ANALYTIC FUNDS
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ANNUAL REPORT
DECEMBER 31, 1998
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ANALYTIC FUNDS
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Analytic Defensive Equity Fund
Analytic Enhanced Equity Fund
Analytic Master Fixed Income Fund
Analytic Short-Term Government Fund
1
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ANALYTIC FUNDS
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TABLE OF CONTENTS
Message to Shareholders 3
Management Discussion and Analysis
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Analytic Defensive Equity Fund 4
Analytic Enhanced Equity Fund 6
Analytic Master Fixed Income Fund 8
Analytic Short-Term Government Fund 10
Report of Independent Accountants 12
Statements of Net Assets 13
Statements of Operations 19
Statements of Changes in Net Assets 20
Financial Highlights 22
Notes to Financial Statements 24
Notice to Shareholders 28
2
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ANALYTIC FUNDS
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MESSAGE TO SHAREHOLDERS
DEAR FELLOW SHAREHOLDERS:
We are pleased to send you the Analytic Funds Annual report for the year ended
December 31, 1998. We appreciate your loyalty and support in this year of
transition.
ANALYTIC FUNDS PERFORMANCE
This was a banner year for our two equity mutual funds. The Defensive Equity
Fund outperformed the S&P 500 Index returning 28.89% without the impact of a
sales charge (21.45% had a sales charge been paid) versus a return of 28.60% for
the S&P. This was an unexpected accomplishment for this otherwise defensive
program. We generally do not anticipate exceptional performance from the
Defensive Equity Fund during strong bull markets, since the hedging program
tends to limit upside participation after a certain point. The strength of our
equity selection within the Defensive Equity Fund, however, outweighed the
limiting impact of our hedging activities.
The Enhanced Equity Fund continued to perform well in 1998. The total return for
the Enhanced Equity Fund in 1998 was 37.82% without the impact of a sales charge
(29.96% had a sales charge been paid), easily beating the S&P 500's 28.60%
return over the same period. Returns of the Enhanced Equity Fund were consistent
as well, and did not result from a single event: the Fund outperformed the S&P
500 in 10 of the 12 months of 1998, and managed to weather the summer market
correction in the stock market without significant added volatility.
With their strong returns in 1998, both equity funds received widespread
recognition in the media, including positive articles and high rankings in the
NEW YORK TIMES, the WALL STREET JOURNAL, and BUSINESS WEEK, as well as
recognition on popular investment websites such as THESTREET.COM and MICROSOFT
INVESTOR, to name a few.
The Short-Term Government Fund also beat its benchmark in 1998. That Fund
returned 7.10% without the impact of a sales charge (5.51% had a sales charge
been paid) in 1998, beating the Merrill Lynch 1-3 Year Treasury Index's 7.00%
performance over the same time period. The Master Fixed Income Fund, however,
underperformed its benchmark in 1998 returning 3.80% without the impact of a
sales charge (-1.14% had a sales charge been paid) versus the Lehman Brother
Government/Corporate Bond Index return of 9.47%. While the Master Fixed Income
Fund was generally successful throughout the year, the corporate credit exposure
in the program was adversely impacted by the stock market's decline in August,
overwhelming the otherwise steady gains achieved throughout much of the rest of
1998.
We are excited about the potential for the funds and we thank you for your
continued interest and support in the Analytic Funds.
Sincerely,
/S/ Harindra de Silva /S/ Greg McMurran
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Harindra de Silva, Ph.D., CFA Greg McMurran
President/Portfolio Manager Chief Investment Officer
/S/ Bob Bannon /S/ Dennis Bein /S/ Scott Barker
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Bob Bannon Dennis Bein, CFA Scott Barker
Portfolio Manager Portfolio Manager Portfolio Manager
3
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ANALYTIC FUNDS
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ANALYTIC DEFENSIVE EQUITY FUND
Portfolio Profile
OBJECTIVE: This equity-income portfolio seeks to obtain greater long-term total
returns and smaller fluctuations in quarterly total return from a diversified,
hedged common stock portfolio than from the same portfolio unhedged.
INVESTS IN: Large capitalization companies
STRATEGY: The Analytic Defensive Equity Fund is managed with a focus on: (1)
optimal portfolio construction and (2) active hedging applied to various
security positions. In the short run, this strategy is expected to: (1) improve
upon the return of the equity market when the equity market is gradually rising
or flat, (2)capture a large fraction of the return when the equity market is
steeply rising, and (3) provide substantial protection in declining markets. All
stocks in the S&P 500 index are ranked according to each stock's one month
expected return outlook, based on the forecasts of a sophisticated proprietary
mathematical model. Over 70 separate factors drive the modeling process.
Variables chosen for the modeling process are drawn from categories such as
risk, momentum, valuation, growth and liquidity. An adaptive weighting scheme
allows those variables that have been most effective over recent horizons to
have the greatest weight in predicting expected returns. Based on the rankings,
a non-linear optimization process is used to determine a portfolio that attempts
to maximize expected return while keeping expected volatility less than that of
the S&P 500. Additional constraints are used in the optimization process to
insure that the resulting portfolio has minimal exposure to size, style, and
industry sector biases. Hedging decisions are based on estimates of the fair
value and expected contribution made by the position to the portfolio's overall
expected return. Although the portfolio is at least partially hedged at all
times, if hedging a particular position does not contribute to the portfolio's
stability and growth, it is not hedged.
Performance
The calendar year 1998 was a banner year for large cap U.S. equities. The S&P
500 returned 28.6% for the year, making it a rough year for most conservative
portfolios. The average Lipper Equity-Income Fund was up 11.4% for the year,
providing evidence of the trade-off investors typically are forced to make when
assembling a conservative investment portfolio. Despite this challenge to our
defensive portfolio, the Fund was able to return 28.89% (21.45% had a sales
charge been paid) for the year. Not only was this better than the average
equity-income fund for the year, but the Fund actually out-performed its peer
group in all four quarters during 1998.
Portfolio Highlights
Analytic Investors, Inc. has assembled what we believe to be a truly unique
defensive portfolio. It has no size, style or industry sector biases, and has a
beta of approximately 0.70. Furthermore, it has no large weights in any one
individual security, with position sizes generally limited to 2%. Despite its
low risk nature, the Defensive Equity Fund out-performed the S&P 500 in a very
strong equity market. The reason -- successful implementation of our proprietary
valuation model and a commitment to hedging the portfolio, regardless of market
environment. Of course past performance is never a guarantee of future results.
4
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ANALYTIC FUNDS
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COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE ANALYTIC
DEFENSIVE EQUITY FUND, VERSUS THE S&P 500 INDEX, AND THE LIPPER EQUITY INCOME
FUNDS AVERAGE.
[LINE GRAPH OMITTED]
ANALYTIC DEFENSIVE S&P 500 LIPPER EQUITY INCOME
EQUITY FUND INDEX (2) FUNDS AVERAGE (3)
12/31/88 $9,425 $10,000 $10,000
12/89 11,097 13,162 12,193
12/90 11,268 12,754 11,216
12/91 12,765 16,639 14,272
12/92 13,553 17,905 15,720
12/93 14,464 19,703 17,918
12/94 14,821 19,961 17,603
12/95 18,015 27,454 22,978
12/96 20,842 33,752 27,409
12/97 24,824 45,008 34,754
12/98 31,996 57,881 38,539
Effective October 26, 1998 and until further notice, Class A shares of the
Analytic Defensive Equity Fund will be sold without an initial sales charge. The
chart above assumes the deduction of a 5.75% sales charge from the $10,000
initial investment in the Analytic Defensive Equity Fund made on December 31,
1988. A $10,000 investment in the Fund would have grown to $39,227 without the
deduction of the 5.75% sales charge.
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 S&P 500 Index is a capitalization-weighted index of 500 stocks. The
index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
3 The Lipper Equity Income Funds Average is an equally weighted benchmark
composed of mutual funds, each of which limits its investments, by
prospectus or portfolio practice, to companies that generally pay regular
dividends. The performance figures are based on changes in net asset value
of the funds in the Index with all capital gains distributions and income
dividends reinvested.
Average Annual Total Return (1)
As of December 31, 1998
<TABLE>
<CAPTION>
One Year 3 Year 5 Year 10 Year Since
Return Return Return Return Inception
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<S> <C> <C> <C> <C> <C>
Analytic Defensive Equity Fund 21.45% 18.47% 15.82% 12.34% 12.17%
Without payment of a sales charge 28.89% 21.10% 17.21% 13.01% 12.50%
</TABLE>
Sector Weightings at December 31, 1998
[PIE CHART OMITTED]
HEALTHCARE 10.82%
BASIC MATERIALS 4.84%
ENERGY 6.56%
CONSUMER (NON-CYCLICAL) 9.71%
CONSUMER (CYCLICAL) 6.91%
CONSUMER SERVICES 5.88%
INDUSTRIALS 2.95%
UTILITY 3.01%
TRANSPORT 1.65%
TECHNOLOGY 18.05%
TELECOMMUNICATIONS 9.47%
COMMERCIAL SERVICES 3.24%
FINANCIAL 16.91%
% of Total Portfolio Investments
5
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ANALYTIC FUNDS
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ANALYTIC ENHANCED EQUITY FUND
Portfolio Profile
OBJECTIVE: This diversified equity portfolio seeks to provide above-average
returns from a domestic common stock portfolio.
INVESTS IN: Large capitalization companies
STRATEGY: The portfolio attempts to outperform the S&P 500 Index through: (1)
the use of a disciplined quantitative strategy to identify an undervalued
portfolio of stocks and, (2) the use of an optimization-based approach for
portfolio construction to efficiently control risk. Analytic Investors ranks all
stocks in the S&P 500 index according to each stock's one month expected return
outlook, based on the forecasts of a sophisticated proprietary mathematical
model. Over 70 separate factors drive the modeling process. Variables chosen for
the modeling process are drawn from categories such as risk, momentum,
valuation, growth and liquidity. An adaptive weighting scheme allows those
variables that have been most effective over recent horizons to have the
greatest weight in predicting expected returns. Based on the rankings, a
non-linear optimization process is used to determine a portfolio that attempts
to maximize expected return while keeping expected volatility less than that of
the S&P 500. Additional constraints are used in the optimization process to
attempt to insure that the resulting portfolio has minimal exposure to size,
style, and industry sector biases.
