensation Cap or Restrict Executive or Director Compensation WFB will generally vote for shareholder proposals requiring FOR companies to report on their executive retirement benefits (deferred compensation, split-dollar life insurance, SERPs, and pension benefits. WFB will generally vote for shareholder proposals requesting to FOR put extraordinary benefits contained in SERP agreements to a shareholder vote, unless the company's executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans. WFB will generally vote against proposals that (a) seek AGAINST additional disclosure of information on executive or director's pay, or (b) seek to limit executive and director pay. Golden and Tin Parachutes WFB will vote for proposals that seek shareholder ratification of FOR golden or tin parachutes as shareholders should have the opportunity to approve or disapprove of these severance agreements. Alternatively, WFB will examine on a case-by-case basis proposals CASE-BY-CASE that seek to ratify or cancel golden or tin parachutes. Effective parachutes may encourage management to consider takeover bids more fully and may also enhance employee morale and productivity. Among the arrangements that will be considered on their merits are: - arrangements guaranteeing key employees continuation of base salary for more than three years or lump sum payment of more than three times base salary plus retirement benefits; - guarantees of benefits if a key employee voluntarily terminates; - guarantees of benefits to employees lower than very senior management; and - indemnification of liability for excise taxes.
C-79 By contrast, WFB will vote against proposals that would guarantee AGAINST benefits in a management-led buyout.
C-80 Reincorporation WFB will evaluate a change in a company's state of incorporation CASE-BY-CASE on a case-by-case basis. WFB will analyze the valid reasons for the proposed move, including restructuring efforts, merger agreements, and tax or incorporation fee savings. WFB will also analyze proposed changes to the company charter and differences between the states' corporate governance laws. States have adopted various statutes intended to encourage CASE-BY-CASE companies to incorporate in the state. These may include state takeover statutes, control share acquisition statutes, control share cash-out statutes, freezeout provisions, fair price provisions, and disgorgement provisions. WFB will examine reincorporations on a case-by-case in light of these statutes and in light of the corporate governance features the company has adopted to determine whether the reincorporation is in shareholders' best interests. In addition, WFB will also examine poison pill endorsements, CASE-BY-CASE severance pay and labor contract provisions, and anti-greenmail provisions in the context of a state's corporate governance laws on a case-by-case basis. WFB will evaluate shareholder proposals requiring offshore CASE-BY-CASE companies to reincorporate into the United States on a case-by-case basis. Reincorporation proposals may have considerable implications for shareholders, affecting the company's takeover defenses and possibly its corporate structure and rules of governance. Stakeholder Laws WFB will vote against resolutions that would allow the Board to AGAINST consider stakeholder interests (local communities, employees, suppliers, creditors, etc.) when faced with a takeover offer. Similarly, WFB will vote for proposals to opt out of stakeholder FOR laws, which permit directors, when taking action, to weight the interests of constituencies other than shareholders in the process of corporate decision-making. Such laws allow directors to consider nearly any factor they deem relevant in discharging their duties. Mergers/Acquisitions and Corporate Restructurings WFB will consider proposals on mergers and acquisitions on a CASE-BY-CASE case-by-case basis. WFB will determine if the transaction is in the best economic interests of the shareholders. WFB will take into account the following
C-81 factors: - anticipated financial and operating benefits; - offer price (cost versus premium); - prospects for the combined companies; - how the deal was negotiated; - changes in corporate governance and their impact on shareholder rights.
C-82 In addition, WFB will also consider whether current shareholders CASE-BY-CASE would control a minority of the combined company's outstanding voting power, and whether a reputable financial advisor was retained in order to ensure the protection of shareholders' interests. On all other business transactions, i.e. corporate restructuring, CASE-BY-CASE spin-offs, asset sales, liquidations, and restructurings, WFB will analyze such proposals on a case-by-case basis and utilize the majority of the above factors in determining what is in the best interests of shareholders. Specifically, for liquidations, the cost versus premium factor may not be applicable, but WFB may also review the compensation plan for executives managing the liquidation, Appraisal Rights WFB will vote for proposals to restore, or provide shareholders FOR with rights of appraisal. Rights of appraisal provide shareholders who are not satisfied with the terms of certain corporate transactions (such as mergers) the right to demand a judicial review in order to determine the fair value of their shares. Mutual Fund Proxies WFB will usually vote mutual fund proxies as recommended by management. Proposals may include, and are not limited to, the following issues: - eliminating the need for annual meetings of mutual fund shareholders; - entering into or extending investment advisory agreements and management contracts; - permitting securities lending and participation in repurchase agreements; - changing fees and expenses; and - changing investment policies. FOR An investment advisory agreement is an agreement between a mutual fund and its financial advisor under which the financial advisor provides investment advice to the fund in return for a fee based on the fund's net asset size. Most agreements require that the particular fund pay the advisor a fee constituting a small percentage of the fund's average net daily assets. In exchange for this consideration, the investment advisor manages the fund's account, furnishes investment advice, and provides office space and facilities to the fund. A new investment advisory agreement may be necessitated by the merger of the advisor or the advisor's corporate parent.
