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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
Annual Report
December 31, 1998
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
Dear Shareholder:
The PBHG Insurance Series Fund, Inc. - PBHG Large Cap Growth Portfolio returned
30.63% for the fiscal year ended December 31, 1998. This compares favorably to
the 38.71% and 28.59% returns of the benchmarks, the Russell 1000 Growth Index
and S&P 500 Index, respectively. We view the Portfolio's results as gratifying,
since only 14% of active equity mutual fund managers out-performed the S&P 500
Index in 1998. The most notable driver of Portfolio performance was the
Technology sector, which was not only the largest contributor to performance for
the year, but also the largest contributor in each of the year's four quarters.
This consistency of performance may seem unusual, given that the sector is often
derided for being unpredictable and unmanageable. However, in our opinion,
technology remains the fastest growing sector of our economy and thus the area
to find the greatest number of high-quality, fast-growing companies. The U.S.
maintains a clear competitive advantage in technology over the rest of the
world, which we believe bodes well for the continued superior growth of this
sector and presents a wealth of promising investment opportunities.
Consequently, we expect to continue to exhibit an over-weighted technology
position in the Portfolio.
Our other two over-weighted sectors, Healthcare and Services, also contributed
solidly to overall Portfolio performance. In healthcare, our drug company
holdings topped the list of performers. For the year, only 3 of our 14
healthcare holdings significantly under-performed the S&P 500. The services
sector demonstrated a notable lack of consistency, which likely reflects the
very diverse nature of this sector. Just six holdings contributed most of the
positive performance of this sector. We hope to experience a broadening base of
performers in this important sector as we move forward.
The other significant contributor to overall performance was the
Industrial/General Manufacturing sector, which despite having just two holdings,
contributed nearly as much to the year's overall performance as the services
sector. Both holdings, Harley Davidson and Danaher, were rewarded by investors
for providing consistently strong financial results.
We were fortunate to be underweighted in the weak performing sectors of energy
and financial services. The energy sector performed poorly due to declining
prices for oil and natural gas resulting from the slowdown in several of the
world's regional economies. Financial services companies suffered as a result of
a global liquidity scare that still lingers to some extent.
Unfortunately, not all of the Portfolio's holdings performed well in 1998. We
sold a number of positions because of deteriorating fundamentals -- some sold
before the stock price collapsed and some after. We recognize that investors
hate negative surprises. Consequently, we plan to work even harder in 1999 to
discern changes at the margin in the fundamental business trends of the
companies we own -- changes that portend negative outcomes going forward. While
we fully expect a few negative surprises, we will strive to better anticipate
them and take the appropriate actions.
It is clear that investors favored large-cap growth stocks above all others
during 1998. Determining factors seemed to be sustainable, above-average rates
of growth in a challenging aggregate growth environment, and trading liquidity
that allowed investors to react quickly if deemed necessary. In addition to the
strong business fundamentals evidenced by our companies, we think these two
factors also contributed to the Portfolio's performance over the course of 1998.
At least to some extent, we are grateful for having been in the right place at
the right time. Nonetheless, we continue to believe that high quality, strong
secular (not cyclical) growth companies consistently represent the most
promising investment opportunities.
1
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
As we enter 1999, the equity markets are in a decidedly bullish mood. Recent
concerns about economic problems around the world, hedge fund shenanigans,
terrorist activities, war with Iraq and even the historic impeachment of an
American President appear to have dissipated among investors. While we do not
expect a major sustained downdraft in equity markets in the presence of a low
interest rate environment, a stable U.S. economy, and an accommodating Federal
Reserve, we also do not expect the current euphoria to last all year. One
feature we do expect the equity markets to have in common with 1998 is
volatility. Volatility correlates directly with valuation levels, and with
valuations at historically high levels, we do not expect many dull moments.
We continue to like the long-term prospects of the growth companies we own.
Superior technologies or services, balance sheets, business models, and ability
to execute are all characteristics commonly found in top quality growth
companies that contribute to sustained, above-average growth rates. We believe
companies with these characteristics will continue to be sought out by
investors.
In closing, we thank you for your confidence in Pilgrim Baxter & Associates,
Ltd. and in the PBHG Insurance Series Fund, Inc.
