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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
Annual Report
December 31, 1998
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. -- PBHG Mid-Cap Value Portfolio was
launched on December 1, 1998. Thus, the one month, fourth quarter and since
inception results are all identical. In December, the PBHG Mid-Cap Value
Portfolio returned 11.00% versus 12.05% for the S&P Mid-Cap Value Index. While a
one month return is not particularly significant, we are pleased to report that
the Portfolio is fully-invested and positioned to provide a significant result
for calendar 1999.
The Fed easing sparked a sharp rally in the fourth quarter. While the
absolute returns of small- and mid-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- and mid-cap stocks, we
remain very positive on the investment outlook for these companies.
Federal Reserve easings have historically been very beneficial for small-
and mid-cap 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, the Portfolio
has positions in regional telephone companies Century Telephone and Cincinnati
Bell, which should profit meaningfully from the proliferation of new phone lines
dedicated to Internet access. 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 D. Haubold
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Gary D. Haubold, CFA
Portfolio Manager
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
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AGGREGATE TOTAL RETURN(1)
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Inception to
Date(2)
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PBHG Mid-Cap Value Portfolio 11.00%
Comparison of Change in the Value of a $10,000 Investment in the
PBHG Mid-Cap Value Portfolio, versus the S&P 400 Mid-Cap
Index and the Lipper Mid-Cap Funds Average
PBHG Mid-Cap Value S&P 400 Mid-Cap Lipper Mid-Cap Funds
Portfolio Index(3) Average(4)
------------------ --------------- --------------------
11/30/98 10,000 10,000 10,000
12/98 11,100 11,205 10,955
(1) Performance is historical and not indicative of future results. The
investment return and principal value of an investment will fluctuate, so
an investor's shares, when redeemed, may be worth more or less than their
original cost.
(2) Total return has not been annualized. The PBHG Mid-Cap Value Portfolio
commenced operations on December 1, 1998.
(3) The S&P Mid-Cap 400 Index is an unmanaged capitalization-weighted index
that measures the performance of the mid-range sector of the U.S. stock
market. 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 Mid-Cap Funds Average is an equally weighted benchmark composed
of mutual funds, each of which by prospectus or portfolio practice invests
primarily in companies with market capitalizations less than $5 billion at
the time of purchase. The performance figures are based on changes in net
asset value of the Funds in the category with all capital gains
distributions and income dividends reinvested. The Index is not intended to
imply the Portfolio's past or future performance.
2
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
SCHEDULE OF INVESTMENTS
As of December 31, 1998
<TABLE>
<CAPTION>
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Market
Description Shares Value
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<S> <C> <C>
COMMON STOCK -- 98.4%
COMMERICAL SERVICES -- 4.0%
ADVERTISING -- 2.4%
Young & Rubicam* 400 $ 12,950
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12,950
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DIVERSIFIED COMMERCIAL SERVICES -- 1.6%
Reynolds & Reynolds, Cl A 200 4,588
Sabre Group Holdings, Cl A* 100 4,450
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9,038
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TOTAL COMMERCIAL SERVICES (COST $19,923) 21,988
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CONSUMER DURABLES -- 2.2%
CONSUMER ELECTRONICS/APPLIANCES -- 1.1%
Maytag 100 6,225
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6,225
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MOTOR VEHICLES -- 1.1%
Ford Motor 100 5,869
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5,869
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TOTAL CONSUMER DURABLES (COST $11,009) 12,094
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CONSUMER NON-DURABLES -- 7.1%
MEAT/POULTRY/FISH -- 0.6%
Conagra 100 3,150
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3,150
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PACKAGE GOODS/COSMETICS -- 2.1%
Clorox 100 11,681
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11,681
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PACKAGED FOODS -- 2.7%
Quaker Oats 200 11,900
Ralston Purina Group 100 3,238
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15,138
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SPECIALTY FOODS/CANDY -- 1.7%
Flowers Industries 400 9,575
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9,575
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TOTAL CONSUMER NON-DURABLES (COST $38,898) 39,544
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CONSUMER SERVICES -- 2.5%
HOTELS/RESORTS -- 0.7%
Royal Caribbean Cruises Limited 100 3,700
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3,700
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NEWSPAPERS -- 0.9%
