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PBHG Growth II Portfolio
PBHG Technology &
Communications Portfolio
PBHG Select 20 Portfolio
PBHG Large Cap Value Portfolio
PBHG Small Cap Value Portfolio
PBHG
INSURANCE
SERIES
FUND,
INC.
ANNUAL REPORT
DECEMBER 31, 1997
<PAGE>
PBHG Growth II Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Growth II Portfolio ended an
abbreviated first fiscal year on December 31, 1997. In its first eight months of
operation, the fund generated an aggregate total return of 7.50%, compared with
the benchmark Russell Mid-Cap Growth Index return of 24.13%. Performance in this
initial period was buffeted by a number of factors, not all of which were market
related. For example, results in the first month of the fund's existence were
constrained by the high proportion of cash in the portfolio, a consequence of
being in a start-up mode when large (relative to a small base) daily cash
inflows can create an "under-invested" portfolio. During May, the Russell
Mid-Cap Growth Index returned 8.96% while the Growth II Portfolio returned only
0.90%.
Once we reached a more fully invested position in June, we made up some lost
ground and essentially performed in line with our benchmark through mid-October.
Mid-Cap growth stocks were coming out of a severe relative valuation correction
vis-a-vis their large capitalization brethren in the Standard & Poor's 500
Index, an adjustment which had begun in May of 1996. Now, with year-over-year
earnings growth apparently slowing somewhat in the large cap, stable growth
area, the attraction of smaller company growth issues was moving to the fore.
Economists remained confident that real economic growth would continue at a
moderate rate, and with reported rates of inflation still quite low and the Fed
unwilling to follow up on its initial "pre-emptive" rate hike, the bond market
extended its rally. The outlook seemed quite promising.
But surprises being what they are, the markets were caught off guard by the
currency crisis in Asia. Asian currencies -- already weak -- simply collapsed,
victims of inflated economies and speculation. The rush to convert holdings into
U.S. dollars made it difficult to conduct cross-boarder business and called into
question the ability of the area to raise capital and support its expected
growth. Technology companies and a good many of our oil service companies do a
significant amount of business -- both in terms of manufacturing and final sales
- -- in the area, and the market's retribution was swift and severe. Energy issues
were further impacted by an unusually warm winter and the prospect of renewed
oil sales from Iraq. Investors were relatively quick to return to the large cap
"stable growth" issues which dominate the Dow Jones and S&P 500 Indexes, but the
year closed with many smaller company issues languishing in uncertainty.
Looking ahead into 1998, we expect a challenging environment for equities. The
uncertainty created by the "Asian Contagion" and its potential impact on our
economy will not be known, indeed cannot be known, for some time. With the
resultant uncertainty pervading the financial markets, we would expect
volatility to continue to be a market watchword. Despite these 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 characteristics, with position weighted three-to-five
year historic revenue and earnings growth of 26% and 41%, respectively, and
latest twelve-month earnings growth of 62%, compare quite favorably with our
benchmark. We believe that these characteristics will serve the Portfolio well
in 1998 and beyond.
1
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG GROWTH II PORTFOLIO
THE PILGRIM BAXTER DISCIPLINE
As part of our annual review, it seems worthwhile to review our
investment philosophy. Our investment philosophy and methodology remain
the same through both up and down cycles. We continue to seek out and
invest in the highest quality, fastest growing companies we can find
within the capitalization parameters established for the Portfolio. As
long-time managers following this style, we are pleased to report that
we believe there is currently no shortage of very good companies,
quality management, and strong ideas in which to invest.
We continue to find most of our investments in the technology, health
care, consumer, and service sectors -- those industries in which
company and stock price performance have been most remarkable over the
last several years. As a result, we often find our portfolios highly
concentrated in particular sectors of the market at different times. We
tend to hold significant positions in industries while their growth
curves are steepest -- either due to technological improvement, an
under-supply of new or key industry products, or perhaps consolidation
among competitors. Our companies are most often characterized by rapid
unit growth and problem-solving capacity for their customers. This
concentration can contribute to very favorable returns while the
companies scale the growth curve and there aren't enough shares to go
around Wall Street. But the ride down may be equally steep, once
investors get a hint that the growth may be slowing. Our disciplined
investment process identifies and drives us toward those companies
whose fortunes are meeting or exceeding operating expectations, and
away from those whose business opportunities are flagging.
Our disciplined investment approach has always and will continue to
strictly follow a "bottom-up" approach, i.e., focusing on individual
companies -- their fundamental business characteristics and the
sustainability of their growth rates. We don't make market forecasts
and don't use others' "big picture" forecasts to guide our investment
process. Finally, we strive to be fully invested at all times, since we
believe attempting to "time" the market is also not a productive
endeavor.
In closing, we thank you for your confidence in Pilgrim Baxter &
Associates, Ltd. and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ Bruce J. Muzina /s/ Gary L. Pilgrim
-------------------- -----------------------
Bruce J. Muzina Gary L. Pilgrim, CFA
Portfolio Manager Portfolio Manager
2
<PAGE>
PBHG Growth II Portfolio
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN(1)
- --------------------------------------------------------------------------------
Inception to
Date(2)
- --------------------------------------------------------------------------------
PBHG Growth II Portfolio 7.50%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in
the PBHG Growth II Portfolio versus the Russell Mid-Cap Growth
Index, the S&P 500 Index, and the Lipper Mid-Cap Funds Average
[In the printed version there appears a line chart depicted by the
following plot points]
PBHG Growth II Russell Mid-Cap S&P 500 Lipper Mid-Cap
Portfolio Growth Index(3) Index(4) Funds Average(5)
4/30/97 10,000 10,000 10,000 10,000
5/97 10,090 10,896 10,608 11,000
6/97 10,450 11,198 11,083 11,414
7/97 11,300 12,269 11,964 12,336
8/97 10,960 12,149 11,294 12,286
9/97 11,440 12,764 11,913 13,069
10/97 10,830 12,124 11,515 12,457
11/97 10,580 12,252 12,049 12,449
12/97 10,750 12,412 12,256 12,613
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 Growth II Portfolio commenced
operations on May 1, 1997.
3 The Russell Mid-Cap Growth Index is an unmanaged index comprised of the 800
smallest securities in the Russell 1000 Index with a greater-than-average growth
orientation.
4 The Standard & Poor's ("S&P") 500 Index is a capitalization-weighted index of
500 stocks designed to measure performance of the broad domestic economy. The
Index is unmanaged and reflects the reinvestment of income dividends and capital
gains distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing.
5 The Lipper Mid-Cap Funds Average is an equally weighted benchmark composed of
mutual funds, each of which limits its investments, by prospectus or portfolio
practice, to companies with average market capitalizations and/or revenues
between $800 million and the average market capitalization of the Wilshire 4500
Index. The performance figures are based on changes in net assets value of the
funds in the category with all capital gains distributions and income dividends
reinvested.
3
<PAGE>
PBHG Large Cap Value Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Large Cap Value Portfolio ended an
abbreviated fiscal year on December 31, 1997. In its first two months of
operation, the Portfolio generated an aggregate total return of 4.30% versus
total return of 7.47% for the Russell 1000 Value index. Although we are off to a
sluggish start, we should note that two months are a very short period in
investing. Based on the plentiful number of good investment ideas meeting our
criteria, we are quite optimistic regarding the Large Cap Value Portfolio's
prospects for the coming year.
MARKET OVERVIEW
Despite the widely reported outbreak of "Asian Contagion" in the fall, the U.S.
stock market provided positive returns in the last two months of 1997. The
financial panic in Asia did add to volatility in our markets in November and
December, and our markets face an additional element of uncertainty moving
forward into 1998. However, it is also true that the Federal Reserve appears
much less likely to tighten monetary policy in the wake of the Asian financial
crises. Here in the U.S., given our low inflation, moderate interest rates and a
Federal Budget in balance for the first time in 20 years, we believe the
investment outlook is quite positive.
Our fundamental view of the large cap value sector of the market is also
favorable. Despite the strong overall stock market of the past 3 years, the
volatility and irrational psychology of many investors has left many large cap
value stocks lagging behind at very reasonable valuations. Among our notable
holdings, Ford is valued at only 9.3 times estimated 1998 earnings, and American
Airlines, Santa Fe International, Morgan Stanley/Dean Witter Discover, Eaton and
Dow Chemical all trade for 14 times or less 1998 earnings per share. While the
S&P 500 may be close to fair value at approximately 19.8 times estimated 1998
earnings per share, we think our Large Cap Value Portfolio is comprised of
stocks which are substantially undervalued.
THE PILGRIM BAXTER VALUE DISCIPLINE
Since this is our first annual report to our shareholders, it seems worthwhile
to review our investment approach. Our investment philosophy and methodology
remain the same regardless of the stock market environment. We stay fully
invested at all times and do not try to "time" the market. Our value approach is
a rational and disciplined approach based on a multi-factor model that allows
for intelligent trade-offs between the valuation of a stock, and the growth rate
and business dynamics of the underlying enterprise. We work hard to create a
portfolio of large cap stocks with a below-average P/E ratio, good growth
characteristics and business dynamics which are sharply above-average. As noted
above, Ford, American Airlines, Santa Fe International, Morgan Stanley/Dean
Witter Discover, Eaton and Dow Chemical are all high-quality companies selling
at reasonable valuations which exemplify our approach. This strategy has worked
well for us in the past and we are optimistic that it will work well in the
future.
4
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG LARGE CAP VALUE PORTFOLIO
Our disciplined approach is predominantly a "bottom-up" stock selection
approach, although at times our best ideas will cluster in a specific
sector or industry, leading us to overweight that area. We do not
engage in futile attempts to forecast the markets and we refrain from
using others' "big picture" forecasts to guide our investment process.
Essentially, we believe that Ezra Solomon, an economist, had it exactly
right when he noted that "the only function of economic forecasting is
to make astrology respectable".
In closing, we thank you for your confidence in Pilgrim Baxter Value
Investors, Inc. and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ Gary D. Haubold
--------------------------
Gary D. Haubold, CFA
Portfolio Manager
5
<PAGE>
PBHG Large Cap Value Portfolio
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN(1)
- --------------------------------------------------------------------------------
Inception to
Date(2)
- --------------------------------------------------------------------------------
PBHG Large Cap Value Portfolio 4.30%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the PBHG Large Cap
Value Portfolio versus the Russell 1000 Value Index, and the Lipper Growth &
Income Funds Average
[In the printed version there appears a line chart depicted by the
following plot points]
PBHG Large Cap Russell 1000 Lipper Growth &
Value Portfolio Value Index(3) Income Funds Average(4)
10/29/97 10,000 10,000 10,000
11/97 10,200 10,442 10,272
12/97 10,441 10,747 10,447
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 Value Portfolio
commenced operations on October 29, 1997.