Sincerely,
/s/ James D. McCall
- -------------------------
James D. McCall, CFA
Portfolio Manager
2
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1998(1)
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Annualized
One Year Inception to
Return Date(2)
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<S> <C> <C>
PBHG Large Cap Growth Portfolio 30.63% 29.68%
</TABLE>
Comparison of Change in the Value of a $10,000 Investment in the PBHG Large Cap
Growth Portfolio, versus the Russell 1000 Growth Index, the Lipper Growth
Funds Average and the S&P 500 Index
[IN THE PRINTED VERSION THERE IS A LINE GRAPH WITH THE FOLLOWING
PLOT POINTS DEPICTED.]
PBHG Large Russell 1000 Lipper Growth S&P 500
Growth Portfolio Growth Index(3) Funds Average(4) Index(5)
---------------- --------------- ---------------- --------
4/97 10000 10000 10000 10000
6/97 10780 11151 11153 11083
9/97 11961 11989 12324 11912
12/97 11821 12171 12173 12255
3/98 13511 14015 13741 13963
6/98 14112 14650 13991 14424
9/98 12350 13322 12133 12992
12/98 15440 16884 14882 15759
(1) Performance is historical and not indicative of future results. The
investment return and principal value of an investment will fluctuate, so
an investor's shares, when redeemed, may be worth more or less than their
original cost.
(2) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
(3) The Russell 1000 Growth Index is an unmanaged index comprised of those
securities in the Russell 1000 Index with a greater-than-average growth
orientation. The Index reflects the reinvestment of income dividends and
capital gains distributions, if any, but does not reflect fees, brokerage
commissions, or other expenses of investing. The Index is not intended to
imply the Portfolio's past or future performance.
(4) The Lipper Growth Funds Average is an equally weighted bench-mark composed
of mutual funds, each of which normally invests in companies whose
long-term earnings are expected to grow significantly faster than the
earnings of the stocks represented in the major unmanaged stock indexes.
The performance figures are based on changes in net assets value of the
funds in the category with all capital gains distributions and income
dividends reinvested. The Index is not intended to imply the Portfolio's
past or future performance.
(5) The Standard & Poor's ("S&P") 500 Index is a capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic economy. The
Index is unmanaged and reflects the reinvestment of income dividends and capital
gains distributions, if any, but does not reflect fees, brokerage commissions,
or other expenses of investing. The Index is not intended to imply the
Portfolio's past or future performance.
3
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
STATEMENT OF NET ASSETS
As of December 31, 1998
<TABLE>
<CAPTION>
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Market
Value
Description Shares (000)
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<S> <C> <C>
COMMON STOCK -- 91.3%
CONSUMER -- 11.7%
BUILDING MATERIAL CHAINS -- 1.7%
Home Depot 3,400 $ 208
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208
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ENTERTAINMENT/MOVIES -- 2.0%
Carnival, Cl A 5,300 254
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254
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FUNERAL HOMES/SERVICES -- 0.5%
Service Corporation International 1,800 69
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69
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RETAIL-APPAREL -- 0.5%
Jones Apparel Group* 2,800 62
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62
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RETAIL-DISCOUNT STORES -- 2.6%
Family Dollar Stores 5,800 128
Wal-Mart Stores 2,500 203
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331
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RETAIL-HOME FURNISHING -- 0.4%
Ethan Allen Interiors 1,100 45
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45
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RETAIL-OFFICE PRODUCTS/SUPPLIES -- 2.6%
Staples* 7,500 328
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328
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RETAIL-SPECIALTY -- 0.4%
Borders Group* 2,000 50
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50
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RETAIL-SUPERMARKET/DRUG STORES -- 1.0%
CVS 2,300 127
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127
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TOTAL CONSUMER (COST $1,139) 1,474
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ENERGY -- 0.2%
CONTRACT DRILLING -- 0.2%
Santa Fe International 600 9
Transocean Offshore 600 16
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25
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TOTAL ENERGY (COST $58) 25
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FINANCIAL -- 4.6%
CONSUMER FINANCE -- 3.1%
Associates First Capital 5,600 237
Newcourt Credit Group 4,400 154
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391
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DIVERSIFIED FINANCIAL SERVICES -- 0.7%
Heller Financial* 2,900 85
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85
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MORTGAGE RELATED -- 0.8%
MGIC Investments 2,600 104
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104
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TOTAL FINANCIAL (COST $599) 580
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</TABLE>
<TABLE>
<CAPTION>
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Market
Value
Description Shares (000)
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<S> <C> <C>
COMMON STOCK -- CONTINUED
HEALTH -- 21.1%
BIOTECHNOLOGY -- 1.0%
Genentech* 1,600 $ 128
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128
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CONTRACT RESEARCH -- 2.1%
Quintiles Transnational* 5,000 267
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267
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DRUGS/PHARMACEUTICALS -- 7.5%
