PILGRIM(R)
---------------------------
FUNDS FOR SERIOUS INVESTORS
Prospectus
Class: A
July 31, 2000
LEXINGTON MONEY MARKET
A Pilgrim Fund
This prospectus contains important
information about investing in the
Lexington Money Market Trust. You
should read it carefully before you
invest, and keep it for future
reference. Please note that your
investment: is not a bank deposit,
is not insured or guaranteed by the
FDIC, the Federal Reserve Board or
any other government agency and is
affected by market fluctuations.
There is no guarantee that the Fund
will achieve its objectives. As
with all mutual funds, the
Securities and Exchange Commission
(SEC) has not approved or
disapproved these securities nor
has the SEC judged whether the
information in this prospectus is
accurate or adequate. Any
representation to the contrary is a
criminal offense.
<PAGE>
WHAT'S INSIDE
--------------------------------------------------------------------------------
[GRAPHIC] OBJECTIVE
These pages contain a description of the Lexington Money Market Trust (Fund),
including its objective, investment strategy and risks.
[GRAPHIC] INVESTMENT STRATEGY
You'll also find:
[GRAPHIC] RISKS
How the Fund has performed. A chart that shows the Fund's financial performance
for the past ten years.
[GRAPHIC] HOW THE FUND HAS PERFORMED
What you pay to invest. A list of the fees and expenses you pay -- both directly
and indirectly -- when you invest in the Fund.
Lexington Money Market 2
What You Pay to Invest 4
Shareholder Guide 5
Management of the Fund 9
Dividends, Distributions and Taxes 10
More Information About Risks 11
Financial Highlights 12
Where To Go For More Information Back cover
<PAGE>
LEXINGTON MONEY MARKET
--------------------------------------------------------------------------------
OBJECTIVE [GRAPHIC]
The Fund's investment objective is to seek as high a level of current income
from short-term investments as is consistent with the preservation of capital
and liquidity. The Fund seeks to maintain a stable net asset value of $1 per
share.
INVESTMENT STRATEGY [GRAPHIC]
The Fund will invest in short-term money market instruments that have been rated
in one of the two highest rating categories by both S&P and Moody's, both major
rating agencies. The Fund invests in short-term money market instruments (those
with a remaining maturity of 397 days or less) that offer attractive yields and
are considered to be undervalued relative to issues of similar credit quality
and interest rate sensitivity.
Specifically, the Fund will invest in instruments issued by the U.S. Government,
its agencies and instrumentalities (U.S. Government Securities); high quality
deposit-type obligations, such as negotiable certificates of deposit and time
deposits, banker's acceptances and letters of credit of domestic, foreign banks
and foreign branches of foreign banks; savings and loans associations and
savings banks; other short-term instruments of similar quality; instruments
fully collateralized by such obligations; and repurchase agreements under which
the Fund may aquire an underlying debt instrument for a relatively short period
subject to the obligations of the sellers to repurchase, and of the Fund to
resell, at a fixed price.
The Fund will also ensure that its money market instruments' average weighted
maturities do not exceed 90 days.
RISKS [GRAPHIC]
The Fund is subject to the risks associated with investing in debt securities.
An investment in the Fund is not insured or guaranteed by the Federal Reserve
Deposit Insurance Corporation or any other governmental agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
Changes in interest Rates -- money market funds like the Fund are subject to
less interest rate risk than other income funds because they invest in debt
securities with a remaining maturity not greater than 397 days. Still, the value
of the Fund's investments may fall when interest rates rise.
Credit Risk -- money market funds like the Fund are subject to less credit risk
than other income funds because they invest in short-term debt securities of the
highest quality. Still, the Fund could lose money if the issuer of a debt
security is unable to meet its financial obligations or goes bankrupt.
U.S. Government Securities -- some U.S. Government agency securities may be
subject to varying degrees of credit risk, and all U.S. Government Securities
may be subject to price declines in the securities due to changing interest
rates. If an obligation, such as obligations issued by the Federal National
Mortgage Association, the Student Loan Marketing Association, the Federal Home
Loan Bank and the Federal Home Loan Mortgage Corporation, is supported only by
the credit of the agency or instrumentality issuing the obligation, the investor
must look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. Securities directly suported by the full faith and credit of
the United States have less credit risk.
Risk of Concentration in Banking Obligations -- the risks of concentrating in
investments in the banking industry include credit risk, interest rate risks,
and regulatory risk (the impact of state or federal legislation and
regulations).
2 Lexington Money Market
<PAGE>
LEXINGTON MONEY MARKET
--------------------------------------------------------------------------------
HOW THE FUND HAS PERFORMED [GRAPHIC]
The bar chart and table below show the Fund's annual returns and long-term
performance, and illustrate the variability of the Fund's returns. The Fund's
past performance is not an indication of future performance.
The bar chart below provides some indication of the risks of investing in the
Fund by showing the changes in the performance of the Fund's Class A shares from
year to year.
Year by Year Total Returns (%)(1)(2)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.56 5.45 3.01 2.30 3.35 5.06 4.50 4.68 4.64 4.34
----------
(1) These figures are as of December 31 of each year.
(2) Prior to July 26, 2000, Lexington Management Corporation served as the
adviser to the Fund. Effective July 31, 2000, the Fund's outstanding shares
were classified as "Class A" shares.
Best and worst quarterly performance during this period:
2nd quarter 1990: up 1.90%
4th quarter 1993: up 0.56%
The Fund's year-to-date total return as of June 30, 2000 was up 2.58%
For information on the Fund's 7-day yield, please call the Fund at
1-800-992-0180. You should remember that past performance is not an indication
of future performance.
The table below provides some indication of the risks of investing in the Fund
by comparing the Fund's performance to that of a broad measure of market
performance--the Merrill Lynch 91-Day Treasury Bill Index.
Average Annual Total Returns
Merrill Lynch
91-Day
Treasury
Class A Bill Index(3)
------- -------------
One year ended
December 31, 1999 % 4.64 4.85
Five years ended
December 31, 1999 % 4.60 5.35
Ten years ended
December 31, 1999 % 4.34 5.28
----------
(3) The Merrill Lynch 91-Day Treasury Bill Index is an unmanaged index that
seeks to measure the performance of United States Treasury bills currently
available in the marketplace.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Lexington Money Market 3
<PAGE>
WHAT YOU PAY TO INVEST
--------------------------------------------------------------------------------
There are two types of fees and expenses when you invest in mutual funds: fees,
including sales charges, you pay directly when you buy or sell shares, and
operating expenses paid each year by the Fund. The tables that follow show the
fees and expenses for the Fund.
Fees You Pay Directly
Class A
-------
Maximum sales charge on your investment (as
a % of offering price) %
Lexington Money Market None
Maximum deferred sales charge (as a % of
purchase or sales price, whichever is less)
Lexington Money Market None
Operating Expenses Paid Each Year by the Fund(1)
(as a % of average net assets)
Class A
<TABLE>
<CAPTION>
Distribution Total
and Service Fund Fee Waiver
Management (12b-1) Other Operating by Net
Fund Expenses Fee Fees Expenses Expenses Adviser(2) Expenses
------------- --- ---- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lexington Money Market % 0.50 0.00 0.32 0.82 -- 0.82
</TABLE>
----------
(1) This table shows the estimated operating expenses for the Fund as a ratio of
expenses to average daily net assets. The estimated operating expenses are
based on estimated contractual operating expenses commencing with Pilgrim
Investments' management of the Fund.
(2) Pilgrim Investments has entered into an expense limitation agreement with
the Fund under which it will limit expenses of the Fund, excluding interest,
taxes, brokerage and extraordinary expenses, subject to possible
reimbursement to Pilgrim Investments within three years.
Example
The example that follows is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. The example
assumes that you invested $10,000, reinvested all your dividends, the Fund
earned an average annual return of 5%, and annual operating expenses remained at
the current level. Keep in mind that this is only an estimate -- actual expenses
and performance may vary.
Fund 1 year 3 years 5 years 10 years
---- ------ ------- ------- --------
Lexington Money Market $84 262 455 1,014
4 What You Pay to Invest
<PAGE>
SHAREHOLDER
HOW TO PURCHASE SHARES GUIDE
--------------------------------------------------------------------------------
Available for additional purchases only by shareholders that initially purchased
the Fund when it was a part of the Lexington family of funds. This Fund is
closed to new accounts.
The minimum additional investment is $100.
Make your investment using the table on the right.
The Fund and the Distributor reserve the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim reserves the right to waive minimum investment
amounts. The Fund reserves the right to liquidate sufficient shares to recover
annual transfer agent fees or to close your account and redeem your shares
should you fail to maintain your account value at a minimum of $1,000 ($250 for
IRA's).
Additional
Method Investment
------ ----------
By Contacting Visit or consult an investment professional.
Your Investment
Professional
By Mail Fill out the Account Additions form included on the bottom
of your account statement along with your check payable to
the Fund and mail them to the address on the account
statement. Remember to write your account number on the
check.
By Wire Instruct your bank to wire funds to the Fund in the care of:
State Street Bank and Trust -- Kansas City (SSB)
ABA #101003621 Kansas City, MO
credit to: Lexington Money Market (the Fund)
A/C #751-8315; for further credit
to: Shareholder
A/C #__________________________
(your account number)
Shareholder Name: (Your Name Here)
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 5
<PAGE>
SHAREHOLDER
GUIDE HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem shares using the table on the right.
Under unusual circumstances, the Fund may suspend the right of redemption as
allowed by federal securities laws.
Systematic Withdrawal Plan
You may elect to make periodic withdrawals from your account on a regular basis.
* Your account must have a current value of at least $10,000.
* Minimum withdrawal amount is $100.
* You may choose from monthly, quarterly, semi-annual or annual payments.
For additional information, contact the Shareholder Servicing Agent, or see the
Statement of Additional Information.
Payments
Normally, payment for shares redeemed will be made within three days after
receipt by the Transfer Agent of a written request in good order. When you place
a request to redeem shares for which the purchase money has not yet been
collected, the request will be executed at the next determined net asset value,
but the Fund will not release the proceeds until your purchase payment clears.
This may take up to 15 days or more. To reduce such delay, purchases should be
made by bank wire or federal funds.
The Fund normally intends to pay in cash for all shares redeemed, but under
abnormal conditions that make payment in cash unwise, the Fund may make payment
wholly or partly in securities at their then current market value equal to the
redemption price. In such case, the Fund could elect to make payment in
securities for redemptions in excess of $250,000 or 1% of its net assets during
any 90-day period for any one shareholder. An investor may incur brokerage costs
in converting such securities to cash.
