PBHG INSURANCE SERIES FUND, INC.
PBHG SELECT 20 PORTFOLIO
PROSPECTUS DATED MAY 1, 1998
PBHG Insurance Series Fund, Inc. (the "Company") is an open-end management
investment company authorized to issue multiple series of shares, each
representing a portfolio of investments. The Company currently has authorized
seven series, one of which is offered by this Prospectus: the PBHG Select 20
Portfolio (the "Select 20 Portfolio", or the "Portfolio").
This Prospectus sets forth concisely the information about the Company that a
prospective investor should know before investing. The Company'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 Company and the
Portfolio 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 Company at 1-800-347-9256. The SEC
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Company and other registrants that file electronically with the
SEC. 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 Company in any jurisdiction in which such
sale, offer to sell, or solicitation may not be lawfully made.
INVESTMENTS IN THE COMPANY ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE COMPANY ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE COMPANY 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, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE COMPANY 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
SUMMARY ................................................................... 3
EXPENSE SUMMARY............................................................. 5
FINANCIAL HIGHLIGHTS........................................................ 7
INVESTMENT OBJECTIVES AND POLICIES.......................................... 8
GENERAL INVESTMENT POLICIES AND STRATEGIES.................................. 8
RISK FACTORS................................................................ 9
INVESTMENT LIMITATIONS...................................................... 10
PURCHASES AND REDEMPTIONS................................................... 11
NET ASSET VALUE............................................................. 11
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS..................................... 12
PERFORMANCE ADVERTISING..................................................... 12
GENERAL INFORMATION......................................................... 14
GLOSSARY OF PERMITTED INVESTMENTS........................................... 18
2
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SUMMARY
The Company
The Company is an open-end management investment company which currently offers
shares of seven series. This Prospectus offers shares of one of the series: the
PBHG Select 20 Portfolio (the "Portfolio"). The Portfolio has distinct
investment objectives and policies. See "Investment Objectives and Policies."
Additional portfolios may be added to the Company 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 Portfolio and the
Company, 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 IS THE INVESTMENT OBJECTIVE OF THE PORTFOLIO? The Portfolio seeks long-term
capital appreciation. There can be no assurance that the Portfolio will achieve
its investment objective. The Portfolio will invest primarily in a variety of
equity securities in accordance with its particular investment program and
policies. The Portfolio invests primarily in equity securities of a limited
number of larger capitalization companies (no more than 20 issuers) that are
perceived by the Adviser to have a strong potential for capital appreciation.
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE PORTFOLIO? The
Portfolio invests in securities that fluctuate in value, and investors should
expect the Portfolio's net asset value per share to fluctuate. Because the
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.
The Portfolio 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 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 Portfolio 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 Portfolio; the possible failure to correctly predict
movements in the direction of the market; and the risk that the Portfolio 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 the Prospectus and see "Risks of Transactions in Futures Contracts and
Options" in the Statement of Additional Information.
3
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WHO IS THE ADVISER? Pilgrim Baxter & Associates, Ltd. serves as the investment
adviser to the Portfolio. See "Expense Summary," and "The Adviser."
WHO ARE THE ADMINISTRATOR AND SUB-ADMINISTRATOR? PBHG Fund Services, a
wholly-owned subsidiary of the Adviser, serves as the Administrator of the
Company and SEI Fund Resources, an affiliate of the Company's distributor,
serves as Sub-Administrator of the Company.
See "The Administrator and Sub-Administrator."
WHO ARE THE TRANSFER AGENT AND SHAREHOLDER SERVICING AGENTS? DST Systems, Inc.
serves as the transfer agent and dividend disbursing agent of the Company. PBHG
Fund Services serves as shareholder servicing agent of the Company. UAM
Shareholder Service Center, Inc. ("UAM SSC"), an affiliate of the Adviser,
provides services to the Company pursuant to a sub-shareholder servicing
agreement between PBHG Fund Services and UAM SSC. See "The Transfer Agent and
Shareholder Servicing Agents."
WHO IS THE DISTRIBUTOR? SEI Investments Distribution Co. provides the Company
with distribution services. See "The Distributor."
HOW ARE SHARES PURCHASED AND REDEEMED? Individual investors may not purchase or
redeem shares of the Portfolio 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."
