PBHG INSURANCE SERIES FUND, INC.
PBHG GROWTH II PORTFOLIO
PBHG SMALL CAP VALUE PORTFOLIO
PBHG LARGE CAP VALUE PORTFOLIO
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
PBHG SELECT 20 PORTFOLIO
PROSPECTUS DATED MAY 1, 1997
AS AMENDED AUGUST 8, 1997
PBHG Insurance Series Fund, Inc. (the "Fund") is an open-end diversified
management investment company authorized to issue multiple series of shares,
each representing a diversified portfolio of investments (individually, a
"Portfolio" and collectively, the "Portfolios"). The Fund currently has
authorized six series, five of which are available hereunder.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. The Fund's shares are offered
only to insurance companies ("Participating Insurance Companies") to fund
benefits under their variable annuity contracts ("VA Contracts") and variable
life insurance policies ("VLI Policies").
Please read this Prospectus carefully and retain it for future reference. This
Prospectus should be read in conjunction with the prospectuses issued by the
Participating Insurance Companies for the VA Contracts and VLI Policies that
accompany this Prospectus. Additional information about the Fund and the
Portfolios is contained in a Statement of Additional Information which has been
filed with the Securities and Exchange Commission (the "SEC") and is available
to investors without charge by calling the Fund at 1-800-347-9256. The Statement
of Additional Information, as amended from time to time, bears the same date as
this Prospectus and is incorporated by reference in its entirety into this
Prospectus.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, the securities of the Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE
THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED,
THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE
INVESTOR.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE AVAILABLE AND ARE BEING OFFERED EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF VARIABLE LIFE
INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS.
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
INVESTMENT OBJECTIVES AND POLICIES.......................... 3
GENERAL INVESTMENT POLICIES AND STRATEGIES.................. 5
RISK FACTORS................................................ 7
INVESTMENT LIMITATIONS...................................... 8
PURCHASES AND REDEMPTIONS................................... 8
NET ASSET VALUE............................................. 9
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS..................... 9
PERFORMANCE ADVERTISING..................................... 9
GENERAL INFORMATION......................................... 11
GLOSSARY OF PERMITTED INVESTMENTS........................... 15
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SUMMARY
THE FUND
The Fund is an open-end diversified management investment company which
currently offers shares of six Portfolios, five of which are available
hereunder. The five available Portfolios are: the PBHG Growth II Portfolio (the
"Growth II Portfolio"), PBHG Small Cap Value Portfolio (the "Small Cap Value
Portfolio"), PBHG Large Cap Value Portfolio (the "Large Cap Value Portfolio"),
PBHG Technology & Communications Portfolio (the "Technology & Communications
Portfolio") and PBHG Select 20 Portfolio (the "Select 20 Portfolio"). Each of
the Portfolios has distinct investment objectives and policies. See "Investment
Objectives and Policies." Additional Portfolios may be added to the Fund in the
future. This Prospectus will be supplemented or amended to reflect the addition
of any new Portfolios.
This summary, which provides basic information about the Portfolios and the
Fund, is qualified in its entirety by reference to the more detailed information
provided elsewhere in this Prospectus and in the Statement of Additional
Information.
WHAT ARE THE INVESTMENT OBJECTIVES OF THE PORTFOLIOS? The Growth II
Portfolio seeks capital appreciation. The Small Cap Value Portfolio seeks to
achieve above-average total return over a market cycle of three to five years.
The Large Cap Value Portfolio seeks long-term growth of capital and income.
Current income is a secondary objective. The Technology & Communications
Portfolio seeks long-term growth of capital. The Select 20 Portfolio seeks
long-term capital appreciation. There can be no assurance that a Portfolio will
achieve its investment objective. Each Portfolio will invest primarily in a
variety of equity securities in accordance with its particular investment
program and policies. The Growth II Portfolio invests primarily in equity
securities of small and medium capitalization companies believed by Pilgrim
Baxter & Associates, Ltd. (the "Adviser") to have an outlook for strong earnings
growth and the potential for significant capital appreciation. The Small Cap
Value Portfolio invests primarily in a diversified portfolio of equity
securities with market capitalizations in the range of companies represented in
the Russell 2000 Index which are deemed by the Adviser and Newbold's Asset
Management, Inc. (the "Sub-Adviser") to be relatively undervalued based on
certain proprietary measures of value. The Large Cap Value Portfolio invests
primarily in a diversified portfolio of equity securities of large
capitalization companies which, in the opinion of the Adviser and Sub-Adviser,
are undervalued or overlooked by the market. The Technology & Communications
Portfolio invests primarily in equity securities of companies, without regard to
market capitalization, which rely extensively on science and technology in their
product development or operations, or which are expected to benefit from
technological improvements and which may be experiencing exceptional growth in
sales and earnings driven by technology-related products and services. The
Select 20 Portfolio invests primarily in equity securities of a limited number
of larger capitalization companies (no more than 20) that are perceived by the
Adviser to have a strong potential for capital appreciation.
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE PORTFOLIOS? Each
Portfolio invests in securities that fluctuate in value, and investors should
expect each Portfolio's net asset value per share to fluctuate. Each Portfolio
may invest in stocks and convertible securities that may be traded in the
over-the-counter market. Some of these securities may not be as liquid as
exchange-listed stocks. In addition, the Growth II and Small Cap Value
Portfolios invest extensively in securities of small capitalization companies
and, to a lesser extent, the Technology & Communications Portfolio also invests
in small or medium capitalization company stocks and, therefore, may experience
greater price volatility than investment companies that invest primarily in more
established, larger capitalized companies. Because the Select 20 Portfolio
invests in equity securities of a relatively small number of companies, the
impact of a change in value of a stock holding may be magnified. Although the
Technology & Communications Portfolio will invest in the securities of
technology companies in many different industries, many of these industries
share common characteristics. Furthermore, equity securities of technology
companies may be subject to greater price volatility than securities of
companies in many other industries. Each of the Portfolios may invest in equity
securities of non-U.S. issuers, which are subject to certain risks not typically
associated with domestic securities. Such risks include changes in currency
rates and in exchange control regulations, costs associated with conversions
between various currencies, limited publicly available information regarding
foreign issuers, lack of uniformity in accounting, auditing and financial
standards
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and requirements, greater securities market volatility, less liquidity, less
government supervision of securities markets, changes in taxes on income on
securities, and possible seizure, nationalization or expropriation of the
foreign issuer or foreign deposits. The Portfolios also may enter into futures
contracts, which are subject to special risks. When futures contracts are being
used for hedging purposes, such risks include the potential of imperfect
correlation between the change in the value of a futures contract purchased or
sold and the market value of the securities held by the Portfolios; the possible
failure to correctly predict movements in the direction of the market; and the
risk that the Portfolios may not be able to close out a particular futures
contract because of a lack of a liquid secondary market in such futures
contract. Other risks of investing in futures contracts include that the prices
of futures contracts are volatile and are influenced by changes in market and
interest rates and that futures trading involves an extremely high degree of
leverage which may result in losses in excess of the amount invested in the
futures contract. See "Investment Objectives and Policies", "Risk Factors" and
"Glossary of Permitted Investments" in this Prospectus and see "Risks of
Transactions in Futures Contracts and Options" in the Statement of Additional
Information.
WHO ARE THE ADVISER AND SUB-ADVISER? Pilgrim Baxter & Associates, Ltd.
serves as the investment adviser to each Portfolio. Newbold's Asset Management,
Inc. serves as the investment sub-adviser to the Small Cap Value and Large Cap
Value Portfolios. See "The Adviser" and "The Sub-Adviser."
WHO ARE THE ADMINISTRATOR AND SUB-ADMINISTRATOR? PBHG Fund Services serves
as the Administrator of the Fund and SEI Fund Resources, an affiliate of the
Fund's distributor, serves as Sub-Administrator of the Fund. See "The
Administrator and Sub-Administrator."
WHO IS THE TRANSFER AGENT? DST Systems, Inc. serves as the transfer agent,
dividend disbursing agent and shareholder servicing agent of the Fund. See "The
Transfer Agent."
