As filed with the Securities and Exchange Commission
on April 12, 1999
Registration Nos. 333-19497
811-08009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment [ ]
Post-Effective Amendment No. 6 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 7 [X]
(Check appropriate box or boxes.)
PBHG INSURANCE SERIES FUND, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
825 Duportail Road
Wayne, Pennsylvania 19087
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code (610) 341-9000
--------------
Harold J. Baxter
825 Duportail Road
Wayne, Pennsylvania 19087
---------------------------------------
(Name and Address of Agent For Service)
Copies to:
<TABLE>
<S> <C> <C>
William H. Rheiner, Esq. and to John M. Zerr, Esq.
Ballard Spahr Andrews & Ingersoll Pilgrim Baxter & Associates, Ltd.
1735 Market Street, 51st Floor 825 Duportail Road
Philadelphia, PA 19103-7599 Wayne, PA 19087
(215) 864-8600 (610) 341-9000
</TABLE>
<PAGE>
Approximate Date of
Proposed Public Offering:
As soon as practicable after the effective date of this Filing.
It is proposed that this filing will become effective (check appropriate box)
|X| immediately upon filing pursuant to paragraph (b)
| | on _____________________ pursuant to paragraph (b)
| | 60 days after filing pursuant to paragraph (a)(1)
| | on (date) pursuant to paragraph (a)(1)
| | 75 days after filing pursuant to paragraph (a)(2)
| | on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
| | this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Offered: Common Stock
<PAGE>
PBHG INSURANCE SERIES FUND, INC.
CROSS REFERENCE SHEET
(as required by Rule 495 (a))
PART A
N-1A
- ----
Item No. Location
- -------- --------
<TABLE>
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Summary; Expense Summary
3. Condensed Financial Information Not Applicable
4. General Description of Registrant Investment Objectives and Policies; General
Investment Policies and Strategies; Risk
Factors; Investment Limitations; General
Information--The Company
5. Management of the Fund General Information--Directors of the
Company; General Information--The
Adviser; General Information--The Sub-
Adviser (Small Cap Value, Mid-Cap Value,
and Large Cap Value Portfolios); General
Information--The Administrator and the
Sub-Administrator; General Information--
The Transfer Agent and Shareholder
Servicing Agents; General Information--
The Distributor
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other Securities General Information--Voting Rights; Tax Status,
Dividends and Distributions
7. Purchase of Securities Being Offered Purchases and Redemptions; Net Asset Value
8. Redemption or Repurchase Purchases and Redemptions; Net Asset Value
9. Pending Legal Proceedings Not Applicable
PART B
10. Cover Page Cover Page
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
11. Table of Contents Table of Contents
12. General Information and History The Company
13. Investment Objectives and Policies Description of Permitted Investments;
Investment Limitations; Description of
Shares
14. Management of the Fund Directors and Officers of the Company;
The Administrator and Sub-Administrator
15. Control Persons and Principal Holders Directors and Officers of the Company
of Securities
16. Investment Advisory and Other The Adviser; The Sub-Adviser;
Services The Administrator and Sub-Administrator;
The Distributor
17. Brokerage Allocation and Other Portfolio Transactions
Practices
18. Capital Stock and Other Securities Description of Shares
19. Purchase, Redemption and Pricing of Purchase and Redemption of
Securities Being Offered Shares; Determination of Net Asset Value
20. Tax Status Taxes
21. Underwriters The Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
<PAGE>
[logo]
PBHG Insurance Series Fund, Inc.
PBHG Small Cap Value Portfolio
PBHG Mid-Cap Value Portfolio
PBHG Large Cap Value Portfolio
PBHG Growth II Portfolio
PBHG Large Cap Growth Portfolio
PBHG Technology & Communications Portfolio
PBHG Select 20 Portfolio
Prospectus
May 1, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Portfolio shares as an investment or determined
whether this prospectus is truthful or complete. Anyone who tells you otherwise
is committing a crime.
<PAGE>
An Introduction to the PBHG Insurance Series Fund and this Prospectus
The PBHG Insurance Series Fund, Inc. is a mutual fund that sells shares in
its separate investment Portfolios through variable annuity contracts ("VA
Contracts") and variable life insurance policies ("VLI Policies") offered by
separate accounts of certain insurance companies ("Participating Insurance
Companies").
Each Portfolio has its own investment goal and strategies for reaching
that goal. Before investing, make sure the Portfolio's goal matches your own. In
general, these Portfolios are designed for long-term investors, such as those
saving for retirement, or investors that want a fund that seeks to outperform
the market in which it invests over the long-term. These Portfolios may not be
suitable for investors who require regular income or stability of principal, or
who are pursuing a short-term investment goal, such as investing emergency
reserves.
Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter") is the investment
adviser for each Portfolio. Pilgrim Baxter Value Investors, Inc. ("Value
Investors"), a wholly-owned subsidiary of Pilgrim Baxter, is the sub-adviser for
the Small Cap Value, Mid-Cap Value and Large Cap Value Portfolios. Pilgrim
Baxter and Value Investors invest Portfolio assets in a way that they believe
will help a Portfolio achieve its goal. However, there is no guarantee that a
Portfolio will achieve its goal.
This Prospectus contains important information you should know before
investing in any Portfolio and as a shareholder in a Portfolio. This information
is arranged into different sections for easy reading and future reference. To
obtain more information about the Portfolios, please refer to the back cover of
this Prospectus.
Portfolio Summaries
Small Cap Value Portfolio
Mid-Cap Value Portfolio
Large Cap Value Portfolio
Growth II Portfolio
Large Cap Growth Portfolio
Technology & Communications Portfolio
Select 20 Portfolio
More About the Portfolios
The Investment Adviser and Sub-Adviser
Your Investment
Year 2000
Pricing Portfolio Shares
Buying and Selling Portfolio Shares
Distributions and Taxes
Potential Conflicts of Interest
Financial Highlights
2
<PAGE>
PBHG Small Cap Value Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors with above-average total return over a
3 to 5 year market cycle, consistent with reasonable risk.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in value securities, such as common stocks, issued by companies with
market capitalizations within the range of the Russell 2000 Index. Currently,
the companies in the Russell 2000 have market capitalizations between $100
million and $1.5 billion. The value securities in the Portfolio are primarily
common stocks that Pilgrim Baxter and Value Investors believe are currently
underpriced using certain financial measurements, such as their
price-to-earnings ratios. Pilgrim Baxter and Value Investors use their own
research, computer models and measures of value in managing this Portfolio. The
Portfolio's sector weightings are generally within 10% of the Russell 2000's
sector weightings. In addition, the Portfolio generally has lower
price-to-earnings and price-to-book value ratios than the Russell 2000.
The Portfolio also may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in the financial markets, a company's
individual situation, or industry changes. These risks are greater for companies
with smaller market capitalizations because they tend to have more limited
product lines, markets and financial resources and may be dependent on a smaller
management group than larger, more established companies.
The Portfolio emphasizes value securities of smaller sized companies, so it is
likely to be more volatile than the stock market in general, as measured by the
S&P 500 Index. In addition, the value securities in the Portfolio may never
reach what Pilgrim Baxter and Value Investors believe are their full worth and
may even go down in price.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
3
<PAGE>
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the Russell 2000
Index, a widely recognized, unmanaged index that tracks the performance of 2000
small cap stocks. Both the chart and the table assume reinvestment of dividends
and distributions. Of course, the Portfolio's past performance does not indicate
how it will perform in the future.
Calendar Year Total Returns
[Bar Chart]
1998 10.94%
During the period shown in the bar chart the highest and lowest returns for
a calendar quarter were:
Best Quarter: 4th Quarter 1998 25.92%
Worst Quarter: 3rd Quarter 1998 -19.85%
Average Annual Total Returns as of 12/31/98
Past Since Inception
1 Year (10/28/97)
------ ----------
Small Cap Value Portfolio 10.94% 13.68%
Russell 2000 Index -2.55% -12.80%
Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your investment. Annual operating expenses are paid out of
the Portfolio's assets, so their effect is included in the share price. The
expenses listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends [and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted
from portfolio assets)
Management Fees 1.00%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.46%
Total Annual Fund Operating Expenses 1.46%
Fee Waiver [and/or Expense Reimbursement] 0.26%
Net Expenses 1.20%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.20%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.20%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 122
2 Years $ 462
5 Years $ 797
10 Years $1,746
*These costs assume the 1.20% expense cap
is in place only for 1 year. If the Portfolio's
expenses were capped at 1.20% for all years,
your cost would be:
1 Year: $ 122
3 Years: $ 381
5 Years: $ 660
10 Years: $1,455
4
<PAGE>
PBHG Mid-Cap Value Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors with above-average total return over a
3 to 5 year market cycle, consistent with reasonable risk.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in value securities, such as common stocks, issued by companies with
market capitalizations within the range of the S&P 400 MidCap(R)Index.
Currently, the companies in this Index have market capitalizations between
$200 million and $5 billion. The value securities in the Portfolio are primarily
common stocks that Pilgrim Baxter and Value Investors believe are currently
underpriced using certain financial measurements, such as their
price-to-earnings ratios. Pilgrim Baxter and Value Investors use their own
research, computer models and measures of value in managing this Portfolio. The
Portfolio's sector weightings are generally within 5% of the S&P 400's sector
weightings. In addition, the Portfolio generally has a lower price-to-earnings
ratio than the S&P 400.
The Portfolio may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in the financial markets, the company's
individual situation, or industry changes. These risks are greater for companies
with smaller market capitalizations because they tend to have more limited
product lines, markets and financial resources and may be dependent on a smaller
management group than larger, more established companies.
The Portfolio emphasizes value securities of medium sized companies, so it is
likely to be more volatile than the stock market in general, as measured by the
S&P 500 Index. In addition, the value securities in the Portfolio may never
reach what Pilgrim Baxter and Value Investors believe are their full worth and
may even go down in price.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
5
<PAGE>
[graphic]Performance Information:
The performance table below illustrates the risks and volatility of an
investment in the Portfolio by comparing the Portfolio's performance over time
to that of the S&P 400 MidCap(R) Index, a widely recognized, unmanaged index
that tracks the performance of 400 mid-cap stocks. The chart assumes
reinvestment of dividends and distributions. Of course, the Portfolio's past
performance does not indicate how it will perform in the future.
Performance Table:
Average Annual Total Returns as of 12/31/98
Since Inception
(11/30/98)
----------
Mid-Cap Value Portfolio 11.00%
S&P 400 Mid Cap(R) Index 12.05%
[graphic]Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your investment. Annual operating expenses are paid out of
the Portfolio's assets, so their effect is included in the share price. The
expenses listed below are based on the Portfolio's last fiscal year. Since the
Portfolio did not commence investment operations until November 30, 1998, "Other
Expenses" is based on estimated amounts the Portfolio expects to pay during the
current fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted from portfolio
assets)
Management Fees 0.85%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 3.28%
Total Annual Fund Operating Expenses 4.13%
Fee Waiver [and/or Expense Reimbursement] 2.93%
Net Expenses 1.20%*
* This is the actual total fund operating expense you will pay as an investor
in this Portfolio for the current fiscal year ending December 31, 1999. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.20%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and its
total annual fund operating expenses are less than 1.20%, the Portfolio's Board
of Directors may elect to reimburse Pilgrim Baxter for any fees it waived or
expenses it reimbursed on the Portfolio's behalf during the previous two years.
To date, the Board has made no reimbursement election.
[graphic]Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 122
3 Years $1,255
*These Costs assumme the 1.20% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.20%
for all years, your cost would be:
1 Year: $122
3 Years: $381
6
<PAGE>
PBHG Large Cap Value Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors long-tem growth of capital and income.
Current income is a secondary objective.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in value securities, such as common stocks, issued by companies with
large market capitalizations. These companies generally have market
capitalizations greater than $1 billion. The value securities in the Portfolio
are primarily common stocks that Pilgrim Baxter and Value Investors believe are
currently underpriced using certain financial measurements, such as their
price-to-earnings ratios. Pilgrim Baxter and Value Investors use their own
research, computer models and measures of value in managing this Portfolio.
The Portfolio may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in the financial markets, the company's
individual situation, or industry changes.
While the value securities in the Portfolio may never reach what Pilgrim Baxter
and Value Investors believe are their full worth and may even go down in price,
the Portfolio's emphasis on large company securities may limit some of the risk
associated with value investing because large company securities tend to be less
volatile than smaller company securities.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the S&P 500 Index, a
widely recognized, unmanaged
7
<PAGE>
index that measures the performance of large cap stocks across all major
industries. Both the chart and the table assume reinvestment of dividends and
distributions. Of course, the Portfolio's past performance does not indicate how
it will perform in the future.
Calendar Year Total Returns
[Bar Chart]
1998 37.96%
During the period shown in the bar chart the highest and lowest returns for a
calendar quarter were:
Best Quarter: 4th Quarter 1998 29.59%
Worst Quarter: 3rd Quarter 1998 -7.54%
Average Annual Total Returns as of 12/31/98
Past Since Inception
1 Year (10/28/97)
------ ----------
Large Cap Value Portfolio 37.96% 36.29%
S&P 500 Index 28.59% 25.07%
[graphic] Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your investment. Annual operating expenses are paid out of
the Portfolio's assets, so their effect is included in the share price. The
expenses listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends [and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted
from portfolio assets)
Management Fees 0.65%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.82%
Total Annual Fund Operating Expenses 1.47%
Fee Waiver [and/or Expense Reimbursement] 0.47%
Net Expenses 1.00%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.00%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.00%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
[graphic] Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 102
3 Years $ 465
5 Years $ 803
10 Years $1,757
*These Costs assume the 1.00% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.00%
for all years, your cost would be:
1 Year $ 102
3 Years $ 318
5 Years $ 522
10 Years $1,225
8
<PAGE>
PBHG Growth II Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors with capital appreciation.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in growth securities, such as common stocks, of small and medium sized
companies. These companies generally have market capitalizations or annual
revenues between $500 million and $10 billion. The growth securities in the
Portfolio are primarily common stocks that Pilgrim Baxter believes have strong
earnings growth and capital appreciation potential. Pilgrim Baxter uses its own
research, computer models and measures of growth in managing this Portfolio.
The Portfolio may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in the financial markets, the company's
individual situation, or industry changes. These risks are greater for companies
with smaller market capitalizations because they tend to have more limited
product lines, markets and financial resources and may be dependent on a smaller
management group than larger, more established companies.
The Portfolio emphasizes small and medium sized growth companies, so it is
likely to be more volatile than the stock market in general, as measured by the
S&P 500 Index. In addition, the growth securities in the Portfolio may never
reach what Pilgrim Baxter believes are their full earnings growth and capital
appreciation potential and may even go down in price.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
9
<PAGE>
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the Russell MidCap
Growth Index, a widely recognized, unmanaged index that tracks the performance
of the 800 smallest stocks in the Russell 1000 Index with greater-than-average
growth orientation. Both the chart and the table assume reinvestment of
dividends and distributions. Of course, the Portfolio's past performance does
not indicate how it will perform in the future.
Calendar Year Total Returns
[Bar Chart]
1998 8.19%
During the period shown in the bar chart the highest and lowest returns for a
calendar quarter were:
Best Quarter: 4th Quarter 1998 24.79%
Worst Quarter: 3rd Quarter 1998 -21.28%
Average Annual Total Returns as of 12/31/98
Past Since Inception
1 Year (04/30/97)
------ ----------
Growth II Portfolio 8.19% 9.46%
Russell Mid Cap Growth Index 17.86% 25.65%
Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your investment. Annual operating expenses are paid out of
the Portfolio's assets, so their effect is included in the share price. The
expenses listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends [and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted from portfolio
assets)
Management Fees 0.85%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.69%
Total Annual Fund Operating Expenses 1.54%
Fee Waiver [and/or Expense Reimbursement] 0.34%
Net Expenses 1.20%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.20%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.20%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
[graphic]Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 122
3 Years $ 486
5 Years $ 839
10 Years $1,834
*These Gross Costs assume the 1.20% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.20%
for all years, your cost would be:
1 Year $ 122
3 Years $ 381
5 Years $ 660
10 Years $1,455
10
<PAGE>
PBHG Large Cap Growth Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors with long-term growth of capital.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in growth securities, such as common stocks, of large capitalization
companies. These companies generally have market capitalizations over $1
billion. The growth securities in the Portfolio are primarily common stocks that
Pilgrim Baxter believes have strong earnings growth and capital appreciation
potential. Pilgrim Baxter uses its own research, computer models and measures of
growth in managing this Portfolio.
The Portfolio also may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in financial markets, the company's
individual situation or industry changes.
While the growth securities in the Portfolio may never reach what Pilgrim Baxter
believes are their full earnings growth and capital appreciation potential and
may even go down in price, the Portfolio's emphasis on large company securities
may limit some of the risk associated with growth investing because large
company securities tend to be less volatile than smaller company securities.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the S&P 500 Index, a
widely recognized, unmanaged index that measures the performance of large cap
stocks across all major industries. Both
11
<PAGE>
the chart and the table assume reinvestment of dividends and distributions. Of
course, the Portfolio's past performance does not indicate how it will perform
in the future.
Calendar Year Total Returns
[Bar Chart]
1998 30.63%
During the period shown in the bar chart the highest and lowest returns for
a calendar quarter were:
Best Quarter: 4th Quarter 1998 23.22%
Worst Quarter: 3rd Quarter 1998 -11.20%
Average Annual Total Returns as of 12/31/98
Past Since
1 Year Inception
------ ---------
Large Cap Growth Portfolio 30.63% 29.68%
S&P 500 Index 28.50% 31.31%
[graphic]Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your investment. Annual operating expenses are paid out of
the Portfolio's assets, so their effect is included in the share price. The
expenses listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends [and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted
from portfolio assets)
Management Fees 0.75%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.78%
Total Annual Fund Operating Expenses 1.53%
Fee Waiver [and/or Expense Reimbursement] 0.43%
Net Expenses 1.10%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.10%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.10%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
[graphic]Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 112
3 Years $ 483
5 Years $ 834
10 Years $1,824
*These costs assume the 1.10% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.10%
for all years, your cost would be:
1 Year $ 112
3 Years $ 350
5 Years $ 606
10 Years $1,340
12
<PAGE>
PBHG Technology & Communications Portfolio
[graphic]Goal:
The Portfolio seeks to provide investors with long-term growth of capital.
Current income is incidental to the Portfolio's goal.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks of companies that rely extensively on technology
or communications in their product development or operations, are expected to
benefit from technological advances and improvements, or may be experiencing
exceptional growth in sales and earnings driven by technology or communications
related products and services. These companies may be in different industries,
such as computer software and hardware, network and cable broadcasting, defense
and data storage and retrieval, and biotechnology. The Portfolio offers
investors significant growth potential because it invests in companies that may
be responsible for breakthrough products or technologies or positioned to
take advantage of cutting-edge developments. The Portfolio's holdings may range
from smaller companies developing new technologies or pursuing scientific
breakthroughs to large, blue chip firms with established track records in
developing and marketing scientific advances.
