AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 23, 1998.
1933 ACT REGISTRATION NO. 2-99810
1940 ACT REGISTRATION NO. 811-04391
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 35
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 33
THE PBHG FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
825 DUPORTAIL ROAD
WAYNE, PA 19087
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (800) 433-0051
HAROLD J. BAXTER
PILGRIM BAXTER & ASSOCIATES, LTD.
825 DUPORTAIL ROAD
WAYNE, PENNSYLVANIA 19087-5525
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
JOHN M. ZERR, ESQ. WILLIAM H. RHEINER, ESQ.
GENERAL COUNSEL AND SECRETARY BALLARD SPAHR ANDREWS & INGERSOLL, LLP
PILGRIM BAXTER & ASSOCIATES, LTD. 1735 MARKET STREET
825 DUPORTAIL ROAD 51ST FLOOR
WAYNE, PENNSYLVANIA 19087-5525 PHILADELPHIA, PENNSYLVANIA 19103-7599
<PAGE>
Approximate date of Proposed Public Offering: As soon as practicable after
effective date of Registration Statement
It is proposed that this filing will become effective:
__________ immediately upon filing pursuant to paragraph (b)
__________ on [date] pursuant to paragraph (b)
__________ 60 days after filing pursuant to paragraph (a)(1)
__________ on ____________________, pursuant to paragraph (a)(1)
X 75 days after filing pursuant to paragraph (a)(2)
- ---------
__________ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following:
_______ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered: Common Stock
<PAGE>
THE PBHG FUNDS, INC.
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
PART A. Item No. and Captions Caption in Prospectus
<S> <C>
1. Cover Page Cover Page
2. Synopsis Summary
3. Condensed Financial Information Expense Summary; Financial Highlights; Performance
Advertising
4. General Description of Registrant The Fund and the Portfolios; Investment Objectives and
Policies; General Investment Policies and Strategies; Risk
Factors; Investment Limitations; General Information - The
Fund
5. Management of the Fund Financial Highlights; General Information - Directors of the
Fund; General Information - The Adviser; General
Information - Value Investors; General Information - The
Administrator and Sub-Administrator; General Information
- The Transfer Agent and Shareholder Servicing Agents;
General Information - The Distributor
6. Capital Stock and Other Securities The Fund and the Portfolios; General Information - Voting
Rights; General Information - Dividends and Distributions;
Taxes
7. Purchase of Securities Being Offered How to Purchase Fund Shares; Shareholder Services;
Determination of Net Asset Value; General Information -
The Distributor
8. Redemption or Repurchase How to Redeem Fund Shares; Determination of Net Asset
Value
9. Pending Legal Proceedings Not Applicable
PART B. Item No. and Captions Caption in Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History The Fund
13. Investment Objectives and Policies Description of Permitted Investments; Investment
Limitations; Description of Shares
14. Management of the Registrant Directors and Officers of the Fund; The Administrator
15. Control Persons and Principal Holders of Directors and Officers of the Fund; 5% and 25%
Securities Shareholders
16. Investment Advisory and Other Services The Adviser and Sub-Advisers; The Administrator and
Sub-Administrator; The Distributor
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Description of Shares
19. Purchase, Redemption, and Pricing of Purchase and Redemption of Shares;
Securities Being Offered Determination of Net Asset Value
20. Tax Status Taxes
21. Underwriters The Distributor
22. Calculation of Yield Quotations Computation of Yield; Calculation of Total Return
23. Financial Statements Financial Statements
</TABLE>
Part C. Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration
Statement.
<PAGE>
THE PBHG FUNDS, INC.
PBHG CLASS SHARES
PROSPECTUS DATED __________ __, 1999
The PBHG Funds, Inc. (the "Fund") is a mutual fund that offers a convenient and
economical means of investing in professionally managed portfolios of
securities. This Prospectus offers PBHG Class shares of each of the following
portfolios (each a "Portfolio" and, together, the "Portfolios"):
PBHG NEW OPPORTUNITIES FUND
PBHG FOCUSED VALUE FUND
This Prospectus sets forth concisely the information about the Fund and the
Portfolios that a prospective investor should know before investing. Investors
are advised to read this Prospectus and retain it for future reference. A
Statement of Additional Information dated ________ __, 1999, has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by calling 1-800-433-0051. This Prospectus is also available on the
Fund's Web site at http://www.pbhgfunds.com. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund and other registrants that file electronically
with the Securities and Exchange Commission. The Statement of Additional
Information is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, the Federal Reserve
Board, or any other agency and are subject to investment risk, including the
possible loss of principal.
In order to facilitate the management of the PBHG New Opportunities Fund, the
Board of Directors of the Fund has determined that at the close of business on
the Business Day (as defined later in this Prospectus) on which the net asset
value of the PBHG New Opportunities Fund first exceeds $150 million (the
"Closing Day"), the PBHG New Opportunities Fund shall close to all new and
subsequent investments other than the following: (a) subsequent investments made
by persons who were shareholders of the PBHG New Opportunities Fund on the
Closing Day; (b) new and subsequent investments made by discretionary advised
clients of the Adviser and its affiliates; and (c) new and subsequent
investments by pension, profit-sharing or other employee benefit plans created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code (the
"Code") or plans under Section 457 of the Code, or
<PAGE>
employee benefit plans created pursuant to Section 403(b) of the Code and
sponsored by nonprofit organizations defined under Section 501(c)(3) of the
Code. This decision does not affect the status of the PBHG Focused Value Fund.
2
<PAGE>
SUMMARY
The PBHG Funds, Inc. (the "Fund") is an open-end management investment
company which provides a convenient way to invest in professionally managed
portfolios of securities. This Prospectus provides basic information about the
following two separate series of the Fund: the PBHG New Opportunities Fund ("New
Opportunities Fund") and the PBHG Focused Value Fund ("Focused Value Fund"). The
New Opportunities Fund is classified as a diversified investment company and the
Focused Value Fund is classified as a non-diversified investment company.
Who are the Adviser and the Sub-Adviser? Pilgrim Baxter & Associates, Ltd.
("Adviser") serves as the investment adviser to each Portfolio. Pilgrim Baxter
Value Investors, Inc. ("Value Investors") serves as the sub-adviser to the
Focused Value Fund. See "The Adviser" and "Value Investors" under the caption
"General Information."
TABLE OF CONTENTS
SUMMARY....................................................................3
EXPENSE SUMMARY............................................................4
THE FUND AND THE PORTFOLIOS................................................6
INVESTMENT OBJECTIVES AND POLICIES.........................................6
GENERAL INVESTMENT POLICIES AND STRATEGIES.................................9
RISK FACTORS..............................................................10
INVESTMENT LIMITATIONS....................................................12
HOW TO PURCHASE FUND SHARES...............................................12
SHAREHOLDER SERVICES......................................................15
HOW TO REDEEM FUND SHARES.................................................18
DETERMINATION OF NET ASSET VALUE..........................................20
PERFORMANCE ADVERTISING...................................................20
TAXES.....................................................................21
GENERAL INFORMATION.......................................................22
GLOSSARY OF PERMITTED INVESTMENTS.........................................28
Who are the Administrator and Sub-Administrator? PBHG Fund Services, a
wholly-owned subsidiary of the Adviser, serves as the administrator of the Fund,
and SEI Fund Resources, an affiliate of the Fund's distributor, serves as
sub-administrator of the Fund. See "The Administrator and Sub-Administrator"
under the caption "General Information."
Who are the Transfer Agent and Shareholder Servicing Agents? DST Systems,
Inc. serves as the transfer agent and dividend disbursing agent of the Fund (the
"Transfer Agent"). PBHG Fund Services serves as shareholder servicing agent of
the Fund. UAM Shareholder Service Center, Inc., an affiliate of the Adviser,
serves as sub-shareholder servicing agent of the Fund. The Fund may also pay
amounts to certain third parties that provide sub-transfer agency and other
administrative services
3
<PAGE>
relating to the Fund to persons who beneficially own interests in the Fund. See
"The Transfer Agent and Shareholder Servicing Agents" under the caption "General
Information."
Who is the Distributor? SEI Investments Distribution Co. provides the Fund
with distribution services. See "The Distributor" under the caption "General
Information."
Is There a Sales Load? No, PBHG Class shares of each Portfolio are offered
on a no-load basis.
Is There a Minimum Investment? The New Opportunities Fund has a minimum
initial investment of $5,000 for regular accounts and $2,000 for IRAs. The
Focused Value Fund has a minimum initial investment of $2,500 for regular
accounts and $2,000 for IRAs. Each Portfolio, however, has a minimum initial
investment of $500 for both regular accounts and IRAs provided a Systematic
Investment Plan is established by the investor with a minimum investment of $25
per month at the same time that the initial investment is made. The minimum
initial investment for Education IRAs is $500.
How Do I Purchase and Redeem Shares? Purchases and redemptions may be made
through the Transfer Agent on any day on which the New York Stock Exchange is
open for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent receives
sufficient information to execute the order and receives payment by check or
readily available funds prior to 4:00 p.m. Eastern time. Redemption orders
placed with the Transfer Agent prior to 4:00 p.m. Eastern time on any Business
Day will be effective that day. The purchase and redemption price for shares is
the net asset value per share determined as of the end of the day the order is
effective. The Fund also offers a Systematic Investment Plan and a Systematic
Withdrawal Plan. See "Shareholder Services."
EXPENSE SUMMARY
The purpose of the following table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in PBHG Class shares.
Annual Operating Expenses
(as a percentage of average net assets after applicable fee waivers and expense
reimbursements)
<TABLE>
<CAPTION>
Total Operating
Other Expenses (net of
Advisory Expenses (net of fee waivers and
Fees (net of expense expense
fee waivers, 12b-1 reimbursements, reimbursements, if
if any) (1) Fees if any) (1)(2) any)(1)(3)
- ---------------------------------------- ------------------ ---------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
New Opportunities Fund 1.21% None 0.79% 2.00%
- ---------------------------------------- ------------------ ---------- ---------------------- ------------------------
Focused Value Fund 0.48% None 1.02% 1.50%
======================================== ================== ========== ====================== ========================
</TABLE>
4
<PAGE>
- ---------------
(1) Because these Portfolios of the PBHG Funds had not yet commenced operations
prior to the date of this Prospectus, "Other Expenses" are based on
estimated amounts, net of any expense reimbursement. Absent any fee waiver
or expense reimbursement arrangement, "Advisory Fees," "Other Expenses" and
"Total Operating Expenses," respectively, as a percentage of average net
assets of each Portfolio are as follows:
Total
Advisory Other Operating
Fees Expenses Expenses
-------- -------- ---------
New Opportunities Fund 1.50% 0.79% 2.29%
Focused Value Fund 0.85% 1.02% 1.87%
(2) A wire redemption charge, currently $10, is deducted from the amount of a
Federal Reserve wire redemption payment made at the request of a
shareholder.
(3) The Adviser has agreed to waive that portion, if any, of the annual
management fees payable by the Portfolio and to pay certain expenses of the
Portfolio to the extent necessary to ensure that the "Total Operating
Expenses" of the Portfolio (exclusive of taxes, interest, brokerage
commissions, capitalized expenditures and extraordinary expenses) do not
exceed, as a percentage of daily net assets, on an annualized basis: 2.00%
of the New Opportunities Fund and 1.50% of the Focused Value Fund. The fee
waiver/expense reimbursement arrangement for each Portfolio is expected to
remain in effect for the current fiscal year. If in any fiscal year in
which a Portfolio's assets are greater than $75 million and its "Total
Operating Expenses" do not exceed the limits previously noted, the Board of
Directors may elect to reimburse the Adviser for any fees it waived or
expenses it reimbursed on that Portfolio's behalf during the previous two
fiscal years.
Example An investor in PBHG Class shares of a Portfolio would pay the
following expenses on a $1,000 investment assuming (1) 5% annual
return, and (2) redemption at the end of each period.
1 Year 3 Years
- ---------------------------------- -------------- --------------
New Opportunities Fund $20 $63
- ---------------------------------- -------------- --------------
Focused Value Fund $15 $47
================================== ============== ==============
5
<PAGE>
The example is based upon total operating expenses for the Portfolios as set
forth in the "Annual Operating Expenses" table above and assumes that the
percentage amounts listed in such table under "Total Ooperating Expenses" apply
in year one through year three. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in
understanding the various costs and expenses that may be directly or indirectly
borne by investors in PBHG Class shares of each Portfolio. See "The Adviser" and
"The Administrator and Sub-Administrator" under the caption "General
Information."
THE FUND AND THE PORTFOLIOS
The Fund is an open-end management investment company with 16 separate series.
The Fund is offering, by means of this Prospectus, shares in 2 of those separate
series: New Opportunities Fund and Focused Value Fund. The Fund's shares are
currently divided into two classes of shares (PBHG Class and Advisor Class)
having such preferences and special or relative rights and privileges as the
Board of Directors determines. Only the PBHG Class shares of each Portfolio are
offered by this Prospectus. Advisor Class shares are not currently available for
the Portfolios. Additional information pertaining to the Fund may be obtained in
writing from the Fund's Transfer Agent at DST Systems, Inc., P.O. Box 419534,
Kansas City, Missouri 64141-6534, or by calling 1-800-433-0051.
INVESTMENT OBJECTIVES AND POLICIES
PBHG New Opportunities Fund
The New Opportunities Fund, a diversified portfolio, seeks long-term capital
appreciation. Under normal market conditions, the Portfolio will invest at least
65% of its total assets in common and preferred stocks, warrants and convertible
securities of U.S. companies in economic sectors which, in the Adviser's
opinion, have above-average long-term growth potential. These companies will
generally have market capitalizations under $1 billion. The Adviser manages this
Portfolio using a long-term investment strategy. Therefore, the Portfolio may
underperform other equity investments during certain short-term periods. Some of
the sectors and industries within those sectors that the Adviser believes have
above-average growth potential over the next three to five years are:
Personal Communications - long distance telephone, competitive local exchange
carriers, cellular telephone and paging and personal communication networks;
Media/Entertainment - cable television system operators, cable television
network programmers, film entertainment providers, radio and television stations
and billboard advertisers;
Medical Technology/Cost-Containment - home and outpatient care, medical device
companies, drug and biotechnology, health care information services, physician
practice management and managed care providers;
6
<PAGE>
Environmental Services - solid waste disposal, hazardous waste disposal,
remediation services and environmental testing;
Energy Related Services - oil and gas exploration and production companies and
contract drilling services;
Technology - database software, application software, entertainment software,
networking software, computer system integrators, information services, internet
related companies, semiconductors and manufacturing technology;
Financial Services - specialty insurance companies, credit card issuers, and
other consumer-oriented financial services companies; and
Consumer Products and Services - retailers, restaurants, hotel chains, travel
companies, consumer franchise companies and other consumer product or service
companies able to provide quality products or service at lower prices or
offering greater perceived value than competitors.
Of course, the sectors that the Adviser believes have above-average long-term
growth potential will change as the economy changes. As a result, the Portfolio
may or may not be invested in these or other sectors at any time.
In addition, the Portfolio may emphasize one or more sectors. For example, the
Portfolio may invest 100% of its total assets in one sector. Although the
Portfolio will not invest 25% or more of its total assets in any one industry,
the Portfolio's emphasis on certain sectors of the economy may make the
Portfolio's performance more susceptible to economic, political or regulatory
developments in that sector. As a result, the Portfolio's net asset value may
fluctuate more than other equity investments.
The New Opportunities Fund also may invest in foreign securities, including
ADRs, and may sell securities short. The Portfolio may use futures and option
contracts to equitize cash, minimize price fluctuations in its holdings or
adjust its market exposure. See "Risk Factors" and Glossary of Permitted
Investments" for additional information.
PBHG Focused Value Fund
The Focused Value Fund, a non-diversified portfolio, seeks to achieve
above-average total return over a market cycle of three to five years. Under
normal market conditions, the Portfolio will invest at least 65% of its total
assets in common stocks of undervalued U.S. companies across all market
capitalizations.
To determine whether a company is "undervalued," the Adviser and Value Investors
use their own research, computer models and proprietary measures of value. The
Adviser and Value Investors consider, among other factors: the relationship of a
company's potential earnings power to its current stock price; current dividend
income and the potential for dividend growth; low price/earnings ratio relative
to other similar companies; strong competitive advantages, including a
recognized brand or
7
<PAGE>
trade name or niche market position; sufficient resources for expansion;
capability of management; and favorable overall business prospects. As a value
fund, the Portfolio could be invested in a company that is out-of-favor with
mainstream investors. For example, the Portfolio may invest in securities of
companies that are considered to be financially sound and attractive investments
based on their operating history, but are experiencing temporary earnings
declines due to unfavorable publicity or adverse economic conditions that may be
company or industry specific. The Portfolio also may invest in companies that
the Adviser and Value Investors believe will react positively to changing
economic conditions or in companies that have taken or are expected to take
actions to improve their financial results or increase their share price. This
value approach also may result in investment selections that are out-of-favor
with other investors. However, this approach may also produce significant
capital appreciation for the Portfolio.
The Portfolio is non-diversified, which means its performance is dependent upon
the securities of a smaller number of companies than is the case with a
diversified fund. As a result, the impact of a change in value (positive or
negative) of a single holding may be magnified. Although the Portfolio is
classified as a non-diversified investment company under the Investment Company
Act of 1940, the Portfolio intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended, which requires that at the end of each quarter of the taxable
year, (i) at least 50% of the market value of the Portfolio's total assets be
invested in cash, U.S. Government securities, the securities of other regulated
investment companies, and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Portfolio's total assets, and (ii) not more than 25%
of the value of its total assets be invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies).
The Focused Value Fund also may invest in preferred stocks, warrants,
convertible securities and foreign securities, including ADRs, that are traded
on an exchange or an established over-the-counter market. The Portfolio may sell
securities short. The Portfolio may use futures contracts to equitize cash,
minimize price fluctuations in its holdings or adjust its market exposure. See
"Risk Factors" and "Glossary of Permitted Investments" for additional
information.
THERE CAN BE NO ASSURANCE THAT ANY PORTFOLIO WILL BE ABLE TO ACHIEVE ITS
INVESTMENT OBJECTIVE.
8
<PAGE>
GENERAL INVESTMENT POLICIES
AND STRATEGIES
Investment Process of the Adviser
The Adviser's investment process is both quantitative and fundamental, and is
extremely focused on earnings growth. In seeking to identify investment
opportunities, the Adviser begins by creating a universe of rapidly growing
companies with market capitalizations within the parameters described for each
Portfolio and that possess certain quality characteristics. Using proprietary
software and research models that incorporate important attributes of successful
growth, such as positive earnings surprises, upward earnings estimate revisions,
and accelerating sales and earnings growth, the Adviser creates a universe of
growing companies. Then, using fundamental research, the Adviser evaluates each
company's earnings quality and assesses the sustainability of the company's
current growth trends. Through this highly disciplined process, the Adviser
seeks to construct investment portfolios that possess strong growth
characteristics. The Adviser tries to keep each Portfolio fully invested at all
times. Because the universe of companies will undoubtedly experience volatility
in stock price, it is important that shareholders in the Portfolios maintain a
long-term investment perspective. Of course, there can be no assurance that use
of these techniques will be successful, even over the long term.
Investment Process of Value Investors
Value Investor's investment process, like that of the Adviser, is both
quantitative and fundamental. In seeking to identify attractive investment
opportunities, Value Investors first creates a universe of companies each of
whose current share price is low in relation to its real worth or future
prospects. Using custom designed research models and proprietary software, which
incorporate certain key elements of value investing (such as consistency of
dividend payment, balance sheet strength, and low stock price relative to its
assets, earnings, cash flow and business franchise), Value Investors screens
more than 8,000 possible companies and creates an initial universe of
statistically attractive value companies. Following the creation of this
universe of possible investments, Value Investors uses its fundamental research
capabilities to carefully identify securities that are currently out of favor
but which have the potential to achieve significant appreciation as the
marketplace recognizes their fundamental value. Once constructed, portfolios are
continually monitored for change. Value Investors follows a disciplined
valuation approach. Value Investors' decision to sell a security depends on many
factors. However, generally speaking, Value Investors considers selling a
security when it becomes overvalued relative to the market, shows deteriorating
fundamentals or falls short of its expectations. Of course, there can be no
assurance that use of these techniques will be successful, even over the long
term.
Portfolio Turnover
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. A higher turnover rate (100% or more)
increases transaction costs (e.g., brokerage commissions) and increases realized
gains and losses. It is expected that under normal market conditions, the annual
portfolio turnover rates for each of the PBHG Funds will not exceed the
9
<PAGE>
following levels: the New Opportunities Fund, 500% and the Focused Value Fund,
300%. High rates of portfolio turnover necessarily result in correspondingly
greater brokerage and portfolio trading costs, which are paid by the Portfolio.
Trading in fixed-income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. In addition
to portfolio trading costs, higher rates of portfolio turnover may result in the
realization of capital gains. To the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes.
Temporary Defensive Positions
Under normal market conditions, each Portfolio expects to be fully invested in
its primary investments, as described above. However, for temporary defensive
purposes, when the Adviser or Value Investors, as appropriate, determines that
market conditions warrant, each Portfolio may invest up to 100% of its assets in
cash and money market instruments (consisting of securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; certificates of
deposit, time deposits and bankers' acceptances issued by banks or savings and
loan associations having net assets of at least $500 million as stated on their
most recently published financial statements; commercial paper rated in one of
the two highest rating categories by at least one NRSRO; repurchase agreements
involving such securities; and, to the extent permitted by applicable law and
each Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent a Portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective. See "Glossary of Permitted Investments" and the Statement
of Additional Information for additional information.
RISK FACTORS
Small and Medium Capitalization Stocks
Investments in common stocks in general are subject to market risks that may
cause their prices to fluctuate over time. Therefore, an investment in either
Portfolio may be more suitable for long-term investors who can bear the risk of
these fluctuations. The New Opportunities Fund and the Focused Value Fund may
invest extensively in securities of issuers with small or medium market
capitalizations. While the Adviser and Value Investors intend to invest in small
and medium capitalization companies that have strong balance sheets and
favorable business prospects, any investment in small and medium capitalization
companies involves greater risk and price volatility than that customarily
associated with investments in larger, more established companies. This
increased risk may be due to the greater business risks of their small or medium
size, limited markets and financial resources, narrow product lines and frequent
lack of management depth. The securities of small and medium capitalization
companies are often traded in the over-the-counter market, and might not be
traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies are
likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
10
<PAGE>
Over-the-Counter Market
Each Portfolio may invest in over-the-counter stocks. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
which limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter common stock is less than the volume of trading in a listed
stock. This means that the depth of market liquidity of some stocks in which
each Portfolio invests may not be as great as that of other securities and, if a
Portfolio were to dispose of such a stock, it might have to offer the shares at
a discount from recent prices, or sell the shares in small lots over an extended
period of time.
Foreign Securities
Each of the Portfolios may invest up to 20% of their total assets in foreign
securities. For purposes of this limitation, ADRs are not included. Investing in
the securities of foreign issuers involves special risks and considerations not
typically associated with investing in U.S. companies. These risks and
considerations include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
which could affect U.S. investment in foreign countries and potential
restrictions on the flow of international capital and currencies. Foreign
issuers may also be subject to less government regulation than U.S. companies.
Moreover, the dividends and interest payable on foreign securities may be
subject to foreign withholding taxes, thus reducing the net amount of income
available for distribution to a Portfolio's shareholders. Further, foreign
securities often trade with less frequency and volume than domestic securities
and, therefore, may exhibit greater price volatility. Changes in foreign
exchange rates will affect, favorably or unfavorably, the value of those
securities which are denominated or quoted in currencies other than the U.S.
dollar.
Investments in Technology Companies
Each of the Portfolios may invest in equity securities of technology companies.
Such securities have tended to be subject to greater volatility than securities
of companies that are not dependent upon or associated with technological
issues. For example, technology companies may be strongly affected by worldwide
scientific or technological developments and their products and services may be
subject to governmental regulation or adversely affected by governmental
policies.
Options and Futures Contracts
Each Portfolio may utilize futures contracts and may write and purchase put and
call options. The risk of loss in trading futures contracts can be substantial
because of the low margin deposits required and the extremely high degree of
leveraging involved in futures contracts. As a result, a relatively small price
movement in a futures contract may cause an immediate and substantial loss or
gain. The primary risks associated with the use of options and futures contracts
are (i) imperfect correlations between the change in market value of the
securities held by the Portfolio and the prices of the options or futures
contracts purchased or sold by the Portfolio and (ii) possible lack of a liquid
secondary market for an over-the-counter option or futures contract and the
resulting inability to close the over-
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the-counter option of futures position prior to its maturity date, which could
have an adverse impact on the Portfolio's ability to execute futures and options
strategies.
For additional information regarding permitted investments for each Portfolio
and other risks, see "Glossary of Permitted Investments" and the Statement of
Additional Information.
INVESTMENT LIMITATIONS
The investment objective of each Portfolio and certain investment limitations
are fundamental policies of each Portfolio. A Portfolio's fundamental policies
cannot be changed without the consent of the holders of a majority of such
Portfolio's outstanding shares. The following description summarizes several of
the Portfolios' fundamental investment limitations which are fully set forth in
the Statement of Additional Information.
Neither Portfolio may:
Invest 25% or more of its total assets at the time of purchase in securities of
issuers (other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements collateralized by such
obligations) whose principal business activities are in the same industry.
Borrow money except in the amounts up to 33 1/3% of the total assets of each
Portfolio.
In addition, the New Opportunities Fund may not:
Purchase more than 10% of the voting securities of any one issuer or purchase
securities of any one issuer if, at the time of purchase, more than 5% of its
total assets will be invested in that issuer, except that up to 25% of its
assets may be invested without regard to these limits. For purposes of this
limitation, the term "issuer" does not include obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations.
HOW TO PURCHASE FUND SHARES
You may purchase shares of each Portfolio directly through DST Systems, Inc.,
the Fund's Transfer Agent. Purchases of shares of each Portfolio may be made on
any Business Day. Shares of each Portfolio are offered only to residents of
states in which such shares are eligible for purchase.
You may place orders by mail, wire or telephone. If market conditions are
extraordinarily active, or if severe weather or other emergencies exist, and you
experience difficulties placing orders by telephone, you may wish to consider
placing your order by other means, such as mail or overnight delivery.
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You may also purchase shares of each Portfolio through certain broker-dealers or
other financial institutions that are authorized to sell you shares of the
Portfolios. Such financial institutions may charge you a fee for this service in
addition to each Portfolio's public offering price.
Neither the Fund nor the Transfer Agent will be responsible for any loss,
liability, cost or expenses for acting upon wire instructions, or telephone
instructions that it reasonably believes to be genuine. The Fund and the
Transfer Agent will each employ reasonable procedures to confirm that
instructions communicated by telephone are genuine including requiring a form of
personal identification prior to acting upon instructions received by telephone
and recording telephone instructions.
Each Portfolio reserves the right to reject any purchase order or to suspend or
modify the continuous offering of its shares. For example, the investment
opportunities for small or medium capitalization companies may from time to time
be more limited than those in other sectors of the stock market. Therefore, in
order to retain adequate investment flexibility, the Adviser may from time to
time recommend to the Board of Directors of the Fund that a Portfolio which
invests extensively in such companies indefinitely discontinue the sale of its
shares to new investors (other than directors, officers and employees of the
Adviser, Value Investors and their affiliated companies). In such event, the
Board of Directors would determine whether such discontinuance is in the best
interests of the applicable Portfolio and its shareholders.
Minimum Investment
The minimum initial investment in the New Opportunities Fund is $5,000 for
regular accounts and $2,000 for traditional or Roth IRAs. The minimum initial
investment in the Focused Value Fund is $2,500 for regular accounts and $2,000
for traditional or Roth IRAs. However, investors who establish a Systematic
Investment Plan, as described below, with a minimum investment of $25 per month
may at the same time open a regular account or traditional or Roth IRA with any
Portfolio with a minimum initial investment of $500. There is no minimum for
subsequent investments. The Distributor may waive the minimum initial investment
amount at its discretion. No minimum applies to subsequent purchases effected by
dividend reinvestment. As described below, subsequent purchases through the
Fund's Systematic Investment Plan must be at least $25.
Initial Purchase by Mail
An account may be opened by mailing a check or other negotiable bank draft
payable to The PBHG Funds, Inc. for at least the minimum initial amount
specified above for regular and IRA accounts, and a completed Account
Application to The PBHG Funds, Inc. c/o DST Systems, Inc., P.O. Box 419534,
Kansas City, Missouri 64141-6534. The Fund will not accept third-party checks,
i.e., a check not payable to The PBHG Funds, Inc. or a Portfolio for initial or
subsequent investments.
Additional Purchases By Phone (Telephone Purchase)
You may purchase additional shares by telephoning the Transfer Agent at
1-800-433-0051. The minimum telephone purchase is $1,000, and the maximum is
five times the net asset value of
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shares held by the shareholder on the day preceding such telephone purchase for
which payment has been received. The telephone purchase will be made at the
offering price next computed after the receipt of the call by the Transfer
Agent. Payment for the telephone purchase must be received by the Transfer Agent
within seven days. If payment is not received within seven days, you will be
liable for all losses incurred by the Fund as a result of the cancellation of
such purchase.