Performance
The calendar year 1998 was a banner year for large cap U.S. equities. The most
prevalent U.S. large capitalization index, the S&P 500, had positive returns 9
of the 12 months and 3 of the 4 quarters. Even with a 14.4% decline in August,
the 28.6% annual performance made U.S. large capitalization securities one of
the best investments available. The rally was concentrated in a relatively few
issues however, as only 28% of the stocks in the S&P 500 beat the index. Despite
this challenging environment for active stock selection, the Fund systematically
out-performed the S&P 500 throughout the year, out pacing it in 10 of the 12
months. The Fund's out-performance was found in both rising and falling markets,
as it beat the S&P in 8 of the 9 positive months and 2 of the 3 negative months.
In total, the fund was up 37.82% (29.96% had a sales charge been paid), easily
beating the S&P 500's 28.6% for the year. Relative to its peer group, the Lipper
Growth Funds Universe, the Fund's performance was also strong. The Fund's 37.9%
beat the average fund in the Lipper Growth Fund category by 16.2%, as the
average fund returned 21.7% for the year.
Portfolio Highlights
With a lower beta and a lower standard deviation than the S&P 500, Analytic
Investors, Inc. has assembled a portfolio that looks strikingly similar to the
S&P 500. It has no size, style or industry sector biases, and it typically moves
in a manner that is very highly correlated to U.S. large capitalization
securities in general. Furthermore, it has no large weights in any one
individual security, with position size generally limited to 2%. All this being
said, the systematic application of our proprietary valuation model does allow
the fund an opportunity to out-perform passive indices, and the consistently
strong performance throughout 1998 offered a glimpse into the return potential
of a disciplined investment approach. Of course past performance is no guarantee
of future results.
6
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ANALYTIC FUNDS
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COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE ANALYTIC
ENHANCED EQUITY FUND, VERSUS THE S&P 500 INDEX, AND THE LIPPER GROWTH FUNDS
AVERAGE.
[LINE GRAPH OMITTED]
Analytic Enhanced S&P 500 Lipper Growth
Equity Fund Index (2) Funds Average (3)
6/30/93 $9,425 $10,000 $10,000
12/93 9,958 10,536 10,776
6/94 9,733 10,180 10,191
12/94 9,933 10,675 10,603
6/95 11,908 12,830 12,526
12/95 13,446 14,683 13,924
6/96 14,715 16,164 15,358
12/96 16,542 18,052 16,702
6/97 19,267 21,771 19,137
12/97 21,463 24,072 20,901
6/98 26,690 28,333 24,084
12/98 29,586 30,957 25,590
Effective October 26, 1998 and until further notice, Class A shares of the
Analytic Enhanced Equity Fund will be sold without an initial sales charge. The
chart above assumes the deduction of a 5.75% sales charge from the $10,000
initial investment in the Analytic Enhanced Equity Fund made on June 30, 1993. A
$10,000 investment in the Fund would have grown to $30,897 without the deduction
of the 5.75% sales charge.
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 S&P 500 Index is a capitalization-weighted index of 500 stocks. The
index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
3 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 asset value of the funds in the category
with all capital gains distributions and income dividends reinvested.
Average Annual Total Return (1)
As of December 31, 1998
One Year 3 Year 5 Year Since
Return Return Return Inception
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Analytic Enhanced Equity Fund 29.96% 27.50% 22.87% 21.46%
Without payment of a sales charge 37.82% 30.07% 24.33% 22.76%
Sector Weightings at December 31, 1998
[PIE CHART OMITTED]
BASIC MATERIALS 5.18%
ENERGY 6.56%
CONSUMER (NON-CYCLICAL) 9.67%
CONSUMER (CYCLICAL) 6.91%
CONSUMER SERVICES 5.73%
INDUSTRIALS 2.79%
UTILITY 3.34%
TRANSPORT 1.73%
TECHNOLOGY 18.06%
TELECOMMUNICATIONS 9.47%
COMMERCIAL SERVICES 2.81%
FINANCIAL 16.92%
HEALTHCARE 10.82%
% of Total Portfolio Investments
7
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ANALYTIC FUNDS
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ANALYTIC MASTER FIXED INCOME FUND
Portfolio Profile
OBJECTIVE: This portfolio seeks to provide above-average total returns from a
diversified portfolio consisting primarily of domestic government, corporate,
and mortgage-related fixed income securities. The portfolio also includes
various synthetic fixed income securities constructed using listed options.
INVESTS IN: Primarily U.S. Treasury, U.S. Agency, and U.S. dollar denominated
high grade debt securities, including mortgage-related securities. Subject to
certain additional limitations, under normal market conditions, a portion of the
assets may be invested in floating rate and other types of debt securities, high
grade non-US dollar denominated debt securities, below high grade fixed income
securities, convertible securities, synthetic convertible positions, covered
call and cash secured put investments, preferred stock, and the shares of other
investment companies which invest primarily in high grade debt securities. The
Fund may also invest in currency and rate-related derivative securities.
STRATEGY: Portfolio volatility is targeted to be similar to that of the Lehman
Brothers Government/Corporate Bond Index. A diversified portfolio with this
targeted risk characteristic is constructed using high quality corporates,
mortgages and government securities, as well as listed options. Fixed income and
cash instruments typically account for approximately 97% of the portfolio value
with the remaining 3% invested in selected option positions.
Synthetic corporate positions are selected based on the application of a
proprietary option valuation process. This process values the embedded option
component of a fixed income security as well as combinations of options and
fixed income securities. Estimates of the return volatility of underlying
securities or sectors are the most important element in this valuation process.
Analytic Investors has produced such volatility forecasts for over 25 years.
Performance
For the year ended December 31, 1998, the Fund's total return was 3.80% (-1.14%
had a sales charge been paid) versus the Lehman Brothers Government/Corporate
Bond Index return of 9.47%. Despite a strong fourth quarter, with the Fund
rising 0.67% versus the LBG/C Index rising 0.13%, the Fund under-performed the
Index for the calendar year 1998.
Portfolio Highlights
The vast majority of the performance difference between the Fund and the Index
occurred in the third quarter of 1998. During this period, the U.S. Equity
markets broke from a long string of 14 consecutive quarterly gains to finish
nearly 10% lower. Corporate bonds, which have a small but inherent equity
exposure, suffered along with this downturn. As stocks fell, investors sought a
flight to quality. Consequently, U.S. Treasury issues soared while credit
spreads widened.
The Fund maintains exposure to the corporate sector as a source of added value.
Despite the large downturn of the third quarter, we believe that over a full
market cycle the Fund should produce returns superior to those of the Lehman
Brothers Government/Corporate Bond Index. Indeed, during the fourth quarter
credit spreads narrowed and reverted closer to historical averages.
8
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ANALYTIC FUNDS
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COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE
ANALYTIC MASTER FIXED INCOME FUND, VERSUS THE LEHMAN
GOVERNMENT/CORPORATE BOND INDEX, AND THE LIPPER
SHORT/INTERMEDIATE INVESTMENT GRADE DEBT FUNDS AVERAGE.
[LINE GRAPH OMITTED]
<TABLE>
<CAPTION>
ANALYTIC MASTER LEHMAN BROTHERS LIPPER SHORT/INTERMEDIATE INVESTMENT
FIXED INCOME FUND GOVERNMENT/CORPORATE BOND INDEX (2) GRADE DEBT FUNDS AVERAGE (3)
<S> <C> <C> <C>
6/30/93 $9,525 $10,000 $10,000
12/93 9,804 10,236 10,203
6/94 9,511 9,792 9,930
12/94 9,703 9,877 9,980
6/95 10,662 11,042 10,776
12/95 11,297 11,777 11,280
6/96 11,382 11,556 11,294
12/96 11,940 12,120 11,739
6/97 12,321 12,452 12,046
12/97 13,139 13,302 12,526
6/98 13,646 13,857 12,908
12/98 13,644 14,561 13,359
</TABLE>
Effective October 26, 1998 and until further notice, Class A shares of the
Analytic Master Fixed Income Fund will be sold without an initial sales charge.
The chart above assumes the deduction of a 4.75% sales charge from the $10,000
initial investment in the Analytic Master Fixed Income Fund made on June 30,
1993. A $10,000 investment in the Fund would have grown to $14,412 without the
deduction of the 4.75% sales charge.
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 Lehman Brothers Government/Corporate Index is an unmanaged index
composed of a combination of Government and Corporate Bond Indices. The
Government Index includes public obligations of the U.S. Treasury, issues of
Government agencies and corporate debt backed by the U.S. Government. The
Corporate Bond Index includes fixed rate nonconvertible corporate debt. Also
included are Yankee Bonds and nonconvertible debt issued or guaranteed by
foreign or international governments or agencies. All issues are investment
grade (BBB) or higher, with maturities of at least one year outstanding, par
value of at least $100 million for U.S. Government issues and $25 million
for others. Any security downgraded during the month is held in the index
until month-end, then removed. All returns are market value weighted
inclusive of accrued income.
3 The Lipper Short/Intermediate Grade Debt Funds Average is an equally
weighted benchmark composed of mutual funds, each of which invests at least
65% of its assets in investment grade debt issues (rated in the top four
grades) with dollar-weighted average maturities of one to five years. The
performance figures are based on changes in net asset value of the funds in
the Index with all capital gains distributions and income dividends
reinvested.
Average Annual Total Return (1)
As of December 31, 1998
One Year 3 Year 5 Year Since
Return Return Return Inception
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Analytic Master Fixed Income Fund (1.14%) 4.75% 5.78% 5.92%
Without payment of a sales charge 3.80% 6.47% 6.82% 6.87%
[PIE CHART OMITTED]
CORPORATE 34%
AGENCY 7%
TREASURY 26%
CASH EQUIVALENT 30%
OPTION POSITIONS 3%
% of Total Portfolio Investments
9
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ANALYTIC FUNDS
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ANALYTIC SHORT-TERM GOVERNMENT FUND
Portfolio Profile
OBJECTIVE: This government bond portfolio seeks to provide a high level of
income consistent with both low fluctuations in market value and low credit
risk.
INVESTS IN: Primarily U.S. Treasury and Agency securities. Subject to certain
additional limitations, a portion of the assets may be invested in other high
grade debt securities, debt securities of foreign governments and supranational
organizations considered to be of high grade investment quality, currency rate
and interest rate-related derivatives, cash and cash equivalents.
STRATEGY: Portfolio volatility is targeted to be similar to that of the Merrill
Lynch 1 to 3 Year U.S. Treasury Index. A diversified portfolio with this
targeted risk characteristic is constructed using U.S. Government and Agency
issues, high quality corporates, mortgages, as well fixed income and currency
futures. Fixed income and cash instruments typically account for 100% of the
portfolio.
The Fund is constructed to closely match its benchmark with respect to duration,
maturity and quality. In addition, Analytic Investors uses a disciplined
quantitative approach to forecast short-term interest rates and shifts in the
U.S. treasury yield curve as a source of added value.