The Portfolio may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in the financial markets, the company's
individual situation, or industry changes. These risks are greater for companies
with smaller market capitalizations because they tend to have more limited
product lines, markets and financial resources and may be dependent on a smaller
management group than larger, more established companies.
Securities of technology companies are strongly affected by worldwide scientific
and technological developments and governmental policies and, therefore, are
generally more volatile than securities of companies not dependent upon or
associated with technology issues.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
13
<PAGE>
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the Soundview
Technology Index, a widely recognized, unmanaged index that measures the
performance of 100 major technology stocks, as chosen by Soundview Financial
Group. Both the chart and the table assume reinvestment of dividends and
distributions. Of course, the Portfolio's past performance does not indicate how
it will perform in the future.
Calendar Year Total Returns
[Bar Chart]
1998 32.20%
During the period shown in the bar chart the highest and lowest returns for a
calendar quarter were:
Best Quarter: 4th Quarter 1998 29.37%
Worst Quarter: 3rd Quarter 1998 -4.18%
Average Annual Total Returns as of 12/31/98
Past Since Inception
1 Year (04/30/97)
------ ----------
Technology & Communications Portfolio 32.20% 21.06%
Soundview Technology Index
[graphic]Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your account. Annual operating expenses are paid out of the
Portfolio's assets, so their effect is included in the share price. The expenses
listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
[and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted from portfolio
assets)
Management Fees 0.85%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.71%
Total Annual Fund Operating Expenses 1.56%
Fee Waiver [and/or Expense Reimbursement] 0.36%
Net Expenses 1.20%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.20%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.20%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
[graphic]Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 122
3 Years $ 493
5 Years $ 850
10 Years $1,856
*These Costs assume the 1.20% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.20%
for all years, your cost would be:
1 Year $ 122
3 Years $ 381
5 Years $ 660
10 Years $1,455
14
<PAGE>
PBHG Select 20 Portfolio
[graphic]Goal:
The Portfolio, a non-diversified fund, seeks to provide investors with long-term
growth of capital.
[graphic]Main Investment Strategies:
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in growth securities, such as common stocks, of no more than 20
large capitalization companies. These companies generally have market
capitalizations over $1 billion. The growth securities in the Portfolio are
primarily common stocks that Pilgrim Baxter believes have strong earnings growth
and capital appreciation potential. Pilgrim Baxter uses its own research,
computer models and measures of growth in managing this Portfolio.
The Portfolio may use options and futures contracts for hedging and risk
management.
[graphic]Main Investment Risks:
The Portfolio is non-diversified which means as compared to a diversified fund,
it invests a higher percentage of its assets in a limited number of stocks in
order to achieve a potentially greater investment return. As a result, the price
change of a single security, positive or negative, has a greater impact on the
Portfolio's net asset value than it would in a diversified fund.
The value of your investment in the Portfolio will go up and down, which means
you could lose money, but you also have the potential to make money.
The price of the securities in the Portfolio will fluctuate. These price
movements may occur because of changes in financial markets, company's
individual situation, or industry changes.
While the growth securities in the Portfolio may never reach what Pilgrim Baxter
believes are their full earnings growth and capital appreciation potential and
may even go down in price, the Portfolio's emphasis on large company securities
may limit some of the risks associated with growth investing because large
company securities tend to be less volatile than smaller company securities.
The Portfolio's use of options and futures contracts may reduce returns or
increase volatility.
Although the Portfolio strives to achieve its goal, it cannot offer guaranteed
results.
Your investment in the Portfolio is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
15
<PAGE>
[graphic]Performance Information:
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. The bar chart shows you how the
Portfolio's performance has varied from year to year. The performance table
compares the Portfolio's performance over time to that of the S&P 500 Index, a
widely recognized, unmanaged index that measures the performance of large cap
stocks across all major industries. Both the chart and the table assume
reinvestment of dividends and distributions. Of course, the Portfolio's past
performance does not indicate how it will perform in the future.
Calendar Year Total Returns
[Bar Chart]
1998 62.52%
During the period shown in the bar chart the highest and lowest returns for a
calendar quarter were:
Best Quarter: 4th Quarter 1998 29.37%
Worst Quarter: 3rd Quarter 1998 -4.18%
Average Annual Total Returns as of 12/31/98
Past Since Inception
1 Year (09/25/97)
------ ----------
Select 20 Portfolio 62.52% 47.11%
S&P 500 Index 28.60% 25.07%
[graphic]Fees and Expenses:
This table summarizes the shareholder transaction fees and annual operating
expenses you would pay as an investor in the Portfolio. Shareholder transaction
fees are paid from your account. Annual operating expenses are paid out of the
Portfolio's assets, so their effect is included in the share price. The expenses
listed below are based on the Portfolio's last fiscal year.
Shareholder Transaction Fees(Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends [and other distributions] None
Redemption Fee None
Exhange Fee None
Maximum Account Fee None
Annual Fund Operating Expenses (Expenses that are deducted from portfolio
assets)
Management Fees 0.85%
Distribution [and/or services] (12b-1) Fees None
Other Expenses 0.36%
Total Annual Fund Operating Expenses 1.21%
Fee Waiver [and/or Expense Reimbursement] 0.01%
Net Expenses 1.20%*
* This is the actual total fund operating expense you would have paid as an
investor in this Portfolio for fiscal year ended December 31, 1998. That's
because Pilgrim Baxter has contractually agreed to waive that portion, if any,
of the annual management fees payable by the Portfolio and to pay certain
expenses of the Portfolio to the extent necessary to ensure that the total
annual fund operating expenses do not exceed 1.20%. You should know that in any
fiscal year in which the Portfolio's assets are greater than $75 million and
its total annual fund operating expenses are less than 1.20%, the Portfolio's
Board of Directors may elect to reimburse Pilgrim Baxter for any fees it waived
or expenses it reimbursed on the Portfolio's behalf during the previous two
years. To date, the Board has made no reimbursement election.
[graphic]Example:
This example translates the "Total Annual Fund Operating Expenses" shown in the
preceding table into dollar amounts. With this information, you can more easily
compare the cost of investing in the Portfolio to the cost of investing in other
mutual funds. This example makes four assumptions: 1) you invest $10,000 in the
Portfolio for the time periods shown; 2) you redeem all your shares at the end
of those time periods; 3) you earn a 5% return on your investment each year; and
4) the Portfolio's operating expenses remain the same for the time periods
shown. The example is hypothetical. Your actual costs and returns may be higher
or lower. In addition, this example does not reflect any additional charges or
expenses that may be imposed under the VA contracts or VLI policies.
Your Cost*
----------
1 Year $ 122
3 Years $ 384
5 Years $ 665
10 Years $1,466
*These Costs assume the 1.20% expense
cap is in place only for 1 year. If the
Portfolio's expenses were capped at 1.20%
for all years, your cost would be:
1 Year $ 122
3 Years $ 381
5 Years $ 660
10 Years $1,455
16
<PAGE>
MORE ABOUT THE PORTFOLIOS
[logo]Risks and Rewards:
This section takes a closer look at the investment strategies that make up
each Portfolio's risk and reward characteristics.
In addition to the main investment strategies described in the Portfolio
Summaries section of this Prospectus, each Portfolio may make other types of
investments that have different risk/reward characteristics. These investments,
the Portfolios' main investment strategies and their risk/reward characteristics
are described in the table set forth below. From time to time, a Portfolio may
make investments and pursue strategies different from those described in this
Prospectus. Those investments and strategies are described in the Statement of
Additional Information. The back cover of this Prospectus explains how you can
get a copy of the Statement of Additional Information.
<TABLE>
<CAPTION>
Policies to Balance
Investment Potential Risks Potential Rewards Risks and Rewards
---------- --------------- ----------------- -------------------
<S> <C> <C> <C>
Securities
Shares representing ownership in a o Security prices fluctuate o Securities have generally o Pilgrim Baxter and Value
corporation. Each Portfolio may over time. outperformed more stable Investors maintain a
invest in the following types of investments (such as bonds long-term investment
securities: common and preferred o Security prices may fall as and cash equivalents) over approach and focus on
stocks, convertible securities, a result of factors that relate the long term. securities they believe can
warrants and rights. to the company, such as appreciate over an extended
management decisions or lower time frame, regardless of
demand for the company's interim fluctuations.
products or services.
o Under normal circumstances,
o Security prices may fall each Portfolio intends to
because of factors affecting remain fully invested, with
companies in a number of at least 65% of its total
industries, such as production assets in securities.
costs.
o Pilgrim Baxter and Value
o Security prices may fall Investors focus their
because of changes in the active management on
financial markets, such as securities selection, the
interest rates or currency area they believe their
exchange rate changes. commitment to fundamental
research can most enhance
a Portfolio's performance.
Growth Securities
Securities that Pilgrim Baxter o See securities. o See securities. o See securities.
believes have strong earnings growth
and capital appreciation potential o Growth securities may be o Growth securities may
and will grow faster than the more sensitive to earnings appreciate faster than o In managing a Portfolio,
economy as a whole. changes than other securities non-growth securities. Pilgrim Baxter uses its own
because they typically trade at software and research
higher earnings multiples. models which incorporate
important attributes of
o The growth securities in the successful growth. A key
Portfolio may never reach what attribute of successful
Pilgrim Baxter believes are growth is earnings growth.
their full earnings growth and Pilgrim Baxter's investment
capital appreciation potential process is extremely focused
and may even go down in price. on earnings growth.
o Pilgrim Baxter considers
selling a security when its
anticipated appreciation
is no longer probable,
alternative investments
offer more superior
appreciation prospects or
the risk of a decline in
its market price is too
great.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Value Securities
Securities that Value Investors o See securities. o See securities. o See securities.
believes are currently underpriced
using certain financial o Value companies may have o Value securities may o In managing a Portfolio,
measurements, such as their experienced adverse business produce significant capital Value Investors uses its
price-to-earnings ratio, earnings developments or may be subject appreciation as the market own research, computer
power, dividend income potential, to special risks that have recognizes their full value. models and measures of
and competitive advantages. caused their securities to be value.
out of favor.
o Value Investors considers
o The value securities in the selling a security when it
Portfolio may never reach what becomes overvalued relative
Value Investors believes are to the market, shows
their full worth and may even deteriorating fundamentals
go down in price. or falls short of Value
Investors' expectations.
Small and Medium Sized Company
Securities
o Smaller company securities o Smaller company securities o See securities/growth
involve greater risk and price may appreciate faster than securities/value securities.
volatility than larger, more those of larger, more
established companies because established companies for o Pilgrim Baxter and Value
they tend to have more limited many reasons. For example, Investors focus on smaller
product lines, markets and smaller companies tend to companies with strong
financial resources and may be have younger product lines balance sheets that they
dependent on a smaller whose distribution and expect to exceed consensus
management group. revenues are still maturing. earnings expectations.
Technology Company Securities
Securities of companies that rely o Technology company o Technology company o Each Portfolio seeks to
extensively on technology in their securities are strongly securities offer investors strike a balance among the
product development or operations affected by worldwide significant growth potential industries in which it
or are expected to benefit from scientific and technological because they may be invests so that no one
technological advances and developments and governmental responsible for breakthrough industry dominates the
improvements. policies, and, therefore, are products or technologies or Portfolio's investments.
generally more volatile than may be positioned to take
companies not dependent upon or advantage of cutting-edge,
associated with technology technology-related
issues. developments.
Futures and Options
A futures contract is an agreement o A futures or option contract o A futures or option contract o Each Portfolio uses futures
to buy or sell a set quantity of an used to hedge the Portfolio or that correlates well with and options contracts for
underlying instrument at a future special securities may not the underlying position can hedging and risk management,
date, or to make or receive a cash fully offset the underlying reduce or eliminate losses i.e., to establish or adjust
payment based on changes in the position. at low cost. exposure to particular
value of a securities index. An securities, markets or
option contract is the right to buy o A Portfolio could make money currencies; to manage a
or sell a set quantity of an o A futures or option contract and protect against losses Portfolio's exposure
underlying instrument at a used for risk management may if Pilgrim Baxter's or Value relative to its benchmark
pre-determined price. not have the intended effects Investors' analysis proves or to equitize cash.
and may result in losses or correct.
missed investment opportunities. o Each Portfolio only
establishes hedges that it
o The counterparty to a futures expects will be highly
or option contract could default. correlated with underlying
securities positions.
o No Portfolio considers using
futures or options contracts
unless it would be
cost-effective.
o Each Portfolio maintains
assets sufficient to meet
its obligations under the
contract in a segregated
margin account with a
custodian bank.
OTC Securities
Securities not listed and traded on o OTC securities are not o Increases the number of o Pilgrim Baxter and Value
an organized exchange, but bought traded as often as securities potential investments for a Investors use a highly
and sold through a computer listed on an exchange. So, if Portfolio. disciplined investment
network. the Portfolio were to sell an process that seeks to,
OTC security, it might have to o OTC securities may appreciate among other things, identify
offer the security at a faster than exchange-traded quality investments that
discount or sell it in smaller securities because they are will enhance a Portfolio's
share lots over an extended typically securities of performance.
period of time. younger, growing companies.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Foreign Securities
Equity securities of foreign o Foreign security prices may o Favorable exchange rate o Each Portfolio limits the
issuers, including ADRs. ADRs are fall due to political movements could generate amount of total assets it
certificates issued by a U.S. bank instability, changes in gains or reduce losses. invests in foreign
that represent a stated number of currency exchange rates, securities as follows:
shares of a foreign corporation that foreign economic conditions or o Foreign investments, which Large Cap Growth/Technology
the bank holds in its vault. An ADR inadequate regulatory and represent a major portion & Communications/Select 20:
is bought and sold in the same accounting standards. of the world's securities, 10% and Growth II/Small Cap
manner as U.S. securities. offer attractive potential Value/Mid-Cap Value/Large
performance and opportunities Cap Value: 15%. ADRs are not
for diversification. included in these limits.
Illiquid Securities
Securities that do not have a ready o Portfolio may have o Illiquid securities may o Each Portfolio may not
market and cannot be easily sold, if difficulty valuing these offer more attractive yields invest more than 15% of its
at all, at approximately the price securities precisely. or potential growth than net assets in illiquid
that the Portfolio has valued them. comparable widely traded securities.
o A Portfolio may be unable to securities.
sell these securities at the
time or price it desires.
Restricted Securities
Privately placed securities whose o Restricted securities may be o Restricted securities may o Each Portfolio limits the
resale is restricted under difficult to value because offer more future growth amount of total assets it
securities law. market quotations may not be potential than publicly invests in restricted
readily available. traded securities. securities as follows: Large
Cap Growth/Technology &
o Because of the restrictions Communications/Select 20:
in resale of these securities, and Small Cap Value/Mid-Cap
a Portfolio may not be able to 10% Value/Large Cap Value:
find a qualified buyer or may 15%. The Growth II Portfolio
not be able to sell these is not currently permitted
securities at the time or price to invest in restricted
it desires. securities.
When Issued and Delayed-Delivery
Securities Securities subject to o When a Portfolio buys these o A Portfolio can take o Only the Small Cap Value,
settlement on a future date. securities, it could be exposed advantage of attractive Mid-Cap Value and Large Cap
to leverage risk if it does not investment opportunities. Value Portfolios are
use segregated accounts. permitted to invest in these
securities.
o These Portfolios use
segregated accounts to
offset leverage risk.
</TABLE>
Each Portfolio may invest 100% of its total assets in cash or U.S.
dollar-denominated high quality short-term instruments for temporary defensive
purposes, to maintain liquidity or when economic or market conditions are
unfavorable for profitable investing. These types of investments typically have
a lower yield than other longer-term investments and lack the capital
appreciation potential of equity securities, like stocks. In addition, while
these investments are generally designed to limit a Portfolio's losses, they can
prevent a Portfolio from achieving its investment goal.
Each Portfolio is actively managed, which means a Portfolio's manager may
frequently buy and sell securities. Frequent trading increases a Portfolio's
turnover rate
19
<PAGE>
and may increase transaction costs, such as brokerage commissions. Increased
transaction costs could detract from a Portfolio's performance. In addition, the
sale of Portfolio securities may generate capital gains which, when distributed,
may be taxable to you.
THE INVESTMENT ADVISER AND SUB-ADVISER
[logo]The Investment Adviser
Pilgrim Baxter & Associates, Ltd., 825 Duportail Road, Wayne, Pa 19087, is
the investment advisor for each Portfolio. Founded in 1982, Pilgrim Baxter
currently manages approximately $11.5 billion in assets for pension and
profit-sharing plans, charitable institutions, corporations, trusts, estates and
other investment companies.
Pilgrim Baxter believes that discipline and consistency are important to
long-term investment success. This belief is reflected in its investment
process. Pilgrim Baxter uses a quantitative and fundamental investment process
that is extremely focused on earnings growth.
Pilgrim Baxter begins its investment process by creating a universe of
rapidly growing companies that possess certain growth characteristics. That
universe is continually updated. Pilgrim Baxter then ranks each company in its
universe using propriety software and research models that incorporate
attributes of successful growth like positive earnings surprises, upward
earnings estimate revisions, and accelerating sales and earnings growth.
Finally, using its own fundamental research and a bottom-up approach to
investing, Pilgrim Baxter evaluates each company's earnings quality and whether
the company can sustain its current growth trend. Pilgrim Baxter believes that
through this highly disciplined investment process, it is able to construct a
portfolio of investments with strong growth characteristics.
Pilgrim Baxter's decision to sell a security depends on many factors.
Generally speaking, however, Pilgrim Baxter considers selling a security when
its anticipated appreciation is no longer probable, alternative investments
offer more superior appreciation prospects or the risk of a decline in its
market price is too great.
As investment adviser, Pilgrim Baxter makes investment decisions for the
Growth II, Large Cap Growth, Technology & Communications and Select 20
Portfolios and oversees the investment decisions made by Value Investors as
sub-adviser for the Small Cap Value, Mid-Cap Value and Large Cap Value
Portfolios. The Portfolios' Board of Directors supervises Pilgrim Baxter and
Value Investors and establishes policies that Pilgrim Baxter and Value Investors
must follow as investment adviser and sub-adviser.
[logo]The Sub-Adviser
Pilgrim Baxter Value Investors, Inc., 825 Duportail Road, Wayne, PA 19087,
is a wholly-owned subsidiary of Pilgrim Baxter. Founded in 1940, Value Investors
currently manages $1.5 billion for pension and profit sharing plans, charitable
institutions, trusts, estates and other investment companies.
20
<PAGE>
Value Investors' investment process, like that of Pilgrim Baxter, is both
quantitative and fundamental. In seeking to identify attractive investment
opportunities for the Small Cap Value, Mid-Cap Value and Large Cap Value
Portfolios, Value Investors first creates a universe of more than 8,000
companies whose current share price seems lower than its current or future
worth. Then, using its own computer models and measures of value, Value
Investors creates a sub-universe of statistically attractive value companies.
Value Investors considers factors like a company's earnings power vs. its
current stock price, its dividend income potential, its price-to-earnings ratio
vs. similar companies, its competitive advantages, like brand or trade name or
market niche, its management team and its current and future business prospects.