Initial Purchase By Wire
If you have an account with a commercial bank that is a member of the Federal
Reserve System, you may purchase shares of the Portfolios by requesting your
bank to transmit funds by wire. Before making an initial investment by wire, you
must first telephone 1-800-433-0051 to receive an Account Application and be
assigned an account number. The Account Application must be received prior to
receipt of the wire. Your name, account number, taxpayer identification number
or Social Security Number, and address must be specified in the wire. All wires
must be received by 4:00 p.m. Eastern time to be effective on that day. In
addition, an original Account Application should be promptly forwarded to: The
PBHG Funds, Inc. c/o DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri
64141-6534. All wires must be sent as follows: United Missouri Bank of Kansas
City, N.A.; ABA #10-10-00695; for Account Number 98705-23469; Further Credit:
[name of Portfolio and your assigned account number].
Additional Purchases by Wire
Additional investments may be made at any time through the wire procedures
described above, which must include your name and account number. Your bank may
impose a fee for investments by wire.
Purchase by ACH
If you have made this election, shares of each Portfolio may be purchased via
Automated Clearing House ("ACH"). Investors purchasing via ACH should complete
the bank information section on the Account Application and attach a voided
check or deposit slip to the Account Application. This option must be
established on your account at least 15 days prior to your initiating an ACH
transaction. The maximum purchase allowed through ACH is $100,000.
General Information Regarding Purchases
A purchase order will be effective as of the day received by the Transfer Agent
if the Transfer Agent receives sufficient information to execute the order and
receives payment before 4:00 p.m. Eastern time. Payment may be made by check or
readily available funds. The purchase price of shares of a Portfolio is the net
asset value per share next determined after a purchase order is effective.
Purchases will be made in full and fractional shares of a Portfolio calculated
to three decimal places. The Fund will not issue certificates representing
shares of the Portfolios.
In order for your purchase order to be effective on the day you place your order
with your broker-dealer or other financial institution, such broker-dealer or
financial institution must (i) receive
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your order before 4:00 p.m. Eastern time, and (ii) promptly transmit the order
to the Transfer Agent. See "Determination of Net Asset Value" below. The
broker-dealer or financial institution is responsible for promptly transmitting
purchase orders to the Transfer Agent so that you may receive the same day's net
asset value.
If a check received for the purchase of shares does not clear, the purchase will
be canceled, and you could be liable for any losses or fees incurred by the
Fund. The Fund reserves the right to reject a purchase order when the Fund
determines that it is not in the best interests of the Fund or its shareholders
to accept such an order.
SHAREHOLDER SERVICES
Shareholder Inquiries and Services Offered
If you have any questions about the Portfolios or the shareholder services
described below, please call the Fund at 1-800-433-0051. Written inquiries
should be sent to DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri
64141-6534. The Fund reserves the right to amend the shareholder services
described below or to change the terms or conditions relating to such services
upon 60 days' notice to shareholders. You may, however, discontinue any service
you select, provided that with respect to the Systematic Investment and
Systematic Withdrawal Plans described below, the Fund's Transfer Agent receives
your notification to discontinue such service(s) at least ten (10) days before
the next scheduled investment or withdrawal date.
Systematic Investment and Systematic Withdrawal Plans
For your convenience, the Fund provides plans that enable you to add to your
investment or withdraw from your account(s) with a minimum of paperwork. You can
utilize these plans by simply completing the appropriate section of the Account
Application.
(1) Systematic Investment Plan. The Systematic Investment Plan is a convenient
way for you to purchase shares in the Portfolios at regular monthly or quarterly
intervals selected by you. The Systematic Investment Plan enables you to achieve
dollar-cost averaging with respect to investments in the Portfolios despite
their fluctuating net asset values through regular purchases of a fixed dollar
amount of shares in the Portfolios. Dollar-cost averaging brings discipline to
your investing. Dollar-cost averaging results in more shares being purchased
when a Portfolio's net asset value is relatively low and fewer shares being
purchased when a Portfolio's net asset value is relatively high, thereby helping
to decrease the average price of your shares. Investors who establish a
Systematic Investment Plan may open an account with a minimum balance of $500.
Through the Systematic Investment Plan, shares are purchased by transferring
monies (minimum of $25 per transaction per Portfolio) from your designated
checking or savings account. Your systematic investment in the Portfolio(s)
designated by you will be processed on a regular basis at your option beginning
on or about either the first or fifteenth day of the month or quarter you
select. This Systematic Investment Plan must be established on your account at
least 15 days prior to the intended date of your first systematic investment.
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(2) Systematic Withdrawal Plan. The Systematic Withdrawal Plan provides a
convenient way for you to receive current income while maintaining your
investments in the Portfolio(s). The Systematic Withdrawal Plan permits you to
have payments of $50 or more automatically transferred from your account(s) in
the Portfolio(s) to your designated checking or savings account on a monthly,
quarterly, or semi-annual basis. The Systematic Withdrawal Plan also provides
the option of having a check mailed to the address of record for your account.
In order to start this Plan, you must have a minimum balance of $5,000 in any
account using this feature. Your systematic withdrawals will be processed on a
regular basis beginning on or about either the first or fifteenth day of the
month, quarter or semi-annual period you select.
Exchange Privileges
Once payment for your shares has been received (i.e., an account has been
established) and your payment has been converted to Federal funds, you may
exchange some or all of your shares for shares of the other Portfolios of the
Fund currently available to the public. However, you are limited to four (4)
exchanges annually from such Portfolio. Exchanges are made at net asset value.
The Fund reserves the right to change the terms and conditions of the exchange
privilege discussed herein, or to terminate the exchange privilege, upon sixty
(60) days' notice. Exchanges will be made only after proper instructions in
writing or by telephone are received for an established account by the Transfer
Agent.
The exchange privilege may be exercised only in those states where the shares of
the new Portfolio may legally be sold.
Tax-Sheltered Retirement Plans
A variety of retirement plans, including IRAs, SEP-IRAs, 401(a) Keogh and
corporate money purchase pension and profit sharing plans, and 401(k) and 403(b)
plans are available to investors in the Fund.
(1) Traditional IRAs. You may save for your retirement and shelter your
investment income from current taxes by either: (a) establishing a new
traditional IRA; or (b) "rolling-over" to the Fund monies from other IRAs or
lump sum distributions from a qualified retirement plan. If you are between 18
and 70 1/2 years of age, you can use a traditional IRA to invest up to $2,000
per year of your earned income in any of the Portfolios. You may also invest up
to $2,000 per year in a spousal IRA if your spouse has no earned income. There
is a $10.00 annual maintenance fee charged to traditional IRA investors. If you
maintain IRA accounts in more than one Portfolio of the Fund, you will only be
charged one fee. This fee can be prepaid or will be debited from your account if
not received by the announced deadline.
(2) Roth IRAs. Roth IRAs are similar to traditional IRAs in many respects and
provide a unique opportunity for qualifying individuals to accumulate investment
earnings tax-free. Contributions to Roth IRAs are not tax-deductible (while
contributions to traditional IRAs may be), however, if you meet the distribution
requirements, you can withdraw your investments without paying any taxes on the
earnings. In addition to establishing a new Roth IRA, you may be eligible to
convert a traditional IRA into a Roth IRA. Maintenance fees charged for Roth
IRAs are similar to those for traditional IRAs.
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(3) SEP-IRAs. If you are a self-employed person, you can establish a Simplified
Employee Pension Plan ("SEP-IRA"). A SEP-IRA is designed to provide persons with
self-employed income (and their eligible employees) with many of the same tax
advantages as a Keogh, but with fewer administrative requirements.
(4) 401(a) Keogh and Corporate Retirement Plans. Both a prototype money purchase
pension plan and a profit sharing plan, which may be used alone or in
combination, are available for self-employed individuals and their partners and
corporations to provide tax-sheltered retirement benefits for individuals and
employees.
(5) 401(k) Plans. Through the establishment of a 401(k) plan by a corporation of
any size, employees can invest a portion of their wages in the Portfolios on a
tax-deferred basis in order to help them meet their retirement needs.
(6) 403(b) Plans. Section 403(b) plans are custodial accounts which are
available to employees of most non-profit organizations and public schools.
Other Special Accounts
The Fund also offers the following special accounts to meet your needs:
(1) Education IRAs. Education IRAs allow you to save for qualified higher
education expenses of designated beneficiaries. Like traditional and Roth IRAs,
Education IRAs provide an opportunity for your investment to grow tax-free until
distributed. Contributions to an Education IRA are not tax deductible, however,
distributions from an Education IRA which are used to pay qualified higher
education expenses are tax-free. You may contribute up to $500 per year for the
benefit of each prospective student under the age of 18. There is a $7.00 annual
maintenance fee charged to Education IRA accounts. The fee can be prepaid or
will be deducted from your account if not received by the announced deadline.
(2) Uniform Gift to Minors/Uniform Transfers to Minors. By establishing a
Uniform Gift to Minors Account/Uniform Transfers to Minors Account with the Fund
you can build a fund for your children's education or a nest egg for their
future and, at the same time, potentially reduce your own income taxes.
(3) Custodial and Fiduciary Accounts. The Fund provides a convenient means of
establishing custodial and fiduciary accounts for investors with fiduciary
responsibilities.
For further information regarding any of the above retirement plans and
accounts, please call toll free at 1-800-433-0051. Retirement investors may,
however, wish to consult with their own tax counsel or adviser.
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HOW TO REDEEM FUND SHARES
Redemption orders received by the Transfer Agent prior to 4:00 p.m. Eastern time
on any Business Day will be effective that day. The redemption price of shares
is the net asset value per share of a Portfolio next determined after the
redemption order is effective. Payment of redemption proceeds will be made as
promptly as possible and, in any event, within seven days after the redemption
order is received, provided, however, that redemption proceeds for shares
purchased by check (including certified or cashier's checks) or by ACH will be
forwarded only upon collection of payment for such shares; collection of payment
will take 15 days.
You may also redeem shares of each Portfolio through certain broker-dealers and
other financial institutions at which you maintain an account. Such financial
institutions may charge you a fee for this service.
In order for your redemption order to be effective on the day you place your
redemption order with your broker-dealer or other financial institution, such
broker-dealer or financial institution must (i) receive your order before 4:00
p.m. Eastern time, and (ii) promptly transmit the order to the Transfer Agent.
See "Determination of Net Asset Value" below. The financial institution is
responsible for promptly transmitting redemption orders to the Transfer Agent so
that your shares are redeemed at the same day's net asset value per share.
You may receive redemption payments in the form of a check or by Federal Reserve
wire or ACH transfer.
By Mail
There is no charge for having a check for redemption proceeds mailed to you.
By Telephone
Redemption orders may be placed by telephone, provided that this option has been
selected. Shares held in IRA accounts are not eligible for this option and must
be redeemed by written request. Neither the Fund nor the Transfer Agent will be
responsible for any loss, liability, cost or expense for acting upon wire
instructions or upon telephone instructions that it reasonably believes to be
genuine. The Fund and the Transfer Agent will each employ reasonable procedures
to confirm that instructions communicated by telephone are genuine, including
requiring a form of personal identification prior to acting upon instructions
received by telephone and recording telephone instructions. If reasonable
procedures are not employed, the Fund and the Transfer Agent may be liable for
any losses due to unauthorized or fraudulent telephone transactions.
If market conditions are extraordinarily active, or other extraordinary
circumstances exist and you experience difficulties placing redemption orders by
telephone, you may wish to consider placing your order by other means, such as
mail or overnight delivery. The Fund will not accept redemption requests for an
amount greater than $50,000 by telephone instruction, except for cases where the
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proceeds of the redemption request are transmitted by Federal wire to a
pre-established checking account. Such redemption requests must be received in
writing and be signature guaranteed.
By Wire
The Transfer Agent will deduct a wire charge, currently $10.00, from the amount
of a Federal Reserve wire redemption payment made at the request of a
shareholder. Shareholders cannot receive proceeds from redemptions of shares of
a Portfolio by Federal Reserve wire on federal holidays restricting wire
transfers.
BY ACH
The Fund does not charge for ACH transactions; however, proceeds from such
transactions will not be posted to your bank account until the second Business
Day following the transaction. In order to process a redemption by ACH, banking
information must be established on your account at least 15 days prior to
initiating a transaction. A voided check or deposit slip must accompany requests
to establish this option.
Signature Guarantees
A signature guarantee is a widely accepted way to protect you by verifying the
signature on certain redemption requests. The Fund requires signature guarantees
to be provided in the following circumstances: (1) written requests for
redemptions in excess of $50,000; (2) all written requests to wire redemption
proceeds; (3) redemption requests that provide that the redemption proceeds
should be sent to an address other than the address of record or to a person
other than the registered shareholder(s) for the account; and (4) redemptions
requesting proceeds to be sent to a new address or an address that has been
changed within the past 30 days; (5) requests to transfer the registration of
shares to another owner; (6) written requests to add telephone exchange and
telephone redemption options to an account; and (7) changes in previously
designated wiring instructions. These requirements may be waived or modified
upon notice of shareholders. Signature guarantees can be obtained from any of
the following institutions: a national or state bank, a trust company, a federal
savings and loan association, or a broker-dealer that is a member of a national
securities exchange. The Fund does not accept guarantees from notaries public or
organizations that do not provide reimbursement in the case of fraud.
Minimum Account Size
Due to the relatively high cost of maintaining smaller accounts, the Fund will
impose an annual $12.00 minimum account charge and reserves the right to redeem
shares in any non-retirement account if, as the result of redemptions, the value
of any account drops below the minimum initial investment amount, specified
above, for each Portfolio. See "Minimum Investment" and "Systematic Investment
and Systematic Withdrawal Plans" for minimum investments. You will be allowed at
least 60 days, after notice from the Fund, to make an additional investment to
bring your account value up to at least the applicable minimum account size
before the annual $12.00 minimum account fee is charged and/or
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the redemption of a non-retirement account is processed. The applicable minimum
account charge will be imposed annually on any such account until the account is
brought up to the applicable minimum account size.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined by dividing the
total market value of the Portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the Portfolio. Net asset value
per share is determined daily, normally as of the close of trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern time) on any Business Day. The
net asset value per share of each Portfolio is listed under PBHG in the mutual
fund section of most major daily newspapers, including The Wall Street Journal.
Each Portfolio's assets are primarily valued on the basis of market quotations.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. In addition, if quotations are not readily
available, or if the assets have been materially affected by events occurring
after the close of the foreign markets, assets may be valued by another method
that the Board of Directors believes accurately reflects fair value.
PERFORMANCE ADVERTISING
From time to time, each Portfolio may advertise its yield and total return.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made regarding actual
future yields or returns. Yield refers to the annualized income generated by an
investment in the Portfolio over a specified 30-day period. The yield is
calculated by assuming that the same amount of income generated by the
investment during that period is generated in each 30-day period over one year
and is shown as a percentage of the investment.
The total return of each Portfolio refers to the average compounded rate of
return on 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 and assuming the reinvestment of all dividend and capital gain
distributions.
Each Portfolio may periodically compare its performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.) or by financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices which may assume investment
of dividends but generally do not reflect deductions for administrative and
management costs and other investment alternatives. Each Portfolio may quote
services such as Morningstar, Inc., a service that ranks mutual funds on the
basis of risk-adjusted performance, and Ibbotson Associates of Chicago,
Illinois, which provides historical returns of the capital markets in the U.S.
Each Portfolio may use long-term performance of these capital markets to
demonstrate general long-term risk versus reward scenarios and could include the
value of a hypothetical investment in any
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of the capital markets. Each Portfolio may also quote financial and business
publications and periodicals as they relate to fund management, investment
philosophy, and investment techniques.
Each Portfolio may quote various measures of volatility and benchmark
correlation in advertising and may compare these measures to those of other
funds. Measures of volatility attempt to compare historical share price
fluctuations or total returns to a benchmark while measures of benchmark
correlation indicate how valid a comparative benchmark might be. Measures of
volatility and correlation are calculated using averages of historical data and
cannot be calculated precisely.
The performance of the Fund's Advisor Class shares will be lower than that of
the Fund's PBHG Class shares because of the additional Rule 12b-1 shareholder
servicing expenses charged to Advisor Class shares.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local income tax treatment of the
Portfolios or their shareholders. Accordingly, you are urged to consult your tax
advisors regarding specific questions as to federal, state and local income
taxes. See the Statement of Additional Information.
Tax Status of the Portfolios
Each Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Fund's other Portfolios. Each Portfolio intends to
qualify or to continue to qualify for the special tax treatment afforded RICs as
defined under Subchapter M of the Code. So long as a Portfolio qualifies for
this special tax treatment, it will be relieved of federal income tax on that
part of its net investment income and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) which it distributes to
shareholders.
Tax Status of Distributions
Each Portfolio will distribute all of its net investment income (including, for
this purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Dividends from net investment income
will qualify for the dividends-received deduction for corporate shareholders
only to the extent such distributions are derived from dividends paid by
domestic corporations. It can be expected that only certain dividends of a
Portfolio will qualify for that deduction. Any net capital gains will be
distributed annually and will be taxed to shareholders as long-term capital
gains, regardless of how long the shareholder has held shares and regardless of
whether the distributions are received in cash or in additional shares. The
Portfolios will make annual reports to shareholders of the federal income tax
status of all distributions, including the amount of dividends eligible for the
dividends-received deduction.
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Certain securities purchased by the Portfolios (such as U.S. Treasury STRIPS,
defined in "Glossary of Permitted Investments" below) are sold with original
issue discount and thus do not make periodic cash interest payments. Each
Portfolio will be required to include as part of its current net investment
income the accrued discount on such obligations for purposes of the distribution
requirement even though the Portfolio has not received any interest payments on
such obligations during that period. Because a Portfolio distributes all of its
net investment income to its shareholders, the Portfolio may have to sell
portfolio securities to distribute such accrued income, which may occur at a
time when the Adviser or sub-adviser would not have chosen to sell such
securities and which may result in a taxable gain or loss.
Income received on direct U.S. obligations is exempt from income tax at the
state level when received directly by a Portfolio and may be exempt, depending
on the state, when received by a shareholder as income dividends from a
Portfolio provided certain state-specific conditions are satisfied. Not all
states permit such income dividends to be tax exempt and some require that a
certain minimum percentage of an investment company's income be derived from
state tax-exempt interest. Each Portfolio will inform shareholders annually of
the percentage of income and distributions derived from direct U.S. obligations.
You should consult your tax advisor to determine whether any portion of the
income dividends received from a Portfolio is considered tax exempt in your
particular state.
Dividends declared by a Portfolio in October, November or December of any year
and payable to shareholders of record on a date in one of those months will be
deemed to have been paid by the Portfolio and received by the shareholders on
December 31 of that year, if paid by the Portfolio at any time during the
following January.
Each Portfolio intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for the federal excise tax applicable to
regulated investment companies.
Tax Treatment of Transactions
Each sale, exchange or redemption of a Portfolio's shares is a taxable event to
the shareholder.
Income derived by a Portfolio from securities of foreign issuers may be subject
to foreign withholding taxes.
GENERAL INFORMATION
The Fund
The Fund, an open-end management investment company, was originally incorporated
in Delaware in 1985 under the name PBHG Growth Fund, Inc. Effective July 31,
1992, the Fund was reorganized as a Maryland corporation pursuant to an
Agreement and Articles of Merger which was approved by Fund shareholders on July
21, 1992. On September 8, 1993, the Fund's shareholders voted to change the name
of the Fund to The Advisors' Inner Circle Fund II, Inc. On May 2, 1994, the
Fund's shareholders voted to change the name of the Fund to The PBHG Funds, Inc.
As of the date of this
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Prospectus, the Fund has an authorized capitalization of 11.6 billion shares of
common stock with a par value of $0.001 per share. All consideration received by
the Fund for shares of any Portfolio and all assets of such Portfolio belong to
that Portfolio and would be subject to liabilities related thereto. The Fund
reserves the right to create and issue shares of additional portfolios. Each
Portfolio of the Fund pays its respective expenses relating to its operation,
including fees of its service providers, audit and legal expenses, expenses of
preparing prospectuses, proxy solicitation material and reports to shareholders,
costs of custodial services and registering the shares of its Portfolios under
federal and state securities laws, pricing and insurance expenses and pays
additional expenses including litigation and other extraordinary expenses,
brokerage costs, interest charges, taxes and organization expenses.
The Adviser
Pilgrim Baxter & Associates, Ltd. is a professional investment management firm
and registered investment adviser that, along with its predecessors, has been in
business since 1982. The controlling shareholder of the Adviser is United Asset
Management Corporation ("UAM"), a New York Stock Exchange listed holding company
principally engaged, through affiliated firms, in providing institutional
investment management services and acquiring institutional investment management
firms. UAM's corporate headquarters are located at One International Place,
Boston, Massachusetts 02110. The Adviser currently has discretionary management
authority with respect to approximately $10 billion in assets. In addition to
advising the Portfolios, the Adviser provides advisory services to pension and
profit-sharing plans, charitable institutions, corporations, individual
investors, trusts and estates, and other investment companies. The principal
business address of the Adviser is 825 Duportail Road, Wayne, Pennsylvania
19087.
The Adviser serves as the investment adviser to each Portfolio under an
investment advisory agreement with the Fund (the "Advisory Agreement"). The
Adviser makes the investment decisions for the assets of each Portfolio and
continuously reviews, supervises and administers the investment program of each
Portfolio, subject to the supervision of, and policies established by, the Board
of Directors of the Fund.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of: 1.50% of New Opportunities Fund's
average daily net assets and 0.85% of the Focused Value Fund's average daily net
assets. The investment advisory fees paid by the Portfolios are higher than
those paid by most investment companies, although the Adviser believes the fees
to be comparable to those paid by investment companies with similar investment
objectives and policies.
In the interest of limiting the expenses of the Portfolios, the Adviser has
voluntarily entered into expense limitation agreements with the Fund ("Expense
Limitation Agreements") pursuant to which the Adviser has agreed to waive or
limit a portion of its fee and to assume other expenses in an amount necessary
to limit total annual operating expenses to not more than 2.00% and 1.50% of the
average daily net assets of each of the New Opportunities Fund and the Focused
Value Fund, respectively. 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 New Opportunities Fund and the
Focused Value Fund to exceed 2.00%
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and 1.50%, respectively. 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 is less than 2.00% in the case of the New
Opportunities Fund and 1.50% in the case of the Focused Value Fund; and (iii)
the payment of such reimbursement was approved by the Board of Directors on a
quarterly basis.
Gary L. Pilgrim, CFA will serve as the portfolio manager of the New
Opportunities Fund. Mr. Pilgrim has served as the Chief Investment Officer for
the Adviser since 1990 and also serves as a Director of the Adviser.
Value Investors
Value Investors, 825 Duportail Road, Wayne, Pennsylvania, 19087, is a registered
investment adviser that, along with its predecessors, has been in business since
1940. Value Investors is a wholly-owned subsidiary of the Adviser. Value
Investors currently has discretionary management authority with respect to
approximately $1.5 billion in assets. In addition to sub-advising the Focused
Value Fund, Value Investors provides advisory services to pension and
profit-sharing plans, charitable institutions, trusts, estates and other
investment companies. Value Investors serves as the investment sub-adviser for
the Focused Value Fund, pursuant to a sub-advisory agreement with the Fund and
the Adviser ("Sub-Advisory Agreement"). Under the Sub-Advisory Agreement, Value
Investors manages the investments of the Focused Value Fund, selects investments
and places all orders for purchases and sales of the Portfolio's securities,
subject to the general supervision of the Board of Directors of the Fund and the
Adviser.
For the services provided and expenses incurred pursuant to the Sub-Advisory
Agreements for the Focused Value Fund, Value Investors is entitled to receive
from the Adviser a sub-advisory fee with respect to the average daily net assets
of the Portfolio that is computed daily and paid monthly at an annual rate of
0.40%.
Gary D. Haubold will serve as manager of the Focused Value Fund. Mr. Haubold
joined Value Investors in January 1997. Prior to joining Value Investors, Mr.
Haubold was employed by Miller Anderson & Sherrerd ("MAS") from 1993 until
January 1997. At MAS, Mr. Haubold served as the co-manager of the Mid-Cap Value
Portfolio of the MAS Fund from its inception on December 30, 1994 through
January 6, 1997 and the co-manager of the Small Cap Value Portfolio of the MAS
Fund from December 31, 1994 through January 6, 1997. Mr. Haubold was the person
primarily responsible for the day-to-day management of those two mutual funds
during the periods noted. Prior to joining MAS, Mr. Haubold was Senior Vice
President of Wood, Struthers & Winthrop.
The Administrator and Sub-Administrator
PBHG Fund Services (the "Administrator"), a wholly-owned subsidiary of the
Adviser, provides the Fund with administrative services, including regulatory
reporting and all necessary office space, equipment, personnel and facilities.
For these administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of 0.15% of the average
daily net
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assets of the Fund. The principal place of business of the Administrator is 825
Duportail Road, Wayne, PA 19087.
SEI Fund Resources (the "Sub-Administrator"), an indirect wholly-owned
subsidiary of SEI Investments Company ("SEI") and an affiliate of the Fund's
distributor, assists the Administrator in providing administrative services to
the Fund. For acting in this capacity, the Administrator pays the
Sub-Administrator fees at an annual rate based on the combined average daily net
assets of the Fund, PBHG Advisor Funds, Inc., and PBHG Insurance Series Fund,
Inc., calculated as follows: (i) 0.040% of the first $2.5 billion, plus (ii)
0.025% of the next $7.5 billion, plus (iii) 0.020% of the excess over $10
billion.
The Transfer Agent and Shareholder Servicing Agents
DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534 serves as
the transfer agent and dividend disbursing agent for the Fund under a transfer
agency agreement with the Fund. The Administrator serves as shareholder
servicing agent for the Fund under a shareholder servicing agreement with the
Fund. UAM Shareholder Service Center, Inc. ("UAM SSC"), an affiliate of the
Adviser, serves as sub-shareholder servicing agent for the Fund under a
sub-shareholder servicing agreement between UAM SSC and the Administrator. The
principal place of business of UAM SSC is 825 Duportail Road, Wayne,
Pennsylvania 19087. From time to time, the Fund may pay amounts to third parties
that provide sub- transfer agency and other administrative services relating to
the Fund to persons who beneficially own interests in the Fund, such as
participants in 401(k) plans. These services may include, among other things,
sub-accounting services, answering inquiries relating to the Fund, delivering,
on behalf of the Fund, proxy statements, annual reports, updated Prospectuses,
other communications regarding the Fund, and related services as the Fund or the
beneficial owners may reasonably request. In such cases, the Fund will not
compensate such third parties at a rate that is greater than the rate the Fund
is currently paying the Fund's Transfer Agent for providing these services to
shareholders investing directly in the Fund.
The Distributor
SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley Road,
Oaks, PA 19456, a wholly-owned subsidiary of SEI, provides the Fund with
distribution services. No compensation is paid to the Distributor for
distribution services for the PBHG Class shares of the Portfolios.
Directors of the Fund
The management and affairs of the Fund are supervised by the Board of Directors
under the laws of the State of Maryland. The Directors have approved contracts
under which, as described above, certain companies provide essential management
services to the Fund.
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Voting Rights
Each share held entitles the shareholder of record to one vote. Shareholders of
each Portfolio will vote separately on matters relating solely to it, such as
approval of advisory agreements and changes in fundamental policies, and matters
affecting some but not all Portfolios of the Fund will be voted on only by
shareholders of the affected series. Shareholders of all series of the Fund will
vote together in matters affecting the Fund generally, such as the election of
Directors or selection of independent accountants. Shareholders of the PBHG
Class of the Fund will vote separately on matters relating solely to the PBHG
Class and not on matters relating solely to the Advisor Class of the Fund. As a
Maryland corporation, the Fund is not required to hold annual meetings of
shareholders but shareholder approval will be sought for certain changes in the
operation of the Fund and for the election of directors under certain
circumstances. In addition, a director may be removed by the remaining directors
or by shareholders at a special meeting called upon written request of
shareholders owning at least 10% of the outstanding shares of the Fund. In the
event that such a meeting is requested, the Fund will provide appropriate
assistance and information to the shareholders requesting the meeting.
Reporting
The Fund issues unaudited financial information semi-annually and audited
financial statements annually for each Portfolio. The Fund also furnishes
periodic reports and, as necessary, proxy statements to shareholders of record.
Year 2000 Compliance
There is general concern throughout the industry that a number of computer
systems and software packages in use today may not be able to recognize the Year
2000 or accurately process information after December 31, 1999. The Fund is
actively working with the Adviser, the sub-advisers and the Fund's other service
providers, including but not limited to, the Administrator, Sub-Administrator,
Distributor, Transfer Agent and shareholder servicing agents to identify
potential problems and develop plans reasonably designed to address these
potential problems before the Year 2000. While there can be no absolute
assurance that all service providers will be fully Year 2000-compliant or that
non-compliant systems or software will have no impact at all, the Fund believes
that these steps will be successful in identifying and minimizing any negative
impact associated with Year 2000 processing problems. Furthermore, the Fund does
not currently anticipate that there will be any material cost to the Fund or any
Portfolio as a result of this project.