C-83 Fundamental investment restrictions are limitations within a fund's articles of incorporation that limit the investment practices of the particular fund. As fundamental, such restrictions may only be amended or eliminated with shareholder approval. Non-fundamental investment restrictions may be altered by action of the board of trustees. Distribution agreements are agreements authorized by guidelines established
C-84 under the Investment Company Act of 1940 and, in particular, Rule 12b-1 thereunder, between a fund and its distributor, which provide that the distributor is paid a monthly fee to promote the sale of the fund's shares. Reorganizations of funds may include the issuance of shares for an acquisition of a fund, or the merger of one fund into another for purposes of consolidation. The mutual fund industry is one of the most highly regulated industries, as it is subject to: individual state law under which the company is formed; the federal Securities Act of 1933; the federal Securities Exchange Act of 1934; and the federal Investment Company Act of 1940. Social and Environmental Proposals WFB will generally vote against social and environmental AGAINST proposals by shareholders as their impact on share value can rarely be anticipated with any degree of confidence. Proposals that limit the business activity or capability of the company or result in significant costs do not benefit shareholder value. Social and environmental issues that may arise include: - Energy and Environment - Repressive Regimes and Foreign Labor Practices (South Africa, Northern Ireland, China) - Military Business - Maquiladora Standards & International Operations Policies - World Debt Crisis - Equal Employment Opportunity & Discrimination - Animal Rights - Product Integrity and Marketing - Human Resources Issues - Political and Charitable Contributions - Reference to Sexual Orientation - Pollution or Climate Change - Genetically Engineered Ingredients/Seeds - Board Diversity - Arctic National Wildlife Refuge - Greenhouse Gas Emissions - Renewable Energy Sources - Kyoto Compliance - Land Use - Nuclear Safety - Concentrated Animal Feeding Operations - Enhanced Environmental Reporting On Operations In Protected Areas
- Toxic Chemicals - Drug Importation - Political Contributions - Animal Testing - Drug Pricing
PARTC: OTHER INFORMATION ITEM 23. EXHIBITS (a)(1) Articles of Incorporation -Previously filed on April 26, 1983 as Exhibit 1 to Post-Effective Amendment No. 24 to this Registration Statement, and incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 44 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950109-97-001341) on February 14, 1997. (a)(2) Articles of Amendment to the Articles of Incorporation is incorporated by reference to Exhibit (a)(2) of Post-Effective Amendment No. 52 on Form N-1 A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-02-000828) on April 25, 2002. (a)(3) Articles of Amendment to the Articles of Incorporation is is incorporated by reference to Exhibit (a)(3) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27, 2005. (b) By-Laws - Previously filed on August 27, 1992 as Exhibit 2 to Post-Effective Amendment No. 37 to this Registration Statement, and incorporated by reference to Exhibit 2 of Post-Effective Amendment No. 44 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950109-97-001341) on February 14, 1997. (c) None (outstanding shares of common stock are recorded on the books and records of the Registrant - Certificates of stock are not issued). (d)(1) Investment Advisory Agreement between the Registrant and Independence Capital Management, Inc. is incorporated by reference to Exhibit (d)(1) of Post-Effective Amendment No. 49 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-00-000942) on April 21,2000. (d)(2) Amendment to the Investment Advisory Agreement between the Registrant and Independence Capital Management, Inc. is incorporated by reference to Exhibit (d)(2) of Post-Effective Amendment No. 52 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-02-000828) on April 25,2002. (d)(3) Sub-Advisory Agreement between Independence Capital Management, Inc. and Bjurman, Barry & Associates with respect to the Small Cap Growth Fund is incorporated by reference to Exhibit (d)(3) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27,2005. (d)(4) Sub-Advisory Agreement between Independence Capital Management, Inc. and Turner Investment Partners, Inc. with respect to the Mid Cap Growth Fund is incorporated by reference to Exhibit (d)(3) of Post-Effective Amendment No. 49 on Form N-1 A (File Nos. 2-77284 and 811-03459), as filed with the C-1 Securities and Exchange Commission via EDGAR (Accession No. 0000950116-00-000942) on April 21,2000. (d)(5) Sub-Advisory Agreement between Independence Capital Management Inc. and Lord, Abbett & Co. LLC with respect to the Large Cap Value and Strategic Value Funds is incorporated by reference to Exhibit (d)(5) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27,2005. (d)(6) Sub-Advisory Agreement between Independence Capital Management, Inc. and Wells Capital Management, Incorporated with respect to the Index 500 Fund is incorporated by reference to Exhibit (d)(5) of Post-Effective Amendment No. 49 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-00-000942) on April 21,2000. (d)(7) Sub-Advisory Agreement between Independence Capital Management Inc. and Neuberger Berman Management Inc. with respect to the Mid Cap Value Fund is incorporated by reference to Exhibit (d)(6) of Post-Effective Amendment No. 49 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-00-000942) on April 21,2000. (d)(8) Sub-Advisory Agreement between Independence Capital Management, Inc. and Goldman Sachs Asset Management, L.P. with respect to the Small Cap Value Fund is incorporated by reference to Exhibit (d)(8) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27,2005. (d)(9) Sub-Advisory Agreement between Independence Capital Management, Inc. and T. Rowe Price Associates, Inc. with respect to the Flexibly Managed, High Yield Bond and Growth Stock Funds is incorporated by reference to Exhibit (d)(9) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27,2005. (d)(10) Sub-Advisory Agreement between Independence Capital Management, Inc. and Vontobel Asset Management, Inc. with respect to the International Equity Fund is incorporated by reference to the Registrant's Post-Effective Amendment No. 47 as filed with the Securities and Exchange Commission via EDGAR (Accession No. 000950116-99-000315) on February 26, 1999. (d)(11) Amendment to Sub-Advisory Agreement between Independence Capital Management, Inc. and Vontobel Asset Management, Inc. with respect to the International Equity Fund is filed herewith. (d)(12) Sub-Advisory Agreement between Independence Capital Management Inc. and ABN AMRO Asset Management, Inc. with respect to the Large Cap Growth Fund is incorporated by reference to Exhibit (d)(11) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27,2005. (d)(13) Sub-Advisory Agreement between Independence Capital Management and Heitman Real Estate Securities LLC with respect to the REIT Fund is C-2 incorporated by reference to Exhibit (d)(12) of Post-Effective Amendment No. 52 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-02-000828) on April 25,2002. (d)(14) Amendment to Sub-Advisory Agreement between Independence Capital Management, Inc. and Heitman Real Estate Securities LLC with respect to the REIT Fund is filed herewith. (e) None. Common stock of the Registrant is sold only to The Penn Mutual Life Insurance Company and its affiliated insurance companies for their general or separate accounts. (f) None. (g)(1) Amended and Restated Custodian Agreement between the Registrant and Provident National Bank - Previously filed on April 26, 1993 as Exhibit 8(a) to Post-Effective Amendment No. 38 to this Registration Statement, and incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 44 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950109-97-001341) on February 14, 1997. (g)(2) Amended Appendix A to the Amended and Restated Custodian Agreement between the Registrant and PFPC Trust Company - Incorporated by reference to Exhibit (g)(2) of Post-Effective Amendment No. 52 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-02-000828) on April 25, 2002. (g)(3) Form of Foreign Custody Manager Agreement between the Registrant and PNC Bank - Incorporated by reference to Exhibit (g)(3) of Post-Effective