Knight-Ridder 100 5,112
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5,112
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RESTAURANTS -- 0.9%
Tricon Global Restaurants* 100 5,013
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5,013
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TOTAL CONSUMER SERVICES (COST $12,562) 13,825
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ELECTRONIC TECHNOLOGY -- 9.2%
ELECTRONIC COMPONENTS -- 3.4%
Hadco* 200 7,000
Plexus* 100 3,388
Smart Modular Technologies* 300 8,325
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18,713
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</TABLE>
<TABLE>
<CAPTION>
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Market
Description Shares Value
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<S> <C> <C>
COMMON STOCK -- CONTINUED
ELECTRONIC DATA PROCESSING -- 0.8%
NCR* 100 $ 4,175
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4,175
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SEMI-CONDUCTORS -- 2.1%
Intel 100 11,856
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11,856
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TELECOMMUNICATIONS EQUIPMENT -- 2.9%
Advanced Fibre Communication* 1,000 10,938
Qualcomm* 100 5,181
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16,119
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TOTAL ELECTRONIC TECHNOLOGY (COST $46,038) 50,863
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FINANCE -- 23.0%
INVESTMENT MANAGERS -- 1.7%
Waddell & Reed Financial, Cl A 400 9,475
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9,475
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MAJOR BANKS -- 7.1%
Bankboston 400 15,575
Fleet Financial Group 300 13,406
Unionbancal 300 10,219
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39,200
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MID-SIZED BANKS -- 9.9%
Amsouth Bancorporation 200 9,125
First Security 100 2,338
Hibernia, Cl A 1,300 22,587
Mercantile Bankshares 300 11,550
Old Kent Financial 100 4,650
Pacific Century Financial 200 4,875
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55,125
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SPECIALTY INSURERS -- 4.3%
Ambac Financial Group 400 24,074
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24,074
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TOTAL FINANCE (COST $123,990) 127,874
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HEALTH SERVICES -- 1.1%
SERVICES TO THE HEALTH INDUSTRY -- 1.1%
Pharmaceutical Product Development* 200 6,013
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6,013
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TOTAL HEALTH SERVICES (COST $5,481) 6,013
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HEALTH TECHNOLOGY -- 2.8%
MEDICAL SPECIALISTS -- 1.6%
Mallinckrodt 300 9,244
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9,244
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OTHER PHARMACEUTICALS -- 1.2%
Allergan 100 6,475
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6,475
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TOTAL HEALTH TECHNOLOGY (COST $15,344) 15,719
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NON-ENERGY MINERALS -- 2.4%
BUILDING MATERIALS -- 2.4%
Vulcan Materials 100 13,156
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13,156
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TOTAL NON-ENERGY MINERALS (COST $12,500) 13,156
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PRODUCER MANUFACTURING -- 2.9%
AUTO PARTS -- 1.1%
Federal-Mogul 100 5,950
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5,950
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</TABLE>
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
<TABLE>
<CAPTION>
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Market
Description Shares Value
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<S> <C> <C>
COMMON STOCK -- CONTINUED
OFFICE EQUIPMENT/SUPPLIES -- 1.8%
Lexmark International Group, Cl A* 100 $ 10,050
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10,050
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TOTAL PRODUCER MANUFACTURING (COST $13,291) 16,000
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RETAIL TRADE -- 3.3%
COMPUTER/VIDEO CHAINS -- 1.1%
Best Buy* 100 6,138
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6,138
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FOOD CHAINS -- 2.2%
Kroger* 200 12,100
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12,100
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TOTAL RETAIL TRADE (COST $17,301) 18,238
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TECHNOLOGY SERVICES -- 21.7%
COMPUTER SOFTWARE -- 16.8%
Adobe Systems 400 18,700
BMC Software* 200 8,913
Computer Associates International 400 17,050
Informix* 2,000 19,749
Novell* 1,000 18,124
Sterling Software* 400 10,825
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93,361
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EDP SERVICES -- 3.5%
American Management Systems 200 8,000
DST Systems* 200 11,413
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19,413
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ELECTRONICS DISTRIBUTORS -- 1.4%
Arrow Electronics* 300 8,006
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8,006
