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PBHG Insurance Series Fund, Inc.
--------------------------------
PBHG Growth II Portfolio
PBHG Technology & Communications Portfolio
PBHG Select 20 Portfolio
PBHG Large Cap Value Portfolio
PBHG Small Cap Value Portfolio
Annual Report
December 31, 1998
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PBHG Insurance Series Fund, Inc.
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PBHG Growth II Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. - PBHG Growth II Portfolio returned 8.19%
for the fiscal year ended December 31, 1998. This compares with the Russell
Midcap Growth Index return of 17.87%. The major factors that led to the
under-performance included a modest overweight in energy stocks relative to the
benchmark throughout the year, as well as the continued strength of market
cap-weighted indexes relative to equally weighted benchmarks. As an example of
the latter, an equally weighted return for the Russell Midcap Growth Index was
9.0%, about half of the market cap weighted return. This same phenomenon
occurred among large cap stocks as well. According to a January 7, 1999 research
report by Morgan Stanley Dean Witter analyzing the performance of the S&P 500
Index during 1998, "5 stocks in the index contributed 25% of the performance of
the index and 15 stocks accounted for half of the performance. . . an
equal-weighted version of the S&P 500 would have returned 13.5% in 1998 - less
than half the return of the market-cap weighted version."
As 1998 came to an end, many of the problems that had appeared so threatening
earlier in the year lost their intensity. Investors became less concerned with
the "Asian contagion" and the threat of global economic problems. Thanks to the
Federal Reserve's three rate cuts, strong employment data and an ever-spending
consumer, the fear of a U.S. recession subsided. The year ended on a positive
note, with the Conference Board reporting that the index of leading economic
indicators rose 0.6% in November, the largest one-month rise in almost two
years. During the earlier part of the year, the market often reacted strongly
and negatively to major news stories. During the latter part of the year, the
markets seemed to focus on good news and ignore bad news. Amazingly, the markets
seemed to shrug off the bombing of Iraq and the impeachment of the President.
Persistent rumors of the possible resignation of Treasury Secretary Robert Rubin
and the announcement of several large mergers/acquisitions appeared to elicit
more response from the market.
Among the different sectors of the market, by far the weakest were the energy
and finance sectors. Energy was affected by weak commodity prices for oil and
gas as the international economic slowdown put a drag on demand. Financials were
hurt by a global liquidity scare that affected companies that rely on asset
securitizations for ongoing access to capital. Technology was strong throughout
the year, with software and services performing well during the first three
quarters of 1998, followed by a rapid rebound in hardware companies in the
fourth quarter, including semiconductors, peripherals and semiconductor capital
equipment.
Looking ahead, we are optimistic that the market will more fairly reward
companies that are able to achieve analysts' earnings expectations. It seems to
us that in an economic environment characterized by a more difficult and slower
setting for earnings, smaller, niche-oriented companies should be more sought
after by investors. Certainly relative valuations for smaller companies continue
to look attractive, especially for the most rapidly growing type of mid-sized
companies that make up the Portfolio.
In our opinion, investor confidence in small- and mid-cap growth stocks needs
the backdrop of a strong market. A strong market needs reasonably good earnings,
stable inflation and interest rates, and a stable attitude on the part of
investors about the appropriate risk premium to assign to various parts of the
market. Because it is impossible to predict these variables with any certainty,
we continue to pursue a strategy of investing in the best mid-sized growth
companies that we can find.
In closing, we thank you for your confidence in Pilgrim Baxter & Associates,
Ltd. and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ Jeffrey A. Wrona
- ---------------------
Jeffrey A. Wrona, CFA
Portfolio Manager
1
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PBHG Insurance Series Fund, Inc.
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PBHG Growth II Portfolio
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AVERAGE ANNUAL TOTAL RETURN(1) AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Annualized
One Year Inception to
Return Date(2)
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PBHG Growth II Portfolio 8.19% 9.46%
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Comparison of Change in the Value of a $10,000 Investment in the PBHG Growth II
Portfolio, versus the Russell Midcap Growth Index, and the
Lipper Mid-Cap Funds Average
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
PBHG Growth II Russell Midcap Lipper Mid-Cap
Portfolio Growth Index(3) Funds Average(4)
-------------- --------------- ----------------
4/97 10000 10000 10000
6/97 10450 11198 11411
9/97 11440 12764 13053
12/97 10750 12412 12627
3/98 11710 13893 14161
6/98 11841 13886 13959
9/98 9320 11568 11453
12/98 11631 14631 14088
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(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) The PBHG Growth II Portfolio commenced operations on May 1, 1997.
(3) The Russell Midcap Growth Index is an unmanaged index comprised of the 800
smallest securities in the Russell 1000 Index with a greater-than-average
growth orientation.The Index is not intended to imply the Portfolio's past
or future performance.
(4) 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. The Index is not intended to
imply the Portfolio's past or future performance.
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PBHG Insurance Series Fund, Inc.
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PBHG Technology & Communications Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. - PBHG Technology & Communications
Portfolio ended its second fiscal year on December 31, 1998. Last year was one
of the most volatile and tumultuous years in recent memory. The market's
activity in 1998 emphasized the degree to which world financial markets have
become integrated. Domestically, the United States continued to enjoy an almost
ideal economic environment that combined solid economic growth, declining
interest rates, low unemployment and low inflation. Despite the sanguine
environment here at home, the market's fortunes throughout the year continued to
turn on the question of whether the U.S. economy would be affected by the
continuing emerging markets financial crisis.
Almost all returns within the technology sector occurred in the first and fourth
quarters of the year. Stocks staged a strong rally in the early part of the year
as economic and earnings reports led investors to believe that the U.S. had
avoided any serious impact from the unfolding economic debacle in Asia. As the
year wore on, stocks paused as investors began to worry that the events abroad
would not slow the economy down enough to prevent a round of interest rate hikes
by the Federal Reserve. However, late April and early May brought favorable
economic data that seemed to indicate that Asian difficulties were beginning to
slow the overheated U.S. economy at the perfect time.
Through the summer, it became clear that the emerging market crisis was not
over. The problems in Asia had lowered demand, and therefore prices, for
petroleum and other commodities. Lower commodity prices decreased the hard
currency receipts that Russia and other emerging market countries depended on to
remain solvent, and the crisis quickly spread. The U.S. market reached new highs
in mid-July, but then suffered the first of two harrowing sell-offs as investors
again focused on international concerns. The market recovered in September, but
sold off again when risky emerging market bets brought a large U.S. hedge fund
to its knees. By October 8th, the S&P 500 Index had declined slightly more than
19%, close to the 20% decline that defines a "bear market." Fortunately, the
Federal Reserve stepped in and brokered a bail-out for the stumbling hedge fund,
Long-Term Capital, and also began cutting interest rates. Stocks usually fair
well in declining interest rate environments and the rate cuts set off a furious
rally. By year-end, the S&P 500 Index had recovered all of its losses and more
as it finished 1998 at new highs.
The PBHG Technology & Communications Portfolio returned 32.20% for the year
versus its benchmarks the Pacific Stock Exchange High Technology (PSE) Index
return of 54.61% and the Soundview Technology Index return of 42.33%. A great
deal of the performance disparity between the Portfolio and the benchmarks can
be explained by the continued out-performance of large capitalization stocks.
During 1998, the S&P 500, an index containing large U.S. companies, outperformed
the small-capitalization Russell 2000 Index by 31.15%. (The S&P 500 was up
28.59% while the Russell 2000 declined 2.56%.) Large company out-performance
also occurred within indexes. According to a January 7, 1999 research report by
Morgan Stanley Dean Witter analyzing the performance of the S&P 500 Index during
1998, the largest 100 stocks in the S&P 500 Index accounted for a
disproportionate 85% of the benchmark's return. Put another way, the other 400
stocks in that Index accounted for only 15% of the S&P 500's return.
3
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PBHG Insurance Series Fund, Inc.
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PBHG Technology & Communications Portfolio
The disparity between large and small company stock performance also occurred in
the technology sector, where the largest technology indexes significantly
outperformed smaller capitalization Indexes. We increased the size of the
average company in the Portfolio throughout the year to take advantage of the
trend favoring large stocks. However, we also continued to follow a disciplined
methodology that, in our opinion, leads us to select the companies that exhibit
the very best fundamentals. When faced with the choice between fundamentals and
other factors, such as this year's size bias in the market, we will always favor
those stocks with the best growth characteristics. As a direct result, while the
size of the average stock holding did increase during the year, our Portfolio
continues to contain many more small companies than our benchmark.
At year end, the weighted-average market capitalization of the PBHG Technology
and Communications Portfolio was roughly one-third that of the PSE Index and
Soundview Technology Index, but the next twelve months' estimated earnings
growth was 20% greater. We believe that, over time, stock appreciation follows
earnings growth. Historically, faster growing, smaller companies have enjoyed
better stock price appreciation, when compared to the market as a whole. In our
opinion, the greater risk aversion caused by the emerging market crisis led
investors to gravitate to larger, more liquid stocks in 1998. Fortunately, no
trend lasts forever and we believe that slowing earnings growth at larger
companies, which are more exposed to overseas markets, will continue in 1999.
Inevitably, we think this will lead investors to pay more attention to the
rapidly growing small and mid-cap companies that continue to make up a large
part of the PBHG Technology and Communications Portfolio.
Sincerely, Sincerely,
/s/ Jeffrey A. Wrona, CFA /s/ Michael S. Hahn, CFA
- ------------------------- ------------------------
Jeffrey A. Wrona, CFA Michael S. Hahn, CFA
Portfolio Manager Portfolio Manager
4
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PBHG Insurance Series Fund, Inc.
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PBHG Technology & Communications Portfolio
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN(1) AS OF DECEMBER 31, 1998
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Annualized
One Year Inception to
Return Date(2)
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PBHG Technology & Communications Portfolio 32.20% 21.06%
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, the Lipper Science & Technology Funds Average and the
Soundview Technology Index
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Pacific Stock
Exchange
PBHG High Lipper Science Soundview
Tech. & Comm. Technology & Technology Technology
Portfolio Index(3) Funds Average(4) Index(5)
------------- ------------- ---------------- ----------
4/97 10000 10000 10000 10000
6/97 10320 11288 11449 11368
9/97 12289 13456 13648 13895
12/97 10409 11639 11822 11333
3/98 11590 13870 13835 13051
6/98 11690 13880 14295 13322
9/98 10641 12843 12767 11570
12/98 13761 18048 18091 16128
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(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) 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. The
Index is not intended to imply the Portfolio's past or future performance.
(4) The Lipper Science & Technology Funds Average is an equally weighted
benchmark 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 assets value of the funds
in the category with all capital gains distributions and income dividends
reinvested. The Index is not intended to imply the Portfolio's past or
future performance.
(5) The Soundview Technology Index is an equal dollar weighted index designed
to measure the performance of the technology industry. It is comprised of
100 major technology companies chosen by Soundview Financial Group. 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. The Index is not intended to imply the
Portfolio's past or future performance.
5
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PBHG Insurance Series Fund, Inc.
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PBHG Select 20 Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. - PBHG Select 20 Portfolio returned 62.52%
for the fiscal year ended December 31, 1998. This compares favorably to the
returns provided by our two benchmark indices, the S&P 500 Index at 28.59% and
the Russell Top 200 Growth Index at 45.08%. In our opinion, the advantages of
concentrated investing -- focusing on a limited number of stocks that we are
convinced have the greatest fundamental strengths in their underlying businesses
- -- were borne out in the results of the PBHG Select 20 Portfolio in 1998. Though
we had a few disappointments during the year, the benefit of having substantial
positions in several of the market's top performers easily compensated for the
negative effects of our disappointing stocks. Fortunately, several portfolio
holdings appreciated by more than 100% for the year.
As you know, we make no attempt to limit sector exposure in the Portfolio. Our
goal is to invest in our twenty best large-cap ideas, regardless of sector. As a
result, we consistently over-weighted the Portfolio in the technology sector,
which proved fortunate. Seven of our top ten performers were technology stocks.
