[LOGO]
PBHG Insurance Series Fund, Inc.
- -------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
Semi-Annual Report
June 30, 1998
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Large Cap Growth Portfolio reached
the midway point of the current fiscal year on June 30, 1998, generating a total
return of 19.37% since January 1, 1998. Over this same time period, the Russell
1000 Growth Index and S&P 500 Index produced total returns of 20.38% and 17.74%,
respectively. On a trailing twelve months basis, the Portfolio has advanced
30.89% compared to the S&P 500 Index advance of 30.21%. The common theme driving
this strong performance was the reporting of better than generally expected
financial results by many of our Portfolio holdings. The subsequent upward
adjustments to future estimates of earnings and growth rates by Wall Street
analysts drove share prices and price/earnings (P/E) multiples higher. This is
the essence of bottom-up growth stock or "earnings momentum" investing. The key
to success with this investment style is in individual stock selection -- you
can't expect to bat 1.000, but you strive to be well above .500.
A review of performance by industry sector shows that technology was by far our
biggest contributor, accounting for roughly 52% of the overall year-to-date
return. Within this group, the biggest individual contributors to Portfolio
performance were America Online (+132%), Dell Computer (+121%), and Lucent
Technologies (+108%). The second biggest sector contribution came from the
healthcare sector, which accounted for about 22% of the Portfolio's total
return. In this sector, the biggest contributors were HBO & Co. (+47%) and
Health Management Associates (+32%). The services sector was a close third in
terms of positive contribution, accounting for 19% of our total return in the
first six months of 1998. The biggest individual contributors here were WorldCom
(+60%) and Clear Channel Communications (+37%).
Our only negative return sector over the period was energy. Fortunately, the
impact has been negligible, since we have steadily reduced our exposure to this
area such that by June 30, 1998, our total exposure was less than 1%. By far our
worst individual performer in the period was Cendant Corp., where a share price
decline of 49% reduced overall Portfolio performance by nearly 1.2%. Cendant
management claimed to suddenly discover "accounting irregularities" at a
recently acquired business. Despite facing a 49% negative hit by selling the
stock around the time of the announcement, we felt this was the most prudent
course of action given the uncertain outcome of additional independent audits of
Cendant's accounting practices. Subsequent to June 30, 1998, Cendant management
reported that the accounting audit had uncovered more irregularities, causing
the stock to decline further, and it now trades well below our exit price of
$20.25. Other poorly performing stocks in the period included supply chain
management software maker Manugistics (-56%), environmental services provider
NewPark Resources (-39%), both of which were sold because of deteriorating
fundamental business trends.
The first half of 1998 has been anything but dull. Many macro events impacted
equity markets causing investor sentiment to vacillate dramatically. Lingering
concerns about the Asian financial crisis pressured the markets in January only
to gradually dissipate over the next several months until May, when a number of
Asian economies appeared to take a turn for the worse. In June investor
sentiment shifted to positive again, focusing on the inflation-dampening impact
of the Asian crisis on the U.S. economy. Other developments influencing
investors thus far in 1998 included: the steady decline in world oil prices, the
emergence of the sub-$1000 PC; the announcements in March (all within a week of
each other) from technology bellweathers Intel, Compaq, and Motorola that each
would miss 1st quarter estimates; the Dow Jones Industrial Average going above
9000; and the continued wave of high-profile mergers and acquisitions, topped
off
1
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
by the record-breaking $83 billion merger of Citicorp and Travelers. All
this and the year is only half over!
As we enter the second half of 1998, we remain constructive on the large cap
portion of the equity market amid numerous macro influences, both positive and
negative. Among the negatives, valuations are at historical highs which
heightens short-term risk. In this regard, however, we take some comfort in a
very supportive interest rate environment and an economy that keeps humming
along. The other key potential negative is the ultimate influence on the U.S.
economy of the collapsed Asian economies. We have structured the Portfolio such
that our holdings have negligible financial exposure in the region and, in some
cases, may actually benefit from the availability of cheaper goods and/or labor.