Lilly (Eli) & Company 1,200 106
Merck & Company 1,000 148
Pfizer 2,300 288
Schering-Plough 4,500 248
Watson Pharmaceutical* 2,500 157
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947
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HOSPITAL -- 2.5%
Health Management Associates* 14,500 314
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314
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HOSPITAL SUPPLIES -- 1.7%
Cardinal Health 2,800 212
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212
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INFORMATION SYSTEMS -- 1.6%
HBO & Company 7,100 204
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204
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MEDICAL DEVICES -- 1.9%
Guidant 2,100 232
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232
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MEDICAL/DENTAL DISTRIBUTORS -- 0.4%
Henry Schein* 1,000 45
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45
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PHARMACEUTICAL SERVICES -- 1.6%
Omnicare 5,800 202
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202
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SPECIAL OUTPATIENT FACILITY -- 0.8%
HealthSouth* 6,500 100
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100
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TOTAL HEALTH (COST $2,178) 2,651
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INDUSTRIAL/GENERAL MANUFACTURING -- 5.1%
AUTO-RELATED -- 2.4%
Harley-Davidson 6,400 303
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303
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MULTI-INDUSTRY -- 2.7%
Danaher 6,300 342
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342
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TOTAL INDUSTRIAL/GENERAL MANUFACTURING
(COST $402) 645
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SERVICE -- 21.5%
CELLULAR TOWERS -- 0.7%
American Tower Systems* 2,900 86
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86
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</TABLE>
4
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
<TABLE>
<CAPTION>
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Market
Value
Description Shares (000)
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONTINUED
COMMERCIAL SERVICES -- 0.8%
Central Parking 3,000 $ 97
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97
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COMMUNICATIONS SERVICES -- 4.6%
Global Crossing* 2,700 122
MCI Worldcom* 4,500 323
Qwest Communications International* 2,700 135
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580
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EDUCATIONAL SERVICES -- 1.2%
Apollo Group, Cl A* 4,400 149
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149
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EMPLOYMENT SERVICES-PROFESSIONAL -- 0.2%
Select Appointments* 1,500 32
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32
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ENVIRONMENTAL -- 3.5%
Allied Waste Industries* 7,700 182
Waste Management 5,600 261
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443
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MARKETING INFORMATION -- 0.5%
IMS Health 800 60
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60
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RADIO/TELEVISION -- 6.4%
Chancellor Media, Cl A* 3,000 144
Clear Channel Communications* 6,048 330
Fox Entertainment Group* 5,300 133
Jacor Communications* 1,500 96
Univision Communications* 2,900 105
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808
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SYSTEMS INTEGRATOR -- 2.6%
Computer Horizons* 2,200 58
Keane* 3,000 120
Sapient* 2,600 146
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324
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TRANSACTIONS PROCESSING -- 1.0%
Fiserv* 2,600 134
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134
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TOTAL SERVICE (COST $2,237) 2,713
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TECHNOLOGY -- 26.6%
COMPUTER-MANUFACTURING -- 2.8%
Dell Computer* 4,800 351
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351
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DATA STORAGE -- 2.8%
EMC* 4,100 349
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349
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NETWORKING HARDWARE -- 4.2%
Ascend Communications* 1,800 118
Cisco Systems* 4,375 406
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524
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NETWORKING SOFTWARE -- 1.9%
Networks Associates* 2,400 159
Veritas Software* 1,400 84
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243
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</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Shares/
Face Market
Amount Value
Description (000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- CONCLUDED
SEMI-CONDUCTOR MANUFACTURING -- 3.3%
Intel 1,100 $ 130
Linear Technology 2,500 224
Motorola 900 55
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409
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SOFTWARE-CLIENT/SERVER -- 2.2%
Compuware* 3,600 281
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281
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SOFTWARE-DESKTOP -- 2.5%
Microsoft* 2,300 319
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319
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SOFTWARE-ENTERPRISE RESOURCE PLANNING -- 0.7%
J.D. Edwards & Company* 3,200 91
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91
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SOFTWARE-INTERNET -- 5.3%
America Online* 3,400 544
Mindspring Enterprises* 2,000 122
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666
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SOFTWARE-SYSTEM/MAINFRAME -- 0.9%
BMC Software* 2,600 116
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116