Shareholder Inquiries
You may direct inquiries to the Fund by writing to The PBHG Funds, Inc., P.O.
Box 419534, Kansas City, Missouri 64141-6534, or by calling 1-800-433-0051.
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Dividends and Distributions
Substantially all of the net investment income (exclusive of capital gains) of
each Portfolio is distributed in the form of annual dividends. If any capital
gain is realized, substantially all of it will be distributed by each Portfolio
at least annually.
Shareholders automatically receive all dividends and capital gain distributions
in additional shares at the net asset value determined on the next Business Day
after the record date, unless the shareholder has elected to take such payment
in cash. Shareholders may change their election by providing written notice to
the Transfer Agent at least 15 days prior to the distribution. Shareholders may
receive payments for cash distributions in the form of a check or by Federal
Reserve wire or ACH transfer. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividend and other distributions reinvested in additional shares. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Dividends and distributions of the Portfolios are paid on a per share basis. The
value of each share will be reduced by the amount of the payment. If shares are
purchased shortly before the record date for a dividend or distribution of
capital gains, a shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable dividend or distribution.
Counsel and Independent Accountants
Ballard Spahr Andrews & Ingersoll, LLP serves as counsel to the Fund.
PricewaterhouseCoopers LLP serves as the independent accountants of the Fund.
Custodians
First Union National Bank (successor to CoreStates Bank, N.A.), 530 Walnut
Street, Philadelphia, Pennsylvania 19106, serves as the custodian for the Fund
and each Portfolio (the "Custodian"). The Custodian holds cash, securities and
other assets of the Fund as required by the Investment Company Act of 1940, as
amended (the "1940 Act").
Miscellaneous
As of November 16, 1998, the following persons owned of record or beneficially,
at least 25% of the outstanding PBHG Class shares and certain Portfolios and may
be deemed to be a controlling persons of that Portfolio for purposes of the 1940
Act: Charles Schwab & Co., - PBHG Technology & Communications Fund; Compass Bank
- - PBHG Large Cap Value; National Financial Services Corp. - PBHG Mid-Cap Value
Fund; and Charles Schwab % Co., - PBHG Mid-Cap Value Fund. The Travelers
Insurance Company owned of record or beneficially, at least 25% of the
outstanding Advisor Class shares of the PBHG Growth Fund and may be deemed to be
a controlling person of that Portfolio for purposes of the 1940 Act.
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GLOSSARY OF PERMITTED INVESTMENTS
The following is a description of permitted investments for the Portfolios:
American Depositary Receipts and Global Depositary Receipts ("GDRS") -- ADRs are
securities, typically issued by a U.S. financial institution (a "depositary"),
that evidence ownership interests in a security or a pool of securities issued
by a foreign issuer and deposited with the depositary. ADRs include American
Depositary Shares and New York Shares. GDRs, which are sometimes referred to as
Continental Depositary Receipts ("CDRs"), are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. ADRs, GDRs
and CDRs may be available for investment through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation by the issuer
of the receipt's underlying security. Holders of an unsponsored depositary
receipt generally bear all the costs of the unsponsored facility. The depositary
of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or
to pass through to the holders of the receipts voting rights with respect to the
deposited securities.
Bankers' Acceptance -- A bill of exchange or time draft drawn on and accepted by
a commercial bank. It is used by corporations to finance the shipment and
storage of goods and to furnish dollar exchange. Maturities are generally six
months or less.
Certificate of Deposit -- A negotiable interest bearing instrument with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit
generally carry penalties for early withdrawal.
Commercial Paper -- The term used to designate unsecured short-term promissory
notes issued by corporations and other entities. Maturities on these issues
typically vary from a few days to nine months.
Convertible Securities -- Securities such as rights, bonds, notes and preferred
stocks which are convertible into or exchangeable for common stocks. Convertible
securities have characteristics similar to both fixed income and equity
securities. Because of the conversion feature, the market value of convertible
securities tends to move together with the market value of the underlying common
stock. As a result, the Portfolio's selection of convertible securities is
based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer, and any
call provisions.
Demand Instruments -- Certain instruments may involve a conditional or
unconditional demand feature which permits the holder to demand payment of the
principal amount of the instrument. Demand instruments may include variable
amount master demand notes.
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Derivatives -- Derivatives are securities that derive their value from other
securities. The following are considered derivative securities: futures, options
on futures, options (e.g., puts and calls), swap agreements, mortgage-backed
securities (e.g., CMOs, REMICs, IOs and POs), when-issued securities and forward
commitments, floating and variable rate securities, convertible securities,
"stripped" U.S. Treasury securities (e.g., Receipts and STRIPS) and privately
issued stripped securities (e.g., TGRs, TRs and CATS). See elsewhere in this
"Glossary of Permitted Investments" for discussions of these various
instruments, and see "Investment Objectives and Policies" for more information
about the investment policies and limitations applicable to their use.
Equity Securities -- Investments in common stocks are subject to market risks
which may cause their prices to fluctuate over time. Changes in the value of
portfolio securities will not necessarily affect cash income derived from these
securities but will affect a Portfolio's net asset value.
Forward Foreign Currency Contracts -- Foreign currency exchange transactions may
be conducted on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market, or through entering into forward currency
contracts to protect against uncertainty in the level of future exchange rates
between a particular foreign currency and the U.S. dollar, or between foreign
currencies in which a Portfolio's portfolio securities are or may be
denominated. A forward foreign currency contract involves an obligation to
purchase or sell a specific currency amount at a future date, which may be any
fixed number of days from the date of the contract, agreed upon by the parties,
at a price set at the time of the contract. Under normal circumstances,
consideration of the prospect for changes in currency exchange rates will be
incorporated into each Portfolio's long-term investment strategies. However, the
Adviser and the sub-advisers believe that it is important to have the
flexibility to enter into forward foreign currency contracts when they determine
that the best interests of any Portfolio will be served.
When the Adviser or a sub-adviser believes that the currency of a particular
country may suffer a significant decline against the U.S. dollar or against
another currency, the Portfolio in question may enter into a forward foreign
currency contract to sell, for a fixed amount of U.S. dollars or other
appropriate currency, the amount of foreign currency approximating the value of
some or all of the Portfolio's securities denominated in such foreign currency.
At the maturity of a forward foreign currency contract, a Portfolio may either
sell a portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader, obligating it to purchase, on the same maturity date, the same amount of
the foreign currency. A Portfolio may realize a gain or loss from currency
transactions.
Generally, a Portfolio will enter into forward foreign currency contracts only
as a hedge against foreign currency exposure affecting the Portfolio or to hedge
a specific security transaction or portfolio position. If a Portfolio enters
into forward foreign currency contracts to cover activities which are
essentially speculative, the Portfolio will segregate cash or readily marketable
securities with its custodian, or a designated sub-custodian, in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to such
contracts.
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Futures Contracts and Options on Futures Contracts -- A purchase of a futures
contract means the acquisition of a contractual right to obtain delivery of the
securities or foreign currency, called for by the contract at a specified price
during a specified future month. When a futures contract is sold, the Portfolio
incurs a contractual obligation to deliver the securities or foreign currency
underlying the contract at a specified price on a specified date during a
specified future month. Each of the Portfolios may sell stock index futures
contracts in anticipation of, or during, a market decline to attempt to offset
the decrease in market value of its common stocks that might otherwise result;
and it may purchase such contracts in order to offset increases in the cost of
common stocks that it intends to purchase. Each of the Portfolios may enter into
futures contracts, and options thereon, to the extent that (i) aggregate initial
margin deposits to establish positions other than "bona fide hedging" positions
(and premiums paid for unexpired options on futures contracts) do not exceed 5%
of the Portfolio's net assets and (ii) the total market value of obligations
underlying all futures contracts does not exceed 50% of the value of each of the
Portfolio's total assets.
Each Portfolio will maintain assets sufficient to meet its obligations under
such futures or options contracts in a segregated margin account with the
custodian bank or will otherwise comply with the SEC's position on asset
coverage. The prices of futures contracts are volatile and are influenced by,
among other things, actual and anticipated changes in the market and interest
rates.
Illiquid Securities -- Securities that cannot be disposed of in the ordinary
course of business within seven days at approximately the price at which the
Portfolio has valued the security.
Mortgage-Backed Securities -- Securities that include interests in pools of
lower-rated debt securities, or consumer loans or mortgages, or complex
instruments such as collateralized mortgage obligations and stripped
mortgage-backed securities. The value of these securities may be significantly
affected by changes in interest rates, the market's perception of the issuers,
and the creditworthiness of the parties involved. Some securities may have a
structure that makes their reaction to interest rates and other factors
difficult to predict, making their value highly volatile. These securities may
also be subject to prepayment risk.
Options -- Each Portfolio may invest in put and call options for various stocks
and stock indices that are traded on national securities exchanges, from time to
time as the Adviser deems to be appropriate. Options will be used for hedging
purposes and will not be engaged in for speculative purposes. The aggregate
value of option positions may not exceed 10% of the Portfolio's net assets as of
the time the Portfolio enters into such options.
A put option gives the purchaser of the option the right to sell, and the writer
the obligation to buy, the underlying security at any time during the option
period. A call option gives the purchaser of the option the right to buy, and
the writer of the option the obligation to sell, the underlying security at any
time during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract.
Although the Portfolio will engage in option transactions only as hedging
transactions and not for speculative purposes, there are risks associated with
such investment including the following: (i) the success of a hedging strategy
may depend on the ability of the Adviser
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or a sub-adviser to predict movements in the prices of the individual
securities, fluctuations in markets and movements in interest rates; (ii) there
may be an imperfect correlation between the changes in market value of the
stocks held by the Portfolio and the prices of options; (iii) there may not be a
liquid secondary market for options; and (iv) while the Portfolio will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security. When writing options (other
than covered call options), the Portfolio must establish and maintain a
segregated account with the Portfolio's Custodian containing cash or other
liquid assets in an amount at least equal to the market value of the option.
Receipts -- Separately traded interest and principal component parts of U.S.
Treasury obligations that are issued by banks or brokerage firms and are created
by depositing U.S. Treasury obligations into a special account at a custodian
bank. The custodian bank holds the interest and principal payments for the
benefit of the registered owners of the receipts. The custodian bank arranges
for the issuance of the receipts evidencing ownership and maintains the
register.
Repurchase Agreements -- Agreements by which a person obtains a security and
simultaneously commits to return it to the seller at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days from the date of purchase. The Fund's Custodians or their agents will hold
the security as collateral for the repurchase agreement. Collateral must be
maintained at a value at least equal to 102% of the purchase price. Each
Portfolio bears a risk of loss in the event the other party defaults on its
obligations and the Portfolio is delayed or prevented from its right to dispose
of the collateral securities or if the Portfolio realizes a loss on the sale of
the collateral securities. The Adviser or a sub-adviser will enter into
repurchase agreements on behalf of a Portfolio only with financial institutions
deemed to present minimal risk of bankruptcy during the term of the agreement
based on guidelines established and periodically reviewed by the Directors.
Repurchase agreements are considered loans under the 1940 Act, as well as for
federal and state income tax purposes.
Restricted Securities -- Securities that may not be sold freely to the public
absent registration under the Securities Act of 1933, as amended ("1933 Act"),
or an exemption from registration. A Portfolio may invest in restricted
securities that the Adviser determines are not illiquid, based on guidelines and
procedures developed and established by the Board of Directors of the Fund. The
Board of Directors will periodically review such procedures and guidelines and
will monitor the Adviser's implementation of such procedures and guidelines.
Under these procedures and guidelines, the Adviser will consider the frequency
of trades and quotes for the security, the number of dealers in, and potential
purchasers for, the securities, dealer undertakings to make a market in the
security, and the nature of the security and of the marketplace trades. The Fund
may purchase restricted securities sold in reliance upon the exemption from
registration provided by Rule 144A under the 1933 Act. Restricted securities may
be difficult to value because market quotations may not be readily available.
Because of the restrictions on the resale of restricted securities, they may
pose liquidity problems for the Portfolios.
Securities Lending -- In order to generate additional income, certain of the
Portfolios may lend the securities in which they are invested pursuant to
agreements requiring that the loan be continuously secured by cash, securities
of the U.S. Government or its agencies or any combination of cash and such
securities as collateral equal at all times to 100% of the market value of the
securities lent. Each
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Portfolio will continue to receive interest on the securities lent while
simultaneously earning interest on the investment of cash collateral in U.S.
Government securities. Collateral is marked to market daily to provide a level
of collateral at least equal to the value of the securities lent. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will only be made to borrowers deemed by the Adviser or sub-advisers to be
of good standing and when, in the judgment of the Adviser or sub-advisers, the
consideration which can be earned currently from such securities loans justifies
the attendant risk.
Short Sales - A Portfolio may sell securities short when it is believed that the
price of that security will decline. A short sale involves the sale of a
security which the Portfolio does not own in the hope of purchasing the same
security at a lower price at a later date. To make delivery to the buyer, the
Portfolio must borrow the security from the broker-dealer executing the short
sale. The broker-dealer is entitled to retain the proceeds from the short sale
until the Portfolio delivers the securities sold short to the broker-dealer. The
Portfolio also is required to pay any dividends paid securities sold short to
the broker-dealer. The Portfolio normally closes out a short position by
purchasing on the open market and delivering to the broker-dealer an equal
amount of securities sold short. When the Portfolio closes out its short
position, it receives the proceeds of the sale. The Portfolio will realize a
gain if the price of the security declines between the date of the short sale
and the date on which the Portfolio purchases a security to replace the borrowed
security. On the other hand, the Portfolio will incur a loss if the price of the
security increases between those dates. To secure its obligation to deliver the
securities sold short, the Portfolio must segregate an amount of cash or liquid
securities equal to the difference between the market value of the securities
sold short at the time they were sold short and any cash or liquid securities
deposited as collateral with the broker-dealer in connection with the short
sale. In addition, until the Portfolio closes out its short sale, it must
maintain, on a daily basis, segregated assets at a level so that (i) the amount
deposited in it plus the amount deposited with the broker (not including the
proceeds from the short sale) will equal the current market value of the
securities sold short and (ii) the amount deposited in its plus the amount
deposited with the broker-dealer (not including the proceeds from the short
sale) will not be less than the market value of the securities at the time they
were sold short.
Swaps -- As a way of managing its exposure to different types of investments,
the International Fund may enter into interest rate swaps, currency swaps and
other types of swap agreements such as caps, collars and floors. In a typical
interest rate swap, one party agrees to make regular payments equal to a
floating interest rate times a "notional principal amount." In return for
payments equal to a fixed rate times the same amount, for a specific period of
time. If a swap agreement provides for payment in different currencies, the
parties might agree to exchange the notional principal amount as well. Swaps may
also depend on other prices or rates, such as the value of an index or mortgage
prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specific interest rate exceeds an agreed-
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of buying a cap and selling a
floor.
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Swap agreements will tend to shift the Portfolio's investments exposure from one
type of investment to another. For example, if the Portfolio agrees to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Portfolio's exposure to U.S. interest rates and increase
its exposure to foreign currency and interest rates. Caps and floors have an
effect similar to buying or writing options. Depending on how they are used,
swap agreements may increase or decrease the overall volatility of investments
and their share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and have a considerable impact on the
Portfolio's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform and may decline in value if the counterparty's
creditworthiness deteriorates. The Portfolio may also suffer losses if it is
unable to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. Any obligation the Portfolio may have under these types
of arrangements will be covered by setting aside liquid securities in a
segregated account. The Portfolio will enter into swaps only with counterparties
deemed creditworthy by the Adviser.
Time Deposit -- A non-negotiable receipt issued by a bank in exchange for the
deposit of funds. Like a certificate of deposit, it earns a specified rate of
interest over a definite period of time; however, it cannot be traded in the
secondary market. Time deposits with a withdrawal penalty are considered to be
illiquid securities.
U.S. Government Agency Obligations -- Certain Federal agencies such as the
Government National Mortgage Association ("GNMA") have been established as
instrumentalities of the United States Government to supervise and finance
certain types of activities. Issues of these agencies, while not direct
obligations of the United States Government, are either backed by the full faith
and credit of the United States (e.g., GNMA securities) or supported by the
issuing agencies' right to borrow from the Treasury. The issues of other
agencies are supported by the credit of the instrumentality (e.g., Federal
National Mortgage Association securities).
U.S. Government Securities -- Bills, notes and bonds issued by the U.S.
Government and backed by the full faith and credit of the United States.
U.S. Treasury Obligations -- Bills, notes and bonds issued by the U.S. Treasury,
and separately traded interest and principal component parts of such obligations
that are transferable through the Federal book-entry system known as Separately
Traded Registered Interest and Principal Securities ("STRIPS"). STRIPS are
usually structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. One type of
STRIPS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive all of
the principal ("principal-only" or "PO class"). The yield to maturity on IO
classes and PO classes is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the portfolio
yield to maturity. If the underlying mortgage assets experience greater
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than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment in these securities, even if the security is in one of
the highest rating categories.
Variable and Floating Rate Instruments -- Certain obligations purchased by a
Portfolio may carry variable or floating rates of interest, may involve a
conditional or unconditional demand feature and may include variable amount
master demand notes. Such instruments bear interest at rates which are not
fixed, but which vary with changes in specified market rates or indices, such as
a Federal Reserve composite index. The interest rates on these securities may be
reset daily, weekly, quarterly or some other reset period, and may have a floor
or ceiling on interest rate changes. There is a risk that the current interest
rate on such obligations may not accurately reflect existing market interest
rates. A demand instrument with a demand notice exceeding seven days may be
considered illiquid if there is no secondary market for such securities.
When-Issued and Delayed-Delivery Securities -- When-issued and delayed-delivery
securities are securities subject to settlement on a future date. For fixed
income securities, the interest rate realized on when-issued or delayed-delivery
securities is fixed as of the purchase date and no interest accrues to the
Portfolio before settlement. These securities are subject to market fluctuation
due to changes in market interest rates and will have the effect of leveraging
the Portfolio's assets. The Portfolios are permitted to invest in forward
commitments or when-issued securities where such purchases are for investment
and not for leveraging purposes. One or more segregated accounts will be
established with the Custodian, and the Portfolios will maintain liquid assets
in such accounts in an amount at least equal in value to each Portfolio's
commitments to purchase when-issued securities.
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LOGO
THE PBHG FUNDS, INC.
PROSPECTUS
___________, 1999
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The PBHG Funds, Inc.
P.O. Box 419534
Kansas City, MO 64141-6534
Investment Adviser:
Pilgrim Baxter & Associates, Ltd.
Distributor:
SEI Investments Distribution Co.
LOGO
The Power of Discipline.
The rewards of time.(Servicemark)
To open an account, receive information,
make inquiries or request literature:
1-800-433-0051
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Fund:
THE PBHG FUNDS, INC.
Portfolios:
PBHG GROWTH FUND
PBHG EMERGING GROWTH FUND
PBHG NEW OPPORTUNITIES 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 FOCUSED VALUE FUND
PBHG INTERNATIONAL FUND
PBHG CASH RESERVES FUND
PBHG TECHNOLOGY & COMMUNICATIONS FUND
PBHG STRATEGIC SMALL COMPANY FUND
(each, a "Portfolio," collectively the "PBHG Fund" or "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 _________ __, 1999 with respect to the PBHG
New Opportunities Fund and the PBHG Focused Value Fund and June 1, 1998 with
respect to the other Portfolios and with the Prospectus for the Advisor Class of
the PBHG Growth Fund shares dated June 1, 1998. The Prospectuses for the
Portfolios may be obtained by calling 1-800-433-0051.
<PAGE>
TABLE OF CONTENTS
Page
----
THE FUND.....................................................................3
DESCRIPTION OF PERMITTED INVESTMENTS.........................................3
INVESTMENT LIMITATIONS......................................................12
THE ADVISER.................................................................18
THE SUB-ADVISERS............................................................21
THE ADMINISTRATOR AND SUB-ADMINISTRATOR.....................................23
THE DISTRIBUTOR.............................................................25
THE CUSTODIANS..............................................................26
DIRECTORS AND OFFICERS OF THE FUND..........................................26
COMPUTATION OF YIELD........................................................29
CALCULATION OF TOTAL RETURN.................................................30
PURCHASE AND REDEMPTION OF SHARES...........................................30
DETERMINATION OF NET ASSET VALUE............................................31
TAXES.......................................................................33
PORTFOLIO TRANSACTIONS......................................................39
DESCRIPTION OF SHARES.......................................................42
5% AND 25% SHAREHOLDERS.....................................................43
FINANCIAL STATEMENTS........................................................48
____________, 1999
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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
Restated 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
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is treated as an unsecured creditor of the seller and is required to return the
underlying security to the seller's estate.
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.
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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 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 may be exchanged on a spot (i.e., cash) basis, or by
entering into forward contracts to purchase or sell foreign currencies at a
future date and price. Forward contracts generally are traded in an interbank
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 applicable Sub-Adviser.
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
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<PAGE>
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.
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.
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If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Portfolio. These subsequent payments called "variation
margin," to and from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short positions in the
futures contract more or less valuable, a process known as "marking to the
market." A Portfolio expects to earn interest income on its initial and
variation margin deposits.
A Portfolio will incur brokerage fees when it purchases and sells futures
contracts. Positions taken in the futures markets are not normally held until
delivery or cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, a
Portfolio may instead make or take delivery of underlying securities whenever it
appears economically advantageous to 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
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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.
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
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expiration date. A Portfolio when it writes a put option will be required to
"cover" it, for example, by depositing and maintaining in a segregated account
with its custodian cash, or other liquid obligations having a value equal to or
greater than the exercise price of the option.
A Portfolio may write put options either to earn additional income in the form
of option premiums (anticipating that the price of the underlying security will
remain stable or rise during the option period and the option will therefore not
be exercised) or to acquire the underlying security at a net cost below the
current value (e.g., the option is exercised because of a decline in the price
of the underlying security, but the amount paid by 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
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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 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
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futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit, if
the futures contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract.
A decision of whether, when, and how to hedge involves skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior, market trends or interest rate trends. There are
several risks in connection with the use by a Portfolio of futures contracts as
a hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of
the underlying instruments which are the subject of the hedge. The Advisers
will, however, attempt to reduce this risk by entering into futures contracts
whose movements, in its judgment, will have a significant correlation with
movements in the prices of the Portfolio's underlying instruments sought to be
hedged.
Successful use of futures contracts by a Portfolio for hedging purposes is also
subject to the 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.
11
<PAGE>
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 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.
An exchange may establish limitations governing the maximum number of calls and
puts in each class (whether or not covered) which may be written by a single
investor or group of investors acting in concert (regardless of whether the
options are written on the same or different exchanges or are held or written in
one or more accounts or through one or more brokers). It is possible that the
Portfolio and clients advised by the Adviser or the applicable Sub-Adviser may
constitute such a group. An exchange may order the liquidation of positions
found to be in violation of these limits, and it may impose certain other
sanctions. These position limits may limit the number of options which a
Portfolio can write on a particular security.
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
12
<PAGE>
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.
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.
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.
Each of the foregoing 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
13
<PAGE>
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.
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.
14
<PAGE>
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
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.
PBHG Focused Value Fund and PBHG New Opportunities Fund
Each of the foregoing Portfolios may not:
1. Make loans except that each such Portfolio, in accordance with its
investment objective and policies, may (a) purchase debt obligations, (b)
enter into repurchase agreements and (c) lend its portfolio securities.
2. Act as an underwriter of securities of other issuers, except as it may be
deemed to be an underwriter under the 1933 Act in connection with the
purchase and sale of portfolio securities.
3. Purchase or sell commodities or commodity contracts, except that each such
Portfolio, in accordance with its investment objective and policies, may:
(i) invest in readily marketable securities of issuers which invest or
engage in such activities; and (ii) enter into forward contracts, futures
contracts and options thereon.
15
<PAGE>
4. Purchase or sell real estate, or real estate partnership interests, except
that this limitation shall not prevent any such Portfolio from investing
directly or indirectly in readily marketable securities of issuers which
can invest in real estate, institutions that issue mortgages, or real
estate investment trusts which deal with real estate or interests therein.
5. Issue senior securities (as defined in the 1940 Act) except as permitted in
connection with the Portfolio's policies on borrowing and pledging, or as
permitted by rule, regulation or order of the SEC.
6. Purchase more than 10% of the voting securities of any one issuer or
purchase securities of any one issuer if, at the time of purchase, more
than 5% of its total assets will be invested in that issuer, except that up
to 25% of its assets may be invested without regard to these limits.
This limitation does not apply to the PBHG Focused Value Fund. For purposes
of this investment limitation, the term "issuer" does not include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and repurchase agreements collateralized by such
obligations.
7. Invest 25% or more of its total assets at the time of purchase in
securities of issuers (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such obligations) whose principal business
activities are in the same industry. For purposes of this investment
limitation, state and municipal governments and their agencies and
authorities are not deemed to be industries; utility companies will be
divided according to their services (e.g., gas, gas transmission, electric,
electric and gas, and telephone) and financial service companies will be
classified according to end use of their service (e.g., automobile finance,
bank finance, and diversified finance).
8. Borrow money (other than pursuant to reverse repurchase agreements) except
for temporary or emergency purposes and then only in amounts up to 33 1/3%
of the total assets of the PBHG Focused Value Fund and the PBHG New
Opportunities Fund. The temporary borrowing will include, for example,
borrowing to facilitate the orderly sale of portfolio securities to
accommodate substantial redemption requests if they should occur, to
facilitate the settlement of securities transactions, and is not for
investment purposes. All borrowings in excess of 5% of a Portfolio's total
assets will be repaid before making additional investments.
The foregoing percentages will apply at the time of each purchase of a security
(except with respect to borrowings in excess of limitation 8(c) above which will
be reduced consistent with the requirements of Section 18(f) of the 1940 Act).
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.
16
<PAGE>
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.
PBHG Large Cap Growth Fund and 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.
Each of the foregoing 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.
PBHG Focused Value Fund and PBHG New Opportunities Fund
Each of the foregoing Portfolios may not:
1. Pledge more than 10% of it's total assets, except that each such Portfolio
may pledge assets to the extent permitted by the 1940 Act 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.
2. 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
17
<PAGE>
pursuant to procedures established by, the Board, based on trading markets
for such security, to be liquid.
3. Purchase or sell puts, calls, straddles, spreads, and any combination
thereof except that each such Portfolio may, in accordance with its
investment objective and policies, write covered call options wit respect
to all of its portfolio securities, write covered put options and enter
into closing purchase transactions with respect to such options, engage in
put and call option transactions and engage in interest rate and stock
index futures contracts and related options transactions.
4. Purchase securities of open-end or closed-end investment companies, except
to the extent permitted by the 1940 Act.
5. Invest in companies for the purpose of exercising control.
6. Purchase securities on margin, except that each such 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 Fund's use of options and futures contracts.
7. Invest in interests in oil, gas or other mineral leases, exploration or
development programs, except that this shall not prevent a Portfolio from
investing in readily marketable securities of issuers that invest or engage
in oil, gas or other mineral leases, exploration or development programs or
issuers secured by interest in such activities.
The foregoing percentages will apply at the time of each purchase of a security
(except with respect to the limitation on investments in illiquid securities).
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.)
As of the date of this Statement of Additional Information, the PBHG New
Opportunities Fund and the PBHG Focused Value Fund had not yet commenced
investment operations. For the fiscal years and
18
<PAGE>
periods ended March 31, 1996, 1997, and 1998 each of the other Portfolios paid
or waived the following advisory fees:
<TABLE>
<CAPTION>
Fees Paid Fees Waived
Portfolio
----------------------------------------------- ---------------------------------------------
1996 1997 1998 1996 1997 1998
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Growth $15,198,342 $44,149,035 $47,429,208 $0 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Emerging Growth $4,784,791 $10,774,907 $12,965,521 $0 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Large Cap Growth $33,161(1) $930,649 $1,014,896 $82,513 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Select Equity $461,555(1) $4,101,441 $3,228,253 $162,473 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Core Growth ($10,712)(2) $2,918,000 $2,095,945 $33,489 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Limited * $1,415,935(3) $1,658,981 * $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Large Cap 20 * $183,335(4) $924,747 * $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Large Cap Value * $32,059(5) $371,529 * $8,931 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Mid-Cap Value * * $207,661(7) * * $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Small Cap Value * * $501,946(7) * * $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG International $25,795 $176,992 $210,622 $88,733 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Cash Reserves $66,035(1) $678,965 $559,846 $99,136 $0 $0
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Technology $58,490(6) $2,970,000 $5,105,411 $70,782 $0 $0
& Communications
- -------------------------- --------------- -------------- --------------- ----------- ------------- -----------------
PBHG Strategic * $153,886(5) $1,029,083 * $0 $0
Small Company
========================== =============== ============== =============== =========== ============= =================
</TABLE>
* Not in operation during the period.
(1) For the period from April 5, 1995 (commencement of operations) through
March 31, 1996.
(2) For the period from January 2, 1996 (commencement of operations) through
March 31, 1996.