This sector made the biggest contribution to Portfolio performance in each
quarter of 1998 and was the only sector that produced a positive return in every
quarter. Remarkably, technology produced the best monthly sector performance
seven times during the year. This noteworthy consistency of performance may seem
unusual given that the technology sector is often derided as being unpredictable
and unmanageable. However, in our opinion, technology remains the fastest
growing sector of our economy and thus the area to find the greatest number of
high-quality, fast-growing companies.
Our other heavily represented sectors -- services, healthcare, and consumer --
all contributed positively to the Portfolio's performance in 1998, though with
greater quarterly variability. The Portfolio benefited from our decision to exit
the energy sector in the first quarter, just as prices for oil and natural gas
began to decline due to dramatic slowdowns in a number of the world's regional
economies. Fortunately, we also sold our holdings in the financial services
sector in July, prior to the global liquidity scare that negatively affected
many stocks in that sector. During 1998, the Portfolio had no exposure to the
commodity-oriented industrial/basic materials sector, which proved beneficial as
those companies' profits suffered because of slackening demand around the world.
As mentioned above, not all of our Portfolio's investments worked in 1998.
Deteriorating fundamentals prompted the sale of a number of holdings, some
before the share price collapsed and, unfortunately, some after. We recognize
that investors dislike negative surprises. Consequently, we plan to work even
harder in 1999 to discern changes at the margin in the fundamental business
trends of the companies we own -- changes that we believe portend negative
outcomes going forward. While we fully expect a few negative surprises, we will
strive to better anticipate them, and take the appropriate actions.
It is clear that investors favored large cap growth stocks above all others
during 1998. Determining factors seemed to be sustainable, above-average rates
of growth in a challenging aggregate growth environment, and trading liquidity
that allowed investors to react quickly if deemed necessary. In addition to the
strong business fundamentals evidenced by our companies, we think these two
factors also contributed to the Portfolio's performance over the course of 1998.
At least to some extent, we are grateful for having been in the right place at
the right time. Nonetheless, we continue to believe that high quality, strong
secular (not cyclical) growth companies consistently represent the most
promising investment opportunities.
6
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PBHG Insurance Series Fund, Inc.
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PBHG Select 20 Portfolio
As we enter 1999, the equity markets are in a decidedly bullish mood. Recent
concerns about economic problems around the world, hedge fund shenanigans,
terrorist activities, war with Iraq and even the historic impeachment of an
American President appear to have dissipated among investors. While we do not
expect a major sustained downdraft in equity markets in the presence of a low
interest rate environment, a stable U.S. economy, and an accommodating Federal
Reserve, we also do not expect the current euphoria to last all year. One
feature we do expect the equity markets to have in common with 1998 is
volatility. Volatility correlates directly with valuation levels, and with
valuations at historically high levels, we do not expect many dull moments.
We continue to like the long-term prospects of the growth companies we own.
Superior technologies or services, balance sheets, business models, and ability
to execute are all characteristics commonly found in top quality growth
companies that contribute to sustained, above-average growth rates. We believe
companies with these characteristics will continue to be sought out by
investors.
In closing, we thank you for your confidence in Pilgrim Baxter & Associates,
Ltd., and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ James D. McCall, CFA
- ------------------------
James D. McCall, CFA
Portfolio Manager
7
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PBHG Insurance Series Fund, Inc.
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PBHG Select 20 Portfolio
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN(1) AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
One Year Inception to
Return Date(2)
- --------------------------------------------------------------------------------
PBHG Select 20 Portfolio 62.52% 47.11%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the PBHG Select 20
Portfolio, versus the S&P 500 Index, the Russell Top 200 Growth Index,
and the Lipper Growth Funds Average
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Russell
PBHG Top 200 Lipper
Select 20 S&P 500 Growth Growth Funds
Portfolio Index(3) Index(4) Average(5)
--------- -------- -------- ------------
9/97 10000 10000 10000 10000
12/97 10050 10287 10305 9878
3/98 11993 11722 11978 11149
6/98 13176 12109 12697 11352
9/98 12625 11436 11793 9857
12/98 16334 13872 14954 12091
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(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) The PBHG Select 20 Portfolio commenced operations on September 28, 1997.
(3) 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. The Index is
not intended to imply the Portfolio's past or future performance.
(4) 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. The Index is not intended to
imply the Portfolio's past or future performance.
(5) The Lipper Growth Funds Average is an equally weighted benchmark 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. The Index is not intended to imply the Portfolio's
past or future performance.
8
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Value Portfolio
Dear Shareholder:
For the fourth quarter of 1998, the PBHG Insurance Series Fund, Inc. - PBHG
Large Cap Value Portfolio returned 29.59% versus 21.30% for the S&P 500 Index.
For the year ended December 31, 1998 the PBHG Large Cap Value Portfolio returned
37.96% versus 28.59% and 15.64% for the S&P 500 and Russell 1000 Value
benchmarks, respectively.
The Fed easing sparked a sharp rally in the fourth quarter. Federal Reserve
easings have historically been a strong positive influence on stock market
returns, and there is no reason to expect this cycle to depart from past norms.
While the Fed lowered rates three times last fall, the cumulative reduction only
amounted to 75 basis points. As a result, the yield curve has not (yet) shifted
to the steep positive slope we initially anticipated. Fortunately, with Fed
Funds at 4.75% and inflation currently running around 1%-2%, we believe Alan
Greenspan has ample room to lower short-term interest rates further over the
course of 1999. Although current Federal Reserve pronouncements suggest that
lower short rates are unlikely over the near-term, we are optimistic that
ongoing global imbalances such as Brazil's recent currency crisis, will
eventually prompt the Fed to ease more assertively. Until then, however, we'd
expect the market to trade sideways in volatile fashion.
Finally, no stock market commentary is complete today without a remark about the
Internet. In the past 20 years, we have watched a number of manias come and go -
most notably, video games, biotechnology, home shopping and physicians practice
management companies. Nevertheless we have never seen a boom on as large a scale
as the Internet craze. At its recent price of $130, Internet bookseller
Amazon.com has appreciated 13-fold over the past twelve months, and now sports a
market capitalization of approximately $20 billion, on par with blue-chip giants
Eastman Kodak and Dow Chemical. Though Amazon.com has sales of $1 billion, it
will lose money for the foreseeable future. Even stranger, the company's market
cap is more than quadruple the combined market cap of the two largest book
retailers, Barnes & Noble and Borders Group!
With that said, we should note that while the highly-visible Internet stocks
have wildly exceeded any rational valuation parameters, the impact of the
Internet on business and life around the world will quite possibly be the
defining event of the 21st Century. Furthermore, companies that benefit from the
Internet boom do not all have names ending in ".com". For example, the
Portfolio's fourth quarter results were helped by its holdings of regional
telephone companies, which should profit from the proliferation of new phone
lines dedicated to Internet access. Also, IBM performed well in the quarter, as
its outlook was improved by renewed demand for its mainframe computers that
drive the giant databases required by e-commerce. Therefore, while we currently
believe it is prudent to avoid speculative Internet stocks, we are continually
on the lookout for mainstream investment ideas whose current business trend is
accelerated by the e-commerce phenomena.
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 Haubold
- --------------------
Gary D. Haubold, CFA
Portfolio Manager
9
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Value Portfolio
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN(1) AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
One Year Inception to
Return Date(2)
- --------------------------------------------------------------------------------
PBHGLarge Cap Value Portfolio 37.96% 36.29%
- --------------------------------------------------------------------------------
Comparison of Change in the Value of a $10,000 Investment in the
PBHG Large Cap Value Portfolio, versus the Russell 1000 Value Index,
the Lipper Growth & Income Funds Average and the S&P 500 Index.
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
PBHG Lipper
Large Cap Value Russell 1000 Growth & Income S&P 500
Portfolio Value Index(3) Funds Average(4) Index(5)
--------------- -------------- ---------------- --------
10/97 10000 10000 10000 10000
12/97 10441 10747 10444 10643
3/98 11641 12001 11666 12127
6/98 12021 12054 11694 12527
9/98 11117 10658 10240 11281
12/98 14406 12428 12061 13684
- ----------
(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) 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 & Income Funds Average is an equally weighted benchmark
composed of 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 assets value of the Funds in the
category with all capital gains distributions and income dividends
reinvested.
(5) 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. The index is
not intended to imply the Portfolio's past or future performance.
10
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PBHG Insurance Series Fund, Inc.
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PBHG Small Cap Value Portfolio
Dear Shareholder:
For the fourth quarter of 1998, the PBHG Insurance Series Fund, Inc. - PBHG
Small Cap Value Portfolio returned 25.92% versus 16.31% for the Russell 2000
Index. For the year ending December 31, 1998 the PBHG Small Cap Value Portfolio
returned 10.94% versus (2.56)% for the Russell 2000 benchmark.
The Fed's interest rate easing sparked a sharp rally in the fourth quarter.
While the absolute returns of small cap stocks were impressive, the Russell 2000
small cap Index again lagged the S&P 500 Index in the quarter (by approximately
5%). The trailing twelve month gap between large and small stock returns has now
reached 31%, one of the largest performance differentials on record. However,
despite the continued relative underperformance of small stocks, we remain very
positive on the investment outlook for small companies.
Federal Reserve easings have historically been very beneficial for small stock
returns, and we believe there is no reason to expect this cycle to depart from
past norms. Although the Fed lowered rates three times last fall, the cumulative
reduction only amounted to 75 basis points. As a result, the yield curve has not
(yet) shifted to the steep positive slope we initially anticipated. Fortunately,
with Fed Funds at 4.75% and inflation currently running around 1%-2%, we
believe, Alan Greenspan has ample room to lower short-term interest rates
further over the course of 1999. Although current Federal Reserve pronouncements
suggest that lower short-term rates are unlikely over the near-term, we are
optimistic that ongoing global imbalances such as Brazil's recent currency
crisis, will eventually prompt the Fed to ease more assertively.
Finally, no stock market commentary is complete these days without a brief
discussion of the Internet. In the past 20 years, we have watched a number of
manias come and go - most notably, video games, biotechnology, home shopping and
physicians practice management companies. Nevertheless we have never seen a boom
on as large a scale as the Internet craze. At its recent price of $130, Internet
bookseller Amazon.com has appreciated 13-fold over the past twelve months, and
now sports a market capitalization of approximately $20 billion, on par with
blue-chip giants Eastman Kodak and Dow Chemical. Though Amazon.com has sales of
$1 billion, it will lose money for the foreseeable future. Even stranger, the
company's market cap is more than quadruple the combined market cap of the two
largest book retailers, Barnes & Noble and Borders Group!
With that said, we should note that while the highly-visible Internet stocks
have wildly exceeded any rational valuation parameters, the impact of the
Internet on business and life around the world will quite possibly be the
defining event of the 21st Century. Furthermore, companies that benefit from the
Internet boom do not all have names ending in ".com". For example, early in the
fourth quarter we invested in Banyan Systems, a mediocre computer networking
company, at a little over $3 per share. At that price, the company's networking
business was fairly valued, but there was nothing in the stock price for
Banyan's rapidly growing Internet Switchboard operation. As the Internet craze
rapidly broadened out in November, we began selling your Banyan shares at a
large percentage profit, and sold the last of your Banyan shares at $7.83 per
share - more than a double in less than a quarter!
So, while we are avoiding the speculative Internet stock frenzy, we are
continually on the lookout for investment ideas whose current business trend is
accelerated by the e-commerce phenomena.
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
11
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PBHG Insurance Series Fund, Inc.
