[LOGO]
PBHG Large Cap Growth Portfolio
PBHG
INSURANCE
SERIES
FUND,
INC.
Annual Report
December 31, 1997
<PAGE>
[LOGO]
PBHG Large Cap Growth Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Large Cap Growth Portfolio ended
its abbreviated first fiscal year on December 31, 1997 with an aggregate total
return of 18.20% since inception on May 1, 1997. Over this same time period, the
Russell 1000 Growth Index produced a total return of 21.67% and the S&P 500
Index produced a total return of 23.72%. In our view, the Portfolio's relative
underperformance versus these benchmarks can be attributed in large part to
three unrelated things. First, cash as a percentage of total portfolio assets
was very high during the first few weeks of operation, the result of a low
beginning asset base and strong daily cash inflows. During this early period,
i.e. the months of May and June, the S&P 500 advanced nearly 12%. Since the
Portfolio was underexposed to the market due to the high levels of cash we were
not able to fully participate in the strong market with the result being that
our return over this same period was constrained to slightly less than 8%. Once
we reached a more fully invested position by early July we steadily made up lost
ground and significantly outperformed the S&P 500 Index over the July through
October time period. Then came November when the brunt of the damage from the
"Asian Flu" was felt, particularly in high growth portfolios like ours, which
often suffer when investors scramble for cover by transferring assets to
relative safe havens like U.S Treasuries and the bluest of the blue chip
companies. Fortunately, in December we outperformed the S&P 500 Index again, as
investors regained some composure and may have begun to recognize the
attractiveness of companies whose growth rates are likely to remain strong even
as the overall economy slows.
The second factor that may have inhibited the Portfolio's performance relative
to the S&P 500 was that our growth discipline precluded us from owning many of
the stocks in the S&P 500 that were the biggest contributors to that Index's
performance. For example, slow-growing conglomerate General Electric was the
biggest individual contributor by far to the S&P 500's gain in 1997. Other S&P
500 companies that helped boost the Index but didn't make our growth hurdles
included Bristol-Myers Squibb, AT&T, Wal-Mart, Proctor & Gamble, and Coca-Cola.
Fortunately, we did benefit from owning a few important S&P 500 contributors
including Microsoft, Pfizer, Eli Lilly, Merck, Lucent and Dell Computer.
Finally, our preference for high growth naturally biases the Portfolio away from
the very largest companies since the law of large numbers constrains their
growth rates. This bias is evident in our Portfolio's average weighted market
capitalization of $21 billion versus $56 billion for the S&P 500 Index. In 1997
"biggest was best" when it came to performance, as evidenced by breaking down
into quintiles the market capitalization of the S&P 500 companies and observing
that total return was highest in the largest company quintile (+39%) and showing
progressively lower returns as you move down the capitalization spectrum to the
smallest company quintile (+3%). The S&P 500 index weighting in the largest
company quintile was 65% compared to our Portfolio's exposure of somewhat less
than 20%. This situation proved to be a significant handicap that we hope won't
be an issue in future periods.
Four of our top five performers over the period were in the business services
sector and included information systems outsourcing firms Computer Horizons
(+39%) and Keane (+38%), mutual fund services firm DST Systems (+32%) and radio
station operator JACOR Communications (+28%). The remaining Top 5 performer was
enterprise software vendor PeopleSoft (+36%).
1
<PAGE>
PBHG Insurance Series Fund, Inc.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
Among the stocks that remain in the Portfolio, the bottom five performers were
water purification equipment supplier U.S. Filter (-24%), specialty finance
company The Money Store (-23%), oil drilling equipment supplier EVI (-20%),
temporary staffing firm AccuStaff (-18%), and semi-conductor equipment
manufacturer ASM Lithography (-17%). With the exception of ASM Lithography we
remain positive on the outlook for these stocks and therefore plan to continue
holding them. After year end, our ASM Lithography position was substantially
reduced.