(3) For the period from July 1, 1996 (commencement of operations) through
March 31, 1997.
(4) For the period from December 1, 1996 (commencement of operations) through
March 31, 1997.
(5) For the period from January 2, 1997 (commencement of operations) through
March 31, 1997.
(6) For the period from October 2, 1995 (commencement of operations) through
March 31, 1996.
(7) For the period from May 1, 1997 (commencement of operations) through
March 31, 1998.
19
<PAGE>
In the interest of limiting the expenses of each Portfolio, the Adviser has
entered into separate expense limitation agreements with the Fund (each, an
"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, the PBHG Strategic Small Company Fund, the
PBHG Focused Value Fund and the PBHG New Opportunities 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 2.25% for the PBHG International Fund; 2.00% for the PBHG
New Opportunities Fund and 1.50% for the other Portfolios. 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 to exceed 2.25% for the International Fund, 2.00% for the New
Opportunities Fund and 1.50% for the other Portfolios. 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 2.25% for the International Fund,
2.00% for the New Opportunities Fund and 1.50% for the other Portfolios; 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
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).
20
<PAGE>
THE SUB-ADVISERS
Pilgrim Baxter Value Investors, Inc.
The Fund, on behalf of each of the PBHG Mid-Cap Value Fund, PBHG Large Cap Value
Fund, PBHG Small Cap Value Fund, PBHG Strategic Small Company Fund, and PBHG
Focused Value Fund, and the Adviser have entered into sub-advisory agreements
(each, a "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 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.
21
<PAGE>
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, 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
22
<PAGE>
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, 1999, 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.
The Fund, the Administrator and SEI Fund Resources (the "Sub-Administrator")
entered into the Sub-Administrative Services Agreement on July 1, 1996, as
amended, 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
Investments 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, 2000, 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 Administrator pays the
Sub-Administrator fees at an annual rate based on the combined average daily net
assets of the Fund, PBHG Advisor Funds, Inc., and PBHG Insurance Series Fund,
Inc., calculated as follows: (i) 0.040% of the first $2.5 billion, plus (ii)
0.025% of the next $7.5 billion, plus (iii) 0.020% of the excess over $10
billion.
23
<PAGE>
As of the date of this Statement of Additional Information, the PBHG New
Opportunities Fund and the PBHG Focused Value Fund had not yet commenced
operations. For the fiscal years and periods ended March 31, 1996, 1997 and 1998
each of the other Portfolios paid the following administration fees:
<TABLE>
<CAPTION>
Fees Paid Fees Waived
Portfolio
---------------------------------------------- -----------------------------------------------
1996 1997+ 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
PBHG Growth $3,576,064 $8,325,330 $8,369,860 $0 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Emerging Growth $1,125,834 $2,026,934 $2,288,033 $0 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Large Cap Growth $69,887(1) $194,580 $202,979 $6,148 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Select Equity $158,422(1) $762,481 $569,691 $6,148 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Core Growth $12,092(2) $527,363 $369,872 $6,148 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Limited * $212,390(3) $248,847 * $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Large Cap 20 * $32,353(4) $163,191 * $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Large Cap Value * $5,658(5) $84,777 * $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Mid-Cap Value * * $36,646(7) * * $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Small Cap Value * * $75,292(7) * * $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG International $74,949 $40,069 $31,592 $0 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Cash Reserves $117,204(1) $354,921 $279,921 $6,148 $0 $0
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Technology & $35,898(6) $537,851 $900,954 $6,148 $0 $0
Communications
- ------------------------------ -------------- -------------- --------------- --------------- -------------- --------------
PBHG Strategic Small * $23,083(5) $154,362 * $0 $0
Company
============================== ============== ============== =============== =============== ============== ==============
</TABLE>
* Not in operation during the period.
+ 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 April 5, 1995 (commencement of operations) through
March 31, 1996.
(2) For the period from January 2, 1996 (commencement of operations) through
March 31, 1996.
(3) For the period from July 1, 1996 (commencement of operations) through March
31, 1997.
(4) For the period from December 1, 1996 (commencement of operations) through
March 31, 1997.
24
<PAGE>
(5) For the period from January 1, 1997 (commencement of operations) through
March 31, 1997.
(6) For the period from October 2, 1995 (commencement of operations) through
March 31, 1996.
(7) For the period from May 1, 1997 (commencement of operations) through March
31, 1998.
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") 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.
25
<PAGE>
No compensation was paid to the Distributor for distribution services for the
fiscal years ended March 31, 1996, 1997 and 1998. For the fiscal year ended
March 31, 1998, $153,243 was paid to Service Providers pursuant to the Service
Plan for the Advisor Class shares of the PBHG Growth Fund.
HOW TO PURCHASE AND REDEEM SHARES
A complete description of the manner by which shares of the Funds may be
purchased appears in the Prospectus under the caption "How to Purchase Fund
Shares."
Complete information concerning the method of exchanging shares of the Funds for
shares of the other Funds is set forth in the Prospectus under the Caption
"Exchange Privileges."
THE CUSTODIANS
First Union National Bank (successor to CoreStates Bank, N.A.), 530 Walnut
Street, Philadelphia, Pennsylvania 19106, 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. Each
Director serves as a Director of two other registered investment companies
advised by the Adviser and each officer serves as an officer in a similar
capacity of two other investment companies advised by the Adviser. 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. Chief
Financial Officer and Director, the Triumph Group Holdings, Inc. since 1992.
Senior Vice President and Chief Financial Officer, Lukens, Inc., 1978-1992.
HAROLD J. BAXTER (51)* - Chairman of the Board and Director - Chairman, Chief
Executive Officer and Director, the Adviser, 825 Duportail Road, Wayne, PA
19087. Trustee, the Administrator since May 1996. Chief Executive Officer, Value
Investors, 825 Duportail Road, Wayne, PA 19087, since June 1996. Trustee, the
Distributor since January 1998.
- --------
* Mr. Baxter is a Director who may be deemed to be an "interested person" of
the Company as that term is defined in the 1940 Act.
26
<PAGE>
JETTIE M. EDWARDS (49) - Director - Syrus Associates, 76 Seaview Drive, Santa
Barbara, California 93108. Consultant, Syrus Associates since 1986. Trustee,
Provident Investment Counsel Trust (investment company) since 1992.
ALBERT A. MILLER (62) - Director - 7 Jennifer Drive, Holmdel, New Jersey 07733.
Principal and Treasurer, JK Equipment Exporters since 1995. 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 - Chief Investment Officer and Director, the
Adviser since 1982. Trustee, the Administrator since May 1996. Director, Value
Investors since June 1996.
SANDRA K. ORLOW (44) - Vice President - Vice President and Assistant Secretary
of SEI and the Sub-Administrator since 1983 and SEI Investments since 1996.
KATHRYN L. STANTON (39) - Vice President, Assistant Secretary - Vice President
and Assistant Secretary of SEI and the Sub-Administrator since 1994 and SEI
Investments since 1996. Associate, Morgan, Lewis & Bockius LLP (law firm),
1989-1994.
TODD CIPPERMAN (32) - Vice President, Assistant Secretary - Vice President and
Assistant Secretary of SEI and the Sub-Administrator since 1995 and SEI
Investments since 1996. Associate, Dewey Ballantine (law firm) 1994-1995.
Associate, Winston & Strawn, (law firm) 1991-1994.
MICHAEL J. HARRINGTON (29) - Vice President - Director of Fund Services, the
Adviser since 1994. Secretary, the Administrator since May 1996. Vice President,
the Distributor since January 1998. Account Manager, SEI, 1991-1994.
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 and Treasurer, the Distributor
since January 1998. 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. President,
the Distributor since January 1998.
JOHN M. ZERR (35) - Vice President and Secretary - General Counsel and
Secretary, the Adviser since November 1996. General Counsel and Secretary, Value
Investors since November 1996. General Counsel and Secretary, the Distributor
since January 1998. Vice President and Assistant Secretary, Delaware Management
Company, Inc. and the Delaware Group of Funds, 1995-1996. Associate, Ballard
Spahr Andrews & Ingersoll (law firm), 1987-1995.
MEGHAN M. MAHON (30) - Vice President and Assistant Secretary since June 1998.
Counsel, the Adviser since April 1998. Assistant Vice President, Assistant
Secretary and Counsel, Delaware Management Company Inc. and the Delaware Group
of Funds, 1997-1998. Associate, Drinker Biddle
27
<PAGE>
& Reath, LLP (law firm) 1994-1997. Associate, McAleese, McGoldrick & Susanin
(law firm) 1993-1994.
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,
1998:
<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, $34,917 N/A N/A $54,083 for services
Director on three Boards
- ------------------------------ ---------------- --------------------- ---------------------- --------------------------
Harold J. Baxter, $0 N/A N/A $0
Director**
- ------------------------------ ---------------- --------------------- ---------------------- --------------------------
Jettie M. Edwards, $34,917 N/A N/A $54,083 for services
Director on three Boards
- ------------------------------ ---------------- --------------------- ---------------------- --------------------------
Albert A. Miller, $34,917 N/A N/A $54,083 for services
Director on three Boards
============================== ================ ===================== ====================== ==========================
</TABLE>
* The Fund and Fund Complex are expected to pay in the aggregate
approximately $84,500 to each Director who is not an "interested person" of
the Registrant for the fiscal year ending March 31, 1999.
** 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 $37,500 for services to the Fund for the
fiscal year ending March 31, 1999.
28
<PAGE>
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 and
income other than investment income) 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 and income other than investment income, 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.
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, 1998, the yield for the PBHG Cash
Reserves Fund was 4.91% and the 7-day effective yield was 5.03%.
29
<PAGE>
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.
As of the date of this Statement of Additional Information, the PBHG New
Opportunities Fund and the PBHG Focused Value Fund had not yet commenced
operations. However, 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, 1998, and for the one, five and ten year periods
ended September 30, 1998, 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 (Advisor) -28.04% * * -10.81% -21.56%
PBHG Growth (PBHG)(1) -27.86% 6.56% 16.00% 15.78% 550.63%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Emerging Growth(2) -25.55% 12.99% * 17.31% 132.96%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Large Cap Growth(3) 6.55% * * 24.47% 114.58%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Select Equity(4) -5.76% * * 24.53% 114.90%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Core Growth(5) -16.29% * * 2.80% 7.90%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Limited(6) -14.17% * * 7.17% 16.91%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Large Cap 20(7) 29.38% * * 32.27% 67.08%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Large Cap Value(8) 6.03% * * 17.22% 32.01%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Mid-Cap Value(12) -2.75 * * 26.16% 39.06%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Small Cap Value(12) -18.64% * * 12.62% 18.38%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG International(9) -10.38% * * 3.06% 13.82%
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Technology & -19.71% * * 21.62% 79.97%
Communications(10)
- -------------------------------- ------------------ ------------------ ------------------ ------------------- -------------------
PBHG Strategic Small Company(11) -25.57% * * 0.02% 0.04%
================================ ================== ================== ================== =================== ===================
</TABLE>
* The Portfolio was not in operation for the full period.
(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 & Communications 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, Presidents' Day, Martin Luther King, Jr.'s Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Shares of the Portfolios are offered on a continuous basis.
30
<PAGE>
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. Each PBHG Fund has made an election pursuant to Rule 18f-1
under the 1940 Act by which such Portfolio has committed itself to pay in cash
all requests for redemption by any shareholder of record, limited in amount with
respect to each shareholder during any 90-day period to the lesser of (1)
$250,000 or (2) one percent of the net asset value of the Portfolio at the
beginning of such 90-day period. 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
Sub-Administrator will use an independent pricing service to obtain valuations
of securities. The pricing service relies primarily on prices of actual market
transactions as well as trade quotations. The procedures of the pricing service
and its valuations are reviewed by the officers of the 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.
Foreign securities are valued on the basis of quotations from the primary market
in which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. In addition, if quotations are not readily
available, or if the values have been materially affected by events occurring
after the closing of a foreign market, assets may be valued by another method
that the Board of Directors believes accurately reflects fair value.
31
<PAGE>
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 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
32
<PAGE>
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 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) 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
(iii) no more than 25% of the value of a Portfolio's total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two or
more issuers which the Portfolio controls and which are engaged in the same or
similar trades or businesses (the "Asset Diversification Test").
For purposes of the Asset Diversification Test, it is unclear under present law
who should be treated as the issuer of forward foreign currency exchange
contracts, of options on foreign currencies, or of
33
<PAGE>
foreign currency futures and related options. It has been suggested that the
issuer in each case may be the foreign central bank or foreign government
backing the particular currency. Consequently, a Portfolio may find it necessary
to seek a ruling from the Internal Revenue Service on this issue or to curtail
its trading in forward foreign currency exchange contracts in order to stay
within the limits of the Asset Diversification Test.
For purposes of the Income Requirement, foreign currency gains (including gains
from options, futures or forward contracts on foreign currencies) that are not
"directly related" to a Portfolio's principal business may, under regulations
not yet issued, be excluded from qualifying income.
If a Portfolio fails to qualify as a RIC for any taxable year, it will be
taxable at regular corporate rates on its net investment income and net capital
gain without any deductions for amounts distributed to shareholders. In such an
event, all distributions (including capital gains distributions) will be taxable
as ordinary dividends to the extent of that Portfolio's current and accumulated
earnings and profits and such distributions will generally be eligible for the
corporate dividends-received deduction.
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.
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
34
<PAGE>
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.
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.
35
<PAGE>
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 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).
36
<PAGE>
Because application of the straddle, conversion transaction and constructive
sale rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected straddle or
investment positions, the amount which must be distributed to shareholders and
which will be taxed to shareholders as ordinary income or long-term capital gain
may be increased or decreased as compared to a fund that did not engage in such
transactions.
Requirements relating to each Portfolio's tax status as a RIC may limit the
extent to which a Portfolio will be able to engage in transactions in options
and futures contracts.
State Taxes
Distributions by a Portfolio to shareholders and the ownership of shares may be
subject to state and local taxes.
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 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, there are certain holding period requirements that
must be satisfied by a shareholder before such 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%
37
<PAGE>
(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 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 15,
1998. 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.
38
<PAGE>
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 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
39
<PAGE>
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.
As of the date of this Statement of Additional Information, the PBHG New
Opportunities Fund and the PBHG Focused Value Fund had not yet commenced
operations. For the fiscal year and periods ended March 31, 1998, 1997, and
1996, for each of the other Portfolios paid brokerage fees as follows:
<TABLE>
<CAPTION>
Total Amount of Total Amount Total Amount
Brokerage of Brokerage of Brokerage
Commissions Paid Commissions Commissions
in 1998 Paid in 1997 Paid in 1996
- -------------------------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C>
PBHG Growth Fund $6,867,275 $4,696,917 $1,546,204
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Emerging Growth Fund+ $822,133 $408,039 $702,027
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Large Cap Growth Fund $124,206 $138,111 $50,907(2)
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Select Equity Fund $355,670 $329,054 $204,485(2)
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Core Growth Fund $336,589 $306,218 $21,334(3)
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Limited Fund $81,540 $80,602(4) *
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Large Cap 20 Fund $167,891 $67,122(5) *
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Large Cap Value Fund $490,469 $40,128(6) *
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Mid-Cap Value Fund $301,165 * *
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Small Cap Value Fund $407,791 * *
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG International Fund $110,586 $110,586 $152,429
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Cash Reserves Fund $0 $0 $0(2)
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Technology & $773,750 $646,233 $39,559(8)
Communications Fund
- -------------------------------------- --------------------- --------------------- ----------------------
PBHG Strategic Small $361,158 $162,617(6) *
Company Fund
====================================== ===================== ===================== ======================
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Total Amount of Total Amount of Total Amount of
Brokerage Brokerage Brokerage Percent of Total
Commissions Paid Commissions Paid Commissions Paid to Amount of Brokerage
to the Distributor to the Distributor in Distributor in Commissions Paid to
in 1996++ 1997++ 1998++ the Distributor in 1998
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
PBHG Growth Fund $102,795 $262,068 $235,453 3%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Emerging Growth Fund+ $50,416 $107,839 $59,704 7%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Large Cap Growth Fund $890 $6,768 $3,015 2%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Select Equity Fund $4,862 $21,840 $6,199 2%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Core Growth Fund $362 $17,609 $3,445 1%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Limited Fund * $23,147 $10,081 12%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Large Cap 20 Fund * $3,003 $4,244 3%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Large Cap Value Fund * $428 $795 1%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Mid-Cap Value Fund * * $564 1%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Small Cap Value Fund * * $1,155 1%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG International Fund 0 $0 $0 0%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Cash Reserves Fund 0 $0 $0 0%
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Technology & $1,458 $24,434 $20,681 3%
Communications Fund
- ----------------------------------- --------------------- --------------------- ---------------------- ------------------------
PBHG Strategic Small * $1,516 $1,565 1%
Company Fund
=================================== ===================== ===================== ====================== ========================
</TABLE>
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<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 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.
(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 Conduct Rules 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.
42
<PAGE>
5% AND 25% SHAREHOLDERS
As of November 16, 1998, 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. Persons owning of record or beneficially
25% or more of the outstanding share class of a Portfolio may be deemed to be a
controlling person of that Portfolio for purposes of the 1940 Act.
PBHG Core Growth Fund - PBHG Class
Charles Schwab & Co., Inc. 16.97%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 11.90%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Emerging Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 14.73%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 10.25%
P.O. Box 3908
Church Street Station
New York, New York 10008-3908
Salomon Smith Barney Inc. 5.63%
NAV Program
333 W. 34th Street
New York, NY 10001-2483
PBHG Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 14.33%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
43
<PAGE>
National Financial Services Corp. 7.29%
P.O. 3908
Church Street Station
New York, New York 10008-3908
Fidelity Investments Institutional 6.43%
Operations Co.
100 Magellan Way
Covington, KY 41015-3987
Connecticut General Life Insurance 5.34%
350 Church Street
PO Box 2975
Hartford, CT 06104
The Manufacturers Life Insurance Co. 6.37%
PO Box 600
Buffalo, NY 14201
PBHG Growth Fund - Advisor Class
The Travelers Insurance Company 49.30%
ATTN: Roger Ferland
1 Tower Square
Hartford, CT 06183-9001
Wilmington Trust Co. 9.10%
FBO General Cable Resource Plan
c/o Mutual Funds
1100 N. Market Street
Wilmington, DE 19801-3029
Wilmington Trust Company 5.18%
FBO Allied Waste 401(k) Plan
1100 N. Market Street
Wilmington, DE 19801-3029
Sisters of Mercy 7.63%
2300 Adeline Drive
Burlingame, CA 94010-5599
44
<PAGE>
Fleet National Bank, Custodian 6.86%
FBO Hoag Memorial Hospital Growth
ATTN: 0004683070
P.O. Box 92800
Rochester, NY 14692-8900
PBHG Large Cap Growth Fund - PBHG Class
Charles Schwab & Co. Inc. 22.08%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 14.71%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Limited Fund - PBHG Class
Charles Schwab & Co., Inc. 7.73%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Northern Trust TR 14.61%
FBO J. Paul Getty Trust
P.O. Box 92956
Chicago, IL 60675-2956
PBHG Large Cap 20 Fund - PBHG Class
Charles Schwab & Co., Inc. 20.26%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 14.72%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
45
<PAGE>
PBHG Select Equity Fund - PBHG Class
Charles Schwab & Co. Inc. 20.35%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 16.71%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Large Cap Value Fund - PBHG Class
Compass Bank, Trustee 47.67%
Alfa Mutual Insurance Company
P.O. Box 11000
Montgomery, AL 36191-0001
Charles Schwab & Co., Inc. 10.03%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104
PBHG Mid-Cap Value - PBHG Class
National Financial Services Corp. 26.63%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co, Inc. 25.64%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
Donaldson Lufkin & Jenrette 9.34%
PO Box 2052
Jersey City, NJ 07303
46
<PAGE>
PBHG Small Cap Value - PBHG Class
National Financial Services Corp. 10.26%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co., Inc. 24.15%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
The Northern Trust Co., Custodian 23.75%
FBO Arthur Andersen
P.O. Box 92956
Chicago, IL 60675-2956
Donaldson Lufkin & Jenrette 9.91%
Transfer Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
PBHG International Fund - PBHG Class
Charles Schwab & Co., Inc. 11.85%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 6.96%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette 7.57%
PO Box 2052
Jersey City, NJ 07303
PBHG Strategic Small Company Fund
Charles Schwab & Co., Inc. 15.29%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
47
<PAGE>
PBHG Technology & Communications Fund - PBHG Class
Charles Schwab & Co., Inc. 25.46%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 14.13%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG Cash Reserves Fund - PBHG Class
Harold J. Baxter & 16.12%
Christine E. Baxter JTTEN
825 Duportail Road
Wayne, PA 19087
FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP located at 2400 Eleven Penn Center, Philadelphia,
Pennsylvania, serves as the independent accountants for the Fund.
The audited financial statements for the fiscal year ended March 31, 1998 and
the report of the independent accountants for that year are included in the
Fund's Annual Report to Shareholders dated March 31, 1998. The Annual Report,
except for pages one through nine thereof, is incorporated herein by reference
and made a part of this document. These financial statements have been audited
by PricewaterhouseCoopers LLP and incorporated by reference into the
Statement of Additional Information in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in auditing and accounting. In addition, the unaudited
financial statements for the Fund as of September 30, 1998 filed with the Funds'
Semi-annual Report are incorporated by reference herein and are made part of
this document.
No financial statements exist for the PBHG Focused Value Fund and the PBHG New
Opportunities Fund because they have not commenced operation as of the date of
this Statement of Additional Information.
48
<PAGE>
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part B - Statement of Additional Information:
The following financial statements are incorporated by reference to the Annual
Report of The PBHG Funds, Inc. (the "Fund") dated March 31, 1998:
Statement of Net Assets as of March 31, 1998
Statement of Operations for the period ended March 31, 1998
Statement of Changes in Net Assets for the period ended March 31, 1998
Financial Highlights for the fiscal year or period ended March 31, 1998
Notes to Financial Statements as of March 31, 1998
The following financial statements (unaudited) are incorporated by reference to
the Semi-Annual Report of the Fund dated September 30, 1998:
Statement of Net Assets as of September 30, 1998
Statements of Assets and Liabilities as of September 30, 1998
Statements of Operations as of September 30, 1998
Statements of Changes in Net Assets as of September 30, 1998 Financial
Highlights for the fiscal year or period ended September 30, 1998
Notes to Financial Statements as of September 30, 1998
(b) Exhibits:
1(a) Articles of Restatement of the Articles of Incorporation of
the Registrant filed October 21, 1998
1(b) Articles Supplementary of the Registrant filed
November 12, 1998
2 Amended and Restated By-Laws of the Registrant adopted
effective April 9, 1998(11)
3 Voting trust agreement - none
4 Specimen Common Stock Certificate(1)
5(a)(1) Investment Advisory Agreement between Pilgrim Baxter &
Associates and the Registrant dated April 28, 1995 and
Schedule A dated April 1, 1997(9)
5(a)(2) Form of Amendment to Investment Advisory Agreement between
Pilgrim Baxter & Associates, Ltd. and the Registrant
<PAGE>
5(b) Investment Sub-Advisory Agreement between and among the
Registrant on behalf of the PBHG Cash Reserves Fund, Pilgrim
Baxter & Associates, Ltd. and Wellington Management Company
dated April 4, 1995(6)
5(c) Form of Investment Sub-Advisory Agreement between the
Registrant, Pilgrim Baxter & Associates, Ltd. and Pilgrim
Baxter Value Investors, Inc.
5(d) Investment Sub-Advisory Agreement between and among the
Registrant, on behalf of the International Fund, Pilgrim
Baxter & Associates, Ltd. and Murray Johnstone International
Limited dated June 30, 1995(6)
5(e) Investment Sub-Advisory Agreement between and among the
Registrant, Pilgrim Baxter & Associates, Ltd. and Newbold's
Asset Management, Inc. on behalf of PBHG Large Cap Value
Fund, dated December 16, 1996 (as revised effective
May 1, 1997)(9)
5(f) Investment Sub-Advisory Agreement between and among the
Registrant, Pilgrim Baxter & Associates, Ltd. and Newbold's
Asset Management, Inc. on behalf of PBHG Strategic Small
Company Fund, dated December 16, 1996(9)
5(g) Investment Sub-Advisory Agreement between and among the
Registrant, Pilgrim Baxter & Associates, Ltd. and Newbold's
Asset Management, Inc. on behalf of PBHG Mid-Cap Value Fund
dated April 1, 1997(9)
5(h) Investment Sub-Advisory Agreement between and among the
Registrant, Pilgrim Baxter & Associates, Ltd. and Newbold's
Asset Management, Inc. on behalf of PBHG Small Cap Value
Fund, dated April 1, 1997(9)
6(a)(1) Distribution Agreement between the Registrant and SEI
Financial Services Company dated July 1, 1996 and Schedule A
dated April 1, 1997(9)
6(a)(2) Form of Amendment to Distribution Agreement between the
Registrant and SEI Financial Services Company
6(b) Form of Selling Group Agreement(3)
6(c) Shareholder Services Agreement between the Registrant and
PBHG Fund Services dated January 1, 1998
7 Bonus, profit sharing or pension plans - none
8(a)(1) Custodian Agreement between the Registrant and The Northern
Trust Company on behalf of the International Fund(9)
8(a)(2) First Amendment to Custody Agreement between the Registrant
and The Northern Trust Company dated June 4, 1998 on behalf
of the International Fund
8(b)(1) Custodian Agreement between the Registrant and CoreStates
Bank, N.A. and Schedule A dated April 1, 1997(9)
C-2
<PAGE>
8(b)(2) Form of Amendment to the Custodian Agreement between the
Registrant and First Union National Bank, successor by
merger to CoreStates Bank, N.A.
9(a)(1) Administrative Services Agreement between the Registrant and
PBHG Fund Services dated July 1, 1996 and Exhibit A dated
April 1, 1997(9)
9(a)(2) Form of Amendment to the Administrative Services Agreement
between the Registrant and PBHG Fund Services
9(b)(1) Sub-Administrative Services Agreement between the Registrant
and SEI Fund Resources dated July 1, 1996 and Schedule A
dated April 1, 1997(9)
9(b)(2) Amendment dated May 1, 1998 to Sub-Administrative Services
Agreement between the Registrant, PBHG Fund Services and SEI
Fund Resources dated July 1, 1996
9(b)(3) Form of Amendment to the Sub-Administrative Services
Agreement between the Registrant, PBHG Fund Services and SEI
Fund Resources
9(c) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Core
Growth Fund dated September 24, 1996(7)
9(d) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Limited
Fund dated September 24, 1996(7)
9(e) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Large
Cap 20 Fund dated November 24, 1996(8)
9(f) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Large
Cap Value Fund dated December 16, 1996(8)
9(g) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG
Strategic Small Company Fund dated December 16, 1996(8)
9(h) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG
International Fund dated March 6, 1997(9)
9(i) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Mid-Cap
Value Fund dated April 1, 1997(9)
9(j) Expense Limitation Agreement between the Registrant and
Pilgrim Baxter & Associates, Ltd. on behalf of PBHG Small
Cap Value Fund dated April 1, 1997(9)
9(k) Form of Expense Limitation Agreement between the Registrant
and Pilgrim Baxter & Associates, Ltd on behalf of each
Portfolio with respect to its Advisor Class shares(10)
9(l) Form of Expense Limitation Agreement between the Registrant
and Pilgrim Baxter & Associates, Ltd. on behalf of each
Portfolio listed on Schedule A
C-3
<PAGE>
10 Opinion and Consent of Ballard Spahr Andrews &
Ingersoll, LLP
11 Consent of PricewaterhouseCoopers LLP
12 Financial Statements omitted from Part B - none
13 Letter from Philadelphia Life Insurance Company to the
Registrant with respect to the initial capitalization of the
Registrant(2)
14(a) Southwestern Life Insurance Company Defined Benefit Pension
Plan and Trust(1)
14(b) Adoption Agreement for Southwestern Life Insurance Company
Standardized Integrated Defined Benefit Pension Plan and
Trust (with Pairing Provisions)(1)
14(c) Adoption Agreement for Southwestern Life Insurance Company
Standardized Non-Integrated Defined Benefit Pension Plan and
Trust (with Pairing Provisions)(1)
14(d) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Integrated Defined Benefit Pension Plan and
Trust(1)
14(e) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Non-Integrated Defined Benefit Pension Plan
and Trust(1)
14(f) Southwestern Life Insurance Company Combination Profit
Sharing-Money Purchase Plan and Trust(1)
14(g) Adoption Agreement for Southwestern Life Insurance Company
Standardized Money Purchase Plan and Trust (with Pairing
Provisions)(1)
14(h) Adoption Agreement for Southwestern Life Insurance Company
Standardized Profit Sharing Plan and Trust (with Pairing
Provisions)(1)
14(i) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Money Purchase Plan and Trust(1)
14(j) Adoption Agreement for Southwestern Life Insurance Company
Non-Standardized Profit Sharing Plan and Trust(1)
14(k) Form 5305, Simplified Employee Pension-Individual Retirement
Accounts Contribution Agreement(1)
14(l) Form 5305-A, Individual Retirement Custodial Account(1)
14(m) Southwestern Life Insurance Company Tax Deferred Annuity
Program Custodial Agreement(1)
14(n) Amendment to Application for Investment Plans under a
403(b)(7) Plan(4)
15 Plan pursuant to Rule 12b-1 with respect to Advisor Class
shares(5)
16 Schedule for computation of Performance Quotation provided
in the Registration Statement(9)
C-4
<PAGE>
18 Rule 18f-3 Multiple Class Plan dated November 20, 1995 and
Schedule A dated April 1, 1997(9)
24(a) Power of Attorney(11)
24(b) Power of Attorney(11)
27 Financial Data Schedules(11)
- ---------------
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(2) Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(3) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(4) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(5) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(6) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(7) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(8) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(9) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(10) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A (File No. 2-99810)
(11) Incorporated herein by reference to Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A (File No.2-99810)
Item 25. Persons Controlled by or under Common Control with Registrant
There are no persons that are controlled by or under common control with
the Registrant.