3 The Russell 1000 Value Index is an unmanaged index comprised of those
securities in the Russell 1000 Index with lower price-to-book ratios and lower
forecasted growth values. 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 and Income Funds Average is an equally weighted bench-mark
composed mutual funds, each of which combines growth of earnings with an income
requirement for level and/or rising dividends. 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.
6
<PAGE>
PBHG Small Cap Value Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Small Cap Value Portfolio ended an
abbreviated fiscal year on December 31, 1997. In its first two months of
operation, the fund generated a total return of 4.80% versus a total return of
1.09% for the Russell 2000 Index. We are pleased to be off to a good start, and
are looking forward to serving you for a full year in 1998.
MARKET OVERVIEW
Despite the widely reported outbreak of "Asian Contagion" in the fall, the U.S.
stock market provided positive returns in the last two months of 1997. The
financial panic in Asia did add to volatility in our markets in November and
December, and our markets face an additional element of uncertainty moving
forward into 1998. However, it is also true that the Federal Reserve appears
much less likely to tighten monetary policy in the wake of the Asian financial
crises. Here in the U.S., given our low inflation, moderate interest rates and a
Federal Budget in balance for the first time in 20 years, we believe the
investment outlook is quite positive.
Our fundamental long-term view of the small cap market is also favorable.
Despite the strong overall stock market of the past 3 years, many small cap
stocks still offer good earnings growth prospects at reasonable multiples of
earnings. Furthermore, large cap companies have now outperformed small companies
in the stock market for 4 consecutive years, and we believe the performance
cycle will turn back in favor of small companies in the not-too-distant future.
When that time comes, we would expect our Small Cap Value Portfolio to perform
notably better than the large cap S&P 500 index.
THE PILGRIM BAXTER VALUE DISCIPLINE
Since this is our first annual report to our shareholders, it seems worthwhile
to review our investment approach. Our investment philosophy and methodology
remain the same regardless of the stock market environment. We stay fully
invested at all times and do not try to "time" the market. Our value approach is
a rational and disciplined approach based on a multi-factor model that allows
for intelligent trade-offs between the valuation of a stock, and the growth rate
and business dynamics of the underlying enterprise. We work hard to create a
portfolio of small stocks with a below-average P/E ratio, good growth
characteristics and business dynamics which are sharply above-average. This
strategy has worked well for us in the past and we are optimistic that it will
work well in the future.
Our disciplined approach is predominantly a "bottom-up" stock selection
approach, although at times our best ideas will cluster in a specific sector or
industry, leading us to overweight that area. We do not engage in futile
attempts to forecast the markets and we refrain from using others' "big picture"
forecasts to guide our investment process. Essentially, we believe that Ezra
Solomon, an economist, had it exactly right when he noted that "the only
function of economic forecasting is to make astrology respectable".
7
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG SMALL CAP VALUE PORTFOLIO
In closing, we thank you for your confidence in Pilgrim Baxter Value Investors,
Inc. and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ Gary D. Haubold
- -----------------------
Gary D. Haubold, CFA
Portfolio Manager
8
<PAGE>
PBHG Small Cap Value Portfolio
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN(1)
- --------------------------------------------------------------------------------
Inception to
Date(2)
- --------------------------------------------------------------------------------
PBHG Small Cap Value Portfolio 4.80%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the PBHG Small Cap
Value Portfolio versus the Russell 2000 Index, and the Lipper
Small Cap Funds Average
[In the printed version there appears a line chart depicted by the
following plot points]
PBHG Small Cap Russell 2000 Lipper Small Cap
Value Portfolio Index(3) Funds Average(4)
10/29/97 10,000 10,000 10,000
11/97 10,010 9,935 9,855
12/97 10,427 10,109 9,938
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 Small Cap Value Portfolio
commenced operations on October 29, 1997.
3 The Russell 2000 Index is an unmanaged index comprised of the 2,000 smallest
securities in the Russell 3000 Index. 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 Small Cap Funds Average is an equally weighted bench-mark composed
of mutual funds, each of which limits its investments, by prospectus or
portfolio practice, to companies on the basis of the size of the company. The
performance figures are based on changes in net assets value of the Funds in the
Index with all capital gains distributions and income dividends reinvested.
9
<PAGE>
PBHG Technology & Communications Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Technology & Communications
Portfolio ended its abbreviated first fiscal year on December 31, 1997. In its
first eight months of operation, the Portfolio generated a total return of
4.10%, compared with the benchmark Pacific Stock Exchange High Technology Index
return of 16.39%. Performance in this initial period was somewhat constrained by
the high proportion of cash in the first two months, which generally results
from being in a start-up mode as large (relative to the small base) daily cash
inflows can create an "under-invested" portfolio. This was particularly true
early in the month of May, when the market was rising rapidly. Over the course
of the summer months, smaller capitalization technology stocks began to
outperform and the momentum of the Portfolio remained strong up until early
October. Intel reported disappointing results on October 14th and the "Asian
Contagion" hit full swing over the following two weeks, leaving the Pacific
Stock Exchange High Technology Index off 17.3% for this fourteen day period. The
Southeast Asian crisis continued to deteriorate through year-end. This, coupled
with pre-release earnings disappointments from Oracle, Seagate, Cabletron, 3Com,
and Electronics For Imaging, created poor fourth quarter results for both the
Portfolio and the relevant benchmarks.
The Portfolio's preference for higher growth, smaller capitalization companies
contributed to its under-performance in 1997. The Portfolio's price earnings
ratio fell by roughly 25% over the fiscal year, despite pristine financial and
operating characteristics of the underlying companies. At December 31st, the
position weighted latest twelve-month earnings growth on our invested assets was
68%, with a 21.3% return on equity.
Companies and sectors with the greatest exposure to Southeast Asia, such as
those companies exporting a large percentage of their products to the region,
suffered the largest sell-off in the final months of the year. Semiconductor
(Microchip, Integrated Circuits), semiconductor equipment (KLA-Tencor, Kulicke &
Soffa, Speedfam, ADE Corporation) and telecommunication (Teledata, Remec,
Powerwave) stocks declined significantly more than the Portfolio as a whole.
Electronics For Imaging stumbled as they experienced inventory drawdowns from
their Japanese customers.
The service subsector provided the best returns for the fiscal year due to their
recurring revenue models which typically lead to strong backlogs and highly
predictable and sustainable earnings growth. These companies tend to leverage
technology as opposed to creating it. They continue to benefit from the year
2000 conversion, the internet and intranet, electronic commerce, and the
shortage of professional information technology specialists in the U.S. and
Europe. The business remains outside the Southeast Asian geography and the
stocks have tended to maintain value in periods of uncertainty. Cambridge
Technology Partners, Information Management Resources, Keane, Intelligroup and
ECSoft Group had strong results for the fiscal year.
THE 1998 OUTLOOK
As we approach 1998, the "Asian Contagion" has become the focal point on the
investment outlook. The recent developments in Asia have added a larger dose of
uncertainty
10
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
to the global economic expansion and the deflationary impact of the
crisis on world trade. According to Greg Smith, strategist at
Prudential Securities, the issue will essentially lie in how
"governments apply corrective policy medicine to support their
currencies and eventually set the base for improved economic growth."
While the Asian situation will contribute to near-term financial market
volatility, the focus will clearly return to the solid domestic
fundamentals in the United States. We believe small cap technology
stocks are showing their best relative earnings strength in several
quarters against the larger multinational technology issues. Superior
relative earnings growth should eventually lead to a relative valuation
premium. The Portfolio is clearly building positions in holdings with
less exposure to the affected emerging markets in favor of companies
with outstanding earnings visibility and sustainability of future
growth rates. Recent U.S. capital spending surveys still predict
healthy spending levels in 1998, particularly in the information
technology service, networking, software and medical device subsectors.
With the power of superior relative earnings growth and historically
low relative valuations, we remain positive on the sector and the
Portfolio's opportunity for 1998.
Sincerely,
/s/ John S. Force
-----------------------
John S. Force, CFA
Portfolio Manager
11
<PAGE>
PBHG Technology & Communications Portfolio
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN(1)
- --------------------------------------------------------------------------------
Inception to
Date(2)
- --------------------------------------------------------------------------------
PBHG Technology & Communications Portfolio 4.10%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the
PBHG Technology & Communications Portfolio versus
the Pacific Stock Exchange High Technology Index, and the Lipper
Science & Technology Funds Average
[In the printed version there appears a line chart depicted by the
following plot points]
PBHG Technology & Pacific Stock Lipper Science &
Communications Exchange High Technology Funds
Portfolio Technology Index(3) Average(4)
4/30/97 10,000 10,000 10,000
5/97 9,990 11,210 11,372
6/97 10,320 11,288 11,449
7/97 11,550 13,031 12,924
8/97 11,490 13,014 12,977
9/97 12,289 13,456 13,652
10/97 10,789 12,074 12,362
11/97 10,549 12,108 12,232
12/97 10,409 11,639 11,778
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 Technology & Communications
Portfolio commenced operations on May 1, 1997.
3 The Pacific Stock Exchange High Technology Index is a price-weighted index of
the top 100 U.S. technology stocks. 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 Science & Technology Funds Average is an equally weighted
bench-mark composed of mutual funds, each of which normally invests more than
65% of its equity portfolio in science and technology stocks. 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.
12
<PAGE>
PBHG Select 20 Porfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Select 20 Portfolio ended its
abbreviated first fiscal year on December 31, 1997 with an aggregate total
return of 0.30% since its inception on September 26, 1997. Over this same time
period, the Russell Top 200 Growth Index produced a total return of 3.05% and
the S&P 500 Index produced a total return of 3.93%. The underperformance
relative to this benchmark can largely be attributed to the Portfolio's
"start-up" mode that existed during this time period particularly in the first
two months of operation. A small asset base that made effective trading
challenging coupled with relatively high daily cash inflows placed the Portfolio
in an underexposed position which is always detrimental to performance in a
rising equity market. Had the market steadily declined during this initial
period, we would have looked very smart. By the beginning of December, the
Portfolio was approaching a more normal situation (the cash position was brought
below 20% for the first time) and in December we experienced a gain of 3.83%
versus an S&P 500 Index gain of 1.57%.
