THE PBHG FUNDS, INC.
SUPPLEMENT DATED JANUARY 19, 1998
TO THE PROSPECTUS FOR THE PBHG CLASS SHARES
DATED JUNE 30, 1997
This Supplement updates certain information contained in the above-dated
Prospectus. You should retain both this Supplement and the Prospectus for
future reference. You may obtain an additional copy of the Prospectus, free
of charge, by calling 1-800-433-0051.
On page 1, the date of the Statement of Additional Information filed with the
Securities and Exchange Commission is changed from May 20, 1997, to January
19, 1998.
On page 2, the following sentence is added to the end of the first paragraph
in the Summary Section:
"Except for the Large Cap 20 Fund, which is classified as a non-diversified
investment company, each Portfolio is classified as a diversified investment
company."
On page 12, the first sentence of the second paragraph under PBHG Large Cap 20
Fund is changed to read in its entirety as follows:
"Under normal market conditions, the Portfolio will invest substantially all of
its assets in equity securities of a limited number (i.e., no more than 20
issuers) of large capitalization companies that, in the Adviser's opinion, have
a strong earnings growth outlook and potential for capital appreciation."
On page 20, the third sentence under Portfolio Turnover is changed to read in
its entirety as follows:
"The portfolio turnover rate for the fiscal year or period ended March 31, 1997,
for each of the Portfolios (except Mid-Cap Value and Small Cap Value Funds) and
for the period ended September 30, 1997, for each of the Portfolios is specified
in the Financial Highlights table."
On page 23, the first fundamental policy disclosed in the Investment Limitations
section is changed to read in its entirety as follows:
"A Portfolio, as a fundamental policy, may not:
1. Except for the Large Cap 20 Fund, purchase securities of any issuer (except
securities issued or guaranteed by the United States, its agencies or
instrumentalities and repurchases agreements involving such securities) if, as
a result, more than 5% of the total assets of the Portfolio would be invested
in the securities of such issuer. With the exception of the Cash Reserves Fund,
this restriction applies to 75% of each Portfolio's total assets."
On page 38, the Miscellaneous section is changed to read in its entirety as
follows:
"As of October 31, 1997, Pilgrim Baxter Partners I LP, 825 Duportail Road,
Wayne, Pennsylvania, 19087, owned of record or beneficially at least 25% of the
outstanding PBHG Class shares of the Cash Reserves Fund, and may be deemed to
be a controlling person of this Portfolio for purposes of the 1940 Act."
On page 5, the last sentence of the paragraph in the Financial Highlights
section is stricken and the following sentence is added:
"The information in the following table for the period ended September 30, 1997
is unaudited. The Semi-Annual Report of the Fund can be obtained (without
charge) by calling 1-800-433-0051."
PBHG - Supplement 1/19/97
<PAGE>
The following information as of September 30, 1997, is added to the table
appearing on pages 6 and 7:
FINANCIAL HIGHLIGHTS
For A Share Outstanding Throughout Each Fiscal Year or Period
September 30, 1997
<TABLE>
<CAPTION>
PBHG PBHG PBHG PBHG PBHG PBHG PBHG
PBHG Emerging Large Cap Select Core PBHG Large Large Cap Mid-Cap
Growth Growth Growth Equity Growth Limited Cap 20 Value Value
Fund Fund Fund Fund Fund Fund Fund Fund Fund(11)
------ -------- --------- ------ ------ ------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of Period $21.06 $19.26 $14.26 $15.91 $10.34 $ 9.05 $ 9.25 $10.11 $10.00
Net Investment
Income (Loss) $(0.08) $(0.07) $(0.08) $(0.17) $(0.11) $(0.05) $(0.04) $ 0.02 --
Realized and Unrealized
Gains or (Losses)
on Securities $6.80 $7.39 $5.32 $6.30 $2.66 $4.57 $3.69 $2.32 $4.30
Distributions from
Net Investment Income -- -- -- -- -- -- -- -- --
Distributions
from Capital Gains -- -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ -----
Net Asset Value
End of Period $27.78 $26.58 $19.50 $22.04 $12.89 $13.57 $12.90 $12.45 $14.30
====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return 31.91%+ 38.01%+ 36.75%+ 38.53%+ 24.66%+ 49.94%+ 39.46%+ 23.15%+ 43.00%+
Net Assets
End of Period (000) $6,232,655 $1,837,508 $143,008 $413,617 $259,414 $187,555 $109,253 $71,089 $29,769
Ratio of Expenses
to Average Net Assets 1.25%* 1.27%* 1.22%* 1.35%* 1.33%* 1.40%* 1.49%* 1.27%* 1.50%*
Ratio of Net Investment
Income (Loss)
to Average Net Assets (0.67)%* (0.72)%* (0.79)%* (1.13)%* (1.06)%* (0.79)%* (0.83)%* 0.74%* (0.10)%*
Ratio of Expenses
to Average Net Assets
(Excluding Waivers) 1.25%* 1.27%* 1.22%* 1.35%* 1.33%* 1.40%* 1.49%* 1.27%* 1.52%*
Ratio of Net
Investment Income (Loss)
to Average Net Assets
(Excluding Waivers) (0.67)%* (0.72)%* (0.79)%* (1.13)%* (1.06)%* (0.79)% (0.83)%* 0.74%* (0.12)%*
Portfolio Turnover Rate 44.44% 48.07% 20.59% 37.35% 25.20% 44.01% 56.75% 46.43% 144.93%
Average
Commission Rate (++) $0.0526 $0.0421 $0.0511 $0.0563 $0.0650 $0.0379 $0.0593 $0.0375 $0.0545
</TABLE>
<TABLE>
<CAPTION>
PBHG PBHG PBHG PBHG
Small Cap PBHG Cash Tech & Str. Small
Value Int'l Reserves Comm Company
Fund(11) Fund Fund Fund Fund
--------- ----- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of Period $10.00 $11.26 $1.00 $14.63 $8.86
Net Investment
Income (Loss) -- $0.02 $0.03 $(0.09) $(0.01)
Realized and Unrealized
Gains or (Losses)
on Securities $4.55 $1.37 -- $7.44 $4.59
Distributions from
Net Investment Income -- -- $(0.03) -- --
Distributions
from Capital Gains -- -- -- -- --
------ ----- ------- ------ -------
Net Asset Value
End of Period $14.55 $12.65 $1.00 $21.98 $13.44
====== ====== ===== ====== ======
Total Return 45.50%+ 12.85%+ 5.02%+ 50.17%+ 51.69%+
Net Assets
End of Period (000) $59,236 $21,420 $167,770 $730,333 $129,934
Ratio of Expenses
to Average Net Assets 1.50%* 1.99%* 0.68%* 1.30%* 1.45%*
Ratio of Net Investment
Income (Loss)
to Average Net Assets 0.01%* (0.46)%* 4.98%* (0.90)%* (0.82)%*
Ratio of Expenses
to Average Net Assets
(Excluding Waivers) 1.51%* 1.99%* 0.68%* 1.30%* 1.45%*
Ratio of Net
Investment Income (Loss)
to Average Net Assets
(Excluding Waivers) 0.00%* (0.46)%* 4.98%* (0.90)%* (0.82)%*
Portfolio Turnover Rate 97.58% 46.80% n/a 141.77% 123.14%
Average
Commission Rate (++) $0.0530 $0.0304 n/a $0.0434 $0.0435
</TABLE>
(11) The PBHG Mid-Cap Value and Small Cap Value Funds commenced operations
May 1, 1997
<PAGE>
Fund:
THE PBHG FUNDS, INC.
Portfolios:
PBHG GROWTH FUND
PBHG EMERGING GROWTH FUND
PBHG LARGE CAP GROWTH FUND
PBHG SELECT EQUITY FUND
PBHG CORE GROWTH FUND
PBHG LIMITED FUND
PBHG LARGE CAP 20 FUND
PBHG LARGE CAP VALUE FUND
PBHG MID-CAP VALUE FUND
PBHG SMALL CAP VALUE FUND
PBHG INTERNATIONAL FUND
PBHG CASH RESERVES FUND
PBHG TECHNOLOGY & COMMUNICATIONS FUND
PBHG STRATEGIC SMALL COMPANY FUND
Adviser:
PILGRIM BAXTER & ASSOCIATES, LTD.
This Statement of Additional Information is not a prospectus and relates only to
each of the Portfolios listed above. It is intended to provide additional
information regarding the activities and operations of The PBHG Funds, Inc. (the
"Fund" or "Registrant") and the Portfolios. The Statement of Additional
Information should be read in conjunction with the Prospectus for the
Portfolios' PBHG Class shares dated June 30, 1997 and with the Prospectus for
the Advisor Class of the PBHG Growth Fund shares dated July 21, 1997. The
Prospectuses for the Portfolios may be obtained by calling 1-800-433-0051.
TABLE OF CONTENTS
Page
THE FUND ............................................................... S-2
DESCRIPTION OF PERMITTED INVESTMENTS.................................... S-2
INVESTMENT LIMITATIONS.................................................. S-11
THE ADVISER............................................................. S-15
THE SUB-ADVISERS........................................................ S-17
THE ADMINISTRATOR AND SUB-ADMINISTRATOR................................. S-19
THE DISTRIBUTOR......................................................... S-21
THE CUSTODIANS.......................................................... S-22
DIRECTORS AND OFFICERS OF THE FUND.......................................S-22
COMPUTATION OF YIELD.................................................... S-25
CALCULATION OF TOTAL RETURN............................................. S-26
PURCHASE AND REDEMPTION OF SHARES....................................... S-27
DETERMINATION OF NET ASSET VALUE........................................ S-28
TAXES................................................................... S-29
PORTFOLIO TRANSACTIONS.................................................. S-35
DESCRIPTION OF SHARES................................................... S-38
5% AND 25% SHAREHOLDERS................................................. S-38
FINANCIAL STATEMENTS.................................................... S-43
January 19, 1998
<PAGE>
THE FUND
This Statement of Additional Information relates to the Fund and each of its
Portfolios. Each Portfolio is a separate series of The PBHG Funds, Inc. (the
"Fund"), which was originally incorporated in Delaware on August 2, 1985 under
the name PBHG Growth Fund, Inc. and commenced business shortly thereafter as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"). On July 21, 1992, shareholders of the Fund approved
an Agreement and Articles of Merger pursuant to which the Fund was reorganized
and merged into a new Maryland corporation, also named PBHG Growth Fund, Inc. On
September 8, 1993, the shareholders of the Fund voted to change the name of the
Fund to The Advisors' Inner Circle Fund II, Inc. On May 2, 1994, the
shareholders voted to change the Fund's name to The PBHG Funds, Inc. The
articles of incorporation permit the Fund to offer separate classes of shares of
each Portfolio. Shareholders may purchase shares through two separate classes,
i.e., PBHG Class and Advisor Class (formerly the Trust Class) shares, which
provide for differences in distribution costs, voting rights and dividends.
Except for these differences, each PBHG Class share and each Advisor Class share
of each Portfolio represents an equal proportionate interest in that Portfolio.
See "Description of Shares." Currently only the PBHG Growth Fund offers Advisor
Class shares. This Statement of Additional Information relates to both classes
of shares of the Fund. No investment in shares of a Portfolio should be made
without first reading the Portfolio's Prospectus. Capitalized terms not defined
herein are defined in each Prospectus offering shares of the Portfolios.
DESCRIPTION OF PERMITTED INVESTMENTS
Repurchase Agreements
Repurchase agreements are agreements by which a person (e.g., a portfolio)
obtains a security and simultaneously commits to return the security to the
seller (a member bank of the Federal Reserve System or primary securities dealer
as recognized by the Federal Reserve Bank of New York) at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.
Repurchase agreements are considered to be loans by a Portfolio for purposes of
its investment limitations. The repurchase agreements entered into by the
Portfolios will provide that the underlying security at all times shall have a
value at least equal to 102% of the resale price stated in the agreement. With
respect to all repurchase agreements entered into by a Portfolio, the Fund's
custodians or their agents must take possession of the underlying collateral.
However, if the seller defaults, the Portfolio could realize a loss on the sale
of the underlying security to the extent that the proceeds of the sale,
including accrued interest, are less than the resale price provided in the
agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, the Portfolio may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Portfolio is treated as an unsecured creditor of the seller
and is required to return the underlying security to the seller's estate.
