[LOGO OMITTED]
THE PBHG FUNDS, INC.
PROSPECTUS
May 22, 2000
PBHG GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund shares or determined whether this prospectus is
truthful or complete. Anyone who tells you otherwise is committing a crime.
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AN INTRODUCTION TO THE PBHG FUNDS(R) AND THIS PROSPECTUS
The PBHG Funds, Inc. is a mutual fund that offers a convenient and economical
means of investing in professionally managed portfolios of securities, called
funds. This prospectus offers PBHG Class Shares of the PBHG Global Technology &
Communications Fund.
The Fund has a specific investment goal and specific investment strategies for
reaching that goal. Before investing, make sure the Fund's goal matches your
own. The Fund is generally designed for long-term investors, such as those
saving for retirement, or investors that want a fund that seeks to outperform
the market in which it invests over the long-term. The Fund may not be suitable
for investors who require regular income or stability of principal, or who are
pursuing a short-term investment goal, such as investing emergency reserves.
INVESTMENT ADVISER
Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter") is the investment adviser
for the Fund.
This Prospectus contains important information you should know before investing
in the Fund and as a shareholder in the Fund. This information is arranged into
different sections for easy reading and future reference. To obtain more
information about the Fund, please refer to the back cover of this Prospectus.
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CONTENTS
FUND SUMMARY
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MORE ABOUT THE FUND
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Risks & Returns ............................................. 7
THE INVESTMENT ADVISER
YOUR INVESTMENT
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Pricing Fund Shares ........................................ 13
Buying Shares .............................................. 14
Selling Shares ............................................. 15
General Policies ........................................... 16
Distribution & Taxes ....................................... 19
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PBHG GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
[GRAPHIC OMITTED] GOAL
The Fund seeks to provide investors with long-term growth of capital.
[GRAPHIC OMITTED] MAIN INVESTMENT STRATEGIES
Under normal market conditions, the Fund, a non-diversified fund, will invest at
least 65% of its total assets in common stocks of U.S. and non-U.S. companies
and American Depositary Receipts ("ADRs") of non-U.S. companies doing business
in the technology and communications sectors of the market. In addition, the
Fund is concentrated which means it will invest 25% or more of its total assets
in one or more of the industries within these sectors. These industries may
include computer software and hardware, network and cable broadcasting,
semiconductors, defense and data storage and retrieval, and biotechnology.
The Fund invests in companies that may be responsible for breakthrough products
or technologies or may be positioned to take advantage of cutting-edge
developments. These companies will be in at least three different countries, one
of which may include the U.S. Some of these countries may be considered emerging
or developing by the international finance community. The Fund's holdings may
range from smaller companies developing new technologies or pursuing scientific
breakthroughs to large, blue chip firms with established track records in
developing, using or marketing scientific advances.
Pilgrim Baxter uses its own fundamental research, computer models and
proprietary measures of growth and business momentum in managing this Fund. The
Fund may sell a security for a variety of reasons, such as a deterioration in
fundamentals or to invest in a company with more attractive growth prospects.
[GRAPHIC OMITTED] MAIN INVESTMENT RISKS
The Fund is non-diversified which means, as compared to a diversified fund, it
invests a higher percentage of its assets in a limited number of stocks in order
to achieve a potentially greater investment return than a more diversified fund.
As a result, the price change of a single security, positive or negative, has a
greater impact on the Fund's net asset value and will cause its shares to
fluctuate in value more than it would in a diversified fund.
4 PBHG GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
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The Fund is concentrated which means, compared to a non-concentrated fund, it
invests a higher percentage of its assets in specific industries within the
technology and communications sectors of the market in order to achieve a
potentially greater investment return. As a result, the economic, political and
regulatory developments in a particular industry, positive or negative, have a
greater impact on the Fund's net asset value and will cause its shares to
fluctuate more than if the Fund did not concentrate its investments.
The value of your investment in the Fund will go up and down, which means you
could lose money.
The price of the securities in the Fund will fluctuate. These price movements
may occur because of changes in the financial markets, the company's individual
situation, or industry changes. These risks are greater for foreign equity
securities and companies with smaller market capitalizations. Investments in
foreign equity securities involve risks relating to political, social and
economic developments abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject. Companies with smaller market capitalizations tend to have more limited
product lines, markets and financial resources and may be dependent on a smaller
management group than larger, more established companies.
Securities of technology and communications companies are strongly affected by
worldwide scientific and technological developments and governmental laws,
regulations and policies and, therefore, are generally more volatile than
securities of companies not dependent upon or associated with technology and
communications issues.
Investments in emerging or developing countries may be subject to extreme
volatility because, in general, these countries' economies are more
under-developed, their political structures are less stable and their financial
markets are less liquid than more developed nations.
Although the Fund strives to achieve its goal, it cannot guarantee that the goal
will be achieved.
Your investment in the Fund is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency.
[LOGO OMITTED] For more information on the Fund's investment strategies and the
associated risks, please refer to the More About the Fund section beginning on
page 7.
PBHG GLOBAL TECHNOLOGY & COMMUNIATIONS FUND 5
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[GRAPHIC OMITTED] PERFORMANCE INFORMATION
Performance information for the Fund will be presented once the Fund has
completed investment operations for a full calendar year.
[GRAPHIC OMITTED] FEES AND EXPENSES
This table summarizes the shareholder fees and annual operating expenses you
would pay as an investor in the Fund. Shareholder fees are paid directly from
your account. Annual operating expenses are paid out of the Fund's assets. Since
the Fund did not commence operations as of the date of this Prospectus, "Other
Expenses" is based on estimated amounts the Fund expects to pay during the
current fiscal year.
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FEES AND EXPENSES TABLE
Shareholder Fees None
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ANNUAL FUND OPERATING EXPENSES
Management Fees 1.50%
Distribution and/or Service (12b-1) Fees None
Other Expenses 0.50%
Total Annual Operating Expenses 2.00%
[GRAPHIC OMITTED] EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds. This example makes four
assumptions: 1) you invest $10,000 in the Fund for the time periods shown; 2)
you redeem all your shares at the end of those time periods; 3) you earn a 5%
return on your investment each year; and 4) the Fund's operating expenses remain
the same for the time periods shown. The example is hypothetical. Your actual
costs may be higher or lower.
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YOUR COST OVER
1 Year 3 Years
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$ 203 $627
PBHG GLOBAL TECHNOLOGY & COMMUNIATIONS FUND 6
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MORE ABOUT THE FUND
[LOGO OMITTED] RISKS AND RETURNS
This section takes a closer look at the main investment strategies that make up
the Fund's risk and return characteristics.
From time to time, the Fund may make investments and pursue strategies different
from those described in this Prospectus. These non-principal investments and
strategies are described in the Statement of Additional Information. The back
cover of this Prospectus explains how you can get a copy of the Statement of
Additional Information.
The Fund may invest 100% of its total assets in cash or U.S. dollar-denominated
high quality short-term debt instruments for temporary defensive purposes, to
maintain liquidity or when economic or market conditions are unfavorable for
profitable investing. These types of investments typically have a lower yield
than other longer-term investments and lack the capital appreciation potential
of equity securities, like stocks. In addition, while these investments are
generally designed to limit the Fund's losses, they can prevent the Fund from
achieving its investment goal.
The Fund is actively managed, which means the Fund's manager may frequently buy
and sell securities. Frequent trading increases the Fund's turnover rate and may
increase transaction costs, such as brokerage commissions. Increased transaction
costs could detract from the Fund's performance. In addition, the sale of Fund
securities may generate capital gains which, when distributed, may be taxable to
you.
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SECURITIES
Shares representing ownership or the right to ownership in a corporation. The
Fund may invest in the following types of securities: common and preferred
stocks, convertible securities, warrants and rights.
POTENTIAL RISKS
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Security prices fluctuate over time. Security prices may fall as a result of
factors that relate to the company, such as management decisions or lower demand
for the company's products or services.
Security prices may fall because of factors affecting companies in a number of
industries, such as increases in production costs.
Security prices may fall because of changes in the financial markets, such as
interest rates or currency exchange rate changes.
POTENTIAL RETURNS
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Securities have generally outperformed more stable investments (such as bonds
and cash equivalents) over the long term.
POLICIES TO BALANCE RISK AND RETURN
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Pilgrim Baxter maintains a long-term investment approach and focus on securities
it believes can appreciate over an extended time frame, regardless of interim
fluctuations.
Under normal circumstances, the Fund intends to remain fully invested, with at
least 65% of its total assets in securities.
Pilgrim Baxter focuses its active management on securities selection, the area
Pilgrim Baxter believes its commitment to fundamental research can most enhance
the Fund's performance.
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GROWTH SECURITIES
Securities that Pilgrim Baxter believes have or are expected to have strong
sales and earnings growth and capital appreciation potential and will grow
faster than the economy as a whole.
POTENTIAL RISKS
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See Securities.
Growth securities may be more sensitive to changes in business momentum and
earnings than other securities because they typically trade at higher earnings
multiples.
The growth securities in the Fund may never reach what Pilgrim Baxter believes
are their full value and may even go down in price.
POTENTIAL RETURNS
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See Securities.
Growth securities may appreciate faster than non-growth securities.
POLICIES TO BALANCE RISK AND RETURN
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See Securities.
In managing the Fund, Pilgrim Baxter uses its own software and research models
which incorporate important attributes of successful growth. Pilgrim Baxter
believes a key attribute of successful growth is positive business momentum as
demonstrated by earnings or revenue and sales growth, among other factors.
Pilgrim Baxter's investment process is extremely focused on companies which
exhibit positive business momentum. Pilgrim Baxter considers selling a security
when its anticipated appreciation is no longer probable, alternative investments
offer superior appreciation prospects or the risk of a decline in its market
price is too great.