Our best performers over the Portfolio's short initial period included
enterprise software provider PeopleSoft (+20.3%), billboard and radio station
operator Clear Channel Communications (+13.5%), on-line service provider America
OnLine (+11.9%), consumer services firm Cendant (+11.7%), and mortgage insurer
MGIC Investment (+10.7%). Our worst performers included communications firm
WorldCom (-8.7%), PC maker DELL Computer (-6.4%), and diversified energy
services company Schlumberger (-4.5%). Despite the short-term declines we remain
positive on the longer-term fundamental business outlook for each of these three
companies and we plan to retain them at this time.
Since this is our first opportunity to communicate with Select 20 Portfolio
shareholders it seems worthwhile to review the Pilgrim Baxter & Associates, Ltd.
disciplined investment approach. Our investment philosophy and methodology
remain the same through both up and down cycles. We constantly seek out and
invest in the highest quality, fastest growing companies we can find within the
capitalization parameters established for the Portfolio. As long-time managers
following this style, we are pleased to report that there is currently no
shortage of very good companies with quality management and strong ideas in
which to invest. We tend to find the best investment ideas in the fast-growing
technology, healthcare, consumer and business services sectors. Since the
Portfolio has no sector constraints it may from time to time become highly
concentrated in one or more of these sectors as we strive to own the 20 best
large cap ideas regardless of industry. (At year end our largest sector exposure
was technology at 35%). Our companies are most often characterized by rapid unit
growth and by problem solving capacity for their customers. These
characteristics, among others, are important in creating the potential for
companies to exceed operating expectations. Our disciplined investment process
drives us toward these companies and away from those whose business
opportunities are waning. Our focused approach has always and will continue to
strictly follow a "bottom-up" approach, i.e. analyzing individual companies --
their fundamental business characteristics and the sustainability of their
growth. We don't make market forecasts and we don't use others' "big picture"
forecasts to guide our investment process. Finally, we strive to be fully
invested at all times, since we believe attempting to "time" the market is not a
productive endeavor.
13
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG SELECT 20 PORTFOLIO
Looking ahead into 1998 we expect a more challenging environment for
equities in general and don't expect a 4th 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,
then 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 Asia 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. The Select 20 Portfolio approach of concentrating
on a limited number of high-quality, fast-growing, large companies may
generate substantial short-term volatility, but if we select the right
stocks the higher short-term risk may be rewarded with superior longer
term performance.
Sincerely,
/s/ James D. McCall
-------------------------
James D. McCall, CFA
Portfolio Manager
14
<PAGE>
PBHG Select 20 Portfolio
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN(1)
- --------------------------------------------------------------------------------
Inception to
Date(2)
- --------------------------------------------------------------------------------
PBHG Select 20 Portfolio 0.30%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in
the PBHG Select 20 Portfolio versus the Russell Top 200
Growth Index, and the Lipper Growth Funds Average
[In the printed version there appears a line chart depicted by the
following plot points]
PBHG Select 20 Russell Top 200 Lipper Growth
Portfolio Growth Index(3) Funds Average(4)
9/26/97 10,000 10,000 10,000
10/97 9,629 9,677 9,620
11/97 9,679 10,197 9,784
12/97 10,050 10,305 9,876
1 Past performance of the period is not predictive of future performance. 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 Select 20 Portfolio commenced
operations on September 26, 1997.
3 The Russell Top 200 Growth Index is an unmanaged index comprised of those
securities in the Russell Top 200 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.
15
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Growth II Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 89.1%
CONSUMER -- 13.8%
HOTELS/RESORTS -- 1.1%
Capstar Hotel* 1,540 $ 52,841
Signature Resorts* 2,500 54,688
- ---------------------------------------------------------------------
107,529
- ---------------------------------------------------------------------
LEISURE/RECREATION -- 0.6%
Callaway Golf 2,099 59,953
- ---------------------------------------------------------------------
59,953
- ---------------------------------------------------------------------
RETAIL-APPAREL -- 2.1%
Jones Apparel Group* 2,425 104,275
Nautica Enterprises* 4,602 106,996
- ---------------------------------------------------------------------
211,271
- ---------------------------------------------------------------------
RETAIL-CATALOG -- 1.2%
CDW Computer Centers* 2,400 125,100
- ---------------------------------------------------------------------
125,100
- ---------------------------------------------------------------------
RETAIL-DISCOUNT STORES -- 1.1%
Dollar Tree Stores* 2,740 113,367
- ---------------------------------------------------------------------
113,367
- ---------------------------------------------------------------------
RETAIL-HOME FURNISHINGS -- 2.7%
Bed Bath & Beyond* 7,185 276,623
- ---------------------------------------------------------------------
276,623
- ---------------------------------------------------------------------
RETAIL-OFFICE PRODUCTS -- 1.8%
Staples* 6,761 187,618
- ---------------------------------------------------------------------
187,618
- ---------------------------------------------------------------------
RETAIL-SPECIALTY -- 2.0%
Borders Group* 1,620 50,726
General Nutrition Companies* 4,580 155,720
- ---------------------------------------------------------------------
206,446
- ---------------------------------------------------------------------
SPECIALTY FOOD/CANDY -- 1.2%
Suiza Foods* 2,100 125,081
- ---------------------------------------------------------------------
125,081
- ---------------------------------------------------------------------
TOTAL CONSUMER (COST $1,378,986) 1,412,988
- ---------------------------------------------------------------------
ENERGY -- 8.0%
CONTRACT DRILLING -- 4.1%
Cliffs Drilling* 1,400 69,825
Ensco International 2,480 83,080
Global Marine* 4,279 104,835
Nabors Industries* 1,600 50,300
Santa Fe International 2,670 108,636
- ---------------------------------------------------------------------
416,676
- ---------------------------------------------------------------------
SERVICE & EQUIPMENT -- 3.9%
BJ Services* 1,300 93,519
Camco International 1,600 101,900
Cooper Cameron* 1,400 85,400
Tidewater 2,093 115,377
- ---------------------------------------------------------------------
396,196
- ---------------------------------------------------------------------
TOTAL ENERGY (COST $850,498) 812,872
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
FINANCIAL -- 3.5%
BROKERAGE/INVESTMENT BANK -- 0.8%
Edwards (A.G.) 2,100 $ 83,475
- ---------------------------------------------------------------------
83,475
- ---------------------------------------------------------------------
CONSUMER FINANCE -- 1.2%
Money Store (The) 3,768 79,128
Newcourt Credit 1,200 40,050
- ---------------------------------------------------------------------
119,178
- ---------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.5%
Amresco 3,400 102,850
Ocwen Financial* 2,200 55,962
- ---------------------------------------------------------------------
158,812
- ---------------------------------------------------------------------
TOTAL FINANCIAL (COST $386,092) 361,465
- ---------------------------------------------------------------------
HEALTH -- 11.8%
ASSISTED LIVING -- 1.3%
Sunrise Assisted Living* 3,200 138,000
- ---------------------------------------------------------------------
138,000
- ---------------------------------------------------------------------
CONTRACT RESEARCH -- 1.8%
Quintiles Transnational* 4,754 181,840
- ---------------------------------------------------------------------
181,840
- ---------------------------------------------------------------------
DRUGS/PHARMACEUTICALS -- 2.9%
Dura Pharmaceuticals* 5,280 242,220
Medicis Pharmaceutical, Cl A* 1,000 51,125
- ---------------------------------------------------------------------
293,345
- ---------------------------------------------------------------------
INFORMATION SYSTEMS -- 2.9%
HBO & Company 6,210 298,080
- ---------------------------------------------------------------------
298,080
- ---------------------------------------------------------------------
SPECIAL OUTPATIENT FACILITY -- 2.9%
HealthSouth* 7,165 198,829
Total Renal Care Holdings* 3,638 100,045
- ---------------------------------------------------------------------
298,874
- ---------------------------------------------------------------------
TOTAL HEALTH (COST $1,129,392) 1,210,139
- ---------------------------------------------------------------------
INDUSTRIAL/BASIC -- 0.1%
PLASTIC/CARBON -- 0.1%
Zoltek Companies 453 12,627
- ---------------------------------------------------------------------
12,627
- ---------------------------------------------------------------------
TOTAL INDUSTRIAL/BASIC (COST $18,078) 12,627
- ---------------------------------------------------------------------
INDUSTRIAL/GENERAL MANUFACTURING -- 1.2%
AUTO-RELATED -- 1.2%
Harley-Davidson 4,560 124,830
- ---------------------------------------------------------------------
124,830
- ---------------------------------------------------------------------
TOTAL INDUSTRIAL/GENERAL MANUFACTURING
(COST $120,410) 124,830
- ---------------------------------------------------------------------
SERVICE -- 20.6%
CORRECTIONAL SERVICE -- 2.2%
Corrections Corp. of America* 6,109 226,415
- ---------------------------------------------------------------------
226,415
- ---------------------------------------------------------------------
EDUCATIONAL SERVICES -- 2.0%
Apollo Group, Cl A* 4,333 204,734
- ---------------------------------------------------------------------
204,734
- ---------------------------------------------------------------------
</TABLE>
16
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Growth II Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
EMPLOYMENT SERVICES -- 1.1%
Accustaff* 4,695 $ 107,985
- ---------------------------------------------------------------------
107,985
- ---------------------------------------------------------------------
ENVIRONMENTAL -- 5.3%
Allied Waste Industries* 5,350 124,722
American Disposal Services* 2,400 87,600
Superior Services* 2,400 69,300
USA Waste Services* 6,779 266,076
- ---------------------------------------------------------------------
547,698
- ---------------------------------------------------------------------
INFORMATION/COMPUTER SERVICES -- 1.2%
Gartner Group, Cl A* 3,325 123,856
- ---------------------------------------------------------------------
123,856
- ---------------------------------------------------------------------
RADIO/TELEVISION -- 4.3%
Clear Channel Communications* 3,588 285,022
Jacor Communications* 3,021 160,490
- ---------------------------------------------------------------------
445,512
- ---------------------------------------------------------------------
SYSTEMS INTEGRATOR -- 1.9%
Computer Horizons* 1,800 81,900
Keane* 2,700 109,688
- ---------------------------------------------------------------------
191,588
- ---------------------------------------------------------------------
TRANSACTION PROCESSING -- 2.6%
Paychex 5,214 263,959
- ---------------------------------------------------------------------
263,959
- ---------------------------------------------------------------------
TOTAL SERVICE (COST $1,885,991) 2,111,747
- ---------------------------------------------------------------------
TECHNOLOGY -- 30.1%
CONTRACT MANUFACTURING -- 2.5%
Jabil Circuit* 3,000 119,250
Solectron* 3,170 131,753