4
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EXPENSE SUMMARY
The purpose of this section is to provide you with information about the
expenses of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
Select 20 Portfolio
-------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets
after applicable expense reimbursements or
fee waivers)
Select 20 Portfolio
-------------------
Advisory Fees (after fee waiver) .00%
12b-1 Fees None
Other Expenses (after expense reimbursement) 1.20%
Total Operating Expenses (after fee waiver/expense 1.20%
reimbursement)
The Adviser has voluntarily agreed to waive or limit its Advisory Fees or assume
Other Expenses in an amount that operates to limit Total Operating Expenses of
the Portfolio to not more than 1.20% of the average daily net assets of the
Portfolio through December 31, 1998. Total Operating Expenses include, but are
not limited to, expenses such as investment advisory fees, custodian fees,
transfer agent fees, audit fees and legal fees. Such waiver of Advisory Fees and
possible assumption of Other Expenses by the Adviser is subject to a possible
reimbursement by the Portfolio in future years if such reimbursement can be
achieved within the foregoing annual expense limits. Such fee waiver/expense
reimbursement arrangements may be modified or terminated at any time after
December 31, 1998. Absent such fee waivers/expense reimbursements, the Advisory
Fees and Total Operating Expenses for the Select 20 Portfolio would be 0.85% and
3.36%.
Example
An investor in a Portfolio would pay the following expenses on a $1,000
investment assuming (1) 5% annual return, and (2) redemption at the end of each
time period.
5
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1 Year 3 Years
------ -------
Select 20 Portfolio $12 $38
The example is based upon Total Operating Expenses for the Portfolio, as set
forth in the "Annual Operating Expenses" table above, and reflects the fee
waiver/expense reimbursement arrangement in effect. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. THE TABLE DOES NOT REFLECT ADDITIONAL CHARGES
AND EXPENSES WHICH ARE, OR MAY BE, IMPOSED UNDER THE VA CONTRACTS OR VLI
POLICIES. SUCH CHARGES AND EXPENSES ARE DESCRIBED IN THE PROSPECTUS OF THE
PARTICIPATING INSURANCE FUND SEPARATE ACCOUNT. The purpose of this table is to
assist the investor in understanding the various costs and expenses that may be
directly or indirectly borne by investors in the Portfolio. See "The Adviser,"
and "The Administrator."
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FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended December 31, 1997, has been
audited by Coopers & Lybrand L.L.P., the Company's independent accountants. The
Company's audited financial statements are incorporated by reference into the
Company's Statement of Additional Information under "Financial Information." The
following table should be read in conjunction with the Company's financial
statements and notes thereto. Additional information about the Portfolio's
performance is contained in the Company's Annual Report, which may be obtained
(without charge) by calling 1-800-347-9256.
For a Share Outstanding Throughout the Period
<TABLE>
<CAPTION>
====================================================================================================================================
Net Asset Net Realized and Distributions Distributions Net Asset Total Net Assets
Value Investment Unrealized from Net from Capital Value End Return** End of
Beginning Income Gains or Investment Gains of Period Period
of Period (Loss) Losses on Income
Securities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PBHG Select 20 Portfolio(1)
- ------------------------------------------------------------------------------------------------------------------------------------
$10.00 --- $0.03 --- --- $10.03 0.30% $7,616,691
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Ratio of Ratio of Net Ratio of Expenses Ratio of Net Portfolio Average
Expenses to Income (Loss) to Average Net Income (Loss) to Turnover Rate Commission
Average Net to Average Net Assets (Excluding Average Net Rate
Assets Assets Waivers) Assets (Excluding
Waivers)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Select 20 Portfolio(1)
- ------------------------------------------------------------------------------------------------------------------------------------
1.20%* 0.51%* 3.36%* (1.65)%* 18.53% $0.0561
====================================================================================================================================
</TABLE>
* Annualized.
** Not Annualized.
(1) The PBHG Select 20 Portfolio commenced operations on September 26, 1997.
Amounts designated as "---" above are either $0 or have been rounded to $0.
The accompanying notes are integral part of the financial statements.
