[PBHG FUNDS LOGO]
Prospectus
June 1, 1998
February 8, 1999
<PAGE>
THE PBHG FUNDS, INC.
PBHG CLASS SHARES
PROSPECTUS DATED JUNE 1, 1998
(AS SUPPLEMENTED NOVEMBER 5, 1998)
AND FEBRUARY 8, 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"):
<TABLE>
<S> <C>
PBHG GROWTH FUNDS PBHG VALUE FUNDS
o PBHG GROWTH FUND o PBHG LARGE CAP VALUE FUND
o PBHG EMERGING GROWTH o PBHG MID-CAP VALUE FUND
FUND o PBHG SMALL CAP VALUE FUND
o PBHG LARGE CAP GROWTH o PBHG FOCUSED VALUE FUND
FUND
o PBHG SELECT EQUITY FUND PBHG SPECIALTY FUNDS
o PBHG CORE GROWTH FUND o PBHG INTERNATIONAL FUND
o PBHG LIMITED FUND o PBHG CASH RESERVES FUND
o PBHG LARGE CAP 20 FUND o PBHG TECHNOLOGY &
o PBHG NEW OPPORTUNITIES COMMUNICATIONS FUND
FUND o PBHG STRATEGIC SMALL
COMPANY FUND
</TABLE>
This Prospectus is dated February 8, 1999 for the PBHG New Opportunities Fund
and the PBHG Focused Value Fund and June 1, 1998 (as supplemented November 5,
1998) for every other portfolio. 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 February 8,
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.
AN INVESTMENT IN THE PBHG CASH RESERVES FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT ANY MONEY MARKET FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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.
AS OF THE DATE OF THIS PROSPECTUS (AS SUPPLEMENTED), THE PBHG CLASS SHARES OF
THE PBHG LIMITED FUND ARE OPEN TO NEW INVESTMENTS ONLY BY EXISTING PBHG CLASS
SHAREHOLDERS OF THE PBHG LIMITED FUND. THE EXISTING PBHG CLASS SHAREHOLDERS OF
THE PBHG LIMITED FUND MAY OPEN NEW ACCOUNTS IN THE PBHG LIMITED FUND, PROVIDED
THAT ANY NEW ACCOUNT IS REGISTERED IN THE SAME NAME OR
1
<PAGE>
HAS THE SAME SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER AS THE EXISTING
SHAREHOLDER'S ACCOUNT.
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 BY EMPLOYEES 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 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.
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.
2
<PAGE>
SUMMARY
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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
16 separate series of the Fund: PBHG Growth Fund (the "Growth Fund"), PBHG
Emerging Growth Fund (the "Emerging Growth Fund"), PBHG Large Cap Growth Fund
(the "Large Cap Growth Fund"), PBHG Select Equity Fund (the "Select Equity
Fund"), PBHG Core Growth Fund (the "Core Growth Fund"), PBHG Limited Fund (the
"Limited Fund"), PBHG Large Cap 20 Fund (the "Large Cap 20 Fund"), PBHG New
Opportunities Fund (the "New Opportunities Fund"), PBHG Large Cap Value Fund
(the "Large Cap Value Fund"), PBHG Mid-Cap Value Fund (the "Mid-Cap Value
Fund"), PBHG Small Cap Value Fund (the "Small Cap Value Fund"), PBHG Focused
Value Fund (the "Focused Value Fund"), PBHG International Fund (the
"International Fund"), PBHG Cash Reserves Fund (the "Cash Reserves Fund"), PBHG
Technology & Communications Fund (the "Technology & Communications Fund"), and
PBHG Strategic Small Company Fund (the "Strategic Small Company Fund"). Except
for the Large Cap 20 Fund and the Focused Value Fund, which are each classified
as a non-diversified investment company, each Portfolio is classified as a
diversified investment company.
WHO ARE THE ADVISER AND EACH OF THE SUB-ADVISERS? 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 Large Cap Value, Mid-Cap Value, Small Cap Value, Focused
Value Fund and Strategic Small Company Funds. Murray Johnstone International
Limited ("Murray Johnstone") serves as the sub-adviser to the International
Fund. Wellington Management Company, LLP ("Wellington Management") serves as the
sub-adviser to the Cash Reserves Fund. See "The Adviser," "Value Investors,"
"Murray Johnstone," and "Wellington Management" under the caption "General
Information."
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Summary..................................................... 3
Expense Summary............................................. 5
Financial Highlights........................................ 6
The Fund and the Portfolios................................. 10
Investment Objectives and Policies.......................... 10
PBHG Value Funds............................................ 16
PBHG Specialty Funds........................................ 20
General Investment Policies and Strategies.................. 24
Risk Factors................................................ 26
Investment Limitations...................................... 28
How to Purchase Fund Shares................................. 28
Shareholder Services........................................ 31
How to Redeem Fund Shares................................... 33
Determination of Net Asset Value............................ 35
Performance Advertising..................................... 36
Taxes....................................................... 37
General Information......................................... 38
Glossary of Permitted Investments........................... 45
</TABLE>
3
<PAGE>
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 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? Each Portfolio (except the Limited Fund, New
Opportunities Fund and Strategic Small Company Fund) has a minimum initial
investment of $2,500 for regular accounts and $2,000 for IRAs. The New
Opportunities Fund has a minimum initial investment of $10,000 for regular
accounts and $2,000 for IRAs. The Limited Fund and Strategic Small Company Fund
each have a minimum initial investment of $5,000 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"). However, shares of the Cash Reserves Fund
cannot be purchased by Federal Reserve wire on federal holidays restricting wire
transfers. 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 2:00 p.m. Eastern time for the Cash Reserves Fund and 4:00 p.m. Eastern time
for each of the other Portfolios. Redemption orders placed with the Transfer
Agent prior to 2:00 p.m. Eastern time for the Cash Reserves Fund and 4:00 p.m.
Eastern time for each of the other Portfolios 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."
4
<PAGE>
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EXPENSE SUMMARY
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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)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL OPERATING
EXPENSES (NET OF
REIMBURSEMENT
AFTER FEE WAIVER
OR EXPENSE
ADVISORY 12B-1 OTHER REIMBURSEMENT,
FEES FEES EXPENSES(1) IF ANY)(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Fund .85% None .41% 1.26%
Emerging Growth Fund .85% None .42% 1.27%
Large Cap Growth Fund .75% None .47% 1.22%
Select Equity Fund .85% None .50% 1.35%
Core Growth Fund .85% None .50% 1.35%
Limited Fund 1.00% None .40% 1.40%
Large Cap 20 Fund .85% None .56% 1.41%
New Opportunities Fund(2) .87% None .63% 1.50%
Large Cap Value Fund .65% None .52% 1.17%
Mid-Cap Value Fund .85% None .62% 1.47%
Small Cap Value Fund 1.00% None .49% 1.49%
Focused Value Fund(2) .48% None 1.02% 1.50%
International Fund 1.00% None 1.00% 2.00%
Cash Reserves Fund .30% None .38% .68%
Technology & Communications Fund .85% None .45% 1.30%
Strategic Small Company Fund 1.00% None .45% 1.45%
</TABLE>
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(1) A wire redemption charge, currently $10.00, is deducted from the amount of a
Federal Reserve wire redemption payment made at the request of a
shareholder. A charge of $12.00 may be imposed annually on accounts that
fall below the minimum account size as a result of shareholder redemptions.
See "How to Redeem Fund Shares -- Minimum Account Size" for the minimum
account size of each Portfolio.
(2) 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 fee waiver 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:
<TABLE>
<CAPTION>
TOTAL
ADVISORY OTHER OPERATING
FEES EXPENSES EXPENSES
-------- -------- ---------
<S> <C> <C> <C>
New Opportunities Fund 1.00% 0.63% 1.63%
Focused Value Fund 0.85% 1.02% 1.87%
</TABLE>
(3) The Adviser has agreed to waive or limit its Advisory Fees or assume Other
Expenses in an amount that operates to limit annual operating expenses of
the Core Growth, Limited, Large Cap 20, New Opportunities Fund, Large Cap
Value, Mid-Cap Value, Small Cap Value, Focused Value Fund and Strategic
Small Company Funds to no more than 1.50% of the average daily net assets of
each such Portfolio. In addition, the Adviser has agreed to waive or limit
its Advisory Fees or assume Other Expenses in an amount that operates to
limit the annual operating expenses of the International Fund to no more
than 2.25% of the average daily net assets of that Portfolio. 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.
5
<PAGE>
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EXAMPLE An investor in 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.
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<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Growth Fund $13 $40 $ 69 $152
Emerging Growth Fund $13 $40 $ 70 $153
Large Cap Growth Fund $12 $39 $ 67 $148
Select Equity Fund $14 $43 $ 74 $162
Core Growth Fund $14 $43 $ 74 $162
Limited Fund $14 $44 $ 77 $168
Large Cap 20 Fund $14 $45 $ 77 $169
New Opportunities Fund $15 $47 N/A N/A
Large Cap Value Fund $12 $37 $ 64 $142
Mid-Cap Value Fund $15 $46 $ 80 $176
Small Cap Value Fund $15 $47 $ 81 $178
Focused Value Fund $15 $47 N/A N/A
International Fund $20 $63 $108 $233
Cash Reserves Fund $ 7 $22 $ 38 $ 85
Technology & Communications Fund $13 $41 $ 71 $157
Strategic Small Company Fund $15 $46 $ 79 $174
</TABLE>
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The example is based upon estimated total operating expenses for the Portfolios,
as set forth in the "Annual Operating Expenses" table above. 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."