WHO IS THE DISTRIBUTOR? SEI Financial Services Company provides the Fund
with distribution services. See "The Distributor."
HOW ARE SHARES PURCHASED AND REDEEMED? Individual investors may not
purchase or redeem shares of the Portfolios directly; shares may be purchased or
redeemed only through VA Contracts and VLI Policies offered by separate accounts
of Participating Insurance Companies. See "Purchases and Redemptions."
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INVESTMENT OBJECTIVES AND POLICIES
GROWTH II PORTFOLIO
The Growth II Portfolio seeks capital appreciation. The Portfolio will normally
be as fully invested as practicable in common stocks and securities convertible
into common stocks, but also may invest up to 5% of its assets in warrants and
rights to purchase common stocks. In the opinion of the Adviser, there may be
times when the shareholders' interests are best served and the investment
objective is more likely to be achieved by having varying amounts of the
Portfolio's assets invested in convertible securities. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in common
stocks and convertible securities of small and medium sized growth companies
(market capitalization or annual revenues up to $4 billion). The average market
capitalizations of holdings in the Portfolio may, however, fluctuate over time
as a result of market valuation levels and the availability of specific
investment opportunities. In addition, the Portfolio may continue to hold
securities of companies whose market capitalizations or annual revenues grow
above $4 billion subsequent to purchase, if the company continues to satisfy the
other investment policies of the Portfolio.
The Portfolio will seek to achieve its objective by investing in companies
believed by the Adviser to have an outlook for strong earnings growth and the
potential for significant capital appreciation. Securities will be sold when the
Adviser believes that anticipated appreciation is no longer probable,
alternative investments offer superior appreciation prospects, or the risk of a
decline in market price is too great. Because of its policy with respect to the
sales of investments, the Portfolio may from time to time realize short-term
gains or losses. The Portfolio will likely have somewhat greater volatility than
the stock market in general, as measured by the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500 Index"). Because the investment techniques employed
by the Adviser are responsive to near-term earnings trends of the companies
whose securities are owned by the Portfolio, portfolio turnover can be expected
to be fairly high.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers (including American Depository Receipts ("ADRs")), and may invest up to
15% of its net assets in illiquid securities. This limitation does not include
any Rule 144A security that has been determined to be liquid pursuant to
procedures established by the Board. See "Risk Factors" and "Glossary of
Permitted Investments" in this Prospectus for a fuller description of the
Portfolio's permitted investments and their risks.
SMALL CAP VALUE PORTFOLIO
The Small Cap Value Portfolio seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of common stocks of small
companies with market capitalizations in the range of companies represented in
the Russell 2000 Index which are considered to be relatively undervalued based
on certain proprietary measures of value.
The current market capitalization of companies in the Russell 2000 Index is
typically between $100 million and $1.5 billion. It is expected that securities
purchased by the Portfolio will typically exhibit lower price/earnings and
price/book value ratios than the average of those in the Russell 2000 Index.
Under normal circumstances, the Portfolio will be structured taking into account
the economic sector weightings of the Russell 2000 Index, with the Portfolio's
sector weightings normally within 10% of the sector weightings of that Index.
In selecting investments for the Portfolio, the Adviser and Sub-Adviser
emphasize fundamental investment value and consider the following factors, among
others, in identifying and analyzing a security's fundamental value: the
relationship of a company's potential earnings power to its current stock price;
current dividend income and the potential for current dividends; low
price/earnings ratio relative to other similar companies; strong competitive
advantages, including a recognized brand or trade name or niche market position;
sufficient resources for expansion; capability of management; and favorable
overall business prospects. The Portfolio may invest in equity securities of
companies that are considered to be financially sound and attractive investments
based on their operating history, but which may be experiencing temporary
earnings declines due to adverse economic conditions that may be company or
industry specific or due to unfavorable publicity. The Portfolio may invest in
such companies when the Adviser and Sub-Adviser believe that those companies
will react positively to changing economic conditions or that such companies
have taken or are expected to take actions designed to improve their financial
fundamentals or to otherwise increase the
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market price of their securities. The utilization of a valuation approach may
result in investment selections that may be out-of-favor or counter to those of
other investors. However, such an approach may also produce significant capital
appreciation.
In addition to the Portfolio's primary investment (i.e., 65% of its total
assets) in common stocks of undervalued small capitalization companies, the
Portfolio may also invest in other equity securities (i.e., preferred stocks,
warrants and securities convertible into or exchangeable for common stocks) of
such small capitalization issuers. The Portfolio may also utilize futures
contracts (i.e., purchase and sell futures contracts) to the extent that (i)
aggregate initial margin deposits to establish other than "bona fide hedging"
positions does not exceed 5% of the Portfolio's net assets and (ii) the total
market value of securities underlying all futures contracts does not exceed 50%
of the value of the Portfolio's total assets. In addition, the Portfolio may
invest up to 15% of its net assets in restricted or illiquid securities. This
limitation does not include any Rule 144A security that has been determined to
be liquid pursuant to procedures established by the Board. The Portfolio may use
high-quality money market investments or short-term bonds to reduce downside
volatility during uncertain or declining market conditions and, for temporary
defensive purposes, may invest in money market securities or short-term bonds
without limitation. See "General Investment Policies and Strategies -- Temporary
Defensive Positions" below for a fuller description.
The securities in which the Portfolio invests normally will be traded in the
United States or Canada on a registered securities exchange or established over-
the-counter market. The Portfolio may invest up to 15% of its total assets in
securities of foreign issuers, including ADRs and other similar instruments. In
addition, the Portfolio may purchase securities on a when-issued or delayed
delivery basis.
See "Risk Factors" and "Glossary of Permitted Investments" in this Prospectus
for a fuller description of the Portfolio's permitted investments and their
risks.
LARGE CAP VALUE PORTFOLIO
The Large Cap Value Portfolio seeks long-term growth of capital and income.
Current income is a secondary objective. Under normal market conditions, the
Portfolio will invest at least 65% of its total assets in a diversified
portfolio of equity securities (i.e., common stocks, preferred stocks, rights,
warrants and securities convertible into or exchangeable for common stocks) of
large capitalization companies which, in the opinion of the Adviser and
Sub-Adviser, are undervalued or overlooked by the market. Such large companies
have market capitalizations in excess of $1 billion at the time of purchase.
In selecting investments for the Portfolio, the Adviser and Sub-Adviser
emphasize fundamental investment value and consider the following factors, among
others, in identifying and analyzing a security's fundamental value: the
relationship of a company's potential earning power to the current market price
of its stock; continuing dividend income and the potential for increasing
dividend growth; a strong balance sheet with low financial leverage; low
price/earnings ratio relative to either that company's historical results or the
current ratios for other similar companies; and potential for favorable business
developments. The Portfolio may invest in equity securities of companies that
are considered to be financially sound and attractive investments based on their
long-term operating history, but which may be experiencing temporary earnings
declines due to adverse economic conditions that may be company or industry
specific or due to unfavorable publicity. The Portfolio may invest in such
companies when the Adviser and Sub-Adviser believe that those companies will
react positively to changing economic conditions or that such companies have
taken or are expected to take actions designed to return their earnings to
historical levels or otherwise increase the market price of their securities.
The equity securities in which the Portfolio invests normally will be traded in
the United States or Canada on a registered securities exchange or established
over-the-counter market. The Portfolio may invest up to 15% of its total assets
in securities of foreign issuers, including ADRs, and may also invest up to 15%
of its net assets in restricted or illiquid securities. The Portfolio may use
high-quality money market investments or short-term bonds to reduce downside
volatility during uncertain or declining market conditions. For temporary or
defensive purposes, the Portfolio may invest in money market securities or
short-term bonds without limitation. The Portfolio may purchase securities on a
when-issued or delayed delivery basis.
The utilization of a valuation approach may result in investment selections that
may be out-of-favor or counter to those of other investors. However, such an
approach may also produce significant capital appreciation. See "Risk Factors"
and "Glossary of Permitted Investments" in this Prospectus for a fuller
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description of the Portfolio's permitted investments and their risks.