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FOREIGN EQUITY SECURITIES
Securities of foreign issuers, including ADRs, EDR's and GDRs. ADRs are
certificates issued by a U.S. bank that represent a stated number of shares of a
foreign corporation that the bank holds in its vault. EDRs and GDRs are also
receipts that represent a stated number of shares of a foreign corporation, only
they are issued by a non-U.S. bank or a foreign branch of a U.S. bank. An ADR is
bought and sold in the same manner as U.S. securities and is priced in U.S.
dollars. EDRs and GDRs are generally designed for use on foreign exchanges and
are typically not priced in U.S. dollars. ADRs, EDRs and GDRs each carry most of
the risks of investing directly in foreign equity securities.
POTENTIAL RISKS
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Foreign security prices may fall due to political instability, changes in
currency exchange rates, foreign economic conditions or inadequate regulatory
and accounting standards.
These risks tend to be greater in emerging markets. As a result, the Fund's
investments in emerging markets may be considered speculative.
The adoption of the euro as the common currency of the European Economic and
Monetary Union (the "EMU") presents some uncertainties and possible risks, such
as changes in the relative strength and value of major world currencies, adverse
tax consequences, and increased price competition among and between EMU and
non-EMU countries. These uncertainties and possible risks could adversely affect
the Fund.
POTENTIAL RETURNS
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Favorable exchange rate movements could generate gains or reduce losses.
Foreign investments, which represent a major portion of the world's securities,
offer attractive potential performance and opportunities for diversification.
POLICIES TO BALANCE RISK AND RETURN
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In managing the Fund, Pilgrim Baxter uses its own software and research models.
Pilgrim Baxter seeks to invest in companies with strong growth potential in
those countries with the best investment opportunities.
Pilgrim Baxter considers selling a security when another company or country
offers superior investment opportunities, the risk associated with a particular
currency becomes too great or the security falls short of Pilgrim Baxter's
expectations.
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SMALL AND MEDIUM SIZED COMPANY SECURITIES
POTENTIAL RISKS
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Small and medium sized company securities involve greater risk and price
volatility than larger, more established companies because they tend to have
more limited product lines, markets and financial resources and may be more
dependent on a smaller management group.
POTENTIAL RETURNS
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Small and medium sized company securities may appreciate faster than those of
larger, more established companies for many reasons. For example, small and
medium sized companies tend to have younger product lines whose distribution and
revenues are still maturing.
POLICIES TO BALANCE RISK AND RETURN
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See Securities and Growth Securities.
Pilgrim Baxter focuses on small and medium sized companies with strong balance
sheets that they expect to exceed consensus earnings expectations.
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TECHNOLOGY OR COMMUNICATIONS COMPANY SECURITIES
Securities of companies that rely extensively on technology or communications in
their product development or operations or are expected to benefit from
technological advances and improvements.
POTENTIAL RISKS
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Technology or communications company securities are strongly affected by
worldwide scientific and technological developments and governmental policies,
and, therefore, are generally more volatile than companies not dependent upon or
associated with technology or communications issues.
POTENTIAL RETURNS
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Technology or communications company securities offer investors significant
growth potential because they may be responsible for breakthrough products or
technologies or may be positioned to take advantage of cutting-edge,
technology-related developments.
POLICIES TO BALANCE RISK AND RETURN
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Although the Fund will invest 25% of more of its total assets in one or more of
the industries within the technology and communications sectors, the Fund seeks
to strike a balance among the industries in which it invests in an effort to
lessen the impact of negative developments in the technology and communications
sectors.
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OTC SECURITIES
Securities not listed and traded on an organized exchange, but bought and sold
through a computer network.
POTENTIAL RISKS
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OTC securities are not traded as often as securities listed on an exchange. So,
if the Fund were to sell an OTC security, it might have to offer the security at
a discount or sell it in smaller share lots over an extended period of time.
POTENTIAL RETURNS
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Increases the number of potential investments for the Fund.
OTC securities may appreciate faster than exchange-traded securities because
they are typically securities of younger, growing companies.
POLICIES TO BALANCE RISK AND RETURN
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Pilgrim Baxter uses a highly disciplined investment process that seeks to, among
other things, identify quality investments that will enhance the Fund's
performance.
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ILLIQUID SECURITIES
Securities that do not have a ready market and cannot be easily sold, if at all,
at approximately the price that the Fund has valued them.
POTENTIAL RISKS
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The Fund may have difficulty valuing these securities precisely.
The Fund may be unable to sell these securities at the time or price it desires.
POTENTIAL RETURNS
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Illiquid securities may offer more attractive yields or potential growth than
comparable widely traded securities.
POLICIES TO BALANCE RISK AND RETURN
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The Fund may not invest more than 15% of its net assets in illiquid securities.
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[LOGO OMITTED]
THE INVESTMENT ADVISER
Pilgrim Baxter & Associates, Ltd., 825 Duportail Road, Wayne, PA 19087, is the
investment advisor for the Fund. Founded in 1982, Pilgrim Baxter currently
manages approximately $20 billion in assets for pension and profit-sharing
plans, charitable institutions, corporations, trusts, estates and other
investment companies.
As investment adviser, Pilgrim Baxter makes investment decisions for the Fund.
The Fund's Board of Directors supervises Pilgrim Baxter and establishes policies
that Pilgrim Baxter must follow in its day-to-day investment management
activities.
Pilgrim Baxter believes that discipline and consistency are important to
long-term investment success. This belief is reflected in its investment
process. Pilgrim Baxter uses a quantitative and fundamental investment process
that is extremely focused on business momentum, as demonstrated by such things
as earnings or revenues and sales growth.
Pilgrim Baxter begins its investment process by creating a universe of rapidly
growing companies that possess certain growth characteristics. That universe is
continually updated. Pilgrim Baxter then ranks each company in its universe
using propriety software and research models that incorporate attributes of
successful growth like positive earnings surprises, upward earnings estimate
revisions, and accelerating sales and earnings growth. Finally, using its own
fundamental research and a bottom-up approach to investing, Pilgrim Baxter
evaluates each company's business momentum, earnings quality and whether the
company can sustain its current growth trend. Pilgrim Baxter believes that
through this highly disciplined investment process, it is able to construct a
portfolio of investments with strong growth characteristics.
Pilgrim Baxter's decision to sell a security depends on many factors. Generally
speaking, however, Pilgrim Baxter considers selling a security when its
anticipated appreciation is no longer probable, alternative investments offer
more superior appreciation prospects, the risk of a decline in its market price
is too great or deterioration in business fundamentals occurs or is expected to
occur.
As of the date of this Prospectus, the Fund had not commenced investment
operations. As investment adviser to this Fund, Pilgrim Baxter is entitled to
receive a fee, calculated daily and payable monthly, at the annual rate of 1.50%
of the Fund's average daily net assets.
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[LOGO OMITTED] FUND MANAGER
Michael K. Ma will manage the Fund. Mr. Ma joined Pilgrim Baxter in October 1999
as a senior technology analyst. Prior to joining Pilgrim Baxter, Mr. Ma worked
for two and one-half years as an Equity Research Analyst in the
Telecommunications Services Group of Deutsche Bank Securities, Inc. Prior to
that, he worked at United States Trust Company of New York, first as a research
assistant and then after 1994 as a portfolio manager.
YOUR INVESTMENT
[LOGO OMITTED] PRICING FUND SHARES
The Fund prices its investments for which market quotations are readily
available at market value. Short-term investments are priced at amortized cost,
which approximates market value. All other investments are priced at fair value
as determined in good faith by the Fund's Board of Directors. If the Fund holds
securities quoted in foreign currencies, it translates that price into U.S.
dollars at current exchange rates. Because foreign markets may be open at
different times than the New York Stock Exchange, the price of the Fund's shares
may change on days when its shares are not available for purchase or sale.
[LOGO OMITTED] NET ASSET VALUE (NAV)
The price of the Fund's shares is based on its net asset value (NAV). The Fund's
NAV equals the value of its assets, less its liabilities, divided by the number
of its outstanding shares. Fund shares are priced every day at the close of
regular trading on the New York Stock Exchange. Fund shares are not priced on
days that the New York Stock Exchange is closed.
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[LOGO OMITTED] BUYING SHARES
You may purchase shares of the fund directly through the Fund's transfer agent.
The price per share you will pay to invest in the Fund is its net asset value
per share (NAV) next calculated after the transfer agent or other authorized
representative accepts your order. The Fund's NAV is calculated at the close of
trading on the New York Stock Exchange, normally 4:00 p.m. Eastern time, each
day the exchange is open for business. The Fund's assets are generally valued at
their market price. However, if a market price is unavailable or if the assets
have been affected by events occurring after the close of trading, the Fund's
board of directors may use another method that it believes reflects fair value.
You may also purchase shares of the Fund through certain broker-dealers or other
financial institutions that are authorized to sell you Fund shares. These
financial institutions may charge you a fee for this service in addition to the
Fund's NAV.
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MINIMUM INVESTMENTS
Initial Additional
Regular accounts $2,500 no minimum
Uniform Gifts/Transfer
to Minor Accounts $500 no minimum
Traditional IRAs $2,000 no minimum
Roth IRAs $2,000 no minimum
Educational IRAs $500 no minimum
Systematic Investment $500 $25
Plans1 (SIP)
1 PROVIDED A SIP IS ESTABLISHED, THE MINIMUM INITIAL INVESTMENT FOR THE FUND IS
$500 ALONG WITH A MONTHLY SYSTEMATIC INVESTMENT OF $25 OR MORE.
CONCEPTS TO UNDERSTAND
Traditional IRA: an individual retirement account. Your contributions may or may
not be deductible depending on your circumstances. Assets grow tax-deferred;
withdrawals and distributions are taxable in the year made.
Spousal IRA: an IRA funded by a working spouse in the name of a nonworking
spouse.
Roth IRA: an IRA with nondeductible contributions, and tax-free growth of assets
and distributions to pay retirement expenses, provided certain conditions are
met.
Education IRA: an IRA with nondeductible contributions, and tax-free growth of
assets and distributions, if used to pay certain educational expenses.