Performance
For the year ended December 31, 1998, the Fund's total return was 7.10% (5.51%
had a sales charge been paid) versus the Merrill Lynch 1 to 3 Year U.S. Treasury
Index return of 7.00%. Performance was strong for the year except for the fourth
quarter, when the Fund posted a total return of 0.19% versus 0.76% for that of
the Merrill Lynch 1-3 Index.
Portfolio Highlights
The out-performance by the Fund was attributable to successful implementation
Portfolio changes based on Analytic Investor's forecasting of shifts in the
yield curve as well as movements in short-term interest rates.
During September and October, Federal Reserve Chairman Alan Greenspan cut
short-term interest rates three times as part of ongoing measures to keep the
growth of the U.S. economy in balance. He did so during the two scheduled
monthly meetings over this period and once at an unscheduled date in between.
This unscheduled action, though not unprecedented, has not been seen for many
years and shows the aggressiveness of the Federal Reserve in regulating the
growth of the U.S. economy.
During this period, the Fund was properly positioned to capitalize on these rate
cuts, enhancing its performance.
10
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ANALYTIC FUNDS
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COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE ANALYTIC
SHORT-TERM GOVERNMENT FUND, VERSUS THE MERRILL 1-3 YEAR TREASURY INDEX, AND
THE LIPPER SHORT INVESTMENT GRADE DEBT FUNDS AVERAGE.
[LINE GRAPH OMITTED]
MERRILL LYNCH LIPPER SHORT
ANALYTIC SHORT-TERM 1 TO 3 YEAR U.S. INVESTMENT
GOVERNMENT FUND TREASURY INDEX (2) GRADE DEBT AVERAGE (3)
6/30/93 $9,850 $10,000 $10,000
12/93 10,042 10,180 10,192
6/94 9,934 10,137 10,098
12/94 10,042 10,238 10,181
6/95 10,689 10,921 10,802
12/95 11,112 11,362 11,241
6/96 11,223 11,514 11,356
12/96 11,699 11,927 11,761
6/97 11,956 12,271 12,089
12/97 12,347 12,721 12,500
6/98 12,709 13,105 12,856
12/98 13,224 13,611 13,223
Effective October 26, 1998 and until further notice, Class A shares of the
Analytic Short-Term Government Fund will be sold without an initial sales
charge. The chart above assumes the deduction of a 1.50% sales charge from the
$10,000 initial investment in the Analytic Short-Term Government Fund made on
June 30, 1993. A $10,000 investment in the Fund would have grown to $13,449
without the deduction of the 1.50% sales charge.
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 Merrill Lynch 1 to 3 Year Treasury Index includes only U.S. Treasury
Notes and Bonds with maturities greater than one year and less than three
years.
3 The Lipper Short Investment Grade Debt Funds Average is an equally weighted
benchmark composed of mutual funds, each of which invests at least 65% of
its assets in investment grade debt issues (rated in the top four grades)
with dollar-weighted average maturities of less than three years. The
performance figures are based on changes in net asset value of the funds in
the Index with all capital gains distributions and income dividends
reinvested.
Average Annual Total Return (1)
As of December 31, 1998
One Year 3 Year 5 Year Since
Return Return Return Inception
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Analytic Short-Term
Government Fund 5.51% 5.46% 5.34% 5.24%
Without payment of a sales charge 7.10% 5.98% 5.66% 5.53%
Sector Weightings at December 31, 1998
[PIE CHART OMITTED]
1-3 YR. TREASURY 35%
AGENCY 49%
CORPORATE 10%
CASH EQUIVALENT 6%
% of Total Portfolio Investments
11
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ANALYTIC FUNDS
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF PBHG ADVISORS FUNDS, INC.:
In our opinion, the accompanying statements of net assets of the PBHG Advisor
Funds, Inc. consisting of the Analytic Defensive Equity, Analytic Enhanced
Equity, Analytic Master Fixed Income, and Analytic Short-Term Government Funds
(the "Funds") 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 Funds at December 31, 1998, and the results of
their operations, the changes in their net assets and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
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 audits 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. The financial statements of the Funds for the fiscal periods presented
prior to the year ended December 31, 1998 were audited by other independent
accountants whose report date February 6, 1998 expressed an unqualified opinion
on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 5, 1999
12
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ANALYTIC FUNDS
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STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC DEFENSIVE EQUITY FUND
Market
Description Shares Value
- --------------------------------------------------------------------------------
COMMON STOCK -- 99.2%
AIRLINES -- 1.5%
AMR* 1,419 $ 84,253
US Airways Group* 13,866 721,032
----------
805,285
- --------------------------------------------------------------------------------
APPAREL -- 0.9%
Springs Industries, Cl A 12,065 499,943
----------
499,943
- --------------------------------------------------------------------------------
BANKS -- 2.0%
Wells Fargo 28,536 1,139,657
----------
1,139,657
- --------------------------------------------------------------------------------
CHEMICAL -- 1.6%
Dow Chemical 9,896 899,918
----------
899,918
- --------------------------------------------------------------------------------
CLOTHING -- 1.8%
Gap 1,588 89,325
Limited 30,729 894,982
----------
984,307
- --------------------------------------------------------------------------------
COMPUTER HARDWARE -- 8.4%
Cisco Systems* 13,539 1,256,588
Dell Computer* 15,987 1,170,049
EMC* 12,807 1,088,595
IBM 6,450 1,191,638
----------
4,706,870
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 3.5%
Microsoft* 13,474 1,868,675
Peoplesoft* 4,588 86,885
----------
1,955,560
- --------------------------------------------------------------------------------
DEFENSE -- AEROSPACE - 3.3%
Boeing 29,751 970,626
Raytheon, Cl B 16,075 855,994
----------
1,826,620
- --------------------------------------------------------------------------------
DRUGS -- 8.3%
American Home Products 20,179 1,136,330
Bristol-Myers Squibb 3,316 443,722
Pfizer 9,422 1,181,872
Schering Plough 19,350 1,069,088
Warner Lambert 11,034 829,619
----------
4,660,631
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 2.2%
Lucent Technologies 11,064 1,217,040
----------
1,217,040
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 3.7%
Central & South West 1,414 38,796
Duke Energy 5,546 355,290
Edison International 29,541 823,454
PG&E 26,928 848,231
----------
2,065,771
- --------------------------------------------------------------------------------
Market
Description Shares Value
- --------------------------------------------------------------------------------
ENERGY RESOURCES -- 4.7%
Chevron 5,877 $ 487,424
Exxon 14,839 1,085,102
Phillips Petroleum 6,335 270,029
Texaco 15,101 798,465
----------
2,641,020
- --------------------------------------------------------------------------------
ENTERTAINMENT -- 1.9%
Viacom, Cl B* 14,275 1,056,350
----------
1,056,350
- --------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES -- 1.3%
McDermott International 30,474 752,327
----------
752,327
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 8.1%
American Express 10,634 1,087,327
Capital One Financial 7,621 876,415
Dun & Bradstreet 13,492 425,841
Fannie Mae 4,020 297,480
General Electric 18,161 1,853,557
----------
4,540,620
- --------------------------------------------------------------------------------
FOOD/BEVERAGE -- 4.9%
Bestfoods 15,903 846,835
Campbell Soup 16,235 892,925
Coca-Cola 15,354 1,026,799
----------
2,766,559
- --------------------------------------------------------------------------------
HEAVY ELECTRICAL -- 0.4%
Emerson Electric 3,813 230,687
----------
230,687
- --------------------------------------------------------------------------------
HEAVY MECHANICAL -- 1.4%
Nacco Industries, Cl A 8,593 790,556
----------
790,556
- --------------------------------------------------------------------------------
HOME PRODUCTS -- 4.3%
Colgate Palmolive 8,723 810,149
Procter & Gamble 4,600 420,038
Unilever NV - NY Shares 13,916 1,154,158
----------
2,384,345
- --------------------------------------------------------------------------------
INFORMATION SERVICES -- 0.6%
Electronic Data Systems 7,051 354,313
----------
354,313
- --------------------------------------------------------------------------------
LEISURE -- 1.0%
Eastman Kodak 7,961 573,192
----------
573,192
- --------------------------------------------------------------------------------
LIFE INSURANCE -- 3.1%
American General 1,999 155,922
Providian Financial 10,042 753,150
Sunamerica 1,266 102,704
Transamerica 6,518 752,829
----------
1,764,605
- --------------------------------------------------------------------------------
13
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC DEFENSIVE EQUITY FUND
Market
Description Shares Value
- --------------------------------------------------------------------------------
MEDIA -- 0.6%
MediaOne Group* 6,658 $ 312,926
----------
312,926
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS -- 4.9%
Becton Dickinson 19,300 823,869
Johnson & Johnson 9,259 776,599
Tyco International 15,331 1,156,532
----------
2,757,000
- --------------------------------------------------------------------------------
METAL CANS -- 0.9%
Crown Cork & Seal 17,254 531,639
----------
531,639
- --------------------------------------------------------------------------------
MOTOR VEHICLES -- 4.5%
Ford Motor 18,792 1,102,856
General Motors 15,091 1,079,950
Navistar International* 10,606 302,271
----------
2,485,077
- --------------------------------------------------------------------------------
OIL REFINING -- 0.3%
Coastal 5,465 190,933
----------
190,933
- --------------------------------------------------------------------------------
OIL SERVICES -- 2.4%
Royal Dutch Petroleum NYS ADR 6,681 319,853
Schlumberger 22,344 1,030,617
----------
1,350,470
- --------------------------------------------------------------------------------
PROPERTY INSURANCE -- 5.4%
Allstate 2,954 114,098
American International Group 11,240 1,086,065
Berkshire Hathaway, Cl B* 405 952,208
Hartford Financial Services 15,903 872,677
----------
3,025,048
- --------------------------------------------------------------------------------
RESTAURANT -- 2.1%
McDonald's 15,134 1,159,643
----------
1,159,643
- --------------------------------------------------------------------------------
SEMICONDUCTORS -- 0.1%
Intel 289 34,265
----------
34,265
- --------------------------------------------------------------------------------
TELEPHONE -- 8.8%