TECHNOLOGY & COMMUNICATIONS PORTFOLIO
The Technology & Communications Portfolio seeks long-term growth of capital.
Current income is incidental to the Portfolio's objective. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in common
stocks of companies which rely extensively on technology or communications in
their product development or operations, or which are expected to benefit from
technological advances and improvements, and that may be experiencing
exceptional growth in sales and earnings driven by technology- or communication-
related products and services.
Such technology and communications companies may be in many different industries
or fields, including computer software and hardware, electronic components and
systems, network and cable broadcasting, telecommunications, mobile
communications, satellite communications, defense and aerospace, transportation
systems, data storage and retrieval, biotechnology and medical, and
environmental. As a result of this focus, the Portfolio offers investors the
significant growth potential of companies that may be responsible for
breakthrough products or technologies or that are positioned to take advantage
of cutting-edge developments.
The Portfolio will normally be fully invested in common stocks (including ADRs)
of such technology and communications companies, but also may invest in warrants
and rights to purchase common stocks and debt securities and preferred stocks
convertible into common stocks. Stock selections will not be based on company
size, but rather on an assessment of a company's fundamental prospects. As a
result, the Portfolio's stock holdings can range from small companies developing
new technologies or pursuing scientific breakthroughs to large, blue chip firms
with established track records in developing and marketing such scientific
advances.
Normally, the Portfolio will purchase securities traded in the U.S. or Canada on
registered exchanges or in the over-the-counter market. The Portfolio may also
invest, in the aggregate, up to 10% of its net assets in restricted securities
and securities of foreign issuers traded outside the U.S. and Canada and, for
hedging purposes, may purchase and sell options on stocks or stock indices. The
Portfolio also may invest up to 15% of its net assets in illiquid securities.
See "Risk Factors" and "Glossary of Permitted Investments" in this Prospectus
for a fuller description of the Portfolio's permitted investments and their
risks.
SELECT 20 PORTFOLIO
The Select 20 Portfolio seeks long-term growth of capital. The Portfolio will
normally be substantially invested in equity securities (including ADRs and
foreign equity securities). The equity securities in which the Portfolio will
invest are common stocks, warrants and rights to purchase common stocks, and
debt securities and preferred stocks that are convertible into common stocks.
The Portfolio may invest in convertible debt securities rated investment grade
by a nationally recognized statistical rating organization ("NRSRO") (i.e.,
within one of the four higher rating categories). The Adviser will consider the
diversity of industries in choosing investments for the Portfolio.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of a limited number (i.e., no more than 20
stocks) of large capitalization companies that, in the Adviser's opinion, have a
strong earnings growth outlook and potential for capital appreciation. Such
large companies have market capitalization in excess of $1 billion. Because the
Portfolio focuses on equity securities of a small number of companies, the
impact of a change in value of a single stock holding may be magnified.
While it has no present intention to do so, the Portfolio reserves the right to
invest up to 10% of its net assets in restricted securities and securities of
foreign issuers traded outside the United States and Canada and, for hedging
purposes only, to purchase and sell options on stocks or stock indices. The
Portfolio may also invest up to 15% of its net assets in illiquid securities,
but will not invest more than 5% of its net assets in restricted securities that
the Adviser determines are illiquid based on guidelines approved by the Board of
Directors of the Fund. See "Risk Factors" and "Glossary of Permitted
Investments" in this Prospectus for a fuller description of the Portfolio's
permitted investments and their risks.
GENERAL INVESTMENT POLICIES AND STRATEGIES
INVESTMENT PROCESS: GROWTH II, TECHNOLOGY & COMMUNICATIONS AND SELECT 20
PORTFOLIOS
The Adviser's investment process in managing the assets of the Growth II,
Technology & Communications and Select 20 Portfolios is both quantitative and
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fundamental, and is focused on quality earnings growth. In seeking to identify
investment opportunities for the Portfolios, the Adviser begins by creating a
universe of rapidly growing companies with market capitalizations within the
parameters described for each Portfolio and that possess certain quality
characteristics. Using proprietary software and research models that incorporate
important attributes of successful growth, such as positive earnings surprises,
upward earnings estimate revisions, and accelerating sales and earnings growth,
the Adviser creates a universe of growing companies. Then, using fundamental
research, the Adviser evaluates each company's earnings quality and assesses the
sustainability of the company's current growth trends. Through this highly
disciplined process, the Adviser seeks to construct investment portfolios for
the Portfolios that possess strong growth characteristics. The Adviser tries to
keep each such Portfolio fully invested at all times. Because the universe of
companies will undoubtedly experience volatility in stock price, it is important
that shareholders in the Portfolios maintain a long-term investment perspective.
Of course, there can be no assurance that use of these techniques will be
successful, even over the long term.
INVESTMENT PROCESS: SMALL CAP VALUE AND LARGE CAP VALUE PORTFOLIOS
The Sub-Adviser's investment process with respect to the Small Cap Value and
Large Cap Value Portfolios, like that of the Adviser, is both quantitative and
fundamental. In seeking to identify attractive investment opportunities for the
Small Cap Value and Large Cap Value Portfolios, the Sub-Adviser first creates a
universe of companies each of whose current share price is low in relation to
its real worth or future prospects. Using custom designed research models and
proprietary software, which incorporate certain key elements of value investing
(such as consistency of dividend payment, balance sheet strength and, low stock
price relative to its assets, earnings, cash flow and business franchise), the
Sub-Adviser screens more than 8,000 possible companies and creates an initial
universe of statistically attractive value companies. Following the creation of
this universe of possible investments, the Sub-Adviser uses its strong
fundamental research capabilities to carefully identify securities that are
currently out of favor but which have the potential to achieve significant
appreciation as the marketplace recognizes their fundamental value. Once
constructed, portfolios are continually monitored for change. The Sub-Adviser
follows a disciplined valuation approach that requires it to sell any portfolio
security that becomes overvalued relative to the market. Sales of portfolio
securities are primarily triggered by the relative change in a company's
price/earnings ratio. Adverse changes in other key value elements are, of
course, factors that would also trigger a sale. Of course, there can be no
assurance that use of these techniques will be successful.
PORTFOLIO TURNOVER
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. A higher turnover rate (100% or more)
increases transaction costs (e.g., brokerage commissions) and increases realized
gains and losses. It is expected that under normal market conditions, the annual
portfolio turnover rate for the Large Cap Value Portfolio will not exceed 100%,
and with respect to the Growth II Portfolio will not exceed 150%. It is expected
that under normal market conditions, the annual portfolio turnover rate for the
Small Cap Value Portfolio will not exceed 200% and with respect to the Select 20
and Technology & Communications Portfolios will not exceed 300%. High rates of
portfolio turnover necessarily result in correspondingly greater brokerage and
portfolio trading costs, which are paid by the Portfolios. Trading in
fixed-income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. In addition, high
rates of portfolio turnover may adversely affect each Portfolio's status as a
"regulated investment company" ("RIC") under Section 851 of the Internal Revenue
Code of 1986, as amended ("Code").
TEMPORARY DEFENSIVE POSITIONS
Under normal market conditions, each Portfolio expects to be fully invested in
its primary investments, as described above. However, for temporary defensive
purposes, when the Adviser or Sub-Adviser, as appropriate, determines that
market conditions warrant, each Portfolio may invest up to 100% of its assets in
cash and money market instruments (consisting of securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; certificates of
deposit, time deposits and bankers' acceptances issued by banks or savings and
loan associations having net assets of at least $500 million as stated on their
most recently published financial statements; commercial paper rated in one of
the two highest rating categories by at least one NRSRO; repurchase agreements
involving such securities; and, to the extent permitted by applicable law and
each Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the
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extent a Portfolio is invested in temporary defensive instruments, it will not
be pursuing its investment objective. See "Glossary of Permitted Investments"
and the Statement of Additional Information.