Lastly, using its own fundamental research and a bottom-up approach to
investing, Value Investors identifies those companies which are currently out of
market favor but have the potential to achieve significant appreciation as the
marketplace recognizes their fundamental value.
Value Investors' decision to sell a security depends on many factors.
Generally speaking, however, Value Investors considers selling a security when
it becomes overvalued relative to the market, shows deteriorating fundamentals
or falls short of Value Investors' expectations.
For the fiscal year ended December 31, 1998, Pilgrim Baxter waived a
portion of its fee so that the effective management fee paid by each Portfolio
was as follows:
Growth II Portfolio 0.51%
Large Cap Growth Portfolio 0.32%
Large Cap Value Portfolio 0.18%
Small Cap Value Portfolio 0.74%
Technology & Communications Portfolio 0.49%
Select 20 Portfolio 0.84%
The Mid-Cap Value Portfolio did not begin investment operations until
November 30, 1998. As investment adviser to this Portfolio, Pilgrim Baxter is
entitled to receive a fee, calculated daily and payable monthly, at the annual
rate of 0.85% of the Mid-Cap Value Portfolio's average daily net assets.
As sub-adviser to the Small Cap Value, Mid-Cap Value and Large Cap Value
Portfolios, Value Investors is entitled to receive a fee from Pilgrim Baxter
equal to a percentage of the daily net assets of each of these Portfolios.
Large Cap Growth Portfolio/Select 20 Portfolio
James D. McCall, CFA, has managed the Large Cap Growth and Select 20
Portfolios since their inceptions. He joined Pilgrim Baxter in 1994, after 9
years as a
21
<PAGE>
growth stock portfolio manager, most recently with First National Bank of
Maryland. Today Mr. McCall manages several other funds at Pilgrim Baxter.
Small Cap Value Portfolio/Mid-Cap Value Portfolio/Large Cap Value Portfolio
Gary D. Haubold, CFA, has managed the Small Cap Value and Mid-Cap Value
Portfolios since their inception and has managed the Large Cap Value Portfolio
since December, 1997. He joined Value Investors in 1997 after 16 years of
experience as a small and mid-cap value portfolio manager, most recently with
Miller Anderson & Sherred. Today Mr. Haubold manages several other funds at
Value Investors.
Growth II Portfolio
Jeffrey Wrona, CFA, has managed this Portfolio since January, 1998. He
joined Pilgrim Baxter in 1997 after seven years as a senior portfolio manager
with Munder Capital Management and today manages several other funds at Pilgrim
Baxter.
Technology & Communications Portfolio
Jeffrey Wrona, CFA and Michael Hahn, CFA, have co-managed this Portfolio
since May, 1998. Mr. Wrona's experience is discussed under the Growth II
Portfolio. Mr. Hahn joined Pilgrim Baxter in 1996 after 2 years as an
assistant portfolio manager with First National Bank of Maryland and today
co-manages another fund at Pilgrim Baxter.
Your Investment
[logo]YEAR 2000
A Portfolio could be adversely affected if the computer systems used by
Pilgrim Baxter, Value Investors or the Portfolio's other service providers do
not properly process and calculate date-related information relating to the end
of this century and the beginning of the next. While year 2000-related computer
problems could have a negative effect on a Portfolio, both in its operations and
in its investments, the Portfolios are working with Pilgrim Baxter Value
Investors and the Portfolios' other service providers to avoid such problems.
Testing of year 2000-related computer problems on the Portfolios'
mission-critical systems should be completed by Summer, 1999. The Portfolios do
not expect to incur any material costs related to their year 2000 initiatives.
No assurances, though, can be provided that a Portfolio will not be adversely
impacted by year 2000-related computer problems.
[logo] PRICING PORTFOLIO SHARES
The price of a Portfolio's shares is based on that Portfolio's net asset
value (NAV). A Portfolio's NAV equals the value of its assets, less its
liabilities, divided by the number of its outstanding shares. Portfolio shares
are priced every day at the close of regular trading on the New York Stock
Exchange. Portfolio shares are not priced on days that the New York Stock
Exchange is closed.
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<PAGE>
A Portfolio prices its investments for which market quotations are readily
available at market value. It prices short-term investments at amortized cost,
which approximates market value. It prices all other investments at fair value
as determined in good faith by the Portfolio's Board of Directors. If a
Portfolio holds securities quoted in foreign currencies, it translates that
price into U.S. dollars at current exchange rates. Because foreign markets may
be open at different times than the New York Stock Exchange, the price of a
Portfolio's shares may change on days when its shares are not available for
purchase or sale.
[logo]BUYING AND SELLING PORTFOLIO SHARES
You may only buy and sell Portfolio shares through VA Contracts and VLI
Policies offered by separate accounts of Participating Insurance Companies. The
prospectus for these separate accounts explains how to purchase and redeem a VA
Contract or VLI Policy.
You may buy Portfolio shares at NAV any day the New York Stock Exchange is
open. The Participating Insurance Company must receive your completed buy order
before the close of regular trading on the New York Stock Exchange for your
Portfolio shares to be bought at that day's NAV. The Participating Insurance
Company is responsible for sending your buy order to the Portfolio. A Portfolio
may periodically close to new purchases or refuse a buy order if the Portfolio
determines that doing so would be in the best interests of the Portfolio and its
shareholders.
You may sell Portfolio shares at NAV any day the New York Stock Exchange
is open. The Participating Insurance Company must receive your sell order before
the close of regular trading on the New York Stock Exchange for you to receive
that day's NAV. The Participating Insurance Company is responsible for sending
your sell order to the Portfolio. The Portfolio generally sends payment for your
shares to the Participating Insurance Company the business day after your sell
order is received. Under unusual circumstances, the Portfolio may suspend
redemptions or postpone payment for up to seven days as permitted by federal
securities law.
[logo]DISTRIBUTIONS AND TAXES
Each Portfolio distributes its net investment income and net realized
capital gains to shareholders at least once a year. These distributions will be
reinvested in the Portfolio unless the Participating Insurance Company instructs
the Portfolio otherwise. There are no fees on reinvestments.
VA Contracts and VLI Policies are currently tax-deferred investments.
Therefore, Portfolio distributions are exempt from current taxation if left to
accumulate in your VA Contract or VLI Policy. In addition, exchanges among the
Portfolios are currently not taxable. The prospectus for the Participating
Insurance Company separate account discusses the tax status of VA Contracts and
VLI Policies in greater detail. The tax status
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<PAGE>
of the Portfolio's distributions for each calendar year will be detailed in the
Participating Insurance Company's annual tax statement from the Portfolio.
Because everyone's tax situation is unique, always consult your tax professional
about federal, state and local tax consequences.
[logo]POTENTIAL CONFLICTS OF INTEREST
Participating Insurance Companies may be affiliated with one another. In
addition, the interests of VA Contact and VLI Policy holders may conflict due to
differences in tax treatment and other considerations. The Portfolios' Board of
Directors monitors each Portfolio for material conflicts and determines what
action, if any, should be taken. For example, the Board may require a
Participating Insurance Company to sell its investments in a Portfolio. As a
result, the Portfolio may be forced to sell securities. In addition, the Board
may refuse to sell shares of a Portfolio to a particular VA Contract of VLI
Policy or may suspend or terminate sales of Portfolio shares if required by law
or regulatory authority or if the action is in the best interests of the
Portfolio and its shareholders.
FINANCIAL HIGHLIGHTS
A Portfolio's financial highlights help you understand its recent
financial performance. The total returns represent the rate that you would have
earned or lost on an investment in the Portfolio, assuming you reinvested all
Portfolio distributions. PricewaterhouseCoopers, LLP has audited the information
contained in these financial highlights. Its report and the Portfolio's
financial statements are included in the Portfolio's Annual Report to
Shareholders, which is available, free of charge, upon request.
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%**
PBHG Mid-Cap Value Portfolio(4)
1998.............. $10.00 -- $1.10 -- -- $11.10 11.00%**
PBHG Large Cap Growth Portfolio
1998.............. $11.82 $ (0.02) $3.64 -- -- $15.44 30.63%
1997(5)........... 10.00 -- 1.82 -- -- 11.82 18.20%**
<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%
PBHG Mid-Cap Value Portfolio(4)
1998.............. $555,144 1.20%* 0.26 %* 4.13%* (2.67)%* 72.32%
PBHG Large Cap Growth Portfolio
1998.............. $12,598 1.10% (0.19)% 1.53% (0.62)% 41.51%
1997(5)........... 4,916 1.10%* 0.00 %* 5.21%* (4.11)%* 37.42%
</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.
(4) The PBHG Mid-Cap Value Portfolio commenced operations on December 1, 1995.
Amounts designated as "--" are either $0 or have been rounded to $0.
(5) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
Amounts designated as "--" are either $0 or have been rounded to $0.
24
<PAGE>
For More Information
[logo]
For investors who want more information about the Portfolios, the
following documents are available free upon request:
Statement of Additional Information (SAI): Provides additional information about
the Portfolios and is incorporated into this Prospectus by reference.
Annual/Semi-annual Reports: Provides financial and performance information about
the Portfolios and their investments and a discussion of the market conditions
and investment strategies that significantly affected the Portfolios'
performance during the last fiscal year or half-year.
[graphic]
Copies of the current versions of these documents, along with other information
about the Portfolios, may be obtained by contacting:
PBHG Insurance Series Fund, Inc.
P.O. Box 419229
Kansas City, MO 64141-6229
Telephone: 1-800-347-9256
You may also contact the Participating Insurance Company for copies of these
documents.
Text-only versions of these documents and this Prospectus are available by
visiting the SEC's Public Reference Room in Washington, D.C. (1-800-SEC-0330) or
by sending your request and a duplicating fee to the SEC's Public Reference
Room, Washington, D.C. 20549-6009. Text-only versions also may be viewed
on-screen or downloaded from the SEC's Internet site at http://www.sec.gov.
PBHG Insurance Series Fund, Inc.'s Investment
Company Act File Number is 811-08009.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1999
Company:
PBHG INSURANCE SERIES FUND, INC.
Portfolios:
PBHG GROWTH II PORTFOLIO
PBHG LARGE CAP GROWTH PORTFOLIO
PBHG SMALL CAP VALUE PORTFOLIO
PBHG MID-CAP VALUE PORTFOLIO
PBHG LARGE CAP VALUE PORTFOLIO
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
PBHG SELECT 20 PORTFOLIO
Investment Adviser:
PILGRIM BAXTER & ASSOCIATES, LTD.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of PBHG
Insurance Series Fund, Inc. (the "Company") and the PBHG Growth II Portfolio,
PBHG Large Cap Growth Portfolio, PBHG Small Cap Value Portfolio, PBHG Mid-Cap
Value Portfolio, PBHG Large Cap Value Portfolio, PBHG Technology &
Communications Portfolio and the PBHG Select 20 Portfolio (the "Portfolios"). It
should be read in conjunction with the Prospectus dated May 1, 1999. The
Prospectus may be obtained without charge by calling 1-800-347-9256.
The Annual Report for each Portfolio, except for pages 1 through 2 thereof, is
incorporated herein by reference and made a part of this document. The Annual
Report may be obtained without charge by calling 1-800-347-9256.
TABLE OF CONTENTS
THE COMPANY...........................................................3
DESCRIPTION OF PERMITTED INVESTMENTS AND RISKS........................3
INVESTMENT LIMITATIONS...............................................16
DIRECTORS AND OFFICERS OF THE COMPANY................................20
5% AND 25% SHAREHOLDERS..............................................23
THE ADVISER..........................................................25
THE SUB-ADVISER......................................................28
THE DISTRIBUTOR......................................................29
THE ADMINISTRATOR AND SUB-ADMINISTRATOR..............................29
OTHER SERVICE PROVIDERS..............................................31
PORTFOLIO TRANSACTIONS...............................................32
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DESCRIPTION OF SHARES................................................35
PURCHASE AND REDEMPTION OF SHARES....................................36
DETERMINATION OF NET ASSET VALUE.....................................37
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS..............................38
PERFORMANCE INFORMATION..............................................44
FINANCIAL STATEMENTS.................................................47
2
<PAGE>
THE COMPANY
The Company is an open-end management investment company which was incorporated
in Maryland in 1997. This Statement of Additional Information relates to all
Portfolios of the Company. Each Portfolio is diversified except for the Select
20 Portfolio, which is non-diversified. No investment in shares of a Portfolio
should be made without first reading the Prospectus. Capitalized terms not
defined in this Statement of Additional Information are defined in the
Prospectus. Pilgrim Baxter & Associates, Ltd. ("Adviser") serves as the
investment adviser to each Portfolio. Pilgrim Baxter Value Investors, Inc.
("Sub-Adviser") serves as the investment sub-adviser to the Small Cap Value,
Mid-Cap Value, and Large Cap Value Portfolios. The Adviser and the Sub-Adviser
are collectively referred to herein as the "Advisers."
DESCRIPTION OF PERMITTED INVESTMENTS AND RISKS
Repurchase Agreements
Repurchase agreements are agreements by which a person (e.g., a Portfolio)
obtains a security and simultaneously commits to return the security to the
seller (a member bank of the Federal Reserve System or primary securities dealer
as recognized by the Federal Reserve Bank of New York) at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.
Repurchase agreements are considered to be loans by a Portfolio for purposes of
its investment limitations. The repurchase agreements entered into by a
Portfolio will provide that the underlying security at all times shall have a
value at least equal to 102% of the resale price stated in the agreement (the
Adviser monitors compliance with this requirement). Under all repurchase
agreements entered into by a Portfolio, the Company's custodian or its agent
must take possession of the underlying collateral. However, if the seller
defaults, a Portfolio could realize a loss on the sale of the underlying
security to the extent that the proceeds of the sale, including accrued
interest, are less than the resale price provided in the agreement including
interest. In addition, even though the Bankruptcy Code provides protection for
most repurchase agreements, if the seller should be involved in bankruptcy or
insolvency proceedings, a Portfolio may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the
Portfolio is treated as an unsecured creditor of the seller and is required to
return the underlying security to the seller's estate.
3
<PAGE>
Futures Contracts
Futures Transactions. A futures contract is a bilateral agreement to buy or sell
a security (or deliver a cash settlement price, in the case of a contract
relating to an index or otherwise not calling for physical delivery at the end
of trading in the contracts) for a set price in the future. Futures contracts
are designated by boards of trade which have been designated "contracts markets"
by the Commodity Futures Trading Commission ("CFTC").
No purchase price is paid or received when the contract is entered into.
Instead, a Portfolio upon entering into a futures contract (and to maintain the
Portfolio's open positions in futures contracts) would be required to deposit
with its custodian in a segregated account in the name of the futures broker an
amount of cash, or other assets, known as "initial margin." The margin required
for a particular futures contract is set by the exchange on which the contract
is traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margin that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Portfolio. These subsequent payments called "variation
margin," to and from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short positions in the
futures contract more or less valuable, a process known as "marking to the
market." A Portfolio expects to earn interest income on its initial and
variation margin deposits.
A Portfolio will incur brokerage fees when it purchases and sells futures
contracts. Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss.
While futures positions taken by a Portfolio will usually be liquidated in this
manner, a Portfolio may instead make or take delivery of underlying securities
whenever it appears economically advantageous to the Portfolio to do so. A
clearing organization associated with the exchange on which futures are traded
assumes responsibility for closing out transactions and guarantees that as
between the clearing members of an exchange, the sale and purchase obligations
will be performed with regard to all positions that remain open at the
termination of the contract.
4
<PAGE>
Securities Index Futures Contracts. Purchases or sales of securities index
futures contracts may be used in an attempt to protect a Portfolio's current or
intended investments from broad fluctuations in securities prices. A securities
index futures contract does not require the physical delivery of securities, but
merely provides for profits and losses resulting from changes in the market
value of the contract to be credited or debited at the close of each trading day
to the respective accounts of the parties to the contract. On the contract's
expiration date a final cash settlement occurs and the futures positions are
simply closed out. Changes in the market value of a particular index futures
contract reflect changes in the specified index of securities on which the
future is based.
By establishing an appropriate "short" position in index futures, the Portfolio
may also seek to protect the value of its portfolio against an overall decline
in the market for such securities. Alternatively, in anticipation of a generally
rising market, a Portfolio can seek to avoid losing the benefit of apparently
low current prices by establishing a "long" position in securities index futures
and later liquidating that position as particular securities are in fact
acquired. To the extent that these hedging strategies are successful, a
Portfolio will be affected to a lesser degree by adverse overall market price
movements than would otherwise be the case.
Limitations on Purchase and Sale of Futures Contracts. A Portfolio will not
purchase or sell futures contracts unless either (1) futures contracts are
purchased for "bona fide hedging" purposes (as that term is defined under the
CFTC regulations) or (2) if purchased for other purposes, the sum of the amounts
of initial margin deposits on the Portfolio's existing futures contracts and
premiums required to establish non-hedging positions would not exceed 5% of the
liquidation value of the Portfolio's total assets. In instances involving the
purchase of futures contracts by a Portfolio, an amount of cash or other liquid
assets, equal to the cost of such futures contracts (less any related margin
deposits), will be deposited in a segregated account with its custodian, thereby
insuring that the use of such futures contracts is unleveraged. In instances
involving the sale of futures contracts by a Portfolio, the securities
underlying such futures contracts or options will at all times be maintained by
the Portfolio or, in the case of index futures contracts, the Portfolio will own
securities the price changes of which are, in the opinion of its Advisers
expected to replicate substantially the movement of the index upon which the
futures contract is based.
For information concerning the risks associated with utilizing futures
contracts, please see "Risks of Transactions in Futures Contracts and Options"
below.
Options
Options are contracts that give one of the parties to the contract the right to
buy or sell the security that is subject to the option at a stated price during
the option period, and obligates the other party to the contract to buy or sell
such security at the stated price during the option period. The types of options
transactions that the Portfolios are permitted to utilize are discussed below.
5
<PAGE>
Writing Call Options. A call option is a contract which gives the purchaser of
the option (in return for a premium paid) the right to buy, and the writer of
the option (in return for a premium received) the obligation to sell, the
underlying security at the exercise price at any time prior to the expiration of
the option, regardless of the market price of the security during the option
period. A call option on a security is covered, for example, when the writer of
the call option owns the security on which the option is written (or on a
security convertible into such a security without additional consideration)
throughout the option period.
A Portfolio will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Portfolio will
give up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, a Portfolio will retain the risk of loss
should the price of the security decline. The premium is intended to offset that
loss in whole or in part. Unlike the situation in which a Portfolio owns
securities not subject to a call option, a Portfolio, in writing call options,
must assume that the call may be exercised at any time prior to the expiration
of its obligation as a writer, and that in such circumstances the net proceeds
realized from the sale of the underlying securities pursuant to the call may be
substantially below the prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing purchase
transaction if the amount paid to purchase a call option is less or more than
the amount received from the sale of the corresponding call option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the exercise or closing out of a call option is likely to be offset in
whole or part by unrealized appreciation of the underlying security owned by the
Portfolio. When an underlying security is sold from the Portfolio's securities
portfolio, the Portfolio will effect a closing purchase transaction so as to
close out any existing covered call option on that underlying security.