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FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The following information for the fiscal periods ended March 31, 1997 and 1998
has been audited by Coopers & Lybrand L.L.P., the Fund's current independent
accountants. The information for the fiscal periods ended prior to March 31,
1997 was audited by the Fund's former independent public accountants. The Fund's
audited financial statements are incorporated by reference into the Fund's
Statement of Additional Information under "Financial Statements." The following
tables should be read in conjunction with the Fund's financial statements and
notes thereto. Additional information about each Portfolio's performance is
contained in the Fund's Annual Report, which may be obtained (without charge) by
calling 1-800-433-0051. No information is included for the New Opportunities
Fund and the Focused Value Fund because they had not commenced operations as of
the date of this Prospectus.
6
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
REALIZED AND NET
NET ASSET NET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS ASSET
VALUE INVESTMENT GAINS OR FROM NET FROM VALUE
BEGINNING INCOME LOSSES INVESTMENT CAPITAL END OF TOTAL
OF PERIOD (LOSS) ON SECURITIES INCOME GAINS PERIOD RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
PBHG GROWTH FUND
PBHG CLASS
- --------------------------------------------------------------------------------------------------------------------------
1998 $21.06 $ (0.26) $ 7.43 -- -- $28.23 34.05%
1997 25.30 (0.10) (4.14) -- -- 21.06 (16.76)%
1996 16.70 (0.06) 8.66 -- -- 25.30 51.50%
1995 14.67 (0.05) 2.09 -- $ (0.01) 16.70 13.92%
1994 10.83 (0.03) 4.06 -- (0.19) 14.67 37.28%
1993 10.37 (0.16) 3.07 -- (2.45) 10.83 34.47%
1992 11.51 (0.06) 1.35 -- (2.43) 10.37 13.78%
1991 10.86 (0.01) 1.45 -- (0.79) 11.51 16.94%
1990 10.84 (0.05) 2.92 $ (0.04) (2.81) 10.86 27.11%
1989 10.44 0.02 0.41 -- (0.03) 10.84 3.98%
- --------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------------------------
1998 $21.03 $ (0.15) $ 7.24 -- -- $28.12 33.71%
1997(1) 25.42 (0.06) (4.33) -- -- 21.03 (17.27)%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG EMERGING GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $19.26 $ (0.24) $ 6.81 -- -- $25.83 34.11%
1997 23.07 (0.11) (2.87) -- $ (0.83) 19.26 (13.71)%
1996 16.10 (0.07) 8.03 -- (0.99) 23.07 50.16%
1995(2),(3) 14.59 (0.01) 1.56 -- (0.04) 16.10 10.64%+
1994(2) 13.22 (0.03) 2.38 -- (0.98) 14.59 19.64%
1993(4) 10.00 (0.03) 3.25 -- -- 13.22 32.20%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $14.26 $ (0.19) $ 8.82 -- $ (0.20) $22.69 60.80%
1997 14.53 (0.05) (0.21) -- (0.01) 14.26 (1.77)%
1996(5) 10.00 (0.03) 4.97 -- (0.41) 14.53 50.47%*
- --------------------------------------------------------------------------------------------------------------------------
PBHG SELECT EQUITY FUND
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1998 $15.91 $ (0.44) $ 8.68 -- -- $24.15 51.79%
1997 17.27 (0.13) (1.03) -- $ (0.20) 15.91 (6.94)%
1996(5) 10.00 0.05 7.68 -- (0.36) 17.27 77.75%*
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PBHG CORE GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $10.34 $ (0.33) $ 3.52 -- -- $13.53 30.85%
1997 11.82 (0.09) (1.39) -- -- 10.34 (12.52)%
1996(6) 10.00 -- 1.82 -- -- 11.82 18.20%+
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PBHG LIMITED FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $ 9.05 $ (0.10) $ 5.53 -- $ (0.40) $14.08 60.78%
1997(7) 10.00 (0.02) 0.93 $ (0.03) (0.01) 9.05 (9.15)%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG LARGE CAP 20 FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $ 9.25 $ (0.07) $ 6.80 -- -- $15.98 72.76%
1997(8) 10.00 (0.01) (0.73) $ (0.01) -- 9.25 (7.40)%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG LARGE CAP VALUE FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $10.11 $ 0.02 $ 3.84 $ (0.06) $ (0.90) $13.01 39.47%
1997(9) 10.00 0.02 0.09 -- -- 10.11 1.10%+
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PBHG MID-CAP VALUE FUND
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1998(12) $10.00 $ (0.01) $ 6.00 -- $ (0.69) $15.30 61.06%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG SMALL CAP VALUE FUND
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1998(12) $10.00 $ (0.03) $ 6.15 -- $ (0.74) $15.38 62.27%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG INTERNATIONAL FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $11.26 $ (0.03) $ 1.83 -- $ (1.02) $12.04 17.46%
1997 10.55 -- 0.71 -- -- 11.26 6.73%
1996 9.13 (0.04) 1.46 -- -- 10.55 15.55%
1995(10) 10.00 (0.03) (0.80) -- (0.04) 9.13 (8.33)%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG CASH RESERVES FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $ 1.00 $ 0.05 -- $ (0.05) -- $1.00 5.13%
1997 1.00 0.05 -- (0.05) -- 1.00 4.89%
1996(5) 1.00 0.05 -- (0.05) -- 1.00 5.24%*
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PBHG TECHNOLOGY & COMMUNICATIONS FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $14.63 $ (0.23) $ 5.72 -- $ (0.85) $19.27 38.29%
1997 12.48 (0.05) 2.55 -- (0.35) 14.63 19.59%
1996(11) 10.00 (0.02) 2.50 -- -- 12.48 24.82%+
- --------------------------------------------------------------------------------------------------------------------------
PBHG STRATEGIC SMALL COMPANY FUND
- --------------------------------------------------------------------------------------------------------------------------
1998 $ 8.86 $ (0.11) $ 5.01 -- $ (0.87) $12.89 56.54%
1997(9) 10.00 -- (1.14) -- -- 8.86 (11.40)%+
</TABLE>
* Annualized.
+ Total returns have not been annualized.
++ Average commission rate paid per share for security
purchases and sales during the period. Presentation of the
rate paid is only required for reporting periods beginning
after September 1, 1995.
(1) The PBHG Growth Fund Advisor Class commenced operations on
August 19, 1996.
(2) The information set forth in this table for the periods
prior to June 2, 1994 is the financial data of the Pilgrim
Baxter Emerging Growth Fund, a series of the Advisors' Inner
Circle Fund. The PBHG Emerging Growth Fund acquired the
assets and assumed the liabilities of the Pilgrim Baxter
Emerging Growth Fund on June 2, 1994. The PBHG Emerging
Growth Fund retained the October 31 fiscal year end of its
predecessor only for fiscal year 1994. The PBHG Emerging
Growth Fund changed its fiscal year end to March 31 in 1995
and reported financial information for the fiscal period
from November 1, 1994 to March 31, 1995.
(3) Per share calculations were performed using average shares
for the period.
(4) The Pilgrim Baxter Emerging Growth Fund, the predecessor
series to the PBHG Emerging Growth Fund, commenced
operations on June 15, 1993.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
RATIO OF NET
RATIO OF INVESTMENT
NET RATIO OF INCOME
RATIO OF INVESTMENT EXPENSES TO (LOSS) TO
NET ASSETS EXPENSES INCOME AVERAGE AVERAGE
END OF TO (LOSS) TO NET ASSETS NET ASSETS PORTFOLIO AVERAGE
PERIOD AVERAGE AVERAGE (EXCLUDING (EXCLUDING TURNOVER COMMISSION
(000) NET ASSETS NET ASSETS WAIVERS) WAIVERS) RATE RATE PAID++
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$5,338,380 1.26% (0.74%) 1.26% (0.74)% 94.21% $0.0549
4,634,138 1.25% (0.69)% 1.25% (0.69)% 64.89% 0.0493
3,298,925 1.48% (0.79)% 1.48% (0.79)% 44.64% N/A
1,014,832 1.50% (0.69)% 1.50% (0.69)% 118.75% N/A
319,059 1.55% (0.78)% 1.59% (0.82)% 94.28% N/A
6,069 2.39% (1.69)% 3.04% (2.34)% 209.24% N/A
7,339 1.52% (0.55)% 2.00% (1.03)% 114.54% N/A
10,356 1.50% (0.09)% 1.75% (0.34)% 228.02% N/A
18,849 1.32% (0.35)% 1.32% (0.35)% 219.41% N/A
23,494 1.19% 0.20% 1.19% 0.20% 175.01% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 89,227 1.51% (1.02)% 1.51% (1.02)% 94.21% $0.0549
12,991 1.53%* (1.11)%* 1.53% (1.11)%* 64.89% 0.0493
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$1,404,157 1.27% (0.80)% 1.27% (0.80)% 95.21% $0.0434
1,195,620 1.28% (0.36)% 1.28% (0.36)% 47.75% 0.0328
689,705 1.47% (0.42)% 1.47% (0.42)% 97.05% N/A
411,866 1.50%* (0.08)%* 1.50%* (0.08)%* 27.50% N/A
113,329 1.45% (0.77)% 1.45% (0.77)% 95.75% N/A
34,517 1.50%* (0.72)%* 1.54%* (0.76)%* 71.18% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 145,662 1.22% (0.79)% 1.22% (0.79)% 46.56% $0.0582
119,971 1.23% (0.47)% 1.23% (0.47)% 51.70% 0.0547
53,759 1.50%* (0.66)%* 2.07%* (1.23)%* 116.75% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 336,076 1.35% (1.15)% 1.35% (1.15)% 72.16% $0.0566
372,486 1.26% (0.76)% 1.26% (0.76)% 71.70% 0.0443
202,796 1.50%* (0.74)%* 1.73%* (0.97)%* 206.22% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 165,510 1.35% (1.07)% 1.35% (1.07)% 72.78% $0.0555
283,995 1.36% (0.77)% 1.36% (0.77)% 46.75% 0.0437
31,092 1.50%* (0.18)%* 2.92%* (1.60)%* 17.00% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 178,168 1.40% (0.72)% 1.40% (0.72)% 81.36% $0.0380
137,520 1.42%* 0.33%* 1.42%* 0.33%* 75.46% 0.0304
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 192,631 1.41% (0.79)% 1.41% (0.79)% 98.27% $0.0594
69,819 1.50%* 0.17%* 1.50%* 0.17%* 43.98% 0.0550
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 76,476 1.17% 0.98% 1.17% 0.98% 403.59% $0.0588
26,262 1.50%* 1.61%* 1.74%* 1.37%* 0.00% 0.0588
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 54,173 1.47%* (0.17)%* 1.47%* (0.17)%* 399.96% $0.0583
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 125,834 1.49%* (0.52)%* 1.49%* (0.52)%* 263.04% $0.0582
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 20,905 2.00% (0.13)% 2.00% (0.13)% 85.94% $0.0306
21,265 2.22% (0.32)% 2.22% (0.32)% 74.82% 0.0287
11,243 2.25% (0.22)% 3.03% (1.00)% 140.26% N/A
15,236 2.25%* (0.43)%* 2.36%* (0.54)%* 81.72% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 117,574 0.68% 5.00% 0.68% 5.00% N/A N/A
341,576 0.68% 4.79% 0.68% 4.79% N/A N/A
99,001 0.70%* 5.05%* 0.88%* 4.87%* N/A N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 495,697 1.30% (0.91)% 1.30% (0.91)% 259.89% $0.0477
493,156 1.33% (0.59)% 1.33% (0.59)% 289.91% 0.0365
61,772 1.50%* (0.50)%* 2.00%* (1.00)%* 125.99% N/A
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
$ 111,983 1.45% (0.92)% 1.45% (0.92)% 215.46% $0.0574
61,382 1.50%* 0.18%* 1.50%* 0.18%* 88.88% 0.0562
</TABLE>
(5) The PBHG Select Equity Fund, the PBHG Large Cap Growth Fund,
and the PBHG Cash Reserves Fund commenced operations on
April 5, 1995.