Ameritech 18,404 1,166,354
AT&T 1,676 126,119
Bell Atlantic 18,647 988,291
Bell South 9,012 449,474
GTE 16,345 1,062,425
SBC Communications 21,135 1,133,364
----------
4,926,027
- --------------------------------------------------------------------------------
TOBACCO -- 0.3%
Philip Morris 3,092 165,423
----------
165,423
----------
TOTAL COMMON STOCK (COST $47,590,665) 55,554,627
- --------------------------------------------------------------------------------
Contracts/Face Market
Description Amount Value
- --------------------------------------------------------------------------------
INDEX OPTIONS-- (1.8%)
Gold & Silver Jan 70 Call (50) $ (7,188)
Oil Index Jan 435 Call (25) (10,000)
Pharmaceutical Index Apr 740 Call (30) (228,375)
S&P 500 Feb 1275 Call (100) (197,500)
S&P 500 Jan 1190 Call (50) (244,375)
S&P 500 Mar 1300 Call (125) (312,500)
S&P Chemical Jan 440 Call (25) (4,219)
----------
TOTAL INDEX OPTIONS (PREMIUMS RECEIVED ($769,509)) (1,004,157)
----------
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.3%
Morgan Stanley
4.50%, Dated 12/31/98, Matures
01/04/99 repurchase price $1,293,715
(Collateralized by U.S. Treasury Note:
Total Market Value $1,324,370)(A)$1,293,077 1,293,077
TOTAL REPURCHASE AGREEMENT (COST $1,293,077) 1,293,077
----------
TOTAL INVESTMENTS-- 99.7% (COST $48,114,233) 55,843,547
----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.3%
Other Assets and Liabilities, Net 177,502
----------
- --------------------------------------------------------------------------------
NET ASSETS
Paid-in-Capital (Authorized 100 Million Shares $0.001
par value) Based on 4,760,831 Outstanding Shares
of Common Stock 49,402,494
Accumulated Net Investment Loss (22,138)
Accumulated Net Realized Loss on Investments,
Options and Futures (1,088,621)
Net Unrealized Appreciation on Investments,
Options and Futures 7,729,314
----------
TOTAL NET ASSETS-- 100.0% $56,021,049
-----------
-----------
NET ASSETS VALUE, AND REDEMPTION
PRICE PER SHARE $11.77
-----------
-----------
OFFERING PRICE PER SHARE $12.49
-----------
-----------
* Non-Income Producing Security
(A) -- Tri-Party Repurchase Agreement
ADR -- American Depository Receipt
Cl -- Class
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC ENHANCED EQUITY FUND
Market
Description Shares Value
- --------------------------------------------------------------------------------
COMMON STOCK -- 93.8%
AIRLINES -- 0.9%
AMR* 985 $ 58,484
US Airways Group* 5,036 261,872
-----------
320,356
- --------------------------------------------------------------------------------
APPAREL -- 0.4%
Springs Industries 3,347 138,691
-----------
138,691
- --------------------------------------------------------------------------------
BANKS -- 1.9%
Wells Fargo 16,341 652,619
-----------
652,619
- --------------------------------------------------------------------------------
CHEMICAL -- 1.6%
Avery Dennison 715 32,220
Dow Chemical 5,667 515,343
-----------
547,563
- --------------------------------------------------------------------------------
CLOTHING -- 2.3%
Gap 4,696 264,150
Limited 17,597 512,513
-----------
776,663
- --------------------------------------------------------------------------------
COMPUTER HARDWARE -- 7.5%
Cisco Systems* 7,753 719,575
Dell Computer* 9,192 672,740
EMC* 7,333 623,305
IBM 2,812 519,517
-----------
2,535,137
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 3.2%
Microsoft* 7,715 1,069,974
-----------
1,069,974
- --------------------------------------------------------------------------------
DEFENSE/AEROSPACE -- 3.0%
Boeing 17,036 555,800
Raytheon, Cl B 8,804 468,813
-----------
1,024,613
- --------------------------------------------------------------------------------
DRUGS -- 6.4%
American Home Products 11,555 650,691
Pfizer 4,564 572,497
Schering Plough 11,080 612,170
Warner Lambert 4,461 335,411
-----------
2,170,769
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 3.7%
Central & South West 496 13,609
Duke Energy 1,946 124,666
Edison International 10,661 297,175
FPL Group 5,323 328,030
PG&E 15,384 484,596
-----------
1,248,076
- --------------------------------------------------------------------------------
Market
Description Shares Value
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 2.8%
Honeywell 4,273 $ 321,810
Lucent Technologies 5,575 613,250
-----------
935,060
- --------------------------------------------------------------------------------
ENERGY RESOURCES -- 3.9%
Chevron 2,972 246,490
Exxon 8,485 620,466
Phillips Petroleum 3,977 169,520
Texaco 5,450 288,169
-----------
1,324,645
- --------------------------------------------------------------------------------
ENTERTAINMENT -- 1.8%
Viacom, Cl B* 8,174 604,876
-----------
604,876
- --------------------------------------------------------------------------------
ENVIRONMENTAL SERVICES -- 1.4%
McDermott International 19,012 469,359
-----------
469,359
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 7.6%
American Express 6,089 622,600
Capital One Financial 2,869 329,935
Dun & Bradstreet 2,804 88,501
Fannie Mae 6,395 473,230
General Electric 10,400 1,061,450
-----------
2,575,716
- --------------------------------------------------------------------------------
FOOD/BEVERAGE -- 4.2%
Bestfoods 5,861 312,098
Campbell Soup 9,297 511,335
Coca-Cola 8,792 587,965
-----------
1,411,398
- --------------------------------------------------------------------------------
FOREST -- 0.5%
Georgia-Pacific Group 2,901 169,890
-----------
169,890
- --------------------------------------------------------------------------------
HEAVY ELECTRICAL -- 0.4%
Emerson Electric 2,036 123,178
-----------
123,178
- --------------------------------------------------------------------------------
HEAVY MACHINERY -- 1.4%
Caterpillar 607 27,922
Nacco Industries, Cl A 4,715 433,780
-----------
461,702
- --------------------------------------------------------------------------------
HOME PRODUCTS -- 4.2%
Colgate Palmolive 3,258 302,587
Procter & Gamble 5,458 498,384
Unilever NV - NY Shares 7,635 633,228
-----------
1,434,199
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES -- 0.1%
Ryder Systems 1,222 31,772
-----------
31,772
- --------------------------------------------------------------------------------
15
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC ENHANCED EQUITY FUND
Market
Description Shares Value
- --------------------------------------------------------------------------------
INFORMATION SERVICES -- 0.2%
Automatic Data Processing 213 $ 17,080
Electronic Data Systems 757 38,039
-----------
55,119
- --------------------------------------------------------------------------------
LEISURE -- 1.4%
Eastman Kodak 6,598 475,056
-----------
475,056
- --------------------------------------------------------------------------------
LIFE INSURANCE -- 4.1%
American General 7,088 552,864
Providian Financial 5,646 423,450
Sunamerica 1,973 160,060
Transamerica 2,287 264,149
-----------
1,400,523
- --------------------------------------------------------------------------------
MEDIA -- 0.3%
MediaOne Group* 2,336 109,792
-----------
109,792
- --------------------------------------------------------------------------------
MEDICAL PRODUCTS -- 6.1%
Becton Dickinson 11,048 471,611
Johnson & Johnson 7,421 622,435
Medtronic 3,949 293,212
Tyco International 8,779 662,266
-----------
2,049,524
- --------------------------------------------------------------------------------
METAL CANS -- 0.4%
Crown Cork & Seal 4,719 145,404
-----------
145,404
- --------------------------------------------------------------------------------
MOTOR VEHICLES -- 5.1%
Ford Motor 10,761 631,536
General Motors 8,641 618,372
Navistar International* 17,275 492,337
-----------
1,742,245
- --------------------------------------------------------------------------------
OIL REFINERIES -- 0.6%
Coastal 5,820 203,336
-----------
203,336
- --------------------------------------------------------------------------------
OIL SERVICES -- 2.7%
Royal Dutch Petroleum NYS ADR 9,796 468,984
Schlumberger 10,018 462,080
-----------
931,064
- --------------------------------------------------------------------------------
PROPERTY INSURANCE -- 3.6%
Allstate 1,583 61,143
American International 4,743 458,292
Berkshire Hathaway, Cl B* 153 359,762
Hartford Financial Services 6,072 333,201
-----------
1,212,398
- --------------------------------------------------------------------------------
RAILROAD -- 0.2%
Burlington Northern Santa Fe 2,469 83,329
-----------
83,329
- --------------------------------------------------------------------------------
Shares/Face Market
Description Amount Value
- --------------------------------------------------------------------------------
RESTAURANTS -- 1.3%
McDonald's 5,530 $ 423,736
-----------
423,736
- --------------------------------------------------------------------------------
TELEPHONE -- 8.4%
American Telephone & Telegraph 390 29,348
Ameritech 6,806 431,330
Bell Atlantic 8,687 460,411
Bell South 13,662 681,392
GTE 9,360 608,400
SBC Communications 12,103 649,023
-----------
2,859,904
- --------------------------------------------------------------------------------
TOBACCO -- 0.2%
Philip Morris 1,085 58,049
-----------
58,049
----------
TOTAL COMMON STOCK (COST $28,231,619) 31,775,735
-----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS -- 0.4%
U.S. Treasury-Bill
4.240%, 04/01/99 (B) (C) $150,000 148,419
-----------
TOTAL U.S. TREASURY BILLS (COST $148,470) 148,419
-----------
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.6%
Morgan Stanley
4.50%, Dated 12/31/98, Matures
01/04/99, repurchase price $1,903,480
(Collateralized By U.S. Treasury Note:
Total Market Value $1,948,584)(A)1,902,542 1,902,542
-----------
TOTAL REPURCHASE AGREEMENT (COST $1,902,542) 1,902,542
-----------
TOTAL INVESTMENT-- 99.8% (COST $30,282,631) $33,826,696
-----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.2%
Other Assets And Liabilities, Net 61,822
-----------
- --------------------------------------------------------------------------------
NET ASSETS
Paid-in-Capital (Authorized 100 million shares
$0.001 par value) Based on 3,107,966 outstanding
shares of common stock 30,586,783
Accumulated Net Investment Loss (12,004)
Accumulated Net Realized Loss on Investments,
Options and Futures (404,451)
Net Unrealized Appreciation on Investments, Options
and Futures 3,718,190
-----------
TOTAL NET ASSETS -- 100.0% $33,888,518
-----------
-----------
NET ASSET VALUE, AND REDEMPTION
PRICE PER SHARE $10.90
-----------
-----------
OFFERING PRICE PER SHARE $11.56
-----------
-----------
* Non-Income Producing Security
(A) -- Tri-Party Repurchase Agreement
(B) -- The rate reflected on the Statement of Net Assets represents the
security's discount rate at purchase.
(C) -- Security has been pledged as collateral for open futures positions.