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PBHG Small Cap Value Portfolio
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN(1) AS OF DECEMBER 31, 1998
- --------------------------------------------------------------------------------
One Year Inception to
Return Date(2)
- --------------------------------------------------------------------------------
PBHG Small Cap Value Portfolio 10.94% 13.68%
- --------------------------------------------------------------------------------
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
[GRAPHIC]
In the printed version of the document, a line graph appears which depicts
the following plot points:
Lipper
PBHG Small Cap Russell 2000 Small Cap
Value Portfolio Index(3) Funds Average(4)
--------------- ------------ ----------------
10/97 10000 10000 10000
12/97 10427 10109 9940
3/98 11889 11125 11032
6/98 11462 10605 10579
9/98 9187 8470 8313
12/98 11568 9852 9904
- ----------
(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) 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. The Index is not intended to imply the Portfolio's past or
future performance.
(4) The Lipper Small 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 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. The Index is not intended to imply the
Portfolio's past or future performance.
12
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Growth II Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 98.0%
CONSUMER -- 13.6%
BUILDING MATERIAL CHAINS -- 2.2%
Premier Parks* 13,200 $ 399
- --------------------------------------------------------------------------
399
- --------------------------------------------------------------------------
FUNERAL HOME SERVICES -- 2.9%
Stewart Enterprises, Cl A 24,400 543
- --------------------------------------------------------------------------
543
- --------------------------------------------------------------------------
RESTAURANTS -- 1.1%
Starbucks* 3,500 196
- --------------------------------------------------------------------------
196
- --------------------------------------------------------------------------
RETAIL-APPAREL -- 5.4%
Abercrombie & Fitch, Cl A* 7,200 509
Ann Taylor Stores* 12,000 474
- --------------------------------------------------------------------------
983
- --------------------------------------------------------------------------
RETAIL-DEPARTMENT STORES -- 0.9%
Nordstrom 5,000 173
- --------------------------------------------------------------------------
173
- --------------------------------------------------------------------------
RETAIL-OFFICE PRODUCTS/SUPPLIES -- 1.1%
Staples* 4,541 198
- --------------------------------------------------------------------------
198
- --------------------------------------------------------------------------
TOTAL CONSUMER (COST $2,086) 2,492
- --------------------------------------------------------------------------
ENERGY -- 2.2%
CONTRACT DRILLING -- 1.9%
Diamond Offshore Drilling 14,700 348
- --------------------------------------------------------------------------
348
- --------------------------------------------------------------------------
DRILLING SERVICES & EQUIPMENT -- 0.3%
BJ Services* 3,400 53
- --------------------------------------------------------------------------
53
- --------------------------------------------------------------------------
TOTAL ENERGY (COST $580) 401
- --------------------------------------------------------------------------
FINANCIAL -- 3.6%
BROKERAGE/INVESTMENT BANK -- 1.0%
Charles Schwab 3,250 183
- --------------------------------------------------------------------------
183
- --------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 2.6%
Heller Financial* 16,000 470
- --------------------------------------------------------------------------
470
- --------------------------------------------------------------------------
TOTAL FINANCIAL (COST $600) 653
- --------------------------------------------------------------------------
HEALTH -- 12.8%
ASSISTED LIVING -- 1.0%
Sunrise Assisted Living* 3,700 192
- --------------------------------------------------------------------------
192
- --------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.4%
Amgen* 2,400 251
- --------------------------------------------------------------------------
251
- --------------------------------------------------------------------------
CONTRACT RESEARCH -- 1.0%
Quintiles Transnational* 3,354 179
- --------------------------------------------------------------------------
179
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
DRUGS/PHARMACEUTICALS -- 0.8%
Medicis Pharmaceutical, Cl A* 2,400 $ 143
- --------------------------------------------------------------------------
143
- --------------------------------------------------------------------------
HOSPITAL SUPPLIES -- 2.8%
Cardinal Health 6,700 508
- --------------------------------------------------------------------------
508
- --------------------------------------------------------------------------
INFORMATION SYSTEMS -- 2.5%
HBO & Company 16,120 463
- --------------------------------------------------------------------------
463
- --------------------------------------------------------------------------
PHARMACEUTICAL SERVICES -- 0.4%
Express Scripts, Cl A* 1,200 81
- --------------------------------------------------------------------------
81
- --------------------------------------------------------------------------
SPECIAL OUTPATIENT FACILITY -- 2.9%
Total Renal Care Holdings* 18,038 533
- --------------------------------------------------------------------------
533
- --------------------------------------------------------------------------
TOTAL HEALTH (COST $1,954) 2,350
- --------------------------------------------------------------------------
INDUSTRIAL/GENERAL MANUFACTURING -- 4.8%
AEROSPACE -- 0.6%
Orbital Sciences* 2,300 102
- --------------------------------------------------------------------------
102
- --------------------------------------------------------------------------
AUTO-RELATED -- 4.2%
Harley-Davidson 7,900 374
Tower Automotive* 16,000 399
- --------------------------------------------------------------------------
773
- --------------------------------------------------------------------------
TOTAL INDUSTRIAL/GENERAL MANUFACTURING (COST $797) 875
- --------------------------------------------------------------------------
SERVICE -- 21.0%
ADVERTISING -- 3.0%
Omnicom Group 4,600 267
Outdoor Systems* 9,300 279
- --------------------------------------------------------------------------
546
- --------------------------------------------------------------------------
COMMUNICATIONS SERVICES -- 7.2%
Global Crossing* 7,900 356
Pacific Gateway Exchange* 9,500 457
Qwest Communications International* 10,200 510
- --------------------------------------------------------------------------
1,323
- --------------------------------------------------------------------------
ENVIRONMENTAL -- 2.6%
Allied Waste Industries* 20,095 475
- --------------------------------------------------------------------------
475
- --------------------------------------------------------------------------
EMPLOYMENT SERVICES - INFORMATION/COMPUTER
SERVICES -- 0.7%
Metamor Worldwide* 5,300 132
- --------------------------------------------------------------------------
132
- --------------------------------------------------------------------------
EMPLOYMENT SERVICES - PROFESSIONAL -- 0.5%
Modis Professional Services* 6,395 93
- --------------------------------------------------------------------------
93
- --------------------------------------------------------------------------
MARKETING INFORMATION -- 2.0%
IMS Health 4,900 370
- --------------------------------------------------------------------------
370
- --------------------------------------------------------------------------
MARKETING SERVICES -- 1.1%
Ha Lo Industries* 5,300 199
- --------------------------------------------------------------------------
199
- --------------------------------------------------------------------------
</TABLE>
13
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Growth II Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
SYSTEMS INTEGRATOR -- 1.5%
Ciber* 5,100 $ 142
Computer Horizons* 4,800 128
- --------------------------------------------------------------------------
270
- --------------------------------------------------------------------------
TELEMARKETING -- 1.4%
Snyder Communications* 7,900 267
- --------------------------------------------------------------------------
267
- --------------------------------------------------------------------------
TRANSACTIONS PROCESSING -- 1.0%
Fiserv* 3,500 180
- --------------------------------------------------------------------------
180
- --------------------------------------------------------------------------
TOTAL SERVICE (COST $3,388) 3,855
- --------------------------------------------------------------------------
TECHNOLOGY -- 40.0%
CONTRACT MANUFACTURING -- 3.5%
Celestica* 9,500 234
Jabil Circuit* 2,400 179
Solectron* 2,470 230
- --------------------------------------------------------------------------
643
- --------------------------------------------------------------------------
DATA STORAGE -- 2.5%
Seagate Technology* 14,900 451
- --------------------------------------------------------------------------
451
- --------------------------------------------------------------------------
DIGITAL VIDEO RELATED -- 0.8%
Gemstar International* 2,700 155
- --------------------------------------------------------------------------
155
- --------------------------------------------------------------------------
ELECTRONIC COMPONENTS -- 2.0%
Corning 8,000 360
- --------------------------------------------------------------------------
360
- --------------------------------------------------------------------------
NETWORKING HARDWARE -- 0.9%
Ascend Communications* 2,500 164
- --------------------------------------------------------------------------
164
- --------------------------------------------------------------------------
NETWORKING SOFTWARE -- 2.0%
Veritas Software* 6,000 360
- --------------------------------------------------------------------------
360
- --------------------------------------------------------------------------
PRECISION INSTRUMENTS -- 3.2%
Mettler-Toledo International* 13,600 382
Waters* 2,400 209
- --------------------------------------------------------------------------
591
- --------------------------------------------------------------------------
SATELLITE/CABLE EQUIPMENT -- 2.2%
General Instrument* 11,800 400
- --------------------------------------------------------------------------
400
- --------------------------------------------------------------------------
SEMI-CONDUCTOR MANUFACTURING -- 7.9%
Advanced Micro Devices* 8,400 243
Altera* 8,500 517
Linear Technology 3,270 293
Micron Technology 7,900 400
- --------------------------------------------------------------------------
1,453
- --------------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCTION EQUIPMENT -- 3.8%
MIPS Technologies* 6,100 195
Novellus Systems* 3,000 149
Teradyne* 8,500 360
- --------------------------------------------------------------------------
704
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Shares/
Face Market
Amount Value
Description (000) (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
SOFTWARE-CLIENT/SERVER -- 2.4%
Citrix Systems* 4,600 $ 446
- --------------------------------------------------------------------------
446
- --------------------------------------------------------------------------
SOFTWARE-INTERNET -- 4.6%
America Online* 1,280 205
At Home, Cl A* 2,100 156
Mindspring Enterprises* 5,400 330
PSINet* 7,600 159
- --------------------------------------------------------------------------
850
- --------------------------------------------------------------------------
SOFTWARE-MIDDLEWARE -- 1.6%
New Era of Networks* 6,600 290
- --------------------------------------------------------------------------
290
- --------------------------------------------------------------------------
SOFTWARE-SYSTEM/MAINFRAME -- 0.6%
BMC Software* 2,280 102
- --------------------------------------------------------------------------
102
- --------------------------------------------------------------------------
TELECOMMUNICATIONS COMPONENTS -- 2.0%
Uniphase* 5,280 366
- --------------------------------------------------------------------------
366
- --------------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $5,623) 7,335
- --------------------------------------------------------------------------
Total Common Stock
(Cost $15,028) 17,961
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.8%
Morgan Stanley
4.50%, dated 12/31/98, matures 01/04/99,
repurchase price $1,065,589 (collateralized
by U.S. Treasury Note: total market value
$1,090,839) (A) $ 1,065 $ 1,065
- --------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,065) 1,065
- --------------------------------------------------------------------------
TOTAL INVESTMENTS -- 103.8%
(COST $16,093) 19,026
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (3.8%)
Other Assets and Liabilities, Net (705)
- --------------------------------------------------------------------------
NET ASSETS
Paid-in-capital (authorized 500 million
shares - $0.001 par value) based on
1,575,446 outstanding shares of common
stock 16,929
Accumulated net realized loss on investments (1,541)
Net unrealized appreciation on investments 2,933
- --------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% 18,321
- --------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 11.63
- --------------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Technology & Communications Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 95.0%
SERVICE -- 10.1%
COMMUNICATIONS SERVICES -- 5.3%
Global Crossing* 9,300 $ 420
Qwest Communications International* 25,700 1,285
- --------------------------------------------------------------------------
1,705
- --------------------------------------------------------------------------
EDUCATIONAL SERVICES -- 0.5%
Devry* 5,500 168
- --------------------------------------------------------------------------
168
- --------------------------------------------------------------------------
MARKETING INFORMATION -- 1.8%
Acxiom* 19,100 593
- --------------------------------------------------------------------------
593