(6) The PBHG Core Growth Fund commenced operations on January 2,
1996.
(7) The PBHG Limited Fund commenced operations on July 1, 1996.
(8) The PBHG Large Cap 20 Fund commenced operations on December
1, 1996.
(9) The PBHG Large Cap Value Fund and PBHG Strategic Small
Company Fund commenced operations on January 2, 1997.
(10) The PBHG International Fund commenced operations on June 14,
1994.
(11) The PBHG Technology & Communications Fund commenced
operations on October 2, 1995.
(12) The PBHG Mid-Cap Value Fund and PBHG Small Cap Value Fund
commenced operations May 1, 1997.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
- -------------------------------------
THE FUND AND THE PORTFOLIOS
- -------------------------------------
The Fund is an open-end management investment company that offers by means of
this Prospectus shares in 14 separate series: Growth Fund, Emerging Growth Fund,
Large Cap Growth Fund, Select Equity Fund, Core Growth Fund, Limited Fund, Large
Cap 20 Fund, Large Cap Value Fund, Mid-Cap Value Fund, Small Cap Value Fund,
International Fund, Cash Reserves Fund, Technology & Communications Fund and
Strategic Small Company Fund. Each share of each Portfolio represents an
undivided interest in that Portfolio. 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 Fund's PBHG Class shares are offered by this
Prospectus. Advisor Class shares are generally subject to the same expenses as
the PBHG Class shares but also are subject to a Rule 12b-1 shareholder servicing
fee of up to 0.25% of the average daily net assets attributable to its shares.
Advisor Class shares are currently available for the Growth Fund only and are
offered by a separate prospectus, which is available without charge by calling
1-800-433-0051. 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 GROWTH FUNDS
PBHG GROWTH FUND
The Growth Fund, a diversified portfolio, seeks capital appreciation. The
Portfolio will normally be as fully invested as practicable in common stocks and
securities convertible into common stocks, but also may invest up to 5% of its
assets in warrants and rights to purchase common stocks. In the opinion of the
Adviser, there may be times when the shareholders' interests are best served and
the investment objective is more likely to be achieved by having varying amounts
of the Portfolio's assets invested in convertible securities. Under normal
market conditions, the Portfolio will invest at least 65% of its total assets in
common stocks and convertible securities of small and medium sized growth
companies (i.e., companies with market capitalization or annual revenues of up
to $2 billion). The average market capitalizations or annual revenues of
holdings in the Portfolio may, however, fluctuate over time as a result of
market valuation levels and the availability of specific investment
opportunities. In addition, the Portfolio may continue to hold securities of
companies whose market capitalizations or annual revenues grow above $2 billion
subsequent to purchase, if the company continues to satisfy the other investment
policies of the Portfolio.
The Portfolio will seek to achieve its objective by investing in companies
believed by the Adviser to have an outlook for strong earnings growth and the
potential for significant capital appreciation. Securities will be sold when the
Adviser believes that anticipated appreciation is no longer probable,
alternative investments offer superior appreciation prospects, or the risk of a
decline in market price is too great. Because of its policy with respect to the
sales of investments, the Portfolio may from time to time realize short-term
gains or losses. The Portfolio will likely have greater volatility than the
stock market in general, as measured by the Standard & Poor's 500 Stock Index
("S&P 500"). Because the investment
10
<PAGE>
techniques employed by the Adviser are responsive to near-term earnings
trends of the companies whose securities are owned by the Portfolio, portfolio
turnover can be expected to be fairly high.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers (including American Depositary Receipts ("ADRs")), and may invest up to
15% of its net assets in illiquid securities. This limitation does not include
any Rule 144A security that has been determined to be liquid pursuant to
procedures established by the Board. The Portfolio may use high-quality money
market investments or short-term bonds to reduce downside volatility during
uncertain or declining market conditions and, for temporary defensive purposes,
may invest in money market securities or short-term bonds without limitation.
See "Temporary Defensive Positions" for a fuller description. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. See "Risk
Factors" and "Glossary of Permitted Investments" for additional information.
PBHG EMERGING GROWTH FUND
The Emerging Growth Fund, a diversified portfolio, seeks long-term growth of
capital. The Portfolio will normally be as fully invested as practicable in
common stocks (including ADRs), but also may invest in equity securities such as
warrants and rights to purchase common stocks, preferred stocks, and securities
convertible into or exchangeable for common stocks. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in common
stocks of domestic emerging growth companies that have historically exhibited
exceptional or strong growth characteristics and, in the Adviser's opinion, have
an expected trend of earnings higher than that of the U.S. market as a whole.
Such companies generally have market capitalizations or annual revenues of up to
$500 million. The average market capitalizations or annual revenues of holdings
in the Portfolio may, however, fluctuate over time as a result of market
valuation levels and the availability of specific investment opportunities. In
addition, the Portfolio may continue to hold securities of companies whose
market capitalizations or annual revenues grow above $500 million subsequent to
purchase, if the company continues to satisfy the other investment policies of
the Portfolio. The Adviser will not consider dividend income when selecting
common stocks for the Portfolio.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio reserves the right to invest, in the aggregate, up to 10% of its net
assets in restricted securities and securities of foreign issuers traded outside
the United States and Canada and, for hedging purposes only, to purchase and
sell options on stocks or stock indices. The Portfolio may also invest up to 15%
of its net assets in illiquid securities. The Portfolio may invest in restricted
securities, but will not invest more than 5% of its net assets in restricted
securities that the Adviser determines are illiquid based on guidelines approved
by the Board of Directors of the Fund. The Portfolio may use high-quality money
market investments or short-term bonds to reduce downside volatility during
uncertain or declining market conditions and, for temporary defensive purposes,
may invest in money market securities or short-term bonds without limitation.
See "Temporary Defensive Positions" for a fuller description. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. See "Risk
Factors" and "Glossary of Permitted Investments" for additional information.
11
<PAGE>
PBHG LARGE CAP GROWTH FUND
The Large Cap Growth Fund, a diversified portfolio, seeks long-term growth
of capital. The Portfolio will normally be substantially invested in equity
securities (including ADRs and foreign securities). The equity securities in
which the Portfolio will invest are common stocks, warrants and rights to
purchase common stocks, preferred stocks and securities convertible into or
exchangeable for common stocks. Normally, the Portfolio will purchase
exchange-traded and over-the-counter equity securities, including foreign
securities traded in the United States. The Portfolio may invest in convertible
debt securities rated investment grade by a nationally recognized statistical
rating organization ("NRSRO") (i.e., within one of the four highest rating
categories).
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks of large capitalization companies that, in the
Adviser's opinion, have an outlook for strong growth in earnings and potential
for capital appreciation. Such companies have market capitalizations in excess
of $1 billion (with a median market capitalization of approximately $2.75
billion). The Adviser also will consider the diversity of industries in choosing
investments for the Portfolio.
The Portfolio may invest up to 10% of its net assets in restricted securities
and securities of foreign issuers traded outside the United States and Canada
and, for hedging purposes only, may purchase and sell options on stocks and
stock indices. The Portfolio may also invest up to 15% of its net assets in
illiquid securities, but will not invest more than 5% of its net assets in
restricted securities that the Adviser determines are illiquid based on
guidelines approved by the Board of Directors of the Fund. The Portfolio may use
high-quality money market investments or short-term bonds to reduce downside
volatility during uncertain or declining market conditions and, for temporary
defensive purposes, may invest in money market securities or short-term bonds
without limitation. See "Temporary Defensive Positions" for a fuller
description. The Portfolio may purchase securities on a when-issued or delayed
delivery basis. See "Risk Factors" and "Glossary of Permitted Investments" for
additional information.