ADR -- American Depository Receipt
Cl -- Class
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC MASTER FIXED INCOME FUND
Contracts/Face Market
Description Amount Value
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 19.6%
American Home Products
7.90%, 02/15/05 200,000 223,250
Bankers Trust
7.50%, 01/15/02 175,000 180,469
First Chicago Nbd
6.125%, 2/15/06 250,000 256,875
Gillette Company
5.75%, 10/15/05 300,000 308,625
-----------
TOTAL CORPORATE BONDS (COST $930,914) 969,219
-----------
- --------------------------------------------------------------------------------
OPTIONS -- (0.6%)
EQUITY OPTIONS
AES Corp February 45 Puts (8) (1,700)
Alcoa January 70 Puts (6) (450)
Anglogold January 17.5 Puts (16) (800)
Bank One January 50 Puts (8) (500)
Becton Dickinson January 40 Puts (9) (675)
Boeing January 32.5 Puts (12) (900)
Cablevision Systems January 45 Puts (9) (450)
Colgate Palmolive January 90 Puts (5) (625)
Columbia HCA Healthcare January 22.5 Puts (21) (263)
Deere & Co February 30 Puts (17) (1,594)
Delta Airlines January 50 Puts (11) (963)
Elf Aquitaine January 55 Puts (8) (850)
Exel Limited, Cl A January 70 Puts (5) (344)
Federated Department Stores February
42.5 Puts (10) (1,938)
First American Financial January 30 Puts (15) (750)
Fleet Financial Group January 42.5 Puts (16) (1,100)
Gateway 2000 January 50 Puts (5) (1,000)
Groupe Danone January 55 Puts (16) (1,700)
ICN Pharmaceuticals January 20 Puts (12) (675)
IXC Communications January 30 Puts (9) (450)
Jones Apparel January 20 Puts (25) (937)
JP Morgan January 100 Puts (6) (1,012)
Mallinckrodt February 30 Puts (17) (1,806)
Mattel January 22.5 Puts (16) (1,200)
Merrill Lynch January 65 Puts (7) (1,312)
Minnesota Mining & Manufacturing
January 70 Puts (7) (1,006)
Motorola January 60 Puts (5) (500)
Panamsat January 35 Puts (8) (550)
Philippine Long Distance January 25 Puts (12) (900)
Platinum Technology January 17.5 Puts (16) (1,200)
Robert Half International January 40 Puts (7) (263)
Rockwell International January 45 Puts (12) (525)
Storage Technology January 30 Puts (14) (613)
Tandy January 40 Puts (12) (1,500)
Telefonos De Mexico January 45 Puts (6) (188)
Transocean Offshore January 22.5 Puts (27) (506)
Warner Lambert January 70 Puts (8) (600)
-----------
TOTAL EQUITY OPTIONS (PREMIUMS RECEIVED ($46,286)) (32,345)
----------
- --------------------------------------------------------------------------------
INDEX OPTIONS -- (0.0%)
S&P 500 Index January 1140 Puts 2 550
S&P Midcap 400 Index January 340 Puts 19 238
-----------
TOTAL INDEX OPTIONS (COST $6,282) 788
-----------
Face Market
Description Amount Value
- --------------------------------------------------------------------------------
U.S. AGENCY BACKED BONDS -- 10.3%
Federal National Mortgage Association
6.64%, 07/02/07 $ 470,000 $ 512,173
-----------
TOTAL U.S. AGENCY BACKED BONDS (COST $512,765) 512,173
-----------
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 68.8%
U.S. Treasury Bills (A)
4.350%, 04/15/99 (B) 30,000 29,652
4.260%, 09/16/99 1,650,000 1,599,147
U.S. Treasury Bond
7.25%, 05/15/16 575,000 696,400
U.S. Treasury Notes
7.50%, 02/15/05 400,000 457,952
6.50%, 05/15/05 100,000 109,556
5.625%, 02/15/06 300,000 317,337
6.875%, 05/15/06 175,000 198,216
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $3,349,341) 3,408,260
-----------
TOTAL INVESTMENTS-- 98.1% (COST $4,753,016) 4,858,095
-----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.9%
Other Assets and Liabilities, Net 96,122
-----------
- --------------------------------------------------------------------------------
NET ASSETS
Paid-in-Capital (Authorized 100 Million Shares
$0.001 Par Value) Based on 504,834
outstanding shares of common stock 5,092,294
Undistributed Net Investment Income 1,104
Accumulated Net Realized Loss on Investments,
Options and Futures (255,496)
Net Unrealized Appreciation on Investments, Options
and Futures 116,315
-----------
TOTAL NET ASSETS-- 100.0% $4,954,217
-----------
-----------
NET ASSET VALUE, AND REDEMPTION
PRICE PER SHARE $9.81
-----------
-----------
OFFERING PRICE PER SHARE $10.30
-----------
-----------
(A) -- The rate reflected on the Statement of Net Assets represents the
security's discount rate at purchase.
(B) -- Security has been pledged as collateral for open futures positions.
Cl -- Class
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
As of December 31, 1998
ANALYTIC SHORT-TERM GOVERNMENT FUND
Face Market
Description Amount Value
- --------------------------------------------------------------------------------
CORPORATE NOTES -- 3.8%
Nippon Telephone & Telegraph
6.00%, 06/30/00 $200,000 $ 201,000
-----------
TOTAL CORPORATE NOTES (COST $200,060) 201,000
-----------
- --------------------------------------------------------------------------------
FOREIGN BONDS -- 5.6%
Shell Canada Limited
8.875%, 01/14/01 275,000 295,507
-----------
TOTAL FOREIGN BONDS (COST $296,574) 295,507
-----------
- --------------------------------------------------------------------------------
U.S. AGENCY OBLIGATIONS -- 41.4%
Federal Home Loan Mortgage
7.05%, 11/07/06 250,000 262,318
Federal National Mortgage Association
Medium Term Notes
6.67%, 08/01/01 600,000 625,518
6.65%, 03/08/06 300,000 308,568
7.32%, 05/03/06 300,000 314,631
6.87%, 07/17/07 300,000 306,321
6.83%, 10/10/07 350,000 358,078
-----------
TOTAL U.S. AGENCY OBLIGATIONS (COST $2,159,836) 2,175,434
-----------
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 48.0%
U.S. Treasury Bill (B)
4.350%, 04/15/99 (C) 20,000 19,768
U.S. Treasury Notes
6.000%, 08/15/00 350,000 357,353
5.625%, 11/30/00 900,000 916,092
5.500%, 12/31/00 275,000 279,598
5.375%, 02/15/01 400,000 406,156
6.375%, 03/31/01 525,000 544,315
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $2,507,663) 2,523,282
-----------
- --------------------------------------------------------------------------------
Face Market
Description Amount Value
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.2%
Morgan Stanley
4.50%, Dated 12/31/98, Matures 01/04/99,
repurchase price $8,831 (collateralized by
U.S. Treasury Note: total market
value $9,041)(A) $8,827 $ 8,827
-----------
TOTAL REPURCHASE AGREEMENT (COST $8,827) 8,827
-----------
TOTAL INVESTMENTS-- 99.0% (COST $5,172,960) 5,204,050
-----------
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.0%
Other Assets and Liabilities, Net 55,181
-----------
- --------------------------------------------------------------------------------
NET ASSETS
Paid-in-Capital (Authorized 100 Million Shares
$0.001 Par Value) Based on 520,727
Outstanding Shares of Common Stock 6,020,411
Overdistributed Net Investment Income (3,112)
Accumulated Net Realized Loss on Investments
and Futures (793,073)
Net Unrealized Appreciation on Investments
and Futures 35,005
-----------
TOTAL NET ASSETS-- 100.0% $5,259,231
-----------
-----------
NET ASSET VALUE, AND REDEMPTION
PRICE PER SHARE $10.10
-----------
-----------
OFFERING PRICE PER SHARE $10.25
-----------
-----------
(A) -- Tri-Party Repurchase Agreement
(B) -- The rate reflected on the Statement of Net Assets represents the
security's discount rate at purchase.
(C) -- Security has been pledged as collateral for open futures positions.