Method Procedures
------ ----------
By Contacting Your You may redeem by contacting your investment
Investment Professional professional. Investment professionals may charge for
their services in connection with your redemption
request, but neither the Fund nor the Distributor
imposes any such charge.
By Mail Send a written request specifying the Fund name and
share class, your account number, the name(s) in
which the account is registered, and the dollar value
or number of shares you wish to redeem to:
Pilgrim Funds
P.O. Box 219368
Kansas City, MO 64121-6368
If certificated shares have been issued, the
certificate must accompany the written request.
Corporate investors and other associations must have
an appropriate certification on file authorizing
redemptions. Contact the Shareholder Servicing Agent
for a form of such certification. A signature
guarantee may be required.
By Telephone -- You may redeem shares by telephone on all accounts
Expedited Redemption other than retirement accounts, unless you have
notified the Shareholder Servicing Agent that you do
not wish to use telephone redemptions. To redeem by
telephone, call the Shareholder Servicing Agent at
(800) 992-0180.
Receiving Proceeds By Check:
You may have redemption proceeds (up to a maximum of
$100,000) mailed to an address which has been on
record with Pilgrim Funds for at least 30 days.
Receiving Proceeds By Wire:
You may have redemption proceeds (subject to a
minimum of $5,000) wired to your pre-designated bank
account. You will not be able to receive redemption
proceeds by wire unless you check the box on the
Account Application which signifies that you wish to
receive redemption proceeds by wire and attach a
voided check. Under normal circumstances, proceeds
will be transmitted to your bank on the business day
following receipt of your instructions, provided
redemptions may be made. In the event that share
certificates have been issued, you may not request a
wire redemption by telephone.
6 Shareholder Guide
<PAGE>
SHAREHOLDER
TRANSACTION POLICIES GUIDE
--------------------------------------------------------------------------------
Net Asset Value
The net asset value (NAV) per share for the Fund is determined each business day
as of the close of regular trading on the New York Stock Exchange (usually at
4:00 p.m. Eastern Time). The NAV per share of the Fund is calculated by taking
the value of the Fund's assets, subtracting the Fund's liabilities, and dividing
by the number of shares are outstanding.
In general, assets are valued based on actual or estimated market value, with
special provisions for assets not having readily available market quotations,
and short-term debt securities, and for situations where market quotations are
deemed unreliable. Short-term debt securities having a maturity of 60 days or
less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith under the supervision of the Board of Trustees. Valuing securities at fair
value involves greater reliance on judgment than securities that have readily
available market quotations.
The Fund tries to maintain a stable NAV of $1.00 per share. Because the Fund
uses the amortized cost method of valuing the securities held by it and rounds
its per share net asset value to the nearest whole cent, it is anticipated that
the net asset value of the Fund will remain constant at $1.00 per share.
However, the Fund makes no assurance that it can maintain a $1.00 net asset
value per share.
Price of Shares
When you buy shares, you pay the NAV. When you sell shares, you receive the NAV.
Exchange orders are effected at NAV.
Execution of Requests
Purchase and sale requests are executed at the next NAV determined after the
order is received in proper form by the Transfer Agent or Distributor. A
purchase order will be deemed to be in proper form when all of the required
steps set forth above under "How to Purchase Shares" have been completed. If you
purchase by wire, however, the order will be deemed to be in proper form after
the telephone notification and the federal funds wire have been received. If you
purchase by wire, you must submit an application form in a timely fashion. If an
order or payment by wire is received after the close of regular trading on the
New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not
be credited until the next business day.
You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Fund will not be issued.
Telephone Orders
The Fund and its transfer agent will not be responsible for the authenticity of
phone instructions or losses, if any, resulting from unauthorized shareholder
transactions if they reasonably believe that such instructions were genuine. The
Fund and its transfer agent have established reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include recording telephone instructions for exchanges and expedited
redemptions, requiring the caller to give certain specific identifying
information, and providing written confirmation to shareholders of record not
later than five days following any such telephone transactions. If the Fund and
its transfer agent do not employ these procedures, they may be liable for any
losses due to unauthorized or fraudulent telephone instructions.
Exchanges
You may exchange shares of the Fund for Class A shares of any other Pilgrim
Fund. Class A shares of the Fund for which no sales charge was paid must pay the
applicable sales load on an exchange into Class A shares of another Fund except
for shareholders that purchased shares that were a part of the Lexington family
of funds at the time of purchase.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges of shares are sales and may result in a gain or loss for federal and
state income tax purposes. There is no specific limit on exchange frequency;
however, the Fund is intended for long term investment and not as a short-term
trading vehicle. The adviser may prohibit excessive exchanges (more than four
per year). The adviser also may, on 60 days' prior notice, restrict the
frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges.
You will automatically have the ability to request an exchange by calling the
Shareholder Service Agent. The Fund may change or cancel its exchange policies
at any time, upon 60 days' written notice to shareholders.
Exchanges from other Pilgrim Funds into this Fund are not allowed.
Systematic Exchange Privilege
With an initial account balance of at least $5,000 and subject to the
information and limitations outlined above, you may elect to have a specified
dollar amount of shares systematically exchanged, monthly, quarterly,
semi-annually or annually (on or about the 10th
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Shareholder Guide 7
<PAGE>
SHAREHOLDER
GUIDE TRANSACTION POLICIES
--------------------------------------------------------------------------------
of the applicable month), from your account to an identically registered account
in the same class of any other open-end Pilgrim Fund. This exchange privilege
may be modified at any time or terminated upon 60 days' written notice to
shareholders.
Small Accounts
Due to the relatively high cost of handling small investments, the Fund reserves
the right upon 30 days' written notice to redeem, at NAV, the shares of any
shareholder whose account (except for IRAs) has a value of less than $1,000,
other than as a result of a decline in the NAV per share.
8 Shareholder Guide
<PAGE>
MANAGEMENT OF
ADVISER THE FUND
--------------------------------------------------------------------------------
Pilgrim Investments, Inc. ("Pilgrim") serves as the investment adviser to the
Fund. Pilgrim has overall responsibility for the management of the Fund. Pilgrim
provides or oversees all investment advisory and portfolio management services
for the Fund, and assists in managing and supervising all aspects of the general
day-to-day business activities and operations of the Fund, including custodial,
transfer agency, dividend disbursing, accounting, auditing, compliance and
related services.
Organized in December 1994, Pilgrim is registered as an investment adviser.
Pilgrim is an indirect wholly-owned subsidiary of ReliaStar Financial Corp.
("ReliaStar") (NYSE: RLR). Through its subsidiaries, ReliaStar offers
individuals and institutions life insurance and annuities, employee benefits,
products and services, life and health reinsurance, retirement plans, mutual
funds, bank products, and personal finance education.
Prior to July 26, 2000, Lexington Management Corporation ("Lexington") served as
investment adviser to the Fund. On July 26, 2000, ReliaStar acquired Lexington
Global Asset Managers, Inc., the parent company of Lexington, and Pilgrim
Investments was approved as adviser to the Fund.
As of June 30, 2000, Pilgrim managed over $16.8 billion in assets.
Pilgrim's principal address is 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004.
Pilgrim receives a monthly fee for its services based on the average daily net
assets of the Fund.
The annual advisory fee paid by the Fund for the most recent fiscal year as a
percentage of the Fund's average daily net assets was 0.50% up to $500 million,
and 0.45% in excess of $500 million.
Pilgrim Directly Manages the Fund. The portfolio managers for the Fund are:
Denis P. Jamison has served as Senior Portfolio Manager of the Fund since July
1981. Mr. Jamison serves as Senior Vice President and Senior Portfolio Manager
of Pilgrim. He is a Chartered Financial Analyst and a member of the New York
Society of Security Analysts. Prior to joining Pilgrim in 1981, Mr. Jamison
spent nine years at Arnold Bernhard & Company, an investment counseling and
financial services organization. At Bernhard, he was a Vice President
supervising the security analyst staff and managing investment portfolios. He is
a specialist in government, corporate and municipal bonds. Mr. Jamison graduated
from the City College of New York with a B.A. in Economics.
Roseann G. McCarthy has served as co-manager of the Fund since November 1997.
Ms. McCarthy is an Assistant Vice President of Pilgrim. Prior to joining the
Fixed Income Department in 1997, she was Mutual Fund Marketing and Research
Coordinator. Prior to 1995, Ms. McCarthy was Fund Statistician and a Shareholder
Service Representative for the Lexington Funds. Ms. McCarthy is a graduate of
Hofstra University with a B.B.A in Marketing and has an M.B.A. in Finance from
Seton Hall University.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Management of the Fund 9
<PAGE>
DIVIDENDS,
DISTRIBUTIONS AND
TAXES DIVIDENDS/TAXES
--------------------------------------------------------------------------------
Dividends
The Fund generally distributes most or all of its net earnings in the form of
dividends. The Fund declares dividends daily and pays them monthly.
Distributions from dividends are normally expected to consist primarily of
ordinary income. The Fund distributes capital gains, if any, annually.
Dividend Reinvestment
Unless you instruct the Fund to pay you dividends in cash, dividends and
distributions paid by the Fund will be reinvested in additional shares of the
Fund. You may, upon written request, elect to have all dividends and other
distributions paid on Class A invested in another Pilgrim Fund which offers the
same class shares.
Taxes
The following information is meant as a general summary for U.S. shareholders.
Please see the Statement of Additional Information for additional information.
You should rely your own tax adviser for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund will distribute most of its net investment income and net capital gains
to its shareholders each year. Although the Fund will not be taxed on amounts it
distributes, most shareholders will be taxed on amounts they receive. A
particular distribution generally will be taxable as either ordinary income or
long-term capital gains. It does not matter how long you have held Fund shares
or whether you elect to receive your distributions in cash or reinvest them in
additional Fund shares. For example, if the Fund designates a particular
distribution as a long-term capital gains distribution, it will be taxable to
you at your long-term capital gains rate.
Dividends declared by the Fund in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital gains
distributions.
If you invest through a tax-deferred account, such as a retirement plan, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you sell or redeem Fund shares. You will
generally have a capital gain or loss, which will be long-term or short-term,
generally depending on how long you hold those shares. If you exchange shares,
you may be treated as if you sold them. You are responsible for any tax
liabilities generated by your transactions.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
10 Dividends, Distributions and Taxes
<PAGE>
MORE INFORMATION
ABOUT RISKS
--------------------------------------------------------------------------------
All mutual funds involve risk -- some more than others -- and there is always
the chance that you could lose money or not earn as much as you hope. The Fund's
risk profile is largely a factor of the principal securities in which it invests
and investment techniques that it uses. For more information about the types of
securities and investment techniques that may be used by the Fund, see the
Statement of Additional Information (SAI).