PBHG SELECT EQUITY FUND
The Select Equity Fund, a diversified portfolio, seeks long-term growth of
capital. The Portfolio will normally be substantially invested in equity
securities (including ADRs and foreign equity securities). The equity securities
in which the Portfolio will invest are common stocks, warrants and rights to
purchase common stocks, preferred stocks and securities that are convertible
into or exchangeable for common stocks. The Portfolio may invest in convertible
debt securities rated investment grade by an NRSRO (i.e., within one of the four
highest rating categories). Normally, the Portfolio will purchase
exchange-traded and over-the-counter equity securities, including foreign
securities traded in the United States. The Adviser will consider the diversity
of industries in choosing investments for the Portfolio.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in common stocks of a limited number of companies that, in the
Adviser's opinion, have a strong earnings growth outlook and potential for
capital appreciation. Normally, the Portfolio's investments will be limited to a
relatively small number of stocks (e.g., no more than 30 stocks) of small,
medium and large capitalization companies. Because the Portfolio focuses on a
small number of stocks, the impact of a change in value of a stock holding may
be magnified.
The Portfolio may invest up to 10% of its net assets in restricted securities
and securities of foreign issuers traded
12
<PAGE>
outside the United States and Canada and, for hedging purposes only, may
purchase and sell options on stocks or stock indices. The Portfolio may also
invest up to 15% of its net assets in illiquid securities, but will not invest
more than 5% of its net assets in restricted securities that the Adviser
determines are illiquid based on guidelines approved by the Board of Directors
of the Fund. The Portfolio may use high-quality money market investments or
short-term bonds to reduce downside volatility during uncertain or declining
market conditions and, for temporary defensive purposes, may invest in money
market securities or short-term bonds without limitation. See "Temporary
Defensive Positions" for a fuller description. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. See "Risk Factors" and
"Glossary of Permitted Investments" for additional information.
PBHG CORE GROWTH FUND
The Core Growth 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 a diversified portfolio of equity securities (i.e.,
common stocks, preferred stocks, rights, warrants and securities convertible
into or exchangeable for common stocks) of companies, without regard to market
capitalization, that are believed by the Adviser to have superior long-term
growth prospects and potential for long-term capital appreciation.
The Adviser seeks to invest in companies poised for rapid growth that have an
historical record of above-average earnings growth, demonstrate the ability to
sustain strong earnings growth, and operate in industries or markets that may be
experiencing increased demand for their products or services. Such companies may
include ones that the Adviser has invested in or believes are good prospects for
certain of its other Portfolios. The Adviser will consider diversity of
industries in choosing investments for the Portfolio and will not limit the
number of small, medium and large capitalization companies in which the
Portfolio will invest.
The Portfolio will normally be as fully invested as practicable in common stocks
and investment grade securities convertible into common stocks (i.e., within one
of the four highest rating categories by an NRSRO). The Portfolio also may
invest up to 5% of its assets in warrants and rights to purchase common stocks.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers (including ADRs) and forward foreign currency exchange contracts, and
may invest up to 15% of its net assets in illiquid securities, but will not
invest more than 10% of its net assets in restricted securities. The Portfolio
may use high-quality money market investments or short-term bonds to reduce
downside volatility during uncertain or declining market conditions and, for
temporary defensive purposes, may invest in money market securities or
short-term bonds without limitation. See "Temporary Defensive Positions" for a
fuller description. The Portfolio may purchase securities on a when-issued or
delayed delivery basis. See "Risk Factors" and "Glossary of Permitted
Investments" for additional information.
PBHG LIMITED FUND
The Limited Fund, a diversified portfolio, seeks long-term capital appreciation.
Under normal conditions, the Portfolio will invest primarily in a diversified
portfolio of equity securities (i.e., common stocks, preferred stocks, rights,
warrants and securities convertible into or exchangeable for common stocks) of
companies, with smaller market capitalizations or annual revenues of up to $250
13
<PAGE>
million, that are believed by the Adviser to have superior long-term growth
prospects and potential for long-term capital appreciation. The average and
median market capitalizations of holdings in the Portfolio may, however,
fluctuate over time as a result of market valuation levels and the availability
of specific investment opportunities. In addition, the Portfolio may continue to
hold securities of companies whose market capitalizations or revenues grow above
$250 million subsequent to purchase, if such companies continue to satisfy the
other investment policies of the Portfolio.
The Portfolio seeks to invest in smaller capitalization companies poised for
rapid and dynamic growth. In selecting holdings for the Portfolio, the Adviser
focuses on companies that possess exceptional or strong historical growth
characteristics and whose trend of earnings and stock prices are expected by the
Adviser to grow faster than those of the U.S. stock market as a whole. Dividend
income will not be considered in selecting holdings for the Portfolio.
The securities of smaller companies are usually less actively followed by
analysts and may be undervalued by the market, which can provide significant
opportunities for capital appreciation. However, the securities of such smaller
companies may also involve greater risks and may be subject to more volatile
market movements than securities of larger, more established companies. See
"Risk Factors" for more information about smaller company securities.
The Portfolio will normally be as fully invested as practicable in common stocks
and investment grade securities convertible into common stocks (i.e., within one
of the four highest rating categories by an NRSRO). The Portfolio also may
invest up to 5% of its assets in warrants and rights to purchase common stocks.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers (including ADRs) and forward foreign currency exchange contracts, and
may invest up to 15% of its net assets in illiquid securities, but will not
invest more than 10% of its net assets in restricted securities. The Portfolio
may also engage in securities lending. The Portfolio may use high-quality money
market investments or short-term bonds to reduce downside volatility during
uncertain or declining market conditions and, for temporary defensive purposes,
may invest in money market securities or short-term bonds without limitation.
See "Temporary Defensive Positions" for a fuller description. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. See "Glossary of
Permitted Investments" for additional information.
PBHG LARGE CAP 20 FUND
The Large Cap 20 Fund, a non-diversified portfolio, seeks long-term growth of
capital. The Portfolio will normally be substantially invested in equity
securities (including ADRs and foreign equity securities). The equity securities
in which the Portfolio will invest are common stocks, warrants and rights to
purchase common stocks, and debt securities and preferred stock that are
convertible into common stocks. The Portfolio may invest in convertible debt
securities rated investment grade by an NRSRO (i.e., within one of the four
highest rating categories). The Adviser will consider the diversity of
industries in choosing investments for the Portfolio.
Under normal market conditions, the Portfolio will invest substantially all of
its assets in equity securities of a limited number (i.e., no more than 20
issuers) of large capitalization companies that, in the Adviser's opinion, have
a strong earnings growth outlook and potential for capital appreciation. Such
large companies have
14
<PAGE>
market capitalization in excess of $1 billion. Because the Portfolio
focuses on equity securities of a small number of companies, the impact of a
change in value of a single stock holding may be magnified. Although the Fund is
classified as a non-diversified investment company under the Investment Company
Act of 1940, the Fund 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 Fund'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 Fund'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 Portfolio may invest up to 10% of its net assets in restricted securities
and securities of foreign issuers traded outside the United States and Canada
and, for hedging purposes only, may purchase and sell options on stocks or
stock indices. The Portfolio may also invest up to 15% of its net assets in
illiquid securities, but will not invest more than 5% of its net assets in
restricted securities that the Adviser determines are illiquid based on
guidelines approved by the Board of Directors of the Fund. The Portfolio may
also engage in securities lending. The Portfolio may use high-quality money
market investments or short-term bonds to reduce downside volatility during
uncertain or declining market conditions and, for temporary defensive purposes,
may invest in money market securities or short-term bonds without limitation.
See "Temporary Defensive Positions" for a fuller description. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. See "Risk
Factors" and "Glossary of Permitted Investments" for additional information.
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;
Environmental Services - solid waste disposal, hazardous waste disposal,
remediation services and environmental testing;
15
<PAGE>
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. See "Risk Factors" and "Glossary of
Permitted Investments" for additional information.
- -------------------------------------
PBHG VALUE FUNDS
- -------------------------------------
PBHG LARGE CAP VALUE FUND
The Large Cap Value Fund, a diversified portfolio, seeks long-term growth of
capital and income. Current income is a secondary objective. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in a
diversified portfolio of equity securities (i.e., common stocks, preferred
stocks, rights, warrants and securities convertible into or exchangeable for
common stocks) of large capitalization companies which, in the opinion of the
Adviser and Value Investors, are undervalued or overlooked by the market. Such
large companies have market capitalizations in excess of $1 billion at the time
of purchase.
In selecting investments for the Portfolio, the Adviser and Value Investors
emphasize fundamental investment value and consider the following factors, among
others, in identifying and analyzing a security's fundamental value: the
relationship of a company's potential earnings power to the current market price
of its stock; continuing dividend income and the potential for increasing
dividend growth; a strong balance sheet with low financial leverage; low
price/earnings ratio relative to either that company's historical results or the
current ratios for other similar companies; and potential for favorable business
developments. The Portfolio may invest in equity securities of companies that
are considered to be financially sound and attractive investments based on their
long-term operations which may be experiencing temporary earnings declines due
to adverse economic conditions that may be company or industry specific or due
to unfavorable publicity. The Portfolio may invest in such companies when the
Adviser and Value Investors believe that those companies will react positively
to changing economic conditions or that
16
<PAGE>
such companies have taken or are expected to take actions designed to
return their earnings to historical levels or otherwise increase the market
price of their securities.