RISK FACTORS
SMALL AND MEDIUM CAPITALIZATION STOCKS
Investments in common stocks in general are subject to market risks that may
cause their prices to fluctuate over time. Therefore, an investment in each
Portfolio may be more suitable for long-term investors who can bear the risk of
these fluctuations. The Growth II and Small Cap Value Portfolios invest
extensively in securities issued by small capitalization companies and, in
certain cases, the Technology & Communications Portfolio invests in securities
of issuers with small or medium market capitalizations. While the Adviser and
Sub-Adviser intend to invest in small and medium capitalization companies that
have strong balance sheets and that the Adviser's and/or Sub-Adviser's research
indicates should exceed consensus earnings expectations, any investment in small
and medium capitalization companies involves greater risk and price volatility
than that customarily associated with investments in larger, more established
companies. This increased risk may be due to the greater business risks of their
small size, limited markets and financial resources, narrow product lines and
frequent lack of management depth. The securities of small and medium
capitalization companies are often traded in the over-the-counter market, and
might not be traded in volumes typical of securities traded on a national
securities exchange. Thus, the securities of small and medium capitalization
companies are likely to be less liquid, and subject to more abrupt or erratic
market movements, than securities of larger, more established companies.
OVER-THE-COUNTER MARKET
Each of the Portfolios may invest in over-the-counter stocks. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
which limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter common stock is less than the volume of trading in a listed
stock. This means that the depth of market liquidity of some stocks in which
these Portfolios invest may not be as great as that of other securities and if
the Portfolios were to dispose of such a stock, they might have to offer the
shares at a discount from recent prices, or sell the shares in small lots over
an extended period of time.
FOREIGN SECURITIES
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks and considerations include differences in accounting, auditing and
financial reporting standards, generally higher commission rates on foreign
portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S. investment in foreign countries
and potential restrictions on the flow of international capital and currencies.
Foreign issuers may also be subject to less government regulation than U.S.
companies. Moreover, the dividends and interest payable on foreign securities
may be subject to foreign withholding taxes, thus reducing the net amount of
income available for distribution to a Portfolio's shareholders. Further,
foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility. Changes in
foreign exchange rates will affect, favorably or unfavorably, the value of those
securities which are denominated or quoted in currencies other than the U.S.
dollar.
INVESTMENTS IN TECHNOLOGY COMPANIES
Equity securities of technology companies have tended to be subject to greater
volatility than securities of companies that are not dependent upon or
associated with technological issues. Although the Technology & Communications
Portfolio will invest in the securities of technology companies operating in
various industries, many of these industries share common characteristics.
Therefore, an event or issue affecting one such industry may have a significant
impact on these other, related industries and, thus, may affect the value of the
Technology & Communications Portfolio's investments in technology companies. For
example, the technology companies in which the Technology & Communications
Portfolio invests may be strongly affected by worldwide scientific or
technological developments and their products and services may be subject to
governmental regulation or adversely affected by governmental policies.
FUTURES CONTRACTS
The primary risks associated with the use of futures contracts for hedging
purposes are: (i) imperfect correlations between the change in market value of
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the securities held by a Portfolio and the prices of futures contracts purchased
or sold by a Portfolio; (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures position, which
could have an adverse impact on a Portfolio's ability to execute futures and
options strategies; and (iii) the possible failure to correctly predict
movements in the direction of the market. Other risks of investing in futures
contracts include that the prices of futures contracts are volatile and are
influenced by changes in market and interest rates and that futures trading
involves an extremely high degree of leverage which may result in losses in
excess of the amount invested in the futures contract.
For additional information regarding risks and permitted investments for each
Portfolio, see "Glossary of Permitted Investments" and the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objectives of each Portfolio, the investment limitations set
forth below and certain investment limitations contained in the Statement of
Additional Information are fundamental policies of the Portfolios. A Portfolio's
fundamental policies cannot be changed without the consent of the holders of a
majority of the Portfolio's outstanding shares.
A Portfolio, as a fundamental policy, may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States, its agencies or instrumentalities and repurchase agreements
involving such securities) if, as a result, more than 5% of the total assets of
the Portfolio would be invested in the securities of such issuer. This
restriction applies to 75% of each Portfolio's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of
a Portfolio to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities. For purposes of this limitation, (i)
utility companies will be divided according to their services, for example, gas
distribution, gas transmission, electric and telephone will each be considered a
separate industry, and (ii) financial service 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. For purposes of this limitation, supranational organizations are
deemed to be issuers conducting their principal business activities in the same
industry.
3. Borrow money except for temporary or for emergency purposes and then only in
an amount not exceeding 10% of the value of each Portfolio's total assets
(except not exceeding 33 1/3% of the value of total assets with respect to the
Growth II and Small Cap Value Portfolios). This borrowing provision is included
solely to facilitate the orderly sale of portfolio securities to accommodate
substantial redemption requests if they should occur and is not for investment
purposes. All borrowings in excess of 5% of a Portfolio's total assets will be
repaid before making investments.
The foregoing percentages will apply at the time of the purchase of a security.
PURCHASES AND REDEMPTIONS
Individual investors may not purchase or redeem shares of the Portfolios
directly; shares may be purchased or redeemed only through VA Contracts and VLI
Policies offered by separate accounts of Participating Insurance Companies.
Please refer to the prospectus of the sponsoring Participating Insurance Company
separate account for instructions on purchasing a VA Contract or VLI Policy and
on how to select the Portfolios as investment options for a VA Contract or VLI
Policy.
PURCHASES. All investments in the Portfolios are credited to a Participating
Insurance Company's separate account immediately upon acceptance of the
investments by the Portfolios. Each Participating Insurance Company receives
orders from its contract owners to purchase or redeem shares of each Portfolio
on each day that the Portfolio calculates its net asset value (a "Business
Day"). That night, all orders received by the Participating Insurance Company
prior to the close of regular trading on the New York Stock Exchange, Inc. (the
"NYSE") (currently 4:00 p.m., Eastern time) on that Business Day are aggregated,
and the Participating Insurance Company places a net purchase or redemption
order for shares of the Portfolios during the morning of the next Business Day.
These orders are executed at the net asset value (described below under "Net
Asset Value") next computed after receipt of such order by the Participating
Insurance Company.
The Portfolios reserve the right to reject any specific purchase order. Purchase
orders may be refused if, in
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the Adviser's opinion, they are of a size that would disrupt the management of
the Portfolio. A Portfolio may discontinue sales of its shares if management
believes that a substantial further increase in assets may adversely effect the
Portfolio's ability to achieve its investment objective. In such event, however,
it is anticipated that existing VA Contract owners and VLI Policy owners would
be permitted to continue to authorize investments in the Portfolios.
REDEMPTIONS. Shares of a Portfolio may be redeemed on any Business Day.
Redemption orders which are received by a Participating Insurance Company prior
to the close of regular trading on the NYSE on any Business Day and transmitted
to the Fund or its specified agent during the morning of the next Business Day
will be processed at the next net asset value computed after receipt of such
order by the Participating Insurance Company. Redemption proceeds will normally
be wired to the Participating Insurance Company on the Business Day following
receipt of the redemption order by the Participating Insurance Company, but in
no event later than seven days after receipt of such order.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of the close of trading on the NYSE (currently 4:00 p.m.,
Eastern time). Portfolio securities listed on an exchange or quoted on a
national market system are valued at the last sales price. Other securities are
quoted at the mean between the most recent bid and asked prices. Short-term
obligations are valued at amortized cost. Securities for which market quotations
are not readily available and other assets held by the Fund, if any, are valued
at their fair value as determined in good faith by the Board of Directors. See
"Determination of Net Asset Value" in the Statement of Additional Information.
TAX STATUS, DIVIDENDS AND
DISTRIBUTIONS
TAXES
For a discussion of the tax status of a VA Contract or VLI Policy, refer to the
Participating Insurance Company separate account prospectus.
Each Portfolio intends to qualify and elect to be treated as a regulated
investment company that is taxed under the rules of Subchapter M of the Code. As
such, a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent such income and gains are
distributed to the separate accounts of Participating Insurance Companies which
hold its shares. Because shares of the Portfolios may be purchased only through
VA Contracts and VLI Policies, it is anticipated that any income, dividends or
capital gain distributions from the Portfolios are taxable, if at all, to the
Participating Insurance Companies and will be exempt from current taxation of
the VA Contract owner and VLI Policy owner if left to accumulate within the VA
Contract or VLI Policy.