Many of the investment techniques and strategies discussed in this prospectus
and in the SAI are discretionary, which means that the adviser can decide
whether to use them or not. The adviser may also use investment techniques or
make investments in securities that are not a part of the Fund's principal
investment strategy.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
More Information about Risks 11
<PAGE>
FINANCIAL
HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single share. The total returns in the table represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). A report of the
Fund's independent accountant, along with the Fund's financial statements, are
included in the Fund's annual report, which is available upon request.
12
<PAGE>
FINANCIAL
HIGHLIGHTS LEXINGTON MONEY MARKET
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 1.00 1.00 1.00 1.00 1.00
Net investment income (loss) $ 0.0425 0.0455 0.0458 0.0441 0.0495
Net realized and unrealized gain (loss) from investment
operations $ -- -- -- -- --
Total income (loss) from investment operations $ 0.0425 0.0455 0.0458 0.0441 0.0495
Less distributions:
Distributions from net investment income $ (0.0425) (0.0455) (0.0458) (0.0441) (0.0495)
Distributions in excess of net investment income $ -- -- -- -- --
Distributions from net realized gains $ -- -- -- -- --
Distributions in excess of net realized gains $ -- -- -- -- --
Total distributions $ (0.0425) (0.0455) (0.0458) (0.0441) (0.0495)
Net asset value, end of period $ 1.00 1.00 1.00 1.00 1.00
TOTAL RETURN % 4.34 4.64 4.68 4.50 5.06
Ratios/Supplemental Data
Net assets, end of period (thousands) $ 97,850 87,488 95,149 97,526 88,786
Ratio of expenses to average net assets, before
reimbursement or waiver % 1.01 1.05 1.04 1.04 1.08
Ratio of expenses to average net assets, net of
reimbursement or waiver % 1.00 1.00 1.00 1.00 1.00
Ratio of net investment income (loss) to average net
assets, before reimbursement or waiver % 4.25 4.51 4.55 4.37 4.87
Ratio of net investment income (loss) to average net
assets, net of reimbursement or waiver % 4.26 4.56 4.58 4.41 4.95
Portfolio Turnover Rate % -- -- -- -- --
</TABLE>
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Lexington Money Market 13
<PAGE>
WHERE TO GO FOR MORE INFORMATION
You'll find more information about the Fund in the:
ANNUAL/SEMI-ANNUAL REPORTS
Includes a discussion of recent market conditions and investment strategies that
significantly affected performance, the financial statements and the auditor's
reports (in annual report only).
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more detailed information about the Fund. The SAI is legally
part of this prospectus (it is incorporated by reference). A copy has been filed
with the Securities and Exchange Commission (SEC).
Please write or call for a free copy of the current Annual/Semi-Annual reports,
the SAI or other Fund information, or to make shareholder inquiries:
The Pilgrim Funds
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
1-800-992-0180
Or visit our website at www.pilgrimfunds.com.
This information may also be reviewed or obtained from the SEC. In order to
review the information in person, you will need to visit the SEC's Public
Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may
obtain the information for a fee by contacting the SEC at:
Securities and Exchange Commission
Public Reference Section
Washington, D.C. 20549-0102
or at the e-mail address: [email protected]
Or obtain the information at no cost by visiting the SEC's Internet website at
http://www.sec.gov.
When contacting the SEC, you will want to refer to the Fund's SEC file number.
The file number is as follows:
Lexington Money Market Trust 811-2701
LEXIMMPRO073100-073100
<PAGE>
GRAPHICS DESCRIPTION APPENDIX
There are four icon sized graphics used throughout the prospectus as follows:
1. In the sections describing the Objective of the Funds, the graphic icon is
that of a dart in the bullseye of a target.
2. In the sections describing the Investment Strategy of the Funds, the
graphic icon is that of a compass pointing due north.
3. In the sections describing the Risks of the Funds, the graphic icon is that
of an old fashioned scale tilting heavy on the left side.
4. In the sections describing the Performance history of the Funds, the
graphic icon is that of a stack of US currency bills.
5. On the bottom footer of every odd numbered page (right hand page), the
graphic icon is that of a telephone by the 800 number of the fund to call
for information.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
July 31, 2000
PILGRIM GLOBAL CORPORATE LEADERS FUND, INC.
PILGRIM GNMA INCOME FUND, INC.
PILGRIM GOLD FUND, INC.
PILGRIM GROWTH AND INCOME FUND, INC.
PILGRIM INTERNATIONAL FUND, INC.
PILGRIM SILVER FUND, INC.
PILGRIM SMALLCAP ASIA GROWTH FUND, INC.
PILGRIM TROIKA DIALOG RUSSIA FUND, INC.
PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC.
PILGRIM GLOBAL INCOME FUND
LEXINGTON MONEY MARKET TRUST
(each a "Fund" and collectively the "Funds")
This Statement of Additional Information ("SAI") relates to each investment
company listed above. Prospectuses for the Funds, dated July 31, 2000, which
provide the basic information you should know before investing in the Funds, may
be obtained without charge from the Funds or the Funds' principal underwriter,
Pilgrim Securities, Inc. ("Pilgrim Securities" or the "Distributor"), at the
address listed above. This Statement of Additional Information is not a
prospectus and it should be read in conjunction with the Prospectuses, dated
July 31, 2000, which have been filed with the Securities and Exchange Commission
("SEC"). In addition, the financial statements from the Funds' December 31, 1999
Annual Reports are incorporated herein by reference. Copies of the Funds'
Prospectuses and Annual or Semi-Annual Reports may be obtained without charge by
contacting the Pilgrim Funds at the address and phone number written above.
TABLE OF CONTENTS
HISTORY OF THE FUNDS........................................................ 2
MANAGEMENT OF THE FUNDS..................................................... 3
EXPENSE LIMITATION AGREEMENTS............................................... 17
RULE 12b-1 PLANS............................................................ 17
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS..................................... 23
INVESTMENT RESTRICTIONS..................................................... 42
PORTFOLIO TRANSACTIONS...................................................... 62
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 66
DETERMINATION OF SHARE PRICE................................................ 72
SHAREHOLDER INFORMATION..................................................... 74
SHAREHOLDER SERVICES AND PRIVILEGES......................................... 75
DISTRIBUTIONS............................................................... 77
TAX CONSIDERATIONS.......................................................... 78
CALCULATION OF PERFORMANCE DATA............................................. 84
GENERAL INFORMATION......................................................... 87
FINANCIAL STATEMENTS........................................................ 88
<PAGE>
HISTORY OF THE FUNDS
PILGRIM GLOBAL CORPORATE LEADERS FUND, INC.
Pilgrim Global Corporate Leaders Fund, Inc. ("Global Corporate Leaders
Fund") is a corporation organized under the laws of the State of Maryland on
March 11, 1987 under the name of Lexington Global Fund, Inc. The Fund is a
diversified, open-end management investment company. The Fund's name was changed
on May 5, 1998 from Lexington Global Fund, Inc. to Lexington Global Corporate
Leaders Fund, Inc., and on July 26, 2000, to Pilgrim Global Corporate Leaders
Fund, Inc.
PILGRIM GNMA INCOME FUND, INC.
Pilgrim GNMA Income Fund, Inc. ("GNMA Income Fund") is a corporation
organized under the laws of the State of Maryland on August 15, 1973 under the
name of Lexington GNMA Income Fund, Inc. The Fund is a diversified, open-end
management investment company. The name of the Fund was changed on July 26, 2000
from Lexington GNMA Income Fund, Inc. to Pilgrim GNMA Income Fund, Inc.
PILGRIM GOLD FUND, INC.
Pilgrim Gold Fund, Inc. ("Gold Fund") is a corporation formed under the
laws of the State of Maryland on May 11, 1988 under the name of Lexington
Goldfund, Inc. The Fund was originally organized as a Delaware corporation on
December 3, 1975. The Fund is a non-diversified, open-end management investment
company. The name of the Fund was changed on July 26, 2000 from Lexington
Goldfund, Inc. to Pilgrim Gold Fund, Inc.
PILGRIM GROWTH AND INCOME FUND, INC.
Pilgrim Growth and Income Fund, Inc. ("Growth and Income Fund") is a
corporation organized under the laws of the State of Maryland on April 30, 1991
under the name of Lexington Growth and Income Fund, Inc. The Fund was originally
organized as a New Jersey Corporation on February 11, 1959. The Fund is an
open-end, diversified management investment company. The name of the Fund was
changed on July 26, 2000 from Lexington Growth and Income Fund, Inc. to Pilgrim
Growth and Income Fund, Inc.
PILGRIM INTERNATIONAL FUND, INC.
Pilgrim International Fund, Inc. ("International Fund") is a corporation
organized under the laws of the State of Maryland on November 23, 1993 under the
name of Lexington International Fund, Inc. The Fund is an open-end, diversified
management investment company. The name of the Fund was changed on July 26, 2000
from Lexington International Fund, Inc. to Pilgrim International Fund, Inc.
PILGRIM SILVER FUND, INC.
Pilgrim Silver Fund, Inc. ("Silver Fund") is a corporation formed under the
laws of the State of Maryland on January 3, 1992 under the name of Lexington
Silver Fund, Inc. The Fund is a non-diversified, open-end management investment
company. The name of the Fund was changed on July 26, 2000 from Lexington Silver
Fund, Inc. to Pilgrim Silver Fund, Inc.
PILGRIM SMALLCAP ASIA GROWTH FUND, INC.
Pilgrim SmallCap Asia Growth Fund, Inc. ("SmallCap Asia Growth Fund") is a
corporation organized under the laws of the State of Maryland on April 18, 1995
under the name of Crosby Small Cap Asia Growth Fund, Inc. The Fund is an
open-end, diversified management investment company. The name of the Fund was
2
<PAGE>
changed on May 3, 1999 from Lexington Crosby Small Cap Asia Growth Fund, Inc. to
Lexington Small Cap Asia Growth Fund, Inc. and on July 26, 2000 to Pilgrim
SmallCap Asia Growth Fund, Inc.
PILGRIM TROIKA DIALOG RUSSIA FUND, INC.
Pilgrim Troika Dialog Russia Fund, Inc. ("Russia Fund") is a corporation
organized under the laws of the State of Maryland on November 20, 1995. The Fund
is a non-diversified, open-end management investment company. The name of the
Fund was changed on April 2, 1996 from Lexington Russia Fund, Inc. to Lexington
Troika Dialog Russia Fund, Inc., and on July 26, 2000, to Pilgrim Troika Dialog
Russia Fund, Inc.
PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC.