Writing Put Options. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. A Portfolio when
it writes a put option will be required to "cover" it, for example, by
depositing and maintaining in a segregated account with its custodian cash, or
other liquid obligations having a value equal to or greater than the exercise
price of the option.
A Portfolio may write put options either to earn additional income in the form
of option premiums (anticipating that the price of the underlying security will
remain stable or rise during the option period and the option will therefore not
be exercised) or to acquire the underlying security at a net cost below the
current value (e.g., the option is exercised because of a decline in the price
of the underlying security, but the amount paid by the Portfolio, offset by the
6
<PAGE>
option premium, is less than the current price). The risk of either strategy is
that the price of the underlying security may decline by an amount greater than
the premium received. The premium which the Portfolio receives from writing a
put option will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to that market
price, the historical price volatility of the underlying security, the option
period, supply and demand and interest rates.
A Portfolio may effect a closing purchase transaction to realize a profit on an
outstanding put option or to prevent an outstanding put option from being
exercised.
Purchasing Put and Call Options. A Portfolio may purchase put options on
securities to protect its holdings against a substantial decline in market
value. The purchase of put options on securities will enable the Portfolio to
preserve, at least partially, unrealized gains in an appreciated security in its
portfolio without actually selling the security. In addition, a Portfolio will
continue to receive interest or dividend income on the security. A Portfolio may
also purchase call options on securities to protect against substantial
increases in prices of securities that the Portfolio intends to purchase pending
its ability to invest in an orderly manner in those securities. A Portfolio may
sell put or call options it has previously purchased, which could result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction cost paid on the put or call option
which was bought.
Securities Index Options. A Portfolio may write covered put and call options and
purchase call and put options on securities indexes for the purpose of hedging
against the risk of unfavorable price movements adversely affecting the value of
the Portfolio's securities or securities it intends to purchase. A Portfolio
will only write "covered" options. A call option on a securities index is
considered covered, for example, if, so long as the Portfolio is obligated as
the writer of the call, it holds securities the price changes of which are, in
the opinion of the Adviser, expected to replicate substantially the movement of
the index or indexes upon which the options written by the Portfolio are based.
A put on a securities index written by the Portfolio will be considered covered
if, so long as it is obligated as the writer of the put, the Portfolio
segregates with its custodian cash or other liquid obligations having a value
equal to or greater than the exercise price of the option. Unlike a stock
option, which gives the holder the right to purchase or sell a specified stock
at a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (i) the difference
between the exercise price of the option and the value of the underlying stock
index on the exercise date, multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market value of the securities
so included. For example, some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indexes may also be based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index.
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<PAGE>
Over-the-Counter Options. A Portfolio may enter into contracts with primary
dealers with whom it may write over-the-counter options. Such contracts will
provide that the Portfolio has the absolute right to repurchase an option it
writes at any time at a repurchase price which represents the fair market value,
as determined in good faith through negotiation between the parties, but which
in no event will exceed a price determined pursuant to a formula contained in
the contract. Although the specific details of the formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Portfolio for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount the option
is "in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." A Portfolio has established
standards of creditworthiness for these primary dealers, although the Portfolio
may still be subject to the risk that firms participating in such transactions
will fail to meet their obligations. In instances in which a Portfolio has
entered into agreements with respect to the over-the-counter options it has
written, and such agreements would enable the Portfolio to have an absolute
right to repurchase at a pre-established formula price the over-the-counter
option written by it, the Portfolio would treat as illiquid only securities
equal in amount to the formula price described above less the amount by which
the option is "in-the-money," i.e., the amount by which the price of the option
exceeds the exercise price.
For information concerning the risks associated with utilizing options and
futures contracts, please see "Risks of Transactions in Futures Contracts and
Options" below.
Risks of Transactions in Futures Contracts and Options
Futures. The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in the market and interest
rates, which in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
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<PAGE>
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the futures contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract.
A decision of whether, when, and how to hedge involves skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior, market trends or interest rate trends. There are
several risks in connection with the use by a Portfolio of futures contracts as
a hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of
the underlying instruments which are the subject of the hedge. The Advisers
will, however, attempt to reduce this risk by entering into futures contracts
whose movements, in its judgment, will have a significant correlation with
movements in the prices of the Portfolio's underlying instruments sought to be
hedged.
Successful use of futures contracts by a Portfolio for hedging purposes is also
subject to the Adviser's ability to correctly predict movements in the direction
of the market. It is possible that, when the Portfolio has sold futures to hedge
its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in the Portfolio's portfolio might decline. If this were to
occur, the Portfolio would lose money on the futures and also would experience a
decline in value in its underlying instruments.
Positions in futures contracts may be closed out only on an exchange or a board
of trade which provides the market for such futures. Although each Portfolio
intends to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active market, there is no guarantee that such will exist
for any particular contract or at any particular time. If there is not a liquid
market at a particular time, it may not be possible to close a futures position
at such time, and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures positions are used to hedge portfolio securities,
the securities will not be sold until the futures positions can be liquidated.
In such circumstances, an increase in the price of securities, if any, may
partially or completely offset losses on the futures contracts.
Options. A closing purchase transaction for exchange-traded options may be made
only on a national securities exchange (exchange). There is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options, such as over-the-counter options,
no secondary market on an exchange may exist. If a Portfolio is unable to effect
a closing purchase transaction, the Portfolio will not sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise.
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<PAGE>
Options traded in the over-the-counter market may not be as actively traded as
those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be difficult to enter into closing transactions
with respect to options traded over-the-counter. A Portfolio will engage in such
transactions only with firms of sufficient credit so as to minimize these risks.
Such options and the securities used as "cover" for such options may be
considered illiquid securities.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the selected
securities index. Perfect correlation is not possible because the securities
held or to be acquired by the Portfolio will not exactly match the composition
of the securities indexes on which options are written. In the purchase of
securities index options the principal risk is that the premium and transaction
costs paid by a Portfolio in purchasing an option will be lost if the changes
(increase in the case of a call, decrease in the case of a put) in the level of
the index do not exceed the cost of the option.
Investment Company Shares
The Portfolios may invest in shares of other investment companies (such as
Standard & Poor's Depository Receipts - "SPDRs"). Because such funds pay
management fees and other expenses, shareholders of a Portfolio would indirectly
pay both the Portfolio's expenses and the expenses of underlying funds with
respect to the Portfolio's assets invested therein. Applicable regulations
prohibit a Portfolio from acquiring the securities of other investment companies
that are "not part of the same group of investment companies" if, as a result of
such acquisition, the Portfolio owns more than 3% of the total voting stock of
the company; more than 5% of the Portfolio's total assets are invested in
securities of any one investment company; or more than 10% of the total assets
of the Portfolio are invested in securities (other than treasury stock) issued
by all investment companies.
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<PAGE>
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of in the
ordinary course of business within seven (7) days at approximately the prices at
which they are valued. Under the supervision of the Board of Directors, the
Advisers determine the liquidity of the Company's investments and, through
reports from the Advisers, the Board monitors investments in illiquid
instruments. In determining the liquidity of a Portfolio's investments, the
Advisers may consider various factors including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
market place for trades (including the ability to assign or offset a Portfolio's
rights and obligations relating to the investment). Investments currently
considered by a Portfolio to be illiquid include repurchase agreements not
entitling the holder to payment of principal and interest within seven (7) days,
over the-counter options, and non-government stripped fixed-rate mortgage backed
securities. Also, the Advisers may determine some government-stripped fixed-rate
mortgage backed securities, loans and other direct debt instruments, and swap
agreements to be illiquid. However, with respect to over-the-counter options a
Portfolio writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the nature and
terms of any agreement a Portfolio may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are priced
at fair value as determined in good faith by a committee appointed by the Board
of Directors. If, through a change in values, net assets or other circumstances,
a Portfolio was in a position where more than 15% of its net assets were
invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
Restricted Securities
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
a Portfolio may be obligated to pay all or part of the registration expense and
a considerable period may elapse between the time it decides to seek
registration and the time a Portfolio may be permitted to sell a security under
an effective registration statement. If, during such a period, adverse market
conditions were to develop, a Portfolio might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
Foreign Currency Transactions
A Portfolio may hold foreign currency deposits from time to time, and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies may be exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
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<PAGE>
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before maturity, or may hold the contract to
maturity and complete the contemplated currency exchange.
A Portfolio may use currency forward contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Portfolios.
In connection with purchases and sales of securities denominated in foreign
currencies, a Portfolio may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." The Advisers expect to enter into settlement hedges in the
normal course of managing the Portfolio's foreign investments. A Portfolio could
also enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Advisers.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Portfolio owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge," would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A Portfolio could also hedge the position by selling another
currency expected to perform similarly to the pound sterling - for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover currency
forward contracts. As required by SEC guidelines, each Portfolio will segregate
assets to cover currency forward contracts, if any, whose purpose is essentially
speculative. A Portfolio will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
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<PAGE>
Successful use of forward currency contracts will depend on the Advisers' skill
in analyzing and predicting currency values. Forward contracts may substantially
change a Portfolio's investment exposure to changes in currency exchange rates,
and could result in losses to a Portfolio if currencies do not perform as the
Advisers anticipate. For example, if a currency's value rose at a time when the
Advisers had hedged a Portfolio by selling that currency in exchange for
dollars, a Portfolio would be unable to participate in the currency's
appreciation. If the Advisers hedge currency exposure through proxy hedges, a
Portfolio could realize currency losses from the hedge and the security position
at the same time if the two currencies do not move in tandem. Similarly, if the
Advisers increase a Portfolio's exposure to a foreign currency, and that
currency's value declines, a Portfolio will realize a loss. There is no
assurance that the Advisers' use of forward currency contracts will be
advantageous to a Portfolio or that it will hedge at an appropriate time.
American Depositary Receipts ("ADRs") and Global Depositary Receipts ("GDRs")
ADRs are securities, typically issued by a U.S. financial institution (a
"depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depositary. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, GDRs and CDRs may be available for investment
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Bankers' Acceptance
A bill of exchange or time draft drawn on and accepted by a commercial bank. It
is used by corporations to finance the shipment and storage of goods and to
furnish dollar exchange. Maturities are generally six months or less.
Certificate of Deposit
A negotiable interest bearing instrument with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market prior to
maturity. Certificates of deposit generally carry penalties for early
withdrawal.
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Commercial Paper
The term used to designate unsecured short-term promissory notes issued by
corporations and other entities. Maturities on these issues typically vary from
a few days to nine months.
Convertible Securities
Securities such as rights, bonds, notes and preferred stocks which are
convertible into or exchangeable for common stocks. Convertible securities have
characteristics similar to both fixed income and equity securities. Because of
the conversion feature, the market value of convertible securities tends to move
together with the market value of the underlying common stock. As a result, a
Portfolio's selection of convertible securities is based, to a great extent, on
the potential for capital appreciation that may exist in the underlying stock.
The value of convertible securities is also affected by prevailing interest
rates, the credit quality of the issuer, and any call provisions.
Demand Instruments
Certain instruments may involve a conditional or unconditional demand feature
which permits the holder to demand payment of the principal amount of the
instrument. Demand instruments may include variable amount master demand notes.
Mortgage-Backed Securities
Securities that include interests in pools of lower-rated debt securities, or
consumer loans or mortgages, or complex instruments such as collateralized
mortgage obligations and stripped mortgage-backed securities. The value of these
securities may be significantly affected by changes in interest rates, the
market's perception of the issuers, and the creditworthiness of the parties
involved. Some securities may have a structure that makes their reaction to
interest rates and other factors difficult to predict, making their value highly
volatile. These securities may also be subject to prepayment risk.
Receipts
Separately traded interest and principal component parts of U.S. Treasury
obligations that are issued by banks or brokerage firms and are created by
depositing U.S. Treasury obligations into a special account at a custodian bank.
The custodian bank holds the interest and principal payments for the benefit of
the registered owners of the receipts. The custodian bank arranges for the
issuance of the receipts evidencing ownership and maintains the register.
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Time Deposit
A non-negotiable receipt issued by a bank in exchange for the deposit of funds.
Like a certificate of deposit, it earns a specified rate of interest over a
definite period of time; however, it cannot be traded in the secondary market.
Time deposits with a withdrawal penalty are considered to be illiquid
securities.
U.S. Government Agency Obligations
Certain Federal agencies such as the Government National Mortgage Association
("GNMA") have been established as instrumentalities of the United States
Government to supervise and finance certain types of activities. Securities
issued by these agencies, while not direct obligations of the United States
Government, are either backed by the full faith and credit of the United States
(e.g., GNMA securities) or supported by the issuing agencies' right to borrow
from the Treasury. The securities issued by other agencies are supported only by
the credit of the instrumentality (e.g., Tennessee Valley Authority securities).
U.S. Government Securities
Bills, notes and bonds issued by the U.S. Government and backed by the full
faith and credit of the United States.
U.S. Treasury Obligations
Bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are transferable
through the Federal book-entry system known as Separately Traded Registered
Interest and Principal Securities ("STRIPS"). Under the STRIPS program, a
Portfolio will be able to have its beneficial ownership of securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidences of ownership of the underlying U.S. Treasury
securities. When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the stripped coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. The principal or corpus is sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the securities that the Treasury sells itself. Other
facilities are available to facilitate the transfer of ownership of non-Treasury
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on such securities through a book-entry
record-keeping system.
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Variable and Floating Rate Instruments
Certain of the obligations purchased by a Portfolio may carry variable or
floating rates of interest, may involve a conditional or unconditional demand
feature and may include variable amount master demand notes. Such instruments
bear interest at rates which are not fixed, but which vary with changes in
specified market rates or indices, such as a Federal Reserve composite index.
The interest rates on these securities may be reset daily, weekly, quarterly or
some other reset period, and may have a floor or ceiling on interest rate
changes. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. A demand instrument with
a demand notice exceeding seven days may be considered illiquid if there is no
secondary market for such securities.
Warrants
Instruments giving holders the right, but not the obligation, to buy shares of a
company at a given price during a specified period.
When-Issued and Delayed-Delivery Securities
When-issued and delayed-delivery securities are securities subject to settlement
on a future date. For fixed income securities, the interest rate realized on
when-issued or delayed-delivery securities is fixed as of the purchase date and
no interest accrues to a Portfolio before settlement. These securities are
subject to market fluctuation due to changes in market interest rates and will
have the effect of leveraging a Portfolio's assets. The Portfolios are permitted
to invest in forward commitments or when-issued securities where such purchases
are for investment and not for leveraging purposes. One or more segregated
accounts will be established with the Custodian, and the Portfolios will
maintain liquid assets in such accounts in an amount at least equal in value to
each Portfolio's commitments to purchase when-issued securities.
INVESTMENT LIMITATIONS
Fundamental Policies
Each Portfolio has adopted certain investment restrictions which are fundamental
and may not be changed without approval by a majority vote of the Portfolio's
shareholders. Such majority is defined in the 1940 Act as the lesser of (i) 67%
or more of the voting securities of the Portfolio present in person or by proxy
at a meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of the Portfolio.
No Portfolio may:
1. Make loans, except that each Portfolio, in accordance with that Portfolio's
investment objectives and policies, may (i) purchase debt instruments, and (ii)
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enter into repurchase agreements. In addition, the PBHG Mid-Cap Value Portfolio
may lend its portfolio securities in an amount not exceeding one-third the value
of its total assets.
2. Act as an underwriter of securities of other issuers, except as it may be
deemed an underwriter under the 1933 Act in connection with the purchase and
sale of portfolio securities.
3. Purchase or sell commodities or commodity contracts, except that a PBHG
Advisor Fund, in accordance with its investment objective and policies may: (i)
invest in readily marketable securities of issuers which invest or engage in
such activities; and (ii) enter into forward contracts, futures contracts and
options thereon.
4. Purchase or sell real estate, or real estate partnership interests, except
that this limitation shall not prevent a PBHG Advisor Fund from investing
directly or indirectly in readily marketable securities of issuers which can
invest in real estate, institutions that issue mortgages, or real estate
investment trusts which deal with real estate or interests therein.
5. Issue senior securities (as defined in the 1940 Act), except as permitted in
connection with the Portfolio's policies on borrowing and pledging, or as
permitted by rule, regulation or order of the SEC.
6. Purchase more than 10% of the voting securities of any one issuer or purchase
securities of any one issuer if, at the time of purchase, more than 5% of its
total assets will be invested in that issuer, except with respect to each
Portfolio, up to 25% of its assets may be invested without regard to these
limits.
This limitation does not apply to the Select 20 Portfolio. In addition, for
purposes of this investment limitation, the term "issuer" does not include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by such obligations.
7. Invest 25% or more of its total assets at the time of purchase in securities
of one or more issuers (other than obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase agreements
collateralized by such obligations) whose principal business activities are in
the same industry. For purposes of this limitation, supranational organizations
are deemed to be issuers conducting their principal business activities in the
same industry; state and municipal governments and their agencies and
authorities are not deemed to be industries, utility companies will be divided
according to their services (e.g., gas, gas transmission, electric, electric and
gas and telephone) and financial service companies will be classified according
to the end use of their service (e.g., automobile finance, bank finance and
diversified finance).
8. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of the Portfolio's total assets (except
not exceeding 33 1/3% of the value of total assets with respect to the Growth
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II, Mid-Cap Value, and Small Cap Value Portfolios). This borrowing provision is
intended to facilitate the orderly sale of portfolio securities to accommodate
substantial redemption requests if they should occur, and is not for investment
purposes. All borrowings in excess of 5% of the Portfolio's total assets will be
repaid before making investments.
9. Invest in companies for the purpose of exercising control.
10. Pledge, mortgage or hypothecate assets, except (i) to secure temporary
borrowings permitted by each Portfolio's limitation on permitted borrowings, or
(ii) in connection with permitted transactions regarding options and futures
contracts.
11. Make short sales of securities, maintain a short position or purchase
securities on margin, except that each Portfolio may (i) obtain short-term
credits as necessary for the clearance of security transactions and (ii)
establish margin accounts as may be necessary in connection with the Portfolio's
use of options and futures contracts.
12. Purchase securities of other investment companies except as permitted by the
1940 Act and the rules and regulations thereunder.
13. Invest in interests in oil, gas or other mineral exploration or development
programs.
The foregoing percentages will apply at the time of the purchase of a security.
Non-fundamental Policies
In addition to the foregoing, each Portfolio has adopted additional investment
restrictions which may be amended by the Board of Directors without a vote of
shareholders.
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Each Portfolio may not:
1. Invest in illiquid securities in an amount exceeding, in the aggregate, 15%
of its net assets. This limitation does not include any Rule 144A restricted
security that has been determined by, or pursuant to procedures established by,
the Board, based on trading markets for such security, to be liquid.
2. Purchase or sell puts, calls, straddles, spreads, and any combination
thereof, if by reason thereof, the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets.