INTERNAL REVENUE SERVICE REQUIREMENTS
The Portfolios intend to comply with the diversification requirements currently
imposed by the Internal Revenue Service on separate accounts of insurance
companies as a condition of maintaining the tax-deferred status of VA Contracts
and VLI Policies. See the Statement of Additional Information for more specific
information.
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains, if
any, at least annually. Distributions of ordinary income and capital gains will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account of a Participating Insurance Company to receive distributions
in cash. Participating Insurance Companies will be informed at least annually
about the amount and character of distributions from the Fund for federal income
tax purposes.
PERFORMANCE ADVERTISING
From time to time, each Portfolio may advertise its yield and total return.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made regarding actual
future yields or returns. Yield refers to the annualized income generated by an
investment in the Portfolio over a specified 30-day period. The yield is
calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year
and is shown as a percentage of the investment.
The total return of each Portfolio refers to the average compounded rate of
return on a hypothetical investment for designated time periods (including but
not limited to the period from which the Portfolio
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<PAGE>
commenced operations through the specified date), assuming that the entire
investment is redeemed at the end of each period and assuming the reinvestment
of all dividend and capital gain distributions.
Total returns quoted for a Portfolio include the effect of deducting the
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract. Accordingly, the prospectus of the sponsoring
Participating Insurance Company separate account should be carefully reviewed
for information on relevant charges and expenses. Excluding these charges and
expenses from quotations of a Portfolio's performance has the effect of
increasing the performance quoted, and the effect of these charges should be
considered when comparing a Portfolio's performance to that of other mutual
funds.
Each Portfolio may periodically compare its performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.) or by financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices which may assume investment
of dividends but generally do not reflect deductions for administrative and
management costs and other investment alternatives. Each Portfolio may quote
services such as Morningstar, Inc., a service that ranks mutual funds on the
basis of risk-adjusted performance, and Ibbotson Associates of Chicago,
Illinois, which provides historical returns of the capital markets in the U.S.
Each Portfolio may use long-term performance of these capital markets to
demonstrate general long-term risk versus reward scenarios and could include the
value of a hypothetical investment in any of the capital markets. Each Portfolio
may also quote financial and business publications and periodicals as they
relate to fund management, investment philosophy, and investment techniques.
Each Portfolio may quote various measures of volatility and benchmark
correlation in advertising and may compare these measures to those of other
funds. Measures of volatility attempt to compare historical share price
fluctuations or total returns to a benchmark while measures of benchmark
correlation indicate how valid a comparative benchmark might be. Measures of
volatility and correlation are calculated using averages of historical data and
cannot be calculated precisely.
PUBLIC FUND PERFORMANCE
The Technology & Communications and Select 20 Portfolios are newly organized and
do not yet have their own performance records. However, the Portfolios have the
same investment objectives and follow substantially the same investment
strategies as two series of a mutual fund ("public fund") whose shares are
currently sold to the public and managed by the Adviser.
Set forth below is the historical performance of each of the corresponding
series of the public fund. Investors should not consider the performance data of
the series of the public fund as an indication of the future performance of the
Technology & Communications and Select 20 Portfolios. The performance figures
shown below reflect the deduction of the historical fees and expenses paid by
the corresponding series of the public fund, AND NOT THOSE TO BE PAID BY THE
PORTFOLIOS. The figures also do not reflect the deduction of any insurance fees
or charges which are imposed by the Participating Insurance Company in
connection with its sale of the VA Contracts and VLI Policies. Investors should
refer to the separate account prospectuses describing the VA Contracts and VLI
Policies for information pertaining to these insurance fees and charges. The
insurance separate account fees will have a detrimental effect on the
performance of the Portfolios. Additionally, although it is anticipated that
each Portfolio and its corresponding public fund series will hold similar
securities, their investment results are expected to differ. In particular,
differences in asset size and in cash flow resulting from purchases and
redemptions of Portfolio shares may result in different security selections,
differences in the relative weightings of securities or differences in the price
paid for particular portfolio holdings. The results shown reflect the
reinvestment of dividends and distributions, and were calculated in the same
manner that will be used by the Portfolios to calculate their own performance.
The following table for the Technology & Communications Portfolio shows average
annualized total returns for the time periods shown for the corresponding series
of the public fund.
TECHNOLOGY & COMMUNICATIONS PORTFOLIO
SINCE
1 YEAR INCEPTION
------ ---------
CORRESPONDING SERIES OF
THE PUBLIC FUND
The PBHG Funds, Inc. --
PBHG Technology &
Communications Fund............. 24.50% 42.64%
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The following table for the Select 20 Portfolio shows the aggregate total return
for the time period shown for the corresponding series of the public fund.
SELECT 20 PORTFOLIO
SINCE
INCEPTION
---------
CORRESPONDING SERIES OF THE PUBLIC
FUND
The PBHG Funds, Inc. --
PBHG Large Cap 20 Fund......................... 27.49%
Results shown are through the period ended June 30, 1997 for each public fund
series shown. The inception dates for each public fund series are October 2,
1995 for the PBHG Technology & Communications Fund and December 2, 1996 for the
PBHG Large Cap 20 Fund.
PRIVATE ACCOUNT PERFORMANCE
The Growth II Portfolio is newly organized and has only been in operation since
May 1, 1997 and therefore does not yet have a statistically significant
performance record. The aggregate total return for the period from May 1, 1997
through June 30, 1997 was 4.50%. However, the Growth II Portfolio has an
investment objective, policies and strategies which are substantially similar to
those employed by the Adviser with respect to certain Private Accounts.
Thus, the performance information derived from these Private Accounts may be
relevant to an investor. The performance of the Growth II Portfolio will vary
from the Private Account composite information because the Growth II Portfolio
will be actively managed and its investments will vary from time to time and
will not be identical to the past portfolio investments of the Private Accounts.
Moreover, the Private Accounts are not subject to certain investment
limitations, diversification requirements and other restrictions imposed by the
Investment Company Act of 1940 and the Code which, if applicable, may have
adversely affected the performance results of the Private Account Composites.
The chart below shows performance information derived from historical composite
performance of the Private Accounts included in the Pilgrim Baxter & Associates,
Ltd. Mid-Cap Growth Composite. The performance figures shown represent the
performance results of the composite of Private Accounts managed in a comparable
manner, adjusted to reflect the deduction of the fees and expenses anticipated
to be paid by the Growth II Portfolio.
The Private Account composite performance figures are time-weighted rates of
return which include all income and realized and unrealized gains or losses, but
do not reflect the deduction of investment advisory fees actually charged to the
Private Accounts.
Investors should not consider the performance data of these Private Accounts as
an indication of the future performance of the Growth II Portfolio.
The following tables show performance information derived from Private Account
historical composite performance reduced by anticipated Growth II Portfolio fees
and expenses, as well as comparisons with the S&P 500, an unmanaged index
generally considered to be representative of the stock market.
PRIVATE ACCOUNT COMPOSITE PERFORMANCE
1 YEAR 5 YEARS 10 YEARS
------- ------- --------
Pilgrim Baxter &
Associates, Ltd.
Mid-Cap Growth
Composite*............................ -7.26% 16.83% 11.51%
S&P 500 Stock
Index................................. 34.56% 19.76% 14.67%
Results shown are through the period ended June 30, 1997. The inception date is
January 1, 1983 for the Pilgrim Baxter & Associates, Ltd. Mid-Cap Growth
Composite.
GENERAL INFORMATION
THE FUND
The Fund, an open-end management investment company, was incorporated in
Maryland in 1997. All consideration received by the Fund for shares of any
Portfolio and all assets of such Portfolio belong to that Portfolio and are
subject to liabilities related thereto. The Fund reserves the right to create
and issue shares of additional series.