C-5
<PAGE>
Item 26. Number of Holders of Securities
As of November 15, 1998:
Title of Class Number of Record Holders
-------------- ------------------------
PBHG Class
PBHG Core Growth Fund 11,831
PBHG Emerging Growth Fund 48,139
PBHG Growth Fund 136,943
PBHG Large Cap Growth Fund 9,497
PBHG Large Cap 20 Fund 18,383
PBHG Limited Fund 6,666
PBHG Select Equity Fund 17,635
PBHG Mid-Cap Value Fund 3,502
PBHG Large Cap Value Fund 2,666
PBHG Small Cap Value Fund 4,082
PBHG International Fund 2,403
PBHG Strategic Small Company Fund 4,897
PBHG Technology & Communications Fund 22,720
PBHG Cash Reserves Fund 6,672
Advisor Class
PBHG Growth Fund 42
Item 27. Indemnification
The Articles of Incorporation of the Registrant include the following:
ARTICLE VII
7.4 Indemnification. The Corporation, including its successors and assigns,
shall indemnify its directors and officers and make advance payment of related
expenses to the fullest extent permitted, and in accordance with the procedures
required, by the General Laws of the State of Maryland and the Investment
Company Act of 1940, as amended ("1940 Act"). The By-Laws may provide that the
Corporation shall indemnify its employees and/or agents in any manner and within
such limits as permitted by applicable law. Such indemnification shall be in
addition to any other right or claim to which any director, officer, employee or
agent may otherwise be entitled. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise
or employee benefit plan, against any liability (including, with respect to
employee benefit plans, excise taxes) asserted against and incurred by such
person in any such capacity or arising out of such person's position, whether or
not the Corporation would have had the power to indemnify against such
liability. The rights provided to any person by this Article 7.4 shall be
enforceable against the Corporation by such person who shall be presumed to have
relied upon such rights in serving or continuing to serve in the capacities
indicated
C-6
<PAGE>
herein. No amendment of these Articles of Incorporation shall impair the rights
of any person arising at any time with respect to events occurring prior to such
amendment.
The By-Laws of the Registrant include the following:
ARTICLE IX
INDEMNIFICATION AND ADVANCE OF EXPENSES
Section 1. Indemnification of Directors and Officers. The Corporation
shall indemnify its directors to the fullest extent that indemnification of
directors is permitted by the Maryland General Corporation Law. The Corporation
shall indemnify its officers to the same extent as its directors and to such
further extent as is consistent with law. The Corporation shall indemnify its
directors and officers who, while serving as directors or officers, also serve
at the request of the Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation, partnership, joint venture,
real estate investment trust, trust, other enterprise or employee benefit plan
to the fullest extent consistent with law. The indemnification and other rights
provided for by this Article shall continue as to a person who has ceased to be
a director or officer, and shall inure to the benefit of the heirs, executors
and administrators of such a person. This Article shall not protect any such
person against any liability to the Corporation or any stockholder thereof to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office ("disabling conduct").
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended ("1933 Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suite or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
To the extent that the Articles of Incorporation, By-Laws or any other
instrument pursuant to which the Registrant is organized or administered
indemnify any director or officer of the Registrant, or that any contract or
agreement indemnifies any person who undertakes to act as investment adviser or
principal underwriter to the Registrant, any such provision protecting or
purporting to protect such persons against any liability to the Registrant or
its security holders to which he would otherwise by subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of his duties,
or by reason of his contract or agreement, will be interpreted and enforced in a
manner consistent with the provisions of Sections 17(h) and (i) of the 1940 Act,
as amended, and Release No. IC-11330 issued thereunder.
Item 28. Business and Other Connections of the Investment Adviser:
Other business, profession, vocation, or employment of a substantial nature in
which each director or principal officer of Pilgrim Baxter & Associates, Ltd.
and Pilgrim Baxter Value Investors, Inc. is or has been, at any time
C-7
<PAGE>
during the last two fiscal years, engaged for his own account or in the capacity
of director, officer, employee, partner or trustee are as follows:
<TABLE>
<CAPTION>
Name and Position with Pilgrim
Baxter & Associates, Ltd. Name of Other Company Connection with Other Company
- ------------------------- --------------------- -----------------------------
<S> <C> <C>
Harold J. Baxter Pilgrim Baxter Value Investors, Inc. Director, Chairman and Chief Executive Officer
Director, Chairman and
Chief Executive Officer
PBHG Fund Services Trustee
PBHG Fund Distributors Trustee
825 Duportail Road
Wayne, PA 19087
PBA Funding, Inc. Trustee
United Asset Management Director
Corporation
Gary L. Pilgrim PBHG Fund Services Trustee
Director, President (4/95 - 10/97) 825 Duportail Road
and Chief Investment Officer Wayne, PA 19087
Pilgrim Baxter Value Investors, Inc. Director
Paul J. Hondros Pilgrim Baxter Value Investors, Inc. Director, President and Chief Operating Officer
President and Chief
Operating Officer
Brian F. Bereznak PBHG Fund Services President and Trustee
Chief Operating Officer
(5/95 - 10/97)
Eric C. Schneider Pilgrim Baxter Value Investors, Inc. Chief Financial Officer and Treasurer
Chief Financial Officer
and Treasurer
PBHG Fund Services Chief Financial Officer
PBHG Fund Distributors Trustee
825 Duportail Road
Wayne, PA 19087
PBA Funding, Inc. Treasurer
John M. Zerr Pilgrim Baxter Value Investors, Inc. General Counsel and Secretary
General Counsel and Secretary
PBHG Fund Services General Counsel and Secretary
PBHG Fund Distributors General Counsel and Secretary
825 Duportail Road
Wayne, PA 19087
PBA Funding, Inc. Secretary
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Name and Position with Pilgrim Baxter
Value Investors, Inc. Name of Other Company Connection with Other Company
- --------------------- --------------------- -----------------------------
<S> <C> <C>
Harold J. Baxter Pilgrim Baxter & Associates, Ltd. Director, Chairman and Chief Executive Officer
Director, Chairman and Chief Executive
Officer
PBHG Fund Services Trustee
PBHG Fund Distributors Trustee
825 Duportail Road
Wayne, PA 19087
United Asset Management Corporation Director
Brian F. Bereznak Pilgrim Baxter & Associates, Ltd. Chief Operating Officer (5/95 - 10/97)
Director
PBHG Fund Services President and Trustee
Gary L. Pilgrim Pilgrim Baxter & Associates, Ltd. Director, Chief Investment Officer,
Director President, (4/95 - 10/97), Secretary
(5/95 - 12/96)
PBHG Fund Services Trustee
825 Duportail Road
Wayne, PA 19087
Paul J. Hondros Pilgrim Baxter & Associates, Ltd. President and Chief Operating Officer
Director, President and
Chief Operating Officer
David W. Jennings Pilgrim Baxter & Associates, Ltd. Director of Client
Director, President and Chief 825 Duportail Road Service
Operating Officer (10/96 - 1/98) Wayne, PA 19087
Eric C. Schneider Pilgrim Baxter & Associates, Ltd. Chief Financial Officer and Treasurer
Chief Financial Officer and
Treasurer
PBHG Fund Services Chief Financial Officer
PBHG Fund Distributors Trustee
825 Duportail Road
Wayne, PA 19087
PBA Funding, Inc. Treasurer
John M. Zerr Pilgrim Baxter & Associates, Ltd. General Counsel and Secretary
General Counsel and Secretary
PBHG Fund Services General Counsel and Secretary
PBHG Fund Distributors General Counsel and Secretary
825 Duportail Road
Wayne, PA 19087
PBA Funding, Inc. Secretary
</TABLE>
C-9
<PAGE>
The list required by this Item 28 of officers and directors of Murray Johnstone
International Limited, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by Murray Johnstone International
Limited pursuant to the Investment Advisers Act of 1940, as amended ("Advisers
Act"), (SEC File No. 801-34926).
The list required by this Item 28 of officers and directors of Wellington
Management, together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules A
and D of Form ADV, filed by Wellington Management pursuant to the Advisers Act
(SEC File No. 801-15908).
Item 29. Principal Underwriters
(a) Furnish the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing the securities of
the Registrant also acts as a principal underwriter, distributor or investment
adviser.
Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor"), acts as distributor for:
SEI Daily Income Trust July 15, 1982
SEI Liquid Asset Trust November 29, 1982
SEI Tax Exempt Trust December 3, 1982
SEI Index Funds July 10, 1985
SEI Institutional Managed Trust January 22, 1987
SEI Institutional International Trust August 30, 1988
The Advisors' Inner Circle Fund November 14, 1991
The Pillar Funds February 28, 1992
CUFund May 1, 1992
STI Classic Funds May 29, 1992
First American Funds, Inc. November 1, 1992
First American Investment Funds, Inc. November 1, 1992
The Arbor Fund January 28, 1993
Boston 1784 Funds (R) June 1, 1993
Morgan Grenfell Investment Trust January 3, 1994
The Achievement Funds Trust December 27, 1994
Bishop Street Funds January 27, 1995
CrestFunds, Inc. March 1, 1995
STI Classic Variable Trust August 18, 1995
Ark Funds November 1, 1995
Monitor Funds January 11, 1996
FMB Funds, Inc. March 1, 1996
SEI Asset Allocation Trust April 1, 1996
TIP Funds April 28, 1996
C-10
<PAGE>
TIP Institutional Funds January 1, 1998
SEI Institutional Investments Trust June 14, 1996
First American Strategy Funds, Inc. October 1, 1996
HighMark Funds February 15, 1997
Armada Funds March 8, 1997
PBHG Insurance Series Fund, Inc. April 1, 1997
Expedition Funds June 9, 1997
Oak Associates Funds February 25, 1998
The Distributor provides numerous financial services to investment managers,
pension plan sponsors, and bank trust departments. These services include
portfolio evaluation, performance measurement and consulting services ("Funds
Evaluation") and automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the information required by the following table with respect
to each director, officer or partner of each principal underwriter
named in the answer to Item 21 of Part B.
The principal business address of each person named in the table below is SEI
Investments Distribution Co., One Freedom Valley Road, Oaks, Pennsylvania 19456
<TABLE>
<CAPTION>
Positions and Offices
Name Positions and Offices with Underwriter with Registrant
- ---- -------------------------------------- ---------------
<S> <C> <C>
Alfred P. West, Jr. Director & Chairman of the Board of Directors -
Henry H. Greer Director -
Carmen V. Romeo Director, Executive Vice President
Mark J. Held President & Chief Operating Officer -
Robert M. Silvestri Chief Financial Officer & Treasurer -
Gilbert L. Beebower Executive Vice President -
Richard B. Lieb Executive Vice President -
Leo J. Dolan, Jr. Senior Vice President -
Carl A. Guarino Senior Vice President -
Larry Hutchinson Senior Vice President
Jack May Senior Vice President
Dennis J. McGonigle Executive Vice President -
Hartland J. McKeown Senior Vice President -
Barbara J. Moore Senior Vice President -
Kevin P. Robins Senior Vice President, Vice President &
General Counsel & Secretary Assistant Secretary
Patrick K. Walsh Senior Vice President -
Robert Crudup Vice President & Managing Director -
Vic Galef Vice President & Managing Director -
Kim Kirk Vice President & Managing Director -
John Krzeminski Vice President & Managing Director -
</TABLE>
C-11
<PAGE>
<TABLE>
<S> <C> <C>
Carolyn McLaurin Vice President & Managing Director -
W. Kelso Morrill Vice President & Managing Director -
Mark Samuels Vice President & Managing Director -
Wayne M. Withrow Vice President & Managing Director -
Robert Aller Vice President -
Gordon W. Carpenter Vice President -
Todd Cipperman Vice President & Assistant Secretary Vice President &
Assistant Secretary
Barbara Doyne Vice President -
Jeff Drennen Vice President -
Kathy Heilig Vice President & Treasurer -
Samuel King Vice President -
Joanne Nelson Vice President -
Joseph M. O'Donnell Vice President -
Sandra K. Orlow Vice President & Secretary Vice President &
Assistant Secretary
Cynthia M. Parrish Vice President & Assistant Secretary -
Kim Rainey Vice President -
Steve Smith Vice President -
Daniel Spaventa Vice President -
Kathryn L. Stanton Vice President & Assistant Secretary Vice President &
Assistant Secretary
S. Courtney E. Collier Vice President & Assistant Secretary -
Lydia A. Gavalis Vice President & Assistant Secretary -
Greg Gettinger Vice President & Assistant Secretary -
Jeff Jacobs Vice President -
Mark Nagle Vice President -
Lynda J. Striegel Vice President & Assistant Secretary -
</TABLE>
c. None.
Item 30. Location of Accounts and Records
Books or other documents required to be maintained by Section 31(a) of the 1940
Act, and the rules promulgated thereunder, are maintained as follows:
(a) With respect to Rules 31a-1(a), 31a-1(b)(1), (2)(a) and (b), (3), (6), (8),
(12); and 31a-1(d), the required books and records are maintained at the
offices of Registrant's Custodians:
First Union National Bank The Northern Trust Company
530 Walnut Street 50 South LaSalle Street
Philadelphia, PA 19106 Chicago, IL 60675
C-12
<PAGE>
(b) With respect to Rules 31a-1(a); 31a-1(b)(1),(4); (2)(C) and (D); (4); (5);
(6); (8); (9); (10); (11) and 31a-1(f), the required books and records are
currently maintained at the offices of Registrant's Sub-Administrator:
SEI Fund Resources
One Freedom Valley Road
Oaks, PA 19456
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the
required books and records are maintained at the principal offices of the
Registrant's Adviser or Sub-Adviser:
Pilgrim Baxter & Associates, Ltd. Murray Johnstone
825 Duportail Road International Limited
Wayne, PA 19087 11 West Nile Street
Glasgow, Scotland G12PX
Wellington Management Company, LLP Pilgrim Baxter Value Investors, Inc.
75 State Street 825 Duportail Road
Boston, MA 02109 Wayne, PA 19087
Item 31. Management Services: None.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to Shareholders,
upon request and without charge.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 34 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Wayne,
and Commonwealth of Pennsylvania on the 23rd day of November, 1998.
THE PBHG FUNDS, INC.
Registrant
By: /s/ Harold J. Baxter
------------------------------
Harold J. Baxter
Chairman and Director
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Harold J. Baxter
____________________ Chairman and Director November 23, 1998
Harold J. Baxter -----------------
*
____________________ Director November 23, 1998
John R. Bartholdson -----------------
*
____________________ Director November 23, 1998
Jettie M. Edwards -----------------
*
____________________ Director November 23, 1998
Albert A. Miller -----------------
*
____________________ President November 23, 1998
Gary L. Pilgrim -----------------
/s/ Brian F. Bereznak
____________________ Vice President November 23, 1998
Brian F. Bereznak -----------------
/s/ Lee T. Cummings
____________________ Treasurer, Chief Financial November 23, 1998
Lee T. Cummings Officer and Controller -----------------
</TABLE>
* By: /s/ Harold J. Baxter
-----------------------------
Harold J. Baxter
(Attorney-in-Fact)
<PAGE>
EXHIBIT LIST
Exhibit Number Description
- -------------- -----------
EX-99.1(a) Articles of Restatement of the Articles of
Incorporation of The PBHG Funds, Inc. filed
October 21, 1998
EX-99.1(b) Articles Supplementary of The PBHG Funds, Inc.
filed November 12, 1998
EX-99.5(a)(2) Form of Amendment to Investment Advisory
Agreement between Pilgrim Baxter & Associates,
Ltd. and the Registrant
EX-99.5(c) Form of Investment Sub-Advisory Agreement between
the Registrant, Pilgrim Baxter & Associates, Ltd.
and Pilgrim Baxter Value Investors, Inc.
EX-99.6(a)(2) Form of Amendment to Distribution Agreement
between the Registrant and SEI Financial
Services Company
EX-99.6(c) Shareholder Services Agreement between the
Registrant and PBHG Fund Services dated
January 1, 1998
EX-99.8(a)(2) First Amendment to Custody Agreement between the
Registrant and The Northern Trust Company dated
June 4, 1998 on behalf of the International Fund
EX-99.8(b)(2) Form of Amendment to the Custodian Agreement
between the Registrant and First Union National
Bank, successor by merger to CoreStates
Bank, N.A.
EX-99.9(a)(2) Form of Amendment to the Administrative Services
Agreement between the Registrant and PBHG
Fund Services
EX-99.9(b)(2) Amendment dated May 1, 1998 to Sub-Administrative
Services Agreement between the Registrant, PBHG
Fund Services and SEI Fund Resources dated
July 1, 1996
EX-99.9(b)(3) Form of Amendment to the Sub-Administrative
Services Agreement between the Registrant, PBHG
Fund Services and SEI Fund Resources
EX-99.9(l) Form of Expense Limitation Agreement between the
Registrant and Pilgrim Baxter & Associates, Ltd.
on behalf of each Portfolio listed on Schedule A
EX-99.10 Opinion and Consent of Ballard Spahr Andrews &
Ingersoll, LLP
EX-99.11 Consent of PricewaterhouseCoopers LLP
THE PBHG FUNDS, INC.
ARTICLES OF RESTATEMENT
THIS IS TO CERTIFY THAT:
FIRST: The PBHG Funds, Inc., a Maryland corporation (the "Corporation"),
desires to restate its charter as currently in effect.
SECOND: The following provisions are all the provisions of the charter
currently in effect:
ARTICLE I
INCORPORATOR
THE UNDERSIGNED, Olivia P. Adler, whose post office address is 1500 K
Street, N.W., Washington, D.C., being at least eighteen (18) years of age, does
hereby act as incorporator to form a corporation under and by virtue of the
Maryland General Corporation Law.
ARTICLE II
NAME
2.1 Name. The name of the corporation is The PBHG Funds, Inc. (the
"Corporation").
2.2 Name Reservation. The Corporation acknowledges that it uses the term
"PBHG" in its corporate name only with the permission of Pilgrim Baxter &
Associates, Ltd., a Delaware corporation ("Pilgrim"), the investment adviser to
the Corporation, and agrees that Pilgrim shall control the use of the term
"PBHG" by the Corporation. The Corporation further agrees that if Pilgrim, its
successors or assigns should at any time cease to be the investment adviser to
the Corporation, the Corporation shall, at the written request of Pilgrim, its
successors or assigns, eliminate the term "PBHG" from its corporate name and any
materials or documents referring to the Corporation, and will not henceforth use
the term "PBHG" in the conduct of the Corporation's business, except to any
extent specifically agreed to by Pilgrim. The Corporation further acknowledges
that Pilgrim reserves the right to grant the non-exclusive right to use the term
"PBHG" to any other persons or entities, including other investment companies,
whether now in existence or hereafter created. The provisions of this paragraph
are binding on the Corporation, its successors and assigns and on its directors,
officers, stockholders, creditors and all other persons claiming under or
through it.
<PAGE>
ARTICLE III
CORPORATE PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed is to act as an
investment company under the federal Investment Company Act of 1940, and to
exercise and enjoy all the powers, rights and privileges granted to, or
conferred upon, corporations by the General Law of the State of Maryland. The
Corporation shall exercise and enjoy all such powers, rights and privileges to
the extent not inconsistent with these Articles of Incorporation.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Incorporated, 300 East
Lombard Street, Baltimore, Maryland 21202. The name of the Corporation's
resident agent in the State of Maryland is The Corporation Trust Incorporated, a
corporation of the State of Maryland, and the post office address of the
resident agent is 300 East Lombard Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
5.1 Authorized Stock. The total number of shares of capital stock which
the Corporation has authority to issue is Nine Billion Two Hundred Million
(9,200,000,000) shares, $.001 par value per share, having an aggregate par value
of Nine Million Two Hundred Thousand Dollars ($9,200,000), all of which shares
are classified and designated as follows:
[INTENTIONALLY LEFT BLANK]
-2-
<PAGE>
Designation Number of Shares
----------- ----------------
PBHG Growth Fund PBHG Class Shares 400,000,000
PBHG Emerging Growth Fund PBHG Class Shares 400,000,000
PBHG International Fund PBHG Class Shares 200,000,000
PBHG Cash Reserves Fund PBHG Class Shares 1,800,000,000
PBHG Select Equity Fund PBHG Class Shares 200,000,000
PBHG Large Cap Growth Fund PBHG Class Share 200,000,000
PBHG Technology & Communications Fund 200,000,000
PBHG Class Shares
PBHG Core Growth Fund PBHG Class Shares 200,000,000
PBHG Limited Fund PBHG Class Shares 200,000,000
PBHG Large Cap 20 Fund PBHG Class Shares 200,000,000
PBHG Large Cap Value Fund PBHG Class Shares 200,000,000
PBHG Mid-Cap Value Fund PBHG Class Shares 200,000,000
PBHG Strategic Small Company Fund 200,000,000
PBHG Class Shares
PBHG Small Cap Value Fund PBHG Class Shares 200,000,000
PBHG Growth Fund Advisor Class Shares 200,000,000
PBHG Emerging Growth Fund Advisor Class Shares 200,000,000
PBHG International Fund Advisor Class Shares 200,000,000
PBHG Cash Reserves Fund Advisor Class Shares 1,800,000,000
PBHG Select Equity Fund Advisor Class Shares 200,000,000
PBHG Large Cap Growth Fund Advisor Class Shares 200,000,000
PBHG Technology & Communications Fund 200,000,000
Advisor Class Shares
PBHG Core Growth Fund Advisor Class Shares 200,000,000
PBHG Limited Fund Advisor Class Shares 200,000,000
PBHG Large Cap 20 Fund Advisor Class Shares 200,000,000
PBHG Large Cap Value Fund Advisor Class Shares 200,000,000
PBHG Mid-Cap Value Fund Advisor Class Shares 200,000,000
PBHG Strategic Small Company Fund 200,000,000
Advisor Class Shares
PBHG Small Cap Value Fund 200,000,000
Advisor Class Shares
5.2 Authorization of Stock Issuance. The Board of Directors may authorize
the issuance and sale of capital stock of the Corporation, from time to time in
such amounts and on such terms and conditions, for such purposes and for such
amount or kind of consideration as the Board of Directors shall determine,
subject to any limits required by then applicable law. All shares shall be
issued on a fully paid and non-assessable basis.
5.3 Fractional Shares. The Corporation may issue fractional shares. Any
fractional share shall carry proportionately the rights of a whole share,
excepting the right to receive a certificate evidencing such fractional share,
but including, without limitation, the right to vote and the right to receive
dividends.
-3-
<PAGE>
5.4 Power to Classify. The Board of Directors of the Corporation may
classify and reclassify any unissued shares of capital stock into one or more
additional or other classes or series as may be established from time to time by
setting or changing in any one or more respects the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms of such shares of stock and pursuant to such
classification or reclassification to increase or decrease the number of
authorized shares of stock, or shares of any existing class or series of stock.
Except as otherwise provided herein, all references herein to capital stock
shall apply without discrimination to the shares of each class or series of
stock.
5.5 Description of Stock. The voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of redemption of the
Corporation's stock shall be as follows, unless otherwise provided in Articles
Supplementary hereto:
(a) Income. The Board of Directors shall have full discretion, to the
extent not inconsistent with the General Laws of the State of Maryland and the
Investment Company Act of 1940, to determine which items shall be treated as
income and which items shall be treated as capital. Each such determination
shall be conclusive and binding.
(b) Dividends and Distributions. The holders of the Corporation's
capital stock of record as of a date determined by the Board of Directors from
time to time shall be entitled, from funds or other assets legally available
therefor, to dividends and distributions, including distributions of capital
gains, in such amounts and at such times as may be determined by the Board of
Directors. Any such dividends or distributions may be declared payable in cash,
property or shares of the Corporation's stock, as determined by the Board of
Directors or pursuant to a standing resolution or program adopted or approved by
the Board of Directors. Dividends and distributions may be declared with such
frequency, including daily, as the Board of Directors may determine and in any
reasonable manner, including by standing resolution, by resolutions adopted only
once or with such frequency as the Board of Directors may determine, or by
formula or other similar method of determination, whether or not the amount of
the dividend or distribution so declared can be calculated at the time of such
declaration. The Board of Directors may establish payment dates for such
dividends and distributions on any basis, including payment that is less
frequent than the effectiveness of such declarations. The Board of Directors
shall have the discretion to designate for such dividends and distributions
amounts sufficient to enable the Corporation to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986 or any successor or
comparable statute, and regulations promulgated thereunder (collectively,
-4-
<PAGE>
the "IRC"), and to avoid liability of the Corporation for Federal income tax in
respect of a given year and to make other appropriate adjustments in connection
therewith. Nothing in the foregoing sentence shall limit the authority of the
Board of Directors to designate greater or lesser amounts for such dividends or
distributions.
(c) Tax Elections. The Board of Directors shall have the power, in its
discretion, to make such elections as to the tax status of the Corporation as
may be permitted or required by the IRC without the vote of stockholders of the
Corporation.
(d) Liquidation. At any time there are not shares of stock of the
Corporation outstanding, the Board of Directors may liquidate the Corporation,
in accordance with applicable law. In the event of the liquidation or
dissolution of the Corporation when there are shares outstanding, the
stockholders of the Corporation shall be entitled to receive, when and as
declared by the Board of Directors, the excess of the assets of the Corporation
over the liabilities of the Corporation. Any such excess amounts will be
distributed to each stockholder of the Corporation in proportion to the number
of outstanding shares held by that stockholder and recorded on the books of the
Corporation.
Subject to the requirements of applicable law, dissolution of the
Corporation may be accomplished by distribution of assets to stockholders as
provided herein, or in any other legal manner.
(e) Voting Rights. On each matter submitted to a vote of stockholders,
each holder of a share of capital stock of the Corporation shall be entitled to
one vote for each full share, and a fractional vote for each fractional share of
stock standing in such holder's name on the books of the Corporation.
(f) Quorum. The presence in person or by proxy at a meeting of the
stockholders of the holders of one-third of the shares of stock of the
Corporation entitled to vote thereat shall constitute a quorum at any meeting of
the stockholders. If at any meeting of the stockholders there shall be less than
a quorum present, the stockholders present at such meeting may, without further
notice, adjourn the same from time to time until a quorum shall be present.
(g) Assets Belonging to Each Class or Series. Notwithstanding the
foregoing provisions of this Article 5.5, and subject to the power of the Board
of Directors as set forth in Article 5.4 to classify unissued shares of capital
stock of the Corporation, and to set or change preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of such unissued shares
of stock, the shares of each class or
-5-
<PAGE>
series of stock of the Corporation now or hereafter issued shall have the
following preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption:
(i) All consideration received by the Corporation for the issuance
or sale of shares of a particular class or series, together with all income,
earnings, profits and proceeds thereon, shall irrevocably belong to such class
or series for all purposes, subject only to the rights of creditors, and are
herein referred to as "assets belonging to" such class or series.
(ii) The assets belonging to such class or series shall be charged
with the liabilities of the Corporation in respect of such class or series and
with such class' or series' share of the general liabilities of the Corporation,
in the later case in the proportion that the net asset value of such class or
series bears to the net asset value of all classes and series. The determination
of the Board of Directors shall be conclusive as to the allocation of
liabilities, including accrued expenses and reserves, to each class or series.
(iii) Dividends or distributions on shares of any class or series,
whether payable in stock or cash, shall be paid only out of earnings, surplus or
other assets belonging to such class or series.
(iv) In the event of the liquidation or dissolution of the
Corporation, stockholders of each class or series shall be entitled to receive,
as a class or series, out of the assets of the Corporation available for
distribution to stockholders, the assets belonging to such class or series; and
the assets so distributable to the stockholders of such class or series shall be
distributed among such stockholders in proportion to the number of shares of
such class or series held by them and recorded on the books of the Corporation.
5.6 Authorizing Vote. Notwithstanding any provision of the General Laws of
the State of Maryland requiring for any purpose a proportion greater than a
majority of the votes of the shares of the Corporation, the affirmative vote of
the holders of a majority of the total number of shares of the Corporation,
outstanding and entitled to vote under such circumstances pursuant to these
Articles of Incorporation and the By-Laws of the Corporation shall be effective
for such purpose, except to the extent otherwise required by the Investment
Company Act of 1940 and rules thereunder; provided that, to the extent
consistent with the General Laws of the State of Maryland and other applicable
law, the By-Laws may provide for authorization to be by the vote of a proportion
less than a majority of the votes of the Corporation.