S-2
<PAGE>
Investment Company Shares
Investment company shares that each Portfolio may invest in are limited to
shares of money market mutual funds, except as set forth under "Investment
Limitations" below. Since such mutual funds pay management fees and other
expenses, shareholders of the Portfolios would indirectly pay both Portfolio
expenses and the expenses of underlying funds with respect to Portfolio assets
invested therein. Applicable regulations prohibit a Portfolio from acquiring the
securities of other investment companies that are not "part of the same group of
investment companies" if, as a result of such acquisition; (i) the Portfolio
owns more than 3% of the total voting stock of the company; (ii) more than 5% of
the Portfolio's total assets are invested in securities of any one investment
company; or (iii) more than 10% of the total assets of the Portfolio are
invested in securities (other than treasury stock) issued by all investment
companies. Each Portfolio has no current intention, in the foreseeable future,
of investing more than 5% of its assets in investment company securities.
Illiquid Investments
Illiquid investments are investments that cannot be sold or disposed of in the
ordinary course of business within seven (7) days at approximately the prices at
which they are valued. Under the supervision of the Board of Directors, the
Adviser or Sub-Advisers determine the liquidity of the Fund's investments and,
through reports from the Adviser or Sub-Advisers, the Board monitors investments
in illiquid instruments. In determining the liquidity of a Portfolio's
investments, the Adviser or Sub-Advisers may consider various factors including:
(i) the frequency of trades and quotations; (ii) the number of dealers and
prospective purchasers in the marketplace; (iii) dealer undertakings to make a
market; (iv) the nature of the security (including any demand or tender
features); and (v) the nature of the market place for trades (including the
ability to assign or offset a Portfolio's rights and obligations relating to the
investment). Investments currently considered by a Portfolio to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days, over-the-counter options, and non-government
stripped fixed-rate mortgage backed securities. Also, the Adviser or
Sub-Advisers may determine some government-stripped fixed-rate mortgage backed
securities, loans and other direct debt instruments, and swap agreements to be
illiquid. However, with respect to over-the-counter options a Portfolio writes,
all or a portion of the value of the underlying instrument may be illiquid
depending on the assets held to cover the option and the nature and terms of any
agreement a Portfolio may have to close out the option before expiration. In the
absence of market quotations, illiquid investments are priced at fair value as
determined in good faith by a committee appointed by the Board of Directors. If,
through a change in values, net assets or other circumstances, a Portfolio was
in a position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
Restricted Securities
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, as amended (the "1933 Act"), or in a registered public offering.
Where registration is required, a Portfolio may be obligated to pay all or part
of the registration expense and a considerable period may elapse between the
time it decides to seek registration and the time a Portfolio may be permitted
to sell a security under an effective
S-3
<PAGE>
registration statement. If, during such a period, adverse market conditions were
to develop, a Portfolio might obtain a less favorable price than prevailed when
it decided to seek registration of the security. Moreover, investing in Rule
144A securities (i.e., securities that qualify for resale under Rule 144A under
the Securities Act of 1933) would have the effect of increasing the level of a
Portfolio's illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities.
Foreign Currency Transactions
A Portfolio may hold foreign currency deposits from time to time, and may
convert dollars and foreign currencies in the foreign exchange markets. Currency
conversion involves dealer spreads and other costs, although commissions usually
are not charged. Currencies maybe exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. The parties to a forward contract may agree to
offset or terminate the contract before maturity, or may hold the contract to
maturity and complete the contemplated currency exchange.
A Portfolio may use currency forward contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Portfolios.
In connection with purchases and sales of securities denominated in foreign
currencies, a Portfolio may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." The Adviser or the applicable Sub-Advisers may enter into
settlement hedges in the normal course of managing the Portfolio's foreign
investments. A Portfolio may also enter into forward contracts to purchase or
sell a foreign currency in anticipation of future purchases or sales of
securities denominated in foreign currency, even if the specific investments
have not yet been selected by the Adviser or the Sub-Advisers.
A Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Portfolio owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value. Such a hedge, sometimes referred
to as a "position hedge", would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A Portfolio could also hedge the position by selling another
currency expected to perform similarly to the pound sterling - for example, by
entering into a forward contract to sell Deutschemark or European Currency Units
in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
S-4
<PAGE>
Under certain conditions, guidelines of the Securities Exchange Commission
("SEC") require mutual funds to set aside appropriate liquid assets in a
segregated account to cover currency forward contracts. As required by SEC
guidelines, each Portfolio will segregate assets to cover currency forward
contracts, if any, whose purpose is essentially speculative. A Portfolio will
not segregate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy hedges.
Successful use of forward currency contracts will depend on the skill of the
Adviser or the applicable Sub-Adviser in analyzing and predicting currency
values. Forward contracts may substantially change a Portfolio's investment
exposure to changes in currency exchange rates, and could result in losses to a
Portfolio if currencies do not perform as the Adviser or the applicable
Sub-Adviser anticipates. For example, if a currency's value rose at a time when
the Adviser or Sub-Adviser had hedged a Portfolio by selling that currency in
exchange for dollars, a Portfolio would be unable to participate in the
currency's appreciation. If the Adviser or a Sub-Adviser hedges a Portfolio's
currency exposure through proxy hedges, the Portfolio could realize currency
losses from the hedge and the security position at the same time if the two
currencies do not move in tandem. Similarly, if the Adviser or the applicable
Sub-Adviser increases a Portfolio's exposure to a foreign currency and that
currency's value declines, the Portfolio will realize a loss. There is no
assurance that the use of forward currency contracts by the Adviser or the
Sub-Advisers will be advantageous to a Portfolio or that it will hedge at an
appropriate time.
Futures Contracts
A futures contract is a bilateral agreement to buy or sell a security (or
deliver a cash settlement price, in the case of a contract relating to an index
or otherwise not calling for physical delivery at the end of trading in the
contracts) for a set price in the future. Futures contracts are designated by
boards of trade which have been designated "contracts markets" by the
Commodities Futures Trading Commission ("CFTC").
No purchase price is paid or received when the contract is entered into.
Instead, a Portfolio upon entering into a futures contract (and to maintain that
Portfolio's open positions in futures contracts) would be required to deposit
with its custodian in a segregated account in the name of the futures broker an
amount of cash, or other assets, known as "initial margin." The margin required
for a particular futures contract is set by the exchange on which the contract
is traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margin that may range upward from less than 5% of the value of the
contract being traded. By using futures contracts as a risk management
technique, given the greater liquidity in the futures market than in the cash
market, it may be possible to accomplish certain results more quickly and with
lower transaction costs.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Portfolio. These subsequent payments called "variation
margin," to and from the futures broker, are
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<PAGE>
made on a daily basis as the price of the underlying assets fluctuate making the
long and short positions in the futures contract more or less valuable, a
process known as "marking to the market." A Portfolio expects to earn interest
income on its initial and variation margin deposits.
A Portfolio will incur brokerage fees when it purchases and sells futures
contracts. Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, a
Portfolio may instead make or take delivery of underlying securities whenever it
appears economically advantageous to that Portfolio to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Securities Index Futures Contracts. Purchases or sales of securities index
futures contracts may be used in an attempt to protect each of the Portfolio's
current or intended investments from broad fluctuations in securities prices. A
securities index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting from changes in
the market value of the contract to be credited or debited at the close of each
trading day to the respective accounts of the parties to the contract. On the
contract's expiration date a final cash settlement occurs and the futures
positions are simply closed out. Changes in the market value of a particular
index futures contract reflect changes in the specified index of securities on
which the future is based.
By establishing an appropriate "short" position in index futures, a Portfolio
may also seek to protect the value of its portfolio against an overall decline
in the market for such securities. Alternatively, in anticipation of a generally
rising market, a Portfolio can seek to avoid losing the benefit of apparently
low current prices by establishing a "long" position in securities index futures
and later liquidating that position as particular securities are in fact
acquired. To the extent that these hedging strategies are successful, a
Portfolio will be affected to a lesser degree by adverse overall market price
movements than would otherwise be the case.
Limitations on Purchase and Sale of Futures Contracts. A Portfolio will not
purchase or sell futures contracts unless either (i) the futures contracts are
purchased for "bona fide hedging" purposes (as that term is defined under the
CFTC regulations) or (ii) if purchased for other than "bona fide hedging"
purposes, the sum of the amounts of initial margin deposits on a Portfolio's
existing futures contracts and premiums required to establish non-hedging
positions would not exceed 5% of the liquidation value of that Portfolio's total
assets. In instances involving the purchase of futures contracts by a Portfolio,
an amount of cash or other liquid assets, equal to the cost of such futures
contracts (less any related margin deposits), will be deposited in a segregated
account with its custodian, thereby insuring that the use of such futures
contracts is unleveraged. In instances involving the sale of futures contracts
by a Portfolio, the securities underlying such futures contracts or options will
at all times be maintained by that Portfolio or, in the case of index futures
contracts, the Portfolio will own securities the price changes of which are, in
the opinion of its Adviser expected to replicate substantially the movement of
the index upon which the futures contract is based.
S-6
<PAGE>
For information concerning the risks associated with utilizing futures
contracts, please see "Risks of Transactions in Futures Contracts Options"
below.
Options
The types of options transactions that each Portfolio may utilize are discussed
below.
Writing Call Options. A call option is a contract which gives the purchaser of
the option (in return for a premium paid) the right to buy, and the writer of
the option (in return for a premium received) the obligation to sell, the
underlying security at the exercise price at any time prior to the expiration of
the option, regardless of the market price of the security during the option
period. A call option on a security is covered, for example, when the writer of
the call option owns the security on which the option is written (or on a
security convertible into such a security without additional consideration)
throughout the option period.
A Portfolio will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, a Portfolio will give
up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, a Portfolio will retain the risk of loss
should the price of the security decline. The premium is intended to offset that
loss in whole or in part. Unlike the situation in which a Portfolio owns
securities not subject to a call option, a Portfolio, in writing call options,
must assume that the call may be exercised at any time prior to the expiration
of its obligation as a writer, and that in such circumstances the net proceeds
realized from the sale of the underlying securities pursuant to the call may be
substantially below the prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." A Portfolio will realize a gain or loss from a closing purchase
transaction if the amount paid to purchase a call option is less or more than
the amount received from the sale of the corresponding call option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the exercise or closing out of a call option is likely to be offset in
whole or part by unrealized appreciation of the underlying security owned by the
Portfolio. When an underlying security is sold from a Portfolio's securities
portfolio, that Portfolio will effect a closing purchase transaction so as to
close out any existing covered call option on that underlying security.
Writing Put Options. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. A Portfolio when
it writes a put option will be required to "cover" it, for example, by
depositing and maintaining in a segregated account with its custodian cash, or
other liquid obligations having a value equal to or greater than the exercise
price of the option.
A Portfolio may write put options either to earn additional income in the form
of option premiums (anticipating that the price of the underlying security will
remain stable or rise during the option period and the option will therefore not
be exercised) or to acquire the underlying security at a net
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<PAGE>
cost below the current value (e.g., the option is exercised because of a decline
in the price of the underlying security, but the amount paid by such Portfolio,
offset by the option premium, is less than the current price). The risk of
either strategy is that the price of the underlying security may decline by an
amount greater than the premium received. The premium which a Portfolio receives
from writing a put option will reflect, among other things, the current market
price of the underlying security, the relationship of the exercise price to that
market price, the historical price volatility of the underlying security, the
option period, supply and demand and interest rates.
A Portfolio may effect a closing purchase transaction to realize a profit on an
outstanding put option or to prevent an outstanding put option from being
exercised.
Purchasing Put and Call Options. A Portfolio may purchase put options on
securities to protect its holdings against a substantial decline in market
value. The purchase of put options on securities will enable a Portfolio to
preserve, at least partially, unrealized gains in an appreciated security in its
portfolio without actually selling the security. In addition, a Portfolio will
continue to receive interest or dividend income on the security. A Portfolio may
also purchase call options on securities to protect against substantial
increases in prices of securities that the Portfolio intend to purchase pending
its ability to invest in an orderly manner in those securities. A Portfolio may
sell put or call options it has previously purchased, which could result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction cost paid on the put or call option
which was bought.