Amendment No. 52 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-02-000828) on April 25,2002. (h)(1) Amended and Restated Administrative and Corporate Services Agreement between the Registrant and The Penn Mutual Life Insurance Company is filed herewith. (h)(2) Accounting Services Agreement between the Registrant and Provident Financial Processing Corporation - Previously filed on March 10, 1990 as Exhibit 9(b) to Post-Effective Amendment No. 33 to this Registration Statement, and incorporated by reference to Exhibit 9(b) of Post-Effective Amendment No. 44 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950109-97-001341) on February 14, 1997. (h)(3) Agreement between the Registrant and Provident Financial Processing Corporation on fees for services under Accounting Services Agreement -Previously filed on February 24, 1995 as Exhibit 9(c) to Post-Effective Amendment No. 43 to this Registration Statement, and incorporated by reference to Exhibit 9(c) of Post-Effective Amendment No. 44 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950109-97-001341) on February 14, 1997. C-3 (h)(4) Amendment to the Accounting Services Agreement is filed herewith. (i) Opinion and Consent of Morgan, Lewis & Bockius LLP is filed herewith. (j) Consent of KPMG LLP, independent registered public accounting firm, is filed herewith. (k) None. (l) None. (m) None. (n) Not applicable. (o) None. (p)(1) Code of Ethics for the Registrant is incorporated by reference to Exhibit (p)(1) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27, 2005. (p)(2) Code of Ethics for Independence Capital Management, Inc. is incorporated by reference to Exhibit (p)(2) of Post-Effective Amendment No. 56 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27, 2005. (p)(3) Code of Ethics for Bjurman, Barry & Associates is incorporated by reference to Exhibit (p)(3) of Post-Effective Amendment No. 57 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-06-001318) on April 25, 2006. (p)(4) Code of Ethics for Turner Investment Partners, Inc. is incorporated by reference to Exhibit (p)(4) of Post-Effective Amendment No. 56 on Form N-1 A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27, 2005. (p)(5) Code of Ethics for Lord, Abbett & Co. LLC is filed herewith. (p)(6) Code of Ethics for Wells Capital Management Incorporated, is filed herewith. (p)(7) Code of Ethics for Neuberger Berman Management, Inc. is filed herewith. (p)(8) Code of Ethics for Goldman Sachs Asset Management, L.P. is filed herewith. C-4 (p)(9) Code of Ethics for T. Rowe Price Associates, Inc. is incorporated by reference to Exhibit (p)(9) of Post-Effective Amendment No. 56 on Form N-1 A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-05-001497) on April 27, 2005. (p)(10) Code of Ethics for Vontobel Asset Management, Inc. is incorporated by reference to Exhibit (p)(10) of Post-Effective Amendment No. 57 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-06-001318) ON April 25, 2006. (p)(11) Code of Ethics for ABN AMRO Asset Management, Inc. is filed herewith. (p)(12) Code of Ethics for Heitman Real Estate Securities LLC is filed herewith. (q)(1) Powers of Attorney of Messrs. Wright, Chappell, Greene and Bay- Incorporated by reference to the Registrant's Post-Effective Amendment No. 47 as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-99-000315) on February 26, 1999. (q)(2) Power of Attorney of Charles E. Mather, III is incorporated by reference to Exhibit (q)(2) of Post-Effective Amendment No. 57 on Form N-1A (File Nos. 2-77284 and 811-03459), as filed with the Securities and Exchange Commission via EDGAR (Accession No. 0000950116-06-001318) on April 25, 2006. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT The Penn Mutual Life Insurance Company ("Penn Mutual") is the owner of 100% of the outstanding common stock of the Registrant. For further information on the ownership of the outstanding common stock of the Registrant, see "Voting Rights" in the Prospectus and "Ownership of Shares" in the Statement of Additional Information, which are incorporated hereunder by reference. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of The Penn Insurance and Annuity Company, a Delaware corporation. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of Independence Capital Management., Inc., a Pennsylvania corporation, and registered investment adviser. Penn Mutual is the record and beneficiary owner of 100% of the outstanding common stock of The Penn Janney Fund, Inc. Penn Janney Fund, Inc. is a Pennsylvania corporation and invests in new business. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of The Pennsylvania Trust Company, a Pennsylvania corporation. Penn Mutual is the record and beneficial owner of 95% of the outstanding common stock of Independence Square Properties, Inc., a holding corporation incorporated in Delaware. C-5 Independence Square Properties, Inc. is the record and beneficial owner of 100% of the outstanding common stock of WPI Investment Company, a Delaware corporation. Indepro Corp. is the record and beneficial owner of 100% of the outstanding common stock of Indepro Property Fund I Corp., and Indepro Property Fund II Corp., both Delaware corporations. Independence Square Properties, Inc. is the record and beneficial owner of 100% of the outstanding common stock of Janney Montgomery Scott LLC, a Delaware corporation. Janney Montgomery Scott LLC is the record and beneficial owner of 100% of the outstanding common stock of the following corporations: JMS Resources, Inc., a Pennsylvania corporation; JMS Investor Services, Inc., a Delaware corporation; Janney Montgomery Scott Insurance Agency Inc., a Massachusetts corporation; and Parker/Hunter, Incorporated, a Pennsylvania corporation. Penn Mutual and Janney Montgomery Scott LLC each is the record and beneficial owner of a subscription agreement for 50% of the common stock of Penn Janney Advisory, Inc., a Pennsylvania corporation. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of Indepro Corp., a Delaware corporation. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of Hornor, Townsend & Kent, Inc., a Pennsylvania corporation. Penn Mutual is the record and beneficial owner of 100% of the outstanding common stock of ISP Parker Hunter, Inc., a Delaware copporation. ISP Parker Hunter is the record and beneficial owner of 5% of the outstanding common stock of Independence Square Properties, Inc., a holding corporation incorporated in Delaware. Hornor, Townsend & Kent, Inc. is the record and beneficial owner of 100% of the outstanding common stock of Hornor, Townsend & Kent, Inc., of Delaware, Inc. a Delaware Corporation; Hornor, Townsend & Kent, Inc. Insurance Agency, Inc. a Pennsylvania Corporation; and Hornor, Townsend & Kent, Inc. Insurance Agency of Ohio, Inc. and Ohio Corporation. Pen Mutual and Janney Montgomery Scott LLC each is the record and beneficial owner of 49.5% of the outstanding common stock of Penn Janney Opportunities Fund LP, a Delware corporation. The remaining 1.0% of the outstanding common stock of Penn Janney Opportunities Fund LP is owned by Penn Janney GP LLC. Pen Mutual and Janney Montgomery Scott LLC each is the record and beneficial owner of 49.5% of the outstanding common stock of Penn Janney GP LLC, a Delware corporation. The remaining 1.0% of the outstanding common stock of Penn Janney GP LLC is owned by Richard Fox. ITEM 25. INDEMNIFICATION Article VII, Section (3) of the Articles of Incorporation of the Registrant provides generally that directors and officers of the Registrant shall be indemnified by the Registrant to the full extent permitted by Maryland law and by the Investment Company Act of 1940, now or hereinafter in force. Article VI, Section (2) of the By-laws of the Registrant provides: Any person who was or is a party or is threatened to be made a defendant or respondent in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by the Corporation against judgments, penalties, fines, settlements and reasonable expenses (including attorney's fees) actually incurred by such person in connection with such action, suit or proceeding to the full extent permissible under the General Laws of the State of Maryland now or hereafter in force, except that such indemnity shall not protect any such person against any liability to the Corporation or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. C-6 ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS INDEPENDENCE CAPITAL MANAGEMENT, INC.