For more complete IRA information, consult a PBHG Shareholder Services
Representative or a tax advisor.
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[LOGO OMITTED] SELLING SHARES
You may sell your Fund shares at NAV any day the New York Stock Exchange is open
for business. Sale orders received by the Fund's transfer agent or other
authorized representatives by 4:00 p.m. Eastern time will be priced at the
Fund's next calculated NAV. The Fund generally sends payment for your shares the
business day after your order is accepted. Under unusual circumstances, the Fund
may suspend redemptions or postpone payment for up to seven days. Also, if the
Fund has not yet collected payment for the shares you are selling, it may delay
paying out the proceeds on your sale until payment has been collected up to 15
days from the date of purchase. You may also sell shares of the Fund through
certain broker-dealers or other financial institutions at which you maintain an
account. These financial institutions may charge you a fee for this service.
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LIMITATIONS ON SELLING SHARES BY PHONE
Proceeds
sent by Minimum Maximum
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Check no minimum $50,000 per day
Wire* no minimum no maximum
ACH no minimum no maximum
Please note that the banking instructions to be used for wire and ACH
redemptions must be established on your account in advance of placing your sell
order.
* WIRE FEE IS $10 PER FEDERAL RESERVE WIRE
WRITTEN REDEMPTION ORDERS
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Some circumstances require written sell orders along with signature guarantees.
These include:
[BULLET] Redemptions in excess of $50,000
[BULLET] Requests to send proceeds to a different address or payee
[BULLET] Requests to send proceeds to an address that has been changed within
the last 30 days
[BULLET] Requests to wire proceeds to a different bank account
A SIGNATURE GUARANTEE
helps to protect you against fraud. You can obtain one from most banks or
securities dealers, but not from a notary public. For joint accounts, each
signature must be guaranteed. Please call us to ensure that your signature
guarantee is authentic.
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[LOGO OMITTED] GENERAL POLICIES
[BULLET] The Fund may reject or suspend acceptance of purchase orders.
[BULLET] The Fund reserves the right to make redemptions in securities rather
than in cash if the redemption amount exceeds $250,000 or 1% of the NAV of the
Fund.
[BULLET] Payment for telephone purchases must be received by the Fund's transfer
agent within seven days or you may be liable for any losses the Fund incurs as a
result of the cancellation of your purchase order.
[BULLET] When placing a purchase, sale or exchange order through an authorized
representative, it is the representative's responsibility to promptly transmit
your order to the Fund's transfer agent so that you may receive that same day's
NAV.
[BULLET] SEI Trust Company, the custodian for PBHG Traditional, Roth and
Education IRA accounts, currently charges a $10 annual custodial fee to
Traditional and Roth IRA accounts and a $7 annual custodial fee to Education IRA
accounts. This fee will be automatically charged to your account if not received
by the announced due date, usually in mid-August.
[BULLET] Because of the relatively high cost of maintaining smaller
accounts, the Fund charges an annual fee of $12 if your account balance drops
below the minimum investment amount because of redemptions. Minimum investment
amounts are identified in the table on page 14. For non-retirement accounts, the
Fund may, upon prior notice, close your account and send you the proceeds if
your account balance remains below the minimum investment amount for over 60
days due to you redeeming or exchanging out of the Fund.
EXCHANGES BETWEEN OTHER FUNDS IN PBHG FUNDS(R)
You may exchange some or all of your Fund shares with certain other funds in
PBHG Funds(R). To obtain a prospectus for these other funds, please call the
telephone number, write the address or access the website located on the back
cover of this prospectus. You may mail, telephone or use the Fund's website to
provide your exchange instructions to the transfer agent. There is currently no
fee for exchanges, however, the Fund may change or terminate this privilege on
60 days notice. In addition, please note that exchanges from the Fund into the
PBHG Cash Reserves Fund may be made only four (4) times per year.
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TO OPEN AN ACCOUNT
IN WRITING
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Complete the application.
Mail your completed application and a check to:
The PBHG Funds, Inc.
P.O. Box 219534
Kansas City, Missouri 64121-9534
BY TELEPHONE
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Call us at 1-800-433-0051 to receive an account application and receive an
account number.
WIRE Have your bank send your investment to:
[BULLET] United Missouri Bank of Kansas
City, N.A.
[BULLET] ABA# 10-10-00695
[BULLET] Account # 98705-23469
[BULLET] Fund Name
[BULLET] Your name
[BULLET] Your Social Security or tax ID
number
[BULLET] Your account number
Return the original account application via mail.
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BY AUTOMATED CLEARING HOUSE (ACH)*
VIA THE INTERNET
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[BULLET] Visit the PBHG Funds website at http://www.pbhgfunds.com.
[BULLET] Enter the "open account" screen, download, print and follow the
instructions for completing an account application.
TO ADD TO AN ACCOUNT
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IN WRITING
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Fill out an investment slip:
Mail the slip and the check to:
The PBHG Funds, Inc.
P.O. Box 219534
Kansas City, Missouri 64121-9534
BY TELEPHONE
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WIRE Have your bank send your investment to:
[BULLET] United Missouri Bank of Kansas City, N.A.
[BULLET] ABA# 10-10-00695
[BULLET] Account # 98705-23469
[BULLET] Fund Name
[BULLET] Your name
[BULLET] Your Social Security or tax ID number
[BULLET] Your account number
BY AUTOMATED CLEARING HOUSE (ACH)*
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[BULLET] Complete the bank information section on the account application.
[BULLET] Attach a voided check or deposit slip to the account application.
[BULLET] The maximum purchase allowed through ACH is $100,000 and this option
must be established on your account 15 days prior to initiating
a transaction.
VIA THE INTERNET
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[BULLET] Complete the bank information section on the account application.
[BULLET] Enter the "Your Account" section of the website and follow the
instructions for purchasing shares.
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TO SELL SHARES
BY MAIL
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Write a letter of instruction that includes:
[BULLET] your name(s) and signature(s)
[BULLET] your account number
[BULLET] the fund name
[BULLET] the dollar amount your wish to sell
[BULLET] how and where to send the proceeds
If required, obtain a signature guarantee (see "Selling Shares")
Mail your request to:
The PBHG Funds, Inc.
P.O. Box 219534
Kansas City, Missouri 64121-9534
SYSTEMATIC WITHDRAW PLAN
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Permits you to have payments of $50 or more mailed or automatically transferred
from your Fund accounts to your designated checking or savings account
[BULLET] Complete the applicable section on the account application
Note: Must maintain a minimum account balance of $5,000 or more.
BY TELEPHONE
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Sales orders may be placed by telephone provided this option was selected on
your account application. Please call 1-800-433-0051.
Note: sales from IRA accounts may not be made by telephone and must be made in
writing.
ACH
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[BULLET] Complete the bank information section on the account application.
[BULLET] Attach a voided check or deposit slip to the account application.
Note: sale proceeds sent via ACH will not be posted to your bank account until
the second business day following the transaction.
WIRE
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Sale proceeds may be wired at your request. Be sure the Fund has your wire
instructions on file.
There is a $10 charge for each wire sent by the Fund.
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[LOGO OMITTED] DISTRIBUTION AND TAXES
The Fund pays shareholders dividends from its net investment income and
distributions from its net realized capital gains at least once a year, if
available. These dividends and distributions will be reinvested in the Fund
unless you instruct the Fund otherwise. There are no fees on reinvestments.
Alternatively, you may elect to receive your dividends and distributions in cash
in the form of a check, wire or ACH.
Unless your investment is in an IRA or other tax-exempt account, your dividends
and distributions will be taxable whether you receive them in cash or reinvest
them. Dividends (including short-term capital gains distributions) are taxed at
the ordinary income rate. Distributions of long-term capital gains are taxable
at the long-term capital gains rate, regardless of how long you have been in the
Fund. Capital gains tax rates are described in the table below.
A sale or exchange of the Fund may also generate a tax liability unless your
account is tax-exempt. There are two types of tax liabilities you may incur from
a sale or exchange. (1) Short-term capital gains will apply if you sell or
exchange the Fund up to 12 months after buying it. (2) Long-term capital gains
will apply to the Fund if sold or exchanged after 12 months. The table below
describes the tax rates for each.
TAXES ON TRANSACTIONS
The tax status of your distributions for each calendar year will be detailed in
your annual tax statement from the Fund. Because everyone's tax situation is
unique, always consult your tax professional about federal, state and local tax
consequences.
- --------------------------------------------------------------------------------
TAXABILITY OF DISTRIBUTIONS
Type of Tax rate for Tax rate for
Distribution 15% bracket 28% bracket
- --------------------------------------------------------------------------
Dividends Ordinary income rate Ordinary income rate
Short-term
Capital Gains Ordinary income rate Ordinary income rate
Long-term
Capital Gains 10% 20%
19
<PAGE>
FOR MORE INFORMATION
[LOGO OMITTED] THE PBHG FUNDS, INC.
--------------------
SEC FILE NUMBER 811-04391
For investors who want more information about the Fund, the following documents
are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more information about the Fund and is incorporated into this
Prospectus by reference.
TO OBTAIN INFORMATION
- --------------------------------------------------------------------------------
BY TELEPHONE
Call 1-800-433-0051
BY MAIL
The PBHG Funds, Inc.
P.O. Box 219534
Kansas City, MO 64121-9534
VIA THE INTERNET
www.pbhgfunds.com
These reports and other information about The PBHG Funds, Inc. are available on
the EDGAR database on the SEC's Internet site at http://www.sec.gov, or by
visiting the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090).
Copies of this information may be obtained, for a duplicating fee, by sending
your written request to the SEC's Public Reference Section, Washington, D.C.
20549-0102, or by electronic request at [email protected].
INVESTMENT ADVISER
Pilgrim Baxter & Associates, Ltd.
DISTRIBUTOR
SEI Investments Distribution Co.
PBHG Global Technology & Communications Prospectus -- 6/00
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 22, 2000
Fund:
THE PBHG FUNDS, INC.