Securities Index Options. A Portfolio may write covered put and call options and
purchase call and put options on securities indexes for the purpose of hedging
against the risk of unfavorable price movements adversely affecting the value of
the Portfolio's securities or securities it intends to purchase. A Portfolio
will only write "covered" options. A call option on a securities index is
considered covered, for example, if, so long as the Portfolio is obligated as
the writer of the call, it holds securities the price changes of which are, in
the opinion of the Adviser, expected to replicate substantially the movement of
the index or indexes upon which the options written by the Portfolio are based.
A put on a securities index written by a Portfolio will be considered covered
if, so long as it is obligated as the writer of the put, the Portfolio
segregates with its custodian cash or other liquid obligations having a value
equal to or greater than the exercise price of the option. Unlike a stock
option, which gives the holder the right to purchase or sell a specified stock
at a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (i) the difference
between the exercise price of the option and the value of the underlying stock
index on the exercise date, multiplied by (ii) a fixed "index multiplier." A
securities index fluctuates with changes in the market value of the securities
so included. For example, some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indexes may also be based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index.
Over-the-Counter Options. A Portfolio may enter into contracts with primary
dealers with whom it may write over-the-counter options. Such contracts will
provide that the Portfolio has the absolute right to repurchase an option it
writes at any time at a repurchase price which represents the fair market value,
as determined in good faith through negotiation between the parties, but which
in no
S-8
<PAGE>
event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of the formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by a Portfolio for writing the option, plus
the amount, if any, of the option's intrinsic value (i.e., the amount the option
is "in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written "out-of-the-money." Such Portfolio has established
standards of creditworthiness for these primary dealers, although the Portfolio
may still be subject to the risk that firms participating in such transactions
will fail to meet their obligations. In instances in which a Portfolio has
entered into agreements with respect to the over-the-counter options it has
written, and such agreements would enable the Portfolio to have an absolute
right to repurchase at a pre-established formula price the over-the-counter
option written by it, the Portfolio would treat as illiquid only securities
equal in amount to the formula price described above less the amount by which
the option is "in-the-money," i.e., the amount by which the price of the option
exceeds the exercise price.
For information concerning the risks associated with utilizing options and
futures contracts, please see "Risks of Transactions in Futures Contracts and
Options" below.
Risks of Transactions in Futures Contracts and Options
Futures. The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in the market and interest
rates, which in turn are affected by fiscal and monetary policies and national
and international political and economic events.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the futures contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract.
A decision of whether, when, and how to hedge involves skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior,
S-9
<PAGE>
market trends or interest rate trends. There are several risks in connection
with the use by a Portfolio of futures contracts as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and movements in the prices of the underlying instruments
which are the subject of the hedge. The Advisers will, however, attempt to
reduce this risk by entering into futures contracts whose movements, in its
judgment, will have a significant correlation with movements in the prices of
the Portfolio's underlying instruments sought to be hedged.
Successful use of futures contracts by a Portfolio for hedging purposes is also
subject to the Portfolio's ability to correctly predict movements in the
direction of the market. It is possible that, when a Portfolio has sold futures
to hedge its portfolio against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the underlying
instruments held in that Portfolio's portfolio might decline. If this were to
occur, the Portfolio would lose money on the futures and also would experience a
decline in value in its underlying instruments.
Positions in futures contracts may be closed out only on an exchange or a board
of trade which provides the market for such futures. Although a Portfolio
intends to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active market, there is no guarantee that such will exist
for any particular contract or at any particular time. If there is not a liquid
market at a particular time, it may not be possible to close a futures position
at such time, and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures positions are used to hedge portfolio securities,
the securities will not be sold until the futures positions can be liquidated.
In such circumstances, an increase in the price of securities, if any, may
partially or completely offset losses on the futures contracts.
Options. A closing purchase transaction for exchange-traded options may be made
only on a national securities exchange. There is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at any
particular time, and for some options, such as over-the-counter options, no
secondary market on an exchange may exist. If a Portfolio is unable to effect a
closing purchase transaction, that Portfolio will not sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise.
Options traded in the over-the-counter market may not be as actively traded as
those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be difficult to enter into closing transactions
with respect to options traded over-the-counter. The Portfolio will engage in
such transactions only with firms of sufficient credit so as to minimize these
risks. Such options and the securities used as "cover" for such options may be
considered illiquid securities.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the selected
securities index. Perfect correlation is not possible because the securities
held or to be acquired by a Portfolio will not exactly match the composition of
the securities indexes on which options are written. In the purchase of
securities index options the principal risk is that the premium and transaction
costs paid by a Portfolio in purchasing an option will be lost if the
S-10
<PAGE>
changes (increase in the case of a call, decrease in the case of a put) in the
level of the index do not exceed the cost of the option.
INVESTMENT LIMITATIONS
Fundamental Policies
Each Portfolio has adopted certain investment restrictions which, in addition to
those restrictions in the Prospectus, are fundamental and may not be changed
without approval by a majority vote of the Portfolio's shareholders. Such
majority is defined in the 1940 Act as the lesser of (i) 67% or more of the
voting securities of the Portfolio present in person or by proxy at a meeting,
if the holders of more than 50% of the outstanding voting securities are present
or represented by proxy; or (ii) more than 50% of the outstanding voting
securities of the Portfolio.
PBHG Growth Fund
The PBHG Growth Fund may not:
1. With respect to 75% of its assets, purchase more than 10% of the outstanding
voting securities of any one issuer.
2. Pledge any of its assets, except that the Portfolio may pledge assets having
a value of not more than 10% of its total assets in order to (i) secure
permitted borrowings, or (ii) as may be necessary in connection with the
Portfolio's use of options and futures contracts.
3. Purchase or write puts, calls or combinations thereof, except that the
Portfolio may invest in and commit its assets to writing and purchasing only put
and call options that are listed on a national securities exchange and issued by
the Options Clearing Corporation to the extent permitted by the Prospectus and
this Statement of Additional Information. In order to comply with the securities
laws of several states, the Portfolio (as a matter of operating policy) will not
write a covered call option if, as a result, the aggregate market value of all
portfolio securities covering call options or subject to put options for that
Portfolio exceeds 25% of the market value of that Portfolio's net assets.
4. Make loans except by the purchase of bonds or other debt obligations of types
commonly offered publicly or privately and purchased by financial institutions,
including investment in repurchase agreements, provided that the Portfolio will
not make any investment in repurchase agreements maturing in more than seven
days if such investments, together with any other illiquid securities held by
the Portfolio, would exceed 15% of the value of its net assets.
5. Invest in the securities of other open-end investment companies, or invest in
the securities of closed-end investment companies except through purchase in the
open market in a transaction involving no commission or profit to a sponsor or
dealer (other than the customary broker's commission) or as part of a merger,
consolidation or other acquisition.
S-11
<PAGE>
6. Engage in the underwriting of securities of other issuers, except that the
Portfolio may sell an investment position even though it may be deemed to be an
underwriter as that term is defined in the 1933 Act.
7. Purchase or sell real estate, commodities or commodity contracts, except that
the Portfolio may enter into futures contracts and options thereon that are
listed on a national securities or commodities exchange where, as a result
thereof, no more than 5% of the total assets for that Portfolio (taken at market
value at the time of entering into the futures contracts) would be committed to
margin deposits on such futures contracts and premiums paid for unexpired
options on such futures contracts; provided that, in the case of an option that
is "in-the-money" at the time of purchase, the "in-the-money" amount, as defined
under Commodity Futures Trading Commission regulations, may be excluded in
computing such 5% limit.
8. Invest in interests in oil, gas or other mineral exploration or development
programs.
All Other Portfolios
Each of the other Portfolios may not:
1. Acquire more than 10% of the voting securities of any one issuer (except that
the PBHG Large Cap 20 Fund is not subject to this limitation).
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of total assets (or with respect to the
PBHG Mid-Cap Value Fund and the PBHG Small Cap Value Fund, 33 1/3 of the value
of the total assets of each such Portfolio). This borrowing provision is
included solely to facilitate the orderly sale of portfolio securities to
accommodate substantial redemption requests if they should occur and is not for
investment purposes. All borrowings in excess of 5% of the Portfolio's total
assets will be repaid before making investments.
4. Make loans, except that each Portfolio, in accordance with that Portfolio's
investment objectives and policies, may (i) purchase or hold debt instruments,
and (ii) enter into repurchase agreements as described in the Portfolio's
prospectus and this Statement of Additional Information. In addition, the PBHG
Limited Fund, the PBHG Large Cap 20 Fund, the PBHG Large Cap Value Fund, the
PBHG Mid-Cap Value Fund, the PBHG Small Cap Value Fund, the PBHG International
Fund and the PBHG Strategic Small Company Fund may each lend its portfolio
securities in an amount not exceeding one-third the value of its total assets.
5. Pledge, mortgage or hypothecate assets, except: (i) to secure temporary
borrowings permitted by each Portfolio's limitation on permitted borrowings; or
(ii) in connection with permitted transactions regarding options and futures
contracts and, except for the PBHG Mid-Cap Value Fund and the PBHG Small Cap
Value Fund, in aggregate amounts not to exceed 10% of total assets taken at
current value at the time of the occurrence of such pledge, mortgage or
hypothecation.
S-12
<PAGE>
6. Purchase or sell real estate, real estate limited partnership interests,
futures contracts, commodities or commodity contracts, except that this shall
not prevent a Portfolio from: (i) investing in readily marketable securities of
issuers which can invest in real estate or commodities, institutions that issue
mortgages, or real estate investment trusts which deal in real estate or
interests therein, pursuant to the Portfolio's investment objective and
policies; and (ii) entering into futures contracts and options thereon that are
listed on a national securities or commodities exchange where, as a result
thereof, no more than 5% of the total assets for that Portfolio (taken at market
value at the time of entering into the futures contracts) would be committed to
margin deposits on such futures contracts and premiums paid for unexpired
options on such futures contracts; provided that, in the case of an option that
is "in-the-money" at the time of purchase, the "in-the-money" amount, as defined
under the Commodity Futures Trading Commission regulations, may be excluded in
computing the 5% limit. Each Portfolio (as a matter of operating policy) will
utilize only listed futures contracts and options thereon.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that each Portfolio may: (i) obtain short-term
credits as necessary for the clearance of security transactions; and (ii)
establish margin accounts as may be necessary in connection with the Portfolio's
use of options and futures contracts.
8. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
9. Purchase securities of other investment companies except as permitted by the
1940 Act and the rules and regulations thereunder.
10. Issue senior securities (as defined in the 1940 Act) except in connection
with permitted borrowing money or pledging, mortgaging or hypothecating assets,
as described in each Portfolio's limitation on borrowing money and each
Portfolio's limitation on permitted borrowings and each Portfolio's limitation
on pledging, mortgaging or hypothecating assets, or as permitted by rule,
regulation or order of the SEC.
11. Invest in interests in oil, gas or other mineral exploration or development
programs and, except for the PBHG Mid-Cap Value Fund and the PBHG Small Cap
Value Fund, invest in oil, gas or mineral leases.
12. Except for the PBHG Large Cap 20 Fund, purchase securities of any issuer
(except securities issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities) if, as a
result, more than 5% of the total assets of the Portfolio would be invested in
the securities of such issuer. With the exception of the PBHG Cash Reserves
Fund, this restriction applies to 75% of each Portfolio's total assets.
13. Purchase any securities which would cause 25% or more of the total assets of
a Portfolio to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities. For purposes of this limitation, (i)
utility companies will be divided
S-13
<PAGE>
according to their services, for example, gas distribution, gas transmission,
electric and telephone will each be considered a separate industry, and (ii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry. For purposes of this
limitation, supranational organizations are deemed to be issuers conducting
their principal business activities in the same industry.
Non-fundamental Policies
In addition to the foregoing, and the policies set forth in each Portfolio's
Prospectus, each Portfolio has adopted additional investment restrictions which
may be amended by the Board of Directors without a vote of shareholders.
PBHG Growth Fund
The PBHG Growth Fund may not:
1. Invest in the securities of foreign issuers if, at the time of acquisition,
more than 15% of the value of the Portfolio's total assets would be invested in
such securities.
2. Make short sales or purchase securities on margin; but it may obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities.