Pilgrim Worldwide Emerging Markets Fund, Inc. ("Worldwide Emerging Markets
Fund") is a corporation organized under the laws of the State of Maryland on
January 22, 1969 under the name of Lexington Growth Fund, Inc. The Fund is a
diversified, open-end management investment company. The name of the Fund was
changed on June 14, 1991 from Lexington Growth Fund, Inc. to Lexington Worldwide
Emerging Markets Fund, Inc., and on July 26, 2000, to Pilgrim Worldwide Emerging
Markets Fund, Inc.
PILGRIM GLOBAL INCOME FUND
Pilgrim Global Income Fund (the "Global Income Fund") is a trust formed
under the laws of the Commonwealth of Massachusetts on February 24, 1983. The
Fund is a non-diversified, open-end management investment company. The name of
the Fund was changed from Lexington Tax Exempt Bond Trust to Lexington Ramirez
Global Income Fund, and to Lexington Global Income Fund, and on July 26, 2000 to
Pilgrim Global Income Fund.
LEXINGTON MONEY MARKET TRUST
Lexington Money Market Trust (the "Money Market Trust") is an organization
commonly referred to as a business trust formed under the laws of the
Commonwealth of Massachusetts on June 30, 1977 under the name of Banner
Redi-Resources Trust. The name of the Fund was changed on March 2, 1979 from
Banner Redi-Resources Trust to "Lexington Money Market Trust".
MANAGEMENT OF THE FUNDS
BOARD OF DIRECTORS/TRUSTEES
Each Fund is managed by its Directors/Trustees ("Board of Directors" and
"Board of Trustees" are used interchangeably in this SAI). The
Directors/Trustees and Officers of the Funds are listed below. An asterisk (*)
has been placed next to the name of each Director/Trustee who is an "interested
person," as that term is defined in the Investment Company Act of 1940 Act
("1940 Act"), by virtue of that person's affiliation with the Funds, or the
Funds' adviser ("Pilgrim Investments" or the "Investment Manager"). Unless
otherwise noted, the mailing address of the Directors/Trustees is 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004. The Board of
Directors/Trustees governs each Fund and is responsible for protecting the
interests of shareholders. The Directors/Trustees are experienced executives who
oversee the Funds' activities, review contractual arrangements with companies
that provide services to the Funds, and review each Fund's performance.
3
<PAGE>
Set forth below is information regarding the Directors/Trustees of the
Funds.
<TABLE>
<CAPTION>
Position(s) With
Name, Age the Fund Principal Occupation During Past 5 Years
------------- -------- ----------------------------------------
<S> <C> <C>
Al Burton Director/Trustee President of Al Burton Productions for more than
(Age 72) the last five years. Mr. Burton is also a
Director, Trustee or Advisory board member of each
of the Funds managed by Pilgrim.
Paul S. Doherty Director/Trustee President, of Doherty, Wallace, Pillsbury and
(Age 66) Murphy, P.C., Attorneys. Formerly a Director of
Tambrands, Inc. (1993-1998). Mr. Doherty is also a
Director or Trustee of each of the Funds managed
by Pilgrim.
Robert B. Goode Director/Trustee Retired. Mr. Goode was formerly Chairman, American
(Age 69) Direct Business Insurance Agency, Inc. (1996 -
2000). Mr. Goode is also a Director or Trustee of
each of the Funds managed by Pilgrim.
Alan L. Gosule Director/Trustee Partner and Chairman of the Tax Department of
(Age 59) Clifford Chance Rogers & Wells (since 1991). Mr.
Gosule is a Director of F.L. Putnam Investment
Management Co., Inc., Simpson Housing Limited
Partnership, Home Properties of New York, Inc.,
CORE Cap, Inc. and Colonnade Partners. Mr. Gosule
is also a Director or Trustee of each of the Funds
managed by Pilgrim.
Walter H. May Director/Trustee Retired. Mr. May was formerly Managing Director
(Age 63) and Director of Marketing for Piper Jaffray, Inc.
Mr. May is also a Director or Trustee of each of
the Funds managed by Pilgrim.
Jock Patton Director/Trustee Private Investor. Director of Hypercom Corporation
(Age 54) (since January 1999), and JDA Software Group, Inc.
(since January 1999). Mr. Patton is also a
Director of Buick of Scottsdale, Inc., National
Airlines, Inc., BG Associates, Inc., BK
Entertainment, Inc., Arizona Rotorcraft, Inc. and
Director and Chief Executive Officer of Rainbow
Multimedia Group, Inc. Mr. Patton was formerly
Director of Stuart Entertainment, Inc., Director
of Artisoft, Inc. (August 1994-July 1998); and a
President and Co-owner of StockVal, Inc. (April
1993 - June 1997). Mr. Patton is also a Director,
Trustee, or a member of the Advisory board of each
of the Funds managed by Pilgrim.
David W.C. Putnam Director/Trustee President, Clerk and Director of F.L. Putnam
(Age 60) Securities Company, Inc. and its affiliates (since
1978). Mr. Putnam is Director of Anchor Investment
Management Corporation and President and
Director/Trustee of Anchor Capital Accumulation
Trust, Anchor International Bond Trust, Anchor
Gold and Currency Trust, Anchor Resources and
Commodities Trust and Anchor Strategic Assets
Trust. Mr. Putnam was formerly Director of Trust
Realty Corp. and Bow Ridge Mining Co. Mr. Putnam
is also a Director or Trustee of each of the Funds
managed by Pilgrim.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Position(s) With
Name, Age the Fund Principal Occupation During Past 5 Years
------------- -------- ----------------------------------------
<S> <C> <C>
John R. Smith Director/Trustee President of New England Fiduciary Company (since
(Age 76) 1991). Mr. Smith is Chairman of Massachusetts
Educational Financing Authority (since 1987), Vice
Chairman of Massachusetts Health and Education
Authority (since 1979) and Vice-Chairman of MHI,
Inc. (Massachusetts Non-Profit Energy Purchasers
Consortium) (since 1996). Mr. Smith is also a
Director or Trustee of each of the Funds managed
by Pilgrim.
*Robert W. Stallings Director/Trustee/ Chairman, Chief Executive Officer and President of
(Age 51) Chairman Pilgrim Group, Inc. ("Pilgrim Group") (since
December 1994); Chairman, Pilgrim Investments,
Inc. (since December 1994); Chairman, Pilgrim
Securities, Inc. ("Pilgrim Securities") (since
December 1994); President and Chief Executive
Officer of Pilgrim Funding, Inc. (since November
1999); and President and Chief Executive Officer
of Pilgrim Capital Corporation and its
predecessors (since August 1991). Mr. Stallings is
also a Director, Trustee, or a member of the
Advisory Board of each of the Pilgrim Funds.
*John G. Turner Director/Trustee Chairman and Chief Executive Officer of ReliaStar
(Age 60) Financial Corp. and ReliaStar Life Insurance Co.
(since 1993); Chairman of ReliaStar Life Insurance
Company of New York (since 1995); Chairman of
Northern Life Insurance Company (since 1992). Mr.
Turner was formerly Director of Northstar
Investment Management Corporation and affiliates
(1993 to 1999) and President of ReliaStar
Financial Corp. and ReliaStar Life Insurance Co.
(1989-1991). Mr. Turner is also Chairman of each
of the Funds managed by Pilgrim.
David Wallace Director/Trustee Chairman of FECO Engineered Systems, Inc. Mr.
(Age 76) Wallace is President and Trustee of the Robert R.
Young Foundation; Governor of the New York
Hospital, Trustee of Greenwit Hospital and
Director of UMC Electronics and Zurn Industries,
Inc. Mr. Wallace was formerly Chairman of Lone
Star Industries and Putnam Trust Company, Chairman
and Chief Executive Officer of Todd Shipyards,
Bangor Punta Corporation, and National Securities
& Research Corporation. Mr. Wallace is also a
Director or Trustee of each of the Funds managed
by Pilgrim.
</TABLE>
5
<PAGE>
In addition, the following individuals serve as Advisory Board Members to
certain of the Pilgrim Funds.
<TABLE>
<CAPTION>
Position(s) With
Name, Age the Fund Principal Occupation During Past 5 Years
---------- -------- ----------------------------------------
<S> <C> <C>
Mary A. Baldwin, Ph.D. Advisory Board Member Realtor, Caldwell Bankers Success Realty
(Age 60) (formerly, The Prudential Arizona Realty) for more
than the last five years. Ms. Baldwin is also Vice
President, United States Olympic Committee
(November 1996-present), and formerly Treasurer,
United States Olympic Committee (November
1992-November 1996). Ms. Baldwin is an Advisory
Board Member of each of the Funds managed by
Pilgrim Investments.
S.M.S. Chada Advisory Board Member Secretary, Ministry of External Affairs, New
(Age 61) Delhi, India; Head of Foreign Service Institute,
New Delhi, India; Special Envoy of the Government
of India; Director, Special Unit for Technical
Cooperation among Developing countries, United
Nations Development Program, New York. Mr. Chada
is an Advisory Board Member of Global Corporate
Leaders, International, SmallCap Asia Growth,
Russia and Global Income Funds.
Andrew M. McCosh Advisory Board Member Professor of the Organisation of Industry and
(Age 58) Commerce, Department of Business Studies, The
University of Edinburgh, Scotland. Mr. McCosh is
an Advisory Board Member of Global Corporate
Leaders, International, SmallCap Asia Growth,
Russia and Global Income Funds.
</TABLE>
COMPENSATION OF DIRECTORS/TRUSTEES
The Funds pay each Director/Trustee who is not an interested person a pro
rata share, as described below, of (i) an annual retainer of $20,000; (ii)
$5,000 per quarterly Board meeting; (iii) $500 per committee meeting; (iv) $500
per special or telephonic meeting; and (v) out-of-pocket expenses. The pro rata
share paid by the Funds is based on each Fund's average net assets as a
percentage of the average net assets of all the funds managed by the Investment
Manager for which the Directors/Trustees serve in common as Directors/Trustees.
The Funds pay each Advisory Board Member a fee of $15,000 annually, plus
reasonable travel expenses. Prior to July 26, 2000, the Funds had a different
compensation structure in place.
The following table sets forth information regarding compensation of
Directors/Trustees by the Funds for the fiscal year ended December 31, 1999.
Officers of the Funds and Directors/Trustees who are interested persons of the
Funds do not receive any compensation from the Fund or any other funds managed
by the Investment Manager. In the column headed "Total Compensation from
Registrants and Fund Complex Paid to Director/Trustee," the number in
parentheses indicates the total number of boards in the fund complex on which
the Director/Trustee served during that fiscal year.