Looking ahead into 1998 we expect a more challenging environment for equities in
general and don't expect a fourth straight year of 20+% gains in the major
indices. What investors dread most is uncertainty and the ultimate impact of the
"Asian Contagion" on our economy will not be known for some time. While trying
to divine the bottom line outcome, one can come up with as many possible
positive influences as negatives. For example, concerns that a flood of cheap
Asian imports will force U.S manufacturers to cut prices and thereby lower
profit margins are counterbalanced by the argument that if the Asian situation
leads to a slowdown in the U.S. economy because of slowing exports to the
region, interest rates should fall leading to lower corporate interest expenses
- -- an offset to lower profit margins. Likewise, one can argue that since U.S.
firms manufacture more product in Southeast Asia for sale elsewhere in the world
than they manufacture in the U.S. and sell to Southeast Asian markets, the
dramatic currency devaluations in Southeast Asia with the resulting decline in
labor costs may prove to be a net positive for U.S. firms.
We think debates such as these will rage well into 1998 with no definitive
answers becoming evident; possibly even by year end. With the resultant
uncertainty pervading the markets we expect continued high short-term volatility
in the U.S. equity markets for the foreseeable future. Despite all the confusing
crosscurrents, we remain committed to our individual company focus and our
belief that superior relative earnings growth should eventually lead to relative
stock valuation premiums. Our Portfolio continues to demonstrate superior
long-term characteristics, with aggregate 3 to 5 year revenue growth estimated
at 27% annually and earnings per share (EPS) growth of 33% annually, compared to
9% annual revenue growth and 11% annual EPS growth for the S&P 500 Index
companies. We also view our Portfolio favorably from a valuation standpoint. In
the aggregate, our Portfolio trades at a price to earnings (P/E) ratio to
estimated growth rate multiple of 1.1 while the same multiple for the S&P 500
Index companies stands at close to 1.8. We believe these characteristics will
serve the Portfolio well in 1998 and beyond.
Sincerely,
/s/ James D. McCall
- ----------------------------
James D. McCall, CFA
Portfolio Manager
2
<PAGE>
PBHG Large Cap Growth Portfolio
-----------------------------------------------
Aggregate Total Return(1)
-----------------------------------------------
Inception to
Date(2)
-----------------------------------------------
PBHG Large Cap Growth Portfolio 18.20%
-----------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the
PBHG Large Cap Growth Portfolio versus the Russell 100 Growth Index,
and the Lipper Growth Funds Average
[GRAPHIC]
In the printed version of the document, a line graph
appears which depicits the following plot points:
<TABLE>
<CAPTION>
4/30/97 5/97 6/97 7/97 8/97 9/97 10/97 11/97 12/97
------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PBHG Large Cap Growth Portfolio 10,000 10,500 10,780 11,790 11,431 11,961 11,521 11,421 11,821
Russell 1000 Growth Index\+3 10,000 10,722 11,151 12,137 11,427 11,989 11,545 12,036 12,171
Lipper Growth Funds Average\+4 10,000 10,729 11,149 12,082 11,674 12,319 11,851 12,052 12,167
</TABLE>
(1) Performance is historical and not indicative of future results. The
investment return and principal value of an investment will fluctuate, so
an investor's shares, when redeemed, may be worth more or less than their
original cost.
(2) Total return has not been annualized. The PBHG Large Cap Growth Portfolio
commenced operations on May 1, 1997.
(3) The Russell 1000 Growth Index is an unmanaged index comprised of those
securities in the Russell 1000 Index with a greater-than-average growth
orientation. The Index reflects the reinvestment of income dividends and
capital gains distributions, if any, but does not reflect fees, brokerage
commissions, or other expenses of investing.
(4) The Lipper Growth Funds Average is an equally weighted bench-mark composed
of mutual funds, each of which normally invests in companies whose long-term
earnings are expected to grow significantly faster than the earnings of the
stocks represented in the major unmanaged stock indexes. The performance
figures are based on changes in net asset value of the funds in the category
with all capital gains distributions and income dividends reinvested.