3. Purchase or hold the securities of an issuer if, at the time thereof, any
such purchase or holding would cause more than 15% of the Portfolio's net assets
to be invested in illiquid securities. This limitation does not include any Rule
144A security that has been determined by, or pursuant to procedures established
by, the Board, based on trading markets for such security, to be liquid.
All Other Portfolios
Each of the other Portfolios may not:
1. Invest in illiquid securities in an amount exceeding, in the aggregate, 15%
of its net assets. This limitation does not include any Rule 144A restricted
security that has been determined by, or pursuant to procedures established by,
the Board of Directors, based on trading markets for such security, to be
liquid.
2. Purchase puts, calls, straddles, spreads, and any combination thereof, except
to the extent permitted by the 1940 Act or the rules or regulations thereunder.
The foregoing percentages will apply at the time of each purchase of a security.
S-14
<PAGE>
THE ADVISER
The Fund and Pilgrim Baxter & Associates, Ltd. have entered into an advisory
agreement with respect to each Portfolio (the "Advisory Agreement"). The
Advisory Agreement provides certain limitations on the Adviser's liability, but
also provides that the Adviser shall not be protected against any liability to
the Fund or each of its Portfolios or its shareholders by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties thereunder.
The Advisory Agreement obligates the Adviser to: (i) provide a program of
continuous investment management for the Fund in accordance with the Fund's
investment objectives, policies and limitations; (ii) make investment decisions
for the Fund; and (iii) place orders to purchase and sell securities for the
Fund, subject to the supervision of the Board of Directors. The Advisory
Agreement provides that the Adviser is not responsible for other expenses of
operating the Fund. (See the Prospectuses for a description of expenses borne by
the Fund.)
For the fiscal years and periods ended March 31, 1995, 1996, and 1997 the
Portfolios paid or waived the following advisory fees:
<TABLE>
<CAPTION>
====================================================================================================================================
Fees Paid Fees Waived
------------------------------------------------------------------------------------------------------
Portfolio 1995 1996 1997 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Growth $4,883,694 $15,198,342 $44,149,035 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Emerging $941,606(1) $4,784,791 $10,774,907 $0 $0 $0
Growth+
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Growth * $33,161 (2) $930,649 * $82,513 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Select Equity * $461,555 (2) $4,101,441 * $162,473 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Core Growth * ($10,712)(3) $2,918,000 * $33,489 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Limited * * $1,415,935(4) * * $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap 20 * * $183,335(5) * * $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Value * * $32,059(6) * * $8,931
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Mid-Cap Value * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Small Cap Value * * * * * *
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG International $98,194(7) $25,795 $176,992 $12,025 $88,733 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Cash Reserves * $66,035 (2) $678,965 * $99,136 $0
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Technology * $58,490 (8) $2,970,000 * $70,782 $0
& Communications
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Strategic * * $153,886(6) * * $0
Small Company
====================================================================================================================================
</TABLE>
S-15
<PAGE>
* Not in operation during the period.
+ The PBHG Emerging Growth Fund acquired the assets and assumed the
liabilities of the Pilgrim Baxter Emerging Growth Fund on June 2, 1994.
The PBHG Emerging Growth Fund retained the October 31 fiscal year of its
predecessor only for fiscal 1994. The PBHG Emerging Growth Fund changed
its fiscal year end to March 31 in 1995.
1 For the period from June 3, 1994 through March 31, 1995.
2 For the period from April 5, 1995 (commencement of operations) through
March 31, 1996.
3 For the period from January 2, 1996 (commencement of operations) through
March 31, 1996.
4 For the period from July 1, 1996 (commencement of operations) through
March 31, 1997.
5 For the period from December 1, 1996 (commencement of operations) through
March 31, 1997.
6 For the period from January 2, 1997 (commencement of operations) through
March 31, 1997.
7 For the period from June 14, 1994 (commencement of operations) through
March 31, 1995.
8 For the period from October 2, 1995 (commencement of operations) through
March 31, 1996.
In the interest of limiting the expenses of each Portfolio, the Adviser has
entered into separate expense limitation agreements with the Fund ("Expense
Limitation Agreement") with respect to the PBHG Class shares of the PBHG Core
Growth Fund, the PBHG Limited Fund, the PBHG Large Cap 20 Fund, the PBHG Large
Cap Value Fund, the PBHG Mid-Cap Value Fund, the PBHG Small Cap Value Fund, the
PBHG International Fund and the PBHG Strategic Small Company Fund. Pursuant to
each Expense Limitation Agreement the Adviser has agreed to waive or limit its
advisory fees and to assume other expenses of the PBHG Class shares of each of
the above referenced Portfolios to the extent necessary to limit the total
annual operating expenses (expressed as a percentage of each Portfolio's average
daily net assets) to 1.50% for all the Portfolios (except the PBHG International
Fund) and 2.25% for the PBHG International Fund. Reimbursement by the Portfolios
of the advisory fees waived or limited and other expenses paid by the Adviser
pursuant to the Expense Limitation Agreements may be made at a later date when
the Portfolios have reached a sufficient asset size to permit reimbursement to
be made without causing the total annual expense rate of the PBHG Class shares
of each Portfolio to exceed 1.50% (or 2.25% for the International Fund).
Consequently, no reimbursement by a Portfolio will be made unless: (i) the
Portfolio's assets exceed $75 million; (ii) the Portfolio's total annual expense
ratio with respect to its PBHG Class shares and is less than 1.50% (or 2.25% for
the International Fund); and (iii) the payment of such reimbursement was
approved by the Board of Directors on a quarterly basis.
With respect to the Advisor Class shares of the PBHG Growth Fund, the Adviser
has entered into an Expense Limitation Agreement with the Fund. Pursuant to such
Expense Limitation Agreement, the Adviser has agreed to waive or limit its
advisory fees and to assume other expenses of the Advisor Class shares of such
Portfolio to the extent necessary to limit the total operating expenses
(exclusive of Rule 12b-1 expenses) to 1.50% of average daily net assets of the
Portfolio. Reimbursement by the Portfolio of the advisory fees waived or limited
and other expenses paid by the Adviser pursuant to the Expense Limitation
Agreement may be made at a later date when the Portfolio has reached a
S-16
<PAGE>
sufficient asset size to permit reimbursement to be made without causing the
total annual expense ratio (exclusive of Rule 12b-1 expenses) of the Advisor
Class shares of the Portfolio to exceed 1.50%. Consequently, no reimbursement by
the Portfolio will be made unless: (i) the Portfolio's assets exceed $75
million; (ii) the Portfolio's total annual expense ratio (exclusive of Rule
12b-1 expenses) with respect to the Advisor Class shares is less than 1.50%; and
(iii) the payment of such reimbursement was approved by the Board of Directors
on a quarterly basis.
The continuance of the Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the Fund's Board of Directors or
by vote of a majority of the Fund's outstanding voting securities and (ii) by
the affirmative vote of a majority of the directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Advisory Agreement may be terminated (i) at
any time without penalty by the Fund upon the vote of a majority of the
directors or by vote of the majority of the Fund's outstanding voting securities
upon 60 days' written notice to the Adviser or (ii) by the Adviser at any time
without penalty upon 60 days' written notice to the Fund. The Advisory Agreement
will also terminate automatically in the event of its assignment (as defined in
the 1940 Act).
THE SUB-ADVISERS
Pilgrim Baxter Value Investors, Inc.
The Fund, on behalf of PBHG Mid-Cap Value Fund, PBHG Large Cap Value Fund, PBHG
Small Cap Value Fund and PBHG Strategic Small Company Fund, and the Adviser have
entered into sub-advisory agreements ("Sub-Advisory Agreement") with Pilgrim
Baxter Value Investors, Inc. ("Value Investors"), a wholly owned subsidiary of
the Adviser. Each Sub-Advisory Agreement provides certain limitations on Value
Investors' liability, but also provides that Value Investors shall not be
protected against any liability to the Fund or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder.
Each Sub-Advisory Agreement obligates Value Investors to: (i) manage the
investment operations of the relevant Portfolio and the composition of the
Portfolio's investment portfolios, including the purchase, retention and
disposition thereof in accordance with the Portfolio's investment objective,
policies and limitation; (ii) provide supervision of the Portfolio's investments
and to determine from time to time what investment and securities will be
purchased, retained or sold by the Portfolio and what portion of the assets will
be invested or held uninvested in cash; and (iii) determine the securities to be
purchased or sold by the Portfolio and will place orders with or through such
persons, brokers or dealers to carry out the policy with respect to brokerage
set forth in the Portfolio's Prospectus or as the Board of Directors or the
Adviser may direct from time to time, in conformity with federal securities
laws.
The continuance of each Sub-Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the Fund's Board of Directors or
by vote of a majority of the outstanding voting securities of the Portfolio and
(ii) by the affirmative vote of a majority of the Directors who are not parties
to the agreement or interested persons of any such party by votes cast in
S-17
<PAGE>
person at a meeting called for such purpose. Each Sub-Advisory Agreement may be
terminated (i) by the Fund, without the payment of any penalty, by the vote of a
majority of the Directors of the Fund or by the vote of a majority of the
outstanding voting securities of the relevant Portfolio, (ii) by the Adviser at
any time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other parties, or (iii) by Value Investors
at any time, without the payment of any penalty, on 90 days' written notice to
the other parties. Each Sub-Advisory Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act).
Murray Johnstone International Ltd.
The Fund, on behalf of the PBHG International Fund, and the Adviser have entered
into a sub-advisory agreement (the "Sub-Advisory Agreement") with Murray
Johnstone International Ltd. ("Murray Johnstone"). The Sub-Advisory Agreement
provides certain limitations on Murray Johnstone's liability, but also provides
that Murray Johnstone shall not be protected against any liability to the Fund
or its shareholders by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from a breach of
fiduciary duty with respect to the receipt of compensation for services
thereunder.
The Sub-Advisory Agreement obligates Murray Johnstone to: (i) manage the
investment operations of the PBHG International Fund and the composition of the
Portfolio's portfolio, including the purchase, retention and disposition thereof
in accordance with the Portfolio's investment objectives, policies and
limitations; (ii) provide supervision of the Portfolio's investments and
determine from time to time what investments and securities will be purchased,
retained or sold by the Portfolio, and what portion of the assets will be
invested or held uninvested in cash; and (iii) determine the securities to be
purchased or sold by the Portfolio and will place orders with or through such
persons, brokers or dealers to carry out the policy with respect to brokerage
set forth in the Portfolio's Prospectus or as the Board of Directors or the
Adviser may direct from time to time, in conformity with federal securities
laws.
The continuance of the Sub-Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the Fund's Board of Directors or
by vote of a majority of the Fund's outstanding voting securities and (ii) by
the affirmative vote of a majority of the Directors who are not parties to the
agreement or interested persons of any such party by votes cast in person at a
meeting called for such purpose. The Sub-Advisory Agreement may be terminated
(i) by the Portfolio at any time, without the payment of any penalty, by the
vote of a majority of Directors of the Fund or by the vote of a majority of the
outstanding voting securities of the Portfolio, (ii) by the Adviser at any time,
without the payment of any penalty, on not more than 60 days' nor less than 30
days' written notice to the other parties, or (iii) by Murray Johnstone at any
time, without the payment of any penalty, on 90 days' written notice to the
other parties. The Sub-Advisory Agreement will also terminate automatically in
the event of its assignment (as defined in the 1940 Act).
Wellington Management Company, LLP
The Fund, on behalf of the PBHG Cash Reserves Fund, and the Adviser have entered
into a sub-advisory agreement (the "Sub-Advisory Agreement") with Wellington
Management Company,
S-18
<PAGE>
LLP ("Wellington"). The Sub-Advisory Agreement provides certain limitations on
Wellington's liability, but also provides that Wellington shall not be protected
against any liability to the Portfolio or its shareholders by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from a breach of fiduciary duty with respect to the receipt of
compensation for services thereunder.
The Sub-Advisory Agreement obligates Wellington to: (i) manage the investment
operations of the PBHG Cash Reserves Fund and the composition of the Portfolio's
portfolio, including the purchase, retention and disposition thereof in
accordance with the Portfolio's investment objectives, policies and
restrictions; (ii) provide supervision of the Portfolio's investments and
determine from time to time what investments and securities will be purchased,
retained or sold by the Portfolio, and what portion of the assets will be
invested or held uninvested in cash; and (iii) determine the securities to be
purchased or sold by the Portfolio and will place orders with or through such
persons, brokers or dealers to carry out the policy with respect to brokerage
set forth in the Portfolio's Registration Statement or as the Board of Directors
or the Adviser may direct from time to time, in conformity with federal
securities laws.