-6-
<PAGE>
5.7 Preemptive Rights. No stockholder of the Corporation shall be entitled
as of right to subscribe for, purchase, or otherwise acquire any shares or any
other securities of the Corporation which the Corporation proposes to issue or
sell; and any or all of such shares or securities of the Corporation, whether
now or hereafter authorized or created, may be issued, or may be reissued or
transferred if the same have been reacquired, and sold to such persons, firms,
corporations and associations, and for such lawful consideration, and on such
terms as the Board of Directors in its discretion may determine, without first
offering the same, or any thereof, to any said stockholder.
5.8 Redemption.
(a) The Board of Directors shall authorize the Corporation, to the
extent it has funds or other property legally available therefor and subject to
such reasonable conditions as the directors may determine, to permit each holder
of shares of capital stock of the Corporation to require the Corporation to
redeem all or any part of the shares standing in the name of such holder on the
books of the Corporation, at the applicable redemption price of such shares
(which may reflect such fees and charges as the Board of Directors may establish
from time to time) determined in accordance with procedures established by the
Board of Directors of the Corporation from time to time in accordance with
applicable law.
(b) Without limiting the generality of the foregoing, the Board of
Directors may authorize the Corporation, at its option and to the extent
permitted by and in accordance with the conditions of applicable law, to redeem
stock of the Corporation owned by any stockholder under circumstances deemed
appropriate by the Board of Directors in its sole discretion from time to time,
such circumstances including but not limited to (1) failure to provide the
Corporation with a tax identification number and (2) failure to maintain
ownership of a specified minimum number or value of shares of any class or
series of stock of the Corporation, such redemption to be effected at such
price, at such time and subject to such conditions as may be required or
permitted by applicable law.
(c) Payment for redeemed stock shall be made in cash unless, in the
opinion of the Board of Directors, which shall be conclusive, conditions exist
which make it advisable for the Corporation to make payment wholly or partially
in securities or other property or assets of the Corporation. Payment made
wholly or partially in securities or other property or assets may be delayed to
such reasonable extent, not inconsistent with applicable law, as is reasonably
necessary under the circumstances. No stockholder shall have the right, except
as determined by the Board of Directors, to have his shares redeemed in such
securities, property or other assets.
-7-
<PAGE>
(d) All rights of a stockholder with respect to a share redeemed,
including the right to receive dividends and distributions with respect to such
share, shall cease and determine as of the time as of which the redemption price
to be paid for such shares shall be fixed, in accordance with applicable law,
except the right of such stockholder to receive payment for such shares as
provided herein.
(e) Notwithstanding any other provision of this Article 5.8, the Board
of Directors may suspend the right of stockholders to require the Corporation to
redeem shares held by them for such periods and to the extent permitted by, or
in accordance with, the Investment Company Act of 1940. The Board of Directors
may, in the absence of a ruling by a responsible regulatory official, terminate
such suspension at such time as the Board of Directors, in its discretion, shall
deem reasonable, such determination to be conclusive.
(f) Shares which have been redeemed shall constitute authorized but
unissued shares.
5.9 Repurchase of Shares. The Board of Directors may by resolution from
time to time authorize the Corporation to purchase or otherwise acquire,
directly or through an agent, shares of its outstanding stock upon such terms
and conditions and for such consideration as permitted by applicable law and
determined to be reasonable by the Board of Directors and to take all other
steps deemed necessary in connection therewith. Shares so purchased or acquired
shall have the status of authorized but unissued shares.
5.10 Valuation. Subject to the requirements of applicable law, the Board of
Directors may, in its absolute discretion, establish the basis or method, timing
and frequency for determining the value of assets belonging to the Corporation
and for determining the net asset value of shares of the Corporation for
purposes of sales, redemptions, repurchases or otherwise. Without limiting the
foregoing, the Board of Directors may determine that the net asset value per
share should be maintained at a designated constant value and may establish
procedures, not inconsistent with applicable law, to accomplish that result.
Such procedures may include a requirement, in the event of a net loss with
respect to shares of the Corporation from time to time, for automatic pro rata
capital contributions from each stockholder in amounts sufficient to maintain
the designated constant share value.
5.11 Certificates. Subject to the requirements of the Maryland General
Corporation Law, the Board of Directors may authorize the issuance of some or
all of the shares without certificates and may establish such conditions as it
may determine in connection with the issuance of certificates.
-8-
<PAGE>
5.12 Shares Subject to Articles and By-Laws. All persons who shall acquire
shares of capital stock in the Corporation shall acquire the same subject to the
provisions of these Articles of Incorporation and the By-Laws of the
Corporation, as each may be amended, supplemented and/or restated from time to
time.
ARTICLE VI
BOARD OF DIRECTORS
6.1 Number of Directors. Prior to the issuance of stock, the number of
directors of the Corporation shall be five and after the issuance of stock shall
be as provided in the By-Laws, provided that the By-Laws may, subject to the
limitations of the Maryland General Corporation Law, fix a different number of
directors and may authorize a majority of the directors to increase or decrease
the number of directors set by these Articles or the By-Laws within limits set
forth by the By-Laws and to fill vacancies created by an increase in the number
of directors. Unless otherwise provided by the By-Laws, the directors of the
Corporation need not be stockholders of the Corporation. The names of the
directors who will serve until the next annual meeting and until their
successors are elected and qualified are:
John R. Bartholdson
Harold J. Baxter
Jettie M. Edwards
Albert A. Miller
6.2 Removal of Directors. Subject to the limits of the Investment Company
Act of 1940 and unless otherwise provided by the By-Laws, a director may be
removed, with or without cause, by the affirmative vote of a majority of (a) the
Board of Directors, (b) a committee of the Board of Directors appointed for such
purpose, or (c) the stockholders by vote of a majority of the outstanding shares
of the Corporation.
6.3 Liability of Directors and Officers.
(a) To the fullest extent permitted by the Maryland General Corporation
Law and the Investment Company Act of 1940, no director or officer of the
Corporation shall be liable to the Corporation or to its stockholders for money
damages. No amendment to these Articles of Incorporation or repeal of any of its
provisions shall limit or eliminate the benefits provided to directors and
officers under this provision with respect to any act or omission which occurred
prior to such amendment or repeal.
-9-
<PAGE>
(b) In performance of his duties, a director is entitled to rely on any
information, opinion, report, or statement, including any financial statement or
other financial data, prepared by others, to the extent not inconsistent with
the General Laws of the State of Maryland. A person who performs his duties in
accordance with the standards of Article 2-405.1 of the Maryland General
Corporation Law or otherwise in accordance with applicable law shall have no
liability by reason of being or having been a director of the Corporation.
6.4 Powers of Directors. In addition to any powers conferred herein or in
the By-Laws, the Board of Directors may, subject to any express limitations
contained in these Articles of Incorporation or in the By-Laws, exercise the
full extent of powers conferred by the General Laws of the State of Maryland or
other applicable law upon corporations or directors thereof and the enumeration
and definition of particular powers herein or in the By-Laws shall in no way be
deemed to restrict or otherwise limit those lawfully conferred powers. In
furtherance and without limitation of the foregoing, the Board of Directors
shall have power:
(a) to make, alter, amend or repeal from time to time the By-Laws of
the Corporation except as otherwise provided by the By-Laws;
(b) subject to requirements of the Investment Company Act of 1940 and
the General Laws of the State of Maryland, to authorize the Corporation to enter
into contracts with any person, including any firm, corporation, trust or
association in which a director, officer, employee or stockholder of the
Corporation may be interested. Such contracts may be for any lawful purpose,
whether or not such purpose involves delegating functions normally performed by
the board of directors or officers of a corporation, including, but not limited
to, the provision of investment management for the Corporation's investment
portfolio, the distribution of securities issued by the Corporation, the
administration of the Corporation's affairs, the provision of transfer agent
services with respect to the Corporation's shares of capital stock, and the
custody of the Corporation's assets. Any person (including its affiliates) may
be retained in multiple capacities pursuant to one or more contracts and may
also perform services, including similar or identical services, for others,
including other investment companies. Subject to the requirements of applicable
law, such contracts may provide for compensation to be paid by the Corporation
in such amounts, including payments of multiple amounts for persons (including
their affiliates) acting in multiple capacities, as the Board of Directors shall
determine in its discretion to be proper and reasonable;
(c) to authorize from time to time the payment of compensation to the
Directors for services to the Corporation,
-10-
<PAGE>
including fees for attendance at meetings of the Board of
Directors and committees thereof.
6.5 Determinations by Board of Directors. Any determination made by or
pursuant to the direction of the Board of Directors and in accordance with the
standards set by the General Laws of the State of Maryland shall be final and
conclusive and shall be binding upon the Corporation and upon all stockholders,
past, present and future of the Corporation.
ARTICLE VII
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING THE POWERS OF THE CORPORATION
AND THE DIRECTORS AND STOCKHOLDERS
7.1 Location of Meetings, Offices and Books. Both directors and
stockholders may hold meetings within or without the State of Maryland and
abroad, and the Corporation may have one or more offices and may keep its books
within or without the State of Maryland and abroad at such places as the
directors shall determine.
7.2 Meetings of Stockholders. Except as otherwise provided in the By-Laws,
in accordance with applicable law, the Corporation shall not be required to hold
an annual meeting of stockholders in any year unless required by applicable law.
Election of directors, whether by the directors or by stockholders, need not be
by ballot unless the By-Laws so provide.
7.3 Inspection of Records. Stockholders of the Corporation shall have only
such rights to inspect and copy the records, documents, accounts and books of
the Corporation and to request statements regarding its affairs as are provided
by the Maryland General Corporation Law, subject to such reasonable regulations,
not contrary to the General Laws of the State of Maryland, as the Board of
Directors may from time to time adopt regarding the conditions and limits of
such rights.
7.4 Indemnification. The Corporation, including its successors and assigns,
shall indemnify its directors and officers and make advance payment of related
expenses to the fullest extent permitted, and in accordance with the procedures
required, by the General Laws of the State of Maryland and the Investment
Company Act of 1940. The By-Laws may provide that the Corporation shall
indemnify its employees and/or agents in any manner and within such limits as
permitted by applicable law. Such indemnification shall be in addition to any
other right or claim to which any director, officer, employee or agent may
otherwise be entitled. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation or is or was
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<PAGE>
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or employee benefit plan,
against any liability (including, with respect to employee benefit plans, excise
taxes) asserted against and incurred by such person in any such capacity or
arising out of such person's position, whether or not the Corporation would have
had the power to indemnify against such liability. The rights provided to any
person by this Article 7.4 shall be enforceable against the Corporation by such
person who shall be presumed to have relied upon such rights in serving or
continuing to serve in the capacities indicated herein. No amendment of these
Articles of Incorporation shall impair the rights of any person arising at any
time with respect to events occurring prior to such amendment.
7.5 Wholly-Owned Subsidiaries. The Corporation may own all or any portion
of the securities of, make loans to, or contribute to the costs or other
financial requirements of any company which is wholly owned by the Corporation
or by the Corporation and by one or more other investment companies and is
primarily engaged in the business of providing, at cost, management,
administrative or related services to the Corporation or to the Corporation and
other investment companies.
7.6 Amendments. The Corporation reserves the right to amend, alter, change
or repeal any provision of these Articles of Incorporation, and all rights
conferred upon stockholders herein are granted subject to this reservation.
7.7 References to Statutes, Articles and By-Laws. All references herein to
statutes, to these Articles of Incorporation or to the By-Laws shall be deemed
to refer to those statutes, Articles or By-Laws as they are amended and in
effect from time to time.
THIRD: The foregoing restatement of the charter has been approved by a
majority of the entire Board of Directors of the Corporation.
FOURTH: The charter is not amended by these Articles of Restatement.
FIFTH: The current address of the principal office of the Corporation is
set forth in Article IV of the foregoing restatement of the charter.
SIXTH: The name and address of the Corporation's current resident agent is
set forth in Article IV of the foregoing restatement of the charter.
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<PAGE>
SEVENTH: The number of directors of the Corporation and the names of those
currently in office are set forth in Article VI of the foregoing restatement of
the charter.
EIGHTH: The undersigned President acknowledges these Articles of
Restatement to be the corporate act of the Corporation and, as to all matters or
facts required to be verified under oath, the undersigned President acknowledges
that to the best of his knowledge, information and belief, these matters and
facts are true in all material respects and that this statement is made under
the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Restatement to be signed in its name and on its behalf by its President and
attested to by its Secretary on this ____ day of October, 1998.
ATTEST: THE PBHG FUNDS, INC.
/s/ John M. Zerr By: /s/ Gary L. Pilgrim (SEAL)
- ------------------- -------------------
John M. Zerr Gary L. Pilgrim
Secretary President
-13-
THE PBHG FUNDS, INC.
ARTICLES SUPPLEMENTARY
The PBHG Funds, Inc., a Maryland corporation (the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation (the "Board of
Directors"), by resolution duly adopted at a meeting duly called and held on
November 5, 1998, (a) increased the aggregate number of shares of stock that the
Corporation has authority to issue from Nine Billion Two Hundred Million
(9,200,000,000) shares to Eleven Billion Six Hundred Million (11,600,000,000)
shares, (b) classified and designated such newly authorized shares
(collectively, the "Shares") as (i) 400,000,000 shares of the PBHG Core Value
Fund, (ii) 400,000,000 shares of the PBHG New Opportunities Fund, (iii)
400,000,000 shares of the PBHG Defensive Equity Fund, (iv) 400,000,000 shares of
the PBHG Enhanced Equity Fund, (v) 400,000,000 shares of the PBHG Master Fixed
Income Fund, and (vi) 400,000,000 shares of the PBHG Short-Term Government Fund,
and (c) further classified and designated the Shares, in equal numbers, within
each such series as PBHG Class Shares and Advisor Class Shares, with the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of shares of stock as set forth in Article V of the charter of the
Corporation (the "Charter")and in any other provisions of the Charter relating
to stock of the Corporation generally.
SECOND: Immediately prior to the filing of these Articles Supplementary,
the total number of shares of stock of all classes that the Corporation had
authority to issue was 9,200,000,000 shares, $0.001 par value per share, having
an aggregate par value of $9,200,000. The number of shares of stock of each
class and the designation of each such class were as follows:
<PAGE>
Designation Number of Shares
- ----------- ----------------
PBHG Growth Fund PBHG Class Shares 400,000,000
PBHG Emerging Growth Fund PBHG Class Shares 400,000,000
PBHG International Fund PBHG Class Shares 200,000,000
PBHG Cash Reserves Fund PBHG Class Shares 1,800,000,000
PBHG Select Equity Fund PBHG Class Shares 200,000,000
PBHG Large Cap Growth Fund PBHG Class Shares 200,000,000
PBHG Technology & Communications Fund PBHG Class Shares 200,000,000
PBHG Core Growth Fund PBHG Class Shares 200,000,000
PBHG Limited Fund PBHG Class Shares 200,000,000
PBHG Large Cap 20 Fund PBHG Class Shares 200,000,000
PBHG Large Cap Value Fund PBHG Class Shares 200,000,000
PBHG Mid-Cap Value Fund PBHG Class Shares 200,000,000
PBHG Strategic Small Company Fund PBHG Class Shares 200,000,000
PBHG Small Cap Value Fund PBHG Class Shares 200,000,000
PBHG Growth Fund Advisor Class Shares 200,000,000
PBHG Emerging Growth Fund Advisor Class Shares 200,000,000
PBHG International Fund Advisor Class Shares 200,000,000
PBHG Cash Reserves Fund Advisor Class Shares 1,800,000,000
PBHG Select Equity Fund Advisor Class Shares 200,000,000
PBHG Large Cap Growth Fund Advisor Class Shares 200,000,000
PBHG Technology & Communications Fund Advisor Class Shares 200,000,000
PBHG Core Growth Fund Advisor Class Shares 200,000,000
PBHG Limited Fund Advisor Class Shares 200,000,000
PBHG Large Cap 20 Fund Advisor Class Shares 200,000,000
PBHG Large Cap Value Fund Advisor Class Shares 200,000,000
PBHG Mid-Cap Value Fund Advisor Class Shares 200,000,000
PBHG Strategic Small Company Fund Advisor Class Shares 200,000,000
PBHG Small Cap Value Fund Advisor Class Shares 200,000,000
THIRD: As of the filing of these Articles Supplementary, the
total number of shares of stock of all classes that the Corporation has
authority to issue is 11,600,000,000 shares, $0.001 par value per share, having
an aggregate par value of $11,600,000. The number of shares of stock of each
class and the designation of each such class are as follows:
2
<PAGE>
Designation Number of Shares
- ----------- ----------------
PBHG Growth Fund PBHG Class Shares 400,000,000
PBHG Emerging Growth Fund PBHG Class Shares 400,000,000
PBHG International Fund PBHG Class Shares 200,000,000
PBHG Cash Reserves Fund PBHG Class Shares 1,800,000,000
PBHG Select Equity Fund PBHG Class Shares 200,000,000
PBHG Large Cap Growth Fund PBHG Class Shares 200,000,000
PBHG Technology & Communications Fund PBHG Class Shares 200,000,000
PBHG Core Growth Fund PBHG Class Shares 200,000,000
PBHG Limited Fund PBHG Class Shares 200,000,000
PBHG Large Cap 20 Fund PBHG Class Shares 200,000,000
PBHG Large Cap Value Fund PBHG Class Shares 200,000,000
PBHG Mid-Cap Value Fund PBHG Class Shares 200,000,000
PBHG Strategic Small Company Fund PBHG Class Shares 200,000,000
PBHG Small Cap Value Fund PBHG Class Shares 200,000,000
PBHG Core Value Fund PBHG Class Shares 200,000,000
PBHG New Opportunities Fund PBHG Class Shares 200,000,000
PBHG Defensive Equity Fund PBHG Class Shares 200,000,000
PBHG Enhanced Equity Fund PBHG Class Shares 200,000,000
PBHG Master Fixed Income Fund PBHG Class Shares 200,000,000
PBHG Short-Term Government Fund PBHG Class Shares 200,000,000
PBHG Growth Fund Advisor Class Shares 200,000,000
PBHG Emerging Growth Fund Advisor Class Shares 200,000,000
PBHG International Fund Advisor Class Shares 200,000,000
PBHG Cash Reserves Fund Advisor Class Shares 1,800,000,000
PBHG Select Equity Fund Advisor Class Shares 200,000,000
PBHG Large Cap Growth Fund Advisor Class Shares 200,000,000
PBHG Technology & Communications Fund Advisor Class Shares 200,000,000
PBHG Core Growth Fund Advisor Class Shares 200,000,000
PBHG Limited Fund Advisor Class Shares 200,000,000
PBHG Large Cap 20 Fund Advisor Class Shares 200,000,000
PBHG Large Cap Value Fund Advisor Class Shares 200,000,000
3
<PAGE>
PBHG Mid-Cap Value Fund Advisor Class Shares 200,000,000
PBHG Strategic Small Company Fund Advisor Class Shares 200,000,000
PBHG Small Cap Value Fund Advisor Class Shares 200,000,000
PBHG Core Value Fund Advisor Class Shares 200,000,000
PBHG New Opportunities Fund Advisor Class Shares 200,000,000
PBHG Defensive Equity Fund Advisor Class Shares 200,000,000
PBHG Enhanced Equity Fund Advisor Class Shares 200,000,000
PBHG Master Fixed Income Fund Advisor Class Shares 200,000,000
PBHG Short-Term Government Fund Advisor Class Shares 200,000,000
FOURTH: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
FIFTH: The total number of shares of capital stock that the Corporation had
authority to issue immediately prior to the filing of these Articles
Supplementary was increased by the Board of Directors in accordance with Section
2-105(c) of the Maryland General Corporation Law.
SIXTH: The Shares were classified by the Board of Directors under authority
granted to it in Section 5.4 of the Charter.
SEVENTH: The undersigned President of the Corporation acknowledges these
Articles Supplementary to be the corporate act of the Corporation and, as to all
matters or facts required to be verified under oath, the undersigned President
acknowledges that to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this statement is
made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be executed under seal in its name and on its behalf by its President and
attested to by its Secretary on November 6, 1998.
ATTEST: THE PBHG FUNDS, INC.
/s/ John M. Zerr By: /s/ Gary L. Pilgrim (SEAL)
- ----------------------- --------------------------
John M. Zerr, Secretary Gary L. Pilgrim, President
4
AMENDMENT TO INVESTMENT ADVISORY AGREEMENT
between
PILGRIM BAXTER & ASSOCIATES, LTD.
and
THE PBHG FUNDS, INC.
This Amendment Agreement made this ___ day of _________, 1998, by and
between PILGRIM BAXTER & ASSOCIATES, LTD. (the "Adviser") and THE PBHG FUNDS,
INC., a Maryland corporation (the "Company"), with respect to each portfolio of
the Company set forth on Schedule A to this Amendment.
WITNESSETH
In consideration of the mutual covenants herein contained and other good
and valuable consideration, the receipt whereof is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. Amendment to Agreement. The Adviser and the Company agree to amend the
Investment Advisory Agreement between the Adviser and the Company dated as of
April 28, 1995, for the sole purpose of adding the PBHG Core Value Fund, the
PBHG New Opportunities Fund, the PBHG Defensive Equity Fund, the PBHG Enhanced
Equity Fund, the PBHG Master Fixed Income Fund and the PBHG Short-Term
Government Fund, as follows:
Schedule A is hereby deleted and replaced with Schedule A attached to this
Amendment.
2. Effect of Amendment. Except as hereinabove modified and amended, the
Investment Advisory Agreement will remain unaltered and in full force and effect
and is hereby ratified and confirmed in all respects as amended.
3. Governing Law. This Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
in duplicate on the day and year first above written.
THE PBHG FUNDS, INC.
Attest:__________________________ By:_____________________________
Name: Name:
Title: Title:
PILGRIM BAXTER & ASSOCIATES, LTD.
Attest:__________________________ By:_____________________________
Name: Name:
Title: Title:
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<PAGE>
PILGRIM BAXTER & ASSOCIATES, LTD.
Pursuant to Section 5 of the Agreement, each Fund shall pay the Adviser, at
the end of each calendar month, compensation computed daily at an annual rate of
the Fund's average daily net assets as follows:
FUND FEE
- ---- ---
PBHG Growth Fund 0.85%
PBHG Emerging Growth Fund 0.85%
PBHG International Fund 1.00%
PBHG Large Cap Growth Fund 0.75%
PBHG Select Equity Fund 0.85%
PBHG Cash Reserves Fund 0.30%
PBHG Technology & Communications Fund 0.85%
PBHG Core Growth Fund 0.85%
PBHG Limited Fund 1.00%
PBHG Large Cap 20 Fund 0.85%
PBHG Large Cap Value Fund 0.65%
PBHG Mid-Cap Value Fund 0.85%
PBHG Strategic Small Company Fund 0.85%
PBHG Small Cap Value Fund 1.00%
PBHG Focused Value Fund 0.85%
PBHG New Opportunities Fund 1.50%
2
THE PBHG FUNDS, INC.
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT made as of this _____ day of ______, 199_, by and among Pilgrim
Baxter & Associates, Ltd. (the "Adviser"), Pilgrim Baxter Value Investors, Inc.
(the "Sub-Adviser") and The PBHG Funds, Inc., a Maryland corporation (the
"Company").
WHEREAS, the Company is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, pursuant to the Investment Advisory Agreement dated April 18, 1995
and Schedule A dated _________, 199_ between the Adviser and the Company, the
Adviser will act as investment adviser to PBHG Focused Value Fund (the
"Portfolio"); and
WHEREAS, the Adviser and the Company each desire to retain the Sub-Adviser
to provide investment advisory services to the Company in connection with the
management of the Portfolio, and the Sub-Adviser is willing to render such
investment advisory services.
NOW, THEREFORE, the parties hereto agree as follows:
1. (a) Subject to supervision by the Adviser and the Company's Board of
Directors, the Sub-Adviser shall manage the investment operations of the
Portfolio and the composition of the Portfolio's investment portfolio, including
the purchase, retention and disposition thereof, in accordance with the
Portfolio's investment objectives, policies and restrictions as stated in the
Portfolio's Prospectus (such Prospectus and Statement of Additional Information,
as currently in effect and as amended or supplemented from time to time, being
herein called the "Prospectus"), and subject to the following understandings:
(1) The Sub-Adviser shall 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.
(2) In the performance of its duties and obligations under this
Agreement, the Sub-Adviser shall act in conformity with the Company's Charter
and the Prospectus and with the instructions and directions of the Adviser and
of the Board of Directors and will conform and comply with the requirements of
the 1940 Act, the Internal Revenue Code of 1986, as amended, and all other
applicable federal and state laws and regulations, as each is amended from time
to time.
(3) The Sub-Adviser shall 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 and Prospectus or as the Board of
Directors or the Adviser may direct from time to time, in conformity with
federal securities laws. In providing the Portfolio with investment supervision,
the Sub-Adviser will give
1
<PAGE>
primary consideration to securing the most favorable price and efficient
execution. Within the framework of this policy, the Sub-Adviser may consider the
financial responsibility, research and investment information and other services
provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which the Sub-Adviser's other clients may
be a party. It is understood that it is desirable for the Portfolio that the
Sub-Advisor have access to supplemental investment and market research and
security and economic analysis provided by brokers who may execute brokerage
transactions at a higher cost to the Portfolio than may result when allocating
brokerage to other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Sub-Adviser is authorized to place orders
for the purchase and sale of securities for the Portfolio with brokers, subject
to review by the Company's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the services
provided by such brokers may be useful to the Sub-Adviser in connection with the
Sub-Adviser's services to other clients.
On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as other clients of
the Sub-Adviser, the Sub-Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
the most equitable and consistent with its fiduciary obligations to the
Portfolio and to such other clients.
(4) The Sub-Adviser shall maintain all books and records with respect
to the Portfolio's portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and
shall render to the Company's Board of Directors such periodic and special
reports as the Company's Board of Directors may reasonably request.
(5) The Sub-Adviser shall provide the Portfolio's Custodian on each
business day with information relating to all transactions concerning the
Portfolio's assets and shall provide the Adviser with such information upon
request of the Adviser.
(6) The investment management services provided by the Sub-Adviser
under this Agreement are not to be deemed exclusive and the Sub-Adviser shall be
free to render similar services to others, as long as such services do not
impair the services rendered to the Adviser or the Company.
(b) Services to be furnished by the Sub-Adviser under this Agreement may be
furnished through the medium of any of the Sub-Adviser's officers or employees.
It is understood that the Sub-Adviser may obtain certain administrative
services, including, without limitation, services relating to trade
reconciliation and the production of client reports, from its parent company in
carrying out its obligations under this Agreement.
2
<PAGE>
(c) The Sub-Adviser shall keep the Portfolio's books and records required to
be maintained by the Sub-Adviser pursuant to paragraph 1(a) of this Agreement
and shall timely furnish to the Adviser all information relating to the
Sub-Adviser's services under this Agreement needed by the Adviser to keep the
other books and records of the Portfolio required by Rule 31a-1 under the 1940
Act. The Sub-Adviser agrees that all records that it maintains on behalf of the
Portfolio are property of the Portfolio and the Sub-Adviser will surrender
promptly to the Portfolio any of such records upon the Portfolio's request;
provided, however, that the Sub-Adviser may retain a copy of such records. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by it
pursuant to paragraph 1(a) of this Agreement.
2. The Adviser shall continue to have responsibility for all services to be
provided to the Portfolio pursuant to the Advisory Agreement and shall oversee
and review the Sub-Adviser's performance of its duties under this Agreement.
3. The Adviser has delivered to the Sub-Adviser copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
(a) Articles of Incorporation, as filed with the Statement Department of
Assessments and Taxation of the State of Maryland (such Articles of
Incorporation as in effect on the date of this Agreement, and as amended or
supplemented from time to time, are herein called the "Charter");
(b) Bylaws of the Company (such Bylaws, as in effect on the date of this
Agreement, and as amended from time to time, are herein called the "Bylaws");
(c) A copy of the resolutions of the Company's Board of Directors authorizing
the appointment of the Adviser and the Sub-Adviser and approving the form of
this Agreement; and
(d) Registration Statement under the 1940 Act and the Securities Act of 1933,
as amended, on Form N-1A (the "Registration Statement"), as filed with the
Securities and Exchange Commission (the "Commission") relating to the Portfolio
and shares of common stock of the Portfolio, and all amendments thereto.
4. For the services to be provided by the Sub-Adviser pursuant, to this
Agreement, the Adviser will pay to the Sub-Adviser as full compensation therefor
a fee at an annual rate of 0.40% of the Portfolio's average daily net assets.
The fee will be paid to the Sub-Adviser from the Adviser's advisory fee for such
Fund.