- ---------------------------------------------------------------------
251,003
- ---------------------------------------------------------------------
EMBEDDED SOFTWARE -- 0.9%
Wind River Systems* 2,380 94,456
- ---------------------------------------------------------------------
94,456
- ---------------------------------------------------------------------
NETWORKING SECURITY -- 2.4%
Checkpoint Software* 1,390 56,643
Security Dynamics Technologies* 5,270 188,402
- ---------------------------------------------------------------------
245,045
- ---------------------------------------------------------------------
SEMI-CONDUCTOR MANUFACTURING -- 3.7%
Linear Technology 3,070 176,909
Microchip Technology* 2,438 73,140
Vitesse Semiconductor* 3,300 124,575
- ---------------------------------------------------------------------
374,624
- ---------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCTION EQUIPMENT -- 1.2%
Helix Technology 2,500 48,750
Novellus Systems* 2,300 74,319
- ---------------------------------------------------------------------
123,069
- ---------------------------------------------------------------------
SOFTWARE-CLIENT/SERVER -- 1.0%
HNC Software* 2,281 98,082
- ---------------------------------------------------------------------
98,082
- ---------------------------------------------------------------------
SOFTWARE-ENTERPRISE RESOURCE PLANNING -- 4.4%
J.D. Edwards & Company* 3,500 103,250
Peoplesoft* 9,014 351,546
- ---------------------------------------------------------------------
454,796
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- ---------------------------------------------------------------------
<S> <C> <C>
SOFTWARE-INTERNET -- 1.3%
America Online* 1,520 $ 135,565
- ---------------------------------------------------------------------
135,565
- ---------------------------------------------------------------------
SOFTWARE-OTHER -- 1.1%
Viasoft* 2,535 107,104
- ---------------------------------------------------------------------
107,104
- ---------------------------------------------------------------------
SOFTWARE-SYSTEM/MAINFRAME -- 2.3%
BMC Software* 3,640 238,875
- ---------------------------------------------------------------------
238,875
- ---------------------------------------------------------------------
TELECOMMUNICATIONS COMPONENTS -- 0.4%
P-Com* 2,300 39,675
- ---------------------------------------------------------------------
39,675
- ---------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 8.9%
ADC Telecommunications* 5,784 241,482
Advanced Fibre Communications* 3,640 106,015
DSC Communications* 5,100 122,400
Qualcomm* 500 25,250
Tellabs* 4,771 252,267
Uniphase* 2,780 115,023
World Access* 2,100 50,137
- ---------------------------------------------------------------------
912,574
- ---------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $3,099,251) 3,074,868
- ---------------------------------------------------------------------
Total Common Stocks
(Cost $8,868,698) 9,121,536
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT -- 15.3%
Greenwich Agency
6.70% dated 12/31/97, matures 01/02/98,
repurchase price $1,569,062
(collateralized by GNMA obligations:
total market value $1,602,496)(A) $1,568,577 1,568,577
- ---------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,568,577) 1,568,577
- ---------------------------------------------------------------------
TOTAL INVESTMENTS -- 104.4%
(COST $10,437,275) 10,690,113
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (4.4%)
Other Assets and Liabilities, Net (454,253)
- ---------------------------------------------------------------------
NET ASSETS
Paid-in-capital (authorized 500 million
shares - $0.001 par value) based on
952,165 outstanding shares of common
stock 10,270,289
Accumulated net realized loss on
investments (287,267)
Net unrealized appreciation on
investments 252,838
- ---------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $10,235,860
- ---------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 10.75
- ---------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 90.6%
BASIC MATERIALS -- 2.3%
CHEMICALS & ALLIED PRODUCTS -- 1.3%
Dow Chemical 200 $ 20,300
- ---------------------------------------------------------------------
20,300
- ---------------------------------------------------------------------
PAPER -- 0.7%
Union Camp 200 10,737
- ---------------------------------------------------------------------
10,737
- ---------------------------------------------------------------------
STEEL -- 0.3%
British Steel Plc ADR 200 4,287
- ---------------------------------------------------------------------
4,287
- ---------------------------------------------------------------------
TOTAL BASIC MATERIALS (COST $35,280) 35,324
- ---------------------------------------------------------------------
CAPITAL GOODS -- 10.5%
AEROSPACE & EQUIPMENT -- 0.5%
United Technologies 100 7,281
- ---------------------------------------------------------------------
7,281
- ---------------------------------------------------------------------
BUILDING & CONSTRUCTION -- 5.2%
Centex 1,300 81,819
- ---------------------------------------------------------------------
81,819
- ---------------------------------------------------------------------
MACHINERY & INSTRUMENTATION -- 4.8%
Agco 500 14,625
Case 400 24,175
Caterpillar 100 4,856
Flowserve 300 8,381
Parker Hannifin 500 22,938
- ---------------------------------------------------------------------
74,975
- ---------------------------------------------------------------------
TOTAL CAPITAL GOODS (COST $161,649) 164,075
- ---------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 5.4%
UTILITIES-TELEPHONE -- 4.2%
Bell Atlantic 200 18,200
GTE 900 47,025
- ---------------------------------------------------------------------
65,225
- ---------------------------------------------------------------------
TELECOMMUNICATIONS -- 1.2%
AT&T 300 18,375
- ---------------------------------------------------------------------
18,375
- ---------------------------------------------------------------------
TOTAL COMMUNICATIONS SERVICES
(COST $79,559) 83,600
- ---------------------------------------------------------------------
CONSUMER CYCLICAL -- 14.3%
AUTO & RELATED -- 5.7%
Chrysler 300 10,556
Eaton 500 44,625
Ford Motor 700 34,081
- ---------------------------------------------------------------------
89,262
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
PRINTING & PUBLISHING -- 5.0%
Knight-Ridder 1,000 $ 52,000
New York Times, Cl A 400 26,450
- ---------------------------------------------------------------------
78,450
- ---------------------------------------------------------------------
RETAIL-DEPARTMENT STORES -- 1.1%
Dillards, Cl A 500 17,625
- ---------------------------------------------------------------------
17,625
- ---------------------------------------------------------------------
RETAIL-SPECIALTY -- 2.5%
Costco Companies* 700 31,238
TJX Companies* 200 6,875
- ---------------------------------------------------------------------
38,113
- ---------------------------------------------------------------------
TOTAL CONSUMER CYCLICAL (COST $221,580) 223,450
- ---------------------------------------------------------------------
CONSUMER STAPLES -- 2.4%
RETAIL-FOODS -- 1.2%
Safeway* 300 18,975
- ---------------------------------------------------------------------
18,975
- ---------------------------------------------------------------------
TOBACCO -- 1.2%
RJR Nabisco Holdings 500 18,750
- ---------------------------------------------------------------------
18,750
- ---------------------------------------------------------------------
TOTAL CONSUMER STAPLES (COST $34,755) 37,725
- ---------------------------------------------------------------------
ENERGY -- 8.7%
NATURAL GAS PIPELINES -- 1.6%
Enron 600 24,937
- ---------------------------------------------------------------------
24,937
- ---------------------------------------------------------------------
OIL & GAS SERVICES -- 7.1%
BJ Services* 800 57,550
Reading and Bates* 300 12,563
Santa Fe International 1,000 40,687
- ---------------------------------------------------------------------
110,800
- ---------------------------------------------------------------------
TOTAL ENERGY (COST $128,298) 135,737
- ---------------------------------------------------------------------
FINANCE -- 36.2%
INSURANCE -- 11.2%
Allstate 300 27,262
Hartford Financial Services 700 65,494
Marsh & McLennan Companies 400 29,825
Nationwide Financial Services 400 14,450
Penncorp Financial Group 300 10,706
PMI Group 200 14,463
Torchmark 300 12,619
- ---------------------------------------------------------------------
174,819
- ---------------------------------------------------------------------
INVESTMENT -- 12.2%
Edwards (A.G.) 400 15,900
Lehman Brothers Holdings 1,000 51,000
Merrill Lynch 200 14,587
Morgan Stanley Dean Witter Discover 800 47,300
Paine Webber Group 1,800 62,213
- ---------------------------------------------------------------------
191,000
- ---------------------------------------------------------------------
</TABLE>
18
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Large Cap Value Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
MONEY CENTER BANKS -- 2.2%
Bankers Trust N.Y. 200 $ 22,488
Chase Manhattan 100 10,950
- ---------------------------------------------------------------------
33,438
- ---------------------------------------------------------------------
OTHER -- 2.3%
Charter One Financial 300 18,938
Federal National Mortgage Association 100 5,706
Travelers Group 200 10,775
- ---------------------------------------------------------------------
35,419
- ---------------------------------------------------------------------
REGIONAL BANKS -- 7.2%
Banc One 300 16,294
Comerica 400 36,100
First Union 200 10,250
Mellon Bank 300 18,188
Nationsbank 200 12,162
Norwest 200 7,725
PNC Financial 200 11,412
- ---------------------------------------------------------------------
112,131
- ---------------------------------------------------------------------
REAL ESTATE/REITS -- 1.1%
Nationwide Health Properties 700 17,850
- ---------------------------------------------------------------------
17,850
- ---------------------------------------------------------------------
TOTAL FINANCE (COST $546,625) 564,657
- ---------------------------------------------------------------------
TECHNOLOGY -- 6.9%
COMPUTERS/NETWORKING -- 1.8%
Bay Networks* 1,100 28,119
- ---------------------------------------------------------------------
28,119
- ---------------------------------------------------------------------
ELECTRONICS & INSTRUMENTATION -- 0.4%
Avnet 100 6,600
- ---------------------------------------------------------------------
6,600
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- ---------------------------------------------------------------------
<S> <C> <C>
OFFICE EQUIPMENT & SUPPLIES -- 4.7%
Compaq Computer 200 $ 11,288
Computer Associates International 100 5,288
International Business Machines 100 10,456
Lexmark International Group* 700 26,600
Storage Technology* 200 12,387
Xerox 100 7,381
- ---------------------------------------------------------------------
73,400
- ---------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $99,678) 108,119
- ---------------------------------------------------------------------
TRANSPORTATION -- 3.9%
TRANSPORTATION -- 3.9%
AMR* 200 25,700
Burlington Northern Santa Fe 100 9,294
Delta Airlines 100 11,900
Southwest Airlines 600 14,775
- ---------------------------------------------------------------------
61,669
- ---------------------------------------------------------------------
TOTAL TRANSPORTATION (COST 58,192) 61,669
- ---------------------------------------------------------------------
Total Common Stocks (Cost $1,365,616) 1,414,356
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.4%
Lehman Brothers
5.61% dated 12/31/97, matures 01/02/98,
repurchase price $21,949 (collaterized
by U.S. Treasury Note: total market
value $22,563)(A) $ 21,942 21,942
- ---------------------------------------------------------------------
Total Repurchase Agreement (Cost $21,942) 21,942
- ---------------------------------------------------------------------
TOTAL INVESTMENTS -- 92.0% (COST $1,387,558) 1,436,298
- ---------------------------------------------------------------------
</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.