The Sub-Advisory Agreement will continue in effect for a period of more than two
years from the date thereof only so long as continuance is specifically approved
at least annually in conformance with the 1940 Act; provided, however, that this
Agreement may be terminated with respect to the Fund (i) by the Fund at any
time, without the payment of any penalty, by the vote of a majority of Directors
of the Fund or by the vote of a majority of the outstanding voting securities of
the Fund, (ii) by the Adviser at any time, without the payment of any penalty,
on not more than 60 days' nor less than 30 days' written notice to the other
parties, or (iii) by Wellington at any time, without the payment of any penalty,
on 90 days' written notice to the other parties. The Sub-Advisory Agreement
shall terminate automatically and immediately in the event of its assignment as
defined in the 1940 Act.
THE ADMINISTRATOR AND SUB-ADMINISTRATOR
The Fund and PBHG Fund Services (the "Administrator") entered into the
Administrative Services Agreement (the "Administrative Agreement") on July 1,
1996 pursuant to which the Administrator oversees the administration of the
Fund's and each Portfolio's business and affairs, including services performed
by various third parties. The Administrator, a wholly-owned subsidiary of the
Adviser, was organized as a Pennsylvania business trust and has its principal
place of business at 825 Duportail Road, Wayne, Pennsylvania 19087. The
Administrator is entitled to a fee from the Fund, which is calculated daily and
paid monthly at an annual rate of 0.15% of the average daily net assets of each
Portfolio. The Administrative Agreement provides that the Administrator shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Administrative
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence on the part of the Administrator in the performance of its duties.
The Administrative Agreement shall remain in effect until December 31, 1998, and
shall thereafter continue in successive periods of one year, unless terminated
by either party upon not less than 90 days' prior written notice to the other
party.
S-19
<PAGE>
The Fund, the Administrator and SEI Fund Resources (the "Sub-Administrator")
entered into the Sub-Administrative Services Agreement on July 1, 1996 pursuant
to which the Sub-Administrator assists the Administrator in connection with the
administration of the business and affairs of the Fund. Prior to July 1, 1996,
the Sub-Administrator served as the administrator of the Fund. The
Sub-Administrator is an indirect wholly-owned subsidiary of SEI Investment
Company ("SEI"). The Sub-Administrator was organized as a Delaware business
trust, and has its principal business offices at One Freedom Valley Road, Oaks,
Pennsylvania 19456. The Sub-Administrative Services Agreement provides that the
Sub-Administrator shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
the Sub-Administrative Agreement relates, except a loss resulting from willful
misfeasance, bad faith or negligence on the part of the Sub-Administrator in the
performance of its duties. The Sub-Administrative Agreement shall remain in
effect until December 31, 1998, and shall continue in successive periods of one
year, unless terminated by either party upon not less than 90 days' prior
written notice to the other party.
Under the Sub-Administrative Services Agreement, the Sub-Administrator is
entitled to a fee from the Administrator, which is calculated daily and paid
monthly, (i) an annual rate of 0.07.% of the average daily net assets of each
Portfolio with respect to the first $2.5 billion of the total average daily net
assets of the Fund and the PBHG Insurance Series Fund, Inc. taken together and
(ii) an annual rate of .025% of the average daily net assets of each Portfolio
with respect to the total average daily net assets of the Fund in excess of $2.5
billion and the PBHG Insurance Series Fund, Inc. taken together.
For the fiscal years and periods ended March 31, 1995, 1996 and 1997 the
Portfolios paid the following administration fees:
<TABLE>
<CAPTION>
===================================================================================================================================
Fees Paid Fees Waived
Portfolio
-------------------------------------------------------------------------------------------------------
1995 1996 1997++ 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Growth $1,200,047 $3,576,064 $8,325,330 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Emerging Growth+ $221,554(1) $1,125,834 $2,026,934 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Growth * $69,887(2) $194,580 * $6,148 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Select Equity * $158,422(2) $762,481 * $6,148 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Core Growth * $12,092(3) $527,363 * $6,148 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Limited * * $212,390(4) * * $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap 20 * * $32,353(5) * * $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Value * * $5,658(6) * * $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Mid-Cap Value * * * * * *
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Small Cap Value * * * * * *
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG International $59,384(7) $74,949 $40,069 $0 $0 $0
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Cash Reserves * $117,204(2) $354,921 * $6,148 $0
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Technology & * $35,898(8) $537,851 * $6,148 $0
Communications
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Strategic Small * * $23,083(6) * * $0
Company
===================================================================================================================================
</TABLE>
* Not in operation during the period.
+ The PBHG Emerging Growth Fund acquired the assets and assumed the
liabilities of the Pilgrim Baxter Emerging Growth Fund on June 1, 1994.
The PBHG Emerging Growth Fund retained the October 31 fiscal year of its
predecessor only for fiscal 1994. The PBHG Emerging Growth Fund changed
its fiscal year end to March 31 in 1995.
++ From January 1, 1996 to June 30, 1996, SEI Fund Resources served as the
Fund's Administrator. From July 1, 1996 to March 31, 1997, PBHG Fund
Services served as the Fund's Administrator.
1 For the period from June 3, 1994 through March 31, 1995.
2 For the period from April 5, 1995 (commencement of operations) through
March 31, 1996.
3 For the period from January 2, 1996 (commencement of operations) through
March 31, 1996.
4 For the period from July 1, 1996 (commencement of operations) through
March 31, 1997.
5 For the period from December 1, 1996 (commencement of operations) through
March 31, 1997.
6 For the period from January 1, 1997 (commencement of operations) through
March 31, 1997.
7 For the period from June 14, 1994 (commencement of operations) through
March 31, 1995.
8 For the period from October 2, 1995 (commencement of operations) through
March 31, 1996.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly owned subsidiary
of SEI, and the Fund are parties to a distribution agreement (the "Distribution
Agreement"). The Distributor is not entitled to receive any compensation for the
distribution services it provides with respect to either class of shares.
The Distribution Agreement is renewable annually. The Distribution Agreement may
be terminated by the Distributor, by a majority vote of the Directors who are
not interested persons and have no financial interest in the Distribution
Agreement or by a majority vote of the outstanding securities of the Fund upon
not more than 60 days' written notice by either party or upon assignment by the
Distributor.
The Fund has adopted a Service Plan pursuant to Rule 12b-1 under the 1940 Act to
enable the Advisor Class shares of the PBHG Growth Fund to directly and
indirectly bear certain expenses relating to the distribution of such Shares.
Pursuant to such Service Plan, the Fund shall be entitled to pay to financial
intermediaries, plan fiduciaries, and investment professionals ("Service
Providers")
S-21
<PAGE>
a shareholder servicing fee at the aggregate annual rate of up to 0.25% of such
Portfolio's average daily net assets attributable to Advisor Class shares. The
shareholder servicing fee is intended to compensate Service Providers for
providing to shareholders or the underlying beneficial owners of Advisor Class
shares: (i) personal support services; (ii) distribution assistance and
distribution support services; and (iii) account maintenance services. In
addition, insurance companies or their affiliates may be paid a shareholder
servicing fee described for providing similar services to variable annuity or
variable life insurance contract holders ("Contract Holders") or their
participants for which such insurance companies are not otherwise compensated by
Contract Holders or participants.
The Distributor shall prepare and deliver written reports to the Board of
Directors of the Fund on a regular basis (at least quarterly) setting forth the
payments made to Service Providers pursuant to the Service Plan, and the
purposes for which such expenditures were made, as well as any supplemental
reports as the Board of Directors may from time to time reasonably request.
Except to the extent that the Administrator, Sub-Administrator or Adviser may
benefit through increased fees from an increase in the net assets of the Fund
which may have resulted in part from the expenditures, no interested person of
the Fund nor any Director of the Fund who is not an interested person of the
Fund had a direct or indirect financial interest in the operation of the Plan or
any related agreement.
No compensation was paid to the Distributor for distribution services for the
fiscal years ended March 31, 1995, March 31, 1996 and March 31, 1997. For the
fiscal year ended March 31, 1997, $8,871 was paid to Service Providers pursuant
to the Service Plan for the Advisor Class shares of the PBHG Growth Fund.
THE CUSTODIANS
Corestates Bank, N.A., Broad and Chestnut Streets, P.O. 7618, Philadelphia,
Pennsylvania 19101, serves as the custodian for the Fund and each Portfolio
other than the PBHG International Fund. The Northern Trust Company, 50 South
LaSalle Street, Chicago, Illinois 60675 serves as the custodian for the PBHG
International Fund (together, the "Custodians"). The Custodians hold cash,
securities and other assets of the Fund as required by the 1940 Act.
DIRECTORS AND OFFICERS OF THE FUND
The management and affairs of the Fund are supervised by the Directors under the
laws of the State of Maryland. The Directors and executive officers of the Fund
and the principal occupations for the last five years are set forth below. Each
may have held other positions with the named companies during that period. The
age of each Director and officer is indicated in the parentheses.
JOHN R. BARTHOLDSON (51) - Director - Triumph Group Holdings, Inc.
(manufacturing), 1255 Drummers Lane, Suite 200, Wayne, PA 19087-1590. Director,
PBHG Insurance Series Fund, Inc. (investment company) since 1997. Chief
Financial Officer and Director, The Triumph Group Holdings, Inc. since 1992.
Senior Vice President and Chief Financial Officer, Lukens, Inc., 1978-1992.
S-22
<PAGE>
HAROLD J. BAXTER (51)* - Director - Chairman, Chief Executive Officer and
Director, the Adviser, 825 Duportail Road, Wayne, PA 19087. Director, PBHG
Insurance Series Fund, Inc. (investment company) since 1997; Director, PBHG
Advisor Funds, Inc. (investment company) since 1998. Trustee, the Administrator
since May 1996 and Chief Executive Officer, Value Investors, since June 1996.
JETTIE M. EDWARDS (50) - Director - Syrus Associates, 76 Seaview Drive, Santa
Barbara, California 93108. Consultant, Syrus Associates since 1986. Director,
PBHG Insurance Series Fund, Inc. (investment company) since 1997. Trustee,
Provident Investment Counsel Trust (investment company) since 1992 and EQ
Advisors Trust (investment company) since March 1997.
ALBERT A. MILLER (63) - Director - 7 Jennifer Drive, Holmdel, New Jersey 07733.
Merchandise executive, Cherry and Webb Stores since 1996. Principal and
Treasurer, JK Equipment Exporters since 1995. Director, PBHG Insurance Series
Fund, Inc. (investment company) since 1997. Advisor and Secretary, The
Underwoman Shoppes Inc. (retail clothing stores) since 1980. Merchandising Group
Vice President, R.H. Macy & Co. 1958-1995 (retired).
GARY L. PILGRIM (57) - President - President, Chief Investment Officer, and
Director, the Adviser since 1982. Trustee, the Administrator since May 1996.
President, PBHG Insurance Series Fund, Inc. (investment company) since 1997.
Director, Value Investors since June 1996.
PAUL J. HONDROS (49) - Executive Vice President - President and Chief Operating
Officer, the Adviser since October 1997. President and Chief Operating Officer,
Value Investors since January 1998. Trustee, the Distributor since January 1998.
President and Chief Executive Officer, Fidelity Investments Retail Group
1990-1997.
SANDRA K. ORLOW (44) - Vice President, Assistant Secretary - Vice President and
Assistant Secretary of SEI, the Sub-Administrator and the Distributor since
1983. Vice President and Assistant Secretary, PBHG Insurance Series Fund, Inc.
(investment company) since 1997.
KATHRYN L. STANTON (39) - Vice President, Assistant Secretary - Vice President,
Assistant Secretary of SEI, the Sub-Administrator and the Distributor since
1994. Vice President and Assistant Secretary, PBHG Insurance Series Fund, Inc.
(investment company) since 1997. Associate, Morgan, Lewis & Bockius LLP (law
firm), 1989-1994.