Temporary Defensive Positions
Under normal market conditions, each Portfolio expects to be fully invested in
its primary investments. However, for temporary defensive purposes, when the
Adviser or Sub-Adviser, as appropriate, determines that market conditions
warrant, each Portfolio may invest up to 100% of its assets in cash and money
market instruments (consisting of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; certificates of deposit, time
deposits and bankers' acceptances issued by banks or savings and loan
associations having net assets of at least $500 million as stated on their most
recently published financial statements; commercial paper rated in one of the
two highest rating categories by at least one NRSRO; repurchase agreements
involving such securities; and, to the extent permitted by applicable law and
each Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent a Portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective.
Portfolio Turnover
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. A higher turnover rate (100% or more)
increases transaction costs (e.g., brokerage commissions) and increases realized
gains and losses. It is expected that under normal market conditions, the annual
portfolio turnover rate for the Growth II and Large Cap Growth Portfolios will
not exceed 150%. It is expected that under normal market conditions, the annual
portfolio turnover rate for the Select 20 and Technology & Communications
Portfolios will not exceed 300%. It is expected that under normal market
conditions, the annual portfolio turnover rate for the Large Cap Value,
Small-Cap Value and Mid-Cap Value Portfolios will not exceed 400%. High rates of
portfolio turnover necessarily result in correspondingly greater brokerage and
portfolio trading costs, which are paid by the Portfolios. Trading in
fixed-income securities does not generally involve the payment of brokerage
commissions, but does involve indirect transaction costs. In addition,
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high rates of portfolio turnover may adversely affect each Portfolio's status as
a "regulated investment company" ("RIC") under Section 851 of the Internal
Revenue Code of 1986, as amended ("Code").
DIRECTORS AND OFFICERS OF THE COMPANY
The management and affairs of the Company are supervised by the Board of
Directors under the laws of the State of Maryland. The Directors have approved
agreements under which, as described above, certain companies provide essential
management services to the Company. The Directors and executive officers of the
Company and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Each Director serves as a Director and each officer serves as an officer
in a similar capacity for The PBHG Funds, Inc., another registered investment
company managed by the Adviser.
<TABLE>
<CAPTION>
Position Held
Name , Address, and Age with the Fund Principal Occupation(s) During Past 5 Years
- ----------------------- ------------- -------------------------------------------
<S> <C> <C>
John R. Bartholdson, Director Chief Financial Officer and Director, the Triumph Group,
1255 Drummers Lane, Suite 200, Inc. (manufacturing) since 1992.
Wayne, PA 19087
(54)
Harold J. Baxter*, Chairman of Chairman, Chief Executive Officer and Director, the Adviser,
825 Duportail Road, the Board since 1995. Trustee, the Administrator since May
Wayne, PA 19087, and Director 1996. Chairman, Chief Executive Officer and Director,
(52) Value Investors, since June 1996. Trustee, the
Distributor since January 1998. Director, UAM since 1996.
Jettie M. Edwards, Director Consultant, Syrus Associates since 1986. Trustee,
76 Seaview Drive, Santa Barbara, Provident Investment Counsel Trust (investment company)
California 93108, since 1992. Trustee, EQ Advisors Trust (investment
(52) company) since 1997.
Albert A. Miller, Director Principal and Treasurer, JK Equipment Exporters since
7 Jennifer Drive, Holmdel, 1995. Advisor and Secretary, the Underwoman Shoppes
New Jersey 07733, Inc. (retail clothing stores) since 1980.
(63) Merchandising Group Vice President, R.H. Macy & Co.,
1958-1995 (retired).
Gary L. Pilgrim, President President, Chief Investment Officer and Director, the
825 Duportail Road, Wayne, Adviser since 1982. Trustee, the Administrator since May
PA 19087, 1996. President and Director, Value Investors since
(58) June 1996.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Position Held
Name , Address, and Age with the Fund Principal Occupation(s) During Past 5 Years
- ----------------------- ------------- -------------------------------------------
<S> <C> <C>
Brian F. Bereznak Vice-President Trustee and President, the Administrator since May
825 Duportail Road, Wayne, PA 1996. Chief Operating Officer, the Adviser from 1993
19087, through December 31, 1996. Vice President of the Adviser since
(37) 1989. Director, Value Investors from June 1996 to October 1997.
Lee T. Cummings Treasurer, Chief Director of Mutual Fund Operations, the Adviser since
825 Duportail Road, Wayne, PA Financial 1996. Treasurer, the Administrator since May 1996.
19087, Officer, President, the Distributor since December 1998.
(35) Controller Investment Accounting Officer, Delaware Group of Funds,
1994-1996. Vice President, Fund/Plan Services, Inc.,
1992-1994
Michael J. Harrington Vice-President Director of Fund Services, the Adviser since 1994.
825 Duportail Road, Wayne, PA Vice-President, the Administrator since May 1996.
19087, Account Manager, SEI, 1991-1994.
(29)
John M. Zerr Vice-President General Counsel and Secretary, the Adviser since
825 Duportail Road, Wayne, PA and Secretary November 1996. General Counsel and Secretary, Value
19087, Investors since November 1996. General Counsel and
(36) Secretary, the Administrator since January 1998.
General Counsel and Secretary, the Distributor since
January 1998. Vice President and Assistant Secretary,
Delaware Management Company, Inc. and the Delaware
Group of Funds, 1995-1996. Associate, Ballard Spahr
Andrews & Ingersoll (law firm), 1987-1995.
Meghan M. Mahon Vice-President Counsel, the Adviser since April 1998. Assistant Vice
825 Duportail Road, Wayne, PA and Assistant President, Assistant Secretary and Counsel, Delaware
19087, Secretary Management Company Inc. and the Delaware Group of
(31) Funds, 1997-1998. Associate, Drinker Biddle & Reath,
LLP (law firm) 1994-1997. Associate, McAleese, McGoldrick
& Susanin (law firm) 1993-1994.
Joseph M. O'Donnell Vice President Vice President and Assistant Secretary of SEI Fund Services
One Freedom Valley Road Oaks, PA and Assistant and SEI Investments Distribution Co. since 1998. Vice
19456 Secretary President and General Counsel, FPS Services, Inc.,
(44) 1993-1997. Staff Counsel and Secretary, Provident
Mutual Family of Funds, 1990-1993.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Position Held
Name, Address, and Age with the Fund Principal Occupation(s) During Past 5 Years
- ---------------------- ------------- -------------------------------------------
<S> <C> <C>
Linda J. Striegel Vice President Vice President and Assistant Secretary of SEI
One Freedom Valley Road Fund Services, and SEI Investments Distribution Co.
Oaks, PA 19456 since 1998. Senior Asset Management Counsel, Barnett
(50) Banks, Inc., 1997-1998. Partner, Groom and Nordberg,
Chartered, 1996-1997. Associate General Counsel,
Riggs Bank, N.A., 1991-1995.
</TABLE>
Each current Director of the Company who is not an "interested person" of the
Company received the following compensation during the fiscal year ended
December 31, 1998:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Estimated Compensation
Compensation Accrued as Part Annual from Company
Name of Person, from of Company Benefits Upon and Company Complex
Position Company Expenses Retirement Paid to Directors
- --------------- ------------ --------------- ------------- -------------------
<S> <C> <C> <C> <C>
John R. Bartholdson, $19,667 N/A N/A $71,333
Director for services on
three boards
Harold J. Baxter, N/A N/A N/A N/A
Director*
Jettie M. Edwards, $19,667 N/A N/A $71,333
Director for services on
three boards
Albert A. Miller, $19,667 N/A N/A $71,333
Director for services on
three boards
</TABLE>
* Mr. Baxter is a Director who may be deemed to be an "interested person" of the
Company, as that term is defined in the 1940 Act, and consequently will be
receiving no compensation from the Company.
22
<PAGE>
5% AND 25% SHAREHOLDERS
As of December 31, 1998, the following persons were the only persons who were
record owners of 5% or more of the shares of the Portfolios. Any record owner of
more than 25% of the shares of a Portfolio may be deemed a controlling person of
that Portfolio. The percent of each Portfolio's shares owned by all officers and
directors of the Company as a group is less than 1 percent of the outstanding
shares of each such Portfolio. The Company believes that most of the shares
referred to below were held by the persons indicated in the accounts for their
fiduciary, agency or custodial clients.
PBHG Growth II Portfolio
Life Insurance Co. of Virginia 58.34%
6610 W. Broad Street
Richmond, VA 23230-1799
Fidelity Investments 27.71%
Life Insurance Co.
82 Devonshire Street R25B
Boston, MA 02109-3614
PBHG Large Cap Growth Portfolio
Life Insurance Co. of Virginia 93.94%
6610 W. Broad Street
Richmond, VA 23230-1799
Annuity Investors Life Insurance Co. 5.87%
250 E. Fifth Street
Cincinnati, OH 45202-4119
PBHG Small Cap Value Portfolio
Fidelity Investments 95.24%
Life Insurance Co.
82 Devonshire Street R25B
Boston, MA 02109-3614
23
<PAGE>
PBHG Mid-Cap Value Portfolio
Pilgrim Baxter & Associates, Ltd. 99.98%
825 Duportail Road
Wayne, PA 19087
PBHG Large Cap Value Portfolio
Fidelity Investments 90.47%
Life Insurance Co.
82 Devonshire Street R25B
Boston, MA 02109-3614
PBHG Technology & Communications Portfolio
Empire Fidelity Investments 11.64%
Life Insurance Co.
200 Liberty Street
One Financial Center
New York, NY 10281-1003
Fidelity Investments 83.92%
Life Insurance Co.
82 Devonshire Street R25B
Boston, MA 02109-3614
PBHG Select 20 Portfolio
Fidelity Investments 90.81%
Life Insurance Co.
82 Devonshire Street R25B
Boston, MA 02109-3614
Empire Fidelity Investments 8.80%
Life Insurance Co.
200 Liberty Street
One Financial Center
New York, NY 10281-1003
24
<PAGE>
THE ADVISER
The Company and Pilgrim Baxter & Associates, Ltd. (the "Adviser") have entered
into an advisory agreement (the "Advisory Agreement"). The Advisory Agreement
provides certain limitations on the Adviser's liability, but also provides that
the Adviser shall not be protected against any liability to the Company or each
of its Portfolios or its shareholders by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard of its obligations or duties thereunder.
The sole shareholder of the Adviser is United Asset Management Corporation
("UAM"), a New York Stock Exchange listed holding company principally engaged,
through affiliated firms, in providing institutional investment management
services and acquiring institutional investment management firms. UAM's
corporate headquarters are located at One International Place, Boston,
Massachusetts 02110. PBHG Fund Services, the Company's Administrator, is a
wholly owned subsidiary of the Adviser (See "The Administrator" for more detail
on PBHG Fund Services). PBHG Fund Services also serves as administrator to The
PBHG Funds, Inc., a management investment company also managed by the Adviser.
The Adviser currently has discretionary management authority with respect to
over $13 billion in assets. In addition to advising the Portfolios, the Adviser
provides advisory services to other mutual funds and to pension and
profit-sharing plans, charitable institutions, corporations, trusts and estates,
and other investment companies. The principal business address of the Adviser is
825 Duportail Road, Wayne, Pennsylvania 19087.
The Advisory Agreement obligates the Adviser to: (1) provide a program of
continuous investment management for each Portfolio in accordance with the
Portfolio's investment objectives, policies and limitations; (2) make investment
decisions for each Portfolio; and (3) place orders to purchase and sell
securities for each Portfolio, subject to the supervision of the Board of
Directors. The Advisory Agreement requires the Adviser to pay its overhead and
employee costs and the compensation and expenses of all its partners, officers
and employees who serve as officers and executive employees of the Company. The
Advisory Agreement provides that the Adviser is not responsible for other
25
<PAGE>
expenses of operating the Company. (See the Prospectus for a description of
expenses borne by the Company.)
The continuance of the Advisory Agreement with respect to each Portfolio after
the first two years must be specifically approved at least annually (i) by the
Company's Board of Directors or by vote of a majority of the outstanding voting
securities of such Portfolio and (ii) by the affirmative vote of a majority of
the Directors who are not parties to the agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Advisory Agreement with respect to each Portfolio may be terminated (i) at any
time without penalty by the Company upon the vote of a majority of the Directors
or by vote of the majority of the outstanding voting securities of such
Portfolio upon sixty (60) days' written notice to the Adviser or (ii) by the
Adviser at any time without penalty upon sixty (60) days' written notice to the
Company. The Advisory Agreement will also terminate automatically in the event
of its assignment (as defined in the 1940 Act).
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.00% of the Small Cap Value Portfolio's
average daily net assets, 0.85% of each of the Growth II, Technology &
Communications, Mid-Cap Value, and Select 20 Portfolios' average daily net
assets, 0.75% of the Large Cap Growth Portfolio's average daily net assets, and
0.65% of the Large Cap Value Portfolio's average daily net assets. The advisory
fees paid by each Portfolio are higher than those paid by most investment
companies, although the Adviser believes the fees to be comparable to those paid
by investment companies with similar investment objectives and policies.
In the interest of limiting expenses of the Portfolios, the Adviser has entered
into an expense limitation agreement through December 31, 1999 with the Company
with respect to each Portfolio (the "Expense Limitation Agreement"), pursuant to
which the Adviser has agreed to waive or limit its fees and to assume other
expenses of the Portfolios to the extent necessary to limit the total annual
operating expenses (expressed as a percentage of each Portfolio's average daily
net assets) to not more than: 1.20% of the average daily net assets of the
Growth II, Small Cap Value, Mid-Cap Value, Technology & Communications and
Select 20 Portfolios; 1.10% of the average daily net assets of the Large Cap
Growth Portfolio; and 1.00% of the average daily net assets of the Large Cap
Value Portfolio. Such waivers and assumption of expenses by the Adviser may be
discontinued at any time after such date. If in any fiscal year in which a
Portfolio's assets are greater than $75 million of its "Total Operating
Expenses" do not exceed the limits previously noted, the Board of Directors may
elect to reimburse the Adviser for any fees it waived or expenses it reimbursed
on that Portfolio's behalf during the previous two fiscal years.
26
<PAGE>
For the fiscal years ended December 31, 1997 and 1998, the Portfolios paid and
the Adviser waived the following advisory fees:
<TABLE>
<CAPTION>
Portfolio Fees Paid Fees Waived
- --------- --------- -----------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Growth II Portfolio(1) $22,720 $123,820 $84,484 $50,092
Large Cap Growth
Portfolio(1) $ 9,625 $ 62,267 $52,349 $35,647
Small Cap Value Portfolio(2) $ 5,577 $303,666 $13,575 $78,573
Mid-Cap Value Portfolio(4) * $ 362 * $ 362
Large Cap Value Portfolio(2) $ 972 $ 51,341 $10,521 $36,853
Technology &
Communications Portfolio(1) $ 6,824 $147,084 $31,235 $62,368
Select 20 Portfolio(3) $ 5,406 $972,158 $13,964 $13,812
</TABLE>
* Not in operation during the period.
1 The period 1997 is calculated from May 1, 1997 (commencement of operations)
through December 31, 1997.
2 The period 1997 is calculated from October 29, 1997 (commencement of
operations) through December 31, 1997.
3 The period 1997 is calculated from September 26, 1997 (commencement of
operations) through December 31, 1997.
4 The 1998 period is calculated from November 30, 1998 (commencement of
operations) through December 31, 1998.
27
<PAGE>
THE SUB-ADVISER
The Company, on behalf of the Small Cap Value, Mid-Cap Value, and Large Cap
Value Portfolios, and the Adviser have entered into a sub-advisory agreement
(the "Sub-Advisory Agreement") with Pilgrim Baxter Value Investors, Inc. (the
"Sub-Adviser"). The Sub-Advisory Agreement provides certain limitations on the
Sub-Adviser's liability, but also provides that the Sub-Adviser shall not be
protected against any liability to the Fund or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder.
The Sub-Advisory Agreement obligates the Sub-Adviser to: (1) manage the
investment operations of the Small Cap Value, Mid-Cap Value, and Large Cap Value
Portfolios and the composition of these Portfolios' investment portfolios,
including the purchase, retention and disposition thereof in accordance with
these Portfolios' investment objectives, policies and limitations; (2) provide
supervision of the Small Cap Value, Mid-Cap Value, and Large Cap Value
Portfolios' investments and to determine from time to time what investments and
securities will be purchased, retained or sold by these Portfolios and what
portion of the assets will be invested or held uninvested in cash; and (3)
determine the securities to be purchased or sold by the Small Cap Value, Mid-Cap
Value, and Large Cap Value Portfolios and place orders with or through such
persons, brokers or dealers to carry out the policy with respect to brokerage
set forth in the Prospectus or as the Board of Directors or the Adviser may
direct from time to time, in conformity with federal securities laws.
The continuance of the Sub-Advisory Agreement with respect to the Small Cap
Value, Mid-Cap Value, and Large Cap Value Portfolios, respectively, after the
first two years must be specifically approved at least annually (i) by the
Company's Board of Directors or by vote of a majority of the outstanding voting
securities of such Portfolios and (ii) by the affirmative vote of a majority of
the Directors who are not parties to the agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Sub-Advisory Agreement with respect to the Small Cap Value, Mid-Cap Value, and
Large Cap Value Portfolios may be terminated (i) by the Company, without the
payment of any penalty, by the vote of a majority of the Directors of the
Company or by the vote of a majority of the outstanding voting securities of a
Portfolio, (ii) by the Adviser at any time, without the payment of any penalty,
on not more than sixty (60) days' nor less than thirty (30) days' written notice
to the other parties, or (iii) by the Sub-Adviser at any time, without the
payment of any penalty, on ninety (90) days' written notice to the other
parties. The Sub-Advisory Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act).
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreement, the Sub-Adviser is entitled to receive from the Adviser a fee,
computed daily and paid monthly, at an annual rate equal to .65% of the Small
28
<PAGE>
Cap Value Portfolio's average daily net assets, .50% of the Mid-Cap Value
Portfolio's average daily net assets, and .40% of the Large Cap Value
Portfolio's average daily net assets.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI, and the Company are parties to a distribution agreement (the
"Distribution Agreement") dated April 1, 1997, pursuant to which the Distributor
serves as principal underwriter for the Company. The Distributor receives no
compensation for serving in such capacity.
The Distribution Agreement is renewable annually. The Distribution Agreement may
be terminated by the Distributor, by a majority vote of the Directors who are
not interested persons and have no financial interest in the Distribution
Agreement or by a majority vote of the outstanding securities of the Company
upon not more than sixty (60) days' written notice by either party or upon
assignment by the Distributor.
THE ADMINISTRATOR AND SUB-ADMINISTRATOR
The Company and PBHG Fund Services (the "Administrator") entered into an
Administrative Services Agreement (the "Administrative Agreement") on April 1,
1997, pursuant to which the Administrator oversees the administration of the
business and affairs of the Company, including services provided to it by
various third parties. The Administrator was organized as a Pennsylvania
business trust and has its principal place of business at 825 Duportail Road,
Wayne, Pennsylvania 19087. Under the Administrative Agreement, the Administrator
is entitled to a fee from the Company, which is calculated daily and paid
monthly, at an annual rate of 0.15% of the average daily net assets of each
Portfolio of the Company. The Administrative Agreement provides that the
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss suffered by the Company in connection with the matters to which the
Administrative Agreement relates, except a loss resulting from willful
misfeasance, bad faith or negligence on the part of the Administrator in the
performance of its duties. The Administrative Agreement shall continue in effect
unless terminated by either party upon not less than ninety (90) days' prior
written notice to the other party.