19
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 83.0%
BASIC MATERIALS -- 2.7%
CHEMICALS & ALLIED PRODUCTS -- 2.0%
Crompton and Knowles 3,200 $ 84,800
Lyondell Petrochemical 3,000 79,500
Millenium Chemical 1,000 23,563
- ---------------------------------------------------------------------
187,863
- ---------------------------------------------------------------------
SPECIALTY CHEMICALS -- 0.7%
Dexter 1,400 60,462
- ---------------------------------------------------------------------
60,462
- ---------------------------------------------------------------------
TOTAL BASIC MATERIALS (COST $240,124) 248,325
- ---------------------------------------------------------------------
CAPITAL GOODS -- 8.2%
AEROSPACE & EQUIPMENT -- 0.6%
AVTeam, Cl A* 1,500 13,312
SPS Technologies* 900 39,263
- ---------------------------------------------------------------------
52,575
- ---------------------------------------------------------------------
BUILDING & CONSTRUCTION -- 0.7%
Lone Star Industries 800 42,500
Medusa 700 29,269
- ---------------------------------------------------------------------
71,769
- ---------------------------------------------------------------------
ELECTRICAL & ELECTRONICS -- 3.2%
Barringer Technologies* 3,900 56,062
Cirrus Logic* 2,800 29,750
Digital Microwave* 3,000 43,500
Essex International* 5,600 166,600
- ---------------------------------------------------------------------
295,912
- ---------------------------------------------------------------------
MACHINERY & INSTRUMENTATION -- 3.7%
Denison International Plc* 2,000 34,500
Gleason 7,300 196,644
Parker Hannifin 900 41,287
Trinity Industries 1,700 75,863
- ---------------------------------------------------------------------
348,294
- ---------------------------------------------------------------------
TOTAL CAPITAL GOODS (COST $754,495) 768,550
- ---------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 0.4%
UTILITIES-TELECOMMUNICATIONS -- 0.4%
Sawtek* 1,500 39,562
- ---------------------------------------------------------------------
39,562
- ---------------------------------------------------------------------
TOTAL COMMUNICATIONS SERVICES
(COST $39,000) 39,562
- ---------------------------------------------------------------------
CONSUMER CYCLICAL -- 13.5%
AUTO & RELATED -- 6.9%
Budget Group* 3,200 110,600
Delco Remy International* 19,000 237,500
Paccar 100 5,250
Stoneridge* 18,000 288,000
- ---------------------------------------------------------------------
641,350
- ---------------------------------------------------------------------
PHOTO & OPTICAL -- 0.4%
Applied Films* 4,000 34,000
- ---------------------------------------------------------------------
34,000
- ---------------------------------------------------------------------
RESTAURANTS -- 0.5%
Sonic* 1,800 50,625
- ---------------------------------------------------------------------
50,625
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
RETAIL-SPECIALTY -- 2.3%
Finlay Enterprises* 2,000 $ 45,500
Gymboree* 4,000 109,500
Hancock Fabrics 3,900 56,550
- ---------------------------------------------------------------------
211,550
- ---------------------------------------------------------------------
TEXTILES & APPAREL -- 3.4%
Dan River* 7,000 115,062
Fibermark* 4,000 86,000
G&K Services 300 12,600
I.C. Isaacs & Company* 10,000 101,250
- ---------------------------------------------------------------------
314,912
- ---------------------------------------------------------------------
TOTAL CONSUMER CYCLICAL
(COST $1,228,828) 1,252,437
- ---------------------------------------------------------------------
CONSUMER STAPLES -- 2.6%
ALCOHOL -- 1.6%
Beringer Wines Estates* 4,000 152,000
- ---------------------------------------------------------------------
152,000
- ---------------------------------------------------------------------
FOOD, HOUSE & PERSONAL -- 0.6%
Prime Medical Services* 4,000 55,250
- ---------------------------------------------------------------------
55,250
- ---------------------------------------------------------------------
TOBACCO -- 0.4%
Standard Commercial 100 1,656
Universal 900 37,013
- ---------------------------------------------------------------------
38,669
- ---------------------------------------------------------------------
TOTAL CONSUMER STAPLES (COST $221,442) 245,919
- ---------------------------------------------------------------------
ENERGY -- 2.6%
OIL & GAS SERVICES -- 2.6%
American Oilfield Divers* 200 2,550
Atwood Oceanics* 1,800 85,275
Cliffs Drilling* 1,000 49,875
Tuboscope Vetco International* 3,400 81,813
Weatherford Enterra* 500 21,875
- ---------------------------------------------------------------------
241,388
- ---------------------------------------------------------------------
TOTAL ENERGY (COST $219,752) 241,388
- ---------------------------------------------------------------------
FINANCE -- 30.7%
INSURANCE -- 1.6%
Allied Group 500 14,313
ARM Financial Group 4,800 126,600
Fremont General 200 10,950
- ---------------------------------------------------------------------
151,863
- ---------------------------------------------------------------------
INVESTMENT -- 3.0%
Everen Capital 3,700 175,750
Raymond James Financial 2,700 107,156
- ---------------------------------------------------------------------
282,906
- ---------------------------------------------------------------------
OTHER -- 3.9%
Charter One Financial 1,000 $ 63,125
Money Store (The) 3,000 63,000
Orion Capital 1,500 69,656
R & G Financial, Cl B 1,800 34,650
Xtra 2,300 134,838
- ---------------------------------------------------------------------
365,269
- ---------------------------------------------------------------------
</TABLE>
20
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
REGIONAL BANKS -- 12.7%
Bank Plus* 100 1,262
Bayonne Bancshares 1,500 20,063
Colonial Bancgroup 400 13,775
Commercial Bank of New York 6,600 151,800
Dime Bancorp 200 6,050
First Essex Bancorp 1,100 25,575
Firstfed Financial* 900 34,875
MAF Bancorp 10,700 378,512
North Fork Bank NY 4,000 134,250
SIS Bancorp 200 8,037
Trans Financial 500 19,438
Webster Financial 3,400 226,100
Westamerica Bancorp 900 92,025
WSFS Financial* 3,300 66,000
- ---------------------------------------------------------------------
1,177,762
- ---------------------------------------------------------------------
REAL ESTATE/REITS -- 9.5%
Berkshire Realty 12,800 153,600
Colonial Properties Trust 5,700 171,713
Crossman Communities* 4,000 110,500
Developers Diversified Realty 3,200 122,400
Eastgroup Properties 2,900 62,712
Highwoods Properties 3,100 115,281
Pennsylvania Real Estate Investment
Trust 5,000 122,812
Weingarten Realty Investment 600 26,888
- ---------------------------------------------------------------------
885,906
- ---------------------------------------------------------------------
TOTAL FINANCE (COST $2,690,618) 2,863,706
- ---------------------------------------------------------------------
HEALTHCARE -- 1.1%
DRUGS & HEALTH CARE -- 1.1%
Arrow International 1,000 37,000
Beverly Enterprises* 400 5,200
Ocular Sciences* 2,200 57,750
- ---------------------------------------------------------------------
99,950
- ---------------------------------------------------------------------
TOTAL HEALTHCARE (COST $93,738) 99,950
- ---------------------------------------------------------------------
MISCELLANEOUS -- 0.4%
MISCELLANEOUS -- 0.4%
Advo Systems* 1,300 25,350
Prime Hospitality* 400 8,150
- ---------------------------------------------------------------------
33,500
- ---------------------------------------------------------------------
TOTAL MISCELLANEOUS (COST $36,552) 33,500
- ---------------------------------------------------------------------
TECHNOLOGY -- 11.7%
COMPUTERS/NETWORKING -- 1.7%
Box Hill Systems* 400 4,175
Scansource* 1,800 36,000
Sequent Computer* 5,800 116,000
- ---------------------------------------------------------------------
156,175
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- ----------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS & INSTRUMENTATION -- 4.3%
Autodesk 4,800 $ 177,600
CHS Electronics* 7,000 119,875
Smart Modular Technologies* 4,500 103,500
- ----------------------------------------------------------------------
400,975
- ----------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES -- 0.8%
AEHR Test Systems* 800 6,400
HMT Technology* 2,500 32,500
Hon Industries 100 5,900
Knoll* 1,000 32,125
- ----------------------------------------------------------------------
76,925
- ----------------------------------------------------------------------
SOFTWARE/SOFTWARE SERVICES -- 4.9%
American Power Conversion* 300 7,088
Great Plains Software* 1,000 27,250
INSO* 1,500 17,344
QAD* 2,900 36,612
Symantec* 12,000 263,250
Vanstar* 9,600 108,600
- ----------------------------------------------------------------------
460,144
- ----------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $1,126,993) 1,094,219
- ----------------------------------------------------------------------
TRANSPORTATION -- 9.1%
TRANSPORTATION 9.1%
Alaska Airgroup* 1,300 50,375
America West Holdings* 2,000 37,250
American Freightways* 10,800 106,650
Arkansas Best* 200 1,950
CNF Transportation 5,000 191,875
Consolidated Freightways* 300 4,088
Fritz Companies* 300 4,182
Greenbrier Companies 900 15,581
Kitty Hawk* 200 3,850
Midway Airlines* 9,000 136,125
US Freightways 3,000 97,500
Willis Lease Finance* 9,000 157,500
Yellow* 1,500 37,688
- ----------------------------------------------------------------------
844,614
- ----------------------------------------------------------------------
TOTAL TRANSPORTATION (COST $896,899) 844,614
- ----------------------------------------------------------------------
Total Common Stocks (Cost $7,548,441) 7,732,170
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT -- 14.9%
Lehman Brothers
5.61% dated 12/31/97, matures 01/02/98,
repurchase price $1,393,343
(collaterized by U.S. Treasury Note:
total market value $1,432,333)(A) $1,392,913 1,392,913
- ----------------------------------------------------------------------
Total Repurchase Agreement (Cost $1,392,913) 1,392,913
- ----------------------------------------------------------------------
TOTAL INVESTMENTS -- 97.9% (COST $8,941,354) 9,125,083
- ----------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
21
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Technology & Communications Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 76.3%
ENERGY -- 0.8%
SERVICE & EQUIPMENT -- 0.8%
Input/Output* 2,500 $ 74,219
- ---------------------------------------------------------------------
74,219
- ---------------------------------------------------------------------
TOTAL ENERGY (COST $73,776) 74,219
- ---------------------------------------------------------------------
HEALTH -- 6.5%
CONTRACT RESEARCH -- 2.0%
Applied Analytical* 200 3,300
Parexel International* 2,400 88,800
Quintiles Transnational* 2,300 87,975
- ---------------------------------------------------------------------
180,075
- ---------------------------------------------------------------------
DRUGS/PHARMACEUTICALS -- 1.1%
Dura Pharmaceuticals* 2,200 100,925
- ---------------------------------------------------------------------