TODD CIPPERMAN (32) - Vice President, Assistant Secretary - Vice President,
Assistant Secretary of SEI, the Sub-Administrator and the Distributor since
1995. Vice President and Assistant Secretary, PBHG Insurance Series Fund, Inc.
(investment company) since 1997. Associate, Dewey Ballantine (law firm)
1994-1995, Associate, Winston & Strawn (law firm) 1991-1994.
BARBARA A. NUGENT (41) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary, SEI since April 1996. Vice President and Assistant
Secretary, PBHG Insurance Series
- --------
* Mr. Baxter is a Director who may be deemed to be an "interested person" of
the Fund as that term is defined in the 1940 Act.
S-23
<PAGE>
Fund, Inc. (investment company) since 1997. Associate, Drinker, Biddle & Reath
(law firm), 1994-1996. Assistant Vice President, Delaware Service Company, Inc.
(transfer agent), 1988-1993.
MICHAEL J. HARRINGTON (29) - Vice President - Director of Fund Services, the
Adviser since 1994. Secretary, the Administrator since May 1996. Account
Manager, SEI, 1991-1994. Assistant Vice President, PBHG Insurance Series Fund,
Inc. (investment company) since 1997.
LEE T. CUMMINGS (34) - Treasurer, Chief Financial Officer and Controller -
Director of Mutual Fund Operations, the Adviser since 1996. Treasurer, the
Administrator since May 1996. Vice President, PBHG Insurance Series Fund, Inc.
(investment company) since 1997. Investment Accounting Officer, Delaware Group
of Funds, 1994-1996. Vice President, Fund/Plan Services, Inc., 1992-1994.
BRIAN F. BEREZNAK (36) - Vice President - Trustee and President, the
Administrator since May 1996, Chief Operating Officer, the Adviser from 1989
through December 31, 1996. Director, Value Investors since June 1996. Vice
President and Assistant Secretary, PBHG Insurance Series Fund, Inc. (investment
company) since 1997.
JOHN M. ZERR (35) - Vice President and Secretary - General Counsel and
Secretary, the Adviser and Value Investors since November 1996. Vice President,
PBHG Insurance Series Fund, Inc. (investment company) since 1997. Vice President
and Assistant Secretary, Delaware Management Company, Inc. and the Delaware
Group of Funds, 1995-1996. Associate, Ballard Spahr Andrews & Ingersoll (law
firm), 1987-1995.
As of the date of this Statement of Additional Information, the Directors and
officers of the Fund as a group owned less than 1% of the outstanding shares of
each class of shares of each Portfolio.
Each current Director of the Fund who is not an "interested person" of the Fund
received the following compensation during the fiscal year ending March 31,
1997:
<TABLE>
<CAPTION>
====================================================================================================================================
Aggregate Pension or
Compensation From Retirement Estimated Annual Total Compensation
The Fund* as Part Benefits Accrued Benefits Upon from the Fund and
Name of Person, Position of Fund Expenses to Directors* Retirement Fund Complex Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John R. Bartholdson, $19,333 N/A N/A $22,333 for services
Director on two Boards
- ------------------------------------------------------------------------------------------------------------------------------------
Harold J. Baxter, $0 N/A N/A $0
Director**
- ------------------------------------------------------------------------------------------------------------------------------------
Jettie M. Edwards, $19,333 N/A N/A $22,333 for services
Director on two Boards
- ------------------------------------------------------------------------------------------------------------------------------------
Albert A. Miller, $19,333 N/A N/A $22,333 for services
Director on two Boards
====================================================================================================================================
</TABLE>
S-24
<PAGE>
* The Fund and Fund Complex are expected to pay in the aggregate
approximately $47,000 to each Director who is not an "interested person"
of the Registrant for the fiscal year ending March 31, 1998.
** Mr. Baxter is a Director who may be deemed to be an "interested person" of
the Fund, as that term is defined in the 1940 Act, and consequently will
be receiving no compensation from the Fund.
Each Director is expected to receive $30,500 for services to the Fund for the
fiscal year ending March 31, 1998.
COMPUTATION OF YIELD
From time to time the PBHG Cash Reserves Fund may advertise its "current yield"
and "effective compound yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
PBHG Cash Reserves Fund refers to the income generated by an investment in the
PBHG Cash Reserves Fund over a seven-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The "effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the PBHG Cash Reserves Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
The current yield of the PBHG Cash Reserves Fund will be calculated daily based
upon the seven days ending on the date of calculation ("base period"). The yield
is computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing shareholder account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing such net change by
the value of the account at the beginning of the same period to obtain the base
period return and multiplying the result by (365/7). Realized and unrealized
gains and losses are not included in the calculation of the yield. The effective
compound yield of the PBHG Cash Reserves Fund is determined by computing the net
change, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula: Effective Yield = ((Base Period Return + 1) 365/7) - 1. The
current and the effective yields reflect the reinvestment of net income earned
daily on portfolio assets.
The yield of the PBHG Cash Reserves Fund fluctuates, and the annualization of a
week's dividend is not a representation by the Fund as to what an investment in
the PBHG Cash Reserves Fund will actually yield in the future. Actual yields
will depend on such variables as asset quality, average asset maturity, the type
of instruments the PBHG Cash Reserves Fund invests in, changes in interest rates
on money market instruments, changes in the expenses of the PBHG Cash Reserves
Fund and other factors.
S-25
<PAGE>
Yields are one basis upon which investors may compare the PBHG Cash Reserves
Fund with other money market funds; however, yields of other money market funds
and other investment vehicles may not be comparable because of the factors set
forth above and differences in the methods used in valuing portfolio
instruments.
For the 7-day period ended September 30, 1997, the yield for the PBHG Cash
Reserves Fund was 5.03% and the 7-day effective yield was 5.16%.
CALCULATION OF TOTAL RETURN
From time to time, each of the Portfolios may advertise its total returns. The
total return refers to the average compounded rate of return to a hypothetical
investment for designated time periods (including, but not limited to, the
period from which the Portfolio commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)n = ERV, where P = a hypothetical initial payment of
$1,000; T = average annual total return; n = number of years; and ERV = ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
designated time period as of the end of such period.
Based on the foregoing, the average annual total returns for each of the
Portfolios (other than the Cash Reserves Fund) from its inception through
September 30, 1997, and for the one, five and ten year periods ended September
30, 1997, and the aggregate total returns for the Portfolios since inception,
were as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Aggregate
Average Annual Total Return Total Return
---------------------------------------------------------------------------------------------------
Since Since
Portfolio One Year Five Year Ten Year Inception Inception
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PBHG Growth(1) -1.56% 30.70% 17.80% 20.53% 801.92%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Emerging Growth(2) 4.30% * * 30.41% 212.89%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Growth(3) 19.38% * * 32.50% 101.39%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Select Equity(4) 5.76% * * 39.29% 128.04%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Core Growth(5) -9.23% * * 15.55% 28.90%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Limited(6) 23.72% * * 27.86% 36.22%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap 20(7) * * * 35.81% 29.14%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap Value(8) * * * 34.04% 24.50%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Mid-Cap Value(12) * * * 134.73% 43.00%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Small Cap Value(12) * * * 144.64% 45.50%
</TABLE>
S-26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG International(9) 17.67% * * 7.53% 27.01%
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Technology & 34.69% * * 49.64% 124.16%
Communications(10)
- ------------------------------------------------------------------------------------------------------------------------------------
PBHG Strategic Small * * * 48.48% 34.40%
Company(11)
====================================================================================================================================
</TABLE>
* Not in operation during the period.
** Not annualized since each Portfolio has been in operations for not more
than ten months as of September 30, 1997.
1 The PBHG Growth Fund commenced operations on December 19, 1985. The
Advisor Class shares of this Portfolio commenced operations on August 19,
1996.
2 The PBHG Emerging Growth Fund commenced operations with its predecessor on
June 15, 1993.
3 The PBHG Large Cap Growth Fund commenced operations on April 5, 1995.
4 The PBHG Select Equity Fund commenced operations on April 5, 1995.
5 The PBHG Core Growth Fund commenced operations on January 2, 1996.
6 The PBHG Limited Fund commenced operations on July 1, 1996.
7 The PBHG Large Cap 20 Fund commenced operations on December 1, 1996.
8 The PBHG Large Cap Value Fund commenced operations on January 1, 1997.
9 The PBHG International Fund commenced operations on June 14, 1994.
10 The PBHG Technology & Growth Fund commenced operations on October 2, 1995.
11 The PBHG Strategic Small Company Fund commenced operations on January 1,
1997.
12 The PBHG Mid-Cap Value Fund and the PBHG Small Cap Value Fund commenced
operations on May 1, 1997.
Quotations of total return, which are not annualized, represent historical
earnings and asset value fluctuations. Total return is based on past performance
and is not a guarantee of future results.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made on any day on which the New York Stock
Exchange is open for business. Currently, the following holidays are observed by
the Fund: New Year's Day,
S-27
<PAGE>
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Shares of the Portfolios are offered on a
continuous basis.
It is currently the Fund's policy to pay all redemptions in cash. The Fund
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Portfolios
in lieu of cash. Shareholders may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
The Fund reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of a Portfolio's securities is not reasonably practicable,
or for such other periods as the SEC has by order permitted. The Fund also
reserves the right to suspend sales of shares of a Portfolio for any period
during which the New York Stock Exchange, the Adviser, the Administrator,
Sub-Administrator, the Transfer Agent and/or the Custodian are not open for
business.
DETERMINATION OF NET ASSET VALUE
The securities of each Portfolio are valued by the Sub-Administrator. The
Administrator will use an independent pricing service to obtain valuations of
securities. The pricing service relies primarily on prices of actual market
transactions as well as trade quotations. The procedures of the pricing service
and its valuations are reviewed by the officers of the Fund under the general
supervision of the Directors.
Portfolio securities listed on an exchange or quoted on a national market system
are valued at the last sales price. Other securities are quoted at the last bid
price. In the event a listed security is traded on more than one exchange, it is
valued at the last sale price on the exchange on which it is principally traded.
If there are no transactions in a security during the day, it is valued at the
most recent 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 obligations are valued at amortized cost. Securities for
which market quotations are not readily available and other assets held by the
Fund, if any, are valued at their fair value as determined in good faith by the
Board of Directors.
The net asset value per share of the PBHG Cash Reserves Fund is calculated by
adding the value of securities and other assets, subtracting liabilities and
dividing by the number of outstanding shares. Securities will be valued by the
amortized cost method which involves valuing a security at its cost on the date
of purchase and thereafter (absent unusual circumstances) assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuations in general market rates of interest on the value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which a security's value, as determined by this method, is higher or
lower than the price the Fund would receive if it sold the instrument. During
periods of declining interest
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<PAGE>
rates, the daily yield of the PBHG Cash Reserves Fund may tend to be higher than
a like computation made by a company with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio securities. Thus, if the use of amortized cost by the PBHG
Cash Reserves Fund resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in the PBHG Cash Reserves Fund would be able to
obtain a somewhat higher yield than would result from investment in a company
utilizing solely market values, and existing investors in the Portfolio would
experience a lower yield. The converse would apply in a period of rising
interest rates.
The use of amortized cost valuation by the PBHG Cash Reserves Fund and the
maintenance of the Portfolio's net asset value at $1.00 are permitted by
regulations set forth in Rule 2a-7 under the 1940 Act, provided that certain
conditions are met. Under Rule 2a-7 as amended, a money market portfolio must
maintain a dollar-weighted average maturity in the Fund of 90 days or less and
not purchase any instrument having a remaining maturity of more than 397 days.
In addition, money market funds may acquire only U.S. dollar denominated
obligations that present minimal credit risks and that are "eligible securities"
which means they are (i) rated, at the time of investment, by at least two
nationally recognized security rating organizations (one if it is the only
organization rating such obligation) in the highest short-term rating category
or, if unrated, determined to be of comparable quality (a "first tier
security"), or (ii) rated according to the foregoing criteria in the second
highest short-term rating category or, if unrated, determined to be of
comparable quality ("second tier security"). The Adviser will determine that an
obligation presents minimal credit risks or that unrated instruments are of
comparable quality in accordance with guidelines established by the Directors.