The Company, the Administrator and SEI Fund Resources (the "Sub-Administrator")
entered into a Sub-Administrative Services Agreement (the "Sub-Administrative
Agreement") on April 1, 1997, as amended effective May 1, 1998, pursuant to
which the Sub-Administrator assists the Administrator in connection with the
administration of the business and affairs of the Company. SEI Investments
Management Corporation ("SEI Investments"), which is a wholly-owned subsidiary
of SEI Investments Company ("SEI"), owns all beneficial interest in the
Sub-Administrator. The Sub-Administrator was organized as a Delaware business
trust, and has its principal business offices at One Freedom Valley Road, Oaks,
Pennsylvania 19456. Under the Sub-Administrative Agreement, the Administrator
pays the Sub-Administrator fees at an annual rate based on the combined average
daily net assets of the Company and The PBHG Funds, Inc.
29
<PAGE>
calculated as follows: (i) 0.040% of the first $2.5 billion, plus (ii) 0.025%
of the next $7.5 billion, plus (iii) 0.020% of the excess over $10 billion. The
Sub-Administrative Agreement provides that the Sub-Administrator shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Company in connection with the matters to which the Sub-Administrative
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence on the part of the Sub-Administrator in the performance of its
duties. The Sub-Administrative Agreement shall continue in effect unless
terminated by either party upon not less than ninety (90) days' prior written
notice to the other party.
For the fiscal years ended December 31, 1997 and 1998, the Portfolios paid and
the Administrator waived the following administration fees:
<TABLE>
<CAPTION>
Portfolio Fees Paid Fees Waived
--------- --------- -----------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Growth II Portfolio(1) $4,009.00 $ 21,851 $0 $0
Large Cap Growth Portfolio(1) $1,925.00 $ 12,453 $0 $0
Small Cap Value Portfolio(2) $ 837.00 $ 45,550 $0 $0
Mid-Cap Value Portfolio(4) * $ 64 * $0
Large Cap Value Portfolio(2) $ 224.00 $ 11,848 $0 $0
Technology & Communications Portfolio(1) $1,204.00 $ 25,956 $0 $0
Select 20 Portfolio(3) $ 954.00 $171,557 $0 $0
</TABLE>
* Not in operation during the period.
1 The period 1997 is calculated from May 1, 1997 (commencement of operations)
through December 31, 1997.
2 The period 1997 is calculated from October 29, 1997 (commencement of
operations) through December 31, 1997.
30
<PAGE>
3 The period 1997 is calculated from September 26, 1997 (commencement of
operations) through December 31, 1997.
4 The 1998 period is calculated from November 30, 1998 (commencement of
operations) through December 31, 1998.
OTHER SERVICE PROVIDERS
The Transfer Agent and Shareholder Servicing Agents
DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534 serves as
the transfer agent and dividend disbursing agent for the Company under a
transfer agency agreement with the Company. PBHG Fund Services serves as
shareholder servicing agent of the Company. UAM Shareholder Service Center, Inc.
("UAM SSC"), an affiliate of the Adviser, provides services to the Company
pursuant to a sub-shareholder servicing agreement between PBHG Fund Services and
UAM SSC.
From time to time, the Company may pay amounts to third parties that provide
sub-transfer agency and other administrative services relating to the Company to
persons who beneficially own interests in the Company, such as participants in
Qualified Plans. These services may include, among other things, sub-accounting
services, answering inquiries relating to the Company, delivering, on behalf of
the Company, proxy statements, annual reports, updated Prospectuses, other
communications regarding the Company, and related services as the Company or the
beneficial owners may reasonably request.
Custodian
First Union National Bank ("Custodian"), formerly named CoreStates Bank, N.A.,
Broad and Chestnut Streets, P.O. Box 7618, Philadelphia, Pennsylvania 19101,
serves as the custodian for the Company. The Custodian holds cash, securities
and other assets of the Company as required by the 1940 Act.
Counsel and Independent Accountants
Ballard Spahr Andrews & Ingersoll, LLP serves as counsel to the Company.
PricewaterhouseCoopers, LLP, formerly named Coopers & Lybrand, L.L.P., serves as
the independent accountants of the Company.
31
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser (or Sub-Adviser, if applicable) is authorized to select brokers and
dealers to effect securities transactions for each Portfolio. The Adviser (or
Sub-Adviser, if applicable) will seek to obtain the most favorable net results
by taking into account various factors, including price, commission, if any,
size of the transactions and difficulty of executions, the firm's general
execution and operational facilities and the firm's risk in positioning the
securities involved. While the Adviser (or Sub-Adviser, if applicable) generally
seeks reasonably competitive spreads or commissions, the Company will not
necessarily be paying the lowest spread or commission available. The Adviser (or
Sub-Adviser, if applicable) seeks to select brokers or dealers that offer the
Portfolios best price and execution or other services which are of benefit to
the Portfolios. In the case of securities traded in the over-the-counter market,
the Adviser (or Sub-Adviser, if applicable) expects normally to seek to select
primary market makers.
The Adviser (or Sub-Adviser, if applicable) may, consistent with the interests
of the Portfolios, select brokers on the basis of the research services they
provide to the Adviser (or Sub-Adviser, if applicable). Such services may
include analyses of the business or prospects of a company, industry or economic
sector, or statistical and pricing services. Information so received by the
Adviser (or Sub-Adviser, if applicable) will be in addition to and not in lieu
of the services required to be performed by the Adviser (or Sub-Adviser, if
applicable) under the Advisory Agreement and Sub-Advisory Agreement. If, in the
judgment of the Adviser (or Sub-Adviser, if applicable), the Portfolios or other
accounts managed by the Adviser (or Sub-Adviser, if applicable) will be
benefited by supplemental research services, the Adviser (or Sub-Adviser, if
applicable) is authorized to pay brokerage commissions to a broker furnishing
such services which are in excess of commissions which another broker may have
charged for effecting the same transaction. These research services include
advice, either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities;
furnishing of analyses and reports concerning issuers, securities or industries;
providing information on economic factors and trends; assisting in determining
portfolio strategy; providing computer software used in security analyses; and
providing portfolio performance evaluation and technical market analyses. The
expenses of the Adviser (or Sub-Adviser, if applicable) will not necessarily be
reduced as a result of the receipt of such supplemental information, and such
services may not be used exclusively, or at all, with respect to each Portfolio
or account generating the brokerage, and there can be no guarantee that the
Adviser (or Sub-Adviser, if applicable) will find all of such services of value
in advising the Portfolios.
It is expected the Portfolios may execute brokerage or other agency transactions
through the Distributor, which is a registered broker-dealer, for a commission
in conformity with the 1940 Act, the Securities Exchange Act of 1934 and rules
promulgated by the SEC. Under these provisions, the Distributor is permitted to
receive and retain compensation for effecting portfolio transactions for the
Portfolios on an exchange if a written contract is in effect between the
Distributor and the Portfolio expressly permitting the Distributor to receive
and retain such compensation. These rules further require that commissions paid
to the Distributor by the Portfolios for exchange transactions not exceed "usual
and customary" brokerage commissions. The rules define "usual and customary"
32
<PAGE>
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." In addition, the Adviser (or Sub-Adviser, if applicable) may direct
commission business to one or more designated broker-dealers, including the
Distributor, in connection with such broker-dealer's payment of certain of the
Portfolios' or the Company's expenses. Because shares of the Portfolios are not
marketed through intermediary broker-dealers, it is not the Portfolios' practice
to allocate brokerage or effect principal transactions with broker-dealers on
the basis of sales of shares that may be made through such firms. However, the
Adviser (or Sub-Adviser, if applicable) may place orders for the purchase or
sale of portfolio securities with qualified broker-dealers who refer clients to
the Portfolios. The Directors, including those who are not "interested persons"
of the Company, have adopted procedures for evaluating the reasonableness of
commissions paid to the Distributor and will review these procedures
periodically.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking best execution and such other policies as
the Board of Directors may determine, the Adviser (or Sub-Adviser, if
applicable) may consider sales of Company shares or VA Contracts and VLI
Policies as a factor in the selection of dealers to execute portfolio
transactions for the Company.
The Directors have adopted a Code of Ethics governing personal trading by
persons who manage, or who have access to trading activity by, the Portfolio.
The Code of Ethics allows trades to be made in securities that may be held by
the Portfolio, however, it prohibits a person from taking advantage of Portfolio
trades or from acting on inside information.
33
<PAGE>
For the fiscal year ended December 31, 1998, the Portfolios paid brokerage fees
as follows:
Total Amount of Total Amount
Brokerage of Brokerage
Commissions Paid in Commissions
1998 Paid in 1997
------------------- ------------
Growth II Portfolio(1) $ 44,358 $ 5,282
Large Cap Growth Portfolio(1) $ 9,233 $ 5,204
Small Cap Value Portfolio(2) $279,584 $10,608
Mid-Cap Value Portfolio(4) $ 1,203 *
Large Cap Value Portfolio(2) $123,126 $ 2,778
Technology & Communications
Portfolio(1) $ 43,420 $ 2,630
Select 20 Portfolio(3) $201,009 $ 4,599
<TABLE>
<CAPTION>
Percent of aggregate
amount of
Percent of Total transactions
Amount of Brokerage involving payment of
Commissions Paid to commissions to the
the Distributor in Distributor in
1998 1998(5)
------------------- --------------------
<S> <C> <C>
Growth II Portfolio(1) 2% 63%
Large Cap Growth Portfolio(1) 7% 77%
Small Cap Value Portfolio(2) 0% 44%
Mid-Cap Value Portfolio(4) 0% 54%
Large Cap Value Portfolio(2) 0% 31%
Technology & Communications Portfolio(1) 2% 73%
Select 20 Portfolio(3) 5% 71%
</TABLE>
o Not in operation during the period.
1 The period 1997 is calculated from May 1, 1997 (commencement of operations)
through December 31, 1997.
34
<PAGE>
2 The period 1997 is calculated from October 29, 1997 (commencement of
operations) through December 31, 1997.
3 The period 1997 is calculated from September 26, 1997 (commencement of
operations) through December 31, 1997.
4 The 1998 period is calculated from November 30, 1998 (commencement of
operations) through December 31, 1998.
DESCRIPTION OF SHARES
The Company is authorized to issue 500,000,000 shares of each Portfolio and to
create additional portfolios of the Company. Each share of a Portfolio
represents an equal proportionate interest in that Portfolio with each other
share. Shares are entitled upon liquidation to a pro rata share in the net
assets of the Portfolio available for distribution to shareholders. All
consideration received by the Company for shares of any Portfolio and all assets
in which such consideration is invested would belong to that Portfolio and would
be subject to the liabilities related thereto.
Voting Rights
Each share held entitles the shareholder of record to one vote. Shareholders of
each Portfolio will vote separately on matters relating solely to it, such as
approval of advisory agreements and changes in fundamental policies, and matters
affecting some but not all Portfolios of the Company will be voted on only by
shareholders of the affected Portfolios. Shareholders of all Portfolios of the
Company will vote together in matters affecting the Company generally, such as
the election of Directors or selection of accountants. As a Maryland
corporation, the Company is not required to hold annual meetings of shareholders
but shareholder approval will be sought for certain changes in the operation of
the Company and for the election of Directors under certain circumstances. In
addition, a Director may be removed by the remaining Directors or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Company. In the event that
such a meeting is requested, the Company will provide appropriate assistance and
information to the shareholders requesting the meeting. Under current law, a
Participating Insurance Company is required to request voting instructions from
VA Contract owners and VLI Policy owners and must vote all shares held in the
separate account in proportion to the voting instructions received. For a more
complete discussion of voting rights, refer to the Participating Insurance
Company separate account prospectus.
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PURCHASES AND REDEMPTIONS
Individual investors may not purchase or redeem shares of the Portfolios
directly; shares may be purchased or redeemed only through VA Contracts and VLI
Policies offered by separate accounts of Participating Insurance Companies.
Please refer to the prospectus of the sponsoring Participating Insurance Company
separate account for instructions on purchasing a VA Contract or VLI Policy.
Shares of each Portfolio are offered on a continuous basis.
Purchases. All investments in the Portfolios are credited to a Participating
Insurance Company's separate account immediately upon acceptance of the
investments by the Portfolios. Each Participating Insurance Company receives
orders from its contract owners to purchase or redeem shares of each Portfolio
on each day that the Portfolio calculates its net asset value (a "Business
Day"). That night, all orders received by the Participating Insurance Company
prior to the close of regular trading on the New York Stock Exchange Inc. (the
"NYSE") (currently 4:00 p.m., Eastern time) on that Business Day are aggregated,
and the Participating Insurance Company places a net purchase or redemption
order for shares of the Portfolios during the morning of the next Business Day.
These orders are executed at the net asset value (described below under "Net
Asset Value") next computed after receipt of such order by the Participating
Insurance Company.
The Portfolios reserve the right to reject any specific purchase order. Purchase
orders may be refused if, in the Adviser's opinion, they are of a size that
would disrupt the management of the Portfolio. A Portfolio may discontinue sales
of its shares if management believes that a substantial further increase in
assets may adversely effect the Portfolio's ability to achieve its investment
objective. In such event, however, it is anticipated that existing VA Contract
owners or VLI Policy owners would be permitted to continue to authorize
investments in the Portfolios.
Redemptions. Shares of a Portfolio may be redeemed on any Business Day.
Redemption orders which are received by a Participating Insurance Company prior
to the close of regular trading on the NYSE on any Business Day and transmitted
to the Company or its specified agent during the morning of the next Business
Day will be processed at the next net asset value computed after receipt of such
order by the Participating Insurance Company. Redemption proceeds will normally
be wired to the Participating Insurance Company on the Business Day following
receipt of the redemption order by the Participating Insurance Company, but in
no event later than seven days after receipt of such order.
The Company reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of each Portfolio's securities is not reasonably
practicable, or for such other periods as the SEC has by order permitted. The
Company also reserves the right to suspend sales of shares of a Portfolio for
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any period during which the New York Stock Exchange, the Adviser, the
Sub-Adviser, the Administrator, the Transfer Agent and/or the Custodian are not
open for business.
Purchases and redemptions may be made on any day on which the New York Stock
Exchange is open for business. Currently, the following holidays are observed by
the Company: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
NET ASSET VALUE
The securities of each Portfolio are valued by the Sub-Administrator. The
Sub-Administrator will use an independent pricing service to obtain valuations
of securities. The pricing service relies primarily on prices of actual market
transactions as well as trade quotations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Company under the general
supervision of the Board of Directors.
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of the close of trading on the NYSE (currently 4:00 p.m.,
Eastern time). Portfolio securities listed on an exchange or quoted on a
national market system are valued at the last sales price. Other securities are
quoted at the most recent bid price. In the event a listed security is traded on
more than one exchange, it is valued at the last sale price on the exchange on
which it is principally traded. If there are no transactions in a security
during the day, it is valued at the most recently quoted bid price. Debt
securities (other than short-term obligations), including listed issues, are
valued on the basis of valuations furnished by a pricing service which utilizes
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities, without exclusive reliance
upon exchange or over-the-counter prices. Short-term obligations are valued at
amortized cost. Securities for which market quotations are not readily available
and other assets held by the Company, if any, are valued at their fair value as
determined in good faith by the Board of Directors.
An example showing how to calculate the net asset value per share is included in
each Portfolio's financial statements which are incorporated by reference into
this Statement of Additional Information.
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TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
Taxes
For a discussion of the tax status of a VA Contract or VLI Policy, refer to the
Participating Insurance Company separate account prospectus. The following is
only a summary of certain income tax considerations generally affecting the
Portfolio and its shareholders and is not intended as a substitute for careful
tax planning. Shareholders are urged to consult their tax advisors with specific
reference to their own tax situations, including their state and local income
tax liabilities.
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio intends to qualify and elect to be treated as a regulated
investment company that is taxed under the rules of Subchapter M of the Code. As
such, a Portfolio will not be subject to federal income tax on its net ordinary
income and net realized capital gains to the extent such income and gains are
distributed to the separate accounts of Participating Insurance Companies which
hold its shares. Because shares of the Portfolios may be purchased only through
VA Contracts and VLI Policies, it is anticipated that any income, dividends or
capital gain distributions from the Portfolios are taxable, if at all, to the
Participating Insurance Companies and will be exempt from current taxation of
the VA Contract owner or VLI Policy owner if left to accumulate within the VA
Contract or VLI Policy.
In order to qualify for treatment as a RIC under the Code, each Portfolio must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement"). In addition to the Distribution Requirement,
each Portfolio must meet several other requirements. Among these requirements
are the following: (i) each Portfolio must derive at least 90% of its gross
income in each taxable year from dividends, interest, certain payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies and other income (including but not limited
to gains from options, futures or forward contracts derived with respect to the
Portfolio's business of investing in such stock, securities or currencies) (the
"Income Requirement"); (ii) at the close of each quarter of the Portfolio's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. Government securities, securities of other RICs and
securities of other issuers, with such securities of other issuers limited, in
respect to any one issuer, to an amount that does not exceed 5% of the value of
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the Portfolio's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) no more than 25% of the
value of a Portfolio's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Portfolio controls
and which are engaged in the same or similar trades or businesses (the "Asset
Diversification Test"). For purposes of the Asset Diversification Test, it is
unclear under present law who should be treated as the issuer of forward foreign
currency exchange contracts, of options on foreign currencies, or of foreign
currency futures and related options. It has been suggested that the issuer in
each case may be the foreign central bank or foreign government backing the
particular currency. Consequently, a Portfolio may find it necessary to seek a
ruling from the Internal Revenue Service on this issue or to curtail its trading
in forward foreign currency exchange contracts in order to stay within the
limits of the Asset Diversification Test.
For purposes of the Income Requirement, foreign currency gains (including gains
from options, futures or forward contracts on foreign currencies) that are not
"directly related" to a Portfolio's principal business may, under regulations
not yet issued, be excluded from qualifying income.
If a Portfolio fails to qualify as a RIC for any taxable year, it will be
taxable at regular corporate rates on its net investment income and net capital
gain without any deductions for amounts distributed to shareholders. In such an
event, all distributions (including capital gains distributions) will be taxable
as ordinary dividends to the extent of that Portfolio's current and accumulated
earnings and profits and such distributions will generally be eligible for the
corporate dividends-received deduction.
The Clinton Administration's fiscal year 1999 budget proposal would treat a
redemption of shares of the Portfolios by VA Contracts and VLI Policies as a
taxable transaction, and it can be expected that similar proposals may be
introduced in Congress in the near future. The Company cannot predict what
proposals, if any, might be enacted or whether such proposals, if enacted, would
apply retroactively to shares of the Portfolios that are issued and outstanding
as of the date of enactment.