On the positive side, investors continue to buy U.S. equity mutual funds and
foreign investors are shifting their capital increasingly to the U.S., as they
look for a safer haven following the damage incurred in many emerging markets.
This represents additional "buying power" that should help sustain stock
valuations. We also believe that a modest slowdown in U.S. economic growth
caused by the Asian situation would not necessarily be a bad thing for U.S.
investors. Specifically, it should help keep interest rates and inflation in
check, which is not only positive for investors but also for those companies
(like the ones we strive to own) that are investing in their businesses in order
to take advantage of growth opportunities.
Sincerely,
/s/ James D. McCall
- ------------------------
James D. McCall, CFA
Portfolio Manager
2
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
- --------------------------------------------------------------------------------
TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 1998(1)
- --------------------------------------------------------------------------------
Aggregate(2)
--------------------- Annualized
Six One Year Inception to
Months Return Date(3)
- --------------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio 19.37% 30.89% 34.31%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the
PBHG Large Cap Growth Portfolio, versus the Russell 1000 Growth Index,
and the Lipper Growth Funds Average
In the printed version there appears a line graph with the following
plot points depicted:
PBHG Large Cap Russell 1000 Lipper Growth
Growth Portfolio Growth Index(4) Funds Average(5)
4/97 10,000 10,000 10,000
6/97 10,780 11,151 11,153
9/97 11,961 11,989 12,324
12/97 11,821 12,171 12,173
3/98 13,511 14,015 13,741
6/98 14,112 14,650 13,991
(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 returns have not been annualized.
(3) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
(4) The Russell 1000 Growth Index is an unmanaged index comprised of those
securities in the Russell 1000 Index with a greater-than-average growth
orientation. The Index reflects the reinvestment of income dividends and capital
gains distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing.
(5) 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 assets value of the funds in the category with all
capital gains distributions and income dividends reinvested.
3
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF NET ASSETS
As of June 30, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Market
Value
Description Shares (000)
- ----------------------------------------------------------------------
COMMON STOCK -- 84.1%
CONSUMER -- 9.9%
ENTERTAINMENT/MOVIES -- 1.8%
Carnival Corporation, Cl A 2,000 $ 79
Premier Parks* 1,200 80
- ----------------------------------------------------------------------
159
- ----------------------------------------------------------------------
FUNERAL HOME/SERVICES -- 0.9%
Service Corporation International 1,800 77
- ----------------------------------------------------------------------
77
- ----------------------------------------------------------------------
HOTELS/RESORTS -- 1.0%
Marriot International, Cl A 2,600 84
- ----------------------------------------------------------------------
84
- ----------------------------------------------------------------------
RETAIL-APPAREL -- 2.4%
Jones Apparel Group* 5,800 212
- ----------------------------------------------------------------------
212
- ----------------------------------------------------------------------
RETAIL-HOME FURNISHINGS -- 0.3%
Ethan Allen Interiors 600 30
- ----------------------------------------------------------------------
30
- ----------------------------------------------------------------------
RETAIL-OFFICE PRODUCTS/SUPPLIES -- 2.5%
Staples* 7,500 217
- ----------------------------------------------------------------------
217
- ----------------------------------------------------------------------
RETAIL-SPECIALTY -- 1.0%
Borders Group* 2,400 89
- ----------------------------------------------------------------------
89
- ----------------------------------------------------------------------
TOTAL CONSUMER (COST $685) 868
- ----------------------------------------------------------------------
ENERGY -- 0.8%
CONTRACT DRILLING -- 0.5%
Santa Fe International 600 18
Transocean Offshore 600 27
- ----------------------------------------------------------------------
45
- ----------------------------------------------------------------------
DRILL PIPE & TUBULARS -- 0.3%
EVI Weatherford* 700 26
- ----------------------------------------------------------------------
26
- ----------------------------------------------------------------------
TOTAL ENERGY (COST $103) 71
- ----------------------------------------------------------------------
FINANCIAL -- 6.1%
CONSUMER FINANCE -- 3.4%
Associates First Capital, Cl A 2,100 161