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TOTAL TECHNOLOGY SERVICES (COST $109,628) 120,780
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TRANSPORTATION -- 0.8%
AIRLINES -- 0.8%
Alaska Airgroup* 100 4,425
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4,425
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TOTAL TRANSPORTATION (COST $4,013) 4,425
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</TABLE>
<TABLE>
<CAPTION>
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Shares/
Face Market
Description Amount Value
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<S> <C> <C>
COMMON STOCK -- CONCLUDED
UTILITIES -- 15.4%
ELECTRIC UTILITIES: CENTRAL -- 2.6%
Utilicorp United 400 $ 14,675
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14,675
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ELECTRIC UTILITIES: EAST -- 4.7%
GPU 300 13,256
PECO Energy 300 12,488
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25,744
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ELECTRIC UTILITIES: SOUTH -- 4.9%
Houston Industries 400 12,850
LG&E Energy 500 14,156
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27,006
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NATURAL GAS DISTRIBUTION -- 0.8%
AGL Resources 200 4,612
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4,612
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OTHER TELECOMMUNICATIONS -- 2.4%
Century Telephone Enterprises 200 13,500
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13,500
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TOTAL UTILITIES (COST $82,994) 85,537
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TOTAL COMMON STOCK (COST $512,972) 546,056
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REPURCHASE AGREEMENT -- 2.6%
Morgan Treasury
4.50%, dated 12/31/98, matures 01/04/99,
repurchase price $14,681 (collateralized
by U.S. Treasury Note: total market value
$15,028)(A) $14,673 14,673
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TOTAL REPURCHASE AGREEMENT (COST $14,673) 14,673
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TOTAL INVESTMENTS -- 101.0% (COST $527,645) $560,729
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</TABLE>
* Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
The accompanying notes are an integral part of the financial statements.
4
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $512,972)..................... $546,056
Repurchase Agreements, at value (Cost $14,673)............ 14,673
Receivable for investments sold........................... 72,523
Other assets.............................................. 1,415
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Total assets.............................................. 634,667
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LIABILITIES:
Payable for investment securities purchased............... (77,782)
Accrued expenses.......................................... (1,741)
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Total liabilities......................................... (79,523)
--------
NET ASSETS:
Paid-in-capital (authorized 500 million shares -- $0.001
par value) based on 50,010 outstanding shares of common
stock................................................... 500,100
Accumulated net investment income......................... 112
Accumulated net realized gain on investments.............. 21,848
Net unrealized appreciation on investments................ 33,084
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Net Assets................................................ $555,144
========
Net Asset Value, Offering and Redemption Price Per
Share................................................... $ 11.10
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
STATEMENT OF OPERATIONS
For the period from December 1, 1998(1) through December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends................................................. $ 296
Interest.................................................. 343
-------
Total Investment Income................................. 639
-------
EXPENSES:
Investment Advisory Fees.................................. 362
Administrative Fees....................................... 64
Custodian Fees............................................ 79
Professional Fees......................................... 208
Transfer Agent Fees....................................... 464
Printing Fees............................................. 479
Directors' Fees........................................... 108
Insurance and Other Fees.................................. 50
-------
Total Expenses.......................................... 1,814
-------
Waiver of Investment Advisory Fees........................ (362)
Reimbursement of Other Expenses by Advisor................ (925)
-------
Net Expenses............................................ 527
-------
NET INVESTMENT INCOME....................................... 112
-------
Net Realized Gain from Security Transactions.............. 21,848
Net Change in Unrealized Appreciation on Investments...... 33,084
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 54,932
-------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $55,044
=======
</TABLE>
(1) The PBHG Mid-Cap Value Fund commenced operations on December 1, 1998.
The accompanying notes are an integral part of the financial statements.