Name and Current Position with Independence Capital Management, Other Business and Connections Inc. During the Past Two Years ----------------------------------- ------------------------------------------ Peter M. Sherman, Chairman, President and Chief Executive President, Chief Executive Officer of Independence Capital Officer and Director Management, Inc., Horsham, PA; Executive Vice President and Chief Investment Officer of The Penn Mutual Life Insurance Company, Horsham, PA. Robert E. Chappell, Director of Independence Capital Director Management, Inc., Horsham, PA; Chairman and Chief Executive Officer of The Penn Mutual Life Insurance Company, Horsham, PA. Peter J. Vogt, Director of Independence Capital Director Management, Inc., Horsham, PA; Executive Vice President and Chief Financial Officer of the Penn Mutual Life Insurance Company, Horsham, PA; Senior Vice President and Chief Financial Officer, Group Insurance, CIGNA Corporation, Philadelphia, PA. Barbara S. Wood, Senior Vice President, Treasurer, Senior Vice President, Treasurer, Secretary & Chief Compliance Officer of Secretary & Chief Compliance Independence Capital Management, Inc., Officer Radnor, PA; Senior Vice President, Treasurer AND CHIEF FINANCIAL OFFICER of The Pennsylvania Trust Company, Radnor, PA. Willard N. Woolbert, Senior Vice President of Independence Senior Vice President Capital Management, Inc., Radnor, PA; Senior Vice President and Chief Investment Officer of The Pennsylvania Trust Company, Radnor, PA.
T. ROWE PRICE ASSOCIATES, INC. Listed below are the directors and executive officers of T. Rowe Price Group, Inc. ("Price Group"), which owns 100% of the stock of T. Rowe Price Associates, Inc. ("Price Associates"), who have other substantial businesses, professions, vocations, or employment aside from their association with Price Associates.
Other Business and Name and Current Position with Connections T. Rowe Price During the Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- James T. Brady Managing director of Mid Atlantic, 5625 Broadmoor Terrace, Director of Price Group Ballantrae International, Ltd., Ijamsville, Maryland 21754 Aether
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Other Business and Name and Current Position with Connections T. Rowe Price During the Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- Systems, Inc., Constellation Energy Group, and McCormick & Co, Inc. J. Alfred Broaddus, Jr. Former president of the Federal 4114 Hanover Avenue, Director of Price Group Reserve Bank of Richmond and a Richmond, Virginia 23221. member of the American Economic Association and the National Association of Business Economists. Director of Owens & Minor, Inc., Albemarle Corp. and Markel Corp. Donald B. Hebb, Jr. Managing General Partner of ABS 400 E. Pratt Street Director of Price Group Capital Partners. Suite 910 Baltimore, MD 21202 Dr. Alfred Sommer Professor of ophthalmology, 615 N.Wolfe Street Director of Price Group epidemiology and international Room 1041 Baltimore, MD 21205 health at the Johns Hopkins Bloomberg School of Public Health. Director of the Academy for Educational Development. Director of Becton Dickinson, a medical technology company. Chairman of the Expert Group on Health of the World Economic Forum's Global Governance Initiative. Chairman of the International Vitamin A Consultative Group Steering Committee. Senior medical advisor for Hellen Keller International. Dwight S. Taylor President of Corporate Development 8815 Centre Park Drive, Suite Director of Price Group Services, LLC, Director of MICROS 400, Columbia, Maryland Systems, Inc., a provider of 21045. information technology for the hospitality and retail industry. Executive Committee Member of the National Board of the National Association of Industrial & Office Properties.
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Other Business and Name and Current Position with Connections T. Rowe Price During the Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- Anne Marie Whittemore Partner of the law firm of One James Center Director of Price Group McGuireWoods L.L.P. and a Director Richmond, VA 23219 of Owens & Minor, Inc., and Albemarle Corporation.
All of the following directors of Group are employees of Price Associates.