- --------------------------------------------------------------------------
SYSTEMS INTEGRATOR -- 0.6%
Tier Technologies* 10,400 179
- --------------------------------------------------------------------------
179
- --------------------------------------------------------------------------
TRANSACTIONS PROCESSING -- 1.9%
Amdocs* 36,800 630
- --------------------------------------------------------------------------
630
- --------------------------------------------------------------------------
TOTAL SERVICE (COST $2,435) 3,275
- --------------------------------------------------------------------------
TECHNOLOGY -- 84.9%
COMPUTER-MANUFACTURING -- 6.7%
Compaq Computers 14,000 587
Dell Computer* 12,700 929
IBM 3,500 647
- --------------------------------------------------------------------------
2,163
- --------------------------------------------------------------------------
CONTRACT MANUFACTURING -- 1.8%
Solectron* 6,400 595
- --------------------------------------------------------------------------
595
- --------------------------------------------------------------------------
DATA COMMUNICATIONS -- 0.2%
DSET* 5,300 55
- --------------------------------------------------------------------------
55
- --------------------------------------------------------------------------
DATA STORAGE -- 7.2%
EMC* 14,700 1,250
Seagate Technology* 36,100 1,092
- --------------------------------------------------------------------------
2,342
- --------------------------------------------------------------------------
DIGITAL VIDEO RELATED -- 0.7%
Gemstar International* 4,000 229
- --------------------------------------------------------------------------
229
- --------------------------------------------------------------------------
NETWORKING HARDWARE -- 8.3%
Ascend Communications* 18,800 1,236
Cisco Systems* 15,750 1,462
- --------------------------------------------------------------------------
2,698
- --------------------------------------------------------------------------
NETWORKING SOFTWARE -- 1.1%
Veritas Software* 5,900 354
- --------------------------------------------------------------------------
354
- --------------------------------------------------------------------------
SATELLITE/CABLE EQUIPMENT -- 1.0%
General Instrument* 9,500 322
- --------------------------------------------------------------------------
322
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Shares/
Face Market
Amount Value
Description (000) (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
SEMI-CONDUCTOR MANUFACTURING -- 20.7%
Advanced Micro Devices* 38,100 $ 1,103
Altera* 13,700 834
Intel 12,700 1,506
Linear Technology 8,600 770
Micron Technology 23,400 1,183
Texas Instruments 8,700 744
Transwitch* 8,100 315
Vitesse Semiconductor* 6,200 283
- --------------------------------------------------------------------------
6,738
- --------------------------------------------------------------------------
SEMI-CONDUCTOR PRODUCTION EQUIPMENT -- 5.7%
Applied Materials* 28,100 1,200
Teradyne* 15,400 653
- --------------------------------------------------------------------------
1,853
- --------------------------------------------------------------------------
SOFTWARE-CLIENT/SERVER -- 6.2%
Citrix Systems* 10,250 995
Compuware* 13,100 1,023
- --------------------------------------------------------------------------
2,018
- --------------------------------------------------------------------------
SOFTWARE-DESKTOP -- 3.5%
Microsoft* 8,300 1,151
- --------------------------------------------------------------------------
1,151
- --------------------------------------------------------------------------
SOFTWARE-INTERNET -- 9.8%
America Online* 9,300 1,488
At Home, Cl A* 5,900 438
Mindspring Enterprises* 6,000 366
PSINet* 23,400 489
Ticketmaster Online* 6,900 386
- --------------------------------------------------------------------------
3,167
- --------------------------------------------------------------------------
SOFTWARE-MIDDLEWARE -- 4.1%
New Era of Networks* 30,200 1,329
- --------------------------------------------------------------------------
1,329
- --------------------------------------------------------------------------
TELECOMMUNICATIONS COMPONENTS -- 3.7%
Uniphase* 17,300 1,200
- --------------------------------------------------------------------------
1,200
- --------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 4.2%
Advanced Fibre Communication* 39,100 428
Nokia ADR, Cl A 7,800 939
- --------------------------------------------------------------------------
1,367
- --------------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $20,734) 27,581
- --------------------------------------------------------------------------
Total Common Stock
(Cost $23,169) 30,856
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 8.2%
Morgan Stanley
4.50%, dated 12/31/98, matures 01/04/99,
repurchase price $2,663,237 (collateralized
by U.S. Government Obligation: total market
value $2,733,972)(A) $2,661 2,661
- --------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $2,661) 2,661
- --------------------------------------------------------------------------
TOTAL INVESTMENTS -- 103.2%
(COST $25,830) 33,517
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (3.2%)
Other Assets and Liabilities, Net (1,024)
- --------------------------------------------------------------------------
</TABLE>
15
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Technology & Communications Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS
Paid-in Capital (Authorized 500 million
shares - $0.001 par value) based on
2,362,151 outstanding shares of common stock $26,633
Accumulated net realized loss on investments (1,827)
Net unrealized appreciation on investments 7,687
- --------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% 32,493
- --------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 13.76
- --------------------------------------------------------------------------
</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.
16
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Select 20 Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 88.9%
CONSUMER -- 15.7%
BUILDING MATERIAL CHAINS -- 5.2%
Home Depot 269,200 $ 16,472
- --------------------------------------------------------------------------
16,472
- --------------------------------------------------------------------------
ENTERTAINMENT/MOVIES -- 5.4%
Carnival, Cl A 362,000 17,376
- --------------------------------------------------------------------------
17,376
- --------------------------------------------------------------------------
RETAIL-OFFICE PRODUCTS/SUPPLIES -- 5.1%
Staples* 371,300 16,221
- --------------------------------------------------------------------------
16,221
- --------------------------------------------------------------------------
TOTAL CONSUMER (COST $38,311) 50,069
- --------------------------------------------------------------------------
HEALTH -- 16.5%
CONTRACT RESEARCH -- 1.7%
Quintiles Transnational* 103,900 5,546
- --------------------------------------------------------------------------
5,546
- --------------------------------------------------------------------------
DRUGS/PHARMACEUTICALS -- 3.8%
Pfizer 95,900 12,029
- --------------------------------------------------------------------------
12,029
- --------------------------------------------------------------------------
HOSPITAL SUPPLIES -- 5.3%
Cardinal Health 221,000 16,768
- --------------------------------------------------------------------------
16,768
- --------------------------------------------------------------------------
MEDICAL DEVICES -- 5.7%
Guidant 163,300 18,004
- --------------------------------------------------------------------------
18,004
- --------------------------------------------------------------------------
TOTAL HEALTH (COST $43,432) 52,347
- --------------------------------------------------------------------------
SERVICE -- 18.6%
COMMUNICATIONS SERVICES -- 5.4%
MCI Worldcom* 240,900 17,285
- --------------------------------------------------------------------------
17,285
- --------------------------------------------------------------------------
ENVIRONMENTAL -- 3.3%
Waste Management 225,300 10,505
- --------------------------------------------------------------------------
10,505
- --------------------------------------------------------------------------
RADIO/TELEVISION -- 9.9%
Chancellor Media, Cl A* 209,700 10,039
Clear Channel Communications* 281,900 15,364
Fox Entertainment Group* 234,800 5,914
- --------------------------------------------------------------------------
31,317
- --------------------------------------------------------------------------
TOTAL SERVICE (COST $50,743) 59,107
- --------------------------------------------------------------------------
TECHNOLOGY -- 38.1%
COMPUTER-MANUFACTURING -- 4.9%
Dell Computer* 210,100 15,377
- --------------------------------------------------------------------------
15,377
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Shares/
Face Market
Amount Value
Description (000) (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONCLUDED
DATA STORAGE -- 5.7%
EMC* 214,500 $ 18,233
- --------------------------------------------------------------------------
18,233
- --------------------------------------------------------------------------
NETWORKING HARDWARE -- 8.5%
Ascend Communications* 127,100 8,356
Cisco Systems* 201,800 18,730
- --------------------------------------------------------------------------
27,086
- --------------------------------------------------------------------------
SOFTWARE-CLIENT/SERVER -- 5.1%
Compuware* 207,000 16,172
- --------------------------------------------------------------------------
16,172
- --------------------------------------------------------------------------
SOFTWARE-DESKTOP -- 2.7%
Microsoft* 61,000 8,474
- --------------------------------------------------------------------------
8,474
- --------------------------------------------------------------------------
SOFTWARE-INTERNET -- 7.6%
America Online* 151,400 24,223
- --------------------------------------------------------------------------
24,223
- --------------------------------------------------------------------------
SOFTWARE-SYSTEM/MAINFRAME -- 3.6%
BMC Software* 257,300 11,466
- --------------------------------------------------------------------------
11,466
- --------------------------------------------------------------------------
TOTAL TECHNOLOGY (COST $75,788) 121,031
- --------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $208,274) 282,554
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 14.6%
Morgan Stanley
4.63%, dated 12/31/98, matures 01/04/99,
repurchase price $46,612,177
(collaterized by U.S. Government
Obligations: total market value
$47,839,843) (A) $ 46,588 46,588
- --------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $46,588) 46,588
- --------------------------------------------------------------------------
TOTAL INVESTMENTS -- 103.5% (COST $254,862) 329,142
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (3.5%)
Other Assets and Liabilities, Net (11,216)
- --------------------------------------------------------------------------
NET ASSETS
Paid-in-capital (authorized 500 million
shares - $0.001 par value) based on
19,508,329 outstanding shares of common
stock 252,661
Accumulated net realized loss on
investments (9,015)
Net unrealized appreciation on investments 74,280
- --------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $317,926
- --------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 16.30
- --------------------------------------------------------------------------
</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.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 94.0%
COMMERCIAL SERVICES -- 1.9%
ADVERTISING -- 1.9%
Young & Rubicam* 13,000 $ 421
- --------------------------------------------------------------------------
421
- --------------------------------------------------------------------------
TOTAL COMMERCIAL SERVICES (COST $382) 421
- --------------------------------------------------------------------------
CONSUMER DURABLES -- 5.2%
CONSUMER ELECTRONICS/APPLIANCES -- 1.1%
Maytag 3,900 243
- --------------------------------------------------------------------------
243
- --------------------------------------------------------------------------
HOMEBUILDING -- 0.6%
Centex 2,900 131
- --------------------------------------------------------------------------
131
- --------------------------------------------------------------------------
MOTOR VEHICLES -- 3.5%
Daimler Chrysler AG* 2,096 201
Ford Motor 9,800 575
- --------------------------------------------------------------------------
776
- --------------------------------------------------------------------------
TOTAL CONSUMER DURABLES (COST $934) 1,150
- --------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 8.8%
ALCOHOLIC BEVERAGES -- 0.4%
Anheuser-Busch 1,300 85
- --------------------------------------------------------------------------
85
- --------------------------------------------------------------------------
APPAREL -- 0.6%
VF 2,700 127
- --------------------------------------------------------------------------
127
- --------------------------------------------------------------------------
MEAT/POULTRY/FISH -- 1.0%
Conagra 7,200 227
- --------------------------------------------------------------------------
227
- --------------------------------------------------------------------------
PACKAGE GOODS/COSMETICS -- 2.6%
Clorox 4,100 478
Dial 3,100 90
- --------------------------------------------------------------------------
568
- --------------------------------------------------------------------------
PACKAGED FOODS -- 3.9%
Quaker Oats 4,200 250
Ralston Purina Group 2,700 87
Sara Lee 19,200 541
- --------------------------------------------------------------------------
878
- --------------------------------------------------------------------------
TOBACCO -- 0.3%
Philip Morris 1,300 70
- --------------------------------------------------------------------------
70
- --------------------------------------------------------------------------
TOTAL CONSUMER NON-DURABLES (COST $1,849) 1,955
- --------------------------------------------------------------------------
CONSUMER SERVICES -- 3.1%
HOTELS/RESORTS -- 0.8%
Royal Caribbean Cruises Limited 5,000 185
- --------------------------------------------------------------------------
185