Portfolio:
PBHG GLOBAL TECHNOLOGY & COMMUNICATIONS FUND
Investment Adviser:
PILGRIM BAXTER & ASSOCIATES, LTD.
This Statement of Additional Information is not a prospectus. It is intended to
provide additional information regarding the activities and operations of The
PBHG Funds, Inc. (the "Fund" or "Registrant") and the Portfolio named above. It
should be read in conjunction with the Prospectus for the Portfolio's PBHG Class
shares dated May 22, 2000. The Prospectus may be obtained without charge by
calling 1-800-433-0051.
<PAGE>
TABLE OF CONTENTS
PAGE
----
THE FUND................................................... 3
DESCRIPTION OF PERMITTED INVESTMENTS....................... 3
INVESTMENT LIMITATIONS..................................... 16
DIRECTORS AND OFFICERS OF THE FUND......................... 18
5% AND 25% SHAREHOLDERS.................................... 21
THE ADVISER................................................ 27
THE DISTRIBUTOR............................................ 28
THE ADMINISTRATOR AND SUB-ADMINISTRATOR.................... 28
OTHER SERVICE PROVIDERS.................................... 29
PORTFOLIO TRANSACTIONS..................................... 30
DESCRIPTION OF SHARES...................................... 31
PURCHASES AND REDEMPTIONS OF SHARES........................ 32
DETERMINATION OF NET ASSET VALUE........................... 39
TAXES...................................................... 39
PERFORMANCE ADVERTISING.................................... 45
CALCULATION OF TOTAL RETURN................................ 45
FINANCIAL STATEMENTS....................................... 46
<PAGE>
THE FUND
The Fund is an open-end management investment company 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.
This Statement of Additional Information relates to only the PBHG Global
Technology & Communications Fund (the "Portfolio") of the Fund. The Portfolio
has two separate classes of shares, the PBHG Class and the Advisor Class
(formerly the Trust Class). PBHG Class shares provide different distribution
costs, voting rights and dividends than Advisor Class shares. Except for these
differences, each PBHG Class share and each Advisor Class share of the Portfolio
represents an equal proportionate interest in the Portfolio. See "Description of
Shares." This Statement of Additional Information relates to both classes of
shares of the Portfolio, however, shareholders may currently purchase only PBHG
Class shares of the Portfolio. No investment in shares of the Portfolio should
be made without first reading the Portfolio's Prospectus. Capitalized terms not
defined in this Statement of Additional Information are defined in the
Prospectus offering shares of the Portfolio.
Pilgrim Baxter & Associates, Ltd. ("Adviser") serves as the investment adviser
to the Portfolio.
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 the Portfolio for purposes
of its investment limitations. The repurchase agreements entered into by the
Portfolio 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 the Portfolio, the Fund's
custodian or its 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
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<PAGE>
protection for most repurchase agreements, if the seller should be involved in
bankruptcy or insolvency proceedings, the Portfolio may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Portfolio is treated as an unsecured creditor of the seller and is
required to return the underlying security to the seller's estate.
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, the Portfolio upon entering into a futures contract (and to maintain
the Portfolio's open positions in futures contracts) would be required to
deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, or other assets, known as "initial margin." The margin
required for a particular futures contract is set by the exchange on which the
contract is traded, and may be significantly modified from time to time by the
exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margin that may range upward from less than 5% of the
value of the contract being traded. By using futures contracts as a risk
management technique, given the greater liquidity in the futures market than in
the cash market, it may be possible to accomplish certain results more quickly
and with lower transaction costs.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Portfolio. These subsequent payments called "variation
margin," to and from the futures broker, are 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." The Portfolio expects to earn interest income on its initial and
variation margin deposits.
The 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 the Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying securities whenever it
appears economically advantageous to the 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
4
<PAGE>
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, the 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, the 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, the
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. The 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 the Portfolio's
existing futures contracts and premiums required to establish non-hedging
positions would not exceed 5% of the liquidation value of the Portfolio's total
assets. In instances involving the purchase of futures contracts by the
Portfolio, an amount of cash or other liquid assets, equal to the cost of such
futures contracts (less any related margin deposits), will be deposited in a
segregated account with its custodian, thereby insuring that the use of such
futures contracts is unleveraged. In instances involving the sale of futures
contracts by the Portfolio, the securities underlying such futures contracts or
options will at all times be maintained by the 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
Options are contracts that give one of the parties to the contract the right to
buy or sell the security that is subject to the option at a stated price during
the option period, and obligates the other party to the contract to buy or sell
such security at the stated price during the option period. The types of options
transactions that the 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.
The 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, the
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
5
<PAGE>
represents a profit. Moreover, in writing the call option, the 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
the Portfolio owns securities not subject to a call option, the 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.
The 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." The 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 the Portfolio's securities
portfolio, the Portfolio will effect a closing purchase transaction so as to
close out any existing covered call option on that underlying security.
WRITING PUT OPTIONS. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. The 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.
The 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 the 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 the 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.
The 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. The 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 the Portfolio to
preserve, at least partially, unrealized gains in an appreciated security in its
portfolio without actually selling the security. In addition, the Portfolio will
continue to receive interest or dividend income on the security. The 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. The 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.
6
<PAGE>
SECURITIES INDEX OPTIONS. The 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. The
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 the Portfolio will be considered covered
if, so long as it is obligated as the writer of the put, the Portfolio
segregates with its custodian cash or other liquid obligations having a value
equal to or greater than the exercise price of the option. Unlike a stock
option, which gives the holder the right to purchase or sell a specified stock
at a specified price, an option on a securities index gives the holder the right
to receive a cash "exercise settlement amount" equal to (i) the difference
between the exercise price of the option and the value of the underlying stock
index on the exercise date, multiplied by (ii) a fixed "index multiplier." A
securities index fluctuates with changes in the market value of the securities
so included. For example, some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indexes may also be based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index.
OVER-THE-COUNTER OPTIONS. The 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 the 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." The 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 the 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.
7
<PAGE>
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the futures contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract.
A decision of whether, when, and how to hedge involves skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree because of
unexpected market behavior, market trends or interest rate trends. There are
several risks in connection with the use by the 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
Adviser 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 the 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 the 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 the 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 the 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.
8
<PAGE>
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 the Portfolio is unable to effect
a closing purchase transaction, the Portfolio will not sell the underlying
security until the option expires or the Portfolio delivers the underlying
security upon exercise.
Options traded in the over-the-counter market may not be as actively traded as
those on an exchange. Accordingly, it may be more difficult to value such
options. In addition, it may be difficult to enter into closing transactions
with respect to options traded over-the-counter. The Portfolio will engage in
such transactions only with firms of sufficient credit so as to minimize these
risks. Such options and the securities used as "cover" for such options may be
considered illiquid securities.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the selected
securities index. Perfect correlation is not possible because the securities
held or to be acquired by the 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 the 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 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 the Portfolio can write on a particular
security.
INVESTMENT COMPANY SHARES
The Portfolio may invest in securities of other investment companies, including
Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are investment companies
whose portfolios mirror the compositions of specific S&P indices, such as the
S&P 500 and the S&P 400. SPDRs are traded on the American Stock Exchange. SPDR
holders, such as the Portfolio, are paid a "Dividend Equivalent Amount" that
corresponds to the amount of cash dividends accruing to the securities held by
the SPDR Trust, net of certain fees and expenses. Since investment companies pay
management fees and other expenses, shareholders of the Portfolio would
indirectly pay both Portfolio expenses and the expenses of underlying funds with
respect to Portfolio assets invested therein. Applicable regulations prohibit
the 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. The Portfolio has no current intention, in
the foreseeable future, of investing more than 5% of its assets in investment
company securities. The Portfolio may, however, invest in The 1940 Act limits
investments
9
<PAGE>
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 determines the liquidity of the Portfolio's investments and, through
reports from the Adviser, the Board monitors investments in illiquid
instruments. In determining the liquidity of the Portfolio's investments, the
Adviser 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 the
Portfolio's rights and obligations relating to the investment). Investments
currently considered by the 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 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 the 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 the 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, the Portfolio was in a position
where more than 15% of its net assets were invested in illiquid securities, it
would seek to take appropriate steps to protect liquidity.
RESTRICTED SECURITIES
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, as amended (the "1933 Act"), or in a registered public offering.
Where registration is required, the 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 the Portfolio may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the 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 the Portfolio's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
FOREIGN CURRENCY TRANSACTIONS
The 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
10
<PAGE>
exchange.
The 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 Portfolio.
In connection with purchases and sales of securities denominated in foreign
currencies, the 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 may enter into settlement hedges in the normal
course of managing the Portfolio's foreign investments. The 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.
The Portfolio may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if
the 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. The Portfolio could also hedge the position by selling
another currency expected to perform similarly to the pound sterling - for
example, by entering into a forward contract to sell Deutschemark or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally would not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
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, the Portfolio will segregate assets to cover currency forward
contracts, if any, whose purpose is essentially speculative. The 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 in analyzing and predicting currency values. Forward contracts may
substantially change the Portfolio's investment exposure to changes in currency
exchange rates, and could result in losses to the Portfolio if currencies do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged the Portfolio by selling that currency in
exchange for dollars, the Portfolio would be unable to participate in the
currency's appreciation. If the Adviser hedges the 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 increases the 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 will be advantageous to the Portfolio or that it will hedge at an
appropriate time.
AMERICAN DEPOSITARY RECEIPTS ("ADRS"), EUROPEAN DEPOSITORY RECEIPTS ("EDRS")
AND GLOBAL DEPOSITARY RECEIPTS ("GDRS")
11
<PAGE>
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. EDRs
are receipts issued by non-U.S. banks or trust companies and foreign branches of
U.S. banks that evidence ownership of the underlying foreign securities. 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, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all the costs of the
unsponsored facility. The depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
BANKERS' ACCEPTANCE
A bill of exchange or time draft drawn on and accepted by a commercial bank. It
is used by corporations to finance the shipment and storage of goods and to
furnish dollar exchange. Maturities are generally six months or less.