Each Portfolio of the Fund pays its respective expenses relating to its
operation, including fees of its service providers, audit and legal expenses,
expenses of preparing prospectuses, proxy solicitation material and reports to
shareholders, costs of custodial services and registering the shares of the
Portfolio under federal securities laws, pricing and insurance expenses and pays
additional expenses including litigation and other extraordinary expenses,
brokerage costs, interest charges, taxes and organization expenses.
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<PAGE>
THE ADVISER
Pilgrim Baxter & Associates, Ltd. is a professional investment management firm
and registered investment adviser that, along with its predecessors, has been in
business since 1982. The controlling shareholder of the Adviser is United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed holding company
principally engaged, through affiliated firms, in providing institutional
investment management services and acquiring institutional investment management
firms. UAM's corporate headquarters are located at One International Place,
Boston, Massachusetts 02110. The Adviser currently has discretionary management
authority with respect to over $15 billion in assets. In addition to advising
the Portfolios, the Adviser provides advisory services to other mutual funds and
to pension and profit-sharing plans, charitable institutions, corporations,
trusts and estates, and other investment companies. The principal business
address of the Adviser is 1255 Drummers Lane, Suite 300, Wayne, Pennsylvania
19087.
The Adviser serves as the investment adviser to each of the Portfolios under an
investment advisory agreement with the Fund (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser either continuously reviews, supervises and
administers the investment program of each Portfolio, which includes managing
and selecting investments, or, with respect to the Small Cap Value and Large Cap
Value Portfolios, oversees the investment management of the Portfolios by the
Portfolios' Sub-Adviser, subject to the supervision of, and policies established
by, the Board of Directors of the Fund.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the Small Cap Value Portfolio's
average daily net assets, 0.85% of each of the Growth II, Technology &
Communications and Select 20 Portfolios' average daily net assets and 0.65% of
the Large Cap Value Portfolio's average daily net assets. The advisory fees paid
by each Portfolio are higher than those paid by most investment companies,
although the Adviser believes the fees to be comparable to those paid by
investment companies with similar investment objectives and policies.
THE SUB-ADVISER (SMALL CAP VALUE AND LARGE CAP VALUE PORTFOLIOS)
Newbold's Asset Management, Inc., 950 Haverford Road, Bryn Mawr, Pennsylvania,
is a registered investment adviser that was formed in 1940. As with the Adviser,
the controlling shareholder of the Sub-Adviser is UAM. The Sub-Adviser currently
has discretionary management authority with respect to over $4 billion in
assets. In addition to advising the Portfolios, the Sub-Adviser provides
advisory services to pension and profit-sharing plans, charitable institutions,
trusts, estates and other investment companies.
The Sub-Adviser serves as the investment sub-adviser for the Small Cap Value and
Large Cap Value Portfolios pursuant to a sub-advisory agreement with the Fund
and the Adviser ("Sub-Advisory Agreement"). Under the Sub-Advisory Agreement,
the Sub-Adviser manages the investments of the Small Cap Value and Large Cap
Value Portfolios, selects investments and places all orders for purchases and
sales of the Portfolios' securities, subject to the general supervision of the
Board of Directors of the Fund and the Adviser.
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreement, the Sub-Adviser is entitled to receive from the Adviser a fee,
computed daily and paid monthly, at an annual rate equal to 0.65% of the Small
Cap Value Portfolio's average daily net assets and 0.40% of the Large Cap Value
Portfolio's average daily net assets.
EXPENSE LIMITATION AGREEMENT
In the interest of limiting expenses of the Portfolios, the Adviser has entered
into an expense limitation agreement with the Fund ("Expense Limitation
Agreement"), with respect to each Portfolio, pursuant to which the Adviser has
agreed to waive or limit its fees and to assume other expenses of the Portfolios
to the extent necessary to limit the total annual operating expenses (expressed
as a percentage of each Portfolio's average daily net assets) to not more than
1.20% of the average daily net assets of the Growth II, Small Cap Value,
Technology & Communications and Select 20 Portfolios and to not more than 1.00%
of the average daily net assets of the Large Cap Value Portfolio, through
December 31, 1997. Such waivers and assumption of expenses by the Adviser may be
discontinued at any time after such date. Reimbursement by the Portfolios of the
advisory fees waived or limited and other expenses paid by the Adviser pursuant
to the Expense Limitation Agreement may be made at a later date when the
Portfolios have reached a sufficient asset size to permit reimbursement to be
made without causing the total annual expense ratio of each Portfolio to exceed
the Total Operating Expense percentages described above.
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<PAGE>
THE PORTFOLIO MANAGERS
The Growth II Portfolio will be managed by Gary L. Pilgrim, CFA, and Bruce J.
Muzina. Mr. Pilgrim has served as the Chief Investment Officer of the Adviser
since 1990 and has been its President since 1993. Mr. Pilgrim currently manages
or co-manages several series of The PBHG Funds, Inc., another mutual fund
managed by the Adviser. Mr. Muzina joined the Adviser in 1985 from Citibank,
where he was Vice President/Portfolio Manager of U.S. equity portfolios for
international institutional accounts. His experience includes security analysis
and investment research focused on health care and chemical industries, as well
as pension and profit sharing portfolio management at a major advisory firm and
at Philadelphia National Bank. Mr. Muzina is an honors MBA graduate of Temple
University and received his undergraduate degree from Pennsylvania State
University.
The Select 20 Portfolio will be managed by James D. McCall. Mr. McCall has been
a portfolio manager with the Adviser since 1994. Prior to joining the Adviser,
Mr. McCall was a portfolio manager with First Maryland Bank Corporation (May
1992 to November 1994) and a portfolio manager with Provident Mutual Management,
Inc. prior to that time. Mr. McCall manages two series of The PBHG Funds, Inc.
and has managed or co-managed such series since their inception. Mr. McCall also
manages the PBHG Large Cap 20 Fund and has done so since its inception.
The Small Cap Value Portfolio will be managed by Gary D. Haubold, CFA. Mr.
Haubold joined the Sub-Adviser in January 1997. Prior to joining the Sub-
Adviser, Mr. Haubold was employed by Miller Anderson & Sherrerd LLP ("MAS") from
1993 until January 6, 1997. At MAS, Mr. Haubold served as the co-manager of the
Mid Cap Value Portfolio of the MAS Fund and the co-manager of the Small Cap
Value Portfolio of the MAS Fund. Prior to joining MAS, Mr. Haubold was Senior
Vice President of Wood, Struthers & Winthrop.
The Large Cap Value Portfolio will be managed by James H. Farrell, CFA. Mr.
Farrell joined the Sub-Adviser in September, 1996 and is its Chief Investment
Officer. Mr. Farrell also manages another mutual fund advised by the
Sub-Adviser, a series of The PBHG Funds, Inc. Prior to joining the Sub-Adviser,
he was an Investment Counselor in a sole proprietorship for two years. From 1983
to 1994, he was a partner at Cashman, Farrell and Associates, an investment
advisory firm.
John F. Force, CFA, will manage the Technology & Communications Portfolio. Mr.
Force joined the Adviser in 1993 and is a portfolio manager and equity analyst
for the Adviser. He currently manages the PBHG Technology & Communications Fund,
a series of The PBHG Funds, Inc. Prior to joining the Adviser, Mr. Force was
Vice President/Portfolio Manager at Fiduciary Management Associates from July,
1987 to September, 1992.
THE ADMINISTRATOR AND THE SUB-ADMINISTRATOR
PBHG Fund Services (the "Administrator") provides the Fund with administrative
services, including regulatory reporting and all necessary office space,
equipment, personnel and facilities. For these administrative services, the
Administrator is entitled to a fee, which is calculated daily and paid monthly,
at an annual rate of 0.15% of the average daily net assets of the Fund. The
principal place of business of the Administrator is 1255 Drummers Lane, Suite
300, Wayne, Pennsylvania 19087.