6
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
STATEMENT OF CHANGES IN NET ASSETS
For the period from December 1, 1998(1) through December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT ACTIVITIES:
<S> <C>
Net Investment Income..................................... 112
Net Realized Gain from Security Transactions.............. 21,848
Net Change in Unrealized Appreciation on Investments...... 33,084
---------
Net Increase in Net Assets Resulting from Operations.... 55,044
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income..................................... --
Net Realized Gains from Security Transactions............. --
---------
Total Distributions..................................... --
---------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued............................................. 500,100
Shares Issued upon Reinvestment of Distributions.......... --
Shares Redeemed........................................... --
---------
Increase in Net Assets Derived from Capital Share
Transactions............................................ 500,100
---------
Total Increase in Net Assets............................ 555,144
---------
NET ASSETS:
Beginning of Period....................................... --
---------
End of Period............................................. 555,144
=========
(A) SHARES ISSUED AND REDEEMED:
Shares Issued............................................. 50,010
Shares Issued upon Reinvestment of Distributions.......... --
Shares Redeemed........................................... --
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Net Increase in Shares Outstanding........................ 50,010
=========
</TABLE>
(1) The PBHG Mid-Cap Value Portfolio commenced operations on December 1, 1998.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
7
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
FINANCIAL HIGHLIGHTS
For the period from December 1, 1998(1) through December 31, 1998
For a Share Outstanding Throughout the period
<TABLE>
<CAPTION>
Net Net
Asset Realized and Distributions Distributions Asset
Value Net Unrealized from Net from Value
Beginning Investment Gains or Losses Investment Capital End Total
of Period Income on Securities Income Gains of Period Return
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998........................ $10.00 -- $1.10 -- -- $11.10 11.00%+
<CAPTION>
Ratio Ratio of
of Expenses Net Income
Net Ratio Ratio of to Average to Average
Assets of Expenses Net Income Net Assets Net Assets Portfolio
End to Average to Average (Excluding (Excluding Turnover
of Period Net Assets Net Assets Waivers) Waivers) Rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998........................ $555,144 1.20%* 0.26%* 4.13%* (2.67)%* 72.32%
</TABLE>
* Annualized.
+ Total return has not been annualized.
1 The PBHG Mid-Cap Value Portfolio commenced operations on December 1, 1998.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
8
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1998
1. ORGANIZATION
The PBHG Mid-Cap Value Portfolio (the "Portfolio") is a series of the PBHG
Insurance Series Fund, Inc. (the "Fund"), a Maryland corporation. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund consists of the Portfolio and six
others: the PBHG Growth II Portfolio (the "Growth II Portfolio"), the PBHG Large
Cap Growth Portfolio (the "Large Cap Growth Portfolio")the PBHG Technology &
Communications Portfolio (the "Technology & Communications Portfolio"), the PBHG
Small Cap Value Portfolio (the "Small Cap Value Portfolio"), the PBHG Large Cap
Value Portfolio (the "Large Cap Value Portfolio"), and the PBHG Select 20
Portfolio (the "Select 20 Portfolio") (collectively, the "Portfolios"). Each
Portfolio of the Fund 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 Growth II Portfolio, the Large Cap Growth
Portfolio, the Technology & Communications Portfolio, the Small Cap Value
Portfolio, the Large Cap Value Portfolio, or the Select 20 Portfolio, which are
presented separately. The Portfolio's prospectus provides a description of the
Portfolio's investment objectives, policies and strategies. The assets of the
Portfolio are segregated, and a shareholder's interest is limited to the
Portfolio in which shares are held. The Fund is intended to be a funding vehicle
for variable annuity contracts and variable life insurance policies to be
offered by the separate accounts of life insurance companies. At December 31,
1998, 100% of the outstanding shares of the Portfolio were held by Pilgrim
Baxter & Associates, Ltd. (the "Adviser").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Portfolio.
SECURITY VALUATION -- Investment securities of the Portfolio 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 most recent 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 are declared annually, if
available. Distributions of net realized capital gains 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. As of December 31, 1998, there were no
temporary or permanent differences.
FEDERAL INCOME TAXES -- It is the Portfolio's intention to continue to qualify
as a regulated investment company for Federal income tax purposes and to
distribute all of its taxable income and net capital gains. Accordingly, no
provision has been made for Federal income taxes.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day by dividing the total value of the Portfolio's assets, less
liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by a third party custodian bank until the respective
agreements mature. Provisions of the repurchase agreements and procedures
adopted by the Fund and followed by 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 the Portfolio may be delayed or limited.
OTHER -- Expenses that are directly related to one of the Portfolios are charged
directly to that Portfolio. Other operating expenses are prorated to the
Portfolios on the basis of relative net assets.