- --------------------------------------------------------------------------
MEDIA CONGLOMERATES -- 0.4%
Viacom, Cl B* 1,100 81
- --------------------------------------------------------------------------
81
- --------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
NEWSPAPERS -- 1.0%
Knight-Ridder 4,300 $ 220
- --------------------------------------------------------------------------
220
- --------------------------------------------------------------------------
RESTAURANTS -- 0.9%
Tricon Global Restaurants* 4,000 201
- --------------------------------------------------------------------------
201
- --------------------------------------------------------------------------
TOTAL CONSUMER SERVICES (COST $558) 687
- --------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY -- 11.1%
COMPUTER COMMUNICATIONS -- 1.1%
Cisco Systems* 2,700 251
- --------------------------------------------------------------------------
251
- --------------------------------------------------------------------------
ELECTRONIC DATA PROCESSING -- 2.9%
Dell Computer* 800 59
IBM 1,800 332
NCR* 3,300 138
Sun Microsystems* 1,400 120
- --------------------------------------------------------------------------
649
- --------------------------------------------------------------------------
SEMI-CONDUCTORS -- 6.4%
Altera* 2,000 122
Intel 6,800 806
Level One Communications* 6,000 213
Micron Technology 1,900 96
Texas Instruments 2,200 188
- --------------------------------------------------------------------------
1,425
- --------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 0.7%
Motorola 1,400 85
Tellabs* 1,000 69
- --------------------------------------------------------------------------
154
- --------------------------------------------------------------------------
TOTAL ELECTRONIC TECHNOLOGY (COST $1,778) 2,479
- --------------------------------------------------------------------------
ENERGY MINERALS -- 0.2%
INTEGRATED OIL COMPANIES -- 0.2%
Conoco, Cl A* 2,500 52
- --------------------------------------------------------------------------
52
- --------------------------------------------------------------------------
TOTAL ENERGY MINERALS (COST $58) 52
- --------------------------------------------------------------------------
FINANCE -- 17.2%
DIVERSIFIED FINANCIAL SERVICES -- 0.3%
American Express 700 72
- --------------------------------------------------------------------------
72
- --------------------------------------------------------------------------
FINANCE COMPANIES -- 4.2%
Fannie Mae 1,600 118
Federal Home Loan Mortgage 12,600 812
- --------------------------------------------------------------------------
930
- --------------------------------------------------------------------------
INVESTMENT BANKERS/BROKERS/SERVICES -- 0.2%
Paine Webber Group 900 35
- --------------------------------------------------------------------------
35
- --------------------------------------------------------------------------
INVESTMENT MANAGERS -- 0.3%
Waddell & Reed Financial, Cl A 2,900 69
- --------------------------------------------------------------------------
69
- --------------------------------------------------------------------------
LIFE INSURANCE -- 0.4%
MONY Group (The)* 3,100 97
- --------------------------------------------------------------------------
97
- --------------------------------------------------------------------------
</TABLE>
18
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Value Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
MAJOR BANKS -- 5.4%
BankBoston 7,200 $ 280
Chase Manhattan 3,100 211
Fleet Financial Group 7,300 326
Mellon Bank 3,400 234
PNC Bank 2,900 157
- --------------------------------------------------------------------------
1,208
- --------------------------------------------------------------------------
MID-SIZED BANKS -- 2.4%
AmSouth Bancorporation 8,200 374
First Security 2,300 54
Hibernia, Cl A 6,400 111
- --------------------------------------------------------------------------
539
- --------------------------------------------------------------------------
MULTI-LINE INSURANCE -- 2.3%
Allstate 5,200 201
American International Group 3,300 319
- --------------------------------------------------------------------------
520
- --------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE -- 0.5%
Progressive 600 102
- --------------------------------------------------------------------------
102
- --------------------------------------------------------------------------
SMALLER BANKS -- 0.5%
Valley National Bancorporation 4,200 118
- --------------------------------------------------------------------------
118
- --------------------------------------------------------------------------
SPECIALTY INSURERS -- 0.7%
AMBAC Financial Group 2,500 150
- --------------------------------------------------------------------------
150
- --------------------------------------------------------------------------
TOTAL FINANCE (COST $3,528) 3,840
- --------------------------------------------------------------------------
HEALTH TECHNOLOGY -- 11.3%
BIOTECHNOLOGY -- 1.0%
Amgen* 600 63
Biogen* 2,000 166
- --------------------------------------------------------------------------
229
- --------------------------------------------------------------------------
MAJOR PHARMACEUTICALS -- 7.7%
Abbott Laboratories 7,400 363
Bristol-Myers Squibb 600 80
Lilly (Eli) & Company 2,300 204
Pharmacia & Upjohn 1,500 91
Schering-Plough 7,700 425
Warner-Lambert 7,200 541
- --------------------------------------------------------------------------
1,704
- --------------------------------------------------------------------------
OTHER PHARMACEUTICALS -- 2.6%
Allergan 9,000 583
- --------------------------------------------------------------------------
583
- --------------------------------------------------------------------------
TOTAL HEALTH TECHNOLOGY (COST $2,249) 2,516
- --------------------------------------------------------------------------
INDUSTRIAL SERVICES -- 1.4%
ENGINEERING & CONSTRUCTION -- 1.4%
Fluor 7,200 306
- --------------------------------------------------------------------------
306
- --------------------------------------------------------------------------
TOTAL INDUSTRIAL SERVICES (COST $297) 306
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
NON-ENERGY MINERALS -- 1.3%
BUILDING MATERIALS -- 1.3%
Owens Corning 2,400 $ 85
USG 1,600 82
Vulcan Materials 1,000 131
- --------------------------------------------------------------------------
298
- --------------------------------------------------------------------------
TOTAL NON-ENERGY MINERALS (COST $265) 298
- --------------------------------------------------------------------------
PRODUCER MANUFACTURING -- 4.4%
AUTO PARTS: O.E.M. -- 0.9%
Federal-Mogul 3,200 190
- --------------------------------------------------------------------------
190
- --------------------------------------------------------------------------
DIVERSIFIED MANUFACTURE -- 0.4%
Tyco International 1,200 91
- --------------------------------------------------------------------------
91
- --------------------------------------------------------------------------
INDUSTRIAL MACHINERY/COMPONENTS -- 0.6%
Ingersoll Rand 2,800 131
- --------------------------------------------------------------------------
131
- --------------------------------------------------------------------------
OFFICE EQUIPMENT/SUPPLIES -- 2.5%
Diebold 6,600 235
Lexmark International Group, Cl A* 3,300 332
- --------------------------------------------------------------------------
567
- --------------------------------------------------------------------------
TOTAL PRODUCER MANUFACTURING (COST $796) 979
- --------------------------------------------------------------------------
RETAIL TRADE -- 2.8%
CLOTHING/SHOE/ACCESSORY STORES -- 0.7%
TJX Companies 5,800 168
- --------------------------------------------------------------------------
168
- --------------------------------------------------------------------------
COMPUTER/VIDEO CHAINS -- 0.4%
Best Buy* 1,400 86
- --------------------------------------------------------------------------
86
- --------------------------------------------------------------------------
DEPARTMENT STORES -- 0.5%
Federated Department Stores* 2,500 109
- --------------------------------------------------------------------------
109
- --------------------------------------------------------------------------
DISCOUNT STORES -- 0.8%
Wal-Mart Stores 2,100 171
- --------------------------------------------------------------------------
171
- --------------------------------------------------------------------------
FOOD CHAINS -- 0.4%
Kroger* 1,400 85
- --------------------------------------------------------------------------
85
- --------------------------------------------------------------------------
TOTAL RETAIL TRADE (COST $495) 619
- --------------------------------------------------------------------------
TECHNOLOGY SERVICES -- 10.3%
COMPUTER SOFTWARE -- 7.5%
Adobe Systems 3,200 150
BMC Software* 5,700 254
Computer Associates International 8,300 353
Compuware* 300 23
Microsoft* 1,900 264
Novell* 20,000 363
Oracle* 1,000 43
Sterling Software* 8,200 222
- --------------------------------------------------------------------------
1,672
- --------------------------------------------------------------------------
</TABLE>
19
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Value Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
EDP SERVICES -- 1.5%
DST Systems* 4,300 $ 245
Keane* 2,100 84
- --------------------------------------------------------------------------
329
- --------------------------------------------------------------------------
ELECTRONIC DISTRIBUTORS -- 1.3%
Arrow Electronics* 10,700 286
- --------------------------------------------------------------------------
286
- --------------------------------------------------------------------------
TOTAL TECHNOLOGY SERVICES (COST $2,081) 2,287
- --------------------------------------------------------------------------
TRANSPORTATION -- 2.5%
AIRLINES -- 2.5%
AMR* 4,100 243
Comair Holdings 5,000 170
Continental Airlines, Cl B* 1,200 40
Delta Air Lines 2,100 109
- --------------------------------------------------------------------------
562
- --------------------------------------------------------------------------
TOTAL TRANSPORTATION (COST $546) 562
- --------------------------------------------------------------------------
UTILITIES -- 12.5%
ELECTRIC UTILITIES: CENTRAL -- 0.5%
Kansas City Power & Light 3,500 104
- --------------------------------------------------------------------------
104
- --------------------------------------------------------------------------
ELECTRIC UTILITIES: EAST -- 2.6%
Allegheny Energy 5,200 179
Consolidated Edison 2,500 132
PECO Energy 6,700 279
- --------------------------------------------------------------------------
590
- --------------------------------------------------------------------------
ELECTRIC UTILITIES: SOUTH -- 3.7%
Central & South West 1,500 41
Florida Progress 1,800 81
Houston Industries 12,500 402
LG&E Energy 10,400 294
- --------------------------------------------------------------------------
818
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Shares/
Face Market
Amount Value
Description (000) (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
MAJOR U.S. TELECOMMUNICATIONS -- 4.7%
Ameritech 700 $ 44
Bellsouth 1,000 50
GTE 1,500 98
MCI Worldcom* 1,700 122
SBC Communications 2,100 113
Sprint Fon Group 3,700 311
US West 5,000 322
- --------------------------------------------------------------------------
1,060
- --------------------------------------------------------------------------
OTHER TELECOMMUNICATIONS -- 1.0%
Century Telephone Enterprises 3,300 224
- --------------------------------------------------------------------------
224
- --------------------------------------------------------------------------
TOTAL UTILITIES (COST $2,529) 2,796
- --------------------------------------------------------------------------
Total Common Stock
(Cost $18,345) 20,947
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 4.5%
Morgan Stanley
4.50%, dated 12/31/98, matures 01/04/99,
repurchase price $1,013,880 (collateralized
by U.S. Treasury Note: total market value
$1,037,904)(A) $1,013 1,013
- --------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(COST $1,013) 1,013
- --------------------------------------------------------------------------
TOTAL INVESTMENTS -- 98.5%
(COST $19,358) $21,960
- --------------------------------------------------------------------------
</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 93.8%
COMMERCIAL SERVICES -- 5.5%
ADVERTISING -- 0.8%
ADVO Systems* 10,600 $ 280
VDI Media* 6,000 57
- --------------------------------------------------------------------------
337
- --------------------------------------------------------------------------
DIVERSIFIED COMMERCIAL SERVICES -- 4.4%
Interim Services* 12,300 288
NCO Group* 1,300 59
Personnel Group of America* 24,600 431
RCM Technologies* 21,000 556
Reynolds & Reynolds, Cl A 26,500 607
- --------------------------------------------------------------------------
1,941
- --------------------------------------------------------------------------
WHOLESALE DISTRIBUTORS -- 0.3%
United Stationers 6,000 156
- --------------------------------------------------------------------------
156
- --------------------------------------------------------------------------
TOTAL COMMERCIAL SERVICES (COST $1,948) 2,434
- --------------------------------------------------------------------------
CONSUMER DURABLES -- 9.3%
AUTOMOTIVE AFTERMARKET -- 0.4%
Bandag 1,000 40
Standard Motor Products 6,200 150
- --------------------------------------------------------------------------
190
- --------------------------------------------------------------------------
HOME FURNISHINGS -- 4.7%
Dorel Industries, Cl B* 36,000 581
Ethan Allen Interiors 1,800 74
La-Z-Boy 17,200 306
Mohawk Industries* 22,900 963
Pillowtex 5,300 142
- --------------------------------------------------------------------------
2,066
- --------------------------------------------------------------------------
HOMEBUILDING -- 4.2%
Beazer Homes USA* 14,200 355
Champion Enterprises* 9,600 263
Crossman Communities* 11,000 304
Horton (D.R.) 24,800 570
MDC Holdings 2,200 47
Pulte 11,000 306
- --------------------------------------------------------------------------
1,845
- --------------------------------------------------------------------------