6
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE AGGREGATE
COMPENSATION AGGREGATE AGGREGATE COMPENSATION COMPENSATION AGGREGATE
FROM GLOBAL COMPENSATION COMPENSATION FROM GROWTH FROM COMPENSATION
NAME OF PERSON, CORPORATE FROM GNMA FROM GOLD AND INCOME INTERNATIONAL FROM SILVER
POSITION LEADERS FUND INCOME FUND FUND FUND FUND FUND
--------------- ------------ ----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
S.M.S. Chadha $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600
Robert M. DeMichele $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Beverley C. Duer $ 1,946 $1,946 $2,196 $1,946 $1,946 $1,946
Barbara R. Evans $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Richard M. Hisey $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Jerard F. Maher $ 1,488 $1,488 $1,738 $1,488 $1,488 $1,488
Andrew M. McCosh $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600
Donald B. Miller $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600
Francis Olmsted* $ 1,464 $1,463 $1,464 $1,464 $1,464 $1,464
John G. Preston $ 1,600 $1,600 $1,975 $1,600 $1,600 $1,600
Allen H. Stowe $ 0 $1,600 $ 0 $ 0 $ 0 $ 0
Margaret W. Russell* $ 1,243 $1,243 $1,243 $1,243 $1,243 $1,243
Philip C. Smith* $ 1,326 $1,326 $1,326 $1,326 $1,326 $1,326
Francis A. Sunderland* $ 1,246 $1,247 $1,246 $1,246 $1,246 $1,246
AGGREGATE AGGREGATE
COMPENSATION AGGREGATE COMPENSATION TOTAL
FROM COMPENSATION FROM AGGREGATE AGGREGATE COMPENSATION
SMALLCAP FROM TROIKA WORLDWIDE COMPENSATION COMPENSATION FROM FUND
NAME OF PERSON, ASIA GROWTH DIALOG EMERGING FROM GLOBAL FROM MONEY COMPLEX
POSITION (1) FUND RUSSIA FUND MARKETS FUND INCOME FUND MARKET TRUST TO DIRECTORS
------------ ---- ----------- ------------ ----------- ------------ ------------
S.M.S. Chadha $1,600 $1,600 $1,600 $1,600 $1,600 $24,006
(15 boards)
Robert M. DeMichele $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(15 boards)
Beverly C. Duer $1,946 $1,946 $1,946 $1,946 $ 1,946 $29,656
(15 boards)
Barbara R. Evans $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(15 boards)
Richard M. Hisey $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(8 boards)
Jerard F. Maher $1,488 $1,488 $1,488 $1,488 $1,488 $22,976
(15 boards)
Andrew M. McCosh $1,600 $1,600 $1,600 $1,600 $ 1,600 $24,006
(15 boards)
Donald B. Miller $1,600 $1,600 $1,600 $1,600 $1,600 $24,006
(15 boards)
Francis Olmstead* $1,464 N/A $1,463 $1,464 $ 1,463 $16,800
(N/A)
John G. Preston $1,600 $1,600 $1,600 $1,600 $1,600 $24,006
(15 boards)
Allen H. Stowe $ 0 $1,600 $1,600 $ 0 $1,600 $12,712
(8 boards)
Margaret W. Russell* $1,243 $1,243 $1,243 $1,243 $1,243 $18,000
(N/A)
Philip C. Smith* $1,326 $1,326 $1,326 $1,326 $1,326 $19,200
(N/A)
Francis A. Sunderland* $1,246 $1,246 $1,246 $1,246 $1,246 $16,800
(N/A)
</TABLE>
--------
* Retired prior to July 26, 2000.
7
<PAGE>
The following table shows the annual benefits payable to certain
Directors/Trustees who are eligible for benefits under the Funds' Retirement
Plan for Eligible Directors/Trustees, effective September 12, 1995, and amended
and restated on April 18, 2000 (the "Retirement Plan"). The Retirement Plan
applies to individuals who were Directors/Trustees of the Funds prior to July
26, 2000. The Retirement Plan was amended by the Directors/Trustees on April 18,
2000 to, among other things, eliminate the age a Director/Trustee must attain in
order to receive retirement benefits. As amended, a Director/Trustee would be
eligible for retirement benefits upon completion of ten continuous or
non-forfeited years of service, as defined in the Retirement Plan, and service
has terminated due to death, disability or voluntary or involuntary termination
other than for "cause," as defined in the Retirement Plan. Messrs. Duer, Maher,
Miller and Stowe were not nominated to serve as Directors/Trustees of the Funds
after the completion of the Lexington Acquisition. Therefore, their service was
terminated and their benefits will commence with the closing of the Lexington
Acquisition and will continue for ten years, in accordance with the terms of the
Retirement Plan.
ANNUAL DATE BENEFITS
NAME OF DIRECTOR/TRUSTEE BENEFIT EXPECTED TO END
------------------------ -------- ---------------
Beverley C. Duer $ 21,750 July 2010
Jerard F. Maher* $ 18,000 July 2010
Donald B. Miller $ 21,750 July 2010
Francis Olmsted $ 16,800 October 1, 2005
Margaret W. Russell $ 18,000 April 1, 2008
Philip C. Smith $ 19,200 October 1, 2006
Allen H. Stowe* $ 18,000 July 2010
Francis A. Sunderland $ 16,800 April 1, 2006
----------
* Messrs. Maher and Stowe are eligible to receive benefits under the
Retirement Plan as a result of their prior service as a Trustee of another
fund.
In addition, Mr. Chadha and Mr. McCosh will be eligible for retirement
benefits after six years of service, provided that if the Retirement Plan is
terminated during that period for reasons other than for "cause," as defined in
the Retirement Plan, they will be eligible to receive retirement benefits as if
they had completed 10 years of service.
OFFICERS
Unless otherwise noted, the mailing address of the Officers is 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004. The following individuals
serve as Officers for the Funds:
James R. Reis, Executive Vice President and Assistant Secretary. (Age 42)
Director, Vice Chairman (since December 1994), Executive Vice President
(since April 1995), and Director of Structured Finance (since April 1998),
Pilgrim Group, Inc. and Pilgrim Investments; Director (since December 1994)
and Vice Chairman (since November 1995) of Pilgrim Securities; Executive
Vice President, Assistant Secretary and Chief Credit Officer of Pilgrim
Prime Rate Trust; Executive Vice President and Assistant Secretary of each
of the other Pilgrim Funds. Chief Financial Officer (since December 1993),
Vice Chairman and Assistant Secretary (since April 1993) and former
President (May 1991 - December 1993), Pilgrim Capital (formerly Express
America Holdings Corporation). Presently serves or has served as an officer
or director of other affiliates of Pilgrim Capital.
Stanley D. Vyner, Executive Vice President. (Age 49) President and Chief
Executive Officer (since August 1996), Pilgrim Investments; Executive Vice
President of most of the other Pilgrim Funds (since July 1996). Formerly
Chief Executive Officer (November 1993 - December 1995) HSBC Asset
Management Americas, Inc., and Chief Executive Officer, and Actuary (May
1986 - October 1993) HSBC Life Assurance Co.
8
<PAGE>
James M. Hennessy, Executive Vice President and Secretary. (Age 50)
Executive Vice President and Secretary (since April 1998), Pilgrim Capital
(formerly Express America Holdings Corporation), Pilgrim Group, Pilgrim
Securities and Pilgrim Investments; Executive Vice President and Secretary
of each of the other Pilgrim Funds. Formerly Senior Vice President, Pilgrim
Capital (April 1995 - April 1998); Senior Vice President, Express America
Mortgage Corporation (June 1992 - August 1994) and President, Beverly Hills
Securities Corp. (January 1990 - June 1992).
Michael J. Roland, Senior Vice President and Principal Financial Officer.
(Age 41) Senior Vice President and Chief Financial Officer, Pilgrim Group,
Pilgrim Investments and Pilgrim Securities (since June 1998); Senior Vice
President and Principal Financial Officer of each of the other Pilgrim
Funds. He served in same capacity from January, 1995 - April, 1997.
Formerly, Chief Financial Officer of Endeaver Group (April, 1997 to June,
1998).
Robert S. Naka, Senior Vice President and Assistant Secretary. (Age 36)
Senior Vice President, Pilgrim Investments (since November 1999) and
Pilgrim Group, Inc. (since August 1999). Senior Vice President and
Assistant Secretary of each of the other Pilgrim Funds. Formerly Vice
President, Pilgrim Investments (April 1997 - October 1999), Pilgrim Group,
Inc. (February 1997 - August 1999). Formerly Assistant Vice President,
Pilgrim Group, Inc. (August 1995 - February 1997). Formerly Operations
Manager, Pilgrim Group, Inc. (April 1992 - April 1995).
Robyn L. Ichilov, Vice President and Treasurer. (Age 32) Vice President,
Pilgrim Investments (since August 1997), Accounting Manager (since November
1995). Vice President and Treasurer of most of the other Pilgrim Funds.
Formerly Assistant Vice President and Accounting Supervisor for PaineWebber
(June 1993 - April 1995).
CODE OF ETHICS
The Funds have adopted a Code of Ethics governing personal trading
activities of all Directors/Trustees and Officers of the Funds and persons who,
in connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Funds or obtain information pertaining
to such purchase or sale. The Code is intended to prohibit fraud against the
Funds that may arise from personal trading. Personal trading is permitted by
such persons subject to certain restrictions; however they are generally
required to pre-clear all security transactions with the Funds' Compliance
Officer or her designee and to report all transactions on a regular basis.
Sub-Advisers have adopted their own Code of Ethics to govern the personal
trading activities of their personnel.
PRINCIPAL SHAREHOLDERS
As of July 26, 2000, the Directors and Officers as a group owned less than
1% of any class of the Funds' outstanding shares. As of that date, to the
knowledge of management, no person owned beneficially or of record more than 5%
of the outstanding Class A shares of the Funds, except as follows below. As of
July 26, 2000, there were no outstanding B, C, or Q shares of the Funds.
9
<PAGE>
PRINCIPAL SHAREHOLDERS
5% OR GREATER
<TABLE>
<CAPTION>
CLASS AND
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP(1) OF CLASS OF FUND
---- ---------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Pilgrim Global Corporate Charles Schwab & Co, Inc N/A N/A 18.49%
Leaders Fund Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Lexington Management Corp. N/A N/A 18.26%
FBO Southeastern Assoc.