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
---------------- ---------------- ------------- ----------------
ANALYTIC ANALYTIC
ANALYTIC ANALYTIC MASTER SHORT TERM
DEFENSIVE EQUITY ENHANCED EQUITY FIXED INCOME GOVERNMENT
FUND FUND FUND FUND
---------------- ---------------- ------------ ----------------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividends $ 834,797 $ 278,410 $ -- $ --
Interest 72,942 86,678 302,997 222,290
---------- ---------- -------- --------
Total Investment Income 907,739 365,088 302,997 222,290
---------- ---------- -------- --------
EXPENSES:
Investment Advisory Fees 358,704 107,747 22,260 10,668
Administrative Fees 60,225 46,266 32,834 31,885
Custodian Fees 47,551 10,859 15,125 3,755
Professional Fees 71,290 52,341 17,809 14,210
Transfer Agent Fees 68,308 26,412 11,705 11,383
Printing Fees 84,851 62,300 20,743 19,217
Directors' Fees 30,558 21,388 8,282 3,279
Registration and Filing Fees 32,816 31,620 16,682 22,115
Distribution Fees 43,998 28,095 5,784 4,178
Insurance and Other Expenses 19,358 15,032 11,367 11,498
---------- ---------- -------- --------
Total Expenses 817,659 402,060 162,591 132,188
---------- ---------- -------- --------
Waiver of Investment Advisory Fees (112,512) (107,747) (22,260) (10,668)
Reimbursement of Other Expenses by Advisor -- (68,331) (87,496) (91,752)
---------- ---------- -------- --------
NET EXPENSES 705,147 225,982 52,835 29,768
---------- ---------- -------- --------
NET INVESTMENT INCOME (LOSS) 202,592 139,106 250,162 192,522
---------- ---------- -------- --------
Net Realized Gain (Losses) on:
Investments 15,212,614 1,081,419 (4,998) 852
Written Options (1,990,827) (3,936) (198,758) --
Futures (261,951) 82,683 26,340 3,848
---------- ---------- -------- --------
Total Net Realized Gain 12,959,836 1,160,166 (177,416) 4,700
---------- ---------- -------- --------
Change in Unrealized Appreciation/Depreciation:
Investments (886,538) 3,053,993 74,026 36,465
Written Options (86,084) 5,766 14,443 --
Futures 17,425 160,199 11,236 3,915
---------- ---------- -------- --------
Net Change in Unrealized Appreciation on Investments (955,197) 3,219,958 99,705 40,380
---------- ---------- -------- --------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 12,004,639 4,380,124 (77,711) 45,080
---------- ---------- -------- --------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,207,231 $4,519,230 $172,451 $237,602
---------- ---------- -------- --------
---------- ---------- -------- --------
<FN>
Amounts designated as "--" are either $0 or have been rounded to $0.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
------------------------ --------------------------
ANALYTIC ANALYTIC
DEFENSIVE EQUITY ENHANCED EQUITY
FUND FUND
------------------------ -------------------------
1/1/98 1/1/97 1/1/98 1/1/97
to to to to
12/31/98 12/31/97 12/31/98 12/31/97
-------- --------- -------- --------
INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C>
Net Investment Income $ 202,592 $ 393,089 $ 139,106 $ 59,053
Net Realized Gain (Loss) from Security Transactions 12,959,836 11,003,126 1,160,166 843,101
Net Change in Unrealized Appreciation (Depreciation) on Investments (955,197) (2,307,869) 3,219,958 267,769
---------- ---------- ---------- ---------
Net Increase (Decrease) in Net Assets Resulting from Operations 12,207,231 9,088,346 4,519,230 1,169,923
---------- ---------- ---------- ---------
Distributions to Shareholders From:
Net Investment Income (202,592) (393,089) (139,106) (59,053)
In Excess of Net Investment Income (16,547) (5,591) (11,348) (4,391)
Net Realized Gains from Security Transactions (14,197,773) (10,854,215) (1,552,303) (843,101)
In Excess of net Realized Gains -- -- -- (10,895)
---------- ---------- ---------- ---------
Total Distributions (14,416,912) (11,252,895) (1,702,757) (917,440)
---------- ---------- ---------- ---------
Capital Share Transactions:
Shares Issued 23,440,046 6,552,231 37,872,222 5,881,889
Shares Issued upon Reinvestment of Distributions 14,214,749 10,959,522 1,625,000 892,423
Shares Redeemed (25,709,722) (21,545,351) (15,756,019) (3,214,594)
---------- ---------- ---------- ---------
Increase (Decrease) in Net Assets Derived from Capital
Share Transactions 11,945,073 (4,033,598) 23,741,203 3,559,718
---------- ---------- ---------- ---------
Total Increase (Decrease) in Net Assets 9,735,392 (6,198,147) 26,557,676 3,812,201
---------- ---------- ---------- ---------
NET ASSETS:
Beginning of Period 46,285,657 52,483,804 7,330,842 3,518,641
---------- ---------- ---------- ---------
End of Period $56,021,049 $46,285,657 $33,888,518 $7,330,842
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
SHARES ISSUED AND REDEEMED(1):
Shares Issued 1,712,065 443,330 3,775,473 668,511
Shares Issued upon Reinvestment of Distributions 1,359,489 880,736 161,494 105,607
Shares Redeemed (2,040,891) (1,421,408) (1,698,955) (378,176)
---------- ---------- ---------- ---------
Net Increase in Shares Outstanding 1,030,663 (97,341) 2,238,012 395,941
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
----------------------- ----------------------
ANALYTIC ANALYTIC
MASTER FIXED INCOME SHORT-TERM GOVERNMENT
FUND FUND
----------------------- ----------------------
1/1/98 1/1/97 1/1/98 1/1/97
to to to to
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
INVESTMENT ACTIVITIES:
<S> <C> <C> <C> <C>
Net Investment Income $ 250,162 $1,313,223 $ 192,522 $ 51,472
Net Realized Gain (Loss) from Security Transactions (177,416) 936,018 4,700 (3,860)
Net Change in Unrealized Appreciation (Depreciation) on Investments 99,705 (65,767) 40,380 2,655
---------- ---------- ---------- ---------
Net Increase (Decrease) in Net Assets Resulting from Operations 172,451 2,183,474 237,602 50,267
---------- ---------- ---------- ---------
Distributions to Shareholders From:
Net Investment Income (250,162) (1,311,868) (192,522) (51,472)
In Excess of Net Investment Income (302) -- (3,485) (184)
Net Realized Gains from Security Transactions (30,480) (936,018) -- --
In Excess of net Realized Gains -- (46,569) -- --
---------- ---------- ---------- ---------
Total Distributions (280,944) (2,294,455) (196,007) (51,656)
---------- ---------- ---------- ---------
Capital Share Transactions:
Shares Issued 2,574,096 7,587,121 2,550,601 3,777,511
Shares Issued upon Reinvestment of Distributions 245,226 1,166,897 174,351 50,743
Shares Redeemed (3,468,172) (31,857,016) (484,860) (1,856,900)
---------- ---------- ---------- ---------
Increase (Decrease) in Net Assets Derived from Capital
Share Transactions (648,850) (23,102,998) 2,240,092 1,971,354
---------- ---------- ---------- ---------
Total Increase (Decrease) in Net Assets (757,343) (23,213,979) 2,281,687 1,969,965
---------- ---------- ---------- ---------
NET ASSETS:
Beginning of Period 5,711,560 28,925,539 2,977,544 1,007,579
---------- ---------- ---------- ---------
End of Period $4,954,217 $5,711,560 $5,259,231 $2,977,544
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
SHARES ISSUED AND REDEEMED(1):
Shares Issued 257,174 642,486 253,112 378,996
Shares Issued upon Reinvestment of Distributions 24,619 114,359 17,334 5,213
Shares Redeemed (347,983) (2,675,138) (48,498) (186,250)
---------- ---------- ---------- ---------
Net Increase in Shares Outstanding (66,190) (1,918,293) 221,948 197,960
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
<FN>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) 1997 shares issued and redeemed have been restated to reflect the
conversion exchange ratios on the dates of the reorganizations.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
20 & 21
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
Ended December 31
<TABLE>
<CAPTION>
Net Distributions Distributions
Asset Net Realized and Distributions in excess Distributions in excess
Value Investment Unrealized from Net of net from of net
Beginning Income Gains or (Losses) Investment Investment Capital Capital
of Period (Loss) on Securities Income Income Gains Gains
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------
ANALYTIC DEFENSIVE EQUITY FUND
- ------------------------------
<S> <C> <C> <C> <C> <C>
1998 (2) $12.41 $0.05 $3.05 $(0.05) -- $(3.69) --
1997 13.71 0.12 2.49 (0.12) -- (3.79) --
1996 12.64 0.19 1.78 (0.19) -- (0.71) --
1995 10.60 0.23 2.04 (0.23) -- -- --
1994 11.40 0.30 (0.02) (0.30) -- (0.78) --
- -----------------------------
ANALYTIC ENHANCED EQUITY FUND
- -----------------------------
1998 (1) $8.43 $0.06 $3.07 $(0.06) $(0.01) $(0.59) --
1997 7.43 0.09 2.12 (0.09) (0.01) (1.10) $(0.01)
1996 7.95 0.13 1.69 (0.13) -- (2.20) (0.01)
1995 6.04 0.14 1.98 (0.14) -- (0.07) --
1994 6.23 0.17 (0.19) (0.17) -- -- --
- ---------------------------------
ANALYTIC MASTER FIXED INCOME FUND
- ---------------------------------
1998 (1) $10.00 $0.54 $(0.14) $(0.54) -- $(0.05) --
1997 11.62 0.67 0.46 (0.67) -- (1.98) $(0.10)
1996 11.78 0.66 (0.01) (0.66) -- (0.14) (0.01)
1995 10.75 0.69 1.03 (0.69) -- -- --
1994 11.61 0.72 (0.85) (0.72) -- (0.01) --
- -----------------------------------
ANALYTIC SHORT-TERM GOVERNMENT FUND
- -----------------------------------
1998 (1) $9.97 $0.59 $0.14 $(0.59) $(0.01) -- --
1997 9.99 0.56 (0.02) (0.56) -- -- --
1996 10.14 0.63 (0.10) (0.67) -- -- --
1995 9.70 0.57 0.44 (0.57) -- -- --
1994 10.19 0.49 (0.49) (0.49) -- -- --
Ratio
Ratio of Net
of Net Ratio Investment
Net Net Investment of Expenses Income (Loss)
Asset Assets Ratio Income to Average to Average
Return Value End of Expenses (Loss) Net Assets Net Assets Portfolio
of End Total of Period to Average to Average (Excluding (Excluding Turnover
Capital of Period Return (000) Net Assets Net Assets Waivers) Waivers) Rate
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------
ANALYTIC DEFENSIVE EQUITY FUND
- ------------------------------
1998 (2) -- $11.77 28.89% $56,021 1.38% 0.40% 1.60% 0.18% 299.28%
1997 -- 12.41 19.11% 46,286 1.30% 0.75% 1.30% 0.75% 75.41%
1996 -- 13.71 15.66% 52,484 1.23% 1.43% 1.34% 1.32% 43.17%
1995 -- 12.64 21.52% 42,648 1.22% 1.87% 1.38% 1.71% 32.37%
1994 -- 10.60 2.47% 48,254 1.10% 3.45% 1.10% 3.45% 48.71%
- -----------------------------
ANALYTIC ENHANCED EQUITY FUND
- -----------------------------
1998 (1) -- $10.90 37.82% $33,889 1.26% 0.78% 2.25% (0.21)% 297.36%
1997 -- 8.43 29.86% 7,331 1.00% 1.17% 2.24% (0.07)% 189.39%
1996 -- 7.43 22.95% 3,519 0.91% 1.53% 1.51% 0.93% 179.47%
1995 -- 7.95 35.36% 2,318 0.50% 2.02% 1.33% 1.19% 10.15%
1994 -- 6.04 (0.37)% 1,511 0.24% 3.24% 1.35% 2.13% 24.75%
- ---------------------------------
ANALYTIC MASTER FIXED INCOME FUND
- ---------------------------------
1998 (1) -- $ 9.81 3.80% $ 4,954 1.07% 5.06% 3.29% 2.84% 98.26%
1997 -- 10.00 10.04% 5,712 0.90% 5.60% 1.09% 5.41% 39.98%
1996 -- 11.62 5.69% 28,926 0.72% 5.66% 0.97% 5.41% 21.95%
1995 -- 11.78 16.43% 24,868 0.69% 5.99% 1.03% 5.65% 31.82%
1994 -- 10.75 (1.04)% 6,155 0.60% 7.16% 1.17% 6.59% 44.30%
- -------------------------------
ANALYTIC SHORT-TERM GOVERNMENT
- -------------------------------
1998 (1) -- $10.10 7.10% $ 5,259 0.84% 5.43% 3.73% 2.54% 25.19%
1997 -- 9.97 5.54% 2,978 0.60% 5.57% 7.78% (1.61)% 33.50%
1996 (0.01) 9.99 5.28% 1,008 0.56% 5.99% 0.76% 5.79% 31.48%
1995 -- 10.14 10.65% 27,880 0.50% 5.76% 0.82% 5.44% 10.15%
1994 -- 9.70 0.00% 24,481 0.45% 5.37% 0.85% 4.97% 3.21%
<FN>
1 The information set forth in this table for the periods prior to July 27,
1998 is the financial data of the Enhanced Equity Fund, Master Fixed Income
Fund and Short-Term Government Fund, series of a predecessor company, The
Analytic Series Fund, Inc. Analytic Enhanced Equity Fund, Analytic Master
Fixed Income Fund and Analytic Short-Term Government acquired the assets and
assumed the liabilities of the Enhanced Equity Fund, Master Fixed Income
Fund and Short-Term Government Fund of The Analytic Series Fund, Inc. on
July 27, 1998. The net asset values at the beginning of each period and the
changes in net asset values including the net asset values at the end of
each period through the date of reorganization have been restated to reflect
the conversion ratios on the date of reorganization as follows: 0.61425 for
the Analytic Enhanced Equity Fund, 1.1312 for the Analytic Master Fixed
Income Fund and 1.0162 for the Analytic Short-Term Government Fund.