TOTAL CONSUMER DURABLES (COST $3,580) 4,101
- --------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 5.5%
APPAREL -- 0.5%
Kellwood 9,500 238
- --------------------------------------------------------------------------
238
- --------------------------------------------------------------------------
MEAT/POULTRY/FISH -- 1.1%
IBP 16,200 472
- --------------------------------------------------------------------------
472
- --------------------------------------------------------------------------
SHOE MANUFACTURING -- 1.1%
K-Swiss, Cl A 3,400 91
Timberland, Cl A* 8,900 406
- --------------------------------------------------------------------------
497
- --------------------------------------------------------------------------
COMMON STOCK -- CONTINUED
SPECIALTY FOODS/CANDY -- 2.8%
Earthgrains 2,500 $ 77
Fresh Del Monte Produce* 15,800 343
Ralcorp Holdings* 12,900 235
Universal Foods 20,500 562
- --------------------------------------------------------------------------
1,217
- ---------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
TOTAL CONSUMER NON-DURABLES (COST $2,423) 2,424
- --------------------------------------------------------------------------
CONSUMER SERVICES -- 5.6%
BOOKS/MAGAZINES -- 1.7%
IDG Books Worldwide* 26,300 454
Scholastic* 5,400 290
- --------------------------------------------------------------------------
744
- --------------------------------------------------------------------------
OTHER CONSUMER SERVICES -- 1.1%
Veterinary Centers of America* 25,000 498
- --------------------------------------------------------------------------
498
- --------------------------------------------------------------------------
RESTAURANTS -- 2.8%
Buffets* 40,300 481
Foodmaker* 19,100 421
Rare Hospitality International* 19,000 266
Rock Bottom Restaurants* 6,800 37
- --------------------------------------------------------------------------
1,205
- --------------------------------------------------------------------------
TOTAL CONSUMER SERVICES (COST $1,964) 2,447
- --------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY -- 7.9%
ELECTRONIC COMPONENTS -- 1.0%
Hadco* 8,200 287
Plexus* 1,900 64
Smart Modular Technologies* 3,600 100
- --------------------------------------------------------------------------
451
- --------------------------------------------------------------------------
ELECTRONIC DATA PROCESSING -- 0.5%
Micron Electronics* 12,000 208
- --------------------------------------------------------------------------
208
- --------------------------------------------------------------------------
ELECTRONIC PRODUCTION EQUIPMENT -- 1.2%
Novellus Systems* 11,000 545
- --------------------------------------------------------------------------
545
- --------------------------------------------------------------------------
MILITARY/GOVERNMENT/TECHNICAL -- 0.2%
Applied Signal Technology* 7,500 81
- --------------------------------------------------------------------------
81
- --------------------------------------------------------------------------
OFFICE/PLANT AUTOMATION -- 0.4%
Brooktrout Technology* 10,900 187
- --------------------------------------------------------------------------
187
- --------------------------------------------------------------------------
SEMI-CONDUCTORS -- 2.7%
C-Cube Microsystems* 8,200 221
Cirrus Logic* 9,500 93
Cypress Semiconductor* 25,000 208
Lattice Semiconductor* 5,700 261
Level One Communications* 5,600 199
Micrel* 3,500 193
- --------------------------------------------------------------------------
1,175
- --------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 1.9%
Advanced Fibre Communication* 56,200 615
Periophonics* 15,200 200
- --------------------------------------------------------------------------
815
- --------------------------------------------------------------------------
TOTAL ELECTRONIC TECHNOLOGY (COST $3,105) 3,462
- --------------------------------------------------------------------------
</TABLE>
21
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
ENERGY MINERALS -- 0.4%
OIL & GAS PRODUCTION -- 0.4%
Devon Energy 1,800 $ 55
Vintage Petroleum 12,000 104
- --------------------------------------------------------------------------
159
- --------------------------------------------------------------------------
TOTAL ENERGY MINERALS (COST $218) 159
- --------------------------------------------------------------------------
FINANCE -- 18.9%
INVESTMENT BANKERS/BROKERS/SERVICES -- 4.3%
Everen Capital 10,900 248
Freedom Securities 12,500 189
Investment Technology Group* 6,000 372
Legg Mason 31,800 1,004
Raymond James Financial 3,300 70
- --------------------------------------------------------------------------
1,883
- --------------------------------------------------------------------------
INVESTMENT MANAGERS -- 1.0%
Federated Investors 14,000 254
Waddell & Reed Financial, Cl A 7,800 185
- --------------------------------------------------------------------------
439
- --------------------------------------------------------------------------
MAJOR BANKS -- 2.8%
Summit Bancorp 4,600 201
Unionbancal 30,000 1,022
- --------------------------------------------------------------------------
1,223
- --------------------------------------------------------------------------
MID-SIZED BANKS --1.6%
Bancwest 5,200 250
Mercantile Bankshares 11,000 423
- --------------------------------------------------------------------------
673
- --------------------------------------------------------------------------
REAL ESTATE -- 0.4%
Sunterra* 12,300 185
- --------------------------------------------------------------------------
185
- --------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 2.4%
Berkshire Realty 23,900 227
Camden Property Trust 2,800 73
Cornerstone Properties 2,700 42
Developers Diversified Realty 10,400 185
Highwoods Properties 1,800 46
Mack Cali Realty 5,600 173
New Plan Excel Realty Trust 1,300 29
Pennsylvania Real Estate Investment Trust 5,000 97
Sun Communties 1,200 42
Weingarten Realty Investors 3,300 147
- --------------------------------------------------------------------------
1,061
- --------------------------------------------------------------------------
RENTAL/LEASING COMPANIES -- 0.6%
GATX 7,000 265
- --------------------------------------------------------------------------
265
- --------------------------------------------------------------------------
SAVINGS & LOAN ASSOCIATIONS -- 0.6%
Carolina First 3,800 95
Flushing Financial 5,850 93
Staten Island Bancorp 4,300 86
- --------------------------------------------------------------------------
274
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
SMALLER BANKS -- 4.6%
City National 9,900 $ 412
Commercial Bank of New York 6,600 97
North Fork Bancorporation 11,300 270
Pacific Bank 9,500 414
UST 24,900 587
Valley National Bancorporation 8,900 251
- --------------------------------------------------------------------------
2,031
- --------------------------------------------------------------------------
SPECIALTY INSURERS -- 0.6%
Financial Securities Assurance Holdings 5,100 277
- --------------------------------------------------------------------------
277
- --------------------------------------------------------------------------
TOTAL FINANCE (COST $8,060) 8,311
- --------------------------------------------------------------------------
HEALTH SERVICES -- 3.7%
HOSPITAL/NURSING MANAGEMENT -- 0.8%
Beverly Enterprises* 26,600 180
HCR Manor Care* 5,400 158
- --------------------------------------------------------------------------
338
- --------------------------------------------------------------------------
MANAGED HEALTH CARE -- 0.4%
Trigon Healthcare* 4,800 179
- --------------------------------------------------------------------------
179
- --------------------------------------------------------------------------
MEDICAL/DENTAL DISTRIBUTORS -- 0.7%
Bindly Western Industries 3,800 187
Owens & Minor 7,700 121
- --------------------------------------------------------------------------
308
- --------------------------------------------------------------------------
SERVICES TO THE HEALTH INDUSTRY -- 1.8%
Boron Lepore & Associates* 2,700 93
Health Management Systems* 20,000 158
Pharmaceutical Product Development* 18,200 547
- --------------------------------------------------------------------------
798
- --------------------------------------------------------------------------
TOTAL HEALTH SERVICES (COST $1,446) 1,623
- --------------------------------------------------------------------------
HEALTH TECHNOLOGY -- 2.2%
BIOTECHNOLOGY -- 0.8%
IDEXX Laboratories* 12,100 326
- --------------------------------------------------------------------------
326
- --------------------------------------------------------------------------
MEDICAL SPECIALTIES -- 0.1%
Invacare 1,800 43
- --------------------------------------------------------------------------
43
- --------------------------------------------------------------------------
OTHER PHARMACEUTICALS -- 1.3%
King Pharmaceuticals* 22,000 580
- --------------------------------------------------------------------------
580
- --------------------------------------------------------------------------
TOTAL HEALTH TECHNOLOGY (COST $627) 949
- --------------------------------------------------------------------------
INDUSTRIAL SERVICES -- 0.5%
ENGINEERING & CONSTRUCTION -- 0.3%
Emcor Group* 2,300 37
Group Maintenance America* 8,200 99
- --------------------------------------------------------------------------
136
- --------------------------------------------------------------------------
OILFIELD SERVICES/EQUIPMENT -- 0.2%
Horizin Offshore* 17,600 97
- --------------------------------------------------------------------------
97
- --------------------------------------------------------------------------
TOTAL INDUSTRIAL SERVICES (COST $325) 233
- --------------------------------------------------------------------------
</TABLE>
22
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
NON-ENERGY MINERALS -- 1.2%
BUILDING MATERIALS -- 0.8%
Southdown 6,252 $ 370
- --------------------------------------------------------------------------
370
- --------------------------------------------------------------------------
STEEL/IRON ORE -- 0.4%
AK Steel Holding 7,300 172
- --------------------------------------------------------------------------
172
- --------------------------------------------------------------------------
TOTAL NON-ENERGY MINERALS (COST $505) 542
- --------------------------------------------------------------------------
PRODUCER MANUFACTURING -- 7.8%
AUTO PARTS -- 1.1%
Delco Remy International, Cl A* 18,400 181
Meritor Automotive 14,200 301
- --------------------------------------------------------------------------
482
- --------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.9%
Dal-Tile International* 41,000 425
- --------------------------------------------------------------------------
425
- --------------------------------------------------------------------------
CONSTRUCTION/AG EQUIPMENT/TRUCKS -- 2.5%
GEHL* 2,600 40
Greenbrier Companies 14,600 206
JLG Industries 21,400 334
Wabash National 24,900 506
- --------------------------------------------------------------------------
1,086
- --------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING -- 0.4%
Mark IV Industries 3,400 44
United Dominion Industries Limited 7,500 153
- --------------------------------------------------------------------------
197
- --------------------------------------------------------------------------
ELECTRICAL PRODUCTS -- 0.2%
Advanced Lighting Technologies* 3,200 31
C & D Technologies 2,000 55
- --------------------------------------------------------------------------
86
- --------------------------------------------------------------------------
METAL FABRICATIONS -- 2.2%
Avondale Industries* 7,000 203
Commonwealth Industries 8,700 82
Encore Wire* 6,000 56
Mobile Mini* 14,400 155
Mueller Industries* 7,700 156
NN Ball & Roller 12,400 73
Tower Automotive* 9,800 244
- --------------------------------------------------------------------------
969
- --------------------------------------------------------------------------
OFFICE EQUIPMENT/SUPPLIES -- 0.5%
Polycom* 9,500 211
- --------------------------------------------------------------------------
211
- --------------------------------------------------------------------------
TOTAL PRODUCER MANUFACTURING (COST $3,454) 3,456
- --------------------------------------------------------------------------
RETAIL TRADE -- 3.5%
CATALOG/SPECIALTY DISTRIBUTION -- 0.8%
DM Management* 20,100 382
- --------------------------------------------------------------------------
382
- --------------------------------------------------------------------------
CLOTHING/SHOE/ACCESSORY STORES -- 0.3%
Mens Wearhouse* 4,000 127
- --------------------------------------------------------------------------
127
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
Market
Value
Description Shares (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
COMPUTER/VIDEO CHAINS -- 1.9%
Trans World Entertainment* 8,800 $ 168
Tweeter Home Entertainment Group* 23,400 673
- --------------------------------------------------------------------------
841
- --------------------------------------------------------------------------
DISCOUNT STORES -- 0.4%
BJ's Wholesale Club* 3,100 143
Shopko Stores 900 30
- --------------------------------------------------------------------------
173
- --------------------------------------------------------------------------
OTHER SPECIALTY STORES -- 0.1%
Sunglass Hut International* 3,700 26
- --------------------------------------------------------------------------
26
- --------------------------------------------------------------------------
TOTAL RETAIL TRADE (COST $1,020) 1,549
- --------------------------------------------------------------------------
TECHNOLOGY SERVICES -- 11.5%
COMPUTER SOFTWARE -- 6.6%
Ansys* 28,200 310
Axent Technologies* 5,000 153
Business Objects ADR* 13,100 426
Informix* 48,500 479
Mapics* 20,000 330
Software Spectrum* 8,100 129
SPSS* 15,000 283
Sterling Software* 16,700 452
Structural Dynamics Research* 5,500 109
Timberline Software 16,000 220
- --------------------------------------------------------------------------
2,891
- --------------------------------------------------------------------------
EDP SERVICES -- 4.7%
4Front Technologies* 34,200 378
American Management Systems 8,000 320
Computer Horizons* 11,000 292