Attn: Lorraine Kimble
Park 80 West Plaza Two
Saddle Brook, NJ 07663
Pilgrim Global Income Fund Donaldson Lufkin & Jenrette N/A N/A 8.04%
Securities
Mutual Funds Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
Prudential Securities, Inc. N/A N/A 6.96%
Attn: Mutual Funds
1 New York Plaza
New York, NY 10004-1901
Charles Schwab & Co, Inc N/A N/A 10.02%
Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim International Fund Grace Jones Richardson N/A N/A 9.60%
Testamentary Trust Dated 2/7/62
Piedmont Financial Company, Inc.
Attn: Susan Gleason
P.O. Box 20124
Greensboro, NC 27420-0124
Donaldson Lufkin & Jenrette N/A N/A 5.26%
Securities
Mutual Funds Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
Pilgrim International Fund Lexington Management Corp. N/A N/A 18.57%
FBO Hillsdale Fund
Attn: Lorraine Kimble
Park 80 West Plaza Two
Saddle Brook, NJ 07663
</TABLE>
----------
(1) Prior to July 26, 2000, the Lexington Funds offered only one class of
shares as a no-load mutual fund complex.
10
<PAGE>
<TABLE>
<CAPTION>
CLASS AND
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP(1) OF CLASS OF FUND
---- ---------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Charles Schwab & Co, Inc N/A N/A 5.82%
Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim Silver Fund National Investor Services Corp. N/A N/A 5.71%
55 Water St., 32nd Floor
New York, NY 10041-3229
Pilgrim SmallCap Asia Donaldson Lufkin & Jenrette N/A N/A 5.04%
Growth Fund Securities
Mutual Funds Dept., 5th Floor
P.O. Box 2052
Jersey City, NJ 07303-2052
Pilgrim Troika Dialog Charles Schwab & Co, Inc N/A N/A 22.55%
Russia Fund Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
National Investor Services Corp. N/A N/A 7.24%
55 Water St., 32nd Floor
New York, NY 10041-3229
Robert Q. Craddock N/A N/A 8.69%
Norwood Clinic
Box C-230
Birmingham, AL 35283
Pilgrim Worldwide Emerging Salomon Smith Barney, Inc. N/A N/A 16.83%
Markets Fund 388 Greenwich St.
New York, NY 10013-2339
</TABLE>
11
<PAGE>
PRINCIPAL SHAREHOLDERS
25% OR GREATER
<TABLE>
<CAPTION>
CLASS AND
TYPE OF PERCENTAGE PERCENTAGE
FUND NAME AND ADDRESS OWNERSHIP(1) OF CLASS OF FUND
---- ---------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Pilgrim Global Income Fund Smith Richardson Foundation N/A N/A 40.98%
c/o Lexington Management Corp.
Park 80 West Plaza Two
Saddle Brook, NJ 07663
Pilgrim GNMA Income Fund Charles Schwab & Co, Inc N/A N/A 50.49%
Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim Gold Fund Charles Schwab & Co, Inc N/A N/A 25.48%
Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim International Fund Lexington Management Corp. N/A N/A 33.93%
FBO Center for Creative
Leadership
Attn: Lorraine Kimble
Park 80 West Plaza Two
Saddle Brook, NJ 07663
Pilgrim Silver Fund Charles Schwab & Co, Inc N/A N/A 35.03%
Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim SmallCap Asia Charles Schwab & Co, Inc N/A N/A 26.91%
Growth Fund Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
Pilgrim SmallCap Asia Smith Richardson Foundation N/A N/A 41.61%
Growth Fund c/o Lexington Management Corp.
Park 80 West Plaza Two
Saddle Brook, NJ 07663
Pilgrim Worldwide Emerging Charles Schwab & Co, Inc N/A N/A 30.49%
Markets Fund Reinvest Account
ATT Mutual Fund Department
101 Montgomery St.
San Francisco, CA 94104-4122
</TABLE>
----------
(1) Prior to July 26, 2000, the Lexington Funds offered only one class of
shares as a no-load mutual fund complex.
12
<PAGE>
INVESTMENT MANAGER
The Investment Manager for the Funds is Pilgrim Investments, Inc. ("Pilgrim
Investments" or the "Investment Manager"). Prior to July 26, 2000, Lexington
Management Corporation ("LMC") served as investment adviser to the Funds. On
July 26, 2000, Lexington Global Asset Managers, Inc, the indirect parent of LMC,
was acquired by ReliaStar Financial Corp., the indirect parent of Pilgrim
Investments, Inc.
The Investment Manager, subject to the authority of the Directors/Trustees
of the Funds, serves as investment manager to the Funds and has overall
responsibility for the management of each Fund's portfolio pursuant to an
Investment Management Agreement between the Investment Manager and each Fund,
subject to the delegation of certain responsibilities to Crosby Asset Management
(US), Inc. as the Sub-Adviser for SmallCap Asia Growth Fund and Troika Asset
Management (Cayman Islands), Ltd. as Sub-Adviser for the Russia Fund. The
Investment Management Agreements require the Investment Manager to oversee the
provision of all investment advisory and portfolio management services for the
Funds.
Each Fund's Investment Management Agreement requires the Investment Manager
to provide, subject to the supervision of the Board of Directors/Trustees,
investment advice and investment services to the Fund and to furnish advice and
recommendations with respect to investment of the Fund's assets and the purchase
or sale of its portfolio securities. The Investment Manager also provides
investment research and analysis. Each Investment Management Agreement provides
that the Investment Manager is not subject to liability to the Fund for any act
or omission in the course of, or connected with, rendering services under the
Investment Management Agreement, except by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations and duties
under the Investment Management Agreement.
After an initial two year term, each Investment Management Agreement
continues in effect from year to year so long as such continuance is
specifically approved at least annually by (a) the Board of Directors or (b) the
vote of a "majority" (as defined in the 1940 Act) of the Fund's outstanding
shares voting as a single class; provided, that in either event the continuance
is also approved by at least a majority of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Investment Manager by
vote cast in person at a meeting called for the purpose of voting on such
approval. Each Investment Management Agreement is terminable without penalty
with not less than 60 days' notice by the Board of Directors or by a vote of the
holders of a majority of the Fund's outstanding shares voting as a single class,
or upon not less than 60 days' notice by the Investment Manager. The Investment
Management Agreements will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
Subject to the expense reimbursement provisions described in this Statement
of Additional Information, other expenses incurred in the operation of the Funds
are borne by the Funds, including, without limitation, investment advisory fees;
brokerage commissions; interest; legal fees and expenses of attorneys; fees of
independent auditors, transfer agents and dividend disbursing agents, accounting
agents, and custodians; the expense of obtaining quotations for calculating each
Fund's net asset value; taxes, if any, and the preparation of each Fund's tax
returns; cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase or redemption of shares; fees and expenses
of registering and maintaining the registration of shares of the Funds under
federal and state laws and regulations; expenses of printing and distributing
reports, notices and proxy materials to existing shareholders; expenses of
printing and filing reports and other documents filed with governmental
agencies; expenses of annual and special shareholder meetings; expenses of
printing and distributing prospectuses and statements of additional information
to existing shareholders; fees and expenses of Directors/Trustees of the Funds
who are not employees of the Investment Manager or any Sub-Adviser, or their
affiliates; membership dues in trade associations; insurance premiums; and
extraordinary expenses such as litigation expenses.
13
<PAGE>
Pilgrim Investments, Inc. is registered as an investment adviser with the
SEC and serves as an investment adviser to registered investment companies (or
series thereof), as well as privately managed accounts. As of May 31, 2000, the
Investment Manager had assets under management of approximately $15.9 billion.
Pilgrim Investments, Inc. is a wholly-owned subsidiary of ReliaStar Financial
Corp. (NYSE:RLR). Through its subsidiaries, ReliaStar Financial Corp. offers
individuals and institutions life insurance and annuities, employee benefits
products and services, life and health reinsurance, retirement plans, mutual
funds, bank products and personal finance education. On April 30, 2000,
ReliaStar Financial Corp. ("ReliaStar") entered into an agreement (the
"Transaction") to be acquired by ING Groep N.V. ("ING"). ING is a global
financial institution active in the field of insurance, banking and asset
management. Headquartered in Amsterdam, it conducts business in more than 60
countries, and has almost 90,000 employees. ING seeks to provide a full range of
integrated financial services to private, corporate, and institutional clients
through a variety of distribution channels. As of December 31, 1999, ING had
total assets of approximately $471.8 billion and assets under management of
approximately $330.3 billion. Completion of the Transaction is contingent upon,
among other things, approval by the Directors/Trustees of the Pilgrim Funds and
certain Fund shareholder and regulatory approvals. The closing of the
Transaction is expected to occur during the third quarter of 2000. ING's
principal executive offices are located at Strawinskylaan 2631, 1077 ZZ
Amsterdam, P.O. Box 810, 1000 AV Amsterdam, the Netherlands.
INVESTMENT MANAGER FEES
The Investment Manager bears the expense of providing its services and pays
the fees of the Sub-Adviser (if any). For its services, each Fund pays the
Investment Manager a monthly fee in arrears equal to a percentage of each Fund's
average daily net assets during the month. The annual investment management fees
for the Funds are as follows.
FUND NAME ADVISER FEE
--------- -----------
Pilgrim Global Corporate 1.00%
Leaders Fund, Inc.
Pilgrim GNMA Income Fund, Inc. 0.60% on the first $150 million, 0.50% on the
next $250 million, 0.45% on the next $400
million, 0.40% thereafter.
Pilgrim Gold Fund, Inc. 1.00% on the first $50 million and 0.75%
thereafter.
Pilgrim Growth and 0.75% on the first $100 million, 0.60% on the
Income Fund, Inc. next $50 million, 0.50% on the next $100
million and 0.40% thereafter.
Pilgrim International Fund, Inc. 1.00%
Pilgrim Silver Fund, Inc. 1.00% on the first $30 million and 0.75%
thereafter.
Pilgrim SmallCap Asia 1.25%
Growth Fund, Inc.
Pilgrim Troika Dialog 1.25%
Russia Fund, Inc.
Pilgrim Worldwide Emerging 1.00%
Markets Fund, Inc.
Pilgrim Global Income Fund 1.00%
Lexington Money Market Trust 0.50% on the first $500 million and 0.45%
thereafter.