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TOTAL TECHNOLOGY (COST $1,794) 3,349
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TRANSPORTATION -- 0.5%
SURFACE TRANSPORTATION -- 0.5%
Coach USA* 1,800 62
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62
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TOTAL TRANSPORTATION (COST $80) 62
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TOTAL COMMON STOCK (COST $8,487) 11,499
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REPURCHASE AGREEMENT -- 12.9%
Morgan Stanley
4.50%, dated 12/31/98, matures 01/04/99,
repurchase price $1,631,113 (collateralized by
U.S. Treasury Note: total market value
$1,669,763)(A) $1,630 1,630
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Total Repurchase Agreement
(Cost $1,630) 1,630
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TOTAL INVESTMENTS -- 104.2%
(COST $10,117) 13,129
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OTHER ASSETS AND LIABILITIES -- (4.2%)
Other Assets and Liabilities, Net (531)
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NET ASSETS
Paid-in capital (authorized 500 million shares
- $0.001 par value) based on 815,773
outstanding shares of common stock 9,988
Accumulated net realized loss on investments (402)
Net unrealized appreciation on investments 3,012
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TOTAL NET ASSETS -- 100.0% 12,598
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NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 15.44
- -----------------------------------------------------------------------
</TABLE>
*Non-income producing security
(A) -- Tri-party repurchase agreement
Cl -- Class
The accompanying notes are an integral part of the financial statements.
5
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
STATEMENT OF OPERATIONS (000)
For the period ended December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends................................................. $ 12
Interest.................................................. 64
------
Total Investment Income................................. 76
------
EXPENSES:
Investment Advisory Fees.................................. 62
Administrative Fees....................................... 12
Custodian Fees............................................ 2
Professional Fees......................................... 5
Transfer Agent Fees....................................... 26
Printing Fees............................................. 14
Directors' Fees........................................... 3
Amortization of Deferred Organizational Costs............. 2
Insurance and Other Fees.................................. 1
------
Total Expenses.......................................... 127
------
Waiver of Investment Advisory Fees........................ (36)
------
Net Expenses............................................ 91
------
NET INVESTMENT LOSS......................................... (15)
------
Net Realized Loss from Security Transactions.............. (341)
Net Change in Unrealized Appreciation on Investments...... 2,780
------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 2,439
------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $2,424
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
STATEMENT OF CHANGES IN NET ASSETS (000)
For the year ended December 31, 1998 and the period ended December 31, 1997
<TABLE>
<CAPTION>
01/01/98 05/01/97(1)
TO TO
12/31/98 12/31/97
-------- -----------
<S> <C> <C>
INVESTMENT ACTIVITIES:
Net Investment Loss....................................... (15) --
Net Realized Loss from Security Transactions.............. (341) (61)
Net Change in Unrealized Appreciation on Investments...... 2,780 232
------- ------
Net Increase in Net Assets Resulting from Operations...... 2,424 171
------- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income..................................... -- --
Net Realized Gains from Security Transactions............. -- --
------- ------
Total Distributions....................................... -- --
------- ------
CAPITAL SHARE TRANSACTIONS (A):
Shares Issued............................................. 11,045 6,225
Shares Issued upon Reinvestment of Distributions.......... -- --
Shares Redeemed........................................... (5,787) (1,497)
------- ------
Increase in Net Assets Derived from Capital Share
Transactions............................................ 5,258 4,728
------- ------
Total Increase in Net Assets............................ 7,682 4,899
------- ------
NET ASSETS:
Beginning of Period....................................... 4,916 17
------- ------
End of Period............................................. 12,598 4,916
======= ======
(A) SHARES ISSUED AND REDEEMED:
Shares Issued............................................. 838 547
Shares Issued upon Reinvestment of Distributions.......... -- --
Shares Redeemed........................................... (438) (133)
------- ------
Net Increase in Shares Outstanding........................ 400 414
======= ======
</TABLE>
(1) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
7
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
FINANCIAL HIGHLIGHTS
For the period ended December 31, 1998
For a Share Outstanding Throughout each Fiscal Year or period
<TABLE>
<CAPTION>
Net Net
Asset Net Realized and Distributions Distributions Asset
Value Investment Unrealized from Net from Value
Beginning income Gains or Losses Investment Capital End Total
of Period (Loss) on Securities Income Gains of Period Return
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998......................... $11.82 $ (0.02) $3.64 -- -- $15.44 30.63%
1997(1)...................... 10.00 -- 1.82 -- -- 11.82 18.20%+
<CAPTION>
Ratio of
Ratio Net Income
Net Ratio of of Expenses (Loss)
Assets Ratio Net Income to Average to Average
End of Expenses (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>
1998......................... $12,598 1.10% (0.19)% 1.53% (0.62)% 41.51%
1997(1)...................... 4,916 1.10%* 0.00 %* 5.21%* (4.11)%* 37.42%
</TABLE>
* Annualized.