The equity securities in which the Portfolio invests normally will be traded in
the United States or Canada on a registered securities exchange or established
over-the-counter market. The Portfolio may invest up to 15% of its total asset
in securities of foreign issuers, including ADRs, and may also invest up to 15%
of its net assets in restricted or illiquid securities. The Portfolio may also
utilize futures contracts (i.e., purchase and sell futures contracts) to the
extent that (i) aggregate initial margin deposits to establish other than "bona
fide hedging" positions do not exceed 5% of the Portfolio's net assets and (ii)
the total market value of securities underlying all futures contracts does not
exceed 50% of the value of the Portfolio's total assets. The Portfolio may also
engage in securities lending. The Portfolio may use high-quality money market
investments or short-term bonds to reduce downside volatility during uncertain
or declining market conditions. For temporary defensive purposes, the Portfolio
may invest in money market securities or short-term bonds without limitation.
See "Temporary Investments" for a fuller description. The Portfolio may purchase
securities on a when-issued or delayed delivery basis.
The use of a valuation approach may result in investment selections that may be
out-of-favor or counter to those of other investors. However, such an approach
may also produce significant capital appreciation. See "Risk Factors" and
"Glossary of Permitted Investments" for additional information.
PBHG MID-CAP VALUE FUND
The Mid-Cap Value Fund, a diversified portfolio, seeks to achieve
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, by investing in common stocks and other equity
securities of companies with market capitalizations in the range of companies
represented in the Standard & Poor's Mid-Cap 400 Index ("S&P 400"), which are
considered to be relatively undervalued based on certain proprietary measures of
value. The current market capitalization of companies represented in the S&P 400
is typically between $200 million and over $5 billion. It is expected that
securities purchased by the Portfolio will typically exhibit lower
price/earnings ratios than the average of those in the S&P 400. Under normal
circumstances, the Portfolio will be structured taking into account the economic
sector weighings of the S&P 400 with the Portfolio's sector weightings normally
within 5% of the sector weightings of that Index.
In selecting investments for the Portfolio, the Adviser and Value Investors
emphasize fundamental investment value and consider the following factors, among
others, in identifying and analyzing a security's fundamental value and capital
appreciation potential: 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 trade name or
niche market position; sufficient resources for expansion; capability of
management; and favorable overall business prospects. The Portfolio may invest
in securities of companies that are considered to be financially sound and
attractive investments based on their operating history, but which may be
experiencing temporary earnings declines due to adverse economic conditions that
may be company or industry specific or due to unfavorable publicity. The
Portfolio may invest in such companies when the Adviser and Value Investors
believe that those
17
<PAGE>
ompanies will react positively to changing economic conditions or that such
companies have taken or are expected to take actions designed to improve their
financial fundamentals or to otherwise increase the market price of their
securities. The use of a valuation approach may result in investment selections
that may be out-of-favor or counter to those of other investors. However, such
an approach may also produce significant capital appreciation.
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities (i.e., common stocks, preferred stocks,
warrants and securities convertible into or exchangeable for common stocks) of
undervalued medium capitalization issuers. The equity securities in which the
Portfolio invests normally will be traded in the United States or Canada on a
registered securities exchange or established over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers, including ADRs and other similar instruments. The Portfolio may also
utilize futures contracts (i.e., purchase and sell futures contracts) to the
extent that (i) aggregate initial margin deposits to establish other than "bona
fide hedging" positions do not exceed 5% of the Portfolio's net assets and (ii)
the total market value of securities underlying all futures contracts does not
exceed 50% of the value of the Portfolio's total assets. In addition, the
Portfolio may invest up to 15% of its net assets in restricted or illiquid
securities. This limitation does not include any Rule 144A security that has
been determined to be liquid pursuant to procedures established by the Board.
The Portfolio may also engage in securities lending. The Portfolio may use
high-quality money market investments or short-term bonds to reduce downside
volatility during uncertain or declining market conditions and, for temporary
defensive purposes, may invest in money market securities or short-term bonds
without limitation. See "Temporary Defensive Positions" below for a fuller
description. In addition, the Portfolio may purchase securities on a when-issued
or delayed delivery basis. See "Risk Factors" and "Glossary of Permitted
Investments" for additional information.
PBHG SMALL CAP VALUE FUND
The Small Cap Value Fund, a diversified portfolio, seeks to achieve
above-average total return over a market cycle of three to five years,
consistent with reasonable risk, by investing primarily in a diversified
portfolio of common stocks of small companies with market capitalizations in the
range of companies represented in the Russell 2000 Index, which are considered
to be relatively undervalued based on certain proprietary measures of value.
The current market capitalization of companies represented in the Russell 2000
Index is typically between $57 million and $610 million. It is expected that
securities purchased by the Portfolio will typically exhibit lower
price/earnings and price/book value ratios than the average of those in the
Russell 2000 Index. Under normal circumstances, the Portfolio will be structured
taking into account the economic sector weightings of the Russell 2000 Index,
with the Portfolio's sector weightings normally within 5% of the sector
weightings of that Index.
In selecting investments for the Portfolio, the Adviser and Value Investors
emphasize fundamental investment value and consider the following factors, among
others, in identifying and analyzing a security's fundamental value: the
relationship of a company's potential earnings power to its current stock price;
current dividend income and the potential for current dividends; low
price/earnings ratio relative to other similar companies; strong competitive
advantages, including a recognized brand or
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trade name or niche market position; sufficient resources for expansion;
capability of management; and favorable overall business prospects. The
Portfolio may invest in common stocks of companies that are considered to be
financially sound and attractive investments based on their operating history,
but which may be experiencing temporary earnings declines due to adverse
economic conditions that may be company or industry specific or due to
unfavorable publicity. The Portfolio may invest in such companies when the
Adviser and Value Investors believe that those companies will react positively
to changing economic conditions or that such companies have taken or are
expected to take actions designed to improve their financial fundamentals or to
otherwise increase the market price of their securities. The use of a valuation
approach may result in investment selections that may be out-of-favor or
contrary to those of other investors. However, such an approach may also produce
significant capital appreciation.
In addition to the Portfolio's primary investment (i.e., under normal market
conditions, at least 65% of its total assets will be invested in common stocks
of undervalued small capitalization companies), the Portfolio may also invest in
other equity securities (i.e., preferred stocks, warrants and securities
convertible into or exchangeable for common stocks) of such small capitalization
issuers. The Portfolio may also utilize futures contracts (i.e., purchase and
sell futures contracts) to the extent that (i) aggregate initial margin deposits
to establish other than "bona fide hedging" positions do not exceed 5% of the
Portfolio's net assets and (ii) the total market value of securities underlying
all futures contracts does not exceed 50% of the value of the Portfolio's total
assets. In addition, the Portfolio may invest up to 15% of its net assets in
restricted or illiquid securities. This limitation does not include any Rule
144A security that has been determined to be liquid pursuant to procedures
established by the Board. The Portfolio may also engage in securities lending.
The Portfolio may use high-quality money market investments or short-term bonds
to reduce downside volatility during uncertain or declining market conditions
and, for temporary defensive purposes, may invest in money market securities or
short-term bonds without limitation. See "Temporary Defensive Positions" below
for a fuller description.
The securities in which the Portfolio invests normally will be traded in
the United States or Canada on a registered securities exchange or established
over-the-counter market. The Portfolio may invest up to 15% of its total asset
in securities of foreign issuers, including ADRs and other similar instruments.
In addition, the Portfolio may purchase securities on a when-issued or delayed
delivery basis. 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 trade name or niche market position; sufficient resources
for expansion;
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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. See "Risk Factors" and "Glossary of Permitted Investments" for
additional information.
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PBHG SPECIALTY FUNDS
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PBHG INTERNATIONAL FUND
The International Fund, a diversified portfolio, seeks to provide long-term
capital appreciation by investing primarily in a diversified portfolio of equity
securities of non-U.S. issuers. Country selection is a significant part of the
investment process. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in securities of issuers in at least
three countries other than the United States. The Portfolio may invest more than
25% of its total assets in the securities of issuers whose principal activities
are in specific countries or geographic regions, including emerging markets. The
term "emerging markets" applies to any country which is generally considered to
be an emerging or developing country by the international financial community.
Under normal circumstances, the Portfolio's assets will be fully invested in the
following equity securities of non-U.S. companies: common stocks, securities
convertible into or exchangeable for common stocks, preferred stocks, warrants
and rights to subscribe to common stocks. The Portfolio may purchase securities
of foreign issuers sold in foreign markets, on United States registered
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exchanges, in the over-the-counter market, or in the form of sponsored or
unsponsored ADRs or Global Depositary Receipts. The Portfolio's investments in
equity securities are not based on company size and can range from small
capitalization companies to large, established companies.
The Portfolio generally will not hedge its currency exposure, since currency
considerations are an important part of the Portfolio's country and company
selection process. Nevertheless, the Portfolio may on occasion enter into
forward foreign currency contracts as a hedge against possible variations in
foreign exchange rates or to hedge a specific security transaction or portfolio
position. (A forward foreign currency contract is a commitment to purchase or
sell a specified currency, at a specified future date, at a specified price.)
In addition, when, in the opinion of the Adviser or Murray Johnstone, market
conditions so warrant, the Portfolio may invest, without limitation, in U.S. or
non-U.S. money market securities and short-term debt securities, including
securities issued or guaranteed by U.S. or non-U.S. governments or the agencies
or instrumentalities of such governments, and securities issued by supranational
agencies. Such securities will be of comparable quality to U.S. securities rated
in one of the four highest rating categories by an NRSRO.