Other Business and Name and Current Position with Connections T. Rowe Price During the Past Two Years ----------------------------------- ------------------------------------------ Edward C. Bernard Director and President of T. Rowe Price Vice Chairman of the Board Insurance Agency, Inc. and T. Rowe Price Advisory Services, Inc. Director of T. Rowe Price International, Inc.; Vice President of TRP Distribution, Inc. Chairman of the Board of T. Rowe Price Savings Bank, T. Rowe Price Investment Services, Inc. T. Rowe Price Services, Inc. T. Rowe Price Trust Co., T. Rowe Price Global Asset Managgemnt And T. Rowe Price Investment Services Limited James A. C. Kennedy Director, Chief Director and President of T. Rowe Price Executive officer and President Associates, Inc. Director Director of T. Rowe Price International Inc. Brian C. Rogers, Vice President of T. Rowe Price Trust Chairman of the Board and Chief Company. Investment Officer
C-9 Executive Officers:
Name and Current Position with Other Business and Connections T. Rowe Price During the Past Two Years ----------------------------------- ------------------------------------------ Kenneth V. Moreland Chief Financial Officer and Vice President Chief Financial Officer and Vice of Price Associates, President and President of Price Group Director and President of TRP Finance, Inc.,TRP Suburban, Inc. TRP Suburban Second, Inc. and President of TRP Colorado Springs LLC. John R. Gilner Chief Compliance Officer of T. Rowe Vice President of Price Group and Price Advisory Services, Inc. and T. Rowe Chief Compliance Officer of Price (Canada), Inc. and Vice President of Price Associates T. Rowe Price Investment Services, Inc. Mary J. Miller Director of T. Rowe Price Trust Company Vice President of Price Group and Director and Vice President of Price Associates
LORD, ABBETT & CO. LLC
Name and Current Position with Other Business and Connections Lord, Abbett & Co. LLC During the Past Two Years ----------------------------------- ------------------------------------------ Robert S. Dow None Managing Member Joan Binstock None Member & Chief Operations Officer Michael R. Brooks None Member & Central Division Director Robert J. Ball None Member & Client Portfolio Manager -- Fixed Income Bruce L. Bartlett None Member & Portfolio Manager & Director of Growth Equity Investments Zane E. Brown None Member & Director of Fixed Income Investments Patrick J. Browne None Member & Eastern Division Director John F. Corr None Member & Director of Taft Hartley Marketing & Client Service Sholom Dinsky None Member & Portfolio Manager - Large Cap Value John J. DiChiaro None Member & Senior Strategy Coordinator - Small Cap Growth Milton Ezrati None Member & Senior Economic Strategist Robert P. Fetch None
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Name and Current Position with Other Business and Connections Lord, Abbett & Co. LLC During the Past Two Years ----------------------------------- ------------------------------------------ Member & Senior Portfolio Manager - Small Cap Value Daria L. Foster None Member & Director of Marketing and Client Service Daniel H. Frascarelli None Member & Portfolio Manager - Large Cap Core Kenneth J. Fuller NONE Member & Portfolio Manager -- Large Cap Value Robert I. Gerber None Member & Director of Taxable Fixed Income Michael S. Goldstein None Member & Portfolio Manager - Fixed Income Michael A. Grant None Member & Director of Institutional Marketing Howard E. Hansen None Member & Portfolio Manager - Mid Cap Value Gerard S. E. Heffernan, Jr. None Member & Research Analyst - Small Cap Value Charles F. Hofer None Member & Client Portfolio Manager Cinda C. Hughes None Member & Client Portfolio Manager - Small Cap Growth Ellen G. Itskovitz None Member & Senior Research Analyst - High Yield/Convertible Lawrence H. Kaplan None Member & General Counsel Jerald M. Lanzotti None Member & Fixed Income Portfolio Manager - Global Bonds Richard C. Larsen None Member & Research Analyst - Large Cap Value Robert A. Lee None Member & Portfolio Manager - Fixed Income Maren Lindstrom None Member & Portfolio Manager Gregory M. Macosko None Member & Senior Analyst Thomas Malone None Member & Western Division Director Charles Massare, Jr. None Member & Director of Quantitative Research & Risk Management Vincent J. McGride NONE Member & Senior Portfolio Manager - International Core Equity Paul L. McNamara None Member & Director of Institutional Sales and Client Service Robert G. Morris None Member & Chief Investment Officer Robert J. Noelke None
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Name and Current Position with Other Business and Connections Lord, Abbett & Co. LLC During the Past Two Years ----------------------------------- ------------------------------------------ Member & National Sales Manager A. Edward Oberhaus, III None Member & Manager of Equity Trading F. Thomas O'Halloran None Member & Portfolio Manager - Small Cap Growth R. Mark Pennington None Member & Director of Separately Managed Accounts Walter H. Prahl None Member & Director of Quantitative Research, Taxable Fixed Income Michael L. Radziemski None Member & Chief Information Officer Jarrod R. Sohosky None Member & Southern Division Director Eli M. Salzmann None Member & Director of Large Cap Value Equity Management Harold E. Sharon None Member & Director of International Equity and Senior Portfolio Manager Douglas B. Sieg None Member & Director of Marketing Richard D. Sieling None Member & Managing Director - Lord Abbett Limited Michael T. Smith None Member & Portfolio Manager - Small Cap Value/Small Cap Blend Diane Tornejal None Member & Director of Human Resources Christopher J. Towle None Member & Senior Portfolio Manager -- Convertibles and High Yield Edward K. von der Linde None Portfolio Manager - Mid Cap Value Marion Zapolin None Member & Chief Financial Officer
The principal business address for Lord, Abbett & Co. LLC is 90 Hudson Street, Jersey City, New Jersey, 07302-3973. WELLS CAPITAL MANAGEMENT, INCORPORATED
Name and Current Position with Other Business and Connections Lord, Abbett & Co. LLC During the Past Two Years ----------------------------------- ------------------------------------------ Robert Bissell None President, Chief Executive Officer
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Name and Position with Wells Other Business Connections During Capital Management, Incorporated the Past Two Years ----------------------------------- --------------------------------- Kirk D. Hartman None Executive Vice President and Chief Investment Officer Amru A. Khan None Executive Vice President, Sales and Marketing Thomas O'Malley None Executive Vice President, Liquidity Management Client Services James W. Paulsen None Executive Vice President, Chief Investment Strategist Karen L. Norton None Senior Vice President and Chief Administrative and Operation Officer David O'Keefe None Senior Vice President, Chief Financial Officer Mai Shiver None Chief Compliance Officer and Director Business Risk Management Sallie C. Squire None Senior Vice President and Director of Professional and Corporate Development William L. Timoney None Executive Vice President and Chief Administrative and Operation Officer
C-13 ABN AMRO ASSET MANAGEMENT, INC.