5. The Sub-Adviser shall not be liable for any error of judgment or for any loss
suffered by a Fund or the Adviser in connection with performance of its
obligations under this Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the 1940 Act), or a loss resulting from willful
misfeasance, bad faith or gross
3
<PAGE>
negligence on the Sub-Adviser's part in the performance of its duties or from
reckless disregard of its obligations and duties under this Agreement, except as
may otherwise be provided under provisions of applicable state law which cannot
be waived or modified hereby.
6. This Agreement shall continue in effect for a period of more than two years
from the date hereof 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 (a) by the Portfolio at any time, without the
payment of any penalty, by the vote of a majority of Directors of the Company or
by the vote of a majority of the outstanding voting securities of a Fund, (b) 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 (c) by the
Sub-Adviser at any time, without the payment of any penalty, on 90 days' written
notice to the other parties. This Agreement shall terminate automatically and
immediately in the event of its assignment. As used in this Section 6, the terms
"assignment" and "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the 1940 Act and the rules and
regulations thereunder, subject to such exceptions as may be granted by the
Commission under the 1940 Act.
7. Nothing in this Agreement shall limit or restrict the right of any of the
Sub-Adviser's directors, officers, or employees to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or dissimilar nature, nor limit or
restrict the Sub-Adviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or association.
8. During the term of this Agreement, the Adviser agrees to furnish the
Sub-Adviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other materials prepared for distribution
to shareholders of the Portfolio, the Company or the public that refers to the
Sub-Adviser or its clients in any way prior to use thereof and not to use
material if the Sub-Adviser reasonably objects in writing within five business
days (or such other period as may be mutually agreed) after receipt thereof. The
Sub-Adviser's right to object to such materials is limited to the portions of
such materials that expressly relate to the Sub-Adviser, its services and its
clients. The Adviser agrees to use its reasonable best efforts to ensure that
materials prepared by its employees or agents or its affiliates that refer to
the Sub-Adviser or its clients in any way are consistent with those materials
previously approved by the Sub-Adviser as referenced in the first sentence of
this paragraph. Sales literature may be furnished to the Sub-Adviser by
first-class or overnight mail, facsimile transmission equipment or hand
delivery.
9. No provisions of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
the vote of the majority of the outstanding voting securities of the Portfolio.
10. This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania; provided, however, that nothing herein shall be construed as being
inconsistent with the 1940 Act.
4
<PAGE>
11. This Agreement embodies the entire agreement and understanding among he
parties hereto, and supersedes all prior agreements and understandings relating
to this Agreement's subject matter. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
12. Should any part of this Agreement be held invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
13. Any notice, advice or report to be given pursuant to this Agreement shall be
delivered or mailed:
To the Adviser at:
825 Duportail Road
Wayne, PA 19087
To the Sub-Adviser at:
825 Duportail Road
Wayne, PA 19087
To the Company or the Portfolio at:
825 Duportail Road
Wayne, PA 19087
14. Where the effect of a requirement of the 1940 Act reflected in any provision
of this Agreement is altered by a rule, regulation or order of the Commission,
whether of special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first written
above.
PILGRIM BAXTER & ASSOCIATES, LTD. THE PBHG FUNDS, INC.
By: ____________________________ By: __________________________
Title: Title:
PILGRIM BAXTER VALUE INVESTORS, INC.
By: ________________________________
Title:
5
AMENDMENT TO DISTRIBUTION AGREEMENT
between
THE PBHG FUNDS, INC.
and
SEI INVESTMENTS DISTRIBUTION CO.
This Amendment Agreement made this ___ day of ________, 1998, by and
between THE PBHG FUNDS, INC., a Maryland corporation (the "Company"), with
respect to the shares of each portfolio of the Company set forth on Schedule A
to this Amendment, and SEI INVESTMENTS DISTRIBUTION CO., a Pennsylvania business
trust (the "Distributor").
WITNESSETH
In consideration of the mutual covenants herein contained and other
good and valuable consideration, the receipt whereof is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. Amendment to Agreement. The Company and the Distributor agree to
amend the Distribution Agreement between the Company and the Distributor dated
as of July 1, 1996, for the sole purpose of adding the PBHG Core Value Fund, the
PBHG New Opportunities Fund, the PBHG Defensive Equity Fund, the PBHG Enhanced
Equity Fund, the PBHG Master Income Fund and the PBHG Short-Term Government
Fund, as follows:
Schedule A is hereby deleted and replaced with Schedule A attached to
this Amendment.
2. Effect of Amendment. Except as hereinabove modified and amended, the
Distribution Agreement will remain unaltered and in full force and effect and is
hereby ratified and confirmed in all respects as amended.
3. Governing Law. This Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed in duplicate on the day and year first above written.
THE PBHG FUNDS, INC.
Attest:__________________________ By:______________________________
Name: Name:
Title: Title:
SEI INVESTMENTS DISTRIBUTION CO.
Attest:__________________________ By:______________________________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
THE PBHG FUNDS, INC.
The PBHG Funds, Inc. consists of the following Funds, each of which is
subject to this Agreement:
PBHG Growth Fund
PBHG Emerging Growth Fund
PBHG International Fund
PBHG Large Cap Growth Fund
PBHG Select Equity Fund
PBHG Cash Reserves Fund
PBHG Technology & Communications Fund
PBHG Core Growth Fund
PBHG Limited Fund
PBHG Large Cap 20 Fund
PBHG Large Cap Value Fund
PBHG Mid-Cap Value Fund
PBHG Strategic Small Company Fund
PBHG Small Cap Value Fund
PBHG Focused Value Fund
PBHG New Opportunities Fund
Dated: ______________________, 1998
2
SHAREHOLDER SERVICES AGREEMENT
THIS AGREEMENT is entered into the 1st day of January, 1998, by and between
The PBHG Funds, Inc. a Maryland corporation (the "Fund"), and PBHG Fund
Services, a Pennsylvania business trust ("Fund Services").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management
investment company and is registered as such under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, Fund Services serves as Administrator to the Fund and each of its
separate series (the "Portfolios") and classes and provides administrative
services pursuant to an administrative services agreement between the Fund and
Fund Services; and
WHEREAS, the Fund desires to retain Fund Services to provide certain
additional services to the Fund, its Portfolios and the holders of shares
thereof, which services are supplemental and related to services provided by DST
Systems, Inc. ("DST") pursuant to a transfer agency agreement between the Fund
and DST (the "DST Agreement"); and
WHEREAS, Fund Services proposes to engage UAM Shareholder Services Center,
Inc. ("UAM SSC") to assist in providing certain services provided for by this
Agreement pursuant to a sub-shareholder services agreement between Fund
Services and UAM SSC.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Fund and Fund Services, intending to be legally bound,
hereby agree as follows:
1. Scope. In addition to the Portfolio and classes of shares thereof existing
on the effective date of this Agreement, the Fund may from time to time
hereafter create additional Portfolios and issue separate classes of its shares
of common stock or classify and reclassify shares of any Portfolio or class, and
the appointment effected hereby shall constitute
<PAGE>
appointment for the provision of services with respect to all existing
Portfolios and classes and any additional Portfolios and classes unless the
parties shall otherwise agree in writing.
2. Appointment. The Fund hereby appoints Fund Services to perform such services
and to serve such functions as are set forth in Appendix A hereto, which
appendix is incorporated herein by this reference. Appendix A may not be amended
except by written agreement between the Fund and Fund Services. Fund Services
hereby agrees to perform such services and serve such functions as provided in
Appendix A in accordance with the terms and conditions set forth in this
Agreement.
3. Obligations Under DST Agreement. To the extent that the provisions or
requirements of the DST Agreement and any agreement related thereto may impose
obligations on Fund Services to provide services, conform to a standard of
conduct, adhere to a stipulated process or procedure, or otherwise undertake to
perform a defined duty or responsibility, or may require the Fund to ensure that
Fund Services fulfills such obligations, Fund Services shall perform such
obligations and shall at all times use reasonable care and act in good faith in
performing such obligations.
4. Duties and Responsibilities of Fund Services. In connection with the services
provided by Fund Services pursuant to this Agreement, Fund Services shall
directly or indirectly:
a. Personnel. Provide the services of personnel competent to perform the
obligations of Fund Services under this Agreement.
b. Facilities. Furnish, at its own expense, such office facilities,
furnishings, office equipment and other property and resources as are necessary
for the fulfillment of the obligations of Fund Services under this Agreement.
c. Books and Records. With respect to the services provided by Fund
Services, maintain customary records, and particularly shall maintain those
records required to be maintained pursuant to subparagraph (2)(iv) of paragraph
(b) of Rule 3la-1 under the 1940
2
<PAGE>
Act. Fund Services may send periodically to the Fund, or to where designated by
the Secretary or an Assistant Secretary of the Fund, all books, documents, and
all records no longer deemed needed for current purposes, upon the understanding
that such books, documents, and records will be maintained by the Fund under and
in accordance with the requirements of Rule 17Ad-7 adopted under the Securities
Exchange Act of 1934. Such materials will not be destroyed by the Fund without
the consent of Fund Services (which consent will not be unreasonably withheld),
but will be safely stored for possible future reference.
d. Reports to the Fund. Furnish to or place at the disposal of the Fund
such information, reports, evaluations, analyses, and opinions relating to the
services performed by Fund Services under this Agreement, and performed by UAM
SSC (or other third party service provider) under any sub-shareholder services
agreement (as provided for hereunder), as the Fund may reasonably request or as
Fund Services may deem helpful to the Fund to make an informed determination
regarding the rendering of services by Fund Services, the continuation of this
Agreement, and the payments contemplated to be made hereunder.
5. Fees. In consideration of the services performed by Fund Services under this
Agreement, the Fund shall such pay fees to Fund Services as are set forth in
Appendix B hereto, which appendix is incorporated herein by this reference. In
addition to the fees set forth in Appendix B, Fund Services shall be entitled to
reimbursement from the Fund for all reasonable out-of-pocket expenses without
mark-up incurred by Fund Services in connection with the performance of the
services provided for in this Agreement. Fund Services shall conduct an
evaluation of the fees payable under this Agreement at six month intervals and
shall advise the Fund as to any adjustments in fees that Fund Services deems
appropriate, but in any event, Appendix B may not be amended except by the
written agreement of the Fund and Fund Services.
6. Third Party Service Providers. The Fund agrees that Fund Services may enter
into a
3
<PAGE>
sub-shareholder services agreement or related agreements with UAM SSC or other
service providers to perform certain services provided for by this Agreement.
Fund Services' obligations and the standards of care under which Fund Services
has undertaken to fulfill such obligations, and the indemnification that Fund
Services has agreed to provide under this Agreement may not, however, be
impaired or assigned by Fund Services without the consent and approval of the
Board of Directors of the Fund.
7. Certain Representations and Warranties of Fund Services. Fund Services
represents and warrants to the Fund that:
a. It is a business trust duly formed and validly subsisting under the laws
of the Commonwealth of Pennsylvania.
b. It is duly qualified to carry on its business in the Commonwealth of
Pennsylvania.
C. It is empowered under applicable laws and by its Declaration of Trust
and Bylaws to enter into and perform the services contemplated in this
Agreement.
d. It is registered as a transfer agent to the extent required under the
Securities Exchange Act of 1934.
e. All requisite proceedings of the Trustees have been taken to authorize
it to enter into and perform this Agreement.
f. It has and will continue to have and maintain the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
8. Certain Representations and Warranties of the Fund. The Fund represents and
warrants to Fund Services that:
a. It is a corporation duly organized and existing and in good standing
under the laws of the State of Maryland.
b. It is an open-end management investment company registered under the
1940 Act.
4
<PAGE>
c. A registration statement under the Securities Act of 1933 has been filed
and will be effective with respect to all shares of the Fund being offered for
sale.
d. All requisite steps have been and will continue to be taken to register
the Fund's shares for sale in all applicable states and such registration will
be effective at all times shares are offered for sale in such states.
e. The Fund is empowered under applicable laws and by its Charter and
Bylaws to enter into and perform this Agreement.
9. Certain Covenants of Fund Services and the Fund.
a. Records are Property of the Fund. To the extent required by Section 31
of the 1940 Act, and the rules thereunder, Fund Services agrees that all records
maintained by Fund Services relating to the services to be performed by Fund
Services under this Agreement are the property of the Fund and will be preserved
and will be surrendered promptly to the Fund on request.
b. Financial Statements. Fund Services agrees to furnish to the Fund annual
reports of its financial condition, consisting of a balance sheet, earnings
statement and any other financial information reasonably requested by the Fund.
The annual financial statements shall be certified by the independent auditors
retained by the parent of Fund Services.
c. Information Concerning the Fund. The Fund agrees to furnish or otherwise
make available to Fund Services such information relating to the business and
affairs of the Fund as Fund Services may reasonably require to discharge its
duties and obligations hereunder. The Fund further agrees to provide Fund
Services with information and updates relating to new product and service
introductions and sales and marketing efforts that may reasonably be expected to
impact on shareholder or prospective shareholder telephone call volume so that
Fund Services can properly allocate the resources necessary to fulfill its
obligations under this Agreement.
5
<PAGE>
d. Cooperation in Shareholder Responses. The Fund agrees that the Fund
will, and shall cause the Fund's investment adviser to, cooperate with Fund
Services to the extent necessary to formulate appropriate responses to written
inquiries from shareholders concerning investment strategy and philosophy and
market commentary.
10. Quality Control.
a. Audits. Fund Services shall be responsible for periodically conducting
quality control audits with respect to telephone purchase, redemption and
exchange requests and account changes received and processed by Fund Services or
any third party service provider with which Fund Services has contracted to
perform any of the services provided for under this Agreement. Fund Services
shall promptly report the results of such quality control audits to the Fund.
b. Inspections. Fund Services shall permit the Fund and its authorized
representatives, including, but not limited to, the Fund's independent auditors,
to have reasonable access to the personnel and records of Fund Services, and to
make periodic inspections of the operations of Fund Services as such would
involve the Fund at reasonable times during business hours for the purpose of
monitoring the quality of services performed by Fund Services, and the level of
fees and reimbursements to which Fund Services is entitled, under this
Agreement.
c. Monitoring of Exchange Privileges. Fund Services shall use its
reasonable efforts to detect and prevent shareholder violations of telephone
exchange privileges as described in the Fund's prospectuses.
d. Service Improvement. Fund Services shall use its reasonable efforts to
keep current on the trends of the investment company industry relating to
shareholder services and to continue to modernize and improve its service
delivery mechanisms.
e. Year 2000 Compliance. Fund Services represents that its Information
System
6
<PAGE>
(as defined in Exhibit C) will be Year 2000 Compliant as set forth in Exhibit C,
attached hereto.
11. Liability and Indemnification.
a. Indemnification by the Fund. Fund Services shall not be responsible for,
and the Fund shall indemnify and hold Fund Services harmless from and against,
any and all losses, liabilities, claims, demands, suits, costs and expenses
(including reasonable attorneys' fees) which may be asserted against Fund
Services or for which Fund Services may be held to be liable, arising out of, or
are attributable to, the Fund's failure to comply with the terms of this
Agreement, or arising out of or attributable to, the Fund's negligence or
willful misconduct or breach of any representation or warranty of the Fund
hereunder.
b. Indemnification by Fund Services. The Fund shall not be responsible for,
and Fund Services shall indemnify the Fund, its officers and directors and hold
them harmless from and against, any and all losses, liabilities, claims,
demands, suits, costs and expenses (including reasonable attorneys' fees) which
may be asserted against the Fund or for which the Fund may be held to be liable,
arising out of, or attributable to, Fund Services' failure to comply with the
terms of this Agreement, or arising out of, or are attributable to, any
negligence or willful misconduct or breach of any representation or warranty of
Fund Services hereunder.
c. Notice of Potential Claims; Defense of Claims. Fund Services and the
Fund agree that each shall promptly notify the other in writing of any situation
which represents or appears to involve a claim which may be the subject of
indemnification hereunder, although the failure to provide such notification
shall not relieve the indemnifying party of its liability pursuant to this
Section 11. The indemnifying party shall have the option to defend against any
such claim. In the event the indemnifying party so elects, it will notify the
indemnified party and shall assume the defense of such claim, and the
indemnified party shall cooperate fully
7
<PAGE>
with the indemnifying party, at the indemnifying party's expense, in the defense
of such claim. If the indemnifying party elects not to defend against such
claim, the indemnified party shall be entitled to advance of reasonable expenses
to defend such claim. Notwithstanding the foregoing, the indemnified party shall
not enter into any settlement of such matter without the written consent of the
indemnifying party, which consent shall not be withheld unreasonably. The
indemnifying party shall not be obligated to indemnify the indemnified party for
any settlement entered into without the written consent of the indemnifying
party. If the consent of the indemnified party is required to effectuate any
settlement and the indemnified party refuses to consent to any settlement
negotiated by the indemnifying party, the liability of the indemnifying party
for losses arising out of or due to such matter shall be limited to the amount
to the rejected proposed settlement.
d. Except for violations of Section 17c. hereunder, in no event and under
no circumstances shall either party to this Agreement be liable to anyone,
including, without limitation, to the other party, for consequential damages for
any act or failure to act under any provision of this Agreement even if advised
of the possibility thereof.
e. Survival of Provisions. The obligations of Fund Services and the Fund
pursuant to this Section 11 shall survive the termination of this Agreement.
12. Limitations on Liability
a. Subcontractors. Nothing herein shall impose any duty upon Fund Services
in connection with or make Fund Services liable for the actions or omissions to
act of unaffiliated third parties such as, by way of example and not limitation,
Airborne Services, the U.S. mails and telecommunication companies, provided, if
Fund Services selected such company, Fund Services shall have exercised
reasonable care in selecting the same. The foregoing limitation of liability
with respect to actions or omissions of unaffiliated third parties shall not be
construed to relieve Fund Services of any obligations under Section 6 hereof
with respect to any services that Fund Services has agreed to perform under this
agreement that are ultimately performed by other parties.
8
<PAGE>
b. Portfolios as Separate Parties. Each Portfolio shall be regarded for all
purposes hereunder as a separate party apart from each other Portfolio. Unless
the context otherwise requires, with respect to every transaction covered by
this Agreement, every reference herein to the Fund shall be deemed to relate
solely to the particular Portfolio to which such transaction relates. Under no
circumstances shall the rights, obligations or remedies with respect to a
particular Portfolio constitute a right, obligation or remedy applicable to any
other Portfolio. The use of this single document to memorialize the separate
agreement of each Portfolio is understood to be for clerical convenience only
and shall not constitute any basis for joining the Portfolios for any reason.
13. Term of Agreement. This Agreement shall become effective on the day and year
first written above and, unless sooner terminated as hereinafter provided, shall
continue in effect for an initial period that will expire on December 31, 1998,
and thereafter shall continue in effect from year to year provided such
continuance is approved at least annually by the vote of a majority of the
directors of the Fund who are not parties to this Agreement or "interested
persons" (as defined by the 1940 Act) of any such party, which vote shall be
cast in person at a meeting called for the purpose of voting on such approval.
14. Termination.
a. Material Breach. This Agreement may be terminated by either party in the
event of a material breach of the Agreement by the other party upon thirty (30)
days' prior written notice to the other party; provided, however, that the
Agreement shall not terminate if such material breach is cured within such
thirty (30) day period.
b. Termination by the Fund. The Fund may, without payment of penalty,
terminate this Agreement upon 90 days' written notice to Fund Services.
c. Termination by Fund Services. Fund Services may, without payment of
penalty, terminate this Agreement upon 90 days' written notice to the Fund.
9
<PAGE>
d. Assignment. No assignment of this Agreement by Fund Services shall occur
without the written consent of the Fund and approval by the Board of Directors
of the Fund as described in Section 13 herein.
15. Notices. All notices to be given hereunder shall be deemed properly given if
given in writing, delivered in person, or if sent by U.S. mail, first class,
postage prepaid, or if sent by facsimile and thereafter confirmed by mail, (i)
if to Fund Services, to PBHG Fund Services, 825 Duportail Road, Wayne, PA 19087,
Attn: Brian Bereznak, and (ii) if to the Fund, to The PBHG Funds, Inc., 825
Duportail Road, Wayne, PA 19087, Attn: Michael Harrington, or to such other
address as shall have been specified in writing by the party to whom such notice
is to be given.
16. Force Majeure. In the event Fund Services is unable to perform its
obligations or duties under the terms of this Agreement because of any act of
God, strike, riot, act of war, equipment failure, power failure or damage or
other causes reasonably beyond its control, Fund Services shall not be liable
for any losses, damages, costs, charges, counsel fees, payments, expenses or
liability to any other party (whether or not a party to this Agreement)
resulting from such failure to perform its obligations or duties under this
Agreement or otherwise from such causes. This provision, however, shall in no
way excuse Fund Services from being liable to the Fund for any and all losses,
damages, costs, charges, counsel fees, payments and expenses incurred by the
Fund due to the non-performance or delay in performance by Fund Services of its
duties and obligation under this Agreement if such non-performance or delay in
performance could have been reasonably prevented by Fund Services through
back-up systems and other procedures commonly employed by other persons in the
mutual fund industry who provide services similar to those to be provided by
Fund Services under this Agreement, provided that Fund Services shall have the
right, at all times, to mitigate or cure any losses, including by making
adjustments or corrections to any current or former shareholder accounts.
10
<PAGE>
17. Miscellaneous.
a. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the Commonwealth of Pennsylvania,
except as such laws may conflict with the 1940 Act and the rules thereunder or
other applicable federal laws or regulations.
b. Severability. If any provision of this Agreement shall be held or made
invalid in whole or in part by a court decision, statute, rule, or otherwise,
the remaining provisions of the Agreement shall not be affected thereby. Invalid
provisions shall, in accordance with the intent and purpose of this Agreement,
be replaced by mutual consent of the parties with such valid provisions which in
their economic effect come as closely as legally possible to such invalid
provisions.
c. Confidentiality. Fund Services agrees on behalf of itself and its
employees to treat confidentially all records and other information relative to
the Fund and its prior, present, or prospective shareholders, except, after
prior notification to and approval in writing by the Fund, which approval shall
not be withheld unreasonably and may not be withheld where Fund Services may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Fund.
d. Amendments in Writing. Any part of this Agreement or any appendix hereto
may be amended or waived only by an instrument in writing signed by the parties
hereto.
e. Headings and Captions. The headings and captions contained in this
Agreement are included for convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect their construction or
effect.
11
<PAGE>
f. Interpretation. Nothing herein contained shall be deemed to require the
Fund to take any action contrary to its Articles of Incorporation or Bylaws, or
any applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Directors of its
responsibility for and control of the conduct of the affairs of the Fund.
g. Enforceability by Successors and Assigns. All terms and provisions of
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective successors and permitted assigns.
h. Survival of Representations, Warranties and Indemnification. The
representations and warranties, and the indemnification extended hereunder, if
any, are intended to and shall continue after and survive the expiration,
termination or cancellation of this Agreement.
i. No Joint Venture. Neither the execution nor performance of this
Agreement shall be deemed to create a partnership or Joint venture by and
between the Fund and Fund Services. It is understood and agreed that all
services performed hereunder by Fund Services shall be as an independent
contractor. This Agreement is between Fund Services and the Fund and neither
this Agreement nor the performance of the services provided for herein shall
create any rights in any third parties. There are no third party beneficiaries
hereto.
j. No Waiver. The failure of either party to insist upon the performance of
any terms or conditions of this Agreement or to enforce any rights resulting
from any breach of any of the terms or conditions of this Agreement, including
the payment of damages, shall not be construed as a continuing or permanent
waiver of any such terms, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred.
12
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized officers, to be effective as of the day and
year first above written.
PBHG FUND SERVICES
By: /s/ Illegible
-------------------------------
Title: Treasurer
----------------------------
THE PBHG FUNDS, INC.
By: /s/ Illegible
-------------------------------
Title: V.P.
----------------------------
13
<PAGE>
APPENDIX A
Services
Fund Services generally shall be responsible for providing shareholder
services, including but not limited to the following:
1. Provide "General" Shareholder Support.
2. Process "Phone" Transactions
ACH Buys from Bank of record
ACH Redemption to Bank of record
Process Purchase Orders (Wire or Check settlement)
Wire Redemption to Bank of record
Account Exchanges between funds
Wire Redemption to Bank of record
3. Process "Basic" Account Maintenance
Stop/restart/defer systematic investment purchase
Increase/decrease a systematic investment purchase
Increase/decrease/defer/discontinue a systematic withdrawal plan
Add a beneficiary birth date
Change dividend/capital gains distribution option
Stop dividend mail
Add/change a dividend move
Combine identical accounts within same fund
Add/delete "stop mail" from an account
Stop/Replace a redemption check
Add/change/delete systematic exchange with the same registration
4. Research/Document/Request corrective processing by Transfer Agent
5. Correspondence Services (Adviser and Call Center Related Issues)
6. Problem Research and Resolution
7. Institutional Desk Servicing
Dealer Servicing
Account Maintenance
Dealer File Maintenance
Transaction Processing
Order Settlement Support
Adjustment Processing Support
NSCC Networking Support
Fund Info/Data Dissemination
8. Non-Signature Guaranteed address change
Stop/restart/defer a Systematic Monthly Investment (SIP)
Increase/decrease a Systematic Monthly Investment (SIP)
Increase/decrease/defer/discontinue a systematic withdrawal
plan (SWP)
Add a beneficiary birth date
Change dividend/capital gains distribution method
14
<PAGE>
Stop dividend mail
Add/change a dividend move
Combine identical accounts within the same funds
Add or delete stop mail from the account
Stop or replace a redemption check after 15 days
Add/change/delete systematic exchanges (SYSEXCH) with the same
registration
Correct minor errors in names on registration if clearly indicated
on the application
Reissue checkwriting drafts on a Cash Reserve account where the
privilege has been established
Link/unlink accounts for the INVESTOR statement product
(managers only)
15
<PAGE>
EXHIBIT C
YEAR 2000 COMPLIANCE
Page 1
Definitions:
"Embedded Control" shall mean any microprocessor, microcontroller, smart
instrumentation or other sensor, driver, monitor, robotic or other device
containing a semiconductor, memory circuit, BIOS, PROM or other microchip,
whether it is part of or operates in conjunction with any mainframes, midrange
computers, personal computers, notebooks, servers, switches, printers, modems,
drives or peripherals ("Hardware") or any other electronic or mechanical device
that operates, controls or monitors any function of any real or personal
property, including but not limited to any security, access control or
telecommunications devices or systems.
"Information System" shall mean any combination of any Hardware, software,
databases or Embedded Controls employed primarily for the creation,
manipulation, storage, retrieval, display and use of information in electronic
form or media.
"Year 2000 Compliant": shall mean:
(a) that each component of an Information System or any Embedded Control:
(i) is designed (or has been modified) to be used prior to and after
January 1, 2000; and
(ii) will operate without error arising from the creation, recognition,
acceptance, calculation, display, storage, retrieval, accessing, comparison,
sorting, manipulation, processing or other use of dates or date-based,
date-dependent or date-related data, including but not limited to century
recognition, day-of-the-week recognition, leap years, date values and interfaces
of the date functionalities; and
(iii) will not be adversely affected by the advent of the year 2000,
the advent of the twenty-first century or the transition from the twentieth
century through the year 2000 and into the twenty-first century.
(b) that the design architectures and functionalities embodying, reflecting
or affecting the criteria set forth in subparagraph (a), above, of all
components of an Information System (or the methods used to modify them) are
compatible and, when operated in, on or in conjunction with any other component
of such Information System, will not cause it or any of its components to fail
to satisfy the criteria set forth in subparagraph (a), above.
(c) that an Information System does not receive data from or communicate
with any component or Information System external to itself (whether or not such
external component or Information System is DST's or any third party's) that
does not conform to the criteria set forth in subparagraphs (a) and (b), above.
DST represents and warrants that all Information Systems of DST used in the
performance of DST's obligations under this Contract are Year 2000 Compliant.
DST covenants that it will take all actions necessary to ensure:
(a) that all Information Systems of DST and the databases used
therewith or created thereby:
16
<PAGE>
(i) shall remain Year 2000 Compliant at all times during the term of
this Contract;
(ii) shall be adequately protected from contamination by non-Year 2000
Compliant third-party communications received by any electro-mechanical or
electronic devices of DST; and
DST acknowledges and agrees that for the purposes of this Contract:
(a) the Fund may request, and DST will provide a detailed summary of
the Year 2000 Compliant status of DST's Information Systems and Embedded
Controls; and
(b) DST shall not be relieved of any liability or responsibility for
any losses to the Fund pursuant to paragraph 8 of this Agreement in respect of
any breach of DST's obligations pursuant to this Exhibit C.
17
FIRST AMENDMENT
TO CUSTODY AGREEMENT
This instrument dated June 4, 1998, is a First Amendment to that certain
Custody Agreement dated June 1, 1994, by and between THE PBHG FUNDS, INC., a
corporation organized under the laws of the State of Maryland, having its
principal office and place of business at 825 Duportail Road, Wayne, PA 19087
(the "Fund"), and THE NORTHERN TRUST COMPANY (the "Custodian"), an Illinois
company with its principal place of business at 50 South LaSalle Street,
Chicago, Illinois 60675.