3
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Market
Description Shares Value
- --------------------------------------------------------------------
COMMON STOCKS -- 93.4%
CONSUMER -- 10.1%
FUNERAL SERVICES -- 1.6%
Service Corp. International 2,100 $ 77,569
- --------------------------------------------------------------------
77,569
- --------------------------------------------------------------------
HOTELS/RESORTS -- 1.4%
Marriott Corp. International 1,000 69,250
- --------------------------------------------------------------------
69,250
- --------------------------------------------------------------------
MISCELLANEOUS-CONSUMER SERVICES -- 2.0%
Cendant* 2,883 99,103
- --------------------------------------------------------------------
99,103
- --------------------------------------------------------------------
RETAIL-APPAREL -- 1.6%
Jones Apparel Group* 1,800 77,400
- --------------------------------------------------------------------
77,400
- --------------------------------------------------------------------
RETAIL-OFFICE PRODUCTS -- 2.9%
Staples* 2,800 77,700
US Office Products* 3,200 62,800
- --------------------------------------------------------------------
140,500
- --------------------------------------------------------------------
SPECIALTY FOOD/CANDY -- 0.6%
International Home Foods* 1,100 30,800
- --------------------------------------------------------------------
30,800
- --------------------------------------------------------------------
TOTAL CONSUMER (COST $477,790) 494,622
- --------------------------------------------------------------------
ENERGY -- 7.3%
CONTRACT DRILLING -- 3.9%
Diamond Offshore Drilling 700 33,687
Ensco International 800 26,800
Nabors Industries* 500 15,719
Noble Drilling* 1,600 49,000
Santa Fe International 600 24,413
Transocean Offshore 900 43,369
- --------------------------------------------------------------------
192,988
- --------------------------------------------------------------------
SERVICE & EQUIPMENT -- 3.4%
Camco International 800 50,950
Cooper Cameron* 900 54,900
EVI* 700 36,225
Schlumberger Limited 300 24,150
- --------------------------------------------------------------------
166,225
- --------------------------------------------------------------------
TOTAL ENERGY (COST $385,949) 359,213
- --------------------------------------------------------------------
FINANCIAL -- 7.5%
COMMERCIAL FINANCE -- 1.0%
Newcourt Credit 1,500 50,063
- --------------------------------------------------------------------
50,063
- --------------------------------------------------------------------
CONSUMER FINANCE -- 2.9%
Associates First Capital 1,300 92,462
Money Store (The) 2,300 48,300
- --------------------------------------------------------------------
140,762
- --------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.0%
Ocwen Financial* 2,000 50,875
- --------------------------------------------------------------------
50,875
- --------------------------------------------------------------------
MORTGAGE RELATED -- 2.6%
MGIC Investment 1,900 126,350
- --------------------------------------------------------------------
126,350
- --------------------------------------------------------------------
TOTAL FINANCIAL (COST $350,958) 368,050
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Market
Description Shares Value
- --------------------------------------------------------------------
<S> <C> <C>
HEALTH -- 18.1%
CONTRACT RESEARCH -- 1.7%
Quintiles Transnational* 2,200 $ 84,150
- --------------------------------------------------------------------
84,150
- --------------------------------------------------------------------
DRUGS/PHARMACEUTICALS -- 6.2%
Dura Pharmaceuticals* 1,200 55,050
Lilly (Eli) & Company 1,000 69,625
Merck & Company 700 74,375
Pfizer 1,400 104,388
- --------------------------------------------------------------------
303,438
- --------------------------------------------------------------------
HOSPITAL -- 2.5%
Health Management Associates* 4,900 123,725
- --------------------------------------------------------------------
123,725
- --------------------------------------------------------------------
INFORMATION SYSTEMS -- 2.5%
HBO & Company 2,600 124,800
- --------------------------------------------------------------------
124,800
- --------------------------------------------------------------------
MEDICAL EQUIPMENT -- 1.5%
Guidant 1,200 74,700
- --------------------------------------------------------------------
74,700
- --------------------------------------------------------------------
PHARMACEUTICAL SERVICE -- 1.9%
Omnicare 3,000 93,000
- --------------------------------------------------------------------
93,000
- --------------------------------------------------------------------