Other Business and Name and Current Position with ABN Connections During the AMRO Asset Management, Inc. Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- Nancy Jane Holland Associated with ABN AMRO Asset 161 North Clark Street Director, Management and its affiliates since Chicago, Illinois 60601 February 2006 - Present Senior 1997 Managing Director 1997 to Present Seymour Andrew Newman, CPA Associated with ABN AMRO Asset 161 North Clark Street Executive Vice President/ CFO/ Management and its affiliates since Chicago, Illinois 60601 Treasury and Secretary March 2000 to 1997 Present Thomas Leavitt Associated with ABN AMRO Asset 161 North Clark Street President, Chief Management and its affiliates since Chicago, Illinois 60601 Executive Officer and Head of 2006 Institutional Sales Laura Manley Associated with ABN AMRO Asset 161 North Clark Street Director, August 2006 to Present Management and its affiliates since Chicago, Illinois 60601 Senior Vice President, January 2005 2007 to present Brian Hoeft Lord, Chief Compliance Associated with ABN AMRO Asset 161 North Clark Street Officer, September 2006 to Management and its affiliates since Chicago, Illinois 60601 Present 2006 Scott Marinko Associated with ABN AMRO Asset 161 North Clark Street director, august 2006 to present Management and its affiliates since Chicago, Illinois 60601 chief operations officer, may 1997 2006 to present A. Wajid Ahmed ABN AMRO Asset Management Holdings, 161 North Clark Street Vice President and Controller Inc. Chicago, Illinois 60601 ABN AMRO Investment Trust Company William R. Anderson NONE 161 North Clark Street Senior Vice President Chicago, Illinois 60601
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Other Business and Name and Current Position with ABN Connections During the AMRO Asset Management, Inc. Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- Glenna K. Anderson None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Mari Heather Birminghman Abn Amro Asset Management 161 North Clark Street Vice President Holdings, Inc. Chicago, Illinois 60601 Meredith Byrne None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Donald Casey Abn Amro Investment Trust 161 North Clark Street Assistant Vice President Company Chicago, Illinois 60601 Christina Degiuseppe None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Craig Denham None 161 North Clark Street Vice President Chicago, Illinois 60601 Richard Drake, Cfa None 161 North Clark Street Senior Managing Director Chicago, Illinois 60601 Martin Eisenberg Abn Amro Asset Management Holdings, 161 North Clark Street Vice President Inc. Chicago, Illinois 60601 Abn Amro Investment Trust Company Peter Fasone None 161 North Clark Street Vice President Chicago, Illinois 60601 John Finley None 161 North Clark Street Vice President Chicago, Illinois 60601 William Finley, Cfa Abn Amro Investment Trust 161 North Clark Street Senior Managing Director Company Chicago, Illinois 60601 Anthony Ford None 161 North Clark Street Vice President Chicago, Illinois 60601 Wilfrido Garcia None 161 North Clark Street Officer Chicago, Illinois 60601 Michael Gasparac None 161 North Clark Street Vice President Chicago, Illinois 60601 Bruce Goldstone, Cpa Abn Amro Asset Management Holdings, 161 North Clark Street Vice President Inc. Chicago, Illinois 60601 Abn Amro Investment Trust Company Vicki Gertken-Tunstall Abn Amro Investment Trust 161 North Clark Street Vice President Company Chicago, Illinois 60601 Suzanne K. Guzy Abn Amro Investment Trust 161 North Clark Street Senior Vice President Company Chicago, Illinois 60601 Steven Haldi None 161 North Clark Street Managing Director Chicago, Illinois 60601
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Name and Current Position with ABN Other Business and Connections AMRO Asset Management, Inc. During the Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- James D. Hardman None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Jeremy C. Hughes None 161 North Clark Street Vice President Chicago, Illinois 60601 Kevin Kehres, Cfa Abn Amro Investment Trust Company 161 North Clark Street Managing Director Chicago, Illinois 60601 David Kelch None 161 North Clark Street Officer Chicago, Illinois 60601 Timothy Kelly Abn Amro Investment Trust Company 161 North Clark Street Vice President Chicago, Illinois 60601 Thomas Kieltyka None 161 North Clark Street Officer Chicago, Illinois 60601 Thomas Kmiotek None 161 North Clark Street Vice President Chicago, Illinois 60601 Todd W. Larson None 161 North Clark Street Vice President Chicago, Illinois 60601 Brian Lord Abn Amro Asset Management Holdings, 161 North Clark Street Chief Compliance Officer & Gen Inc. Chicago, Illinois 60601 Counsel & Asst Secretary Mika Nishimura None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Jerome Papinchock Abn Amro Asset Management 161 North Clark Street Vice President Holdings, Inc. Chicago, Illinois 60601 Abn Amro Investment Trust Company Joseph Pavnica None 161 North Clark Street Vice President Chicago, Illinois 60601 Beverly Plant None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 James R. Pondel Abn Amro Investment Trust Company 161 North Clark Street Vice President Chicago, Illinois 60601 Simon Reeves None 161 North Clark Street Managing Director Chicago, Illinois 60601 Jordan A. Rosner None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Marcia Roth None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Randall Rynearson Abn Amro Investment Trust 161 North Clark Street Vice President Company Chicago, Illinois 60601