The Directors must approve or ratify the purchase of any unrated securities or
securities rated by only one rating organization. In addition, investments in
second tier securities are subject to the further constraints that (i) no more
than 5% of a Portfolio's assets may be invested in such securities in the
aggregate, and (ii) any investment in such securities of one issuer is limited
to the greater of 1% of the Portfolio's total assets or $1 million. The
regulations also require the Directors to establish procedures which are
reasonably designed to stabilize the net asset value per share at $1.00 for the
Portfolio. However, there is no assurance that the Fund will be able to meet
this objective. The Fund's procedures include the determination of the extent of
deviation, if any, of the Portfolio's current net asset value per unit
calculated using available market quotations from the Portfolio's amortized cost
price per share at such intervals as the Directors deem appropriate and
reasonable in light of market conditions and periodic reviews of the amount of
the deviation and the methods used to calculate such deviation. In the event
that such deviation exceeds 1/2 of 1%, the Directors are required to consider
promptly what action, if any, should be initiated. If the Directors believe that
the extent of any deviation may result in material dilution or other unfair
results to shareholders, the Directors are required to take such corrective
action as they deem appropriate to eliminate or reduce such dilution or unfair
results to the extent reasonably practicable. In addition, if any Portfolio
incurs a significant loss or liability, the Directors have the authority to
reduce pro rata the number of shares of that Portfolio in each shareholder's
account and to offset each shareholder's pro rata portion of such loss or
liability from the shareholder's accrued but unpaid dividends or from future
dividends.
TAXES
The following is only a summary of certain income tax considerations generally
affecting the Portfolio and its shareholders and is not intended as a substitute
for careful tax planning. Shareholders are
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<PAGE>
urged to consult their tax advisors with specific reference to their own tax
situations, including their state and local income tax liabilities.
Federal Income Tax
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Qualification as a Regulated Investment Company
Each Portfolio intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. In order to qualify for treatment as a
RIC under the Code, each Portfolio must distribute annually to its shareholders
at least the sum of 90% of its net interest income excludable from gross income
plus 90% of its investment company taxable income (generally, net investment
income plus net short-term capital gain) ("Distribution Requirement"). In
addition to the Distribution Requirement, each Portfolio must meet several other
requirements. Among these requirements are the following: (i) each Portfolio
must derive at least 90% of its gross income in each taxable year from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
and other income (including but not limited to gains from options, futures or
forward contracts derived with respect to the Portfolio's business of investing
in such stock, securities or currencies) (the "Income Requirement"); (ii) each
Portfolio must, for taxable years beginning on or prior to August 5, 1997,
derive less than 30% of its gross income each taxable year from the sale or
other disposition of stocks or securities held for less than three months (the
"Short--Short Gain Test") (for taxable years beginning after August 5, 1997, the
Short-Short Gain test has been repealed by the Taxpayer Relief Act of 1997);
(iii) at the close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and securities of other
issuers, with such securities of other issuers limited, in respect to any one
issuer, to an amount that does not exceed 5% of the value of the Portfolio's
assets and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (iv) no more than 25% of the value of a
Portfolio's total assets may be invested in the securities of any one issuer
(other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Portfolio controls
and which are engaged in the same or similar trades or businesses (the "Asset
Diversification Test").
For purposes of the Asset Diversification Test, it is unclear under present law
who should be treated as the issuer of forward foreign currency exchange
contracts, of options on foreign currencies, or of foreign currency futures and
related options. It has been suggested that the issuer in each case may be the
foreign central bank or foreign government backing the particular currency.
Consequently, a Portfolio may find it necessary to seek a ruling from the
Internal Revenue Service on this issue or to curtail its trading in forward
foreign currency exchange contracts in order to stay within the limits of the
Asset Diversification Test.
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<PAGE>
For purposes of the Income Requirement, foreign currency gains (including gains
from options, futures or forward contracts on foreign currencies) that are not
"directly related" to a Portfolio's principal business may, under regulations
not yet issued, be excluded from qualifying income.
If a Portfolio fails to qualify as a RIC for any taxable year, it will be
taxable at regular corporate rates on its net investment income and net capital
gain without any deductions for amounts distributed to shareholders. In such an
event, all distributions (including capital gains distributions) will be taxable
as ordinary dividends to the extent of that Portfolio's current and accumulated
earnings and profits and such distributions will generally be eligible for the
corporate dividends-received deduction.
Portfolio Distributions
Notwithstanding the Distribution Requirement described above, which requires
only that a Portfolio distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Portfolio will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year 98% of its ordinary
income for that year and 98% of its capital gain net income (the excess of
short- and long-term capital gains over short- and long-term capital losses) for
the one-year period ending on October 31 of that calendar year, plus certain
other amounts.
Treasury regulations permit a RIC in determining its investment company taxable
income and undistributed net capital gain for any taxable year to elect to treat
all or part of any net capital loss, any net long-term capital loss, or any net
foreign currency loss incurred after October 31 as if it had been incurred in
the succeeding year.
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Capital gain dividends are taxable to
shareholders as a long-term capital gain, regardless of the length of time a
shareholder has held his shares. Under the Taxpayer Relief Act of 1997, the
Internal Revenue Service is authorized to issue regulations that will enable
shareholders to determine the tax rates applicable to such capital gain
distributions. For calendar year 1997, the Internal Revenue Service has
announced that RICs will be required to report to their shareholders the amount
of capital gain dividends subject to taxation at the 28 percent tax rate.
Withholding
In certain cases, a Portfolio will be required to withhold, and remit to the
U.S. Treasury, 31% of any distributions paid to a shareholder who (i) has failed
to provide a correct taxpayer identification number, (ii) is subject to backup
withholding by the Internal Revenue Service, or (iii) has not certified to the
Portfolio that such shareholder is not subject to backup withholding.
S-31
<PAGE>
Redemption or Exchange of Shares
Upon a redemption or exchange of shares, a shareholder will recognize a taxable
gain or loss depending upon his or her basis in the shares. Unless the shares
are disposed of as part of a conversion transaction, such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term or short-term, depending upon the
shareholder's holding period for the shares. Any loss recognized by a
shareholder on the sale of Portfolio shares held six months or less will be
treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
Any loss recognized on a sale or exchange will be disallowed to the extent that
Portfolio shares are sold and replaced within the 61-day period beginning 30
days before and ending 30 days after the disposition of such shares. In such a
case, the basis of the shares acquired will be increased to reflect the
disallowed loss. Shareholders should particularly note that this loss
disallowance rule applies even where shares are automatically replaced under the
dividend reinvestment plan.
Investment in Foreign Financial Instruments. Under Code Section 988, gains or
losses from certain foreign currency forward contracts or fluctuations in
currency exchange rates will generally be treated as ordinary income or loss.
Such Code Section 988 gains or losses will increase or decrease the amount of a
Portfolio's investment company taxable income available to be distributed to
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Portfolio's net capital gains. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year, the
Portfolio would not be able to pay any ordinary income dividends, and any such
dividends paid before the losses were realized, but in the same taxable year,
would be recharacterized as a return of capital to shareholders, thereby
reducing the tax basis of Portfolio shares.
Hedging Transactions
Some of the forward foreign currency exchange contracts, options and futures
contracts that the Portfolios may enter into will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated as if
they are sold for their fair market value on the last business day of the
taxable year, regardless of whether a taxpayer's obligations (or rights) under
such contracts have terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
combined with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. The net amount
of such gain or loss for the entire taxable year (including gain or loss arising
as a consequence of the year-end deemed sale of such contracts) is deemed to be
60% long-term and 40% short-term gain or loss. However, in the case of Section
1256 contracts that are forward foreign currency exchange contracts, the net
gain or loss is separately determined and (as discussed above) generally treated
as ordinary income or loss.
Generally, the hedging transactions in which the Portfolios may engage may
result in "straddles" or "conversion transactions" for U.S. federal income tax
purposes. The straddle and conversion transaction rules may affect the character
of gains (or in the case of the straddle rules, losses) realized by the
Portfolios. In addition, losses realized by the Portfolios on positions that are
part of a straddle
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<PAGE>
may be deferred under the straddle rules, rather than being taken into account
in calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules and the
conversion transaction rules have been promulgated, the tax consequences to the
Portfolios of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gain realized by the
Portfolios (and, if they are conversion transactions, the amount of ordinary
income) which is taxed as ordinary income when distributed to shareholders.
Each Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If a Portfolio makes any of the elections,
the amount, character, and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Transactions that may be engaged in by certain of the Portfolios (such as short
sales "against the box") may be subject to special tax treatment as
"constructive sales" under section 1259 of the Code if a Portfolio holds certain
"appreciated financial positions" (defined generally as any interest (including
a futures or forward contract, short sale or option) with respect to stock,
certain debt instruments, or partnership interests if there would be a gain were
such interest sold, assigned, or otherwise terminated at its fair market value).
Upon entering into a constructive sales transaction with respect to an
appreciated financial position, a Portfolio will be deemed to have
constructively sold such appreciated financial position and will recognize gain
as if such position were sold, assigned, or otherwise terminated at its fair
market value on the date of such constructive sale (and will take into account
any gain for the taxable year which includes such date).
Because application of the straddle, conversion transaction and constructive
sale rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected straddle or
investment positions, the amount which must be distributed to shareholders and
which will be taxed to shareholders as ordinary income or long-term capital gain
may be increased or decreased as compared to a fund that did not engage in such
transactions.
Requirements relating to each Portfolio's tax status as a RIC, including (in
particular) the Short--Short Gain Test, may limit the extent to which a
Portfolio will be able to engage in transactions in options and futures
contracts.
State Taxes
Distributions by a Portfolio to shareholders and the ownership of shares may be
subject to state and local taxes.
Foreign Income Taxes
Foreign Tax Consequences
Investment Income received by the PBHG International Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the
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<PAGE>
Portfolio's securities. Tax conventions between certain countries and the United
States may reduce or eliminate these taxes. Foreign countries generally do not
impose taxes on capital gains with respect to investments by foreign investors.
If the PBHG International Fund meets the Distribution Requirement and if more
than 50% of the value of the Portfolio's total assets at the close of its
taxable year consists of securities of foreign corporations, the Portfolio will
be eligible to file an election with the Internal Revenue Service that will
enable shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign and U.S. possessions income taxes paid by the
Portfolio (the "Foreign Tax Credit Election"). Pursuant to the Foreign Tax
Credit Election, the Portfolio will treat those taxes as dividends paid to its
shareholders. Each shareholder will be required to include a proportionate share
of those taxes in gross income as income received from a foreign source and must
treat the amount so included as if the shareholder had paid the foreign tax
directly. The shareholder may then either deduct the taxes deemed paid by him or
her in computing his or her taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the shareholder's
federal income tax. However, the Taxpayer Relief Act of 1997 has imposed holding
period requirements that must be satisfied by both the Portfolio and the
shareholders before a shareholder will be allowed a deduction or credit. If the
Portfolio makes the Foreign Tax Credit Election, it will report annually to its
shareholders the respective amounts per share of the Portfolio's income from
sources within, and taxes paid to, foreign countries and U.S. possessions.
Foreign Shareholders
Dividends from a Portfolio's investment company taxable income and distributions
constituting returns of capital paid to a nonresident alien individual, a
foreign trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") generally will be subject to U.S. withholding tax at a rate of 30%
(or lower treaty rate) upon the gross amount of the dividend. Foreign
shareholders may be subject to U.S. withholding tax at a rate of 30% on the
income resulting from a Portfolio's Foreign Tax Credit Election, but may not be
able to claim a credit or deduction with respect to the withholding tax for the
foreign taxes treated as having been paid by them.
A foreign shareholder generally will not be subject to U.S. taxation on gain
realized upon the redemption or exchange of shares of a Portfolio or on capital
gain dividends. In the case of a foreign shareholder who is a nonresident alien
individual, however, gain realized upon the sale or redemption of shares of a
Portfolio and capital gain dividends ordinarily will be subject to U.S. income
tax at a rate of 30% (or lower applicable treaty rate) if such individual is
physically present in the U.S. for 183 days or more during the taxable year and
certain other conditions are met. In the case of a foreign shareholder who is a
nonresident alien individual, the Portfolios may be required to withhold U.S.
federal income tax at a rate of 31% unless proper notification of such
shareholder's foreign status is provided.