SPECIAL OUTPATIENT FACILITY -- 1.8%
HealthSouth* 3,200 88,800
- --------------------------------------------------------------------
88,800
- --------------------------------------------------------------------
TOTAL HEALTH (COST $838,517) 892,613
- --------------------------------------------------------------------
INDUSTRIAL/GENERAL MANUFACTURING -- 3.2%
AUTO-RELATED -- 2.0%
Harley-Davidson 3,600 98,550
- --------------------------------------------------------------------
98,550
- --------------------------------------------------------------------
MULTI-INDUSTRY -- 1.2%
Danaher 900 56,812
- --------------------------------------------------------------------
56,812
- --------------------------------------------------------------------
TOTAL INDUSTRIAL/GENERAL MANUFACTURING
(COST $145,175) 155,362
- --------------------------------------------------------------------
SERVICE -- 25.2%
COMMERCIAL SERVICES -- 1.2%
DST Systems* 456 19,466
Pittston Brinks Group 1,000 40,250
- --------------------------------------------------------------------
59,716
- --------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 1.7%
Worldcom* 2,800 84,700
- --------------------------------------------------------------------
84,700
- --------------------------------------------------------------------
CORRECTIONAL SERVICE -- 1.0%
Corrections Corp. of America* 1,300 48,181
- --------------------------------------------------------------------
48,181
- --------------------------------------------------------------------
EDUCATIONAL SERVICES -- 2.5%
Apollo Group, Cl A* 1,400 66,150
CBT Group ADR* 700 57,487
- --------------------------------------------------------------------
123,637
- --------------------------------------------------------------------
ELECTRONIC COMMERCE -- 1.6%
Sterling Commerce* 2,100 80,719
- --------------------------------------------------------------------
80,719
- --------------------------------------------------------------------
</TABLE>
4
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
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PBHG Large Cap Growth Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
<S> <C> <C>
Market
Description Shares Value
- --------------------------------------------------------------------
EMPLOYMENT SERVICE -- 0.8%
Accustaff* 1,600 $ 36,800
- --------------------------------------------------------------------
36,800
- --------------------------------------------------------------------
ENVIRONMENTAL -- 5.9%
Allied Waste Industries* 2,000 46,625
Newpark Resources* 3,200 56,000
Thermo Electron* 1,200 53,400
U.S. Filter* 1,300 38,919
USA Waste Services* 2,400 94,200
- --------------------------------------------------------------------
289,144
- --------------------------------------------------------------------
INFORMATION/COMPUTER SERVICE -- 1.0%
Gartner Group, Cl A* 1,300 48,425
- --------------------------------------------------------------------
48,425
- --------------------------------------------------------------------
RADIO/TELEVISION -- 2.8%
Clear Channel Communications* 1,074 85,316
JACOR Communications* 1,000 53,125
- --------------------------------------------------------------------
138,441
- --------------------------------------------------------------------
SYSTEMS INTEGRATOR -- 5.3%
Cambridge Technology Partners* 1,500 62,437
Computer Horizons* 2,000 91,000
Computer Sciences* 400 33,400
Keane* 1,800 73,125
- --------------------------------------------------------------------
259,962
- --------------------------------------------------------------------
TRANSACTIONS PROCESSING -- 1.4%
Fiserv* 1,400 68,775
- --------------------------------------------------------------------
68,775
- --------------------------------------------------------------------
TOTAL SERVICE (COST $1,109,545) 1,238,500
- --------------------------------------------------------------------
TECHNOLOGY -- 22.0%
COMPUTER MANUFACTURING -- 1.4%
Dell Computer* 800 67,200
- --------------------------------------------------------------------
67,200
- --------------------------------------------------------------------
DATA STORAGE -- 1.1%
EMC* 2,000 54,875
- --------------------------------------------------------------------
54,875
- --------------------------------------------------------------------
NETWORKING HARDWARE -- 1.9%
Cisco Systems* 1,650 91,988
- --------------------------------------------------------------------
91,988
- --------------------------------------------------------------------
NETWORKING SOFTWARE -- 1.3%
Network Associates* 1,200 63,450
- --------------------------------------------------------------------
63,450
- --------------------------------------------------------------------