Newcourt Credit Group 2,900 143
- ----------------------------------------------------------------------
304
- ----------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICE -- 1.0%
Heller Financial* 2,900 87
- ----------------------------------------------------------------------
87
- ----------------------------------------------------------------------
MORTGAGE RELATED -- 1.7%
MGIC Investment 2,600 148
- ----------------------------------------------------------------------
148
- ----------------------------------------------------------------------
TOTAL FINANCIAL (COST $492) 539
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Market
Value
Description Shares (000)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
HEALTH -- 17.2%
CONTRACT RESEARCH -- 1.8%
Quintiles Transnational* 3,300 $ 162
- ----------------------------------------------------------------------
162
- ----------------------------------------------------------------------
DRUGS/PHARMACEUTICALS -- 5.0%
Merck & Company 700 94
Pfizer 1,400 153
Schering Plough 900 83
Watson Pharmaceuticals* 2,500 117
- ----------------------------------------------------------------------
447
- ----------------------------------------------------------------------
HOSPITAL -- 2.6%
Health Management Associates, Cl A* 6,800 227
- ----------------------------------------------------------------------
227
- ----------------------------------------------------------------------
INFORMATION SYSTEMS -- 2.1%
HBO & Company 5,200 183
- ----------------------------------------------------------------------
183
- ----------------------------------------------------------------------
MEDICAL DEVICES -- 1.7%
Guidant 2,100 150
- ----------------------------------------------------------------------
150
- ----------------------------------------------------------------------
PHARMACEUTICAL SERVICES -- 2.0%
Omnicare 4,600 175
- ----------------------------------------------------------------------
175
- ----------------------------------------------------------------------
SPECIAL OUTPATIENT FACILITY -- 2.0%
HealthSouth* 6,500 173
- ----------------------------------------------------------------------
173
- ----------------------------------------------------------------------
TOTAL HEALTH (COST $1,234) 1,517
- ----------------------------------------------------------------------
INDUSTRIAL/GENERAL MANUFACTURING -- 4.1%
AUTO-RELATED -- 2.4%
Harley-Davidson 5,400 209
- ----------------------------------------------------------------------
209
- ----------------------------------------------------------------------
MULTI-INDUSTRY -- 1.7%
Danaher 7,622 154
- ----------------------------------------------------------------------
154
- ----------------------------------------------------------------------
TOTAL INDUSTRIAL/GENERAL MANUFACTURING
(COST $280) 363
- ----------------------------------------------------------------------
SERVICE -- 22.8%
COMMERCIAL SERVICES -- 1.5%
Central Parking 2,300 107
DST Systems* 456 26
- ----------------------------------------------------------------------
133
- ----------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 2.8%
QWest Communications International* 1,900 66
Worldcom* 3,700 179
- ----------------------------------------------------------------------
245
- ----------------------------------------------------------------------
EDUCATIONAL SERVICES -- 2.4%
Apollo Group, Cl A* 2,100 69
CBT Group PLC ADR* 2,700 145
- ----------------------------------------------------------------------
214
- ----------------------------------------------------------------------
</TABLE>
4
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Market
Value
Description Shares (000)
- ----------------------------------------------------------------------
COMMON STOCK -- CONTINUED
ELECTRONIC COMMERCE -- 0.9%
Sterling Commerce* 1,700 $ 82
- ----------------------------------------------------------------------
82
- ----------------------------------------------------------------------
ENVIRONMENTAL -- 2.8%
Allied Waste Industries* 2,000 48
USA Waste Services* 4,000 198
- ----------------------------------------------------------------------
246
- ----------------------------------------------------------------------
INFORMATION/COMPUTER SERVICES -- 0.5%
Gartner Group, Cl A* 1,300 46
- ----------------------------------------------------------------------
46
- ----------------------------------------------------------------------
RADIO/TELEVISION -- 5.1%
Chancellor Media Corporation* 2,000 99
Clear Channel Communications* 1,574 172
Jacor Communications* 1,500 89
Univision Communications* 2,400 89
- ----------------------------------------------------------------------
449
- ----------------------------------------------------------------------
SYSTEMS INTEGRATOR -- 4.6%
Cambridge Technology* 2,800 153
Computer Horizons* 2,200 82
Keane* 3,000 168
- ----------------------------------------------------------------------