SEI Fund Resources (the "Sub-Administrator"), an indirect wholly-owned
subsidiary of SEI Corporation ("SEI") and an affiliate of the Fund's
distributor, assists the Administrator in providing administrative services to
the Fund. For acting in this capacity, the Administrator pays the
Sub-Administrator a fee at the annual rate of 0.07% of the average daily net
assets of each Portfolio with respect to $2.5 billion of the total average daily
net assets of (i) the Fund and (ii) The PBHG Funds, Inc., and a fee at the
annual rate of 0.025% of the average daily net assets of each Portfolio with
respect to the total average daily net assets of (i) the Fund and (ii) The PBHG
Funds, Inc. in excess of $2.5 billion.
THE TRANSFER AGENT AND SUB-TRANSFER AGENT
DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534 serves as
the transfer agent, dividend disbursing agent and shareholder servicing agent
for the Fund under a transfer agent agreement with the Fund.
From time to time, the Fund may pay amounts to third parties that provide
sub-transfer agency and other administrative services relating to the Fund to
persons who beneficially own interests in the Fund. These services may include,
among other things, sub-accounting services, answering inquiries relating to the
Fund, delivering, on behalf of the Fund, proxy statements, annual reports,
updated Prospectuses, other communications regarding the Fund, and related
services as the Fund or the beneficial owners may reasonably request.
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<PAGE>
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley Road,
Oaks, Pennsylvania 19456, a wholly-owned subsidiary of SEI, provides the Fund
with distribution services.
DIRECTORS OF THE FUND
The management and affairs of the Fund are supervised by the Board of Directors
under the laws of the State of Maryland. The Directors have approved agreements
under which, as described above, certain companies provide essential management
services to the Fund.
VOTING RIGHTS
Each share held entitles the shareholder of record to one vote. Shareholders of
each Portfolio will vote separately on matters relating solely to it, such as
approval of advisory agreements and changes in fundamental policies, and matters
affecting some but not all Portfolios of the Fund will be voted on only by
shareholders of the affected Portfolios. Shareholders of all Portfolios of the
Fund will vote together in matters affecting the Fund generally, such as the
election of Directors or selection of accountants. As a Maryland corporation,
the Fund is not required to hold annual meetings of shareholders but shareholder
approval will be sought for certain changes in the operation of the Fund and for
the election of Directors under certain circumstances. In addition, a Director
may be removed by the remaining Directors or by shareholders at a special
meeting called upon written request of shareholders owning at least 10% of the
outstanding shares of the Fund. In the event that such a meeting is requested,
the Fund will provide appropriate assistance and information to the shareholders
requesting the meeting. Under current law, a Participating Insurance Company is
required to request voting instructions from VA Contract owners and VLI Policy
owners and must vote all shares held in the separate account in proportion to
the voting instructions received. For a more complete discussion of voting
rights, refer to the Participating Insurance Company separate account
prospectus.
CONFLICTS OF INTEREST. Each Portfolio offers its shares to VA Contracts and VLI
Policies offered through separate accounts of Participating Insurance Companies
which may or may not be affiliated with each other. Due to differences of tax
treatment and other considerations, the interests of VA Contract and VLI Policy
owners participating in the Portfolios may conflict. The Board will monitor the
Portfolios for any material conflicts that may arise and will determine what
action, if any, should be taken. If a conflict occurs, the Board may require one
or more Participating Insurance Company separate accounts to withdraw its
investments in the Portfolios. As a result, the Portfolios may be forced to sell
securities at disadvantageous prices and orderly portfolio management could be
disrupted. In addition, the Board may refuse to sell shares of the Portfolios to
any VA Contract or VLI Policy or may suspend or terminate the offering of shares
of the Portfolios if such action is required by law or regulatory authority or
is in the best interests of the shareholders of the Portfolios.
REPORTING
The Fund issues unaudited financial information semi-annually, and audited
financial statements annually for each Portfolio. The Fund also furnishes
periodic reports and, as necessary, proxy statements to shareholders of record.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Ballard Spahr Andrews & Ingersoll serves as counsel to the Fund. Coopers &
Lybrand, L.L.P. serves as the independent accountants of the Fund.
CUSTODIAN
CoreStates Bank, N.A. ("Custodian"), Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, Pennsylvania 19101, serves as the custodian for the Fund. The
Custodian holds cash, securities and other assets of the Fund as required by the
1940 Act.
MISCELLANEOUS
As of the date of this Prospectus, the Adviser, as each Portfolio's initial
shareholder, owned of record or beneficially, all of the outstanding shares of
each Portfolio, and may be deemed to be a controlling person of each Portfolio
for purposes of the 1940 Act.
It is anticipated that on or before October 1, 1997, Fidelity Investments Life
Insurance Company ("Fidelity Investments") shall purchase $1,000,000 of shares
of the PBHG Select 20 Portfolio. Fidelity Investments is expected to redeem its
investment in the PBHG Select 20 Portfolio on a dollar for dollar basis with new
or additional purchases of the PBHG Select 20 Portfolio by Participating
Insurance Company VA Contract and VLI Policy owners after the PBHG Select 20
Portfolio reaches $10,000,000 in total net assets. Notwithstanding the
foregoing, Fidelity Investments may redeem its investment, in whole or in part,
after December 31, 1998.
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<PAGE>
GLOSSARY OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the Portfolios:
AMERICAN DEPOSITORY RECEIPTS ("ADRS") AND GLOBAL DEPOSITORY RECEIPTS ("GDRS") --
ADRs are securities, typically issued by a U.S. financial institution (a
"depository"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depository. GDRs,
which are sometimes referred to as Continental Depository Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, GDRs and CDRs may be available for investment
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depository, whereas an unsponsored facility may be established by a depository
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depository receipt generally bear all the costs of the
unsponsored facility. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
BANKERS' ACCEPTANCE -- A bill of exchange or time draft drawn on and accepted by
a commercial bank. It is used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
CERTIFICATE OF DEPOSIT -- A negotiable interest bearing instrument with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit
generally carry penalties for early withdrawal.
COMMERCIAL PAPER -- The term used to designate unsecured short-term promissory
notes issued by corporations and other entities. Maturities on these issues
typically vary from a few days to nine months.
CONVERTIBLE SECURITIES -- Securities such as rights, bonds, notes and preferred
stocks which are convertible into or exchangeable for common stocks. Convertible
securities have characteristics similar to both fixed income and equity
securities. Because of the conversion feature, the market value of convertible
securities tends to move together with the market value of the underlying common
stock. As a result, a Portfolio's selection of convertible securities is based,
to a great extent, on the potential for capital appreciation that may exist in
the underlying stock. The value of convertible securities is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
DEMAND INSTRUMENTS -- Certain instruments may involve a conditional or
unconditional demand feature which permits the holder to demand payment of the
principal amount of the instrument. Demand instruments may include variable
amount master demand notes.
DERIVATIVES -- Derivaties are securities that derive their value from other
securities. The following, among others, are considered derivative securities:
futures, options on futures, options (e.g., puts and calls), swap agreements,
mortgage-backed securities (e.g., CMOs, REMICs, IOs and POs), when-issued
securities and forward commitments, floating and variable rate securities,
convertible securities, "stripped" U.S. Treasury securities (e.g., Receipts and
STRIPS) and privately issued stripped securities (e.g., TGRs, TRs and CATS). See
elsewhere in this "Glossary of Permitted Investments" for discussions of these
various instruments, and see "Investment Objectives and Policies" for more
information about the investment policies and limitations applicable to their
use.
EQUITY SECURITIES -- Investments in common stocks are subject to market risks
which may cause their prices to fluctuate over time. Changes in the value of
portfolio securities will not necessarily affect cash income derived from these
securities but will affect a Portfolio's net asset value.
FORWARD FOREIGN CURRENCY CONTRACTS -- Foreign currency exchange transactions may
be used to protect against uncertainty in the level of future exchange rates
between a particular foreign currency and the U.S. dollar, or between foreign
currencies in which a Portfolio's portfolio securities are or may be
denominated. Such transactions may be conducted on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward currency contracts. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency amount at a
future date, which may be any fixed number of days
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from the date of the contract, agreed upon by the parties, at a price set at the
time of the contract. Under normal circumstances, consideration of the prospect
for changes in currency exchange rates will be incorporated into each
Portfolio's long-term investment strategies. However, the Adviser believes that
it is important to have the flexibility to enter into forward foreign currency
contracts when it determines that the best interests of a Portfolio will be
served.