14
<PAGE>
The total amount of advisory fees paid by each Fund (except for the Silver
Fund) for the fiscal years ended December 31, 1997, 1998, and 1999 were as
follows:
TOTAL ADVISORY FEES PAID DURING FISCAL YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pilgrim Global Corporate Leaders Fund, Inc. $ 176,043 $ 249,333 $ 378,573
Pilgrim GNMA Income Fund, Inc. $ 1,844,256 $ 1,224,048 $ 859,774
Pilgrim Gold Fund, Inc. $ 583,491 $ 552,235 $ 769,527
Pilgrim Growth and Income Fund, Inc. $ 1,498,729 $ 1,466,333 $ 1,403,527
Pilgrim International Fund, Inc.* $ 224,416 $ 217,864 $ 210,897
Pilgrim SmallCap Asia Growth Fund, Inc.** $ 167,228 $ 185,265 $ 207,247
Pilgrim Troika Dialog Russia Fund, Inc. $ 444,970 $ 796,381 $ 1,307,946
Pilgrim Worldwide Emerging Markets Fund, Inc. $ 785,431 $ 991,861 $ 2,373,753
Pilgrim Global Income Fund*** $ 334,433 $ 317,877 $ 212,446
Lexington Money Market Trust**** $ 422,726 $ 455,434 $ 455,446
</TABLE>
* Does not reflect LMC reimbursement to Lexington International Fund, Inc. of
$109,634 in 1998.
** Does not reflect LMC reimbursement to Lexington Small Cap Asia Growth Fund,
Inc. of $67,545, $53,928 and $36,717, in 1999, 1998 and 1997, respectively.
*** Does not reflect LMC reimbursement to Lexington Global Income Fund of
$125,346 in 1998 and $141,233 in 1997.
**** Does not reflect LMC reimbursement to Lexington Money Market Fund of $9,546
in 1999.
The total amount of advisory fees paid by the Silver Fund for fiscal years
ended June 30, 1997 and June 30, 1998 were $462,896 and $630,181, respectively.
For the six months ended December 31, 1998, the advisory fees paid by the Silver
Fund were $150,258. In 1999, the Silver Fund paid $261,004 in advisory fees.
SUB-ADVISORY AGREEMENTS
The Investment Management Agreements for the Funds provide that the
Investment Manager, with the approval of the Fund's Board of Directors/Trustees,
may select and employ investment advisers to serve as a Sub-Adviser for any Fund
("Sub-Adviser"), and shall monitor the Sub-Advisers' investment programs and
results, and coordinate the investment activities of the Sub-Advisers to ensure
compliance with regulatory restrictions. The Investment Manager pays all of its
expenses arising from the performance of its obligations under the Investment
Management Agreement, including all fees payable to the Sub-Advisers, executive
salaries and expenses of the Directors/Trustees and Officers of the Funds who
are employees of the Investment Manager or its affiliates. The Sub-Advisers pay
all of their expenses arising from the performance of their obligations under
the sub-advisory agreements (the "Sub-Advisory Agreements").
A Sub-Advisory Agreement may be terminated without payment of any penalties
by the Investment Manager, the Directors/Trustees, on behalf of the Fund, or the
shareholders of the Fund upon 60 days' prior written notice. Otherwise, the
Sub-Advisory Agreement will remain in effect for two years and will, thereafter,
continue in effect from year to year, subject to the annual approval of the
appropriate Board of Directors/Trustees, or the vote of a majority of the
15
<PAGE>
outstanding voting securities, and the vote, cast in person at a meeting duly
called and held, of a majority of the Directors/Trustees, who are not parties to
the Sub-Advisory Agreement or "interested persons" (as defined in the 1940 Act)
of any such Party.
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and Crosby
Asset Management (US), Inc. ("Crosby"), Crosby acts as Sub-Adviser to the
SmallCap Asia Growth Fund. In this capacity, Crosby, subject to the supervision
and control of Pilgrim Investments and the Board of Directors of the Fund,
manages the Fund's portfolio investments, consistently with its investment
objective, and executes any of the Fund's investment policies that it deems
appropriate to utilize from time to time. As compensation to Crosby for its
services, the Investment Manager pays Crosby an annual fee equal to 0.625% of
the Fund's average daily net assets. Fees payable under the Sub-Advisory
Agreement accrue daily and are paid monthly by Pilgrim Investments. Crosby's
address is 32/F Asia Pacific Finance Tower, Citibank Tower, Citibank Plaza, 3
Garden Road, Central, Hong Kong.
Crosby has advised the Board of Directors of SmallCap Asia Growth Fund that
it no longer intends to provide investment advisory services to investment
companies and that it is anticipated that the portfolio manager for the Fund
will become an employee of Insinger Asset Management N.V. ("Insinger"). The
Board of Directors and shareholders of the Fund have approved a new Sub-Advisory
Agreement between Pilgrim Investments and Insinger on behalf of the Fund, to
become effective upon the receipt by Insinger of all necessary governmental
authorizations to provide advisory services in the Asia region. Under the new
Sub-Advisory Agreement with Insinger, Insinger will provide the same services as
Crosby provides under the current Sub-Advisory Agreement. In addition, the fee
to be paid to Insinger will be the same as the sub-advisory fee paid to Crosby.
Pursuant to a Sub-Advisory Agreement between Pilgrim Investments and Troika
Dialog Asset Management (Cayman Islands), Ltd. ("Troika Dialog"), Troika Dialog
act as Sub-Adviser to the Russia Fund. In this capacity, Troika Dialog, subject
to the supervision and control of Pilgrim Investments and the Board of Directors
of the Fund, manages the Fund's portfolio investments, consistent with its
investment objective, and executes any of the Fund's investment policies that it
deems appropriate to use from time to time. As compensation to Troika Dialog for
its services, Pilgrim Investments pays Troika Dialog an annual fee equal to
0.625% of the Fund's average daily net assets. Fees payable under the
Sub-Advisory Agreement accrue daily and are paid monthly by Pilgrim Investments.
Troika Dialog is a majority-owned subsidiary of the Bank of Moscow. It's address
is Romanov Pereulok No. 4, 103875, Moscow, Russia.
The total amounts of sub-advisory fees paid by SmallCap Asia Growth Fund
for fiscal years ended December 31, 1997, 1998 and 1999, were $45,931, $41,168
and $83,626, respectively, and the total amounts of sub-advisory fees paid by
Russia Fund for the fiscal years ended December 31, 1997, 1998 and 1999 were
$653,973, $398,191, and $222,485, respectively.
FORMER SUB-ADVISER TO WORLDWIDE EMERGING MARKETS FUND. Stratos Advisors,
Inc. ("Stratos") served as Sub-Adviser to Worldwide Emerging Markets Fund from
October 1, 1998 to June 7, 2000. The total amount of sub-advisory fees paid by
Worldwide Emerging Markets Fund for the fiscal year ended December 31, 1999, was
$242, 457. Fees for fiscal year ending December 31, 1998, with respect to
Worldwide Emerging Markets Fund, were not calculated because Stratos had not
served as sub-adviser for a full fiscal year.
ADMINISTRATION
Pilgrim Group, Inc. serves as Administrator for the Funds, pursuant to an
Administrative Services Agreement. Subject to the supervision of the Board of
Directors/Trustees, the Administrator provides the overall business management
and administrative services necessary to conduct properly the Funds' business,
except for those services performed by the Investment Manager under the
Investment Management Agreements, the Custodian for the Funds under the
16
<PAGE>
Custodian Agreements, the Transfer Agent for the Funds under the Transfer Agency
Agreements, and such other service providers as may be retained by the Funds
from time to time. The Administrator acts as liaison among these service
providers to the Funds. The Administrator is also responsible for ensuring that
the Funds operate in compliance with applicable legal requirements and for
monitoring the Investment Manager for compliance with requirements under
applicable law and with the investment policies and restrictions of each Fund.
The Administrator is an affiliate of the Investment Manager. For its services
under the Administration Services Agreement, Pilgrim Group, Inc. receives an
annual fee equal to 0.10% of each Fund's average daily net assets.
Prior to July 26, 2000, LMC acted as administrator to the Funds and
performed certain administrative and internal accounting services, including but
not limited to, maintaining general ledger accounts, regulatory compliance,
preparing financial information for semiannual and annual reports, preparing
registration statements, calculating net asset values, providing shareholder
communications, supervising the Custodian and Transfer Agent and providing
facilities for such services. The Funds reimbursed LMC for its actual cost in
providing such services, facilities and expenses.
Prior to July 26, 2000, the adviser performed certain accounting,
shareholder servicing and other administrative services and was reimbursed by
the Funds for the costs of performing such services.
EXPENSE LIMITATION AGREEMENTS
The Investment Manager has entered into an expense limitation agreement
with the Funds, pursuant to which the Investment Manager has agreed to waive or
limit its fees. In connection with this agreement and certain U.S. tax
requirements, the Investment Manager will assume other expenses so that the
total annual ordinary operating expenses of the Funds (which excludes interest,
taxes, brokerage commissions, extraordinary expenses such as litigation, other
expenses not incurred in the ordinary course of the Funds' business, and
expenses of any counsel or other persons or services retained by the Funds'
directors who are not "interested persons" (as defined in the 1940 Act) of the
Investment Manager do not exceed:
MAXIMUM OPERATING EXPENSE LIMIT
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
NAME OF FUND CLASS A CLASS B CLASS C CLASS Q
------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Pilgrim Global Corporate Leaders Fund, Inc. 2.75% N/A N/A N/A
Pilgrim GNMA Income Fund, Inc. 1.29% 2.04% 2.04% 1.29%
Pilgrim Gold Fund, Inc. 2.75% N/A N/A N/A
Pilgrim Growth and Income Fund, Inc. 2.75% 3.50% 3.50% 2.75%
Pilgrim International Fund, Inc. 2.75% 3.50% 3.50% 2.75%
Pilgrim Silver Fund, Inc. 2.75% N/A N/A N/A
Pilgrim SmallCap Asia Growth Fund, Inc. 2.75% 3.50% N/A N/A
Pilgrim Troika Dialog Russia Fund, Inc. 3.35% 4.10% N/A N/A
Pilgrim Worldwide Emerging Markets Fund, Inc. 2.75% N/A N/A N/A
Pilgrim Global Income Fund 2.75% 3.50% 3.50% 2.75%
Lexington Money Market Trust 1.00% N/A N/A N/A
</TABLE>
The Funds will at a later date reimburse the Investment Manager for
management fees waived and other expenses assumed by the Investment Manager
during the previous 36 months, but only if, after such reimbursement, each
Fund's expense ratio does not exceed the percentage described above. The
Investment Manager will only be reimbursed for fees waived or expenses assumed
after the effective date of the expense limitation agreements.
17
<PAGE>
The expense limitation agreement provides that these expense limitations
shall continue until July 26, 2002. Thereafter, the agreement will automatically
renew for one-year terms unless the Investment Manager provides written notice
of the termination of the agreement to the Funds at least 30 days prior to the
end of the then-current term. In addition, the agreement will terminate upon
termination of the Investment Management Agreement, or it may be terminated by
the Funds, without payment of any penalty, upon ninety (90) days' prior written
notice to the Investment Manager at its principal place of business.