403
- ----------------------------------------------------------------------
TRANSACTIONS PROCESSING -- 2.2%
Fiserv* 2,100 89
Saville Systems Ireland ADR* 2,000 100
- ----------------------------------------------------------------------
189
- ----------------------------------------------------------------------
TOTAL SERVICE (COST $1,592) 2,007
- ----------------------------------------------------------------------
TECHNOLOGY -- 22.3%
COMPUTER-MANUFACTURING -- 2.5%
Dell Computer* 2,400 223
- ----------------------------------------------------------------------
223
- ----------------------------------------------------------------------
DATA STORAGE -- 1.4%
EMC* 2,800 125
- ----------------------------------------------------------------------
125
- ----------------------------------------------------------------------
NETWORKING HARDWARE -- 2.3%
Ascend Communications* 1,000 50
Cisco Systems* 1,650 152
- ----------------------------------------------------------------------
202
- ----------------------------------------------------------------------
NETWORKING SOFTWARE -- 1.0%
Networks Associates* 1,800 86
- ----------------------------------------------------------------------
86
- ----------------------------------------------------------------------
SEMI-CONDUCTOR MANUFACTURING -- 1.3%
Linear Technology 1,900 115
- ----------------------------------------------------------------------
115
- ----------------------------------------------------------------------
SOFTWARE-CLIENT/SERVER -- 1.5%
Compuware* 2,500 128
- ----------------------------------------------------------------------
128
- ----------------------------------------------------------------------
SOFTWARE-DESKTOP -- 1.5%
Microsoft* 12,000 130
- ----------------------------------------------------------------------
130
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
<S> <C> <C>
Shares/
Face Market
Amount Value
Description (000) (000)
- ----------------------------------------------------------------------
COMMON STOCK -- CONCLUDED
SOFTWARE-ENTERPRISE RESOURCE PLANNING -- 3.2%
Edwards J.D. & Company* 3,200 $ 137
PeopleSoft* 3,000 141
- ----------------------------------------------------------------------
278
- ----------------------------------------------------------------------
SOFTWARE-INTERNET -- 2.9%
America Online* 2,400 254
- ----------------------------------------------------------------------
254
- ----------------------------------------------------------------------
SOFTWARE-SYSTEM/MAINFRAME -- 1.5%
BMC Software* 2,600 135
- ----------------------------------------------------------------------
135
- ----------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 3.2%
Lucent Technologies 2,000 166
Tellabs* 1,600 115
- ----------------------------------------------------------------------
281
- ----------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $1,305) 1,957
- ----------------------------------------------------------------------
TRANSPORTATION -- 0.9%
SURFACE -- 0.9%
Coach USA* 1,800 82
- ----------------------------------------------------------------------
TOTAL TRANSPORTATION (COST $80) 82
- ----------------------------------------------------------------------
Total Common Stock
(Cost $5,771) 7,404
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT -- 17.0%
Morgan Treasury
5.72%, dated 6/30/98, matures 7/01/98,
repurchase price $1,493,950 (Collateralized
by U.S. Treasury Note total market value
$1,531,058)(A) $1,494 1,494
- ----------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,494) 1,494
- ----------------------------------------------------------------------
TOTAL INVESTMENTS -- 101.1%
(COST $7,265) 8,898
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (1.1%)
Other Assets and Liabilities, Net (100)
- ----------------------------------------------------------------------
NET ASSETS
Paid-in capital (authorized 500 million shares
- $0.001 par value) based on 623,396
outstanding shares of common stock 7,389
Undistributed net investment loss (11)
Accumulated net realized loss on investments (213)
Net unrealized appreciation on investments 1,633
- ----------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% 8,798
- ----------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 14.11
- ----------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
ADR -- American Depository Receipt
Cl -- Class
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF OPERATIONS
For the six months ended June 30, 1998 (000) (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................. $ 5
Interest.................................................. 21
------
Total Investment Income................................. 26
------
EXPENSES:
Investment Advisory Fees.................................. 25
Administrative Fees....................................... 5
Custodian Fees............................................ 2