7
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INVESTMENT OBJECTIVES AND POLICIES
Select 20 Portfolio
The Select 20 Portfolio, a non-diversified 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 highest 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
issuers) 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 Company. 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: Select 20 Portfolio
The Adviser's investment process in managing the assets of the Select 20
Portfolio is both quantitative and fundamental, and is focused on quality
earnings growth. In seeking to identify investment opportunities for the
Portfolio, the Adviser begins by creating a universe of rapidly growing
companies with market capitalizations within the parameters described for the
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 Portfolio that possess strong
growth characteristics. The Adviser tries to keep the 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 Portfolio
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.
8
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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 Portfolio will not exceed 300%. High rates of
portfolio turnover necessarily result in correspondingly greater brokerage and
portfolio trading costs, which are paid by the Portfolio. 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 the 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, the Portfolio expects to be fully invested in
its primary investments, as described above. However, for temporary defensive
purposes, when the Adviser determines that market conditions warrant, the
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
the Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent the 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
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 the 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. Foreign securities held by the Portfolio may be traded, and net asset
value may be significantly affected, at times when investors have no access to
the Company.
9
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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
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 the
Portfolio, see "Glossary of Permitted Investments" and the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objectives of the Portfolio, the investment limitations set forth
below and certain investment limitations contained in the Statement of
Additional Information are fundamental policies of the Portfolio. The
Portfolio's fundamental policies cannot be changed without the consent of the
holders of a majority of the Portfolio's outstanding shares.
The Portfolio, as a fundamental policy, may not:
1. Purchase securities of any issuer (except securities issued or guaranteed by
the United States, its agencies and 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 securities of such issuer. This restriction
applies to 50% of the Portfolio's total assets.
2. Purchase any securities which would cause 25% or more of the total assets of
the 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 the Portfolio's total assets. 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.
10
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PURCHASES AND REDEMPTIONS
Individual investors may not purchase or redeem shares of the Portfolio
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.
Purchases. All investments in the Portfolio are credited to a Participating
Insurance Company's separate account immediately upon acceptance of the
investments by the Portfolio. Each Participating Insurance Company receives
orders from its contract owners to purchase or redeem shares of the 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 Portfolio 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 Portfolio reserves the right to reject any specific purchase order. Purchase
orders may be refused if, in the Adviser's opinion, they are of a size that
would disrupt the management of the Portfolio. The 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 or VLI Policy owners would be permitted to continue to authorize
investments in the Portfolio.
Redemptions. Shares of the 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 Company 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
The 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 most recent bid price. Short-term obligations are valued at
amortized cost. Securities for which market quotations are not readily available
and other assets held by the Company, 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.
11
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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.
The 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 Internal
Revenue Code of 1986, as amended (the "Code"). As such, the 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 Portfolio may be purchased only through VA Contracts and
VLI Policies, it is anticipated that any income, dividends or capital gain
distributions from the Portfolio are taxable, if at all, to the Participating
Insurance Companies and will be exempt from current taxation of the VA Contract
owner or VLI Policy owner if left to accumulate within the VA Contract or VLI
Policy.
The Clinton Administration's fiscal year 1999 budget proposal would treat a
redemption of shares of the Portfolio by VA Contracts and VLI Policies as a
taxable transaction, and it can be expected that similar proposals may be
introduced in Congress in the near future. The Company cannot predict what
proposals, if any, might be enacted or whether such proposals, if enacted, would
apply retroactively to shares of the Portfolio that are issued and outstanding
as of the date of enactment.
Internal Revenue Service Requirements
The Portfolio intends 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
The Portfolio 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 the Portfolio 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 Company for federal income tax
purposes.
PERFORMANCE ADVERTISING
From time to time, the 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 the 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 commenced operations
12
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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 the Portfolio's performance has the effect of
increasing the performance quoted, and the effect of these charges should be
considered when comparing the Portfolio's performance to that of other mutual
funds.
The 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. The 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.
The 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. The Portfolio
may also quote financial and business publications and periodicals as they
relate to fund management, investment philosophy, and investment techniques.
The 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.
Performance of Other Mutual Funds Managed by the Adviser
The Select 20 Portfolio is newly organized. The Portfolio does not yet have its
own performance record. However, the Portfolio has the same investment
objectives and follows substantially the same investment strategies as one
series, the PBHG Large Cap 20 Fund, of The PBHG Funds, Inc. (the "PBHG Funds"),
a mutual fund ("public fund") whose shares are currently sold to the public and
managed by the Adviser. The performance of this corresponding fund may be
relevant to an investor in the Portfolio. The section that follows sets forth
the performance of the Portfolio and its corresponding PBHG Fund.