Under normal market conditions, the Portfolio expects to be fully invested in
the equity securities described above. However, it may invest up to 15% of its
total assets in: swaps, options on securities, non-U.S. indices and currencies,
and futures contracts, including stock index futures contracts, and options on
futures contracts. The Portfolio is permitted to acquire floating and variable
rate debt securities, when-issued securities and illiquid and restricted
securities. The Portfolio will not invest more than 15% of its net assets in
illiquid securities. The Portfolio may invest in common stocks of closed-end
investment companies that invest primarily in international common stocks. If
the Portfolio invests in closed-end investment companies, the Portfolio's
shareholders will bear not only their proportionate share of the expenses of the
Portfolio (including fees of the Adviser), but also will indirectly bear similar
expenses of the underlying closed-end fund. The Portfolio may also engage in
securities lending. The Portfolio may use high-quality money market investments
or short-term bonds to reduce downside volatility during uncertain or declining
market conditions and, for temporary defensive purposes, may invest in money
market securities or short-term bonds without limitation. See "Temporary
Defensive Positions" for a fuller description. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. See "Risk Factors" and
"Glossary of Permitted Investments" for additional information.
PBHG CASH RESERVES FUND
The Cash Reserves Fund, a diversified portfolio, seeks to preserve principal
value and maintain a high degree of liquidity while providing current income.
Under normal market conditions the Portfolio invests in obligations denominated
in U.S. dollars consisting of: (i) commercial paper issued by U.S. and foreign
issuers rated in one of the two highest rating categories by any two NRSROs at
the time of investment, or, if not rated, determined by the Adviser or
Wellington Management to be of comparable quality; (ii) obligations (including
certificates of deposit, time deposits, bank notes and bankers' acceptances) of
U.S. savings and loan and thrift institutions, U.S. commercial banks (including
foreign branches of such banks), and U.S. and foreign branches of foreign banks,
provided that such institutions (or, in the case of a branch, the parent
institution) have total
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assets of $500 million or more as shown on their last published financial
statements at the time of investment; (iii) short-term corporate obligations of
U.S. and foreign issuers with a remaining term of not more than one year of
issuers with commercial paper of comparable priority and security meeting the
above ratings; (iv) U.S. Treasury obligations and obligations issued or
guaranteed as to principal and interest by the agencies or instrumentalities of
the U.S. government; (v) securities issued by foreign governments, including
Canadian and Provincial Government and Crown Agency Obligations; (vi) short-term
obligations issued by state and local governmental issuers which are rated at
the time of investment by at least two NRSROs in one of the two highest
municipal bond rating categories, and carry yields that are competitive with
those of other types of money market instruments of comparable quality; and
(vii) repurchase agreements involving any of the foregoing obligations. The
Portfolio complies with regulations of the Securities and Exchange Commission
(the "SEC") applicable to money market funds. These regulations impose certain
quality, maturity and diversification restraints on investments. Under these
regulations, the Portfolio must maintain a dollar-weighted average portfolio
maturity of 90 days or less and generally, may invest only in securities with
maturities of 397 days or less. The purchase of single rated or unrated
securities by the Adviser or Wellington Management is subject to the approval or
ratification by the Board of Directors.
It is a fundamental policy of the Portfolio to use its best efforts to maintain
a constant net asset value of $1.00 per share. There can be no assurance that
the Portfolio will be able to maintain a net asset value of $1.00 per share on a
continuing basis. The Portfolio may invest up to 10% of its net assets in
illiquid securities. However, restricted securities, including Rule 144A
securities and Section 4(2) commercial paper, that meet the criteria established
by the Board of Directors of the Fund will be considered liquid. Rule 144A
securities are unregistered securities that may be resold only to "qualified
institutional buyers." Investments in Rule 144A securities could have the effect
of increasing the level of the Portfolio's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities. In addition, the Portfolio may invest in U.S. Treasury STRIPS.
See "Risk Factors" and "Glossary of Permitted Investments" for additional
information.
PBHG TECHNOLOGY & COMMUNICATIONS FUND
The Technology & Communications Fund, a diversified portfolio, seeks
long-term growth of capital. Current income is incidental to the Portfolio's
objective. Under normal market conditions, the Portfolio will invest at least
65% of its total assets in common stocks of companies which rely extensively on
technology or communications in their product development or operations, or
which are expected to benefit from technological advances and improvements, and
that may be experiencing exceptional growth in sales and earnings driven by
technology- or communications-related products and services.
Such technology and communications companies may be in many different industries
or fields, including computer software and hardware, electronic components and
systems, network and cable broadcasting, telecommunications, mobile
communications, satellite communications, defense and aerospace, transportation
systems, data storage and retrieval, biotechnology and medical, and
environmental. As a result of this focus, the Portfolio offers investors the
significant growth potential of companies that may be responsible for
breakthrough products or technologies or that are
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positioned to take advantage of cutting-edge developments.
The Portfolio will normally be fully invested in common stocks (including ADRs)
of such technology and communications companies, but also may invest in warrants
and rights to purchase common stocks and debt securities and preferred stocks
convertible into or exchangeable for common stocks. Stock selections will not be
based on company size, but rather on an assessment of a company's fundamental
prospects. As a result, the Portfolio's stock holdings can range from small
companies developing new technologies or pursuing scientific breakthroughs to
large, established firms with track records in developing and marketing such
scientific advances.
Normally, the Portfolio will purchase only securities traded in the U.S. or
Canada on registered exchanges or in the over-the-counter market. The Portfolio
may also invest, in the aggregate, up to 10% of its net assets in restricted
securities and securities of foreign issuers traded outside the U.S. and Canada
and, for hedging purposes only, may purchase and sell options on stocks or stock
indices. The Portfolio also may invest up to 15% of its net assets in illiquid
securities. The Portfolio may use high-quality money market investments or
short-term bonds to reduce downside volatility during uncertain or declining
market conditions and for temporary defensive purposes, may invest in money
market securities or short-term bonds without limitation. See "Temporary
Defensive Positions" for a fuller description. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. See "Risk Factors" and
"Glossary of Permitted Investments" for additional information.
PBHG STRATEGIC SMALL COMPANY FUND
The Strategic Small Company Fund, a diversified portfolio, seeks growth of
capital. Under normal market conditions, the Portfolio will invest at least 65%
of its total assets in a diversified portfolio of equity securities (as
previously defined herein) of small capitalization companies. Such small
companies have market capitalizations or annual revenues of up to $750 million
at the time of purchase. The Portfolio may continue to hold securities of
companies whose market capitalization or revenues grow above that level if such
companies continue to satisfy the other investment policies of the Portfolio.
In selecting investments for the Portfolio, the Adviser or Value Investors may
emphasize securities poised for rapid and dynamic growth ("growth securities")
or securities that are undervalued or overlooked by the market ("value
securities") depending on the views of the Adviser and Value Investors of
current economic or market conditions and their long-term investment outlook.
The Portfolio is flexibly and strategically managed so that depending on the
views of the Adviser and Value Investors of economic or market conditions they
will adjust the mix of growth and value securities held by the Portfolio.
Consequently, at times it may be more heavily invested in growth securities and
at other times it may be more heavily invested in value securities.
Normally, the Portfolio will purchase only securities traded in the United
States or Canada on registered exchanges or in the over-the-counter market. The
Portfolio may invest up to 15% of its total assets in securities of foreign
issuers (including ADRs), and may invest up to 15% of its net assets in
restricted or illiquid securities. The Portfolio may also engage in securities
lending. The Portfolio may use high-quality money market investments or
short-term bonds to reduce downside volatility during uncertain or declining
market conditions and, for temporary defensive purposes, may invest in money
market securities or
23
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short-term bonds without limitation. See "Temporary Defensive Positions"
for a fuller description. The Portfolio may purchase securities on a when-issued
or delayed delivery basis. 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.
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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 quality 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 strong 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 that generally requires it to sell any portfolio security
that it believes has become overvalued relative to the market. Sales of
portfolio securities are primarily triggered by the relative change in
price/earnings ratio. Adverse changes in other key value elements are, of
course, factors that would also trigger a sale. Of course, there can be no
assurance that use of these techniques will be successful, even over the long
term.
INVESTMENT PROCESS OF MURRAY JOHNSTONE
The investment process of Murray Johnstone, like that of the Adviser, is both
quantitative and fundamental. In seeking to identify attractive investment
opportunities for the International Fund, Murray
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Johnstone starts by determining the countries or geographic regions that,
on the basis of its model criteria, can provide the best investment
opportunities for the International Fund. Murray Johnstone's criteria for
country selection incorporates twenty factors that are used to score and rank
each market. Following the creation of this investment universe, Murray
Johnstone uses its strong fundamental research capabilities to identify
individual companies having superior growth records and expectations, sound
balance sheets and high cash flow generation. After this identification process,
each company's investment value is evaluated by taking into account such factors
as relative price performance, upward earnings estimate revisions, improving
balance sheets and strength of management. Currency considerations play a part
in both country and company selection. Since the companies in which the
International Fund invests may experience greater price volatility than a
domestic stock portfolio, it is important that shareholders of the International
Fund maintain a long-term investment perspective. Of course, there can be no
assurance that the 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 and may lower Portfolio performance. It is expected that under
normal market conditions, the annual portfolio turnover rates will not exceed
500% for the New Opportunities Fund and 300% for the Focused Value Fund. The
portfolio turnover rate for the fiscal year or period ended March 31, 1998 for
each of the other Portfolios is specified in the Financial Highlights table.
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 a sub-adviser, as appropriate, determines that
market conditions warrant, each Portfolio may invest up to 100% of its assets in
cash and money market instruments (consisting of securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; certificates of
deposit, time deposits and bankers' acceptances issued by banks or savings and
loan associations having net assets of at least $500 million as stated on their
most recently published financial statements; commercial paper rated in one of
the two highest rating categories by at least one NRSRO; repurchase agreements
involving such securities; and, to the extent permitted by applicable law and
each Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent a Portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective. See "Glossary of Permitted Investments" and the Statement
of Additional Information for additional information.