Portfolio Distributions. Notwithstanding the Distribution Requirement described
above, which requires only that a Portfolio distribute at least 90% of its
annual investment company taxable income and does not require any minimum
distribution of net capital gain (the excess of net long-term capital gain over
net short-term capital loss), the Portfolio will be subject to a nondeductible
4% federal excise tax to the extent it fails to distribute by the end of any
calendar year 98% of its ordinary income for that year and 98% of its capital
gain net income (the excess of short- and long-term capital gains over short-
and long-term capital losses) for the one-year period ending on October 31 of
that calendar year, plus certain other amounts.
Treasury regulations permit a RIC in determining its investment company taxable
income and undistributed net capital gain for any taxable year to elect to treat
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all or part of any net capital loss, any net long-term capital loss, or any net
foreign currency loss incurred after October 31 as if it had been incurred in
the succeeding year.
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares.
Capital gain dividends are taxable to shareholders as a long-term capital gain,
regardless of the length of time a shareholder has held his shares. Under the
Taxpayer Relief Act of 1997, the Internal Revenue Service is authorized to issue
regulations that will enable shareholders to determine the tax rates applicable
to such capital gain distributions. For calendar year 1997, the Internal Revenue
Service has announced that RICs will be required to report to their shareholders
the amount of capital gain dividends subject to taxation at the 28 percent tax
rate.
Internal Revenue Service Requirements
The Portfolios intend to comply with the diversification requirements currently
imposed by the Internal Revenue Service on separate accounts of insurance
companies as a condition of maintaining the tax-deferred status of VA Contracts
and VLI Policies. See the Statement of Additional Information for more specific
information.
Dividends and Distributions
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains, if
any, at least annually. Distributions of ordinary income and capital gains will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account of a Participating Insurance Company to receive distributions
in cash. Participating Insurance Companies will be informed at least annually
about the amount and character of distributions from the Company for federal
income tax purposes.
Withholding. In certain cases, a Portfolio will be required to withhold, and
remit to the U.S. Treasury, 31% of any distributions paid to a shareholder who
(i) has failed to provide a correct taxpayer identification number, (ii) is
subject to backup withholding by the Internal Revenue Service, or (iii) has not
certified to the Portfolio that such shareholder is not subject to backup
withholding.
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Redemption or Exchange of Shares. Upon a redemption or exchange of shares, a
shareholder will recognize a taxable gain or loss depending upon his or her
basis in the shares. Unless the shares are disposed of as part of a conversion
transaction, such gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands and will be long-term or
short-term, depending upon the shareholder's holding period for the shares. Any
loss recognized by a shareholder on the sale of Portfolio shares held six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gains received by the shareholder with respect to
such shares.
Any loss recognized on a sale or exchange will be disallowed to the extent that
Portfolio shares are sold and replaced within the 61-day period beginning 30
days before and ending 30 days after the disposition of such shares. In such a
case, the basis of the shares acquired will be increased to reflect the
disallowed loss. Shareholders should particularly note that this loss
disallowance rule applies even where shares are automatically replaced under the
dividend reinvestment plan.
Investment in Foreign Financial Instruments. Under Code Section 988, gains or
losses from certain foreign currency forward contracts or fluctuations in
currency exchange rates will generally be treated as ordinary income or loss.
Such Code Section 988 gains or losses will increase or decrease the amount of a
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gains. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the
Portfolio would not be able to pay any ordinary income dividends, and any such
dividends paid before the losses were realized, but in the same taxable year,
would be recharacterized as a return of capital to shareholders, thereby
reducing the tax basis of Portfolio shares.
Hedging Transactions. Some of the forward foreign currency exchange contracts,
options and futures contracts that the Portfolios may enter into will be subject
to special tax treatment as "Section 1256 contracts." Section 1256 contracts are
treated as if they are sold for their fair market value on the last business day
of the taxable year, regardless of whether a taxpayer's obligations (or rights)
under such contracts have terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss recognized
as a consequence of the year-end deemed disposition of Section 1256 contracts is
combined with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. The net amount
of such gain or loss for the entire taxable year (including gain or loss arising
as a consequence of the year-end deemed sale of such contracts) is deemed to be
60% long-term and 40% short-term gain or loss. However, in the case of Section
1256 contracts that are forward foreign currency exchange contracts, the net
gain or loss is separately determined and (as discussed above) generally treated
as ordinary income or loss.
Generally, the hedging transactions in which the Portfolios may engage may
result in "straddles" or "conversion transactions" for U.S. federal income tax
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purposes. The straddle and conversion transaction rules may affect the character
of gains (or in the case of the straddle rules, losses) realized by the
Portfolios. In addition, losses realized by the Portfolios on positions that are
part of a straddle may be deferred under the straddle rules, rather than being
taken into account in calculating the taxable income for the taxable year in
which the losses are realized. Because only a few regulations implementing the
straddle rules and the conversion transaction rules have been promulgated, the
tax consequences to the Portfolios of hedging transactions are not entirely
clear. The hedging transactions may increase the amount of short-term capital
gain realized by the Portfolios (and, if they are conversion transactions, the
amount of ordinary income) which is taxed as ordinary income when distributed to
shareholders.
Each Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If a Portfolio makes any of the elections,
the amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Transactions that may be engaged in by certain of the Portfolios (such as short
sales "against the box") may be subject to special tax treatment as
"constructive sales" under section 1259 of the Code if a Portfolio holds certain
"appreciated financial positions" (defined generally as any interest (including
a futures or forward contract, short sale or option) with respect to stock,
certain debt instruments, or partnership interests if there would be a gain were
such interest sold, assigned, or otherwise terminated at its fair market value).
Upon entering into a constructive sales transaction with respect to an
appreciated financial position, a Portfolio will be deemed to have
constructively sold such appreciated financial position and will recognize gain
as if such position were sold, assigned, or otherwise terminated at its fair
market value on the date of such constructive sale (and will take into account
any gain for the taxable year which includes such date).
Because application of the straddle, conversion transaction and constructive
sale rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected straddle or
investment positions, the amount which must be distributed to shareholders and
which will be taxed to shareholders as ordinary income or long-term capital gain
may be increased or decreased as compared to a fund that did not engage in such
transactions.
Requirements relating to each Portfolio's tax status as a RIC may limit the
extent to which a Portfolio will be able to engage in transactions in options
and futures contracts.
State Taxes
Distributions by a Portfolio to shareholders and the ownership of shares may be
subject to state and local taxes.
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Miscellaneous Considerations
The foregoing general discussion of federal income tax consequences is based on
the Code and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
Prospective shareholders are encouraged to consult their tax advisors as to the
consequences of these and other U.S., state, local, and foreign tax rules
affecting investments in the Portfolio.
Section 817 Diversification Requirements
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of segregated asset accounts that fund contracts such as the
VA Contracts and VLI Policies (that is, the assets of the Portfolios), which are
in addition to the diversification requirements imposed on the Portfolios by the
1940 Act and Subchapter M. Failure to satisfy those standards would result in
imposition of Federal income tax on a VA Contract or VLI Policy owner with
respect to the increase in the value of the VA Contract or VLI Policy. Section
817(h)(2) provides that a segregated asset account that funds contracts such as
the VA Contracts and VLI Policies is treated as meeting the diversification
standards if, as of the close of each calendar quarter, the assets in the
account meet the diversification requirements for a regulated investment company
and no more than 55% of those assets consist of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
Provided that all of the beneficial interests in the Portfolios are owned by one
or more (1) insurance companies in their general account or in segregated asset
accounts, or (2) fund managers in connection with the creation or management of
a regulated investment company or trust, the diversification requirements of
section 817 will be applied on a look-through basis to the assets held by the
Portfolios, and the interests in the Portfolios will be disregarded.
The Treasury Regulations amplify the diversification standards set forth in
Section 817(h). Under the regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
such value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of such
value is represented by any four investments. For purposes of these Regulations
all securities of the same issuer are treated as a single investment, but each
United States government agency or instrumentality shall be treated as a
separate issuer. Certain Portfolios holding Treasury securities may be able to
avail themselves of an alternative diversification test provided under the
Treasury Regulations.
Each Portfolio will be managed with the intention of complying with these
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diversification requirements. It is possible that, in order to comply with these
requirements, less desirable investment decisions may be made which would affect
the investment performance of a Portfolio.
PERFORMANCE INFORMATION
From time to time, a Portfolio may advertise yield and/or total return. Such
performance data for a Portfolio should be distinguished from the rate of return
of a corresponding division of a Participating Insurance Company's separate
account, which rate will reflect the deduction of additional insurance charges,
including mortality and expense risk charges, and will therefore be lower. VA
Contract owners and VLI Policy owners should consult their contract and policy
prospectuses, respectively, for further information. The Portfolio's results
also should be considered relative to the risks associated with its investment
objectives and policies.
The Portfolio's results will be based on historical earnings and are not
intended to indicate future performance. No representation can be made regarding
actual future yields or returns. Yield refers to the annualized income generated
by an investment in the Portfolio over a specified 30-day period.
Computation of Yield
From time to time, a Portfolio may advertise yield. These figures are based on
historical earnings and are not intended to indicate future performance. The
yield of a Portfolio refers to the annualized income generated by an investment
in the Portfolio over a specified 30-day period. The yield is calculated by
assuming that the same amount of income generated by the investment during that
period is generated in each 30-day period over one year and is shown as a
percentage of the investment. In particular, yield is calculated according to
the following formula:
Yield = 2((a-b/cd + 1)6 - 1) where a = dividends and interest earned during the
period; b = expenses accrued for the period (net of reimbursement); c = the
average daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
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Calculation of Total Return
From time to time, a Portfolio may advertise total return. The total return of a
Portfolio refers to the average compounded rate of return to a hypothetical
investment for designated time periods (including but not limited to, the period
from which the Portfolio commenced operations through the specified date),
assuming that the entire investment is redeemed at the end of each period. In
particular, total return is calculated according to the following formula: P (1
+ T)n = ERV, where P = a hypothetical initial payment of $1,000; T = average
annual total return; n = number of years; and ERV = ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the designated time period
as of the end of such period.
Total returns quoted for a Portfolio include the effect of deducting the
Portfolio's expenses, but may not include charges and expenses attributable to
any particular Variable Contract. Accordingly, the prospectus of the sponsoring
Participating Insurance Company separate account should be carefully reviewed
for information on relevant charges and expenses. Excluding these charges and
expenses from quotations of a Portfolio's performance has the effect of
increasing the performance quoted, and the effect of these charges should be
considered when comparing a Portfolio's performance to that of other mutual
funds.
Based on the foregoing, the average annual total return and the aggregate total
return for each of the Portfolios through December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Aggregate Total
Portfolio Return
Average Annual Total Return Since Inception
------------------------------ ---------------
One Year Since Inception
-------- ---------------
<S> <C> <C> <C>
Growth II Portfolio(1) 8.19% 9.46% 16.30%
Large Cap Growth Portfolio(1) 30.63% 29.68% 54.40%
Small Cap Value Portfolio(2) 10.94% 13.68% 16.26%
Mid-Cap Value Portfolio(4) * * 11.00%
Large Cap Value Portfolio(2) 37.96% 36.29% 43.89%
Technology & Communications Portfolio(1) 32.2% 21.06% 37.62%
Select 20 Portfolio(3) 62.52% 47.11% 63.00%
</TABLE>
* Not in operation during the period.
1 The Average Annual Total Return Since Inception and Aggregate Total Return
Since Inception periods are calculated from May 1, 1997 (commencement of
operations) through December 31, 1998.
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2 The Average Annual Total Return Since Inception and Aggregate Total Return
Since Inception periods are calculated from October 29, 1997 (commencement of
operations) through December 31, 1998.
3 The Average Annual Total Return Since Inception and Aggregate Total Return
Since Inception periods are calculated from September 26, 1997 (commencement
of operations) through December 31, 1998.
4 The Aggregate Total Return Since Inception period is calculated from November
30, 1998 (commencement of operations) through December 31, 1998.
5 Each day, the Distributor acts as the Portfolios' agent in effecting
repurchase agreement transactions using the Portfolios' uninvested short term
cash. The Distributor receives a fee for this service.
Quotations of total return which are not annualized represent historical
earnings and asset value fluctuations. Total return is based on past performance
and is not a guarantee of future results.
Each Portfolio may periodically compare its performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.) or by financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices which may assume investment
of dividends but generally do not reflect deductions for administrative and
management costs and other investment alternatives. Each Portfolio may quote
services such as Morningstar, Inc., a service that ranks mutual funds on the
basis of risk-adjusted performance, and Ibbotson Associates of Chicago,
Illinois, which provides historical returns of the capital markets in the U.S.
Each Portfolio may use long-term performance of these capital markets to
demonstrate general long-term risk versus reward scenarios and could include the
value of a hypothetical investment in any of the capital markets. Each Portfolio
may also quote financial and business publications and periodicals as they
relate to fund management, investment philosophy, and investment techniques.
Each Portfolio may quote various measures of volatility and benchmark
correlation in advertising and may compare these measures to those of other
funds. Measures of volatility attempt to compare historical share price
fluctuations or total returns to a benchmark while measures of benchmark
correlation indicate how valid a comparative benchmark might be. Measures of
volatility and correlation are calculated using averages of historical data and
cannot be calculated precisely.
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FINANCIAL STATEMENTS
PricewaterhouseCoopers, LLP ("PWC"), located at 2400 Eleven Penn Center,
Philadelphia, Pennsylvania, serves as the independent accountants for the
Company. PWC provides audit services, tax return review and assistance and
consultation in connection with review of SEC filings.
The audited financial statements for the fiscal year ended December 31, 1998 and
the report of the independent accountants for that year are included in the
Company's Annual Report to Shareholders dated December 31, 1998. The Annual
Report for each Portfolio, except for pages 1 through 2 thereof, is incorporated
herein by reference and made a part of this document. These financial statements
have been audited by PWC and have been incorporated by reference into the
Statement of Additional Information in reliance on the report of PWC,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
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PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation incorporated herein by reference to
Registrant's Registration Statement on Form N-1A (File No.
333-19497) as filed electronically on January 10, 1997
("Registration Statement)
Articles Supplementary of Registrant incorporated herein by
reference to Post-Effective Amendment No. 3 to the Registration
Statement as filed electronically on February 13, 1998 ("PEA No.
3)
Certificate of Correction incorporated herein by reference to
Post-Effective Amendment No. 4 to the Registration Statement as
filed electronically on April 30, 1998 ("PEA No. 4")
(b) Amended and Restated Bylaws incorporated by reference to PEA No. 4.
(c) Articles of Incorporation and Certificate of Correction filed as
(a)
(d) Investment Advisory Agreement dated April 1, 1997, by and between
the Registrant, on behalf of each Portfolio of the Registrant, and
Pilgrim Baxter & Associates, Ltd. Incorporated herein by reference
to PEA No. 3.
Schedule A dated February 20, 1998 to Investment Advisory Agreement
dated April 1, 1997, by and between the Registrant, on behalf of
each Portfolio of the Registrant, and Pilgrim Baxter & Associates,
Ltd. incorporated herein by reference to PEA No. 4.
Investment Sub-Advisory Agreement dated April 1, 1997, by and
among the Registrant, on behalf of the Small Cap Value and Large
Cap Value Portfolios, Pilgrim Baxter & Associates, Ltd. and
Newbold's Asset Management, Inc. incorporated herein by reference
to PEA No. 3.
Schedule A dated February 20, 1998 to Investment Sub-Advisory
Agreement dated April 1, 1997, by and among the Registrant, on
behalf of the Small Cap Value, Mid-Ca[ Value and Large Cap Value
Portfolios, Pilgrim Baxter & Associates, Ltd. and Newbold's Asset
Management, Inc. incorporated herein by reference to PEA No. 4.
(e) Distribution Agreement dated April 1, 1997 by and between the
Registrant and SEI Financial Services Company incorporated herein by
reference to PEA No. 3.
Schedule A dated February 20, 1998 to Distribution Agreement dated
April 1, 1997 by and between the Registrant and SEI Financial
Services Company incorporated herein by reference to PEA No. 4.
(f) Not Applicable
(g) Custodian Agreement dated April 1, 1997, by and between the
Registrant and First Union National Bank (successor to CoreStates
Bank, N.A.) incorporated herein by reference to PEA No. 4.
Schedule A dated February 20, 1998 to Custodian Agreement dated
April 1, 1997 by and between the Registrant and First Union National
Bank incorporated herein by reference to Post-Effective Amendment
No. 5 to the Registration Statement as filed electronically on
February 11, 1999 ("PEA No. 5").
C-1
<PAGE>
(h) Transfer Agency Agreement dated April 1, 1997, by and between the
Registrant and DST Systems, Inc. incorporated by reference to PEA
No. 3.
Administrative Services Agreement dated April 1, 1997 by and between
the Registrant and PBHG Fund Services incorporated herein by
reference to PEA No. 3.
Schedule A dated February 20, 1998 to Administrative Services
Agreement dated April 1, 1997 by and between the Registrant and PBHG
Fund Services incorporated herein by reference to PEA No. 4.
Sub-Administrative Services Agreement dated April 1, 1997, by and
among the Registrant, PBHG Fund Services and SEI Fund Resources
incorporated herein by reference to PEA No. 4.
Schedule A dated February 20, 1998 to Sub-Administrative Services
Agreement dated April 1, 1997, by and among the Registrant, PBHG
Fund Services and SEI Fund Resources incorporated herein by
reference to PEA No. 4.
Amendment dated May 1, 1998 to Sub-Administrative Services Agreement
dated April 1, 1997, by and among the Registrant, PBHG Fund Services
and SEI Fund Resources incorporated herein by reference to PEA No.
4.
Expense Limitation Agreement dated April 1, 1997 between the
Registrant and Pilgrim Baxter & Associates, Ltd. incorporated
herein by reference to PEA No. 3.
Schedule A dated February 20, 1998 to Expense Limitation Agreement
dated April 1, 1997 between the Registrant and Pilgrim Baxter &
Associates, Ltd. incorporated herein by reference to PEA No. 4.
Schedule B dated February 20, 1998 to Expense Limitation Agreement
dated April 1, 1997 between the Registrant and Pilgrim Baxter &
Associates, Ltd. incorporated herein by reference to PEA No. 4.
Form of Fund Participation Agreement incorporated herein by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement
Organizational Expense Reimbursement Agreement dated April 1,
1997 between the Registrant and Pilgrim Baxter & Associates, Ltd.
incorporated herein by reference to PEA No. 3.
Shareholder Services Agreement dated January 1, 1998 by and between
Registrant and PBHG Fund Services incorporated herein by reference
to PEA No. 5.
Sub-Shareholder Services Agreement dated January 1, 1998 by and
between PBHG Fund Services and UAM Shareholder Service Center
incorporated herein by reference to PEA No. 5.
(j) Consent of Independent Accountants
(k) Not Applicable
(l) Stock Subscription Agreement dated March 6, 1997 incorporated herein
by reference to PEA No. 5.
(m) Not Applicable
(n) Financial Data Schedules
C-2
<PAGE>
(o) Not Applicable
24 (a) Directors' Power of Attorney
(b) Officers' Power of Attorney
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
There are no persons that are controlled by or under common control with the
Registrant.