All organizational costs incurred in connection with the start up of the Fund
have been equally allocated to each Portfolio, except the Mid-Cap Value
Portfolio, and are being amortized on a straight line basis over a period of
sixty months. In the event that any of the initial shares of each Portfolio are
redeemed by any holder thereof during the period that each Portfolio is
amortizing its organizational costs, the redemption proceeds payable to the
holder thereof will be reduced by the unamortized organizational costs in the
same ratio as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund and the Adviser are parties to an Investment Advisory Agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser is
paid a monthly fee at an annual rate of 0.85% of the average daily net assets of
the Portfolio. In the
9
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PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value Portfolio
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
interest of limiting expenses of the Portfolio, the Adviser has entered
into an expense limitation agreement with the Fund ("Expense Limitation
Agreement"). With respect to the Portfolio, the Adviser has agreed to waive or
limit its fees and to assume other expenses of the Portfolio to the extent
necessary to limit the total annual operating expenses (expressed as a
percentage of the Portfolio's average daily net assets) to 1.20%. Reimbursement
by the Portfolio of the advisory fees waived or limited and other expenses paid
by the Adviser pursuant to the Expense Limitation Agreement during any of the
two previous fiscal years may be made at a later date when the Portfolio has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual expense ratio of the Portfolio to exceed 1.20%.
Consequently, no reimbursement by the Portfolio will be made unless: (i) the
Portfolio's net assets exceed $75 million; (ii) the Portfolio's total annual
expense ratio is less than 1.20%, 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 was $1,287.
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
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% of the average daily net
assets of the Portfolio. Pilgrim Baxter Value Investors, Inc. receives no fees
directly from the 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 the 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 0.040% with respect to the first $2.5 billion of the average
daily net assets of (i) the Fund, (ii) The PBHG Funds, Inc., and (iii) PBHG
Advisor Funds, Inc., other fund families managed by the Adviser (collectively
known as the "PBHG Fund Family"), 0.025% of the next $7.5 billion of the average
daily net assets of each Portfolio in the PBHG Fund Family, and 0.020% of the
average daily net assets of each Portfolio in the PBHG Fund Family in excess of
$10 billion.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent of
the Fund. First Union 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 period ended December 31, 1998, PBHG Fund Services
was paid $450 by the Portfolio 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.
4. INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments, for the Portfolio for the one month ended December
31, 1998, amounted to $886,026 and $394,902 respectively.
The aggregate gross unrealized appreciation and depreciation of securities held
by the Portfolio for federal income tax purposes at December 31, 1998, amounted
to $35,615 and $2,531, respectively. The total cost of securities and the net
realized gains or losses on securities sold for Federal income tax purposes at
December 31, 1998 was not materially different from amounts reported for
financial reporting purposes.
5. LINE OF CREDIT
The 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%. The Portfolio had no
outstanding borrowing at December 31, 1998, or at any time during the period
ended December 31, 1998.
10
<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 statement of assets and liabilities, including
the schedule of investments, of the PBHG Mid-Cap Value Portfolio of PBHG
Insurance Series Fund, Inc., 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 Mid-Cap Value Portfolio
(the "Fund") at December 31, 1998, and the results of its operations, the
changes in its net assets and its financial highlights for the period December
1, 1998 ( commencement of operations) to December 31, 1998, 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 audit. We conducted our audit
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 presentation. We believe that our audit, which
included confirmation of securities at December 31, 1998 by correspondence with
the custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1999
11
<PAGE>
PBHG Insurance Series Fund, Inc.
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PBHG Mid-Cap Value 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) (D)
NET ORDINARY
CAPITAL GAINS INCOME TOTAL
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS QUALIFYING
FUND (TAX BASIS) (TAX BASIS) (TAX BASIS) DIVIDENDS(1)
- ---- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Mid Cap Value Portfolio.......................... 0% 0% 0% 0%
</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.
12
<PAGE>
<PAGE>
[LOGO]
PBHG Insurance Series Fund, Inc.
Investment Adviser
Pilgrim Baxter & Associates, Ltd.
Distributor
SEI Investments Distribution, Co.