Professional Fees......................................... 4
Transfer Agent Fees....................................... 12
Printing Fees............................................. 2
Directors' Fees........................................... 2
Amortization of Deferred Organizational Costs............. 1
Insurance and Other Fees.................................. 1
------
Total Expenses.......................................... 54
------
Waiver of Investment Advisory Fees........................ (17)
------
NET INVESTMENT LOSS......................................... (11)
------
Net Realized Loss from Security Transactions.............. (152)
Net Change in Unrealized Appreciation on Investments...... 1,401
------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 1,249
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $1,238
------
------
</TABLE>
Amounts designated as "-" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
STATEMENT OF CHANGES IN NET ASSETS
For the six month period ended June 30, 1998 (unaudited) and the period ended
December 31, 1997
<TABLE>
<CAPTION>
01/01/98 05/01/97(1)
TO TO
06/30/98 12/31/97
-------- -----------
<S> <C> <C>
INVESTMENT ACTIVITIES:
Net Investment Loss....................................... (11) --
Net Realized Loss from Security Transactions.............. (152) (61)
Net Change in Unrealized Appreciation on Investments...... 1,401 232
------ ------
Net Increase in Net Assets Resulting from Operations...... 1,238 171
------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income..................................... -- --
Net Realized Gains from Security Transactions............. -- --
------ ------
Total Distributions....................................... -- --
------ ------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued............................................. 6,535 6,225
Shares Issued upon Reinvestment of Distributions.......... -- --
Shares Redeemed........................................... (3,891) (1,497)
------ ------
Increase in Net Assets Derived from Capital Share
Transactions............................................ 2,644 4,728
------ ------
Total Increase in Net Assets............................ 3,882 4,899
------ ------
NET ASSETS:
Beginning of Period....................................... 4,916 17
------ ------
End of Period............................................. 8,798 4,916
------ ------
------ ------
(A) SHARES ISSUED AND REDEEMED:
Shares Issued............................................. 502 547
Shares Issued upon Reinvestment of Distributions.......... -- --
Shares Redeemed........................................... (295) (133)
------ ------
Net Increase in Shares Outstanding........................ 207 414
------ ------
------ ------
</TABLE>
1. The PBHG Large Cap Growth Portfolio commenced on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
FINANCIAL HIGHLIGHTS
For the period ended June 30, 1998 (Unaudited)
For a Share Outstanding Throughout each Fiscal Year or period
<TABLE>
<CAPTION>
Net Net
Asset Realized and Distributions Distributions Asset
Value Net Unrealized from Net from Value
Beginning Investment Gains or Losses Investment Capital End Total
of Period loss on Securities Income Gains of Period Return**
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
1998.......................... $11.82 $ (0.02) $2.31 -- -- $14.11 19.37%
1997(1)....................... $10.00 -- 1.82 -- -- $11.82 18.20%
<CAPTION>
Ratio Ratio of
of Expenses Net Income
Net Ratio Ratio of to Average to Average
Assets of Expenses Net Income Net Assets Net Assets Portfolio
End to Average to Average (Excluding (Excluding Turnover
of Period Net Assets Net Assets Waivers) Waivers) Rate
<S> <C> <C> <C> <C> <C> <C>
1998.......................... $8,798 1.10%* (0.32)%* 1.61%* (0.83)%* 28.48%
1997(1)....................... 4,916 1.10%* 0.00%* 5.21%* (4.11)%* 37.42%
</TABLE>
* Annualized.
** Total return has not been annualized.
(1) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1998
1. ORGANIZATION
The PBHG Large Cap Growth Portfolio (the "Portfolio") is a series of the PBHG
Insurance Series Fund, Inc. (the "Fund"), a Maryland corporation. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund consists of the Portfolio and six
others: the PBHG Growth II Portfolio (the "Growth II Portfolio"), the PBHG
Technology & Communications Portfolio (the "Technology & Communications
Portfolio"), the PBHG Small Cap Value Portfolio (the "Small Cap Value
Portfolio"), the PBHG Large Cap Value Portfolio (the "Large Cap Value
Portfolio"), the PBHG Select 20 Portfolio (the "Select 20 Portfolio") and the
PBHG Mid-Cap Value Portfolio (the "Mid-Cap Value Portfolio") (each a "Portfolio"
and, collectively, the "Portfolios"). Each Portfolio is classified as a
diversified management investment company, with the exception of the Select 20
Portfolio which is classified as a nondiversified management investment company.