SEMI-CONDUCTOR MANUFACTURING -- 1.5%
Linear Technology 1,300 74,912
- --------------------------------------------------------------------
74,912
- --------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCTION EQUIPMENT -- 1.1%
ASM Lithography Holdings* 800 54,000
- --------------------------------------------------------------------
54,000
- --------------------------------------------------------------------
SOFTWARE-DESKTOP -- 1.6%
Microsoft* 600 77,550
- --------------------------------------------------------------------
77,550
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
<S> <C> <C>
Shares/Face Market
Description Amount Value
- ---------------------------------------------------------------------
SOFTWARE-ENTERPRISE RESOURCE PLANNING -- 1.9%
J.D. Edwards & Company* 1,600 $ 47,200
Peoplesoft* 1,200 46,800
- ---------------------------------------------------------------------
94,000
- ---------------------------------------------------------------------
SOFTWARE-INTERNET -- 2.2%
America Online* 1,200 107,025
- ---------------------------------------------------------------------
107,025
- ---------------------------------------------------------------------
SOFTWARE-MANUFACTURING -- 1.4%
Manugistics* 1,600 71,400
- ---------------------------------------------------------------------
71,400
- ---------------------------------------------------------------------
SOFTWARE-SYSTEM/MAINFRAME -- 1.7%
BMC Software* 1,300 85,312
- ---------------------------------------------------------------------
85,312
- ---------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 4.9%
ADC Telecommunications* 1,000 41,750
DSC Communications* 1,400 33,600
Lucent Technologies 1,000 79,875
Tellabs* 1,600 84,600
- ---------------------------------------------------------------------
239,825
- ---------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $1,049,593) 1,081,537
- ---------------------------------------------------------------------
Total Common Stocks
(Cost $4,357,527) 4,589,897
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT -- 11.3%
Lehman Brothers
5.61% dated 12/31/97, matures 01/02/98,
repurchase price $555,034
(collateralized by U.S. Treasury Note:
total market value $570,724)(A) $ 555,017 555,017
- ---------------------------------------------------------------------
Total Repurchase Agreement
(Cost $555,017) 555,017
- ---------------------------------------------------------------------
TOTAL INVESTMENTS -- 104.7%
(COST $4,912,544) 5,144,914
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (4.7%)
Other Assets and Liabilities, Net (228,653)
- ---------------------------------------------------------------------
NET ASSETS
Paid-in-capital (authorized 500 million
shares - $0.001 par value) based on
415,811 outstanding shares of common
stock 4,744,496
Undistributed net investment income 40
Accumulated net realized loss on investment (60,645)
Net unrealized appreciation on investments 232,370
- ---------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $4,916,261
- ---------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 11.82
- ---------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
ADR -- American Depository Receipt
Cl -- Class
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF OPERATIONS
For the period from May 1, 1997(1) through December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................. $ 1,606
Interest.................................................. 12,551
--------
Total Investment Income................................. 14,157
--------
EXPENSES:
Investment Advisory Fees.................................. 9,625
Administrative Fees....................................... 1,925
Custodian Fees............................................ 5,001
Professional Fees......................................... 12,204
Transfer Agent Fees....................................... 14,810
Printing Fees............................................. 7,455
Directors' Fees........................................... 12,288
Registration and Filing Fees.............................. 1,400
Amortization of Deferred Organizational Costs............. 1,488
Pricing and Other Fees.................................... 270
--------
Total Expenses.......................................... 66,466
--------
Waiver of Investment Advisory Fees........................ (9,625)
Reimbursement of Other Expenses by Adviser................ (42,724)
--------
Net Expenses............................................ 14,117
--------
NET INVESTMENT INCOME....................................... $ 40
--------
Net Realized Loss from Security Transactions.............. (60,645)
Net Change in Unrealized Appreciation on Investments...... 232,370
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 171,725