2 The information set forth in this table for the periods prior to August 31,
1998 is the financial data of the the Defensive Equity Portfolio of Analytic
Optioned Equity Fund, Inc. Analytic Defensive Equity Fund acquired the
assets and assumed the liabilities of the Defensive Equity Portfolio of
Analytic Optioned Equity Fund, Inc. on August 31, 1998. The net asset values
at the beginning of each period and the changes in net asset values
including the net asset values at the end of each period through the date of
reorganization have been restated to reflect the conversion ratio of 0.95328
on the date of reorganization for the Analytic Defensive Equity Fund.
Amounts designated as- are either $0 or have been rounded to $0.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
22 & 23
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1998
1. ORGANIZATION
PBHG Advisor Funds, Inc. (the Company), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company with seventeen series: the PBHG Advisor Core Value Fund (the
"Core Value Fund"), the PBHG Advisor Value Opportunities Fund (the "Value
Opportunities Fund"), the PBHG Advisor New Contrarian Fund (the "New Contrarian
Fund"), the PBHG Advisor REIT Fund (the "REIT Fund"), the PBHG Advisor Large Cap
Concentrated Fund (the "Large Cap Concentrated Fund"), the PBHG Advisor Growth
II Fund (the "Growth II Fund"), the PBHG Advisor New Opportunities Fund (the
"New Opportunities Fund"), the PBHG Advisor Global Technology & Communications
Fund (the "Global Technology & Communications Fund"), the PBHG Advisor Blue Chip
Growth Fund (the "Blue Chip Growth Fund"), the PBHG Advisor Growth Opportunities
Fund (the "Growth Opportunities Fund"), the PBHG Advisor Enhanced Equity Fund
(the "Enhanced Equity Fund"), the PBHG Advisor Trend Fund (the "Trend Fund") and
the PBHG Advisor Defensive Equity Fund (the "Defensive Equity Fund"),
(collectively referred to as the "Equity Funds"), the PBHG Advisor Master Fixed
Income Fund (the "Master Fixed Income Fund"), the PBHG Advisor High Yield Fund
(the "High Yield Fund"), the PBHG Advisor Cash Reserves Fund (the "Cash Reserves
Fund"), and the PBHG Advisor Short-Term Government Fund (the "Short-Term
Government Fund") (each a "Fund" and, collectively, the "Funds"). As of December
31, 1998, the Value Opportunities Fund, the New Contrarian Fund, the Reit Fund,
the Growth II Fund, the Global Technology & Communications Fund, the Growth
Opportunities Fund, the Trend Fund and the High Yield Fund had not commenced
operations. The Blue Chip Growth Fund, Cash Reserves Fund and the Large Cap
Concentrated Fund commenced operations on June 30, 1998 and ceased operations on
or before December 31, 1998. The financial statements presented herein do not
include the Core Value Fund or New Opportunities Fund which are presented
separately. Each of the Funds has distinct investment objectives and policies
that are described in the prospectus. The assets of each fund are segregated,
and a shareholder's interest is limited to the fund in which shares are held.
Effective December 31, 1998, the PBHG Advisor Defensive Equity Fund, the PBHG
Advisor Enhanced Equity Fund, the PBHG Advisor Master Fixed Income Fund and the
PBHG Advisor Short-Term Government Fund changed their names to Analytic
Defensive Equity Fund, Analytic Enhanced Equity Fund, Analytic Master Fixed
Income Fund and Analytic Short-Term Government Fund respectively.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed by
the Funds.
DERIVATIVE FINANCIAL INSTRUMENTS -- Each Fund may utilize various call option,
put option and financial futures strategies in pursuit of its objective. These
techniques will be used to hedge against changes in securities prices, interest
rates, or foreign currency exchange rates on securities held or intended to be
acquired by the fund to reduce the volatility of the currency exposure
associated with foreign securities, or an an efficient means of adjusting
exposure to stock and bond markets, and not for speculation. The portfolios will
only write covered call and cash secured put options on common stock or stock
indices.
SECURITY VALUATION -- Investment securities of the Equity Funds 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 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 readily
available, are valued at the last bid price. However, 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 investments may be valued at amortized cost
which approximates market value. Foreign securities are valued based upon
quotations from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange rates. In
addition, if quotations are not readily available, or if the values have been
materially affected by events occurring after the closing of a foreign market,
assets may be valued by another method that the Board of Directors believes
accurately reflects fair value.
WRITTEN OPTION ACCOUNTING PRINCIPLES -- When a covered put or call option is
written in a portfolio, an amount equal to the premium received by the portfolio
is included in the portfolio's statement of assets and liabilities as an asset
and an equivalent liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the option written.
When a covered written call expires on its stipulated expiration date, or if the
portfolio enters into a closing purchase transaction, the Fund will realized a
gain (or loss if the cost of the closing purchase transaction exceeds the
premium received when the call option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option will be extinguished. When a covered written call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
When a portfolio writes a covered put option, cash equal to the exercise price
is placed in an interest-bearing escrow account to collateralize the outstanding
put option. When a put option expires, or if the portfolio enters into a closing
purchase transaction, the portfolio will realize a gain or loss on the option
transaction, the cash is released from escrow, and the liability related to such
option is extinguished. When a put option is exercised, the portfolio uses the
cash in escrow to purchase the security, the cost of the security is reduced by
the premium originally received, and no gain or loss is recognized.
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
respectiveholding periods. Acquisition discounts and premiums are accreted and
amortized to maturity using a method which approximates the effective interest
method.
DIVIDENDS -- Dividends from net investment income for the Equity Funds are
declared annually, if available. Dividends from net investment income for the
Master Fixed Income Fund and the Short-Term Government Fund are declared daily
and paid monthly. Distributions of net realized capital gains, for all funds,
are generally made to shareholders annually. 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
or accumulated net realized gain, as appropriate, in the period that the
differences arise.
FEDERAL INCOME TAXES -- It is each Fund's intention 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.
24
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
At December 31, 1998 the Analytic Funds had the following unused capital loss
carryforwards. These realized losses are intended to be used to offset future
net capital gains, to the extent provided by regulations through the following
expiration dates:
2001 2002 2003 2004 2005
------- ------- -------- -------- ------
Short-Term Government Fund $17,718 $57,661 $257,536 $444,657 $3,860
NET ASSET VALUE PER SHARE -- The net asset value per share is calculated each
business day by dividing the total value of each Fund'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 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 Fund may be delayed
or limited.
OTHER -- Expenses that are directly related to one of the Funds are charged
directly to that Fund. Other operating expenses are prorated to the Funds on the
basis of relative net assets. Class specific expenses, such as 12b-1 service
fees and transfer agent fees, are borne directly by that class. Income, other
expenses and realized and unrealized gains and losses of a Fund are allocated to
the respective class on the basis of the relative net assets each day.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation
of financial statements, in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results could
differ from those estimates.
(3) INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Company and the Adviser are parties to an Investment Advisory Agreement (the
"Advisory Agreement"). Under the terms of the Advisory Agreement, the Adviser is
entitled to a fee, which is calculated daily and paid monthly, at an annual rate
of 0.60% of the average net assets of the Enhanced Equity and Defensive Equity
Funds; 0.45% of the average net assets of the Master Fixed Income Fund; and
0.30% of the average net assets of the Short-Term Government Fund.
Analytic Investors, Inc. (formerly Pilgrim Baxter Analytic Investors, Inc.)
serves as the sub-adviser to the Enhanced Equity, Defensive Equity, Master Fixed
Income, and Short-Term Government Funds. For its services provided pursuant to
its Investment Sub-Advisory Agreement with the Adviser and the Fund, Analytic
Investors, Inc. is entitled to receive, from the amounts received by the
Adviser, a sub-advisory fee with respect to the average daily net assets of each
such Fund that is computed daily and paid monthly at annual rates of 0.40%,
0.40%, 0.25%, and 0.10%, respectively. Analytic Investors, Inc. receives no fees
directly from the Enhanced Equity, Defensive Equity, Master Fixed Income, and
Short-Term Government Funds.
In the interest of limiting the expenses of the Funds, the Adviser has entered
into an Expense Limitation Agreement with the Company, on behalf of each Fund.
The Adviser has agreed to waive or limit its advisory fees or assume other
expenses in an amount that operates to limit the aggregate annual total of
certain operating expenses of each Fund as follows: 0.82% of the Defensive
Equity Fund and Enhanced Equity Fund; 0.67% of the Master Fixed Income Fund; and
0.52% of the Short-Term Government Fund. The expenses subject to such limitation
are those that are not specifically allocated to a class of shares of a Fund
under the Company's multiple class plan (the "Rule 18f-3 Plan") including, but
not limited to, investment advisory fees of the Adviser, but excluding: (i)
interest, taxes, brokerage commissions, and other expenditures which are
capitalized in accordance with generally accepted accounting principles; (ii)
expenses specifically allocated to a class of shares of a Fund under the Rule
18f-3 Plan, such as Rule 12b-1 expenses and transfer agency fees; and (iii)
other extraordinary expenses not incurred in the ordinary course of a Fund's
business. Reimbursement by the Funds of the advisory fees waived or limited and
other expenses paid by the Adviser pursuant to the Expense Limitation Agreement
may be made at a later date when such Funds have reached a sufficient asset size
to permit reimbursement to be made without causing the total annual expense
ratio of each Fund to exceed the percentages listed above. Consequently, no
reimbursement by a Fund will be made unless: (i) the Fund's assets exceed $75
million; (ii) the Fund's total annual expense ratio is less than the above
specified percentage; and (iii) the payment of such reimbursement was approved
by the Board of Directors on a quarterly basis.