100,925
- ---------------------------------------------------------------------
INFORMATION SYSTEMS -- 0.1%
Daou Systems* 100 3,125
HBO & Company 200 9,600
- ---------------------------------------------------------------------
12,725
- ---------------------------------------------------------------------
MEDICAL DEVICES -- 1.9%
Arterial Vascular Engineer* 2,700 175,500
- ---------------------------------------------------------------------
175,500
- ---------------------------------------------------------------------
MEDICAL EQUIPMENT -- 1.4%
ESC Medical Systems Limited* 3,300 127,875
- ---------------------------------------------------------------------
127,875
- ---------------------------------------------------------------------
TOTAL HEALTH (COST $561,515) 597,100
- ---------------------------------------------------------------------
SERVICE -- 15.1%
INFORMATION/COMPUTER SERVICES -- 1.0%
Meta Group* 4,100 90,200
- ---------------------------------------------------------------------
90,200
- ---------------------------------------------------------------------
PRINTING SERVICES/FORMS -- 0.1%
Consolidated Graphics* 200 9,325
- ---------------------------------------------------------------------
9,325
- ---------------------------------------------------------------------
SYSTEMS INTEGRATOR -- 8.9%
Cambridge Technology Partners* 6,500 270,562
ECSoft Group ADR* 7,300 131,400
Information Management Resources* 1,900 71,250
Intelligroup* 8,000 153,000
Keane* 3,800 154,375
Technology Solutions* 1,200 31,650
- ---------------------------------------------------------------------
812,237
- ---------------------------------------------------------------------
TRANSACTION PROCESSING -- 5.1%
Ace*Comm* 4,400 51,975
Concord EFS* 4,300 106,963
National Data 2,100 75,862
Saville Systems ADR* 5,600 232,400
- ---------------------------------------------------------------------
467,200
- ---------------------------------------------------------------------
TOTAL SERVICE (COST $1,050,635) 1,378,962
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY -- 53.9%
CABLES/FIBEROPTICS -- 2.4%
Cable Design Technologies* 5,700 $ 221,587
- ---------------------------------------------------------------------
221,587
- ---------------------------------------------------------------------
CONTRACT MANUFACTURING -- 2.8%
International Manufacturing Services* 6,500 47,125
Sanmina* 3,132 212,193
- ---------------------------------------------------------------------
259,318
- ---------------------------------------------------------------------
DATA STORAGE -- 2.3%
Box Hill Systems* 4,400 45,925
Network Appliance* 4,600 163,300
- ---------------------------------------------------------------------
209,225
- ---------------------------------------------------------------------
DESIGN AUTOMATION SOFTWARE -- 1.4%
Cadence Design Systems* 5,300 129,850
- ---------------------------------------------------------------------
129,850
- ---------------------------------------------------------------------
EMBEDDED SOFTWARE -- 0.8%
Wind River Systems* 1,800 71,437
- ---------------------------------------------------------------------
71,437
- ---------------------------------------------------------------------
GRAPHIC/IMAGE PROCESSING -- 1.5%
Electronics For Imaging* 8,200 136,325
- ---------------------------------------------------------------------
136,325
- ---------------------------------------------------------------------
NETWORKING HARDWARE -- 2.3%
Bay Networks* 8,200 209,612
- ---------------------------------------------------------------------
209,612
- ---------------------------------------------------------------------
NETWORKING SOFTWARE -- 2.4%
Network Associates* 2,700 142,762
Veritas Software* 1,500 76,500
- ---------------------------------------------------------------------
219,262
- ---------------------------------------------------------------------
PC-PERIPHERALS MANUFACTURING -- 0.9%
Encad* 800 22,000
Neomagic* 4,400 56,100
- ---------------------------------------------------------------------
78,100
- ---------------------------------------------------------------------
PRECISION INSTRUMENTS -- 2.4%
Lecroy* 3,200 96,800
Remec* 5,100 114,750
- ---------------------------------------------------------------------
211,550
- ---------------------------------------------------------------------
SEMI-CONDUCTOR MANUFACTURING -- 5.3%
C.P. Clare* 2,900 37,700
Galileo Technology* 600 17,325
Integrated Circuit Systems* 2,600 74,100
Microchip Technology* 7,000 210,000
Pericom Semiconductor* 4,100 29,981
Vitesse Semiconductor* 3,000 113,250
- ---------------------------------------------------------------------
482,356
- ---------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCTION EQUIPMENT -- 2.3%
Kulicke & Soffa Industries* 1,600 29,800
PRI Automation* 3,700 106,838
Speedfam International* 2,900 76,850
- ---------------------------------------------------------------------
213,488
- ---------------------------------------------------------------------
SEMI-CONDUCTOR TESTING EQUIPMENT -- 1.5%
ADE Corporation* 3,500 61,250
ASE Test Limited* 1,100 71,913
- ---------------------------------------------------------------------
133,163
- ---------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Technology & Communications Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Market
Description Shares Value
- ---------------------------------------------------------------------
<S> <C> <C>
SOFTWARE-CLIENT/SERVER -- 5.4%
Citrix Systems* 4,900 $ 372,400
Documentum* 2,500 105,313
Smallworldwide ADR* 800 17,500
- ---------------------------------------------------------------------
495,213
- ---------------------------------------------------------------------
SOFTWARE-DESKTOP -- 0.6%
Cybermedia* 3,600 54,225
- ---------------------------------------------------------------------
54,225
- ---------------------------------------------------------------------
SOFTWARE-MANUFACTURING -- 3.6%
Simulation Sciences* 3,300 52,800
Technomatix Technologies* 8,200 276,750
- ---------------------------------------------------------------------
329,550
- ---------------------------------------------------------------------
SOFTWARE-OTHER -- 0.5%
JDA Software Group* 400 14,000
Lernout & Hauspie* 600 27,900
OSHAP Technologies Limited* 400 3,950
- ---------------------------------------------------------------------
45,850
- ---------------------------------------------------------------------
TELECOMMUNICATIONS COMPONENTS -- 3.3%
P-Com* 9,300 160,425
Powerwave Technology* 2,500 42,031
Sawtek* 3,800 100,225
- ---------------------------------------------------------------------
302,681
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- ----------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS EQUIPMENT -- 10.9%
ADC Telecommunications* 100 $ 4,175
Advanced Fibre Communications* 6,300 183,488
Geotel Communications* 800 12,500
Pairgain Technologies* 6,900 133,688
Tekelec* 3,300 100,650
Teledata Communications* 9,000 164,250
Tellabs* 5,800 306,675
World Access* 3,600 85,950
- ----------------------------------------------------------------------
991,376
- ----------------------------------------------------------------------
VOICE/CALL TRANSACTIONS PROCESSING -- 1.3%
Comverse Technology* 600 23,400
Nice Systems Limited ADR* 2,200 92,400
- ----------------------------------------------------------------------
115,800
- ----------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $5,294,682) 4,909,968
- ----------------------------------------------------------------------
Total Common Stocks (Cost $6,980,608) 6,960,249
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT -- 18.9%
Lehman Brothers
5.61%, dated 12/31/97, matures
01/02/98, repurchase price $1,723,343
(collateralized by U.S. Treasury
Note: total market value
$1,771,567)(A) $1,722,811 1,722,811
- ----------------------------------------------------------------------
Total Repurchase Agreement (Cost $1,722,811) 1,722,811
- ----------------------------------------------------------------------
TOTAL INVESTMENTS -- 95.2%
(COST $8,703,419) 8,683,060
- ----------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
ADR -- American Depository Receipt
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
PBHG Select 20 Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Market
Description Shares Value
- --------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 79.4%
CONSUMER -- 7.3%
FUNERAL SERVICES -- 3.2%
Service Corp. International 6,600 $ 243,787
- --------------------------------------------------------------------
243,787
- --------------------------------------------------------------------
MISCELLANEOUS-CONSUMER PRODUCTS -- 4.1%
Cendant* 9,131 313,878
- --------------------------------------------------------------------
313,878
- --------------------------------------------------------------------
TOTAL CONSUMER (COST $515,704) 557,665
- --------------------------------------------------------------------
ENERGY -- 3.6%
SERVICE & EQUIPMENT -- 3.6%
Schlumberger Limited 3,400 273,700
- --------------------------------------------------------------------
273,700
- --------------------------------------------------------------------
TOTAL ENERGY (COST $286,529) 273,700
- --------------------------------------------------------------------
FINANCIAL -- 6.8%
CONSUMER FINANCE -- 3.4%
Associates First Capital 3,600 256,050
- --------------------------------------------------------------------
256,050
- --------------------------------------------------------------------
MORTGAGE RELATED -- 3.4%
MGIC Investment 3,900 259,350
- --------------------------------------------------------------------
259,350
- --------------------------------------------------------------------
TOTAL FINANCIAL (COST $473,344) 515,400
- --------------------------------------------------------------------
HEALTH -- 15.0%
DRUGS/PHARMACEUTICALS -- 4.3%
Lilly (Eli) & Company 4,700 327,237
- --------------------------------------------------------------------
327,237
- --------------------------------------------------------------------
INFORMATION SYSTEMS -- 5.0%
HBO & Company 8,000 384,000
- --------------------------------------------------------------------
384,000
- --------------------------------------------------------------------
MEDICAL EQUIPMENT -- 1.6%
Guidant 1,900 118,275
- --------------------------------------------------------------------
118,275
- --------------------------------------------------------------------
SPECIAL OUTPATIENT FACILITY -- 4.1%
Healthsouth* 11,300 313,575
- --------------------------------------------------------------------
313,575
- --------------------------------------------------------------------
TOTAL HEALTH (COST $1,081,405) 1,143,087
- --------------------------------------------------------------------
SERVICE -- 12.2%
COMMUNICATIONS SERVICES -- 4.9%
WorldCom* 12,300 372,075
- --------------------------------------------------------------------
372,075
- --------------------------------------------------------------------
ENVIRONMENTAL -- 3.3%
USA Waste Services* 6,400 251,200
- --------------------------------------------------------------------
251,200
- --------------------------------------------------------------------