--------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $171,765
--------
--------
</TABLE>
(1)Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF CHANGES IN NET ASSETS
For the period from May 1, 1997(1) through December 31, 1997
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES:
<S> <C>
Net Investment Income..................................... $ 40
Net Realized Loss from Security Transactions.............. (60,645)
Net Change in Unrealized Appreciation on Investments...... 232,370
-----------
Net Increase in Net Assets Resulting from Operations.... 171,765
-----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income..................................... --
Net Realized Gains from Security Transactions............. --
-----------
Total Distributions..................................... --
-----------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued............................................. 6,224,992
Shares Issued upon Reinvestment of Distributions.......... --
Shares Redeemed........................................... (1,497,196)
-----------
Increase in Net Assets Derived from Capital Share
Transactions............................................ 4,727,796
-----------
Total Increase in Net Assets............................ 4,899,561
-----------
NET ASSETS:
Beginning of Period(2).................................... 16,700
-----------
End of Period............................................. $ 4,916,261
-----------
-----------
(A) SHARES ISSUED AND REDEEMED:
Shares Issued............................................. 546,676
Shares Issued upon Reinvestment of Distributions.......... --
Shares Redeemed........................................... (132,535)
-----------
Net Increase in Share Transactions........................ 414,141
-----------
-----------
</TABLE>
(1) Commencement of Operations.
(2) The Beginning of Period number reflects the initial capitalization of the
Portfolio.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
FINANCIAL HIGHLIGHTS
For the period from May 1, 1997(1) through December 31, 1997
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
Net Net
Asset Realized and Distributions Distributions Asset
Value Net Unrealized from Net from Value
Beginning Investment Gains or Losses Investment Capital End Total
of Period Income on Securities Income Gains of Period Return**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997................. $10.00 -- $1.82 -- -- $11.82 18.20%
<CAPTION>
Ratio
Ratio of Net
Ratio of Expenses Income
Net Ratio of Net to Average to Average
Assets of Expenses Income Net Assets Net Assets Portfolio Average
End to Average to Average (Excluding (Excluding Turnover Commission
of Period Net Assets Net Assets Waivers) Waivers) Rate Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997................. $4,916,261 1.10%* 0.00%* 5.21%* (4.11)%* 37.42% $0.0497
</TABLE>
* Annualized.
** Total return has not been annualized.
(1) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997
1. ORGANIZATION
The PBHG Large Cap Growth Portfolio (the "Portfolio") is a series of the PBHG
Insurance Series Fund, Inc. (the "Fund"), a Maryland corporation. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund consists of the Portfolio and five
others: the PBHG Growth II Portfolio (the "Growth II Portfolio"), the PBHG
Technology & Communications Portfolio (the "Technology & Communications
Portfolio"), the PBHG Small Cap Value Portfolio (the "Small Cap Value
Portfolio"), the PBHG Large Cap Value Portfolio (the "Large Cap Value
Portfolio") and the PBHG Select 20 Portfolio (the "Select 20 Portfolio") (each a
"Portfolio" and, collectively, the "Portfolios"). Each Portfolio is classified
as a diversified management investment company, with the exception of the Select
20 Portfolio which is classified as a nondiversified management investment
company. The financial statements presented herein do not include the Growth II
Portfolio, the Technology & Communications Portfolio, the Small Cap Value
Portfolio, the Large Cap Value Portfolio, and the Select 20 Portfolio which are
presented separately. The Portfolio's prospectus provides a description of the
Portfolio's investment objectives, policies and strategies. The assets of the
Portfolio are segregated, and a shareholder's interest is limited to the
Portfolio in which shares are held. The Fund is intended to be a funding vehicle
for variable annuity contracts and variable life insurance policies to be
offered by the separate accounts of life insurance companies. At December 31,
1997, 98% of the outstanding shares of the Portfolio were held by the separate
accounts of one participating Insurance Company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Portfolios.