Cotelligent* 9,900 211
Data Processing Research* 11,100 325
Intelligroup* 16,500 295
SPR* 14,000 242
- --------------------------------------------------------------------------
2,063
- --------------------------------------------------------------------------
ELECTRONICS DISTRIBUTORS -- 0.2%
Scansource* 4,800 103
- --------------------------------------------------------------------------
103
- --------------------------------------------------------------------------
TOTAL TECHNOLOGY SERVICES (COST $3,977) 5,057
- --------------------------------------------------------------------------
TRANSPORTATION -- 7.9%
AIR FREIGHT/DELIVERY SERVICES -- 0.3%
Eagle USA Airfreight* 6,500 159
- --------------------------------------------------------------------------
159
- --------------------------------------------------------------------------
AIRLINES -- 6.0%
Alaska Airgroup* 11,200 495
Amtran* 5,300 144
ASA Holdings 7,500 229
Mesaba Holdings* 25,300 522
Midway Airlines* 35,800 430
Midwest Express Holdings* 30,600 805
- --------------------------------------------------------------------------
2,625
- --------------------------------------------------------------------------
</TABLE>
23
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Small Cap Value Portfolio
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Market
Shares/Face Value
Description Amount (000) (000)
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
TRUCKING -- 1.6%
Landstar System* 17,000 $ 693
- --------------------------------------------------------------------------
693
- --------------------------------------------------------------------------
TOTAL TRANSPORTATION (COST $3,500) 3,477
- --------------------------------------------------------------------------
UTILITIES -- 2.4%
ELECTRIC UTILITIES: CENTRAL -- 0.7%
Kansas City Power & Light 5,100 151
Northwestern 5,300 140
- --------------------------------------------------------------------------
291
- --------------------------------------------------------------------------
ELECTRIC UTILITIES: EAST -- 0.0%
Conectiv, Cl A 562 22
- --------------------------------------------------------------------------
22
- --------------------------------------------------------------------------
ELECTRIC UTILITIES: SOUTH -- 0.0%
Cleco 400 14
- --------------------------------------------------------------------------
14
- --------------------------------------------------------------------------
ELECTRIC UTILITIES: WEST -- 1.0%
Idacorp 11,600 420
- --------------------------------------------------------------------------
420
- --------------------------------------------------------------------------
NATURAL GAS DISTRIBUTION -- 0.4%
Indiana Energy 2,000 49
Wicor 5,700 125
- --------------------------------------------------------------------------
174
- --------------------------------------------------------------------------
OTHER TELECOMMUNICATIONS -- 0.3%
IDT* 10,100 155
- --------------------------------------------------------------------------
155
- --------------------------------------------------------------------------
TOTAL UTILITIES (COST $1,111) 1,076
- --------------------------------------------------------------------------
Total Common Stock
(Cost $37,263) 41,300
- --------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.9%
Morgan Stanley
4.50%, dated 12/31/98, matures
01/04/99, repurchase price $1,724,028
(collateralized by U.S. Treasury Note:
total market value $1,764,880)(A) $ 1,723 1,723
- --------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,723) 1,723
- --------------------------------------------------------------------------
TOTAL INVESTMENTS -- 97.7%
(COST $38,986) $43,023
- --------------------------------------------------------------------------
</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.
24
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (000)
December 31, 1998
<TABLE>
<CAPTION>
PBHG PBHG
LARGE CAP VALUE SMALL CAP VALUE
PORTFOLIO PORTFOLIO
--------------- ---------------
<S> <C> <C>
ASSETS:
Investments, at value (Cost $18,345 and $37,263 respectively)................. $20,947 $41,300
Repurchase Agreements, at value (Cost $1,013 and $1,723 respectively)......... 1,013 1,723
Receivable for investments sold............................................... 1,158 2,176
Receivable for capital shares sold............................................ 486 657
Other Assets.................................................................. 24 30
------- -------
Total assets.................................................................. 23,628 45,886
------- -------
LIABILITIES:
Payable for investment securities purchased................................... (1,325) (1,794)
Accrued expenses.............................................................. (17) (52)
------- -------
Total liabilities............................................................. (1,342) (1,846)
------- -------
NET ASSETS:
Paid-in-capital (authorized 500 million shares for the PBHG Large
Cap Value Portfolio and the PBHG Small Cap Value Portfolio
Funds -- $0.001 par value) based on 1,561,455 and 3,792,876
outstanding shares of common stock.......................................... 18,909 41,053
Accumulated net realized gain (loss) on investments........................... 775 (1,050)
Net unrealized appreciation on investments.................................... 2,602 4,037
------- -------
Net Assets.................................................................... $22,286 $44,040
======= =======
Net Asset Value, Offering and Redemption Price Per Share...................... $ 14.27 $ 11.61
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (000)
For the year ended December 31, 1998
<TABLE>
<CAPTION>
PBHG PBHG
PBHG TECHNOLOGY & PBHG LARGE CAP
GROWTH II COMMUNICATIONS SELECT 20 VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................................... $ 13 $ 5 $ 116 $ 104
Interest...................................................... 69 108 1,052 28
------- ------ ------- -------
Total Investment Income..................................... 82 113 1,168 132
------- ------ ------- -------
EXPENSES:
Investment Advisory Fees...................................... 124 147 972 51
Administrative Fees........................................... 22 26 172 12
Custodian Fees................................................ 9 12 8 14
Professional Fees............................................. 9 12 86 6
Transfer Agent Fees........................................... 26 27 38 25
Printing Fees................................................. 25 35 54 3
Directors' Fees............................................... 6 7 33 2
Amortization of Deferred Organizational Costs................. 2 2 2 2
Pricing....................................................... 1 1 1 --
Insurance and Other Expenses.................................. 1 1 20 1
------- ------ ------- -------
Total Expenses.............................................. 225 270 1,386 116
------- ------ ------- -------
Waiver of Investment Advisory Fees............................ (50) (62) (14) (37)
------- ------ ------- -------
Net Expenses................................................ 175 208 1,372 79
------- ------ ------- -------
NET INVESTMENT INCOME (LOSS).................................... (93) (95) (204) 53
------- ------ ------- -------
Net Realized Gain (Loss) from Security Transactions........... (1,254) (1,742) (8,960) 905
Net Change in Unrealized Appreciation on Investments.......... 2,680 7,707 74,080 2,553
------- ------ ------- -------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................. 1,426 5,965 65,120 3,458
------- ------ ------- -------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 1,333 $5,870 $64,916 $ 3,511
======= ====== ======= =======
<CAPTION>
PBHG
SMALL CAP
VALUE
PORTFOLIO
---------
<S> <C>
INVESTMENT INCOME:
Dividends..................................................... $ 243
Interest...................................................... 75
-------
Total Investment Income..................................... 318
-------
EXPENSES:
Investment Advisory Fees...................................... 304
Administrative Fees........................................... 46
Custodian Fees................................................ 12
Professional Fees............................................. 19
Transfer Agent Fees........................................... 27
Printing Fees................................................. 19
Directors' Fees............................................... 11
Amortization of Deferred Organizational Costs................. 2
Pricing....................................................... 1
Insurance and Other Expenses.................................. 2
-------
Total Expenses.............................................. 443
-------
Waiver of Investment Advisory Fees............................ (78)
-------
Net Expenses................................................ 365
-------
NET INVESTMENT INCOME (LOSS).................................... (47)
-------
Net Realized Gain (Loss) from Security Transactions........... (1,047)
Net Change in Unrealized Appreciation on Investments.......... 3,853
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................. 2,806
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 2,759
=======
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (000)
For the year ended December 31, 1998 and the period ended December 31, 1997
<TABLE>
<CAPTION>
PBHG
LARGE
PBHG CAP
PBHG TECHNOLOGY & PBHG VALUE
GROWTH II COMMUNICATIONS SELECT 20 PORTFOLIO
PORTFOLIO (1) PORTFOLIO (1) PORTFOLIO (2) (3)
-------------------- -------------------- -------------------- --------
01/01/98 05/01/97 01/01/98 05/01/97 01/01/98 09/28/97 01/01/98
TO TO TO TO TO TO TO
12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT ACTIVITIES:
Net Investment Income (Loss).................. $ (93) $ (3) $ (95) $ 3 $ (204) $ 3 $ 53
Net Realized Gain (Loss) from Security
Transactions................................ (1,254) (287) (1,742) (85) (8,960) (55) 905
Net Change in Unrealized Appreciation
on Investments.............................. 2,680 253 7,707 (20) 74,080 200 2,553
-------- -------- -------- ------ -------- ------ --------
Net Increase (Decrease) in Net Assets
Resulting from Operations................. 1,333 (37) 5,870 (102) 64,916 148 3,511
-------- -------- -------- ------ -------- ------ --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income......................... -- -- (3) -- (3) -- (56)
Net Realized Gains from Security
Transactions................................ -- -- -- -- -- -- (117)
-------- -------- -------- ------ -------- ------ --------
Total Distributions......................... -- -- (3) -- (3) -- (173)
-------- -------- -------- ------ -------- ------ --------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued................................. 18,276 11,463 31,082 9,461 294,062 7,464 22,710
Shares Issued upon Reinvestment of
Distributions............................... -- -- 3 -- 3 -- 173
Shares Redeemed............................... (11,524) (1,207) (13,576) (259) (48,669) (12) (5,495)
-------- -------- -------- ------ -------- ------ --------
Increase in Net Assets Derived from Capital
Share Transactions.......................... 6,752 10,256 17,509 9,202 245,396 7,452 17,388
-------- -------- -------- ------ -------- ------ --------
Total Increase in Net Assets................ 8,085 10,219 23,376 9,100 310,309 7,600 20,726
-------- -------- -------- ------ -------- ------ --------
NET ASSETS:
Beginning of Period........................... 10,236 17 9,117 17 7,617 17 1,560
-------- -------- -------- ------ -------- ------ --------
End of Period................................. $ 18,321 $ 10,236 $ 32,493 $9,117 $317,926 $7,617 $ 22,286
======== ======== ======== ====== ======== ====== ========
(A): SHARES ISSUED AND REDEEMED
Shares Issued................................. 1,725 1,062 2,749 896 22,732 759 1,853
Shares Issued upon Reinvestment of
Distributions............................... -- -- -- -- -- -- 12
Shares Redeemed............................... (1,102) (112) (1,263) (22) (3,983) (1) (453)
-------- -------- -------- ------ -------- ------ --------
Net Increase in Shares Outstanding............ 623 950 1,486 874 18,749 758 1,412
======== ======== ======== ====== ======== ====== ========
<CAPTION>
PBHG PBHG
LARGE CAP VALUE SMALL CAP VALUE
PORTFOLIO (3) PORTFOLIO (3)
---------------- --------------------
10/29/97 01/01/98 10/29/97
TO TO TO
12/31/97 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT ACTIVITIES:
Net Investment Income (Loss).................. $ 3 $ (47) $ 8
Net Realized Gain (Loss) from Security
Transactions................................ (13) (1,047) 42
Net Change in Unrealized Appreciation
on Investments.............................. 49 3,853 183
------ -------- ------
Net Increase (Decrease) in Net Assets
Resulting from Operations................. 39 2,759 233
------ -------- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income......................... -- (7) --
Net Realized Gains from Security
Transactions................................ -- (44) --
------ -------- ------
Total Distributions......................... -- (51) --
------ -------- ------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued................................. 1,583 48,005 9,215
Shares Issued upon Reinvestment of
Distributions............................... -- 51 --
Shares Redeemed............................... (79) (16,045) (144)
------ -------- ------
Increase in Net Assets Derived from Capital
Share Transactions.......................... 1,504 32,011 9,071
------ -------- ------
Total Increase in Net Assets................ 1,543 34,719 9,304
------ -------- ------
NET ASSETS:
Beginning of Period........................... 17 9,321 17
------ -------- ------
End of Period................................. $1,560 $ 44,040 $9,321
====== ======== ======
(A): SHARES ISSUED AND REDEEMED
Shares Issued................................. 156 4,363 902
Shares Issued upon Reinvestment of
Distributions............................... -- 5 --
Shares Redeemed............................... (8) (1,464) (14)
------ -------- ------
Net Increase in Shares Outstanding............ 148 2,904 888
====== ======== ======
</TABLE>
(1) The PBHG Growth II, and Technology & Communications Portfolios commenced
operations on May 1, 1997.