The financial statements presented herein do not include the Growth II
Portfolio, the Technology & Communications Portfolio, the Small Cap Value
Portfolio, the Large Cap Value Portfolio, and the Select 20 Portfolio, which are
presented separately, or the Mid-Cap Value Portfolio, which has not yet
commenced operations. The Portfolio's prospectus provides a description of the
Portfolio's investment objectives, policies and strategies. The assets of the
Portfolio are segregated, and a shareholder's interest is limited to the
Portfolio in which shares are held. The Fund is intended to be a funding vehicle
for variable annuity contracts and variable life insurance policies to be
offered by the separate accounts of life insurance companies. At June 30, 1998,
99% of the outstanding shares of the Portfolio were held by the separate
accounts of one participating Insurance Company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Portfolios.
SECURITY VALUATION -- Investment securities of the Portfolios that are listed on
a securities exchange, and for which market quotations are readily available,
are valued at the last quoted sales price on each business day. If there is no
such reported sale, these securities and unlisted securities for which market
quotations are not readily available, are valued at the mean between the most
recent bid price and asked price.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Dividend income and distributions to shareholders are recognized on the
ex-dividend date; interest income is recognized on the accrual basis. Costs used
in determining realized capital gains and losses on the sale of investment
securities are those of the specific securities sold adjusted for the accretion
and amortization of acquisition discounts and premiums during the respective
holding periods.
DIVIDENDS -- Dividends from net investment income of each Portfolio are declared
annually, if available. Distributions of net realized capital gains, of each
Portfolio, are generally made to shareholders annually, if available. Dividends
from net investment income and distributions from net realized capital gains are
determined in accordance with U.S. Federal income tax regulations, which may
differ from those amounts determined under generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, they are charged or
credited to paid-in-capital, net investment income or accumulated net realized
gain, as appropriate, in the period that the differences arise.
FEDERAL INCOME TAXES -- It is the Portfolio's intention to continue to qualify
as a regulated investment company for Federal income tax purposes and to
distribute all of its taxable income and net capital gains. Accordingly, no
provision has been made for Federal income taxes.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day by dividing the total value of the Portfolio's assets, less
liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by the custodian bank until the respective agreements
mature. Provisions of the repurchase agreements and procedures adopted by
Pilgrim Baxter & Associates, Ltd. (the "Adviser") ensure that the market value
of the collateral including accrued interest thereon, is sufficient in the event
of default by the counterparty. If the counterparty defaults and the value of
the collateral declines, or if the counterparty enters into insolvency
proceedings, realization of the collateral by a Portfolio may be delayed or
limited.
OTHER -- Expenses that are directly related to one of the Portfolios are charged
directly to that Portfolio. Other operating expenses are prorated to the
Portfolios on the basis of relative net assets.