+ Total return has not been annualized.
(1) The PBHG Large Cap Growth Portfolio commenced operations on May 1, 1997.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
8
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PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1998
1. ORGANIZATION
The PBHG Large Cap Growth Portfolio (the "Portfolio") is a series of the PBHG
Insurance Series Fund, Inc. (the "Fund"), a Maryland corporation. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund consists of the Portfolio and six
others: the PBHG Growth II Portfolio (the "Growth II Portfolio"), the PBHG
Technology & Communications Portfolio (the "Technology & Communications
Portfolio"), the PBHG Small Cap Value Portfolio (the "Small Cap Value
Portfolio"), the PBHG Large Cap Value Portfolio (the "Large Cap Value
Portfolio"), the PBHG Select 20 Portfolio (the "Select 20 Portfolio") and the
PBHG Mid-Cap Value Portfolio (the "Mid-Cap Value Portfolio") (collectively, the
"Portfolios"). Each Portfolio of the Fund is classified as a diversified
management investment company, with the exception of the Select 20 Portfolio,
which is classified as a non-diversified management investment company. The
financial statements presented herein do not include the Growth II Portfolio,
the Technology & Communications Portfolio, the Small Cap Value Portfolio, the
Large Cap Value Portfolio, the Select 20 Portfolio, or the Mid-Cap Value
Portfolio which are presented separately. The Portfolio's prospectus provides a
description of the Portfolio's investment objectives, policies and strategies.
The assets of the Portfolio are segregated, and a shareholder's interest is
limited to the Portfolio in which shares are held. The Fund is intended to be a
funding vehicle for variable annuity contracts and variable life insurance
policies to be offered by the separate accounts of life insurance companies. At
December 31, 1998, 97% of the outstanding shares of the Portfolio were held by
the separate accounts of one participating Insurance Company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Portfolio.
SECURITY VALUATION -- Investment securities of the Portfolio that are listed on
a securities exchange, and for which market quotations are readily available,
are valued at the last quoted sales price at the close of trading on the primary
exchange (currently 4:00 p.m., Eastern time). If there is no such reported sale,
these securities and unlisted securities for which market quotations are not
readily available, are valued at the most recent bid price.
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Dividend income and distributions to shareholders are recognized on the
ex-dividend date; interest income is recognized on the accrual basis. Costs used
in determining realized capital gains and losses on the sale of investment
securities are those of the specific securities sold adjusted for the accretion
and amortization of acquisition discounts and premiums during the respective
holding periods.
DIVIDENDS -- Dividends from net investment income are declared annually, if
available. Distributions of net realized capital gains are generally made to
shareholders annually, if available. Dividends from net investment income and
distributions from net realized capital gains are determined in accordance with
U.S. Federal income tax regulations, which may differ from those amounts
determined under generally accepted accounting principles. These book/tax
differences are either temporary or permanent in nature. To the extent these
differences are permanent, they are charged or credited to paid-in-capital, net
investment income or accumulated net realized gain, as appropriate, in the
period that the differences arise. Accordingly, the following permanent
differences as of December 31, 1998, primarily attributable to certain net
operating losses, which for tax purposes, are not available to offset future
income or have been used to offset net short-term capital gains, have been
reclassified to the following account:
<TABLE>
<CAPTION>
Paid-In-Capital
---------------
<S> <C>
Large Cap Growth Portfolio $15,417
</TABLE>
These reclassifications have no effect on net assets or net asset value per
share.