When the Adviser believes that the currency of a particular country may suffer a
significant decline against the U.S. dollar or against another currency, the
Portfolio in question may enter into a forward foreign currency contract to
sell, for a fixed amount of U.S. dollars or other appropriate currency, the
amount of foreign currency approximating the value of some or all of the
Portfolio's securities denominated in such foreign currency.
At the maturity of a forward foreign currency contract, a Portfolio may either
sell a 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. A Portfolio may realize a gain or loss from currency
transactions.
Generally, a Portfolio will enter into forward foreign currency contracts only
as a hedge against foreign currency exposure affecting the Portfolio or to hedge
a specific security transaction or portfolio position. If a Portfolio enters
into forward foreign currency contracts to cover activities which are
essentially speculative, the Portfolio will segregate cash or readily marketable
securities with its custodian, or a designated sub-custodian, in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to such
contracts.
Forward contracts may substantially change the Fund's investment exposure to
changes in currency exchange rates, and could result in losses to the Fund if
currencies do not perform as the Adviser anticipates. For example, if a
currency's value rose at a time when the Adviser had hedged the Fund by selling
that currency in exchange for dollars, the Fund would be unable to participate
in the currency's appreciation. Similarly, if the Adviser increases the Fund's
exposure to a foreign currency, and that currency's value declines, the Fund
will realize a loss.
FUTURES CONTRACTS -- Futures contracts are derivatives. Futures contracts
provide for the sale by one party and purchase by another party of a specified
amount of a specific security, securities index or currency at a specified
future time and price. A Portfolio will maintain assets sufficient to meet its
obligations under such futures contracts in a segregated margin account with the
custodian bank or will otherwise comply with the SEC's position on asset
coverage. The prices of futures contracts are volatile and are influenced by,
among other things, actual and anticipated changes in the market and interest
rates.
ILLIQUID SECURITIES -- Securities that cannot be disposed of in the ordinary
course of business within seven days at approximately the price at which the
Portfolio has valued the security.
MORTGAGE-BACKED SECURITIES -- Securities that include interests in pools of
lower-rated debt securities, or consumer loans or mortgages, or complex
instruments such as collateralized mortgage obligations and stripped
mortgage-backed securities. The value of these securities may be significantly
affected by changes in interest rates, the market's perception of the issuers,
and the creditworthiness of the parties involved. Some securities may have a
structure that makes their reaction to interest rates and other factors
difficult to predict, making their value highly volatile. These securities may
also be subject to prepayment risk.
RECEIPTS -- Separately traded interest and principal component parts of U.S.
Treasury obligations that are issued by banks or brokerage firms and are created
by depositing U.S. Treasury obligations into a special account at a custodian
bank. The custodian bank holds the interest and principal payments for the
benefit of the registered owners of the receipts. The custodian bank arranges
for the issuance of the receipts evidencing ownership and maintains the
register.
REPURCHASE AGREEMENTS -- Agreements by which a person obtains a security and
simultaneously commits to return it to the seller at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days from the date of purchase. The Custodian or its agents will hold the
security as collateral for the repurchase agreement. Collateral must be
maintained at a value at least equal to 102% of the purchase price. Each
Portfolio bears a risk of loss in the event the other party defaults on its
obligations and the Portfolio is delayed or prevented from its right to dispose
of the collateral securities or
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if the Portfolio realizes a loss on the sale of the collateral securities. The
Adviser and Sub-Adviser will enter into repurchase agreements on behalf of a
Portfolio only with financial institutions deemed to present minimal risk of
bankruptcy during the term of the agreement based on guidelines established and
periodically reviewed by the Directors. Repurchase agreements are considered
loans under the 1940 Act, as well as for federal and state income tax purposes.
RESTRICTED SECURITIES -- Securities that may not be sold freely to the public
absent registration under the Securities Act of 1933, as amended ("1933 Act"),
or an exemption from registration. A Portfolio may invest in restricted
securities that the Adviser or Sub-Adviser determines are not illiquid, based on
guidelines and procedures developed and established by the Board of Directors of
the Fund. The Board of Directors will periodically review such procedures and
guidelines and will monitor the Adviser's implementation of such procedures and
guidelines. Under these procedures and guidelines, the Adviser will consider the
frequency of trades and quotes for the security, the number of dealers in, and
potential purchasers for, the securities, dealer undertakings to make a market
in the security, and the nature of the security and of the marketplace trades.
The Fund may purchase restricted securities sold in reliance upon the exemption
from registration provided by Rule 144A under the 1933 Act. Restricted
securities may be difficult to value because market quotations may not be
readily available. Because of the restrictions on the resale of restricted
securities, they may pose liquidity problems for the Portfolios.
TIME DEPOSIT -- A non-negotiable receipt issued by a bank in exchange for the
deposit of funds. Like a certificate of deposit, it earns a specified rate of
interest over a definite period of time; however, it cannot be traded in the
secondary market. Time deposits with a withdrawal penalty are considered to be
illiquid securities.
U.S. GOVERNMENT AGENCY OBLIGATIONS -- Certain Federal agencies such as the
Government National Mortgage Association ("GNMA") have been established as
instrumentalities of the United States Government to supervise and finance
certain types of activities. Securities issued by these agencies, while not
direct obligations of the United States Government, are either backed by the
full faith and credit of the United States (e.g., GNMA securities) or supported
by the issuing agencies' right to borrow from the Treasury. The securities
issued by other agencies are supported only by the credit of the instrumentality
(e.g., Tennessee Valley Authority securities).
U.S. GOVERNMENT SECURITIES -- Bills, notes and bonds issued by the U.S.
Government and backed by the full faith and credit of the United States.
U.S. TREASURY OBLIGATIONS -- Bills, notes and bonds issued by the U.S. Treasury,
and separately traded interest and principal component parts of such obligations
that are transferable through the Federal book-entry system known as Separately
Traded Registered Interest and Principal Securities ("STRIPS"). Under the STRIPS
program, a Portfolio will be able to have its beneficial ownership of securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities. When U.S. Treasury obligations have been stripped of their
unmatured interest coupons by the holder, the stripped coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. The principal or corpus is sold at a deep discount because
the buyer receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic interest (cash) payments.
Purchasers of stripped obligations acquire, in effect, discount obligations that
are economically identical to the securities that the Treasury sells itself.
Other facilities are available to facilitate the transfer of ownership of
non-Treasury securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on such securities through a
book-entry record-keeping system.
VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain of the obligations purchased
by a Portfolio may carry variable or floating rates of interest, may involve a
conditional or unconditional demand feature and may include variable amount
master demand notes. Such instruments bear interest at rates which are not
fixed, but which vary with changes in specified market rates or indices, such as
a Federal Reserve composite index. The interest rates on these securities may be
reset daily, weekly, quarterly or some other reset period, and may have a floor
or ceiling on interest rate changes. There is a risk that the current interest
rate on such obligations may not accurately reflect existing market interest
rates. A demand instrument with a demand notice exceeding seven days may be
considered illiquid if there is no secondary market for such securities.
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WARRANTS -- Instruments giving holders the right, but not the obligation, to buy
shares of a company at a given price during a specified period.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES -- When-issued and delayed-delivery
securities are securities subject to settlement on a future date. For fixed
income securities, the interest rate realized on when-issued or delayed-delivery
securities is fixed as of the purchase date and no interest accrues to a
Portfolio before settlement. These securities are subject to market fluctuation
due to changes in market interest rates and will have the effect of leveraging a
Portfolio's assets. The Portfolios are permitted to invest in forward
commitments or when-issued securities where such purchases are for investment
and not for leveraging purposes. One or more segregated accounts will be
established with the Custodian, and the Portfolios will maintain liquid assets
in such accounts in an amount at least equal in value to each Portfolio's
commitments to purchase when-issued securities.
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