CERTIFICATE OF DEPOSIT
A negotiable interest bearing instrument with a specific maturity. Certificates
of deposit are issued by banks and savings and loan institutions in exchange for
the deposit of funds and normally can be traded in the secondary market prior to
maturity. Certificates of deposit generally carry penalties for early
withdrawal.
COMMERCIAL PAPER
The term used to designate unsecured short-term promissory notes issued by
corporations and other entities. Maturities on these issues typically vary from
a few days to nine months.
CONVERTIBLE SECURITIES
Securities such as rights, bonds, notes and preferred stocks which are
convertible into or exchangeable for common stocks. Convertible securities have
characteristics similar to both fixed income and equity securities. Because of
the conversion feature, the market value of convertible securities tends to move
together with the market value of the underlying common stock. As a result, the
Portfolio's selection of convertible securities is based, to a great extent, on
the potential for capital appreciation that may exist in the underlying stock.
The value of convertible securities is also affected by prevailing interest
rates, the credit quality of the issuer, and any call provisions.
DEMAND INSTRUMENTS
Certain instruments may involve a conditional or unconditional demand feature
which permits the holder to
12
<PAGE>
demand payment of the principal amount of the instrument. Demand instruments may
include variable amount master demand notes.
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.
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.
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. Securities
issued by 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 securities issued by other agencies are supported only by
the credit of the instrumentality (e.g., Tennessee Valley Authority securities).
U.S. GOVERNMENT SECURITIES
Bills, notes and bonds issued by the U.S. Government and backed by the full
faith and credit of the United States.
U.S. TREASURY OBLIGATIONS
Bills, notes and bonds issued by the U.S. Treasury, and separately traded
interest and principal component parts of such obligations that are transferable
through the Federal book-entry system known as Separately Traded Registered
Interest and Principal Securities ("STRIPS"). Under the STRIPS program, the
Portfolio will
13
<PAGE>
be able to have its beneficial ownership of securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or other
evidences of ownership of the underlying U.S. Treasury securities. When U.S.
Treasury obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. The principal or
corpus is sold at a deep discount because the buyer receives only the right to
receive a future fixed payment on the security and does not receive any rights
to periodic interest (cash) payments. Purchasers of stripped obligations
acquire, in effect, discount obligations that are economically identical to the
securities that the Treasury sells itself. Other facilities are available to
facilitate the transfer of ownership of non-Treasury securities by accounting
separately for the beneficial ownership of particular interest coupon and corpus
payments on such securities through a book-entry record-keeping system.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain of the obligations purchased by the Portfolio may carry variable or
floating rates of interest, may involve a conditional or unconditional demand
feature and may include variable amount master demand notes. Such instruments
bear interest at rates which are not fixed, but which vary with changes in
specified market rates or indices, such as a Federal Reserve composite index.
The interest rates on these securities may be reset daily, weekly, quarterly or
some other reset period, and may have a floor or ceiling on interest rate
changes. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. A demand instrument with
a demand notice exceeding seven days may be considered illiquid if there is no
secondary market for such securities.
WARRANTS
Instruments giving holders the right, but not the obligation, to buy shares of a
company at a given price during a specified period.
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 Portfolio is 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 Portfolio will maintain
liquid assets in such accounts in an amount at least equal in value to the
Portfolio's commitments to purchase when-issued securities.
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 the
Portfolio may be more suitable for long-term investors who can bear the risk of
these fluctuations. The Portfolio may invest in securities of issuers with small
or medium market capitalizations. While the Adviser intends to invest in small
and medium capitalization companies that have strong balance sheets and
favorable business prospects, any investment in small and medium capitalization
14
<PAGE>
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
The Portfolio may invest in over-the-counter stocks. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
which limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter common stock is less than the volume of trading in a listed
stock. This means that the depth of market liquidity of some stocks in which the
Portfolio invests may not be as great as that of other securities and, if the
Portfolio was to dispose of such a stock, it might have to offer the shares at a
discount from recent prices, or sell the shares in small lots over an extended
period of time.
FOREIGN SECURITIES AND EMERGING MARKETS
The Portfolio will invest in foreign 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 the Portfolio's shareholders. Further, foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
may exhibit greater price volatility. Changes in foreign exchange rates will
affect, favorably or unfavorably, the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar.
The Portfolio'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 Portfolio'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
15
<PAGE>
The Portfolio will 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.
Because the Portfolio is non-diversified, it will invest a higher percentage of
its assets in a limited number of technology stocks. As a result, the price
change of a single security, positive or negative, will have a greater impact on
the Fund's net asset value and will cause its shares to fluctuate in value more
than it would in a more widely diversified fund. In addition, the Portfolio is
concentrated, which means it will invest 25% or more of its total assets in one
or more of the industries within the technology and communications sectors. 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 Portfolio's
investments in technology companies. For example, the technology companies in
which the Portfolio 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.
EUROPEAN ECONOMIC AND MONETARY UNION
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal and Spain are presently members of the European Economic
and Monetary Union (the "EMU"). The EMU adopted the "euro" as a common currency
on January 1, 1999 and subordinated the national currencies of each country to
the euro until July 1, 2000, at which time the national currencies will be
phased out entirely. The euro could adversely affect the value of securities
held by the Portfolio because as the euro is implemented as the common currency,
there may be changes in the relative value of the U.S. dollar and other major
currencies, as well as possible adverse tax consequences. In addition, the
introduction of the euro may affect the fiscal and monetary levels of
participating EMU countries and may also increase price competition among
business firms within EMU countries and between businesses in EMU and non-EMU
countries. These uncertainties raise the possibility of increased volatility in
the financial markets of the affected countries.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The 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.
The Portfolio may not:
1. Make loans, except that the Portfolio, in accordance with the Portfolio's
investment objectives and policies, may (i) purchase or hold debt instruments,
and (ii) enter into repurchase agreements. In addition, the Portfolio may lend
its portfolio securities in an amount not exceeding one-third the value of its
total assets.
16
<PAGE>
2. Act as an underwriter of securities of other issuers except as it may be
deemed 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 the
Portfolio, in accordance with its objectives and policies, may: (i) invest in
readily marketable securities of issuers which invest or engage in such
activities; and (ii) enter into futures contracts and options thereon.
4. Purchase or sell real estate or real estate partnership interests, except
that this limitation shall not prevent the 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 that 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. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of 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.
9. Invest in companies for the purpose of exercising control.
10. Pledge, mortgage or hypothecate assets, except: (i) to secure temporary
borrowings permitted by the Portfolio's limitation on permitted borrowings; or
(ii) in connection with permitted transactions regarding options and futures
contracts and 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.
11. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the 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.
12. Purchase securities of other investment companies except as permitted by
the 1940 Act and the rules and regulations thereunder.
13. Invest in interests in oil, gas or other mineral exploration or
development programs and invest in oil, gas or mineral leases.
14. 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 50% of its assets may be invested without regard to these limits.
As part of its fundamental policies, the Portfolio is also concentrated in
the technology and communications sectors. As a concentrated fund, the Portfolio
may invest more than 25% of its total assets at
17
<PAGE>
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 within these sectors. 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).
NON-FUNDAMENTAL POLICIES
In addition to the foregoing, and the policies set forth in the Portfolio's
Prospectus, the Portfolio has adopted additional investment restrictions which
may be amended by the Board of Directors without a vote of shareholders.
The Portfolio 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
(except with respect to the limitation on investments in illiquid securities).
SENIOR SECURITIES
The term "senior security", as defined in Section 18(g) of the Investment
Company Act of 1940, means any bond, debenture, note, or similar obligation or
instrument constituting a security and evidencing indebtedness, and any stock of
a class having priority over any other class as to distribution of assets or
payment of dividends; and "senior security representing indebtedness" means any
senior security other than stock.
The term "senior security" shall not include any promissory note or other
evidence of indebtedness issued in consideration of any loan, extension, or
renewal thereof, made by a bank or other person and privately arranged, and not
intended to be publicly distributed; nor shall such term include any such
promissory note or other evidence of indebtedness in any case where such a loan
is for temporary purposes only and in an amount not exceeding 5 percent of the
value of the total assets of the issuer at the time when the loan is made. A
loan shall be presumed to be for temporary purposes if it is repaid within sixty
days and is not extended or renewed; otherwise it shall be presumed not to be
for temporary purposes. Any such presumption may be rebutted by evidence.
TEMPORARY DEFENSIVE POSITIONS
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<PAGE>
Under normal market conditions, the Portfolio expects to be fully invested in
its primary investments, as described above. However, for temporary defensive
purposes, when the Adviser determines that market conditions warrant, the
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
the Portfolio's investment restrictions, shares of other investment companies
investing solely in money market securities). To the extent the Portfolio is
invested in temporary defensive instruments, it will not be pursuing its
investment objective.
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. 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.
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 have approved contracts under
which, as described above, certain companies provide essential management
services to the Fund. 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 and each officer serves as an officer in a similar capacity
for The PBHG Insurance Series Fund, Inc., a registered investment company
advised by the Adviser.
<TABLE>
- ------------------------------------- ------------------- =========================================================
Position Held
Name , Address, and Age with the Fund Principal Occupation(s) During Past 5 Years
- ------------------------------------- ------------------- =========================================================
<S> <C> <C>
- ------------------------------------- ------------------- =========================================================
Director Chief Financial Officer and Director, the Triumph
John R. Bartholdson, Group, Inc. (manufacturing) since 1992.
1255 Drummers Lane, Suite 200,
Wayne, PA 19087
(55)
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Chairman of the Chairman, Chief Executive Officer and Director, the
Harold J. Baxter*, Board and Director Adviser since 1982. Trustee, the Administrator since
825 Duportail Road, Wayne, PA 19087, May 1996. Chairman, Chief Executive Officer and
(53) Director, Value Investors, since June 1996. Trustee,
PBHG Fund Distributors since January 1998.