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Name and Current Position with ABN Other Business and Connections AMRO Asset Management, Inc. During the Past Two Years Address -------------------------------------- ----------------------------------- ----------------------------- Timothy Scanlan, Cfa Abn Amro Investment Trust Company 161 North Clark Street Senior Vice President Chicago, Illinois 60601 Timothy Sheehan None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Gregory Shields Abn Amro Investment Trust Company 161 North Clark Street Vice President Chicago, Illinois 60601 Steven Sherman None 161 North Clark Street Vice President Chicago, Illinois 60601 Steven Smart, Cfa 161 North Clark Street Vice President None Chicago, Illinois 60601 Peter W. Spartin Abn Amro Investment Trust Company 161 North Clark Street Senior Vice President Chicago, Illinois 60601 Robert Thomas III None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Jeremy Thurm None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Charles Ullerich None 161 North Clark Street Vice President Chicago, Illinois 60601 Kristine Victory Abn Amro Investment Trust Company 161 North Clark Street Vice President Chicago, Illinois 60601 Daniel Wanzenberg None 161 North Clark Street First Vice President Chicago, Illinois 60601 Ann Weis Abn Amro Asset Management 161 North Clark Street Vice President & Assistant Holdings, Inc. Chicago, Illinois 60601 Secretary Abn Amro Investment Trust Company Christopher White Abn Amro Investment Trust Company 161 North Clark Street Senior Vice President Chicago, Illinois 60601 Paul Wojtyla None 161 North Clark Street Assistant Vice President Chicago, Illinois 60601 Timothy Woods Abn Amro Asset Management 161 North Clark Street Vice President Holdings, Inc. Chicago, Illinois 60601 Abn Amro Investment Trust Company Todd J. Youngberg, Cfa None 161 North Clark Street Managing Director Chicago, Illinois 60601
TURNER INVESTMENT PARTNERS, INC. C-17
NAME AND POSITION WITH COMPANY OTHER COMPANY POSITION WITH OTHER COMPANY -------------------------------------- ----------------------------------- ----------------------------- Thomas R. Trala Turner Funds President Chief Financial and Operating Turner Investment Partners Pty. Board Member & Chief Officer, Secretary Ltd. Operating Officer Turner Investment Management LLC Board Member, President & Chief Operating Officer & Treasurer Mark D. Turner Turner Investment Management, LLC Chairman Vice Chairman of the Board; President, Senior Portfolio Manager Robert E. Turner Turner Funds Trustee Chairman of the Board; Chief Turner Investment Partners Pty. Board Member Investment Officer; Chief Ltd. Executive Officer Bradley University (Peoria, IL) Trustee The Crossroads School (Paoli, PA) Trustee Christopher K. Mchugh Philadelphia University TRUSTEE Board Member, Vice President, Senior Portfolio Manager
The principal address of Turner Investment Partners and its subsidiaries Turner Investment Management, LLC and Turner Investment Partners Pty. Ltd., is 1205 Westlakes Drive, Suite 100, Berwyn, PA, 19312. NEUBERGER BERMAN MANAGEMENT INC.
NAME AND CURRENT POSITION WITH NEUBERGER OTHER BUSINESS CONNECTIONS DURING BERMAN MANAGEMENT INC THE PAST TWO YEARS ------------------------------------------- --------------------------------------------------- Jeffrey B. Lane- Director Chairman, Wealth and Asset Management Division and Vice-Chairman of Lehman Brothers Inc.; Chairman, Neuberger Berman Inc.; formerly President and Chief Executive Officer, Neuberger Berman, LLC Jack L. Rivkin-Chairman Executive Vice President, Neuberger Berman, Inc. Managing Director, Neuberger Berman, LLC Peter E. Sundman-President Executive Vice President and Director, Neuberger Berman Inc.; Chief Operating Officer, Neuberger Berman LLC Robert Conti-Senior Vice President Vice President, Neuberger Berman, LLC Brian Gaffney- Senior Vice President Managing Director Neuberger Berman, LLC Edward S. Grieb-Treasurer & Chief Financial Managing Director, Chief Financial Officer, Officer Treasurer Neuberger Berman LLC
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NAME AND CURRENT POSITION WITH NEUBERGER BERMAN OTHER MANAGEMENT INC BUSINESS CONNECTIONS DURING THE PAST TWO YEARS --------------------------- --------------------------------------------------
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NAME AND CURRENT POSITION WITH NEUBERGER BERMAN OTHER MANAGEMENT INC BUSINESS CONNECTIONS DURING THE PAST TWO YEARS --------------------------- -------------------------------------------------- Maxine L. Gerson- Secretary Senior Vice President, Assistant Secretary Neuberger Berman, LLC
The principal address of NB Management, Neuberger Berman LLC and Neuberger Berman Inc. is 605 Third Avenue, New York, New York, 10158. BJURMAN, BARRY & ASSOCIATES
Name and Current Position with Other Business and Bjurman, Barry & Associates Connections During the Past Two Years Address ------------------------------------- ------------------------------------- ------------------------- O. Thomas Barry III Senior Executive Vice President and 10100 Santa Monica Blvd. Principle & Chief Investment Officer Sr. Portfolio Manager, Board Member Suite 1200 and Principle Member of the Los Angeles, CA 90067 Investment Policy Committee for Bjurman, Barry & Associates from 1978 - Present. Co-President and Senior Portfolio Manager of the Bjurman, Barry Funds from 1997-President. G. Andrew Bjurman President, Senior Portfolio Manager, 10100 Santa Monica Blvd. Principle & Chief Executive Officer Board Member and Principle Member of Suite 1200 the Investment Policy Committee for Los Angeles, CA 90067 Bjurman, Barry & Associates from 1970-Present. Co-President of the Bjurman, Barry Funds from 1997-Present.
GOLDMAN SACHS ASSET MANAGEMENT, L.P. C-20 Goldman Sachs Asset Management, L.P. ("GSAM LP") is a wholly-owned subsidiary of the Goldman Sachs Group, Inc. and serves as the investment Adviser to the Registrant. Set forth below are the names, businesses and business addresses of certain managing directors of GSAM LP who are engaged in any other business, profession, vocation or employment of a substantial nature.
NAME AND POSITION WITH THE NAME AND ADDRESS OF CONNECTION WITH INVESTMENT ADVISER OTHER COMPANY OTHER COMPANY -------------------------- ------------------- --------------- Lloyd C. Blankfein The Goldman Sachs Group, Inc. Chairman, Managing Director-GSAMLP 85 Broad Street Chief Executive New York, New York 10004 Officer and Director Goldman, Sachs & Co. Managing Director 85 Broad Street New York, New York 10004 John S. Weinberg The Goldman Sachs Group, Inc. Vice Chairman Managing Director-GSAM LP 85 Broad Street New York, New York 10004 Goldman, Sachs & Co. Managing Director 85 Broad Street New York, New York 10004
C-21 VONTOBEL ASSET MANAGEMENT, INC.