RADIO/TELEVISION -- 4.0%
Clear Channel Communications* 3,900 309,806
- --------------------------------------------------------------------
309,806
- --------------------------------------------------------------------
TOTAL SERVICE (COST $917,104) 933,081
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- ----------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY -- 34.5%
COMPUTER-MANUFACTURING -- 3.4%
Dell Computer* 3,100 $ 260,400
- ----------------------------------------------------------------------
260,400
- ----------------------------------------------------------------------
DATA STORAGE -- 4.1%
EMC* 11,400 312,788
- ----------------------------------------------------------------------
312,788
- ----------------------------------------------------------------------
NETWORKING HARDWARE -- 4.9%
Cisco Systems* 6,650 370,738
- ----------------------------------------------------------------------
370,738
- ----------------------------------------------------------------------
SOFTWARE-ENTERPRISE RESOURCE PLANNING -- 4.4%
PeopleSoft* 8,600 335,400
- ----------------------------------------------------------------------
335,400
- ----------------------------------------------------------------------
SOFTWARE-INTERNET -- 4.0%
America OnLine* 3,400 303,238
- ----------------------------------------------------------------------
303,238
- ----------------------------------------------------------------------
SOFTWARE-SYSTEMS/MAINFRAME -- 4.7%
BMC Software* 5,500 360,937
- ----------------------------------------------------------------------
360,937
- ----------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 9.0%
Lucent Technologies 4,300 343,462
Tellabs* 6,400 338,400
- ----------------------------------------------------------------------
681,862
- ----------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $2,574,191) 2,625,363
- ----------------------------------------------------------------------
Total Common Stocks
(Cost $5,848,277) 6,048,296
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT -- 26.0%
Lehman Brothers
5.61% dated 12/31/97, matures 01/02/98,
repurchase price $1,980,146
(collateralized by U.S. Treasury
Note: total market value
$2,035,555)(A) $1,979,535 1,979,535
- ----------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,979,535) 1,979,535
- ----------------------------------------------------------------------
TOTAL INVESTMENTS -- 105.4%
(COST $7,827,812) 8,027,831
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (5.4%)
Other Assets and Liabilities, Net (411,140)
- ----------------------------------------------------------------------
NET ASSETS
Paid-in-capital (authorized 500 million
shares - $0.001 par value) based on
759,437 outstanding shares of common
stock 7,469,000
Undistributed net investment income 3,212
Accumulated net realized loss on investment (55,540)
Net unrealized appreciation on investments 200,019
- ----------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 7,616,691
- ----------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 10.03
- ----------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
24
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
PBHG PBHG PBHG
Large Cap Small Cap Technology &
Value Value Communications
Portfolio Portfolio Portfolio
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost $1,365,616, $7,548,441 and
$6,980,608 respectively)................................ $1,414,356 $ 7,732,170 $6,960,249
Repurchase agreement, at value (Cost $21,942, $1,392,913
and $1,722,811 respectively)............................ 21,942 1,392,913 1,722,811
Receivable for fund shares sold........................... 33,049 836,404 902,261
Receivable for investments sold........................... 180,403 233,552 2,583
Receivable from Advisor................................... 6,366 4,770 4,592
Organizational costs...................................... 10,693 10,693 9,595
Dividends and interest receivable......................... 1,207 3,169 190
---------- ----------- ----------
Total Assets.............................................. 1,668,016 10,213,671 9,602,281
---------- ----------- ----------
LIABILITIES:
Payable for investment securities purchased............... 102,061 883,514 476,609
Payable for fund shares redeemed.......................... -- -- 117
Accrued expenses.......................................... 5,460 8,695 8,283
---------- ----------- ----------
Total Liabilities......................................... 107,521 892,209 485,009
---------- ----------- ----------
NET ASSETS:
Paid-in-capital (authorized 500 million shares -- $0.001
par value) based on 149,619, 889,288 and 875,916
outstanding shares of common stock, respectively........ 1,521,632 9,088,046 9,219,094
Undistributed net investment income....................... 2,860 7,795 3,003
Accumulated net realized gain (loss) on investments....... (12,737) 41,892 (84,466)
Net unrealized appreciation (depreciation) on
investments............................................. 48,740 183,729 (20,359)
---------- ----------- ----------
Net assets................................................ $1,560,495 $ 9,321,462 $9,117,272
---------- ----------- ----------
---------- ----------- ----------
Net Asset Value, Offering Price and Redemption Price Per
Share................................................... $ 10.43 $ 10.48 $ 10.41
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PBHG PBHG PBHG
PBHG Large Cap Small Cap Technology & PBHG
Growth II Value Value Communications Select 20
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------ ------------ -------------- ------------
05/01/97(1) 10/29/97(1) 10/29/97(1) 05/01/97(1) 09/26/97(1)
to to to to to
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends......................................... $ 1,820 $ 2,301 $ 6,699 $ 56 $ 1,173
Interest.......................................... 27,273 2,054 7,789 12,581 9,671
-------- ------- -------- --------- --------
Total Investment Income......................... 29,093 4,355 14,488 12,637 10,844
-------- ------- -------- --------- --------
Expenses:
Investment Advisory Fees.......................... 22,720 972 5,577 6,824 5,406
Administrative Fees............................... 4,009 224 837 1,204 954
Custodian Fees.................................... 6,918 1,175 1,175 2,883 1,350
Professional Fees................................. 20,231 2,033 2,662 3,731 3,155
Transfer Agent Fees............................... 14,822 3,336 3,337 14,589 3,339
Printing Fees..................................... 16,408 711 923 1,589 1,280
Directors' Fees................................... 26,599 2,672 2,586 5,596 3,266
Registration and Filing Fees...................... 3,031 449 2,681 2,720 2,203
Amortization of Deferred Organizational Costs..... 1,488 389 389 1,487 577
Pricing and Other Fees............................ 333 55 101 246 66
-------- ------- -------- --------- --------
Total Expenses.................................. 116,559 12,016 20,268 40,869 21,596
-------- ------- -------- --------- --------
Waiver of Investment Advisory Fees................ (22,720) (972) (5,577) (6,824) (5,406)
Reimbursement of Other Expenses by Advisor........ (61,764) (9,549) (7,998) (24,411) (8,558)
-------- ------- -------- --------- --------
Net Expenses.................................... 32,075 1,495 6,693 9,634 7,632
-------- ------- -------- --------- --------
NET INVESTMENT INCOME (LOSS)........................ (2,982) 2,860 7,795 3,003 3,212
-------- ------- -------- --------- --------
Net Realized Gain (Loss) from Security
Transactions...................................... (287,267) (12,737) 41,892 (84,466) (55,540)
Net Change in Unrealized Appreciation (Depreciation)
on Investments.................................... 252,838 48,740 183,729 (20,359) 200,019
-------- ------- -------- --------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS....................................... (34,429) 36,003 225,621 (104,825) 144,479
-------- ------- -------- --------- --------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS........................................ ($37,411) $38,863 $233,416 ($101,822) $147,691
-------- ------- -------- --------- --------
-------- ------- -------- --------- --------
</TABLE>
1. Commencement of operations.
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
PBHG
PBHG PBHG PBHG Technology & PBHG
Growth II Large Cap Value Small Cap Value Communications Select 20
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ --------------- --------------- -------------- ------------
05/01/97(1) 10/29/97(1) 10/29/97(1) 05/01/97(1) 09/26/97(1)
to to to to to
12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
------------ --------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT ACTIVITIES:
Net Investment Income (Loss).................. (2,982) 2,860 7,795 3,003 3,212
Net Realized Gain (Loss) from Security
Transactions................................ (287,267) (12,737) 41,892 (84,466) (55,540)
Net Change in Unrealized Appreciation
(Depreciation) on Investments............... 252,838 48,740 183,729 (20,359) 200,019
---------- --------- --------- --------- ---------
Net Increase (Decrease) in Net Assets
Resulting from Operations................... (37,411) 38,863 233,416 (101,822) 147,691
---------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income......................... -- -- -- -- --
Net Realized Gains from Security
Transactions................................ -- -- -- -- --
---------- --------- --------- --------- ---------
Total Distributions........................... -- -- -- -- --
---------- --------- --------- --------- ---------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued................................. 11,463,502 1,583,152 9,214,689 9,461,619 7,464,127
Shares Issued upon Reinvestment of
Distributions............................... -- -- -- -- --
Shares Redeemed............................... (1,206,931) (78,220) (143,343) (259,125) (11,727)
---------- --------- --------- --------- ---------
Increase in Net Assets Derived from
Capital Share Transactions.................. 10,256,571 1,504,932 9,071,346 9,202,494 7,452,400
---------- --------- --------- --------- ---------
Total Increase in Net Assets.................. 10,219,160 1,543,795 9,304,762 9,100,672 7,600,091
---------- --------- --------- --------- ---------
NET ASSETS:
Beginning of Period(2)........................ 16,700 16,700 16,700 16,600 16,600
---------- --------- --------- --------- ---------
End of Period................................. 10,235,860 1,560,495 9,321,462 9,117,272 7,616,691
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
(A)SHARES ISSUED AND REDEEMED:
Shares Issued................................. 1,062,206 155,675 901,727 896,043 758,995
Shares Issued upon Reinvestment of
Distributions............................... -- -- -- -- --
Shares Redeemed............................... (111,711) (7,726) (14,109) (21,787) (1,218)
---------- --------- --------- --------- ---------
Net Increase in Shares Outstanding............ 950,495 147,949 887,618 874,256 757,777
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</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.