Director, UAM since 1996.
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Director Consultant, Syrus Associates since 1986. Trustee,
Jettie M. Edwards, Provident Investment Counsel Trust (investment company)
76 Seaview Drive, Santa Barbara, since 1992. Trustee, EQ Advisors Trust (investment
California 93108, company) since 1997.
(53)
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Director Principal and Treasurer, JK Equipment Exporters since
Albert A. Miller, 1995. Senior Vice President, Cherry & Webb, CWT
7 Jennifer Drive, Holmdel, New Specialty Stores since 1995, Advisor and Secretary, the
Jersey 07733, Underwoman Shoppes Inc. (retail clothing stores) since
(65) 1980. Merchandising Group Vice President, R.H. Macy &
Co., 1958-1995 (retired).
- ------------------------------------- ------------------- =========================================================
Gary L. Pilgrim, President President, Chief Investment Officer and Director, the
825 Duportail Road, Wayne, PA 19087, Adviser since 1982. Trustee, the Administrator since
(59) May 1996. President and Director, Value Investors
since June 1996.
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Lee T. Cummings Treasurer, Chief Director of Mutual Fund Operations, the Adviser since
825 Duportail Road, Wayne, PA Financial 1996. Treasurer, the Administrator since May 1996.
19087, Officer, President, the Distributor since December 1998.
(36) Controller Investment Accounting Officer, Delaware Group of Funds,
1994-1996. Vice President, Fund/Plan Services, Inc.,
1992-1994
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Matthew R. DiClemente Legal Assistant, the Adviser since 1998.Fund
825 Duportail Road, Wayne, PA Assistant Accountant, the Adviser, 1996-1998. Fund Accountant,
19087, Secretary J.P. Morgan & Co., Inc., 1993-1996. .
(29)
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
John M. Zerr Vice-President General Counsel and Secretary, the Adviser since
825 Duportail Road, Wayne, PA and Secretary November 1996. General Counsel and Secretary, Value
19087, Investors since November 1996. General Counsel and
(37) Secretary, the Administrator since January 1998.
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 Vice-President Counsel, the Adviser since April 1998. Assistant Vice
825 Duportail Road, Wayne, PA and Assistant President, Assistant Secretary and Counsel, Delaware
19087, Secretary Management Company Inc. and the Delaware Group of
(32) Funds, 1997-1998. Associate, Drinker Biddle & Reath,
LLP (law firm)
1994-1997. Associate,
McAleese, McGoldrick &
Susanin (law firm)
1993-1994.
- ------------------------------------- ------------------- =========================================================
James R. Foggo Vice President Vice President and Assistant Secretary of the
One Freedom Valley Road Oaks, PA and Assistant Sub-Administrator and the Distributor since 1998.
19456 Secretary Associate, Paul Weiss, Rifkind, Wharton & Garrison,
(36) 1998. Associate, Baker & McKenzie, 1995-1998.
Associate, Battle Fowler L.L.P., 1993-1995.
- ------------------------------------- ------------------- =========================================================
Timothy D. Barto
One Freedom Valley Road Oaks, PA
19456
- ------------------------------------- ------------------- =========================================================
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
- ------------------------------------- ------------------- =========================================================
Lynda J. Striegel Vice President Vice President and Assistant Secretary of SEI Fund
One Freedom Valley Road Oaks, PA and Assistant Services and SEI Investments Distribution Co. since
19456 Secretary 1998. Senior Asset Management Counsel, Barnett Banks,
(50) Inc. 1997-1998. Partner, Groom and Nordberg, Chartered
1996-1997. Associate General Counsel, Riggs bank, N.A.
1991-1995.
- ------------------------------------- ------------------- =========================================================
- ------------------------------------- ------------------- =========================================================
Each current Director of the Company received the following compensation during
the fiscal year ended March 31, 2000:
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
Pension or Estimated Total
Retirement Annual Compensation
Aggregate Benefits Benefits Upon from Company
Compensation Accrued as Part Retirement and Company Complex
Name of Person, from of Company Paid to Directors
Position Company Expenses
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
John R. Bartholdson, N/A N/A $91,000
Director $40,000 for services on three
boards
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
Harold J. Baxter, N/A N/A N/A N/A
Director*
- ------------------------------------ -------------------- -------------------- ----------------- ==========================
Jettie M. Edwards, $40,000 N/A N/A $91,000
Director for services on three
boards
- ------------------------------------ ==========================
==================== -------------------- -----------------
Albert A. Miller, $40,000 N/A N/A $91,00
Director for services on three
boards
==================================== ==================== -------------------- ----------------- ==========================
</TABLE>
* 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, and consequently will be
receiving no compensation from the Company.
None of the above compensation was allocated to the Portfolio because
it had not commenced investment operations as of March 31, 2000. The
compensation each director receives will not be increased when the Portfolio
commences operations.
5% AND 25% SHAREHOLDERS
As of March 29, 2000, 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 Portfolio. Persons owning of record or beneficially 25% or
more of the outstanding share class of the Portfolio may be deemed to be a
controlling person of the Portfolio for purposes of the 1940 Act.
21
<PAGE>
PBHG CORE GROWTH FUND - PBHG CLASS
Charles Schwab & Co., Inc. 14.68%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 15.97%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG EMERGING GROWTH FUND - PBHG CLASS
Charles Schwab & Co. Inc. 9.54%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 7.30%
P.O. Box 3908
Church Street Station
New York, New York 10008-3908
Fidelity Investments Institutional Operations Co. 10.58%
100 Magellan Way
Covington, KY 41015
Putnam Fiduciary Trust Company 9.89%
P.O. Box 9740
Providence, RI 02940
Chase Manhattan Bank 7.40%
4 New York Plaza, Floor 2
New York, NY 10004
PBHG GROWTH FUND - PBHG CLASS
Charles Schwab & Co. Inc. 11.34%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 6.28%
P.O. 3908
22
<PAGE>
Church Street Station
New York, New York 10008-3908
Fidelity Investments Institutional 12.40%
Operations Co.
100 Magellan Way
Covington, KY 41015-3987
Connecticut General Life Insurance 8.40%
350 Church Street
PO Box 2975
Hartford, CT 06104
PBHG GROWTH FUND - ADVISOR CLASS
The Travelers Insurance Company 72.05%
ATTN: Roger Ferland
1 Tower Square
Hartford, CT 06183-9001
Wilmington Trust Company 12.40%
FBO Allied Waste 401(k) Plan
1100 N. Market Street
Wilmington, DE 19801-3029
Reliance Trust Co. TTEE 12.39%
General Cable Corp
FBO Retirement & Savings Plan
4 Tessennee Dr.
Highland Hights KY 41076
PBHG LARGE CAP GROWTH FUND - PBHG CLASS
Charles Schwab & Co. Inc. 24.43%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp 15.39%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
23
<PAGE>
PBHG LIMITED FUND - PBHG CLASS
Charles Schwab & Co., Inc. 8.73%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
PBHG LARGE CAP 20 FUND - PBHG CLASS
Charles Schwab & Co., Inc. 22.46%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 15.29%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG SELECT EQUITY FUND - PBHG CLASS
Charles Schwab & Co. Inc. 26.01%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 26.98%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
National Investors Services Corp 6.86%
55 Water Street, 32nd Floor
New York, NY 10041
PBHG LARGE CAP VALUE FUND - PBHG CLASS
Charles Schwab & Co., Inc. 10.52%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 10.58%
24
<PAGE>
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Bryce Douglas Investment LP 12.25%
P.O. Box 672
Kimberton, PA 19442-0672
PBHG MID-CAP VALUE - PBHG CLASS
National Financial Services Corp. 17.36%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co, Inc. 35.48%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Investor Services Corp. 7.37%
55 Water Street, 32nd Fl.
New York, NY 10041-3299
PBHG SMALL CAP VALUE - PBHG CLASS
National Financial Services Corp. 5.47%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co., Inc. 21.76%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
The Northern Trust Co., Custodian 43.86%
FBO Arthur Andersen
P.O. Box 92956
Chicago, IL 60675-2956
PBHG FOCUSED VALUE FUND- PBHG CLASS
25
<PAGE>
FTC & Co. 20.12%
P.O. Box 173736
Denver, CO 80217
National Financial Services Corp. 10.94%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
UAM Investment Corporation 10.47%
PO Box 7048
Wilmington, DE 19803-0048
Charles Schwab & Co, Inc. 5.01%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Investor Services Corp. 5.63%
55 Water Street, 32nd Fl.
New York, NY 10041-3299
PBHG NEW OPPORTUNITIES FUND - PBHG CLASS
National Financial Services Corp. 14.99%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Charles Schwab & Co, Inc. 12.17%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Investor Services Corp. 8.11%
55 Water Street, 32nd Fl.
New York, NY 10041-3299
PBHG INTERNATIONAL FUND - PBHG CLASS
Charles Schwab & Co., Inc. 11.08%
Mutual Fund Department
26
<PAGE>
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 8.38%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG STRATEGIC SMALL COMPANY FUND
Charles Schwab & Co., Inc. 14.64%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 24.41%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG TECHNOLOGY & COMMUNICATIONS FUND - PBHG CLASS
Charles Schwab & Co., Inc. 23.84%
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 26.26%
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
PBHG CASH RESERVES FUND - PBHG CLASS
Citicorp USA Inc. 6.52%
One Sansome St, 24th Floor
San Francisco, CA 94104
The Directors and Officers of the Fund collectively owned less than 1% of the
outstanding shares of each portfolio at July 15, 1999, except that the Directors
and Officers collectively owned 4.9% of the PBHG Cash Reserves Fund, and 1.24%
of the PBHG New Opportunities Fund, 5.47% of the PBHG Focused Value Fund, 1.86%
of the Small Cap Value Fund and 2.10% of the Large Cap Value Fund at March 28,
2000.