ITEM 25. INDEMNIFICATION
The Articles of Incorporation of the Registrant include the following:
ARTICLE VII
7.4 Indemnification. The Corporation, including its successors and assigns,
shall indemnify its directors and officers and make advance payment of related
expenses to the fullest extent permitted, and in accordance with the procedures
required, by the General Laws of the State of Maryland and the 1940 Act. The
By-Laws may provide that the Corporation shall indemnify its employees and/or
agents in any manner and within such limits as permitted by applicable law. Such
indemnification shall be in addition to any other right or claim to which any
director, officer, employee or agent may otherwise be entitled. The Corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee or agent of another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise or employee benefit plan, against any
liability (including, with respect to employee benefit plans, excise taxes)
asserted against and incurred by such person in any such capacity or arising out
of such person's position, whether or not the Corporation would have had the
power to indemnify against such liability. The rights provided to any person by
this Article 7.4 shall be enforceable against the Corporation by such person who
shall be presumed to have relied upon such rights in serving or continuing to
serve in the capacities indicated herein. No amendment of these Articles of
Incorporation shall impair the rights of any person arising at any time with
respect to events occurring prior to such amendment.
The Bylaws of the Registrant include the following:
ARTICLE IX
Indemnification of Directors and Officers. The Corporation shall indemnify its
directors to the fullest extent that indemnification of directors is permitted
by the Maryland General Corporation Law. The Corporation shall indemnify its
officers to the same extent as its directors and to such further extent as is
consistent with law. The Corporation shall indemnify its directors and officers
who, while serving as directors or officers, also serve at the request of the
Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, real estate
investment trust, trust, other enterprise or employee benefit plan to the
fullest extent consistent with law. The indemnification and other rights
provided for by this Article shall continue as to a person who has ceased to be
a director or officer, and shall inure to the benefit of the heirs, executors
and administrators of such a person. This Article shall not protect any such
person against any liability to the Corporation or any stockholder thereof to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office ("disabling conduct").
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been
C-3
<PAGE>
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suite or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
To the extent that the Articles of Incorporation, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any director or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment adviser or
principal underwriter to the Registrant, any such provision protecting or
purporting to protect such persons against any liability to the Registrant or
its security holders to which he would otherwise by subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of his duties,
or by reason of his contract or agreement, will be interpreted and enforced in a
manner consistent with the provisions of Sections 17(h) and (i) of the
Investment company Act of 1940, as amended, and Release No. IC-11330 issued
thereunder.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:
Other business, profession, vocation, or employment of a substantial nature in
which each director or principal officer of Pilgrim Baxter & Associates, Ltd. is
or has been, at any time during the last two fiscal years, engaged for his own
account or in the capacity of director, officer, employee, partner or trustee
are as follows:
<TABLE>
<CAPTION>
Name and Position with Pilgrim
Baxter & Associates, Ltd. Name of Other Company Connection with Other Company
- ------------------------------ --------------------- -----------------------------
<S> <C> <C>
Harold J. Baxter Pilgrim Baxter Value Director, Chairman and Chief
Director, Chairman & Investors, Inc. Executive Officer
Chief Executive Officer PBHG Fund Services Trustee
PBHG Fund Distributors Trustee
United Asset Management
Corporation Director
Gary L. Pilgrim PBHG Fund Services
Director, Chief Pilgrim Baxter Value Trustee
Investment Officer & Investors, Inc. Director & President
President
Brian F. Bereznak PBHG Fund Services President and Trustee
Vice President and
Former Chief Operating Officer
Eric C. Schneider Pilgrim Baxter Value Director, Chief Financial
Chief Financial Officer & Investors, Inc. Officer & Treasurer
Treasurer PBHG Fund Services Chief Financial Officer
PBHG Fund Distributors Trustee
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Pilgrim
Baxter & Associates, Ltd. Name of Other Company Connection with Other Company
- ------------------------------ --------------------- -----------------------------
<S> <C> <C>
John M. Zerr Pilgrim Baxter Value
General Counsel and Investors, Inc. General Counsel and Secretary
Secretary PBHG Fund Distributors General Counsel and Secretary
<CAPTION>
Name and Position with Pilgrim
Baxter Valve Investors, Inc. Name of Other Company Connection with Other Company
- ------------------------------ --------------------- -----------------------------
<S> <C> <C>
Harold J. Baxter Pilgrim Baxter &
Director, Chairman & Associates, Ltd. Director, Chairman & Chief
Chief Executive Officer PBHG Fund Services Executive Officer
PHBG Fund Distributors Trustee
United Asset Management Trustee
Corporation Director
Gary L. Pilgrim Pilgrim Baxter & Director, Chief Investment
Director & President Associates, Ltd. Officer & President
PBHG Fund Services Trustee
Eric C. Schneider Pilgrim Baxter & Chief Financial Officer and
Director, Chief Associates, Ltd. Treasurer
Financial Officer & PBHG Fund Services Chief Financial Officer
Treasurer PBHG Fund Distributors Trustee
John M. Zerr Pilgrim Baxter &
General Counsel & Associates, Ltd. General Counsel & Secretary
Secretary PBHG Fund Distributors General Counsel & Secretary
</TABLE>
The principal business addresses of the entities listed in the above tables are
as follows:
Pilgrim Baxter & Associates, Ltd., Pilgrim Baxter Value Investors, Inc., PBHG
Fund Services, and PBHG Distributors: 825 Duportail Road, Wayne, PA 19087
United Asset Management Corporation: One International Place, 44th Floor,
Boston, MA 02110.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Registrant's distributor, SEI Investments Distribution Co., acts as
distributor for:
SEI Daily Income Trust July 15, 1982
SEI Liquid Asset Trust November 29, 1982
C-5
<PAGE>
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI Institutional International Trust August 30, 1988
The Advisors' Inner Circle Fund November 14, 1991
The Pillar Funds February 28, 1992
CUFund May 1, 1992
STI Classic Funds May 29, 1992
First American Funds, Inc. November 1, 1992
First American Investment Funds, Inc. November 1, 1992
The Arbor Fund January 28, 1993
Boston 1784 Funds (R) June 1, 1993
Morgan Grenfell Investment January 3, 1994
The Achievement Funds Trust December 27, 1994
Bishop Street Funds January 27, 1995
CrestFunds, Inc. March 1, 1995
STI Classic Variable Trust August 18, 1995
Ark Funds November 1, 1995
Monitor Funds January 11, 1996
SEI Asset Allocation Trust April 1, 1996
TIP Funds April 28, 1996
The PBHG Funds, Inc. June 1, 1996
SEI Institutional Investments Trust June 14, 1996
First American Strategy Funds, Inc. October 1, 1996
Highmark Funds February 15, 1997
Armada Funds March 8, 1997
Expedition Funds June 9, 1997
TIP Institutional Funds January 1, 1998
Oak Associates Funds February 27, 1998
The Nevis Fund, Inc. June 29, 1998
The Parkstone Group of Funds September 14, 1998
SFS provides numerous financial services to investment managers, pension plan
sponsors, and bank trust departments. These services include portfolio
evaluation, performance measurement and consulting services ("Funds Evaluation")
and automated execution, clearing and settlement of securities transactions
("MarketLink").
The principal business address of each person named in the table below is SEI
Investments Distribution Co., One Freedom Valley Road, Oaks, Pennsylvania
19456
<TABLE>
<CAPTION>
Positions and
Offices with
Name Position and Office with Underwriter Registrant
- ---- ------------------------------------ --------------
<S> <C> <C>
Alfred P. West, Jr. Director, Chairman -
Of Board of Directors
Henry H. Greer Director -
Mark J. Held President & Chief Operating Officer
Robert M. Silvestri Chief Financial Officer & Treasurer -
Carmen V. Romeo Director & Executive Vice President -
Gilbert L. Beebower Executive Vice President -
Dennis J. McGonigle Executive Vice President -
Richard B. Lieb Executive Vice President, President - -
Investment Services Division
Leo J. Dolan, Jr. Senior Vice President -
</TABLE>
C-6
<PAGE>
<TABLE>
<S> <C> <C>
Carl A. Guarino Senior Vice President -
Larry Hutchinson Senior Vice President -
Jack May Senior Vice President -
Hartland J. McKeown Senior Vice President -
Barbara J. Moore Senior Vice President -
Kevin P. Robins Senior Vice President, General Counsel -
and Secretary
Patrick K. Walsh Senior Vice President -
Robert Crudup Vice President & Managing Director
Vic Galef Vice President & Managing Director -
Kim Kirk Vice President & Managing Director -
John Krzeminski Vice President & Managing Director -
Carolyn McLaurin Vice President & Managing Director -
W. Kelso Morrill Vice President & Managing Director -
Mark Samuels Vice President & Managing Director -
Wayne M. Withrow Vice President & Managing Director -
Robert Aller Vice President -
Gordon W. Carpenter Vice President -
Todd Cipperman Vice President & Assistant Secretary -
Barbara Doyne Vice President -
Jeff Drennen Vice President -
Kathy Heilig Vice President -
Jeff Jacobs Vice President -
Samuel King Vice President -
Joanne Nelson Vice President -
Mark Nagle Vice President -
Cynthia M. Parrish Vice President & Assistant Secretary -
Kim Rainey Vice President -
Rob Redican Vice President -
Maria Reinehart Vice President -
Steve Smith Vice President -
Daniel Spaventa Vice President -
Kathryn L. Stanton Vice President & Assistant Secretary -
Joseph M. O'Donnel Vice President & Assistant Secretary Vice President &
Assistant Secretary
S. Courtney Collier Vice President & Assistant Secretary -
Lydia A. Gavalis Vice President & Assistant Secretary -
Greg Gettinger Vice President & Assistant Secretary -
Lynda J. Stiegel Vice President & Assistant Secretary Vice President &
Assistant Secretary
Lori White Vice President & Assistant Secretary -
</TABLE>
c. None.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the Rules promulgated thereunder, are
maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8);
(12); and 31a-1(d), the required books and
C-7
<PAGE>
records are maintained at the offices of Registrant's Custodian:
First Union National Bank (successor to CoreStates Bank, N.A.)
Broad and Chestnut Streets
P.O. Box 7618
Philadelphia, PA 19101
(b) With respect to Rules 31a-1(a); 31a-1(b)(1),(4); (2)(C) and (D); (4); (5);
(6); (8); (9); (10); (11) and 31a-1(f), the required books and records are
currently maintained at the offices of Registrant's Sub-Administrator:
SEI Fund Resources
One Freedom Valley Road
Oaks, PA 19456
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the
required books and records are maintained at the principal offices of the
Registrant's Adviser or Sub-Adviser:
Pilgrim Baxter & Associates, Ltd.
825 Duportail Road
Wayne, PA 19087
Pilgrim Baxter Value Investors, Inc.
825 Duportail Road
Wayne, PA 19087
ITEM 29. MANAGEMENT SERVICES:
None
ITEM 30. UNDERTAKINGS
Not Applicable.
C-8
<PAGE>
SIGNATURES
Pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
the Registrant certifies that it meets all the requirements for effectiveness of
this Registration Statement under Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment No. 5 to the Registration
Statement to be signed on its behalf by the undersigned thereto duly authorized,
in the City of Wayne, and Commonwealth of Pennsylvania, on the 12th day of
April, 1999.
PBHG INSURANCE SERIES FUND, INC.
Registrant
By: /s/ Harold J. Baxter
----------------------------------------
Harold J. Baxter
Chairman and Director
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 5 to the Registration Statement has been signed below by the
following persons on the 12th day of April, 1999 in the capacities and on the
dates indicated.
SIGNATURE AND TITLE DATE
- ------------------- ----
/s/ Harold J. Baxter Chairman and Director 4/12/99
- ---------------------------
Harold J. Baxter
* Director 4/12/99
- ---------------------------
John R. Bartholdson
* Director 4/12/99
- ---------------------------
Jettie M. Edwards
* Director 4/12/99
- ---------------------------
Albert A. Miller
/s/ Gary L. Pilgrim President 4/12/99
- ---------------------------
Gary L. Pilgrim
/s/ Brian F. Bereznak Vice President 4/12/99
- ---------------------------
Brian F. Bereznak
/s/ Lee T. Cummings Treasurer, Chief Financial Officer 4/12/99
- --------------------------- and Controller
Lee T. Cummings
*By: /s/ John M. Zerr
-------------------------
John M. Zerr
Attorney-in-Fact
C-9
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
EX-99.B(j) Consent of Independent Auditors
EX-99.B(m) Financial Data Schedules
EX-99.B24(a) Directors' Power of Attorney
EX-99.B24(b) Officers' Power of Attorney
</TABLE>
EX-99.B(j)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
PBHG Insurance Series Fund, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 6
to the Registration Statement of PBHG Insurance Series Fund, Inc. on Form N-1A
under the Securities Act of 1933 (File No. 333-19497) of our report dated
January 28, 1999, on our audit of the financial statements and financial
highlights PBHG Insurance Series Fund, Inc. appearing in the Registrant's 1998
Annual Report, which is incorporated by reference in the Post-Effective
Amendment to the Registration Statement. We also consent to the reference of our
Firm under the captions "Financial Highlights" in the Prospectus and "Financial
Statements" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 9, 1999
Exhibit 99.24(a)
POWER OF ATTORNEY
We, the undersigned Directors of PBHG Insurance Series Fund, Inc. (the
"Company"), whose signatures appear below, hereby make, constitute and appoint
Harold J. Baxter, John M. Zerr and William H. Rheiner, and each of them acting
individually, to be our true and lawful attorneys and agents, each of them with
the power to act without any other and with full power of substitution, to
execute, deliver and file in each undersigned Director's capacity as shown
below, any and all instruments that said attorneys and agents may deem necessary
or advisable to enable the Company to comply with the Securities Act of 1933, as
amended, including any and all pre-effective and post-effective amendments to
the Company's registration statement, and any rules, regulations, orders or
other requirements of the Securities and Exchange Commission thereunder in
connection with the registration of shares or additional shares of common stock
of the Company or any of its series or classes thereof, and the registration of
the Company or any of its series under the Investment Company Act of 1940, as
amended, including any and all amendments to the Company's registration
statement; and without limitation of the foregoing, the power and authority to
sign the name of the the Company on its behalf, and to sign the name of each
such Director on his or her behalf, and we hereby grant to said attorney or
attorneys, full power and authority to do and perform each and every act and
thing whatsoever as said attorney or attorneys may deem necessary or advisable
to carry out fully the intent of this
<PAGE>
Power of Attorney to the same extent and with the same effect as if we might or
could do personally in our capacity as aforesaid and we ratify, confirm and
approve all acts and things which said attorney or attorneys might do or cause
to be done by virtue of this Power of Attorney and his and her signatures as the
same may be signed by said attorney or attorneys.
Signature Title Date
- --------- ----- ----
/s/ HAROLD J. BAXTER Director 10/10/97
- -----------------------
Harold J. Baxter
/s/ JOHN R. BARTHOLDSON Director 10/10/97
- -----------------------
John R. Bartholdson
/s/ JETTIE M. EDWARDS Director 10/10/97
- -----------------------
Jettie M. Edwards
/s/ ALBERT A. MILLER Director 10/10/97
- -----------------------
Albert A. Miller
Exhibit 99.24(b)
POWER OF ATTORNEY
We, the undersigned Officers of PBHG Insurance Series Fund, Inc. (the
"Company"), whose signatures appear below, hereby make, constitute and appoint
Harold J. Baxter, John M. Zerr and William H. Rheiner, and each of them acting
individually, to be our true and lawful attorneys and agents, each of them with
the power to act without any other and with full power of substitution, to
execute, deliver and file in each undersigned Officer's capacity as shown below,
any and all instruments that said attorneys and agents may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, as
amended, including any and all pre-effective and post-effective amendments to
the Company's registration statement, and any rules, regulations, orders or
other requirements of the Securities and Exchange Commission thereunder in
connection with the registration of shares or additional shares of common stock
of the Company or any of its series under the Investment Company Act of 1940, as
amended, including any and all amendments to the Company's registration
statement; and without limitation of the foregoing, the power and authority to
sign the name of the Company on its behalf, and to sign the name of each such
Officer on his behalf and we grant to said attorney or attorneys, full power and
authority to do and perform each and every act and thing whatsoever as said
attorney or attorneys may deem necessary or advisable to carry out fully the
intent of this Power of Attorney to the same extent and with the same effect as
if we might or
<PAGE>
could do personally in our capacity as aforesaid and we ratify, confirm and
approve all acts and things which said attorney or attorneys might do or cause
to be done by virtue of this Power of Attorney and his signatures as the same
may be signed by said attorney or attorneys.
Signature Title Date
- --------- ----- ----
/s/ GARY L. PILGRIM President 1/21/98
- ---------------------
Gary L. Pilgrim
/s/ PAUL J. HONDROS Executive Vice 1/25/98
- --------------------- President
Paul J. Hondros
/s/ BRIAN F. BEREZNAK Vice President 1/21/98
- ---------------------
Brian F. Bereznak
/s/ LEE T. CUMMINGS Treasurer, Chief 1/21/98
- --------------------- Financial Officer
Lee T. Cummings and Controller
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001029526
<NAME> PBHG INSURANCE SERIES FUND, INC.
<SERIES>
<NUMBER> 010
<NAME> PBHG GROWTH II PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 16093
<INVESTMENTS-AT-VALUE> 19026
<RECEIVABLES> 870
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19896
<PAYABLE-FOR-SECURITIES> (1569)
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> (6)
<TOTAL-LIABILITIES> (1575)
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16929
<SHARES-COMMON-STOCK> 1575
<SHARES-COMMON-PRIOR> 952
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1541)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2933
<NET-ASSETS> 18321
<DIVIDEND-INCOME> 13
<INTEREST-INCOME> 69
<OTHER-INCOME> 0
<EXPENSES-NET> (175)
<NET-INVESTMENT-INCOME> (93)
<REALIZED-GAINS-CURRENT> (1254)
<APPREC-INCREASE-CURRENT> 2680
<NET-CHANGE-FROM-OPS> 1333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1725
<NUMBER-OF-SHARES-REDEEMED> (1102)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8085
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (287)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 124
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 225
<AVERAGE-NET-ASSETS> 14565
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> (.06)
<PER-SHARE-GAIN-APPREC> .94
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.63
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001029526
<NAME> PBHG INSURANCE SERIES FUND, INC.
<SERIES>
<NUMBER> 060
<NAME> PBHG SELECT 20 PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 254862
<INVESTMENTS-AT-VALUE> 329142
<RECEIVABLES> 3034
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 332176
<PAYABLE-FOR-SECURITIES> (13964)
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> (286)
<TOTAL-LIABILITIES> (14250)
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 252661
<SHARES-COMMON-STOCK> 19508
<SHARES-COMMON-PRIOR> 759
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9015)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 74280
<NET-ASSETS> 317926
<DIVIDEND-INCOME> 116
<INTEREST-INCOME> 1052
<OTHER-INCOME> 0
<EXPENSES-NET> (1372)
<NET-INVESTMENT-INCOME> (204)
<REALIZED-GAINS-CURRENT> (8960)
<APPREC-INCREASE-CURRENT> 74080
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