27
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the period ended December 31, 1997
For a Share Outstanding Throughout each Period
<TABLE>
<CAPTION>
Net Net
Asset Net Realized and Distributions Distributions Asset
Value Investment Unrealized from Net from Value
Beginning Income Gains or Losses Investment Capital End Total
of Period (Loss) on Securities Income Gains of Period Return**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------
PBHG GROWTH II PORTFOLIO
- -------------------------
1997(1)... $ 10.00 -- $ 0.75 -- -- $ 10.75 7.50%
- ---------------------------------
PBHG LARGE CAP VALUE PORTFOLIO
- ---------------------------------
1997(2)... $ 10.00 $ 0.02 $ 0.41 -- -- $ 10.43 4.30%
- ---------------------------------
PBHG SMALL CAP VALUE PORTFOLIO
- ---------------------------------
1997(2)... $ 10.00 $ 0.01 $ 0.47 -- -- $ 10.48 4.80%
- -----------------------------------------------
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
- -----------------------------------------------
1997(1)... $ 10.00 -- $ 0.41 -- -- $ 10.41 4.10%
- -------------------------
PBHG SELECT 20 PORTFOLIO
- -------------------------
1997(3)... $ 10.00 -- $ 0.03 -- -- $ 10.03 0.30%
<CAPTION>
Ratio
of Net
Ratio Income
Ratio of Expenses (Loss)
Net Ratio of Net to Average to Average
Assets of Expenses Income (Loss) 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>
- -------------------------
PBHG GROWTH II PORTFOLIO
- -------------------------
1997(1)... $10,235,860 1.20%* (0.11)%* 4.38%* (3.29)%* 44.57% $0.0386
- ---------------------------------
PBHG LARGE CAP VALUE PORTFOLIO
- ---------------------------------
1997(2)... $ 1,560,495 1.00%* 1.91 %* 8.04%* (5.13)%* 68.93% $0.0591
- ---------------------------------
PBHG SMALL CAP VALUE PORTFOLIO
- ---------------------------------
1997(2)... $ 9,321,462 1.20%* 1.40 %* 3.63%* (1.03)%* 41.14% $0.0569
- -----------------------------------------------
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
- -----------------------------------------------
1997(1)... $ 9,117,272 1.20%* 0.37 %* 5.09%* (3.52)%* 69.34% $0.0465
- -------------------------
PBHG SELECT 20 PORTFOLIO
- -------------------------
1997(3)... $ 7,616,691 1.20%* 0.51 %* 3.36%* (1.65)%* 18.53% $0.0561
</TABLE>
* Annualized.
** Total returns have not been annualized.
(1) The PBHG Growth II and PBHG Technology & Communications Portfolios commenced
operations on May 1, 1997.
(2) The PBHG Large Cap Value and PBHG Small Cap Value Portfolios commenced
operations on October 29, 1997.
(3) The PBHG Select 20 Portfolio commenced operations on September 26, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997
1. ORGANIZATION
The PBHG Insurance Series Fund, Inc. (the "Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund consists of six Portfolios: the PBHG
Growth II Portfolio (the "Growth II Portfolio"), the PBHG Large Cap Growth
Portfolio (the "Large Cap Growth Portfolio"), the PBHG Small Cap Value Portfolio
(the "Small Cap Value Portfolio"), the PBHG Large Cap Value Portfolio (the
"Large Cap Value Portfolio"), the PBHG Technology & Communications Portfolio
(the Technology & Communications 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 Large Cap Growth Portfolio which
is presented separately. Each Portfolio's prospectus provides a description of
the Portfolio's investment objectives, policies and strategies. The assets of
each 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, the following percentage of outstanding shares of the portfolios were held
by the separate accounts of the number of participating Insurance Companies
listed below:
<TABLE>
<CAPTION>
Percentage of Number of
Portfolio Outstanding Shares Insurance Companies
--------- ------------------ -------------------
<S> <C> <C>
Growth II Portfolio 69%, 22% 2
Large Cap Value Portfolio 80%, 20% 2
Small Cap Value Portfolio 94% 1
Technology &
Communications
Portfolio 82% 1
Select 20 Portfolio* 92% 1
</TABLE>
* This insurance company has committed to maintain its $1 million initial
contribution for the first full year of portfolio operations.
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 or accumulated net realized gain, as appropriate, in
the period that the differences arise.
Accordingly, the following permanent difference as of December 31, 1997,
attributable to a net operating loss which for tax purposes is not available to
offset future income, has been reclassified to the following account:
Paid-in-Capital
---------------
Growth II Portfolio............................ 2,982
This reclassification has no effect on net assets or net asset value per share.
FEDERAL INCOME TAXES -- It is each 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 each 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.
29
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Portfolios 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 0.85% of the average daily
net assets of the Growth II, Technology & Communications and Select 20
Portfolios' average daily net assets, 1.00% of the Small Cap Value Portfolio's
average daily net assets, and 0.65% of the Large Cap Value Portfolio's average
daily net assets. In the interest of limiting expenses of the Portfolios, the
Adviser has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). The Adviser has agreed to waive or limit its fees and to
assume other expenses of each 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 1.20% of the average daily net assets of the Growth
II, Small Cap Value, Technology & Communications and Select 20 Portfolios and to
not more than 1.00% of the average daily net assets of the Large Cap Value
Portfolio, respectively. Reimbursement by each 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 each
Portfolio to exceed the total operating expense percentages described above.
Consequently, no reimbursement by the Portfolio will be made unless: (i) a
Portfolio's assets exceed $75 million; (ii) a Portfolio's total annual expense
ratio is less than that listed above, 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 Advisor subject to reimbursement were as follows:
Growth II Portfolio $84,484
Large Cap Value Portfolio $10,521
Small Cap Value Portfolio $13,575
Technology & Communications Portfolio $31,235
Select 20 Portfolio $13,964
Pilgrim Baxter Value Investors, Inc. (formerly Newbold's Asset Management,
Inc.), a wholly-owned subsidiary of the Adviser serves as the sub-advisor to the
Large Cap Value Portfolio and the Small Cap Value Portfolio. For its services
provided pursuant to its Investment Sub-Advisory Agreement with the Adviser and
the Fund, Pilgrim Baxter Value Investors receives a fee from the Adviser at an
annual rate of 0.40%, and 0.65%, respectively, of the average daily net assets
of the Large Cap Value Portfolio and Small Cap Value Portfolio. Pilgrim Baxter
Value Investors, Inc. receives no fees directly from the Large Cap Value
Portfolio or the Small Cap Value Portfolio.
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 Advisor, 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 those 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 each Portfolios for the period from its
commencement of operations through December 31, 1997 were as follows:
Purchases Sales
---------- ---------
Growth II Portfolio 10,778,502 1,622,537
Large Cap Value Portfolio 1,828,153 449,800
Small Cap Value Portfolio 8,714,717 1,208,169
Technology & Communications Portfolio 7,880,992 815,918
Select 20 Portfolio 6,314,267 410,450
The aggregate gross unrealized appreciation and depreciation of securities held
by the Portfolios and the total cost of securities for Federal income tax
purposes at December 31, 1997 are as follows:
Net
Unrealized
Unrealized Unrealized Appreciation/
Appreciation Depreciation (Depreciation)
------------ ------------ --------------
Growth II Portfolio 696,088 443,250 252,838
Large Cap Value
Portfolio 57,436 8,696 48,740
Small Cap Value
Portfolio 387,044 203,315 183,729
Technology &
Communications
Portfolio 466,468 486,827 (20,359)
Select 20 Portfolio 302,265 102,246 200,019
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1997
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.
The following Portfolios had capital loss carryforwards at December 31, 1997,
that can be used to offset future capital gains.
Capital Loss Carryforward
Expires 12/31/2005
-------------------------
Growth II Portfolio.................... 267,017
Large Cap Value Portfolio.............. 12,083
Technology & Communications
Portfolio............................ 21,241
Select 20 Portfolio.................... 55,142
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.
- ----------------------------------------------------------------
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.
31
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF PBHG INSURANCE SERIES FUND, INC.:
We have audited the statements of net assets of the PBHG Growth II and PBHG
Select 20 Portfolios, and the statements of assets and liabilities, including
the schedules of investments, of the PBHG Large Cap Value, PBHG Small Cap Value,
and PBHG Technology & Communications Portfolios of PBHG Insurance Series Fund,
Inc. as of December 31, 1997, and the related statements of operations,
statements of changes in net assets and financial highlights for the period May
1, 1997 (commencement of operations) to December 31, 1997 for the PBHG Growth II
and PBHG Technology & Communications Portfolios, September 28, 1997
(commencement of operations) to December 31, 1997 for the PBHG Select 20
Portfolio, and October 29, 1997 (commencement of operations) to December 31,
1997 for the PBHG Large Cap Value and PBHG Small Cap Value Portfolios. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
PBHG Growth II, PBHG Large Cap Value, PBHG Small Cap Value, PBHG Technology &
Communications and PBHG Select 20 Portfolios of PBHG Insurance Series Fund, Inc.
as of December 31, 1997, and the results of their operations, changes in their
net assets and their financial highlights for period May 1, 1997 (commencement
of operations) to December 31, 1997 for the PBHG Growth II and PBHG Technology &
Communications Portfolios, September 28, 1997 (commencement of operations) to
December 31, 1997 for the PBHG Select 20 Portfolio, and October 29, 1997
(commencement of operations) to December 31, 1997 for the PBHG Large Cap Value
and PBHG Small Cap Value Portfolios in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1998
32
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
Investment Adviser: Distributor:
Pilgrim Baxter & Associates, Ltd. SEI Investments Distribution Co.