27
<PAGE>
THE ADVISER
The Fund and Pilgrim Baxter & Associates, Ltd. have entered into an advisory
agreement with respect to the 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 the 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 sole 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. PBHG Fund Services, the Fund's Administrator, is a wholly
owned subsidiary of the Adviser (See "The Administrator" for more detail on PBHG
Fund Services). PBHG Fund Services also serves as administrator to PBHG
Insurance Series Fund, Inc., an investment company also managed by the Adviser.
The Adviser currently has discretionary management authority with respect to
over $28 billion in assets. In addition to advising the Portfolio, the Adviser
provides advisory services to pension and profit-sharing plans, charitable
institutions, corporations, trusts and estates, and other investment companies.
The principal business address of the Adviser is 825 Duportail Road, Wayne,
Pennsylvania 19087.
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 also requires the Adviser to pay its overhead and employee costs and
the compensation and expenses of all its partners, officers and employees who
serve as officers and executive employees of the Fund. 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).
From time to time, the Adviser or a company under common control with the
Adviser may make payments to broker-dealers for the promotion of the sale of
Fund shares or for their own company-sponsored sales programs.
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).
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of 1.50% of the Portfolio's average daily
net assets. The investment advisory fees paid by the Portfolio is higher
28
<PAGE>
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 Portfolio, the Adviser has
voluntarily entered into an expense limitation agreement with the Fund ("Expense
Limitation Agreement") pursuant to which the Adviser has agreed to waive or
limit a portion of its fee and to assume other expenses in an amount necessary
to limit total annual operating expenses to not more than 2.15% of the 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 rate of the Portfolio to exceed 2.15%.
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 is less than 2.15%; and (iii) the payment of such reimbursement was
approved by the Board of Directors on a quarterly basis.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley Road,
Oaks, PA 19456, a wholly owned subsidiary of SEI, and the Fund are parties to a
distribution agreement (the "Distribution Agreement"). The Distributor does not
receive any compensation for the distribution services it provides with respect
to the Portfolio.
Under the Distribution Agreement, the Distributor is contractually required to
continuously distribute the securities of the Fund. 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 ADMINISTRATOR AND SUB-ADMINISTRATOR
The Fund and PBHG Fund Services (the "Administrator") entered into the
Administrative Services Agreement (the "Administrative Agreement") pursuant to
which the Administrator oversees the administration of the Fund's and the
Portfolio's business and affairs, including regulatory reporting and all
necessary office space, equipment, personnel and facilities, as well as 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
the 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, 2000, 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-
29
<PAGE>
Administrative Services Agreement on pursuant to which the Sub-Administrator
assists the Administrator in connection with the administration of the business
and affairs 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 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.
OTHER SERVICE PROVIDERS
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. The Administrator also provides development and maintenance
services for the Fund's web site, pursuant to a Web-Services Agreement. From
time to time, the Fund may pay amounts to third parties that provide
sub-transfer agency and other administrative services relating to the Fund to
persons who beneficially own interests in the Fund, such as participants in
401(k) plans. These services may include, among other things, sub-accounting
services, answering inquiries relating to the Fund, delivering, on behalf of the
Fund, proxy statements, annual reports, updated Prospectuses, other
communications regarding the Fund, and related services as the Fund or the
beneficial owners may reasonably request. In such cases, the Fund will not
compensate such third parties at a rate that is greater than the rate the Fund
is currently paying the Fund's Transfer Agent for providing these services to
shareholders investing directly in the Fund.
CUSTODIANS
The Northern Trust Company (the "Custodian"), 50 South LaSalle Street, Chicago,
Illinois 60675, serves as the custodian for the Portfolio. The Custodian holds
cash, securities and other assets of the Portfolio as required by the 1940 Act.
COUNSEL AND INDEPENDENT ACCOUNTANTS
30
<PAGE>
Ballard Spahr Andrews & Ingersoll, LLP serves as counsel to the Fund.
PricewaterhouseCoopers LLC serves as the independent accountants of the Fund.
PORTFOLIO TRANSACTIONS
The Adviser is authorized to select brokers and dealers to effect securities
transactions for the Portfolio. The Adviser 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 generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. The Adviser seeks to select
brokers or dealers that offer the Portfolio best price and execution or other
services which are of benefit to the Portfolio. 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 the Portfolio's public offering price. In
the case of securities traded in the over-the-counter market, the Adviser expect
normally to seek to select primary market makers.
The Adviser may, consistent with the interests of the Portfolio, select brokers
on the basis of the research services they provide to the Adviser. 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, the Portfolio or other accounts managed by the Adviser will be
benefited by supplemental research services, the Adviser is 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 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 will find all of such services of value in
advising the Portfolio.
It is expected that the Portfolio 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 Portfolio on an exchange if a written contract is
in effect between the Distributor and the Portfolio expressly permitting the
Distributor to receive and retain such compensation. These rules further require
that commissions paid to the Distributor by the Portfolio for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In addition, the
Adviser may direct commission business to one or more designated
31
<PAGE>
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 may place orders for the purchase or sale of Portfolio
securities with qualified broker-dealers that refer prospective shareholders to
the Portfolio. 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 Adviser 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. In addition, the Fund's
Board of Directors reviews and approves the codes of ethics of the Adviser and
Distributor and any material amendments thereto. The Board also reviews annually
reports on issues raised under the Adviser and Distributor's codes of ethics
during the previous year.
DESCRIPTION OF SHARES
The Fund may increase the number of shares which the Portfolio is authorized to
issue and may create additional portfolios of the Fund. Each share of the
Portfolio represents an equal proportionate interest in the 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
the Portfolio and all assets in which such consideration is invested would
belong to the Portfolio and would be subject to the liabilities related thereto.
VOTING RIGHTS
Each share held entitles the shareholder of record to one vote. Shareholders of
the 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.
32
<PAGE>
PURCHASES AND REDEMPTIONS 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 Portfolio are offered on a continuous basis.
PURCHASES
You may purchase shares of the Portfolio directly through DST Systems, Inc., the
Fund's Transfer Agent. Shares of the 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 the Portfolio through certain broker-dealers or
other financial institutions that are authorized to sell you shares of the
Portfolios. Such financial institutions may charge you a fee for this service in
addition to the 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.
The 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 the Portfolio, to the
extent it invests extensively in such companies, indefinitely discontinue the
sale of its shares to new investors (other than directors, officers and
employees of the Adviser and its affiliated companies). In such event, the Board
of Directors would determine whether such discontinuance is in the best
interests of the Portfolio and its shareholders.
MINIMUM INVESTMENT
The minimum initial investment in the Portfolio is $2,500 for regular accounts
and $2,000 for traditional or Roth IRAs. However, investors who establish a
Systematic Investment Plan, as described below, with a minimum investment of $25
per month may at the same time open a regular account or traditional or Roth IRA
with any Portfolio with a minimum initial investment of $500. There is no
minimum for subsequent investments. The Distributor may waive the minimum
initial investment amount at its discretion. No minimum applies to subsequent
purchases effected by dividend reinvestment. As described below, subsequent
purchases through the Fund's Systematic Investment Plan must be at least $25.
33
<PAGE>
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 the Portfolio for initial
or subsequent investments.
ADDITIONAL PURCHASES BY PHONE (TELEPHONE PURCHASE)
You may purchase additional shares by telephoning the Transfer Agent at
1-800-433-0051. THE MINIMUM TELEPHONE PURCHASE IS $1,000, AND THE MAXIMUM IS
FIVE TIMES THE NET ASSET VALUE OF 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 Portfolio by requesting your bank
to transmit funds by wire. Before making an initial investment by wire, you must
first telephone 1-800-433-0051 to receive an Account Application and be assigned
an account number. The Account Application must be received prior to receipt of
the wire. Your name, account number, taxpayer identification number or Social
Security Number, and address must be specified in the wire. All wires must be
received by 4:00 p.m. Eastern time to be effective on that day. In addition, an
original Account Application should be promptly forwarded to: The PBHG Funds,
Inc. c/o DST Systems, Inc., P.O. Box 419534, Kansas City, Missouri 64141-6534.
All wires must be sent as follows: United Missouri Bank of Kansas City, N.A.;
ABA #10-10-00695; for Account Number 98705-23469; Further Credit: [name of
Portfolio and your assigned account number].
ADDITIONAL PURCHASES BY WIRE
Additional investments may be made at any time through the wire procedures
described above, which must include your name and account number. Your bank may
impose a fee for investments by wire.
PURCHASE BY ACH
If you have made this election, shares of the 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.
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GENERAL INFORMATION REGARDING PURCHASES
A purchase order will be effective as of the day received by the Transfer Agent
if the Transfer Agent receives sufficient information to execute the order and
receives payment before 4:00 p.m. Eastern time. Payment may be made by check or
readily available funds. The purchase price of shares of the 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 the Portfolio calculated
to three decimal places. The Fund will not issue certificates representing
shares of the Portfolio.
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 4:00 p.m. Eastern time
and (ii) promptly transmit the order to the Transfer Agent. See "Determination
of Net Asset Value" below. The broker-dealer or financial institution is
responsible for promptly transmitting purchase orders to the Transfer Agent so
that you may receive the same day's net asset value.
If a check received for the purchase of shares does not clear, the purchase will
be canceled, and you could be liable for any losses or fees incurred by the
Fund. The Fund reserves the right to reject a purchase order when the Fund
determines that it is not in the best interests of the Fund or its shareholders
to accept such an order.
REDEMPTIONS
Redemption orders received by the Transfer Agent prior to 4:00 p.m. Eastern time
for the Portfolio on any Business Day will be effective that day. The redemption
price of shares is the net asset value per share of the 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 may take up to 15 days.
You may also redeem shares of the Portfolio through certain broker-dealers and
other financial institutions at which you maintain an account. Such financial
institutions may charge you a fee for this service.