WHEREAS, the Fund is a registered open-end management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund has retained Custodian to furnish custodial services;
WHEREAS, the Board of Directors of the Fund wishes to delegate to Custodian
certain responsibilities of managing the Fund's foreign custody arrangements as
provided in Rule 17f-5 under the 1940 Act, except with respect to central
depositories and clearing agencies or with respect to custody arrangements in
the countries listed on Schedule I, attached, as that Schedule may be amended
from time to time by written notice to the Fund;
WHEREAS, the Board of Directors of the Fund has determined that it is
reasonable to rely on Custodian to perform the responsibilities delegated to it
under this Amendment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Section 1(o) of the Custody Agreement is amended to read as follows:
(o) "Sub-Custodian" shall mean and include (i) any branch of the Custodian
and (ii) any "eligible foreign custodian," as that term is defined in Rule
l7f-5 under the 1940 Act, as amended, which has been approved by the Fund
or a Delegate of the Fund in the manner required by Rule 17f-5.
2. The following is added as Section 1(r):
(r) "Delegate of the Fund" shall mean and include any entity to whom the
Board of Directors of the Fund has delegated any responsibility under Rule
17f-5 of the 1940 Act.
3. Section 3 of the Custody Agreement is amended to read as follows:
<PAGE>
"3. Appointment and Removal of Sub-Custodians.
(a) The Custodian may appoint one or more Sub-Custodians to act as
Depository or Depositories or as sub-custodian or sub-custodians of
Securities and moneys at any time held in any Portfolio, upon the terms and
conditions specified in this Agreement. The Custodian shall oversee the
maintenance by any Sub-Custodian of any Securities or moneys of any
Portfolio.
(b) Any agreement between the Custodian and each Sub-Custodian described in
clause (ii) of Section I(o) and acting hereunder shall contain any
provisions necessary to comply with Rule 17f-5 under the 1940 Act.
(c) Prior to the Custodian's use of any Sub-Custodian described in clause
(ii) of Paragraph I(o), the Fund or a Delegate of the Fund must approve
such Sub-Custodian in the manner required by Rule 17f-5 and provide the
Custodian with satisfactory evidence of such approval.
(d) The Custodian shall promptly take such steps as may be required to
remove any Sub-Custodian that has ceased to be an "eligible foreign
custodian" or has otherwise ceased to meet the requirements under Rule
17f-5. If the Custodian intends to remove any Sub-Custodian previously
approved by the Fund or a Delegate of the Fund pursuant to paragraph 3(c),
and the Custodian proposes to replace such Sub-Custodian with a
Sub-Custodian that has not yet been approved by the Fund or a Delegate of
the Fund, it will so notify the Fund or a Delegate of the Fund and provide
it with information reasonably necessary to determine such proposed
Sub-Custodian's eligibility under Rule 17f-5, including a copy of the
proposed agreement with such Sub-Custodian. The Fund shall at the meeting
of the Board of Directors next following receipt of such notice and
information, or a Delegate of the Fund, shall promptly determine whether to
approve the proposed Sub-Custodian and will promptly thereafter give
written notice of the approval or disapproval of the proposed action.
(e) The Custodian hereby warrants to the Fund that in its opinion, after
due inquiry, the established procedures to be followed by each
Sub-Custodian (that is not a foreign securities depository or clearing
agency) in connection with the safekeeping of property of a Portfolio
pursuant to this Agreement afford reasonable care for the safekeeping of
such property based on the standards applicable in the relevant market.
4. The following is added as Section 3A to the Custody Agreement:
"3A. Delegation of Foreign Custody Management.
2
<PAGE>
(a) The Fund hereby delegates to Custodian and the Custodian accepts
the responsibilities set forth in subparagraph (b) below of this Section
3A, in accordance with Rule 17f-5 under the 1940 Act, with respect to
foreign custody arrangements for the Fund's existing and future investment
portfolios, except that the Custodian shall not have such responsibility
with respect to central depositories and clearing agencies or with respect
to custody arrangements in the countries listed on Schedule I, attached
hereto, as that Schedule may be amended from time to time by notice to the
Fund.
(b) With respect to each foreign custody arrangement regarding the
assets of any investment portfolio of the Fund for which Custodian has
responsibility under this Section 3A, Custodian shall:
(i) determine that the Fund's assets will be subject to reasonable
care, based on the standards applicable to custodians in the relevant
market, if maintained with an "eligible foreign custodian", as that
term is defined in Rule 17f-5 under the 1940 Act, after considering
all factors relevant to the safekeeping of such assets;
(ii) determine that the written contract with such foreign custodian
governing the foreign custody arrangements will provide reasonable
care for the Fund's assets;
(iii) establish a system to monitor the appropriateness of maintaining
the Fund's assets with such foreign custodian and the contract
governing the Fund's foreign custody arrangements;
(iv) provide to the Fund's Board of Directors, at least annually,
written reports notifying the Board of the placement of the Fund's
assets with a particular foreign custodian and periodic reports of any
material changes to the Fund's foreign custodian arrangements; and
(v) withdraw the Fund's assets from any foreign custodian as soon as
reasonably practicable, if the foreign custody arrangement no longer
meets the requirement of Rule 17f-5.
5. Sections 14(b)1 and 14(b)2 of the Custody Agreement are amended to read
as follows:
"1. The Custodian will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of property of the
Portfolios. The Custodian shall be liable to, and shall indemnify and hold
harmless the Fund from and against any loss which shall occur as the result
of the failure of the Custodian or a Sub-Custodian (other than a foreign
securities depository or clearing agency) to exercise reasonable care with
respect to their
3
<PAGE>
respective obligations under this Agreement and the safekeeping of such
property. The determination of whether the Custodian or Sub-Custodian has
exercised reasonable care in connection with their obligations under this
Agreement shall be made in light of prevailing standards applicable to
professional custodians in the jurisdiction in which such custodial
services are performed. In the event of any loss to the Fund by reason of
the failure of the Custodian or a Sub-Custodian (other than a foreign
securities depository or clearing agency) to exercise reasonable care, the
Custodian shall be liable to the Fund only to the extent of the Fund's
direct damages and expenses, which damages, for purposes of property only,
shall be determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special condition or circumstances.
2. The Custodian will not be responsible for any act, omission, or
default of, or for the solvency of, any foreign securities depository or
clearing agency approved by the Board of Directors or a Delegate of the
Fund pursuant to Section (1)(o) or Section 3 hereof."
Except as set forth above, all terms of the Custody Agreement as in effect
immediately prior to this amendment shall remain in full force and effect.
Executed this 4th day of June, 1998.
THE NORTHERN TRUST COMPANY THE PBHG FUNDS, INC.
on behalf of PBHG International Fund
By: __________________________________ By: ________________________________
Its: _________________________________ Its: _______________________________
4
<PAGE>
SCHEDULE I
(Countries for which Custodian shall not have responsibility under
Section 3A for management of foreign custody arrangements)
Russia
Lithuania
Taiwan
Croatia
5
AMENDMENT TO CUSTODIAN AGREEMENT
between
THE PBHG FUNDS, INC.
and
FIRST UNION NATIONAL BANK
This Amendment Agreement made this ___ day of ________, 1998, by and
between THE PBHG FUNDS, INC., a Maryland corporation (the "Company"), with
respect to the shares of each portfolio of the Company set forth on Schedule A
to this Amendment, and FIRST UNION NATIONAL BANK (formerly CoreStates Bank,
N.A.) (the "Custodian").
WITNESSETH
In consideration of the mutual covenants herein contained and other good
and valuable consideration, the receipt whereof is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. Amendment to Agreement. The Company and the Custodian agree to amend the
Custodian Agreement between the Company and the Custodian dated as of October
17, 1996, for the sole purpose of adding the PBHG Core Value Fund, the PBHG New
Opportunities Fund, the PBHG Defensive Equity Fund, the PBHG Enhanced Equity
Fund, the PBHG Master Income Fund and the PBHG Short-Term Government Fund, as
follows:
Schedule A is hereby deleted and replaced with Schedule A attached to this
Amendment.
2. Effect of Amendment. Except as hereinabove modified and amended, the
Custodian Agreement will remain unaltered and in full force and effect and is
hereby ratified and confirmed in all respects as amended.
3. Governing Law. This Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
in duplicate on the day and year first above written.
THE PBHG FUNDS, INC.
Attest:__________________________ By:_________________________________
Name: Name:
Title: Title:
FIRST UNION NATIONAL BANK
Attest:__________________________ By:_________________________________
Name: Name:
Title: Title:
1
<PAGE>
SCHEDULE A
PORTFOLIOS OF THE PBHG FUNDS, INC.
This Custodian Agreement is by and between First Union National Bank and
the Fund, on behalf of the following Portfolios:
PBHG Growth Fund
PBHG Emerging Growth Fund
PBHG International Fund
PBHG Large Cap Growth Fund
PBHG Select Equity Fund
PBHG Cash Reserves Fund
PBHG Technology & Communications Fund
PBHG Core Growth Fund
PBHG Limited Fund
PBHG Large Cap 20 Fund
PBHG Large Cap Value Fund
PBHG Mid-Cap Value Fund
PBHG Strategic Small Company Fund
PBHG Small Cap Value Fund
PBHG Focused Value Fund
PBHG New Opportunities Fund
Date: _______________________________
2
AMENDMENT TO ADMINISTRATIVE SERVICES AGREEMENT
between
THE PBHG FUNDS, INC.
and
PBHG FUND SERVICES
This Amendment Agreement made this ___ day of ______ 1998, by and between
THE PBHG FUNDS, INC., a Maryland corporation (the "Company"), with respect to
the shares of each portfolio of the Company set forth on Schedule A to this
Amendment, and PBHG FUND SERVICES, a Pennsylvania business trust (the
"Administrator").
WITNESSETH
In consideration of the mutual covenants herein contained and other good
and valuable consideration, the receipt whereof is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. Amendment to Agreement. The Company and the Administrator agree to amend
the Administrative Services Agreement between the Company and the Administrator
dated as of July 1, 1996, for the sole purpose of adding the PBHG Core Value
Fund, the PBHG New Opportunities Fund, the PBHG Defensive Equity Fund, the PBHG
Enhanced Equity Fund, the PBHG Master Income Fund and the PBHG Short-Term
Government Fund, as follows:
Schedule A is hereby deleted and replaced with Schedule A attached to this
Amendment.
2. Effect of Amendment. Except as hereinabove modified and amended, the
Administrative Services Agreement will remain unaltered and in full force and
effect and is hereby ratified and confirmed in all respects as amended.
3. Governing Law. This Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
in duplicate on the day and year first above written.
THE PBHG FUNDS, INC.
Attest: _________________________________ By: _______________________________
Name: Name:
Title: Title:
PBHG FUND SERVICES
Attest: _________________________________ By: _______________________________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
THE PBHG FUNDS, INC.
The PBHG Funds, Inc. consists of the following Funds, each of which is
subject to this Agreement:
PBHG Growth Fund
PBHG Emerging Growth Fund
PBHG International Fund
PBHG Large Cap Growth Fund
PBHG Select Equity Fund
PBHG Cash Reserves Fund
PBHG Technology & Communications Fund
PBHG Core Growth Fund
PBHG Limited Fund
PBHG Large Cap 20 Fund
PBHG Large Cap Value Fund
PBHG Mid-Cap Value Fund
PBHG Strategic Small Company Fund
PBHG Small Cap Value Fund
PBHG Focused Value Fund
PBHG New Opportunities Fund
Dated: ________________________, 1998
AMENDMENT TO SUB-ADMINISTRATIVE SERVICES AGREEMENT
This AMENDMENT dated this first day of May, 1998 hereby amends the
Sub-Administrative Services Agreement (the "Agreement") dated July 1, 1996 made
by and among The PBHG Funds, Inc. a Maryland corporation ("PBHG Funds"), PBHG
Fund Services, a Pennsylvania business trust (the "Administrator") and SEI Fund
Resources, a Delaware business trust ("SEI"); (collectively, the "Parties").
WITNESSETH
WHEREAS PBHG Funds operates as an open-end management investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act"); and
WHEREAS pursuant to its articles of incorporation PBHG Funds offers
separate series of shares representing interests in separate investment
portfolios (the "Portfolios") as set forth on Schedule "A" attached hereto; and
WHEREAS under the terms of the Agreement, SEI provides certain services to
PBHG Funds on behalf of the Administrator; and
WHEREAS the Administrator and SEI hereby amend the Agreement as set forth
below.
NOW THEREFORE in consideration of the premises and mutual covenants and
agreements hereunder and for good and valuable and consideration the sufficiency
and receipt of which is hereby acknowledged, the Parties hereto, intending to be
legally bound, hereby agree as follows:
1. Incorporation by Reference
The terms of the Agreement are hereby incorporated into and hereby become
part of this Amendment provided if any such term or terms of the Agreement
is/are in conflict with any term or terms of this Amendment, this Amendment
shall control the contractual obligations of the Parties.
2. Duration and Termination of this Amendment. The terms of this Amendment shall
become effective on May 1, 1998 and shall continue and remain in effect until
December 31, 2000 (the "Initial Term"). After the Initial Term, the terms of
this Amendment shall continue on a year to year basis (a "Renewal Term") subject
to further amendment or termination. After the Initial Term, this Amendment may
be terminated as follows: (a) by the mutual written agreement of the Parties;
(b) by either Party on 90 days' written notice as of the end of the Initial Term
or the end of any Renewal Term; (c) by either Party hereto on such date as is
specified by written notice given by the terminating Party, in the event of a
material breach of this Amendment by the other Party, provided the terminating
party has notified the other party of such breach at least 45 days prior to the
specified date of termination and the breaching party has not remedied such
breach by the specified date; (d) effective upon the liquidation of SEI; or (e)
upon the liquidation of PBHG Funds or any Portfolio thereof, as the case may be.
For purposes of this paragraph, the term "liquidation" shall mean a transaction
in which the assets of SEI, PBHG Funds or of a Portfolio thereof are sold or
otherwise disposed of and the proceeds therefrom are distributed in cash to the
shareholders in complete liquidation of the interests of such shareholders in
the particular entity.
3. Year 2000 Warranty SEI warrants that all software code owned or under control
by it, used in the performance of its obligations hereunder will be Year 2000
compliant. For purposes of this paragraph, "Year 2000 Compliant" means that the
software will continue to operate beyond December 31, 1999 without creating any
logical or mathematical inconsistencies concerning any
<PAGE>
date after December 31, 1999 and without decreasing the functionality of the
system applicable to dates prior to January 1, 2000 including, but not limited
to, making changes to (a) date and data century recognition; (b) calculations
which accommodate same- and multi-century formulas and date values; and (c)
input/output of date values which reflect century dates. All changes described
in this paragraph will be made at no additional cost to PBHG Funds or the
Administrator.
4. Compensation of SEI In compensation for the services provided to PBHG Funds,
the Administrator agrees to pay to SEI fees based upon the greater sum (higher
value) which results from making the following calculations:
o A. Asset based fee calculated upon the combined assets of PBHG Funds, PBHG
Insurance Series Fund, Inc. and PBHG Advisor Funds, Inc. (the "Companies") at
the rate of
0.040% on the first $2.5 Billion of combined assets
0.025% on the next $7.5 Billion of combined assets
0.020% on combined assets in excess of $10 Billion.
o B. A fee based on the aggregate number of Portfolios and classes of each
Portfolio of the Companies calculated at the sum of
$35,000.00 per Portfolio, plus
$5,000 per additional class of shares of each Portfolio.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed
by their respective officers duly authorized on the day and year first written
above.
THE PBHG FUNDS, INC. PBHG FUND SERVICES
BY: /s/ BY: /s/
---------------------------- -----------------------------
TITLE: Vice President TITLE: Treasurer
SEI FUND RESOURCES
BY: /s/
----------------------------
TITLE: Vice President
<PAGE>
SCHEDULE A
The Following Portfolios are included under the terms of this Amendment:
1. PBHG Growth Fund
2. PBHG Emerging Growth Fund
3. PBHG Large-Cap Growth Fund
4. PBHG Select Equity Fund
5. PBHG Core Growth Fund
6. PBHG Limited Fund
7. PBHG Large Cap 20 Fund
8. PBHG Large Cap Value Fund
9. PBHG Mid-Cap Value Fund
10. PBHG Small Cap Value Fund
11. PBHG International Fund
12. PBHG Cash Reserves Fund
13. PBHG Technology & Communications Fund
14. PBHG Strategic Small Company Fund
AMENDMENT TO SUB-ADMINISTRATIVE SERVICES AGREEMENT
among
THE PBHG FUNDS, INC.,
PBHG FUND SERVICES
and
SEI FUND RESOURCES
This Amendment Agreement made this ___ day of __________, 1998, by and
among THE PBHG FUNDS, INC., a Maryland corporation (the "Company"), with respect
to the shares of each portfolio of the Company set forth on Schedule A to this
Amendment, PBHG FUND SERVICES, a Pennsylvania business trust (the
"Administrator"), and SEI FUND RESOURCES, a Delaware business trust (the
"Sub-Administrator").
WITNESSETH
In consideration of the mutual covenants herein contained and other good
and valuable consideration, the receipt whereof is hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
1. Amendment to Agreement. The Company, the Administrator and the
Sub-Administrator agree to amend the Sub-Administrative Services Agreement
between the Company, the Administrator and the Sub-Administrator dated as of
July 1, 1996, as amended, for the sole purpose of adding the PBHG Core Value
Fund, the PBHG New Opportunities Fund, the PBHG Defensive Equity Fund, the PBHG
Enhanced Equity Fund, the PBHG Master Income Fund and the PBHG Short-Term
Government Fund, as follows:
Schedule A to the May 1, 1998 amendment is hereby deleted and replaced with
Schedule A attached to this Amendment.
2. Effect of Amendment. Except as hereinabove modified and amended, the
Sub-Administrative Services Agreement will remain unaltered and in full force
and effect and is hereby ratified and confirmed in all respects as amended.
3. Governing Law. This Amendment shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
in duplicate on the day and year first above written.
THE PBHG FUNDS, INC.
Attest: By:
-------------------------- ------------------------------
Name: Name:
Title: Title:
PBHG FUND SERVICES
Attest: By:
-------------------------- ------------------------------
Name: Name:
Title: Title:
SEI FUND RESOURCES
Attest: By:
-------------------------- ------------------------------
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
The following Portfolios are included under the terms of this Amendment:
PBHG Growth Fund
PBHG Emerging Growth Fund
PBHG International Fund
PBHG Large Cap Growth Fund
PBHG Select Equity Fund
PBHG Cash Reserves Fund
PBHG Technology & Communications Fund
PBHG Core Growth Fund
PBHG Limited Fund
PBHG Large Cap 20 Fund
PBHG Large Cap Value Fund
PBHG Mid-Cap Value Fund
PBHG Strategic Small Company Fund
PBHG Small Cap Value Fund
PBHG Focused Value Fund
PBHG New Opportunities Fund
Dated: ________________, 1998
THE PBHG FUNDS, INC.
EXPENSE LIMITATION AGREEMENT
EXPENSE LIMITATION AGREEMENT, effective as of _____________, 199_, by and
between Pilgrim Baxter & Associates, Ltd. (the "Adviser") and The PBHG Funds,
Inc. (the "Fund"), on behalf of each portfolio of the Fund set forth in Schedule
A (each a "Portfolio", and collectively, the "Portfolios").
WHEREAS, the Fund is a Maryland corporation organized under Articles of
Incorporation dated July 31,1992 (the "Articles"), and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company of the series type and each Portfolio is one of
the series of the Fund; and
WHEREAS, the Fund and the Adviser have entered into an Investment Advisory
Agreement (the "Advisory Agreement"), pursuant to which the Adviser will render
investment advisory services to each Portfolio for compensation based on the
value of the average daily net assets of each such Portfolio; and
WHEREAS, the Fund and the Adviser have determined that it is appropriate
and in the best interests of each Portfolio and its shareholders to maintain
certain expenses of each Portfolio at a level below the level to which each such
Portfolio would normally be subject during its start-up period.
NOW, THEREFORE, the parties hereto agree as follows:
1. EXPENSE LIMITATION.
1.1 APPLICABLE EXPENSE LIMIT. To the extent that the aggregate expenses
incurred by a Portfolio in any fiscal year, including but not limited to
investment advisory fees of the Adviser (but excluding: (i) interest, taxes,
brokerage commissions, and other expenditures which are capitalized in
accordance with generally accepted accounting principles; and (ii) other
extraordinary expenses not incurred in the ordinary course of such Portfolio's
business) ("Portfolio Operating Expenses"), exceed the Operating Expense Limit,
as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall
be the liability of the Adviser.
<PAGE>
1.2 OPERATING EXPENSE LIMIT. The Operating Expense Limit in any year shall
be as set forth in Schedule A as to each Portfolio, or such other rate as may be
agreed to in writing by the parties.
1.3 METHOD OF COMPUTATION. To determine the Adviser's liability with
respect to the Excess Amount, each month the Portfolio Operating Expenses for
each Portfolio shall be annualized as of the last day of the month. If the
annualized Portfolio Operating Expenses for any month of a Portfolio exceed the
Operating Expense Limit of such Portfolio, the Adviser shall first waive or
reduce its investment management fee for such month by an amount sufficient to
reduce the annualized Portfolio Operating Expenses to an amount no higher than
the Operating Expense Limit. If the amount of the waived or reduced investment
advisory fee for any such month is insufficient to pay the Excess Amount, the
Adviser may also remit to the appropriate Portfolio or Portfolios an amount
that, together with the waived or reduced advisory fee, is sufficient to pay
such Excess Amount.
1.4 YEAR-END ADJUSTMENT. If necessary, on or before the last day of the
first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the amount of the advisory fees waived or
reduced and other payments remitted by the Adviser to the Portfolio or
Portfolios with respect to the previous fiscal year shall equal the Excess
Amount.
2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS.
2.1 REIMBURSEMENT. If in any year during which the total assets of a
Portfolio are greater than $75 million and in which the Advisory Agreement is
still in effect, the estimated aggregate Portfolio Operating Expenses of such
Portfolio for the fiscal year are less than the Operating Expense Limit for that
year, subject to quarterly approval by the Fund's Board of Directors as provided
in Section 2.2 below, the Adviser shall be entitled to reimbursement by such
Portfolio, in whole or in part as provided below, of the advisory fees waived or
reduced and other payments remitted by the Adviser to such Portfolio pursuant to
Section 1 hereof. The total amount of reimbursement to which the Adviser may be
entitled (the "Reimbursement Amount") shall equal, at any time, the sum of all
investment advisory fees previously waived or reduced by the Adviser and all
other payments remitted by the Adviser to the Portfolio, pursuant to Section 1
hereof, during any of the previous two (2)
2
<PAGE>
fiscal years, less any reimbursement previously paid by such Portfolio to the
Adviser, pursuant to Sections 2.2 or 2.3 hereof, with respect to such waivers,
reductions, and payments. The Reimbursement Amount shall not include any
additional charges or fees whatsoever, including, e.g., interest accruable on
the Reimbursement Amount.
2.2 BOARD APPROVAL. No reimbursement shall be paid to the Adviser pursuant
to this provision in any fiscal quarter, unless the Fund's Board of Directors
has determined that the payment of such reimbursement is in the best interests
of the Portfolio or Portfolios and their shareholders. The Fund's Board of
Directors shall determine quarterly in advance whether any reimbursement may be
paid to the Adviser in such quarter.
2.3 METHOD OF COMPUTATION. To determine each Portfolio's payments, if any,
to reimburse the Adviser for the Reimbursement Amount, each month the Portfolio
Operating Expenses of each Portfolio shall be annualized as of the last day of
the month. If the annualized Portfolio Operating Expenses of a Portfolio for any
month are less than the Operating Expense Limit of such Portfolio, such
Portfolio, only with the prior approval of the Board, shall pay to the Adviser
an amount sufficient to increase the annualized Portfolio Operating Expenses of
that Portfolio to an amount no greater than the Operating Expense Limit of that
Portfolio, provided that such amount paid to the Adviser will in no event exceed
the total Reimbursement Amount.
2.4 YEAR-END ADJUSTMENT. If necessary, on or before the last day of the
first month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the actual Portfolio Operating Expenses of a
Portfolio for the prior fiscal year (including any reimbursement payments
hereunder with respect to such fiscal year) do not exceed the Operating Expense
Limit.
3. TERM AND TERMINATION OF AGREEMENT.
This Agreement shall continue in effect for a period of one year from the
date of its execution and from year to year thereafter provided such continuance
is specifically approved by a majority of the Directors of the Fund who (i) are
not "interested persons" of the Fund or any other party to this Agreement, as
defined in the 1940 Act, and (ii) have no direct or indirect financial interest
in the operation of this Agreement ("Non-Interested
3
<PAGE>
Directors"). Nevertheless, this Agreement may be terminated as to any one or all
Portfolios by either party hereto, without payment of any penalty, upon 90 days'
prior written notice to the other party at its principal place of business;
provided that, in the case of termination by the Fund, such action shall be
authorized by resolution of a majority of the Non-Interested Directors of the
Fund or by a vote of a majority of the outstanding voting securities of the
Fund.
4. MISCELLANEOUS.
4.1 CAPTIONS. The captions in this Agreement are included for convenience
of reference only and in no other way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
4.2 INTERPRETATION. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Pennsylvania without reference to conflicts of
law rules. Nothing herein contained shall be deemed to require the Fund or any
Portfolio to take any action contrary to the Fund's Articles or By-Laws, or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Fund's Board of Directors of its
responsibility for and control of the conduct of the affairs of the Fund or the
Portfolios.
4.3 DEFINITIONS. Any questions of interpretation of any term or provision
of this Agreement, including but not limited to the investment advisory fee, the
computations of net asset values, and the allocation of expenses, having a
counterpart in or otherwise derived from the terms and provisions of the
Advisory Agreement or the 1940 Act, shall have the same meaning as and be
resolved by reference to such Advisory Agreement or the 1940 Act.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and year first above
written.
ATTEST: THE PBHG FUNDS, INC.
on behalf of each of the
Portfolios listed on Schedule A
By:
- ----------------------------- -------------------------------
Secretary
ATTEST: PILGRIM BAXTER & ASSOCIATES, LTD.
By:
- ----------------------------- -------------------------------
Secretary
5
<PAGE>
SCHEDULE A
TO
EXPENSE LIMITATION AGREEMENT
Operating
Expense
Limit
---------
This Agreement relates to the following
Portfolios of the Fund:
PBHG Focused Value Fund 1.50%
PBHG New Opportunities Fund 2.00%
DATED __________________________
Exhibit 99.10
[Letterhead of Ballard Spahr Andrews & Ingersoll, LLP]
November __, 1998
The PBHG Funds, Inc.
825 Duportail Road
Wayne, PA 19087
Re: The PBHG Funds, Inc.
Post-Effective Amendment No. 35
to the Registration Statement on Form N-1A
------------------------------------------
Gentlemen:
We have acted as counsel to The PBHG Funds, Inc. (the "Company"),
a corporation organized under the laws of the State of Maryland registered under
the Investment Company Act of 1940, as amended, as an open-end series management
investment company.
This opinion is given in connection with the filing by the Company
of its Post-Effective Amendment No. 35 to the Registration Statement on Form
N-1A ("Registration Statement") under the Securities Act of 1933, as amended,
relating to the registration of shares of common stock, par value $.001 per
share (the "Shares"), representing interests in the PBHG Core Value Fund and the
PBHG New Opportunities Fund, each a portfolio of the Company.
In connection with our giving this opinion, we have examined a
copy of the Charter of the Company, and originals or copies, certified or
otherwise identified to our satisfaction, of such other documents, corporate
records and other instruments as we have deemed necessary or advisable for
purposes of this opinion. We have also examined the prospectus included in the
Registration Statement substantially in the form in which it is to become
effective (the "Prospectus"). As to various questions of fact material to our
opinion, we have relied upon information provided by officers of the Company.
<PAGE>
We express no opinion concerning the laws of any jurisdiction
other than the federal law of the United States of America and the General
Corporation Law of the State of Maryland.
Based on the foregoing, we are of the opinion that the Shares to
be offered for sale pursuant to the Prospectus are, to the extent of the number
of Shares authorized to be issued by the Company in its Charter, duly authorized
and, when sold, issued and paid for as described in the Prospectus, will have
been legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"General Information - Counsel and Independent Accountants" in the Prospectus
included in the Registration Statement.
Very truly yours,
/s/Ballard Spahr Andrews & Ingersoll, LLP
Exhibit 11(a)
PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Post-Effective Amendment
No. 35 to the Registration Statement under the Securities Act of 1933 of The
PBHG Funds, Inc. (the "Fund") on Form N-1A (File No. 2-99810) of our report for
the 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, and PBHG Strategic Small Company Fund of The PBHG Funds,
Inc. (the "Funds") dated April 29, 1998 on our audit of the financial statements
and financial highlights of the Funds as of March 31, 1998 and for the
respective periods then ended, which report is included in the Annual Report to
Shareholders.
We also consent to the reference to our Firm under the headings "Financial
Highlights" and "Counsel and Independent Accountants" in the Prospectus and
under the heading "Financial Statements" in the Statement of Additional
Information.
/s/ PriceWaterhouseCoopers LLP
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PriceWaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA
November 20, 1998