At December 31, 1998, the amount of advisory fee waiver and reimbursement of
third party expenses by the Adviser subject to possible reimbursement were as
follows:
Defensive Equity Fund $112,512
Enhanced Equity Fund $106,882
Master Fixed Income Fund $32,957
Short-Term Government Fund $35,588
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of the
Adviser, provides the Funds with administrative services, including regulatory
reporting and all necessary office space, equipment, personnel and facilities.
For these administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of 0.15% of the average
daily net assets of the Funds.
SEI Investments Management Corporation, a wholly-owned subsidiary of SEI
Investments Corporation, is the owner of all beneficial interest in SEI
Investments Mutual Fund Services (the "Sub-Administrator"). The
Sub-Administrator assists the Administrator in providing administrative services
to the Funds.
PBHG Fund Distributors, a wholly owned subsidiary of the Adviser, provides the
Funds with distribution services.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for
the Funds under a transfer agent agreement with the Funds. PBHG Fund Services
provides shareholder support and other shareholder account-related services with
assistance from UAM Shareholder Service Center, Inc. First Union National Bank
serves as the custodian for the Funds.
The Funds have adopted Distribution Plans (the "12b-1 Plan") for those Funds
offering Class A and B shares. The Plan provides for the payment by the Funds to
the Distributor of up to 0.35% of each Fund's average net assets attributable to
Class A shares and up to 1.00% for Class B shares. The Funds' directors have
determined that payments under the 12b-1 distribution plan for Class A shares
will currently be limited to 0.25%. Class I shares are not subject to 12b-1
fees.
Certain officers and directors of the Fund who are or were officers of the
Adviser, Administrator, Sub-Administrator and the Distributor receive no
compensation from the Fund for their services.
25
<PAGE>
ANALYTIC FUNDS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1998
Reorganization
On February 20, 1998, the Board of Directors of the Fund and the Board of
Trustees of The Analytic Series Fund, Inc. approved an Agreement and Plan of
Reorganization to reorganize the Analytic Enhanced Equity Portfolio, Analytic
Master Fixed Income Portfolio, and Analytic Short-Term Government Portfolio into
the Analytic Enhanced Equity Fund, Analytic Master Fixed Income Fund and
Analytic Short-Term Government Fund, respectively. This reorganization was
approved by the shareholders of each of the Analytic Series Funds at a special
meeting held on April 28, 1998. The following were the results of the vote:
--------------- ------------- ---------------
Enhanced Equity Master Fixed Short-Term
Fund Income Fund Government Fund
Shares Voted: Shares Voted: Shares Voted:
--------------- ------------- ---------------
For 427,870 320,815 272,385
Against 5,411 4,832 --
Abstain 7,637 -- --
--------------- ------------- ---------------
Total 440,918 325,647 272,385
The reorganization was completed on July 27, 1998 with all of the property and
assets of the Analytic Series Fund transferred to the corresponding Analytic
Fund. Upon the transfer, the Analytic Fund issued Class A shares of the voting
common stock. The portfolios of the Analytic Series Fund are accounting
survivors for financial reporting purposes.
On June 4, 1998, the Board of Directors of the Fund and Board of Trustees of
Analytic Optioned Equity Fund, Inc. approved an Agreement and Plan of
reorganization to reorganize the Defensive Equity Portfolio into the Analytic
Defensive Equity Fund. This reorganization was approved by the shareholders of
the Analytic Optioned Equity Fund, Inc. at a special meeting held on June 28,
1998. The following were the results of the vote:
---------------
Defense Equity
Fund
Shares Voted:
---------------
For 2,064,563
Against 172,052
Abstain 70,928
---------------
Total 2,307,543
The reorganization was completed on August 31, 1998 with all of the property and
assets of the Analytic Optioned Equity Fund transferred to the Analytic
Defensive Equity Fund. Upon the transfer, the Analytic Fund issued Class A
shares of the voting common stock. The Analytic Optioned Equity Fund is the
accounting survivor for financial reporting purposes.
(4) INVESTMENT TRANSACTIONS
The cost of securities purchased and the proceeds from securities sold, other
than short-term investments for the funds for the year ended December 31, 1998
were as follows:
PURCHASES SALES
-------------- --------------
Defensive Equity Fund $215,618,305 $151,136,953
Enhanced Equity Fund 74,188,288 47,750,125
Master Fixed Income Fund 3,399,179 3,429,995
Short-Term Government Fund 1,236,529 850,388
The aggregate gross unrealized appreciation and depreciation of securities held
by the Funds and the total cost of securities for Federal income tax purposes at
December 31, 1998 are as follows:
TOTAL COST
NET OF SECURITIES
UNREALIZED FOR FEDERAL
UNREALIZED UNREALIZED APPRECIATION/ INCOME TAX
APPRECIATION DEPRECIATION (DEPRECIATION) PURPOSES
------------ ------------ -------------- -------------
Defensive Equity Fund $8,900,435 $(1,171,121) $7,729,314 $48,114,233
Enhanced Equity Fund 3,983,263 (439,198) 3,544,065 30,282,631
Master Fixed
Income Fund 117,518 (12,439) 105,079 4,753,016
Short-Term
Government Fund 36,727 (5,637) 31,090 5,172,960
(5) WRITTEN OPTION CONTRACTS
The Fund trades written option contracts with off-balance sheet risk in the
normal course of its investment activities in order to manage exposure to market
risks such as interest rates. The contractual amounts of these instruments
represent the investment the Fund has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Transactions in option contracts written in the Defensive Equity Fund were as
follows:
NUMBER OF
CONTRACTS PREMIUMS
------------ --------------
Outstanding at December 31, 1997 3,258 $ 570,334
Options written 14,087 10,464,643
Options terminated in closing purchase
transactions (10,280) (7,917,116)
Options expired (6,129) (2,243,705)
Options exercised (531) (104,647)
-------- ------------
Outstanding at December 31, 1998 405 $ 769,509
-------- ------------
-------- ------------
Transactions in option contracts written in the Enhanced Equity Fund were as
follows:
NUMBER OF
CONTRACTS PREMIUMS
------------ --------------
Outstanding at December 31, 1997 5 $ 20,234
Options written 5 20,234
Options terminated in closing purchase
transactions (10) (40,468)
-------- ------------
Outstanding at December 31, 1998 0 0
-------- ------------
Transactions in option contracts written in the Master Fixed Income Fund were as
follows:
NUMBER OF
CONTRACTS PREMIUMS
------------ --------------
Outstanding at December 31, 1997 176 $ 70,262
Options written 3,545 615,715
Options terminated in closing purchase
transactions (2,510) (504,461)
Options expired (611) (96,307)
Options exercised (177) (38,923)
-------- -----------
Outstanding at December 31, 1998 423 $ 46,286
-------- -----------
-------- -----------
26
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
(6) FUTURES CONTRACTS
Each Fund may enter into futures contracts to the extent permitted by its
investment policies and objectives. Upon entering into a futures contract, a
fund is required to make a deposit of a portion of the initial margin with its
custodian in a segregated account, in addition, the fund will deposit securities
with the broker for the remainder of the margin requirement. Subsequent
payments, which are dependent on the daily fluctuations in the value of the
underlying instrument, are made or received by a Fund each day (daily variation
margin) and are recorded as unrealized gains or losses until the contracts are
closed . When the contract is closed, a Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transactions and a fund's basis in the contract. Risks of entering into futures
contracts include the possibility that a change in the value of the contract may
not correlate with the changes in the value of the underlying instruments.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that a fund could lose more than the original margin deposit
required to initiate a futures transaction.
The following Funds had futures contracts open as of December 31, 1998.
NUMBER
CONTRACT OF TRADE SETTLEMENT UNREALIZED
DESCRIPTION CONTRACTS PRICE MONTH GAIN/(LOSS)
--------- ----- ---------- -----------
Enhanced Equity Fund
S&P 500 10 $1,175.85 March 1999 $174,125
--------
--------
Master Fixed
Income Fund
U.S. Long Bond (5) $129.76 March 1999 $ 9,856
U.S. 10 Year Note 16 120.16 March 1999 (16,160)
U.S. 5 Year Note (30) 114.22 March 1999 25,950
U.S. 2 Year Note 16 106.02 March 1999 (8,410)
--------
$ 11,236
--------
--------
Short-Term
Government Fund
U.S. Long Bond (2) $129.77 March 1999 $ 3,949
U.S. 10 Year Note 6 120.16 March 1999 (6,000)
U.S. 5 Year Note (10) 114.22 March 1999 8,750
U.S. 2 Year Note 6 106.02 March 1999 (3,154)
British Pound 1 165.60 March 1999 40
Canadian Dollar (1) 65.21 March 1999 0
Deutsche Mark (1) 59.98 March 1999 (273)
Swiss Franc (1) 73.80 March 1999 603
--------
$ 3,915
--------
--------
(7) LINE OF CREDIT
Each Fund may borrow, an amount up to its prospectus defined limitations, from a
committed line of credit available to (i) the Fund and (ii) PBHG Funds, Inc. and
(iii) PBHG Insurance Series Fund, Inc. Draws on the line of credit will bear
interest at the Federal Funds Rate plus 0.40%. As of December 31, 1998, none of
the Funds had an outstanding borrowing. Listed below is the Fund which had
outstanding balances during the year ended December 31, 1998.
MAXIMUM AVERAGE DAILY WEIGHTED
AMOUNT OUTSTANDING AVERAGE
BORROWED BALANCE INTEREST RATE
---------- ----------- ---------------
ENHANCED EQUITY FUND $3,500,000 $77,808 5.90%
27
<PAGE>
ANALYTIC FUNDS
- --------------------------------------------------------------------------------
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, each portfolio is designating the
following items with regard to distributions paid during the year as follows:
<TABLE>
LONG TERM
(20% RATE) ORDINARY
CAPITAL GAINS INCOME TAX-EXEMPT TOTAL QUALIFYING
FUND DISTRIBUTIONS DISTRIBUTIONS INTEREST DISTRIBUTIONS DIVIDENDS(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Analytic Defensive Equity Fund .......... 0% 100% 0% 100% 100%
Analytic Enhanced Equity Fund ........... 0% 100% 0% 100% 100%
Analytic Fixed Income Fund .............. 0% 100% 0% 100% 0%
Analytic Short Term Government Fund ..... 0% 100% 0% 100% 0%
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<FN>
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
</FN>
</TABLE>
28
<PAGE>
ANALYTIC FUNDS
P.O. Box 419534
Kansas City, MO 64141-6534
Investment Adviser:
Pilgrim Baxter & Associates, Ltd.
Investment Sub-Adviser:
Analytic Investors, Inc.
Distributor
PBHG Fund Distributors
To open an account, receive account information
or request literature call 1-800-433-0051
BD-Analytic 1998