In order for your redemption order to be effective on the day you place your
redemption order with your broker-dealer or other financial institution, such
broker-dealer or financial institution must (i) receive your order before 4:00
p.m. Eastern time for the Portfolio and (ii) promptly transmit the order to the
Transfer Agent. See "Determination of Net Asset Value" below. The financial
institution is responsible for promptly transmitting redemption orders to the
Transfer Agent so that your shares are redeemed at the same day's net asset
value per share.
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. The Portfolio has made an election pursuant to Rule 18f-1 under
the 1940 Act by which the 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
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incur brokerage charges on the sale of any such securities so received in
payment of redemptions. In addition, in-kind distributions may include illiquid
securities which shareholders may be unable to dispose of at the time or price
desired.
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 the 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 the 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.
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
the Portfolio by Federal Reserve wire on federal holidays restricting wire
transfers.
BY ACH
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The Fund does not charge for ACH transactions; however, proceeds from such
transactions will not be posted to your bank account until the second Business
Day following the transaction. In order to process a redemption by ACH, banking
information must be established on your account at least 15 days prior to
initiating a transaction. A voided check or deposit slip must accompany requests
to establish this option.
SIGNATURE GUARANTEES
A signature guarantee is a widely accepted way to protect you by verifying the
signature on certain redemption requests. The Fund requires signature guarantees
to be provided in the following circumstances: (1) written requests for
redemptions in excess of $50,000; (2) all written requests to wire redemption
proceeds; (3) redemption requests that provide that the redemption proceeds
should be sent to an address other than the address of record or to a person
other than the registered shareholder(s) for the account; and (4) redemptions
requesting proceeds to be sent to a new address or an address that has been
changed within the past 30 days; (5) requests to transfer the registration of
shares to another owner; (6) written requests to add telephone exchange and
telephone redemption options to an account; and (7) changes in previously
designated wiring instructions. These requirements may be waived or modified
upon notice of shareholders. Signature guarantees can be obtained from any of
the following institutions: a national or state bank, a trust company, a federal
savings and loan association, or a broker-dealer that is a member of a national
securities exchange. The Fund does not accept guarantees from notaries public or
organizations that do not provide reimbursement in the case of fraud.
SHAREHOLDER INQUIRIES AND SERVICES OFFERED
If you have any questions about the Portfolio 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 Portfolio 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 Portfolio despite its
fluctuating net asset value through regular purchases of a fixed dollar amount
of shares in the Portfolio. Dollar-cost averaging brings discipline to your
investing. Dollar-cost averaging results in more shares being purchased when the
Portfolio's net asset value is relatively low and fewer shares being purchased
when the 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.
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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
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. The Systematic Withdrawal Plan permits you to have
payments of $50 or more automatically transferred from your account(s) in the
Portfolio to your designated checking or savings account on a monthly,
quarterly, or semi-annual basis. The Systematic Withdrawal Plan also provides
the option of having a check mailed to the address of record for your account.
In order to start this Plan, you must have a minimum balance of $5,000 in any
account using this feature. Your systematic withdrawals will be processed on a
regular basis beginning on or about either the first or fifteenth day of the
month, quarter or semi-annual period you select.
EXCHANGE PRIVILEGES
Once payment for your shares has been received (i.e., an account has been
established) and your payment has been converted to Federal funds, you may
exchange some or all of your shares for shares of the other portfolios of the
Fund currently available to the public. However, you are limited to four (4)
exchanges annually from the Portfolio to the PBHG 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' 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 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 the Portfolio. 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,
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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 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 Portfolio 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.
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
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redemptions, the value of any account drops below the minimum initial investment
amount, specified above, for the 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.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Portfolio, is determined by dividing the
total market value of the Portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the Portfolio. Net asset value
per share is determined daily, normally as of the close of trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern time) on any Business Day. The
net asset value per share of the Portfolio, is listed under PBHG in the mutual
fund section of most major daily newspapers, including The Wall Street Journal.
The securities of the 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.
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 Portfolio
or its shareholders. Accordingly,
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you are urged to consult your tax advisors regarding specific questions as to
federal, state and local income taxes.
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
The Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Fund's other portfolios. The 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, the
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, the Portfolio must meet several other requirements.
Among these requirements are the following: (i) the 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 the Portfolio's total assets may be invested in
the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Portfolio controls and which are engaged in the same or similar trades
or businesses (the "Asset Diversification Test").
For purposes of the Asset Diversification Test, it is unclear under present law
who should be treated as the issuer of forward foreign currency exchange
contracts, of options on foreign currencies, or of foreign currency futures and
related options. It has been suggested that the issuer in each case may be the
foreign central bank or foreign government backing the particular currency.
Consequently, the 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 the Portfolio's principal business may, under regulations
not yet issued, be excluded from qualifying income.
If the 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
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such an event, all distributions (including capital gains distributions) will be
taxable as ordinary dividends to the extent of the 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 the 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. The Portfolio intends to make sufficient distributions prior to
the end of each calendar year to avoid liability for the federal excise tax.
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.
The 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 the
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
Portfolio 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 debt securities purchased by the Portfolio are sold with original issue
discount and thus do not make periodic cash interest payments. The 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 the 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 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 the Portfolio and may be exempt, depending
on the state, when received by a shareholder as income dividends from the
Portfolio provided certain state-specific conditions are satisfied. Not all
states permit such income dividends to be tax exempt and some require that a
certain minimum percentage of an investment company's income be derived from
state tax-exempt interest. The 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 the Portfolio is considered tax exempt
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in your particular state.
Dividends declared by the 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.
WITHHOLDING
In certain cases, the Portfolio will be required to withhold, and remit to the
U.S. Treasury, 31% of any distributions paid to a shareholder who (i) has failed
to provide a correct taxpayer identification number, (ii) is subject to backup
withholding by the Internal Revenue Service, or (iii) has not certified to the
Portfolio that such shareholder is not subject to backup withholding.
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 the Portfolio's investment company taxable income
available to be distributed to shareholders as ordinary income, rather than
increasing or decreasing the amount of the Portfolio's net capital gains.
Additionally, if Code Section 988 losses exceed other investment company taxable
income during a taxable year, the Portfolio would not be able to pay any
ordinary income dividends, and any such dividends paid before the losses were
realized, but in the same taxable year, would be recharacterized as a return of
capital to shareholders, thereby reducing the tax basis of Portfolio shares.
HEDGING TRANSACTIONS
Some of the forward foreign currency exchange contracts, options and futures
contracts that the Portfolio 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
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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 Portfolio 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
Portfolio. In addition, losses realized by the Portfolio 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 Portfolio of hedging transactions are not entirely
clear. The hedging transactions may increase the amount of short-term capital
gain realized by the Portfolio (and, if they are conversion transactions, the
amount of ordinary income) which is taxed as ordinary income when distributed to
shareholders.
The Portfolio may make one or more of the elections available under the Code
which are applicable to straddles. If the 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 the Portfolio (such as short sales
"against the box") may be subject to special tax treatment as "constructive
sales" under section 1259 of the Code if the 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, the Portfolio will be deemed to have
constructively sold such appreciated financial position and will recognize gain
as if such position were sold, assigned, or otherwise terminated at its fair
market value on the date of such constructive sale (and will take into account
any gain for the taxable year which includes such date).
Because application of the straddle, conversion transaction and constructive
sale rules may affect the character of gains or losses, defer losses and/or
accelerate the recognition of gains or losses from the affected straddle or
investment positions, the amount which must be distributed to shareholders and
which will be taxed to shareholders as ordinary income or long-term capital gain
may be increased or decreased as compared to a fund that did not engage in such
transactions.
Requirements relating to the Portfolio's tax status as a RIC may limit the
extent to which the Portfolio will be able to engage in transactions in options
and futures contracts.
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STATE TAXES
Distributions by the Portfolio to shareholders and the ownership of shares may
be subject to state and local taxes.
FOREIGN INCOME TAX
Investment Income received by the Portfolio 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 Portfolio 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 with respect to income derived
from securities for which applicable holding period requirements have been
satisfied (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 the Portfolio's investment company taxable income and
distributions constituting returns of capital paid to a nonresident alien
individual, a foreign trust or estate, foreign corporation, or foreign
partnership (a "foreign shareholder") generally will be subject to U.S.
withholding tax at a rate of 30% (or lower treaty rate) upon the gross amount of
the dividend. Foreign shareholders may be subject to U.S. withholding tax at a
rate of 30% on the income resulting from the 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 the 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 the 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 Portfolio 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.
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Notwithstanding the foregoing, if distributions by the Portfolio are effectively
connected with a U.S. trade or business of a foreign shareholder, then dividends
from the 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 the 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 the Portfolio.
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 May 31, 1999.
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.
PERFORMANCE ADVERTISING
From time to time, the Portfolio may advertise its yield and total return. These
figures will be based on historical earnings and are not intended to indicate
future performance. No representation can be made regarding actual future yields
or returns. Yield refers to the annualized income generated by an investment in
the Portfolio over a specified 30-day period. The yield is calculated by
assuming that the same amount of income generated by the investment during that
period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The 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. The 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.
The 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. The Portfolio
may also quote financial and business publications and periodicals as they
relate to fund management, investment philosophy, and investment techniques.
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The Portfolio may quote various measures of volatility and benchmark correlation
in advertising and may compare these measures to those of other funds. Measures
of volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
The performance of the Fund's Advisor Class shares will be lower than that of
the Fund's PBHG Class shares because of the additional Rule 12b-1 shareholder
servicing expenses charged to Advisor Class shares.
CALCULATION OF TOTAL RETURN
From time to time, the Portfolio 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.
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.
As of the date of this Statement of Additional Information, the Portfolio had
not yet commenced operations and has no one year, five year, ten year or since
inception total return.
FINANCIAL STATEMENTS
PricewaterhouseCoopers LLC serves as the independent accountants for the
Portfolio. PWC provides audit services, tax return review and assistance and
consultation in connection with review of SEC filings.
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