Investors should not consider the performance data of the series of the public
fund as an indication of the future performance of the Portfolio. The
performance figures shown below reflect the deduction of the historical fees and
expenses paid by the PBHG Funds' corresponding series, AND NOT THOSE TO BE PAID
BY THE PORTFOLIO. 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 Portfolio. Additionally, although it is anticipated that the
Select 20 Portfolio and its corresponding PBHG 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.
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The results shown reflect the reinvestment of dividends and distributions, and
were calculated in the same manner that will be used by the Select 20 Portfolio
to calculate its own performance.
Select 20 Portfolio. The Select 20 Portfolio has investment objectives, policies
and strategies that are substantially similar to those of the PBHG Large Cap 20
Fund, a series of The PBHG Funds, Inc. The Select 20 Portfolio has been in
operation since September 26, 1997. The total return for the Portfolio from
inception through March 31, 1998 was 19.70%. The PBHG Large Cap 20 Fund has been
in operation since December 2, 1996. The total return for the PBHG Large Cap 20
Fund for the one year period ended March 31, 1998 was 72.76%, and the average
annual total return from inception through March 31, 1998 was 42.21%.
GENERAL INFORMATION
The Company
PBHG Insurance Series Fund, Inc. is an open-end management investment company
which was incorporated in Maryland in 1997. All consideration received by the
Company for shares of any Portfolio and all assets of such Portfolio belong to
that Portfolio and are subject to liabilities related thereto. The Company
reserves the right to create and issue shares of additional series.
The Portfolio 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.
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 $16 billion in assets. In addition to advising
the Portfolio, 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 825 Duportail Road, Wayne, Pennsylvania 19087.
The Adviser serves as the investment adviser to the Portfolio under an
investment advisory agreement with the Company (the "Advisory Agreement"). Under
the Advisory Agreement, the Adviser continuously reviews, supervises and
administers the investment program of the Portfolio, subject to the supervision
of, and policies established by, the Board of Directors of the Company.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 0.85% of the Select 20 Portfolio's
average daily net assets. The advisory fees paid by the Portfolio are higher
than
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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.
Expense Limitation Agreement
In the interest of limiting expenses of the Portfolio, the Adviser has entered
into an expense limitation agreement through December 31, 1998 with the Company
with respect to the Portfolio (the "Expense Limitation Agreement"), pursuant to
which the Adviser has agreed to 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 not more than 1.20% of the average daily net assets of the
Portfolio. Such waivers and assumption of expenses by the Adviser may be
discontinued at any time after such date. Reimbursement by the Portfolio 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
Portfolio has reached a sufficient asset size to permit reimbursement to be made
without causing the total annual expense ratio of the Portfolio to exceed the
Total Operating Expense percentages described above.
The Portfolio Managers
The Select 20 Portfolio is 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 another series of the Company and also
manages three series of The PBHG Funds, Inc. and has done so since their
inception.
The Administrator and The Sub-Administrator
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of the
Adviser, provides the Company 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 Company. The principal place of business of the
Administrator is 825 Duportail Road, Wayne, Pennsylvania 19087.
SEI Fund Resources (the "Sub-Administrator"), an indirect wholly-owned
subsidiary of SEI Investments Company ("SEI") and an affiliate of the Company's
distributor, assists the Administrator in providing administrative services to
the Company. For acting in this capacity, the Administrator pays the
Sub-Administrator fees at an annual rate based on the combined average daily net
assets of the Company, The PBHG Funds, Inc., and PBHG Advisor Funds, Inc.
calculated as follows: (i) 0.040% of the first $2.5 billion, plus (ii) 0.025% of
the next $7.5 billion, plus (iii) 0.020% of the excess over $10 billion.
The Transfer Agent and Shareholder Servicing Agents
DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534 serves as
the transfer agent and dividend disbursing agent for the Company under a
transfer agency agreement with the Company. PBHG Fund Services serves as
shareholder servicing agent of the Company. UAM Shareholder Service Center, Inc.