FEDERAL INCOME TAXES -- It is the Portfolio's intention to continue to qualify
as a regulated investment company for Federal income tax purposes and to
distribute all of its taxable income and net capital gains. Accordingly, no
provision has been made for Federal income taxes.
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day by dividing the total value of the Portfolio's assets, less
liabilities, by the number of shares outstanding.
REPURCHASE AGREEMENTS -- Securities pledged as collateral for repurchase
agreements are held by a third party custodian bank until the respective
agreements mature. Provisions of the repurchase agreements and procedures
adopted by the Fund and followed by Pilgrim Baxter & Associates, Ltd. (the
"Adviser") ensure that the market value of the collateral including accrued
interest thereon, is sufficient in the event of default by the counterparty. If
the counterparty defaults and the value of the collateral declines, or if the
counterparty enters into insolvency proceedings, realization of the collateral
by a Portfolio may be delayed or limited.
OTHER -- Expenses that are directly related to one of the Portfolios are charged
directly to that Portfolio. Other operating expenses are prorated to the
Portfolios on the basis of relative net assets.
All organizational costs incurred in connection with the start up of the Fund
have been equally allocated to each Portfolio, except the Mid-Cap Value
Portfolio, and are being amortized on a straight line basis over a period of
sixty months. In the event that any of the initial shares of each Portfolio are
redeemed by any holder thereof during the period that each Portfolio is
amortizing its organizational costs, the redemption proceeds payable to the
holder thereof will be reduced by the unamortized organizational costs in the
same ratio as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
9
<PAGE>
PBHG Insurance Series Fund, Inc.
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PBHG Large Cap Growth Portfolio
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund and the Adviser are parties to an Investment Advisory Agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser is
paid a monthly fee at an annual rate of 0.75% of the average daily net assets of
the Portfolio. In the interest of limiting expenses of the Portfolio, the
Adviser has entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement"). With respect to the Portfolio, the Adviser has agreed to
waive or limit its fees and to assume other expenses of the Portfolio to the
extent necessary to limit the total annual operating expenses (expressed as a
percentage of the Portfolio's average daily net assets) to 1.10%. Reimbursement
by the Portfolio of the advisory fees waived or limited and other expenses paid
by the Adviser pursuant to the Expense Limitation Agreement during any of the
two previous fiscal years may be made at a later date when the Portfolio has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual expense ratio of the Portfolio to exceed 1.10%.
Consequently, no reimbursement by the Portfolio will be made unless: (i) the
Portfolio's net assets exceed $75 million; (ii) the Portfolio's total annual
expense ratio is less than 1.10%, and (iii) the payment of such reimbursement is
approved by the Board of Directors on a quarterly basis. At December 31, 1998,
the amount of advisory fee waiver and reimbursement of third party expenses by
the Adviser subject to possible reimbursement was $87,996.
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of the
Adviser, provides the Fund with administrative services, including regulatory
reporting and all necessary office space, equipment, personnel and facilities.
For these administrative services, the Administrator receives a fee, which is
calculated daily and paid monthly, at an annual rate of 0.15% of the average
daily net assets of the Portfolio.
SEI Investments Management Corporation, a wholly-owned subsidiary of SEI
Investments Company, is the owner of all beneficial interest in SEI Investments
Mutual Funds Services (the "Sub-Administrator"). The Sub-Administrator is an
affiliate of the Fund's distributor and assists the Administrator in providing
administrative services to the Fund. For acting in this capacity, for the period
January 1, 1998 to April 30, 1998, the Administrator paid the Sub-Administrator
a fee at the annual rate of 0.07% of the average daily net assets of each
Portfolio with respect to the first $2.5 billion of the total average daily net
assets of (i) the Fund, and (ii) The PBHG Funds, Inc., another family of funds
managed by the Adviser, and a fee at the annual rate of 0.025% of the average
daily net assets of each Portfolio with respect to the total daily net assets of
(i) the Fund and (ii) The PBHG Funds, Inc. in excess of $2.5 billion. Effective
May 1, 1998 the Administrator pays the Sub-Administrator a fee equal to the
greater of $35,000 per Portfolio and $5,000 per additional class of shares or at
the annual rate of 0.040% with respect to the first $2.5 billion of the average
daily net assets of (i) the Fund, (ii) The PBHG Funds, Inc., and (iii) PBHG
Advisor Funds, Inc., other fund families managed by the Adviser (collectively
known as the "PBHG Fund Family"), 0.025% of the next $7.5 billion of the average
daily net assets of each Portfolio in the PBHG Fund Family, and 0.020% of the
average daily net assets of each Portfolio in the PBHG Fund Family in excess of
$10 billion.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent of
the Fund. First Union National Bank, serves as the custodian for the Fund.