SECURITY VALUATION -- Investment securities of the Portfolios that are listed on
a securities exchange, and for which market quotations are readily available,
are valued at the last quoted sales price on each business day. If there is no
such reported sale, these securities and unlisted securities for which market
quotations are not readily available, are valued at the mean between the most
recent bid price and asked price.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Dividend income and distributions to shareholders are recognized on the
ex-dividend date; interest income is recognized on the accrual basis. Costs used
in determining realized capital gains and losses on the sale of investment
securities are those of the specific securities sold adjusted for the accretion
and amortization of acquisition discounts and premiums during the respective
holding periods.
DIVIDENDS -- Dividends from net investment income of each Portfolio are declared
annually, if available. Distributions of net realized capital gains, of each
Portfolio, are generally made to shareholders annually, if available. 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 generally accepted accounting
principles. 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, net investment income or accumulated net realized
gain, as appropriate, in the period that the differences arise.
FEDERAL INCOME TAXES -- It is the Portfolio's intention to qualify or continue
to qualify as a regulated investment company for Federal income tax purposes and
to distribute all of its taxable income and net capital gains. Accordingly, no
provision has been made for Federal income taxes.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day by dividing the total value of the Portfolio's assets, less
liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the custodian bank until the respective agreements
mature. Provisions of the repurchase agreements and procedures adopted by
Pilgrim Baxter & Associates, Ltd. (the "Adviser") ensure that the market value
of the collateral including accrued interest thereon, is sufficient in the event
of default by the counterparty. If the counterparty defaults and the value of
the collateral declines, or if the counterparty enters into insolvency
proceedings, realization of the collateral by a Portfolio may be delayed or
limited.
OTHER -- Expenses that are directly related to one of the Portfolios are charged
directly to that Portfolio. Other operating expenses are prorated to the
Portfolios on the basis of relative net assets.
All organizational costs incurred in connection with the start up of the Fund
have been equally allocated to each Portfolio and are being amortized on a
straight line basis over a period of sixty months. In the event that any of the
initial shares of each Portfolio are redeemed by any holder thereof during the
period that each Portfolio is amortizing its organizational costs, the
redemption proceeds payable to the holder thereof will be reduced by the
unamortized organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares outstanding at the
time of redemption.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund and the Adviser are parties to an Investment Advisory Agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser is
paid a monthly fee at an annual rate of 0.75% of the average daily net assets of
the Large Cap Growth Portfolio. 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 the Large Cap Growth
Portfolio, the Adviser has agreed to
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PBHG INSURANCE SERIES FUND, INC.
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PBHG Large Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
waive or limit its fees and to assume other expenses of the Portfolio to the
extent necessary to limit the total annual operating expenses (expressed as a
percentage of the Portfolio's average daily net assets) to 1.10%. Reimbursement
by the Portfolio of the advisory fees waived or limited and other expenses paid
by the Adviser pursuant to the Expense Limitation Agreement during any of the
two previous fiscal years may be made at a later date when the Portfolio has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual expense ratio of the Large Cap Growth Portfolio to
exceed 1.10%. Consequently, no reimbursement by the Portfolio will be made
unless: (i) the Portfolio's assets exceed $75 million; (ii) the Portfolio's
total annual expense ratio is less than 1.10%, and (iii) the payment of such
reimbursement is approved by the Board of Directors on a quarterly basis. At
December 31, 1997, the amount of advisory fee waiver and reimbursement of third
party expenses by the Adviser subject to reimbursement was $52,349.
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of the
Adviser, provides the Fund with administrative services, including regulatory
reporting and all necessary office space, equipment, personnel and facilities.