("UAM SSC"), an
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affiliate of the Adviser, provides services to the Company pursuant to a
sub-shareholder servicing agreement between PBHG Fund Services and UAM SSC.
From time to time, the Company may pay amounts to third parties that provide
sub-transfer agency and other administrative services relating to the Company to
persons who beneficially own interests in the Company. These services may
include, among other things, sub-accounting services, answering inquiries
relating to the Company, delivering, on behalf of the Company, proxy statements,
annual reports, updated Prospectuses, other communications regarding the
Company, and related services as the Company or the beneficial owners may
reasonably request.
The Distributor
SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley Road,
Oaks, Pennsylvania 19456, a wholly-owned subsidiary of SEI, provides the Company
with distribution services.
Directors of the Company
The management and affairs of the Company 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 Company.
Voting Rights
Each share held entitles the shareholder of record to one vote. Shareholders of
the Portfolio will vote on matters relating solely to it, such as approval of
advisory agreements and changes in fundamental policies, as well as other
matters affecting the Portfolio. Shareholders of the Select 20 Portfolio will
vote together with shareholders of other of the Company's Portfolios in matters
affecting the Company generally, such as the election of Directors or selection
of accountants. As a Maryland corporation, the Company is not required to hold
annual meetings of shareholders but shareholder approval will be sought for
certain changes in the operation of the Company 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 Company. In the event that such a meeting is requested, the Company 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
The 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 Portfolio may conflict. The Board will monitor the Portfolio 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
Portfolio. As a result, the Portfolio 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 Portfolio to any VA
Contract or VLI Policy or may suspend or terminate the offering of shares of
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the Portfolio if such action is required by law or regulatory authority or is in
the best interests of the shareholders of the Portfolio.
Reporting
The Company issues unaudited financial information semi-annually, and audited
financial statements annually for the Portfolio. The Company also furnishes
periodic reports and, as necessary, proxy statements to shareholders of record.
Year 2000 Compliance
There is general concern throughout the industry that a number of computer
systems and software packages in use today may not be able to recognize the Year
2000 or accurately process information after December 31, 1999. The Company is
actively working with the Adviser, the Sub-Adviser and the Company's other
service providers, including but not limited to, the Administrator,
Sub-Administrator, Distributor, Transfer Agent and shareholder servicing agents
to identify potential problems and develop plans reasonably designed to address
these potential problems before the Year 2000. While there can be no absolute
assurance that all service providers will be fully Year 2000-compliant or that
non-compliant systems or software will have no impact at all, the Company
believes that these steps will be successful in identifying and minimizing any
negative impact associated with Year 2000 processing problems. Furthermore, the
Company does not currently anticipate that there will be any material cost to
the Company or any Portfolio as a result of this project.
Counsel and Independent Accountants
Ballard Spahr Andrews & Ingersoll, LLP serves as counsel to the Company. Coopers
& Lybrand, L.L.P. serves as the independent accountants of the Company.
Custodian
First Union National Bank (successor to CoreStates Bank, N.A.) ("Custodian"),
530 Walnut Street, Philadelphia, Pennsylvania 19106, serves as the custodian for
the Company. The Custodian holds cash, securities and other assets of the
Company as required by the 1940 Act.
Miscellaneous
As of March 31, 1998, Fidelity Investments Life Insurance Co. owned of record
more than 25% of the shares of the Select 20 Portfolio and may be deemed to be a
controlling person of the Portfolio. The Company believes that most of these
shares are held by the record owners for their fiduciary, agency or custodial
clients.
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GLOSSARY OF PERMITTED INVESTMENTS
The following is a description of permitted investments for certain of the
Portfolio:
American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs") --
ADRs are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. GDRs,
which are sometimes referred to as Continental Depositary 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
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all the costs of the
unsponsored facility. The depositary 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 -- Derivatives 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
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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 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 the 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 Company's investment exposure to
changes in currency exchange rates, and could result in losses to the Company 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 Company by
selling that currency in exchange for dollars, the Company would be unable to
participate in the currency's appreciation. Similarly, if the Adviser increases
the Company's exposure to a foreign currency, and that currency's value
declines, the Company 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
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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.
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. The
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 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 Company. 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 Company 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 Portfolio.
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).
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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.
Warrants -- Instruments giving holders the right, but not the obligation, to buy
shares of a company at a given price during a specified period.
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