All organizational costs incurred in connection with the start up of the Fund
have been equally allocated to each Portfolio, except the Mid-Cap Value
Portfolio and are being amortized on a straight line basis over a period of
sixty months. In the event that any of the initial shares of each Portfolio are
redeemed by any holder thereof during the period that each Portfolio is
amortizing its organizational costs, the redemption proceeds payable to the
holder thereof will be reduced by the unamortized organizational costs in the
same ratio as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund and the Adviser are parties to an Investment Advisory Agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser is
paid a monthly fee at an annual rate of 0.75% of the average daily net assets of
9
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
the Large Cap Growth Portfolio. In the interest of limiting expenses of the
Portfolios, the Adviser has entered into an expense limitation agreement with
the Fund ("Expense Limitation Agreement"). With respect to the Large Cap Growth
Portfolio, the Adviser has agreed to waive or limit its fees and to assume other
expenses of the Portfolio to the extent necessary to limit the total annual
operating expenses (expressed as a percentage of the Portfolio's average daily
net assets) to 1.10%. Reimbursement by the Portfolio of the advisory fees
waived or limited and other expenses paid by the Adviser pursuant to the Expense
Limitation Agreement during any of the two previous fiscal years may be made at
a later date when the Portfolio has reached a sufficient asset size to permit
reimbursement to be made without causing the total annual expense ratio of the
Large Cap Growth Portfolio to exceed 1.10%. Consequently, no reimbursement by
the Portfolio will be made unless: (i) the Portfolio's net assets exceed $75
million; (ii) the Portfolio's total annual expense ratio is less than 1.10%, and
(iii) the payment of such reimbursement is approved by the Board of Directors on
a quarterly basis. At June 30, 1998, the amount of advisory fee waiver and
reimbursement of third party expenses by the Adviser subject to possible
reimbursement was $69,272.
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 Investments
Mutual Funds Services (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 paid the Sub-Administrator a fee at the annual rate of 0.07% of
the average daily net assets of each Portfolio with respect to the first $2.5
billion of the total average daily net assets of (i) the Fund, and (ii) The PBHG
Funds, Inc., another family of funds managed by the Adviser, and a fee at the
annual rate of 0.025% of the average daily net assets of each Portfolio with
respect to the total daily net assets of (i) the Fund and (ii) The PBHG Funds,
Inc. in excess of $2.5 billion. Effective May 1, 1998 the Administrator will pay
the Sub-Administrator a fee equal to the greater of $35,000 per Portfolio and
$5,000 per additional class of shares or at the annual rate of 0.040% with
respect to the first $2.5 billion of the average daily net assets of (i) the
Fund, (ii) PBHG Funds, Inc., and (iii) PBHG Advisor Funds, Inc., other fund
families managed by the Adviser (collectively known as the "PBHG Fund Family"),
0.025% of the next $7.5 billion of the average daily net assets of each
Portfolio in the PBHG Fund Family, and 0.020% of the average daily net assets of
each Portfolio in the PBHG Fund Family in excess of $10 billion.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent of
the Fund. First Union Bank, N.A. serves as the custodian for the Fund.
Effective January 2, 1998 the Fund entered into a shareholder servicing
agreement with PBHG Fund Services to provide shareholder support and other
shareholder account-related services. PBHG Fund Services has, in turn,
contracted with UAM Shareholder Service Center, Inc. to assist in the provision
of these services.
Certain officers and directors of the Fund who are or were officers of the
Adviser, Administrator, Sub-Administrator and the Distributor received no
compensation from the Fund.
4. INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments, for the Large Cap Growth Portfolio for the six
months ended June 30, 1998, amounted to $3,278,819 and $1,713,347, respectively.
The aggregate gross unrealized appreciation and depreciation of securities held
by the Large Cap Growth Portfolio for federal income tax purposes at June 30,
1998, amounted to $1,724,394 and $91,204, respectively. The total cost of
securities and the net realized gains or losses on securities sold for Federal
income tax purposes at June 30, 1998 was not materially different from amounts
reported for financial reporting purposes. At December 31, 1997 the Large Cap
Growth Portfolio had a $60,546 capital loss carryforward, expiring in December
2005, which can be used to offset future capital gains.
5. LINE OF CREDIT
Each Portfolio may borrow, an amount up to its prospectus defined limitations,
from a committed line of credit available to (i) the Fund, (ii) The PBHG Funds,
Inc. and (iii) PBHG Advisor Funds, Inc. The line of credit will bear interest at
the Federal Funds Rate plus 0.40%. The Portfolio had no outstanding borrowing at
June 30, 1998, or at any time during the six months ended June 30, 1998.
10
<PAGE>
[This page intentionally left blank]
<PAGE>
[LOGO]
PBHG Insurance Series Fund, Inc.
Investment Adviser
Pilgrim Baxter & Associates, Ltd.
Distributor
SEI Investments Distribution, Co.