Effective January 2, 1998, the Fund entered into a shareholder servicing
agreement with PBHG Fund Services to provide shareholder support and other
shareholder account-related services. PBHG Fund Services has, in turn,
contracted with UAM Shareholder Service Center, Inc. to assist in the provision
of these services. For the year ended December 31, 1998 PBHG Fund Services was
paid $7,000 by the Portfolio for transfer agent services.
Certain officers and directors of the Fund who are or were officers of the
Adviser, Administrator, Sub-Administrator and the Distributor received no
compensation from the Fund.
4. INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments, for the Portfolio for the year ended December 31,
1998, amounted to $7,435,572 and $2,965,311, respectively.
The aggregate gross unrealized appreciation and depreciation of securities held
by the Portfolio for federal income tax purposes at December 31, 1998, amounted
to $3,350,846 and $338,198, respectively. The total cost of securities and the
net realized gains or losses on securities sold for Federal income tax purposes
at December 31, 1998 was not materially different from amounts reported for
financial reporting purposes. At December 31, 1998 the Portfolio had a $401,498
capital loss carryforward, $60,546 and $340,952 expiring in December 2005 and
December 2006, respectively, which can be used to offset future capital gains.
5. LINE OF CREDIT
The Portfolio may borrow, an amount up to its prospectus defined limitations,
from a committed line of credit available to (i) the Fund, (ii) The PBHG Funds,
Inc. and (iii) PBHG Advisor Funds, Inc. Borrowings from the line of credit will
bear interest at the Federal Funds Rate plus 0.40%. The Portfolio had no
outstanding borrowing at December 31, 1998, or at any time during the year ended
December 31, 1998.
10
<PAGE>
PBHG Insurance Series Fund, Inc.
- -------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE PBHG INSURANCE SERIES FUND, INC.:
In our opinion, the accompanying statement of net assets of the PBHG Large Cap
Growth Portfolio of PBHG Insurance Series Fund, Inc., and the related statements
of operations and of changes in net assets, and the financial highlights present
fairly, in all material respects, the financial position of the PBHG Large Cap
Growth Portfolio (the "Fund") at December 31, 1998, and the results of its
operations for the year then ended, changes in its net assets for each of the
two years (or period) in the period then ended and its financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 28, 1999
11
<PAGE>
PBHG Insurance Series Fund, Inc.
[LOGO] -------------------------------------------------------------------------
PBHG Large Cap Growth Portfolio
NOTICE TO SHAREHOLDERS (unaudited)
For shareholders that do not have a December 31, 1998 taxable year end, this
notice is for informational purposes only.
For shareholders with a December 31, 1998 taxable year end, please consult your
tax adviser as to the pertinence of this notice.
For the fiscal year ended December 31, 1998, the Funds are designating net
capital gains and qualifying dividends with regard to distributions paid during
the year as follows:
<TABLE>
<CAPTION>
(A) (B) (C) (D)
NET ORDINARY
CAPITAL GAINS INCOME TOTAL
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS QUALIFYING
FUND (TAX BASIS) (TAX BASIS) (TAX BASIS) DIVIDENDS(1)
- ---- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Large Cap Growth Portfolio.................................. 0% 0% 0% 89%
</TABLE>
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
* Items (A) and (B) are based on a percentage of each portfolio's
distributions.
** Item (D) is based on a percentage of ordinary income distributions of each
portfolio.
None of the Portfolios qualify in California, Connecticut, or New York to pass
through exempt interest dividends from U.S. government obligations.
12
<PAGE>
[LOGO]
PBHG Insurance Series Fund, Inc.
Investment Adviser
Pilgrim Baxter & Associates, Ltd.
Distributor
SEI Investments Distribution, Co.