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RISK FACTORS
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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 each
Portfolio (other than the Cash Reserves Fund) may be more suitable for long-term
investors who can bear the risk of these fluctuations. The Growth Fund, Emerging
Growth Fund, Limited Fund, Small Cap Value Fund and Strategic Small Company Fund
invest extensively in small capitalization companies. The Mid-Cap Value Fund
invests extensively in medium capitalization companies. In certain cases, the
Core Growth Fund, Select Equity Fund and Technology & Communications Fund invest
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.
OVER-THE-COUNTER MARKET
Each Portfolio (except the Cash Reserves Fund) 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 the Portfolios were to dispose of such a stock,
they 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 AND EMERGING MARKETS
Each of the Portfolios may invest in foreign equity securities. 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
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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.
The International Fund's investments in emerging markets may be considered
speculative, and therefore may offer higher potential for gains and losses than
investments in developed markets of the world. With respect to any emerging
country, there may be greater potential for nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) which could affect
adversely the economies of such countries or the value of the International
Fund's investments in those countries. In addition, it may be difficult to
obtain and enforce a judgment in the courts of such countries. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade.
INVESTMENTS IN TECHNOLOGY COMPANIES
Each Portfolio (except the Cash Reserves Fund) 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. Although the Technology & Communications
Fund will invest primarily in the securities of technology companies operating
in various industries, many of these industries share common characteristics.
Therefore, an event or issue affecting one such industry may have a significant
impact on these other, related industries and, thus, may affect the value of the
Technology & Communications Fund's investments in technology companies. For
example, the technology companies in which the Technology & Communications Fund
invests 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 of the Portfolios may utilize futures contracts, and may write and purchase
call and put options to equitize cash, minimize price fluctuations in its
holdings or adjust its market position. 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 trading. 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-the-counter
option or 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
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Permitted Investments" and the Statement of Additional Information.
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INVESTMENT LIMITATIONS
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The investment objectives of each Portfolio and the investment limitations set
forth herein and certain investment limitations contained in the Statement of
Additional Information are fundamental policies of each Portfolio. A Portfolio's
fundamental policies cannot be changed without the consent of the holders of a
majority of the Portfolio's outstanding shares.
A Portfolio, as a fundamental policy, may not:
1. Except for the Large Cap 20 Fund and the Focused Value 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 Cash Reserves Fund, this restriction applies to 75% of each Portfolio's
total assets.
2. 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.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of each Portfolio's total assets (or
33 1/3% of the value of each of the Growth, New Opportunities Mid-Cap Value,
Small Cap Value and Focused Value Funds' total assets). 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.
The foregoing percentages apply at the time of the purchase of a security.
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HOW TO PURCHASE FUND SHARES
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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.
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
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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, each of the sub-advisers 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. Shares of the PBHG Limited Fund are currently offered only to
existing shareholders of the PBHG Class shares of the Portfolio. The PBHG
Limited Fund may recommence offering its shares to new investors in the future,
provided that the Board of Directors determines that doing so would be in the
best interest of the Portfolio and its shareholders.
MINIMUM INVESTMENT
The minimum initial investment in each Portfolio (other than the Limited Fund,
New Opportunities Fund and Strategic Small Company Fund) is $2,500 for regular
accounts and $2,000 for traditional or Roth IRAs. The minimum initial investment
in the New Opportunities Fund is $10,000 for regular accounts and $2,000 for
traditional or Roth IRAs. The minimum initial investment in the Limited Fund and
the Strategic Small Company Fund is $5,000 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
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1-800-433-0051. THE MINIMUM TELEPHONE PURCHASE IS $1,000, AND THE MAXIMUM IS
FIVE TIMES THE NET ASSET VALUE OF 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 2:00 p.m. Eastern time for the Cash Reserves Fund and
4:00 p.m. Eastern time for all other Portfolios 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 2:00 p.m. Eastern time for the Cash Reserves Fund and
4:00 p.m. Eastern time for all other Portfolios. 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 your order before 2:00 p.m. Eastern time
for the Cash Reserves Fund and 4:00 p.m. Eastern time for all other Portfolios
and
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(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.
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SHAREHOLDER SERVICES
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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.
(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
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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, if you own shares of any
Portfolio other than the Cash Reserves Fund, you are limited to four (4)
exchanges annually from such Portfolio to the Cash Reserves Fund. 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' written 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.
(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
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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
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Redemption orders received by the Transfer Agent prior to 2:00 p.m. Eastern
time for the Cash Reserves Fund and 4:00 p.m. Eastern time for each of the other
Portfolios 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 2:00
p.m. Eastern time for the Cash Reserves Fund and 4:00 p.m. Eastern time for each
other Portfolio and (ii) promptly transmit the order to the Transfer Agent. See
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"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
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.
CHECK WRITING (CASH RESERVES FUND ONLY)
Check writing service is offered free of charge to shareholders of the Cash
Reserves Fund. If you have an account balance of $5,000 or more, you may redeem
shares by writing checks on your account for $250 or more. To establish this
privilege, please call 1-800-433-0051 to request a signature card. Once you have
signed and returned a signature card, you will receive a supply of checks. A
check may be made payable to any person, and your account will continue to earn
dividends until the check clears. Because of the difficulty of determining in
advance the exact value of your account, you may not use a check to close your
account. Your account will be charged a fee for stopping payment of a check upon
your request, or if the
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check cannot be honored because of insufficient funds or other valid reasons.
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 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.
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DETERMINATION OF NET ASSET VALUE
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The net asset value per share of each Portfolio, other than the Cash
Reserves Fund, 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, other than the Cash Reserves Fund, is listed under PBHG
in the mutual fund section of most major daily newspapers, including The Wall
Street Journal. Each Portfolio's assets (other than the Cash Reserves Fund) 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
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close of the foreign markets, assets may be valued by another method that
the Board of Directors believes accurately reflects fair value.
The Cash Reserves Fund values its portfolio securities using the amortized cost
method of valuation, approximating market value. Net asset value per share is
determined daily as of 2:00 p.m. Eastern time on each Business Day.
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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. For Portfolios other than the Cash Reserves Fund,
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 "current yield" of the Cash Reserves Fund refers to the net change
(excluding capital changes and income other than investment income) in the
Portfolio 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" (also called "effective compound yield") is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this assumed
reinvestment.
The total return of each Portfolio other than the Cash Reserves Fund 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 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
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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.
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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.
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
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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. The International Fund expects to be able to treat
shareholders as having paid their proportionate share of such foreign taxes.
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GENERAL INFORMATION
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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 Prospectus (as supplemented), the Fund has an authorized
capitalization of 9.2 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. Each Portfolio's expense ratios are disclosed
under "Financial Highlights" in this Prospectus.
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.
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The Adviser currently has discretionary management authority with respect
to approximately $16 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: 0.85% of each of the Growth, Emerging
Growth, Select Equity, Core Growth, Large Cap 20, Mid-Cap Value, Focused Value
and Technology & Communications Funds' average daily net assets; 0.75% of the
Large Cap Growth Fund's average daily net assets; 0.65% of the Large Cap Value
Fund's average daily net assets; 1.00% of each of the Limited, New
Opportunities, Small Cap Value, International and Strategic Small Company Funds'
average daily net assets; and 0.30% of the Cash Reserves Fund's average daily
net assets. The investment advisory fees paid by certain of 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 1.50% of the average
daily net assets of each of the Core Growth, Limited, Large Cap 20, New
Opportunities, Large Cap Value, Mid-Cap Value, Small Cap Value, Focused Value
and Strategic Small Company Funds, and to not more than 2.25% of the average
daily net assets of the International Fund. Reimbursement by the Portfolios of
the advisory fees waived or limited and other expenses paid by the Adviser
pursuant to the Expense Limitation Agreements may be made at a later date when
the Portfolios have reached a sufficient asset size to permit reimbursement to
be made without causing the total annual expense rate of each Portfolio to
exceed 1.50% (or 2.25% for the International Fund). Consequently, no
reimbursement by a Portfolio will be made unless: (i) the Portfolio's assets
exceed $75 million; (ii) the Portfolio's total annual expense ratio is less than
1.50% (or 2.25% for the International Fund); and (iii) the payment of such
reimbursement was approved by the Board of Directors on a quarterly basis.
For the fiscal year ended March 31, 1998, the Adviser received a fee equal to
0.85% of the Growth Fund's average daily net assets, 0.85% of the Emerging
Growth Fund's average daily net assets, 0.75% of the Large Cap Growth Fund's
average daily net assets, 0.85% of the Select Equity Fund's average daily net
assets, 0.85% of the Core Growth Fund's average daily net assets, 1.00% of the
Limited Fund's average daily net assets, 0.85% of the Large Cap 20 Fund's
average daily net assets, 0.65% of the Large Cap Value Fund's average daily net
assets, 1.00% of the International Fund's average daily net assets, 0.30% of the
Cash Reserves Fund's average daily net assets, 0.85% of the Technology &
Communications Fund's average daily net assets and 1.00% of the Strategic
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Small Company Fund's average daily net assets. As of the date of this
Prospectus, the New Opportunities and Focused Value Funds had not yet commenced
operations.