For these administrative services, the Administrator receives a fee, which is
calculated daily and paid monthly, at an annual rate of 0.15% of the average
daily net assets of each Portfolio.
SEI Investments Management Corporation, a wholly-owned subsidiary of SEI
Investments Company, is the owner of all beneficial interest in SEI Fund
Resources (the "Sub-Administrator"). The Sub-Administrator is an affiliate of
the Fund's distributor and 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., another family of
funds managed by the Adviser, and a fee at the annual rate of 0.025% of the
average daily net assets of each Portfolio with respect to the total daily net
assets of (i) the Fund and (ii) The PBHG Funds, Inc. in excess of $2.5 billion.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent of
the Fund. Corestates Bank, N.A. serves as the custodian for the Fund.
Effective January 2, 1998 the Fund entered into a shareholder servicing
agreement with PBHG Fund Services to provide shareholder support and other
shareholder account-related services. PBHG Fund Services has, in turn,
contracted with UAM Shareholder Service Center, Inc. to assist in the provision
of these services.
Certain officers and directors of the Fund who are or were officers of the
Adviser, Administrator, Sub-Administrator and the Distributor received no
compensation from the Fund.
4. INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments, for the Large Cap Growth Portfolio from its
commencement of operations through December 31, 1997, amounted to $5,078,612 and
$660,440, respectively.
The aggregate gross unrealized appreciation and depreciation of securities held
by the Large Cap Growth Portfolio for federal income tax purposes at December
31, 1997, amounted to $385,928 and $153,558, respectively. The total cost of
securities and the net realized gains or losses on securities sold for Federal
income tax purposes at December 31, 1997 was not materially different from
amounts reported for financial reporting purposes. At December 31, 1997 the
Large Cap Growth Portfolio had a $60,546 capital loss carryforward, expiring in
December 2005, which can be used to offset future capital gains.
5. LINE OF CREDIT
Each Portfolio may borrow, an amount up to its prospectus defined limitations,
from a committed line of credit available to (i) the Fund and (ii) The PBHG
Funds, Inc. The line of credit will bear interest at the Federal Funds Rate plus
0.40%. No Portfolio had an outstanding borrowing at December 31, 1997, or at any
time during the period from May 1, 1997 (commencement of operations) through
December 31, 1997.
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CONSENT OF SOLE SHAREHOLDER (UNAUDITED)
On March 10, 1997, the sole shareholder of each Portfolio approved the following
appointments: Pilgrim Baxter & Associates, Ltd. as investment adviser to the
Portfolios, Pilgrim Baxter Value Investors, Inc. (formerly Newbold's Asset
Management, Inc.) as investment sub-adviser to the Small Cap Value and Large Cap
Value Portfolios, PBHG Fund Services as administrator to the Portfolios, SEI
Fund Resources as sub-administrator to the Portfolios and SEI Investments
Distribution Co. to serve as distributor of the shares of the Portfolios.
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PBHG INSURANCE SERIES FUND, INC.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF PBHG INSURANCE SERIES FUND, INC.:
We have audited the accompanying statement of net assets of the PBHG Large Cap
Growth Portfolio of PBHG Insurance Series Fund, Inc., as of December 31, 1997,
and the related statement of operations, statement of changes in net assets and
financial highlights for the period May 1, 1997 (commencement of operations) to
December 31, 1997. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 investments owned as of December 31, 1997 by
correspondence with the custodian and brokers. 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 audit provides 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 the
PBHG Large Cap Growth Portfolio of PBHG Insurance Series Fund, Inc. as of
December 31, 1997, and the results of its operations, changes in its net assets
and its financial highlights for the period May 1, 1997 (commencement of
operations) to December 31, 1997 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1998
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[LOGO]
PBHG Insurance Series Fund, Inc.
Investment Adviser: Distributor:
Pilgrim Baxter & Associates, Ltd. SEI Investments Distribution Co.