Notwithstanding the foregoing, if distributions by the Portfolios are
effectively connected with a U.S. trade or business of a foreign shareholder,
then dividends from such Portfolio's investment company taxable income, capital
gains, and any gains realized upon the sale of shares of the Portfolio will be
subject to U.S. income tax at the graduated rates applicable to U.S. citizens or
domestic corporations.
Transfers by gift of shares of a Portfolio by a foreign shareholder who is a
nonresident alien individual will not be subject to U.S. federal gift tax. An
individual who, at the time of death, is a
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<PAGE>
foreign shareholder will nevertheless be subject to U.S. federal estate tax with
respect to shares at the graduated rates applicable to U.S. citizens and
residents, unless a treaty exception applies. In the absence of a treaty, there
is a $13,000 statutory estate tax credit.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisors with respect to the
particular tax consequences to them of an investment in any of the Portfolios.
Miscellaneous Considerations
The foregoing general discussion of federal income tax consequences is based on
the Code and the regulations issued thereunder as in effect on November 1, 1997.
Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
Prospective shareholders are encouraged to consult their tax advisors as to the
consequences of these and other U.S., state, local, and foreign tax rules
affecting investments in the Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser or Sub-Advisers are authorized to select brokers and dealers to
effect securities transactions for the Portfolios. The Adviser or Sub-Advisers
will seek to obtain the most favorable net results by taking into account
various factors, including price, commission, if any, size of the transactions
and difficulty of executions, the firm's general execution and operational
facilities and the firm's risk in positioning the securities involved. While the
Adviser or Sub-Advisers generally seek reasonably competitive spreads or
commissions, the Fund will not necessarily be paying the lowest spread or
commission available. The Adviser or Sub-Advisers seek to select brokers or
dealers that offer the Portfolios best price and execution or other services
which are of benefit to the Portfolios. Certain brokers or dealers assist their
clients in the purchase of shares from the Distributor and charge a fee for this
service in addition to a Portfolio's public offering price. In the case of
securities traded in the over-the-counter market, the Adviser or Sub-Advisers
expect normally to seek to select primary market makers.
The Adviser or Sub-Advisers may, consistent with the interests of the
Portfolios, select brokers on the basis of the research services they provide to
the Adviser or Sub-Advisers. Such services may include analyses of the business
or prospects of a company, industry or economic sector, or statistical and
pricing services. Information so received by the Adviser will be in addition to
and not in lieu of the services required to be performed by the Adviser under
the Advisory Agreement. If, in the judgment of the Adviser or Sub-Adviser, a
Portfolio or other accounts managed by the Adviser or Sub-Adviser will be
benefitted by supplemental research services, the Adviser or Sub-Advisers are
authorized to pay brokerage commissions to a broker furnishing such services
which are in excess of commissions which another broker may have charged for
effecting the same transaction. These research services include advice, either
directly or through publications or writings, as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of
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<PAGE>
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer software used in security analyses; and providing portfolio
performance evaluation and technical market analyses. The expenses of the
Adviser or Sub-Advisers will not necessarily be reduced as a result of the
receipt of such information, and such services may not be used exclusively, or
at all, with respect to the Portfolio or account generating the brokerage, and
there can be no guarantee that the Adviser or Sub-Advisers will find all of such
services of value in advising the Portfolios.
It is expected that the Portfolios may execute brokerage or other agency
transactions through the Distributor, which is a registered broker-dealer, for a
commission in conformity with the 1940 Act, the Securities Exchange Act of 1934,
as amended, and rules promulgated by the SEC. Under these provisions, the
Distributor is permitted to receive and retain compensation for effecting
portfolio transactions for the Portfolios on an exchange if a written contract
is in effect between the Distributor and the Portfolio expressly permitting the
Distributor to receive and retain such compensation. These rules further require
that commissions paid to the Distributor by the Portfolio for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In addition, the
Adviser or Sub-Advisers may direct commission business to one or more designated
broker-dealers, including the Distributor, in connection with such
broker-dealer's payment of certain of the Portfolio's or the Fund's expenses. In
addition, the Adviser or Sub-Adviser may place orders for the purchase or sale
of Portfolio securities with qualified broker-dealers that refer prospective
shareholders to the Portfolios. The Directors, including those who are not
"interested persons" of the Fund, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD") and subject to seeking best execution and such other
policies as the Board of Directors may determine, the Advisers may consider
sales of the Portfolio's shares as a factor in the selection of broker-dealers
to execute portfolio transactions for the Portfolio.
The Fund's Board of Directors has adopted a Code of Ethics governing personal
trading by persons who manage, or who have access to trading activity by the
Portfolio. The Code of Ethics allows trades to be made in securities that may be
held by the Portfolio, however, it prohibits a person from taking advantage of
Portfolio trades or from acting on inside information.
For the fiscal year and periods ended March 31, 1997, 1996, and 1995, the
Portfolios paid brokerage fees as follows:
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<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Total Total Percent of
Amount of Amount of Total Amount
Total Brokerage Brokerage of Brokerage
Total Amount Total Amount Amount Commissions Commissions Commissions
of Brokerage of Brokerage of Brokerage Paid to the Paid to the Paid to the
Commissions Commissions Commissions Distributor Distributor Distributor
Fund Paid in 1997 Paid in 1996 Paid in 1995 in 1996++ in 1997++ in 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Growth $4,696,917 $1,546,204 $802,803 $102,795 $262,068 6%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Emerging $408,039 $702,027 $101,235(1) $50,416 $107,839 26%
Growth+
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap $138,111 $50,907(2) * $890 $6,768 5%
Growth
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Select Equity $329,054 $204,485(2) * $4,862 $21,840 7%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Core Growth $306,218 $21,334(3) * $362 $17,609 6%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Limited Fund $80,602(4) * * * $23,147 29%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap 20 $67,122(5) * * * $3,003 4%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Large Cap $40,128(6) * * * $428 1%
Value
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Mid-Cap Value * * * * * *
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Small Cap * * * * * *
Value
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG International $110,586 $152,429 $87,658(7) 0 $0 0%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Cash Reserves $0 $0(2) * 0 $0 0%
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Technology & $646,233 $39,559(8) * $1,458 $24,434 4%
Communications
- -----------------------------------------------------------------------------------------------------------------------------------
PBHG Strategic Small $162,617(6) * * * $1,516 9%
Company
===================================================================================================================================
</TABLE>
* Not in operation during the period.
+ The PBHG Emerging Growth Fund acquired the assets and assumed the
liabilities of the Pilgrim Baxter Emerging Growth Fund on June 1, 1994.
The PBHG Emerging Growth Fund retained the October 31 fiscal year of its
predecessor only for fiscal 1994. The PBHG Emerging Growth Fund changed
its fiscal year end to March 31 in 1995.
++ These commissions were paid to the Distributor in connection with
repurchase agreement transactions.
1 For the period from June 3, 1994 through March 31, 1995.
2 For the period from April 5, 1995 (commencement of operations) through
March 31, 1996.
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<PAGE>
3 For the period from January 2, 1996 (commencement of operations) through
March 31, 1996.
4 For the period from July 1, 1996 (commencement of operations) through
March 31, 1997.
5 For the period from December 1, 1996 (commencement of operations) through
March 31, 1997.
6 For the period from January 2, 1997 (commencement of operations) through
March 31, 1997.
7 For the period from June 14, 1994 (commencement of operations) through
March 31, 1995.
8 For the period from October 2, 1995 (commencement of operations) through
March 31, 1996.
Consistent with the Rules of Fair Practice of the NASD and subject to seeking
best execution and such other policies as the Board of Directors may determine,
the Adviser may consider sales of Fund shares as a factor in the selection of
dealers to execute portfolio transactions for the Fund.
DESCRIPTION OF SHARES
The Fund may increase the number of shares which each Portfolio is authorized to
issue and may create additional portfolios of the Fund. Each share of a
Portfolio represents an equal proportionate interest in that Portfolio with each
other share. Shares are entitled upon liquidation to a pro rata share in the net
assets of the Portfolio available for distribution to shareholders. Shareholders
have no preemptive rights. All consideration received by the Fund for shares of
any Portfolio and all assets in which such consideration is invested would
belong to that Portfolio and would be subject to the liabilities related
thereto.
5% AND 25% SHAREHOLDERS
As of October 31, 1997, the following persons were the only persons who were
record owners (or to the knowledge of the Fund, beneficial owners) of 5% or more
of the shares of the Portfolios. The Fund believes that most of the shares
referred to below were held by the persons indicated in accounts for their
fiduciary, agency or custodial clients.
PBHG Core Growth Fund - PBHG Class
Charles Schwab & Co., Inc. 19.03%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 14.24%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
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<PAGE>
PBHG Emerging Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 20.73%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 13.33%
P.O. Box 3908
Church Street Station
New York, New York 10008-3908
PBHG Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 21.25%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 9.06%
P.O. 3908
Church Street Station
New York, New York 10008-3908
Fidelity Investments Institutional 5.66%
Operations Co.
100 Magellan Way
Covington, KY 41015-3987
PBHG Growth Fund - Advisor Class
The Travelers Insurance Company 39.98%
ATTN: Roger Ferland
1 Tower Square
Hartford, CT 06183-9001
Sisters of Mercy 8.93%
2300 Adeline Drive
Burlingame, CA 94010-5599
Fleet National Bank, Custodian 9.04%
FBO Hoag Memorial Hospital Growth
ATTN: 0004683070
P.O. Box 92800
Rochester, NY 14692-8900
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Chase Manhattan Bank 14.19%
General Cable Savings Plan
Resource Plan
ATTN: Mary Makebov
770 Broadway, Fl. 10
New York, NY 10003-9522
PBHG Large Cap Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 21.94%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 15.07%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Naidot & Co. 7.06%
100 Woodbridge Center Drive
Woodbridge, NJ 07095
PBHG Limited Fund - PBHG Class
Charles Schwab & Co., Inc. 9.09%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust TR 10.96%
FBO J. Paul Getty Trust
P.O. Box 92956
Chicago, IL 60675-2956
PBHG Large Cap 20 Fund - PBHG Class
Charles Schwab & Co., Inc. 19.40%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 10.71%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
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PBHG Select Equity Fund - PBHG Class
Charles Schwab & Co. Inc. 22.38%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 17.68%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Large Cap Value Fund - PBHG Class
Compass Bank, Trustee 47.19%
Alfa Mutual Insurance Company
P.O. Box 11000
Montgomery, AL 36191-0001
PBHG Mid-Cap Value - PBHG Class
National Financial Services Corp. 23.30%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co, Inc. 23.08%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson Lufkin Jenrette 9.19%
Transfer Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
PBHG Small Cap Value - PBHG Class
National Financial Services Corp. 22.37%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
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Charles Schwab & Co., Inc. 30.00%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson Lufkin & Jenrette 7.42%
Transfer Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
PBHG International Fund - PBHG Class
Charles Schwab & Co., Inc. 13.69%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 8.16%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Strategic Small Company Fund
Charles Schwab & Co., Inc. 16.90%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 18.43%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Technology & Communications Fund - PBHG Class
Charles Schwab & Co., Inc. 28.24%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 15.74%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
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PBHG Cash Reserves Fund - PBHG Class
Pilgrim Baxter Partners I L.P. 36.89%
1255 Drummers Lane, Suite 300
Wayne, PA 19087-1565
Pilgrim Baxter Partners II LP 7.50%
1255 Drummers Lane, Suite 300
Wayne, PA 19087-1565
FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P. located at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania, serves as the independent accountants for the Fund. Coopers &
Lybrand L.L.P. provides audit services, tax return preparation and assistance
and consultation in connection with review of SEC filings.
The audited financial statements for the fiscal year ended March 31, 1997 and
the report of the independent accountants for that year are included in the
Fund's Annual Report to Shareholders dated March 31, 1997. The Annual Report,
except for pages one through ten thereof, is incorporated herein by reference
and made a part of this document. These financial statements have been audited
by Coopers & Lybrand L.L.P. and have been included in the Prospectus and
incorporated by reference into the Statement of Additional Information in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in auditing and accounting.
Unaudited financial statements for the period ended September 30, 1997, are
included in the Fund's Semi-Annual Report to Shareholders dated September 30,
1997. The Semi-Annual Report, except for pages 1 through 2 thereof, is
incorporated herein by reference and made a part of this document.
S-43