Christine M. Baxter, CFA, Portfolio Manager, has managed the Emerging Growth
Fund since its inception. Ms. Baxter has worked as an equity analyst and
portfolio manager for the Adviser since 1991. Gary L. Pilgrim, CFA has served as
the portfolio manager of the Growth Fund since its inception. Mr. Pilgrim has
served as the Chief Investment Officer for the Adviser since 1990 and also
serves as a Director of the Adviser. James D. McCall, CFA has managed the Large
Cap Growth, Large Cap 20, Core Growth and Select Equity Funds since their
inception. During the period March 1997 through May 31, 1998 Mr. McCall
co-managed the Large Cap Growth, Core Growth and Select Equity Funds. Mr. McCall
has been a portfolio manager with the Adviser since 1994. Prior to joining the
Adviser, Mr. McCall was a portfolio manager with First National Bank of
Maryland. Erin Piner has managed the PBHG Limited Fund since October 19, 1998.
Ms. Piner joined the Adviser in 1995 as an Equity Analyst. Prior to that, Ms.
Piner worked in the client services group of PaineWebber, Inc. from 1994 until
1995 and in the client services group of Kidder Peabody from 1992 until its
merger with PaineWebber, Inc. 1994. Frank P. Slattery will serve as the
portfolio manager for the New Opportunities Fund. Mr. Slattery joined the
Adviser in 1998 as an equity research analyst focusing on growth stocks. Prior
to joining the Adviser, he was a financial analyst in the Investment Banking
Energy Group of Merrill Lynch & Co. Jeffrey A. Wrona, CFA and Michael S. Hahn,
CFA have been co-portfolio managers of the PBHG Technology & Communications Fund
since May 22, 1998. Mr. Wrona holds a Master's Degree in Business Administration
and a Bachelor's Degree in Engineering from the University of Michigan. Mr.
Wrona joined the Adviser in 1997. Mr. Wrona served for seven years as a Senior
Portfolio Manager at Munder Capital Management where he co-founded Munder's
Mid-Cap Growth product and managed mutual fund and separate account portfolios.
Mr. Wrona's prior experience includes securities analysis at Drexel Burnham
Lambert. Mr. Wrona began his business career as a product design engineer with
Ford Motor Company. Mr. Hahn holds a Master's Degree in Finance from the
University of Maryland and a Bachelor's Degree from The Pennsylvania State
University. Mr. Hahn joined the Adviser in 1996. Prior to joining the Adviser,
Mr. Hahn was an Assistant Portfolio Manager for First National Bank of Maryland.
Mr. Hahn's experience also includes positions in corporate finance/accounting
for IBM-Federal Systems and residential real estate management with Southern
Management. James M. Smith, CFA, has co-managed the Strategic Small Company Fund
since its inception. Mr. Smith has over twenty years of Equity Portfolio
Management and research experience. Mr. Smith joined the Adviser in 1993. Prior
to that, Mr. Smith was Senior Vice President/Portfolio Manager at Selected
Financial Services, a registered investment advisory firm.
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 over
$4 billion in assets. In addition to sub-advising certain of the Portfolios,
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 Large Cap Value, Mid-
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Cap Value, Small Cap Value, Focused Value and Strategic Small Company Funds
pursuant to sub-advisory agreements with the Fund and the Adviser ("Sub-Advisory
Agreements"). Under each Sub-Advisory Agreement, Value Investors manages the
investments of each of those Portfolios, selects investments and places all
orders for purchases and sales of each 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 Large Cap Value, Mid-Cap Value, Small Cap Value, Focused
Value and Strategic Small Company Funds, Value Investors is entitled to receive
from the Adviser a sub-advisory fee with respect to the average daily net assets
of each Portfolio that is computed daily and paid monthly at annual rates of
0.40%, 0.50%, 0.65%, 0.40% and 0.30%, respectively.
Gary D. Haubold, CFA has managed the Mid-Cap Value and Small Cap Value Funds and
co-managed the Strategic Small Company Fund since each Portfolio's inception.
Mr. Haubold has managed the Large Cap Value Fund since December 9, 1997. Mr.
Haubold will also serve as the portfolio manager for 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.
MURRAY JOHNSTONE
Murray Johnstone, 11 West Nile Street, Glasgow, Scotland, is a U.S. registered
investment adviser that was founded in 1989 under the laws of Scotland. Murray
Johnstone is a wholly-owned subsidiary of Murray Johnstone Holdings Limited,
which together have under management approximately $7 billion in assets, as of
March 31, 1998, for institutional clients worldwide. Murray Johnstone Holdings
Limited, along with its predecessors, has been in business since 1907, and is an
indirect wholly-owned subsidiary of UAM. Murray Johnstone has been advising
open-end investment companies, employee benefit plans and institutions since
1992. For its services provided pursuant to its investment sub-advisory
agreement with the Adviser and the Fund, Murray Johnstone receives a fee from
the Adviser at an annual rate of 0.50% of the International Fund's average daily
net assets. Murray Johnstone receives no fees directly from the International
Fund.
Rodger F. Scullion, MSI and Andrew V. Preston have served as co-managers of
the International Fund since July 3, 1995. Mr. Scullion has been associated with
Murray Johnstone since November, 1992, and serves as its Managing Director,
Chief Executive Officer and Chief Investment Officer. Prior to that, Mr.
Scullion served as Investment Director of Murray Johnstone Limited. Mr. Preston
has been associated with Murray Johnstone since 1992 and serves as a Director.
Prior to that he was with Murray Johnstone Limited. He is a Director of
Yamaichi-Murray Johnstone.
WELLINGTON MANAGEMENT
Wellington Management serves as the investment sub-adviser for the Cash Reserves
Fund pursuant to a sub-advisory agreement with the Fund and the Adviser. Under
the sub-advisory
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agreement, Wellington Management manages the investments of the Portfolio,
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
agreement, Wellington Management is entitled to receive from the Adviser a fee,
computed daily and paid monthly, at the annual rate equal to 0.075% of the
Portfolio's average daily net assets up to and including $500 million and 0.020%
of the Portfolio's average daily net assets over $500 million, but subject to a
minimum annual fee of $50,000.
Wellington Management is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of March 31,
1998, Wellington had discretionary management authority with respect to
approximately $195 billion of assets. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1933 and to investment counseling clients since 1960. Wellington
Management, 75 State Street, Boston, Massachusetts 02109, is a Massachusetts
limited liability partnership, of which the following persons are managing
partners: Robert W. Doran, Duncan M. McFarland and John R. Ryan.
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 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
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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.
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.
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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.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income (exclusive of capital gains) of a
Portfolio (except the Cash Reserves Fund) 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. The Cash Reserves Fund accrues
dividends daily and pays them monthly to shareholders.
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. Coopers &
Lybrand L.L.P. 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 other than the International Fund. The Northern Trust
Company, 50 South LaSalle Street, Chicago, Illinois 60675 serves as the
custodian for the International Fund (together, the "Custodians"). The
Custodians hold cash, securities and other assets of the Fund as required by the
Investment Company Act of 1940, as amended (the "1940 Act").
25% SHAREHOLDERS
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
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The following is a description of permitted investments for certain of 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. The Portfolios may invest in convertible securities rated
investment grade by a nationally recognized statistical rating organization.
DEMAND INSTRUMENTS -- Certain instruments may involve a conditional or
unconditional demand feature which permits the holder to demand payment of
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the principal amount of the instrument. Demand instruments may include variable
amount master demand notes.
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. The International Fund
will convert currency on a spot basis, and investors should be aware of the
costs of currency conversion.
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
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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.
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 20% of the value of the
International Fund's total assets or 50% of the value of each of the other
specified Portfolio's total assets.
The International Fund may also purchase and write options to buy or sell
futures contracts. The International Fund may write options on futures only on a
covered basis. Options on futures are similar to options on securities except
that options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract, rather than actually to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option.
Each Portfolio will maintain assets sufficient to meet its obligations under
such futures 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.
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OPTIONS -- Each Portfolio, except the PBHG Cash Reserves Fund, 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 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.
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RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS -- Investments by the Cash
Reserves Fund are subject to limitations imposed under regulations adopted by
the SEC. These regulations generally require the Cash Reserves Fund to acquire
only U.S. dollar obligations maturing in 397 days or less and to maintain a
dollar-weighted average portfolio maturity of 90 days or less. In addition, the
Cash Reserves Fund may acquire only obligations that present minimal credit
risks and that are "eligible securities."
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 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.
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
49
<PAGE>
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.
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 high quality 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
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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 I0 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 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 of the obligations purchased
by the International Fund 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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[PBHG FUNDS LOGO]
The PBHG Funds, Inc.
P.O. 419534
Kansas City, MO 64141-6534
Investment Adviser:
Pilgrim Baxter & Associates, Ltd.
Distributor:
SEI Investments Distribution Co.
To open an account, receive information,
make inquiries or request literature:
1-800-433-0051
PBHG-February 8, 1999-11/98
<PAGE>
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 February 8, 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
February 8, 1999
2
<PAGE>
THE FUND
This Statement of Additional Information relates to the Fund and each of its
Portfolios. Each Portfolio is a separate series of The PBHG Funds, Inc. (the
"Fund"), which was originally incorporated in Delaware on August 2, 1985 under
the name PBHG Growth Fund, Inc. and commenced business shortly thereafter as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"). On July 21, 1992, shareholders of the Fund approved
an Agreement and Articles of Merger pursuant to which the Fund was reorganized
and merged into a new Maryland corporation, also named PBHG Growth Fund, Inc. On
September 8, 1993, the shareholders of the Fund voted to change the name of the
Fund to The Advisors' Inner Circle Fund II, Inc. On May 2, 1994, the
shareholders voted to change the Fund's name to The PBHG Funds, Inc. The
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
3
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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.
4
<PAGE>
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
5
<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.
6
<PAGE>
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.
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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
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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
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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.
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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.
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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.
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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>
41
<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