(2) The PBHG Select 20 Portfolio commenced operations on September 28, 1997.
(3) The PBHG Large Cap Value and Small Cap Value Portfolios commenced operations
on October 29, 1997.
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.
[LOGO] -------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the period ended December 31, 1998
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 Income (Loss) on Securities Income Gains of Period Return
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
PBHG Growth II Portfolio
1998.............. $ 10.75 ($0.06) $0.94 -- -- $11.63 8.19%
1997(1)........... 10.00 -- 0.75 -- -- 10.75 7.50%**
PBHG Technology & Communications Portfolio
1998.............. $ 10.41 ($0.04) $3.39 -- -- $13.76 32.20%
1997(1)........... 10.00 -- 0.41 -- -- 10.41 4.10%**
PBHG Select 20 Portfolio
1998.............. $ 10.03 ($0.01) $6.28 -- -- $16.30 62.52%
1997(2)........... 10.00 -- 0.03 -- -- 10.03 0.30%**
PBHG Large Cap Value Portfolio
1998.............. $ 10.43 ($0.02) $3.98 $(0.04) $(0.08) $14.27 37.96%
1997(3)........... 10.00 0.02 0.41 -- -- 10.43 4.30%**
PBHG Small Cap Value Portfolio
1998.............. $ 10.48 ($0.02) $1.16 -- $(0.01) $11.61 10.94%
1997(3)........... 10.00 0.01 0.47 -- -- 10.48 4.80%**
<CAPTION>
Ratio Ratio of Net
Net of Expenses Income (Loss)
Assets Ratio Ratio of Net to Average to Average
End of Expenses Income (Loss) Net Assets Net Assets Portfolio
of Period to Average to Average (Excluding (Excluding Turnover
(000) Net Assets Net Assets Waivers) Waivers) Rate
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
PBHG Growth II Portfolio
1998.............. $ 18,321 1.20% (0.64)% 1.54% (0.98)% 228.09%
1997(1)........... 10,236 1.20%* (0.11)%* 4.38%* (3.29)%* 44.57%
PBHG Technology & Communications Portfolio
1998.............. $ 32,493 1.20% (0.55)% 1.56% (0.91)% 264.58%
1997(1)........... 9,117 1.20%* 0.37 %* 5.09%* (3.52)%* 69.34%
PBHG Select 20 Portfolio
1998.............. $ 317,926 1.20% (0.18)% 1.21% (0.19)% 48.79%
1997(2)........... 7,617 1.20%* 0.51 %* 3.36%* (1.65)%* 18.53%
PBHG Large Cap Value Portfolio
1998.............. $ 22,286 1.00% 0.67 % 1.47% 0.20 % 635.10%
1997(3)........... 1,560 1.00%* 1.91 %* 8.04%* (5.13)%* 68.93%
PBHG Small Cap Value Portfolio
1998.............. $ 44,040 1.20% (0.15)% 1.46% (0.41)% 293.90%
1997(3)........... 9,321 1.20%* 1.40 %* 3.63%* (1.03)%* 41.14%
</TABLE>
* Annualized.
** Total return has not been annualized.
(1) The PBHG Growth II and PBHG Technology & Communications Portfolios commenced
operations on May 1, 1997.
(2) The PBHG Select 20 Portfolio commenced operations on September 28, 1997.
(3) The PBHG Large Cap Value and PBHG Small Cap Value Portfolios commenced
operations on October 29, 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.
[LOGO] -------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1998
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 seven Portfolios: the PBHG
Growth II Portfolio (the "Growth II Portfolio"), the PBHG Large Cap Growth
Portfolio (the "Large Cap Growth Portfolio"), the PBHG Technology &
Communications Portfolio (the "Technology & Communications Portfolio"), the PBHG
Select 20 Portfolio (the "Select 20 Portfolio"), the PBHG Large Cap Value
Portfolio (the "Large Cap Value Portfolio"), the PBHG Small Cap Value Portfolio
(the "Small Cap Value 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 non-diversified management investment company. The financial
statements presented herein do not include the Large Cap Growth Portfolio or the
Mid-Cap Value Portfolio, which are 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, 1998, the following percentage of
outstanding shares of the Portfolios were held by the separate accounts of the
number of participating insurance companies listed below:
Percentage of Number of
Portfolio Outstanding Shares Insurance Companies
- ------------------------- ------------------- -------------------
Growth II Portfolio 61%, 27% 2
Technology &
Communications Portfolio 80% 1
Select 20 Portfolio 91% 1
Large Cap Value Portfolio 89%, 11% 2
Small Cap Value Portfolio 93% 1
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 at the close of trading on the primary
exchange (currently 4:00 p.m., Eastern time). If there is no such reported sale,
these securities and unlisted securities for which market quotations are not
readily available, are valued at the last bid 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. Accordingly, the
following permanent differences as of December 31, 1998, primarily attributable
to certain net operating losses which, for tax purposes, are not available to
offset future income or have been used to offset net short-term capital gains,
have been reclassified to the following accounts:
Paid-In-Capital
---------------
Growth II Portfolio $ 93,106
Technology & Communications Portfolio $ 95,178
Select 20 Portfolio $203,690
Small Cap Value $ 46,830
These reclassifications have 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 the Portfolio's assets, less
liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by a third party custodian bank until the respective
agreements mature. Provisions of the repurchase agreements and procedures
adopted by the Fund and followed 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.
29
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 0.85% 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. 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 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 net 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, 1998, the amount of advisory fee waiver and reimbursement of third
party expenses by the Adviser subject to possible reimbursement were as follows:
Growth II Portfolio $134,577
Technology & Communications
Portfolio $ 93,603
Select 20 Portfolio $ 27,776
Large Cap Value Portfolio $ 47,374
Small Cap Value Portfolio $ 92,148
Pilgrim Baxter Value Investors, Inc. (formerly Newbold's Assets 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 the 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 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, for the period
January 1, 1998 to April 30, 1998, 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 pays 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 0.04% of 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 0.02% 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 National Bank, 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. For the year ended December 31, 1998, PBHG Fund Services was
paid $7,000 by the Growth II and Technology & Communications Portfolios, $6,875
by the Select 20 Portfolio and $6,750 by the Large Cap Value and Small Cap Value
Portfolios for transfer agent 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.
30
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
4. INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments, for each Portfolio for the year ended December 31,
1998 were as follows:
Purchases Sales
(000) (000)
--------- ------
Growth II Portfolio 38,030 30,616
Technology & Communications Portfolio 58,877 40,947
Select 20 Portfolio 260,049 48,663
Large Cap Value Portfolio 65,067 48,994
Small Cap Value Portfolio 114,999 84,238
At December 31, 1998 the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes was not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation of securities held by each
Portfolio at December 31, 1998 are as follows:
Net
Unrealized
Unrealized Unrealized Appreciation/
Appreciation Depreciation (Depreciation)
(000) (000) (000)
------------ ------------ --------------
Growth II Portfolio 3,328 (395) 2,933
Technology &
Communications Portfolio 7,812 (125) 7,687
Select 20 Portfolio 75,513 (1,233) 74,280
Large Cap Value Portfolio 2,683 (81) 2,602
Small Cap Value Portfolio 6,035 (1,998) 4,037
The following Portfolios had capital loss carryforwards at December 31, 1998,
that can be used to offset future capital gains:
Capital Loss Capital Loss
Carryforward Carryforward
Expires Expires
12/31/2005 12/31/2006
------------- -------------
Growth II Portfolio 267,017 1,186,723
Technology & Communications
Portfolio 21,241 1,670,958
Select 20 Portfolio 55,142 8,729,157
Small Cap Value Portfolio -- 565,282
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. Borrowings from the line of credit will
bear interest at the Federal Funds Rate plus 0.40%. No Portfolio had an
outstanding borrowing at December 31, 1998. Listed below is the fund which had
an outstanding balance during the year ended December 31, 1998:
Maximum Average Daily Weighted
Amount Outstanding Average
Borrowed Balance Interest Rate
-------- ----------- --------------
Small Cap Value Portfolio $300,000 $ 2,466 5.09%
31
<PAGE>
PBHG Insurance Series Fund, Inc.
- -------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE PBHG INSURANCE SERIES FUND, INC.:
In our opinion, the accompanying statements of net assets of the PBHG Growth II
Portfolio, PBHG Technology & Communications Portfolio and PBHG Select 20
Portfolio and the statements of assets and liabilities, including the schedules
of investments, of the PBHG Large Cap Value Portfolio and PBHG Small Cap Value
Portfolio and the related statements of operations, and of changes in net
assets, and the financial highlights present fairly, in all material respects,
the financial position of the PBHG Insurance Series Fund, Inc., including the
PBHG Growth II Portfolio, PBHG Technology & Communications Portfolio, PBHG
Select 20 Portfolio, PBHG Large Cap Value Portfolio and PBHG Small Cap Value
Portfolio (the "Funds") at December 31, 1998, and the results of their
operations for the year then ended, the changes in their net assets for each of
the two years (or periods) in the period then ended and their financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1999
32
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Growth II Portfolio
NOTICE TO SHAREHOLDERS (unaudited)
For shareholders that do not have a December 31, 1998 taxable year end, this
notice is for informational purposes only.
For shareholders with a December 31, 1998 taxable year end, please consult your
tax adviser as to the pertinence of this notice.
For the fiscal year ended December 31, 1998, the Funds are designating net
capital gains and qualifying dividends with regard to distributions paid during
the year as follows:
<TABLE>
<CAPTION>
(A) (B) (C)
NET ORDINARY
CAPITAL GAINS INCOME TOTAL
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
FUND (TAX BASIS) (TAX BASIS) (TAX BASIS)
- ---- ------------- ------------- -------------
<S> <C> <C> <C>
Growth II Portfolio................................... 0% 0% 0%
Technology & Communications Portfolio................. 0% 0% 0%
Select 20 Portfolio................................... 0% 100% 100%
Large Cap Value Portfolio............................. 0% 100% 100%
Small Cap Value Portfolio............................. 0% 100% 100%
<CAPTION>
(D)
QUALIFYING
FUND DIVIDENDS(1)
-------------
<S> <C>
Growth II Portfolio..................................................... 81%
Technology & Communications Portfolio................................... 47%
Select 20 Portfolio..................................................... 71%
Large Cap Value Portfolio............................................... 41%
Small Cap Value Portfolio............................................... 76%
</TABLE>
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
* Items (A) and (B) are based on a percentage of each portfolio's
distributions.
** Item (D) is based on a percentage of ordinary income distributions of each
portfolio.
None of the Portfolios qualify in California, Connecticut, or New York to pass
through exempt interest dividends from U.S. government obligations.
33
<PAGE>
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PBHG Insurance Series Fund, Inc.
Investment Adviser
Pilgrim Baxter & Associates, Ltd.
Distributor
SEI Investments Distribution Co.