Name and Current Position with Other Business Connections During Vontobel Asset Management, Inc. the Past Two Years ------------------------------- --------------------------------- Herbert J. Scheidt Chief Executive Officer, Chairman of the Board of Directors Vontobel Group, Zurich Switzerland Chairman of the Executive Committee Bank Vontobel AG Christoph Ledergerber Head of Asset Management and Investment Vice Chairman of the Board of Funds Directors Member of the Group Executive Board Axel May CFO, Head of Risk Management Director Vontobel Group, Zurich, Switzerland Member of the Group Executive Board Giuseppe Benelli Director Chief Investment Officer, Head of Group Investment Center Member of the Group Executive Board Heinrich Schlegel President and CEO None Thomas Wittwer None Managing Director, Institutional Marketing Peter Newell None Managing Director, Institutional Marketing Rajiv Jain None Managing Director, Head Portfolio Manager, International Equities Edwin Walczak None Managing Director, Head of Domestic Portfolio Management Joseph F. Mastoloni Director, World Insurance Trust Member of First Vice President & Chief The World Funds, Inc. Board Compliance Officer
The WORLD Funds, Inc. is a registered investment company, incorporated under the laws of Maryland, comprising MULTIPLE fund series for which Vontobel Asset Management, Inc. serves as investment sub-adviser TO ONE FUND SERIES. HEITMAN REAL ESTATE SECURITIES LLC C-22
Name and Position with Heitman Other Business Connections During Real Estate Securities LLC the Past Two Years ------------------------------ --------------------------------- Timothy J Pire None Managing Director Randall E. Newsome None Executive Vice President Larry S. Antonatos None Executive Vice President Nancy B. Lynn None Vice President Karen A. O'Donnell None Assistant Vice President William E. Pogorelec None Vice President Mark Zahara None Trader Jeffrey Yurk Assistant Vice None President Donna Nicole Bair None Vice President
The principal address of Heitman Real Estate Securities LLC is 191 North Wacker Drive, Suite 2500, Chicago, IL 60606. ITEM 27. PRINCIPAL UNDERWRITERS Not Applicable. C-23 Item 28. Location of Accounts and Records Penn Mutual Life Insurance Co. Wells Capital Management, Incorporated 600 Dresher Road 525 Market Street Horsham,PA 19044 San Francisco, CA 94105 Penn Series Funds, Inc. Goldman Sachs Asset Management, L.P. 600 Dresher Road 32 Old Slip Horsham,Pa 19044 New York, NY 10005 PFPC Inc. Bjurman Barry & Associates Bellevue Corporate Center 10100 Santa Monica Boulevard, Suite 1200 103 Bellevue Parkway Los Angeles, CA 90067 Wilmington, DE 19809 T. Rowe Price Associates, Inc. Turner Investment Partners 100 E.Pratt Street 1205 Westlakes Drive, Suite 100 Baltimore, MD 21202 Berwyn, Pa 19312 Morgan, Lewis & Bockius LLP Neuberger Berman 1701 Market Street Management Inc. Philadelphia, PA 19103-2921 605 Third Avenue New York, NY 10158 Independence Capital Management, Inc. Vontobel Asset Management, Inc. Five Radnor Corporate Center, 450 Park Avenue Suite 450 New York, NY 10022 Radnor, PA 19087 ABN AMRO Asset Management, Inc. Lord, Abbett & Co. LLC 161 North Clark Street 90 Hudson Street Chicago, IL 60601 Jersey City, NJ 07302 Heitman Real Estate Securities LLC 191 North Wacker Drive, Suite 2500 Chicago, IL 60606
Item 29. Management Services Not applicable. Item 30. Undertakings The Registrant undertakes to furnish each person to whom a prospectus is delivered a copy of the Registrant's latest annual report to shareholders, upon request and without charge. C-24 SIGNATURES As required by the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and that it has duly caused this Post-Effective Amendment No. 58 to the Registration Statement on Form N-1 A to be signed on its behalf by the undersigned, thereunto duly authorized in the Township of Horsham and Commonwealth of Pennsylvania, on this 25th day of April, 2007. PENN SERIES FUNDS, INC. (Registrant) By: /s/ Peter M. Sherman ------------------------------------ Peter M. Sherman, President Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 58 to the Registration Statement on From N-1 A has been signed below by the following persons in the capacities indicated on the 25th day of April, 2007.
SIGNATURE TITLE --------- ----- /s/ Peter M. Sherman President (Principal Executive Officer) ------------------------------------- Peter M. Sherman /s/ Jill Bukata Controller (Principal Financial Officer) ------------------------------------- Jill Bukata * EUGENE BAY Director * JAMES S. GREENE Director * ROBERT E. CHAPPELL Director * M. DONALD WRIGHT Director * CHARLES E. MATHER, III Director * By: /s/ Robert E. Chappell ---------------------------- Robert E. Chappell, Attorney-In-Fact
C-25 EXHIBIT INDEX (d)(11) Amendment to Sub-Advisory Agreement between Independence Capital Management, Inc. and Vontobel Asset Management, Inc. with respect to the International Equity Fund. (d)(14) Amendment to Sub-Advisory Agreement between Independence Capital Management, Inc. and Heitman Real Estate Securities LLC with respect to the REIT Fund. (h)(1) Amended and Restated Administrative and Corporate Services Agreement between the Registrant and The Penn Mutual Life Insurance Company. (h)(4) Amendment to the Accounting Services Agreement. (i) Opinion and Consent of Morgan, Lewis & Bockius LLP. (j) Consent of KPMG LLP, independent registered public accounting firm. (p)(5) Code of Ethics for Lord, Abbett & Co. LLC. (p)(6) Code of Ethics for Wells Capital Management Incorporated. (p)(7) Code of Ethics for Neuberger Berman Management, Inc. (p)(8) Code of Ethics for Goldman Sachs Asset Management, L.P. (p)(11) Code of Ethics for ABN AMRO Asset Management, Inc. (p)(12) Code of Ethics for Heitman Real Estate Securities LLC. C-26