Prior to July 26, 2000, the Funds voluntarily limited expenses of the Funds
to the following amounts:
MAXIMUM OPERATING EXPENSE LIMIT
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
FUND NAME PREVIOUS EXPENSE CAP
--------- --------------------
Pilgrim Global Corporate Leaders Fund, Inc. 2.50%
Pilgrim GNMA Income Fund, Inc. 1.04%
Pilgrim Gold Fund, Inc. 2.75%
Pilgrim Growth and Income Fund, Inc. 2.75%
Pilgrim International Fund, Inc. 2.75%
Pilgrim Silver Fund, Inc. 2.50%
Pilgrim SmallCap Asia Growth Fund, Inc. 2.50%
Pilgrim Troika Dialog Russia Fund, Inc. 3.35%
Pilgrim Worldwide Emerging Markets Fund, Inc. 2.75%
Pilgrim Global Income Fund 2.75%
Lexington Money Market Trust 1.00%
DISTRIBUTOR
Shares of the Funds are distributed by Pilgrim Securities pursuant to a
Distribution Agreement between each Fund and the Distributor. Each Distribution
Agreement requires the Distributor to use its best efforts on a continuing basis
to solicit purchases of shares of each Fund. The Funds and the Distributor have
agreed to indemnify each other against certain liabilities. At the discretion of
the Distributor, all sales charges may at times be re-allowed to an authorized
dealer ("Authorized Dealer"). If 90% or more of the sales commission is
re-allowed, such Authorized Dealer may be deemed to be an "underwriter" as that
term is defined under the Securities Act of 1933, as amended. Each Distribution
Agreement will remain in effect for two years and from year to year thereafter
only if its continuance is approved annually by a majority of the Board of
Directors/Trustees who are not parties to such agreement or "interested persons"
of any such party and must be approved either by votes of a majority of the
Board of Directors/Trustees or a majority of the outstanding voting securities
of the Fund. See the Prospectus for information on how to purchase and sell
shares of the Funds, and the charges and expenses associated with an investment.
The sales charge retained by the Distributor and the commissions re-allowed to
selling dealers are not an expense of the Funds and have no effect on the net
asset value of the Funds. The Distributor, like the Investment Manager, is a
subsidiary of ReliaStar. Prior to July 26, 2000, the distributor for the Funds
was Lexington Funds Distributor, Inc. ("LFD").
RULE 12B-1 PLANS
Each Fund (with the exception of the Lexington Money Market Trust) has a
distribution or shareholder service plan pursuant to Rule 12b-1 under the 1940
Act ("Rule 12b-1 Plans") applicable to all classes of shares offered by each
Fund. The Funds intend to operate the Rule 12b-1 Plans in accordance with their
terms and the National Association of Securities Dealers, Inc. rules concerning
18
<PAGE>
sales charges. Under the Rule 12b-1 Plans, the Distributor may be entitled to
payment each month in connection with the offering, sale, and shareholder
servicing of Class A, Class B, Class C, and Class Q shares in the following
amounts: 0.25% of average daily net assets for Class A shares, 1.00 % of average
daily net assets for Class B shares, 1.00% of average daily net assets for Class
C shares and 0.25% of average daily net assets for Class Q shares.
These fees may be used to cover the expenses of the Distributor primarily
intended to result in the sale of Class A, Class B, Class C and Class Q shares
of the Funds, including payments to dealers for selling shares of the Funds and
for servicing shareholders of these classes of the Funds. Activities for which
these fees may be used include: promotional activities; preparation and
distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
payments to dealers and others that provide shareholder services; interest on
accrued distribution expenses; and costs of administering the Rule 12b-1 Plans.
No more than 0.75% per annum of each Fund's average net assets may be used to
finance distribution expenses, exclusive of shareholder servicing payments, and
no Authorized Dealer may receive shareholder servicing payments in excess of
0.25% per annum of a Fund's average net assets held by the Authorized Dealer's
clients or customers.
Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly
basis to Authorized Dealers for both distribution and shareholder servicing at
rates that are based on the average daily net assets of shares that are
registered in the name of that Authorized Dealer as nominee or held in a
shareholder account that designates the Authorized Dealer as the dealer of
record. The rates, on an annual basis, are as follows: 0.25% for Class A, 0.25%
for Class B, and 1.00% for Class C. Rights to these ongoing payments begin to
accrue in the 13th month following a purchase of Class A, B or C shares. With
respect to each 12b-1 Plan, the Distributor shall receive payment without regard
to actual distribution expenses it incurs. In the event a Rule 12b-1 Plan is
terminated in accordance with its terms, the obligations of a Fund to make
payments to the Distributor pursuant to the Rule 12b-1 Plan will cease and the
Fund will not be required to make any payments for expenses incurred after the
date the Plan terminates.
In addition to providing for the expenses discussed above, the Rule 12b-1
Plans also recognize that the Investment Manager and/or the Distributor may use
their resources to pay expenses associated with activities primarily intended to
result in the promotion and distribution of the Funds' shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers. Such compensation and
incentives may include, but are not limited to, cash, merchandise, trips and
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited sales personnel, payment for
travel expenses (including meals and lodging) incurred by sales personnel and
members of their families, or other invited guests, to various locations for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding the Funds or other funds managed by the Investment
Manager and/or other events sponsored by dealers. In addition, the Distributor
may, at its own expense, pay concessions in addition to those described above to
dealers that satisfy certain criteria established from time to time by the
Distributor. These conditions relate to increasing sales of shares of the Funds
over specified periods and to certain other factors. These payments may,
depending on the dealer's satisfaction of the required conditions, be periodic
and may be up to (1) 0.30% of the value of the Funds' shares sold by the dealer
during a particular period, and (2) 0.10% of the value of the Funds' shares held
by the dealer's customers for more than one year, calculated on an annual basis.
The Rule 12b-1 Plans have been approved by the Board of Directors/Trustees
of each Fund, including all of the Directors/Trustees who are not interested
persons of the Funds as defined in the 1940 Act. The Rule 12b-1 Plans must be
renewed annually by the Board of Directors/Trustees, including a majority of the
Directors/Trustees who are not interested persons of the Funds and who have no
direct or indirect financial interest in the operation of the Rule 12b-1 Plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Directors/Trustees be committed to the
19
<PAGE>
Directors/Trustees who are not interested persons. Each Rule 12b-1 Plan and any
distribution or service agreement may be terminated as to a Fund at any time,
without any penalty, by such Directors/Trustees or by a vote of a majority of
each Fund's outstanding shares on 60 days written notice. The Distributor or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
In approving each Rule 12b-1 Plan, the Board of Directors/Trustees has
determined that differing distribution arrangements in connection with the sale
of new shares of a Fund is necessary and appropriate in order to meet the needs
of different potential investors. Therefore, the Board of Directors/Trustees,
including those Directors/Trustees who are not interested persons of the Funds,
concluded that, in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Rule
12b-1 Plans as tailored to each class of the Funds, will benefit the Funds and
their respective shareholders.
Each Rule 12b-1 Plan and any distribution or service agreement may not be
amended to increase materially the amount spent for distribution expenses as to
a Fund without approval by a majority of each Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement shall be
approved by the Directors/Trustees who are not interested persons of the Fund,
cast in person at a meeting called for the purpose of voting on any such
amendment. The Distributor is required to report in writing to the Board of
Directors/Trustees at least quarterly on the monies reimbursed to it under a
Rule 12b-1 Plan, as well as to furnish the Board with such other information as
may be reasonably be requested in connection with the payments made under the
Rule 12b-1 Plan in order to enable the Board to make an informed determination
of whether a Rule 12b-1 Plan should be continued.
Prior to July 26, 2000, the Gold, Growth and Income, International, Russia,
Worldwide Emerging Markets and Global Income Funds each had a reimbursement
style 12b-1 Plan, which provided that the Funds pay distribution fees, including
payments to Lexington Funds Distributor, Inc. (the Funds' former distributor),
at an annual rate not to exceed 0.25% of their average daily net assets for
distribution services. Under this 12b-1 Plan, the Funds, either directly or
through the Investment Manager, would make payments periodically (i) to the
distributor or to select broker/dealers, (ii) to other persons who have entered
into shareholder processing and service agreements with the investment manager
or with the distributor, with respect to Fund shares owned by shareholders for
which such broker-dealers were the dealer or holder of record, or (iii) for
expenses associated with distribution of Fund shares, including the compensation
of the sales personnel of the distributor. Payments were also made for any
advertising and promotional expenses relating to selling efforts, including but
not limited to the incremental costs of printing prospectuses, statements of
additional information, annual reports and other periodic reports for
distribution to persons who are not shareholders of the Fund; the costs of
preparing and distributing any other supplemental sales literature; costs of
radio, television, newspaper and other advertising; telecommunications expenses,
including the cost of telephones, telephone lines and other communications
equipment, incurred by or for the Distributor in carrying out its obligations
under the Distribution Agreement.
20
<PAGE>
The following table shows the expenses incurred by the Funds for
distribution-related activities under the Rule 12b-1 Plans during the fiscal
year ended December 31, 1999.
NAME OF THE FUND AGGREGATE AMOUNT PAID
---------------- ---------------------
Pilgrim Global Corporate Leaders Fund, Inc. N/A
Pilgrim GNMA Income Fund, Inc. N/A
Pilgrim Gold Fund, Inc. $ 75,410
Pilgrim Growth and Income Fund, Inc. $ 102,040
Pilgrim International Fund, Inc. $ 17,424
Pilgrim Silver Fund, Inc. N/A
Pilgrim SmallCap Asia Growth Fund, Inc. N/A
Pilgrim Troika Dialog Russia Fund, Inc. $ 61,804
Pilgrim Worldwide Emerging Markets Fund, Inc. $ 196,336
Pilgrim Global Income Fund $ 40,884
Lexington Money Market Trust N/A
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of each Fund shares for the fiscal period ended
December 31, 1999 were as follows:
PILGRIM GLOBAL CORPORATE LEADERS FUND, INC.
Advertising N/A
Printing N/A
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL N/A
PILGRIM GNMA INCOME FUND, INC
Advertising N/A
Printing N/A
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL N/A
PILGRIM GOLD FUND, INC
Advertising $ 15,836
Printing 4,525
Payments to Brokers or Dealers N/A
Miscellaneous 55,049
TOTAL $ 75,410
PILGRIM GROWTH AND INCOME FUND, INC
Advertising $ 78,571
Printing 23,469
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL $ 102,040
21
<PAGE>
PILGRIM INTERNATIONAL FUND, INC
Advertising $ 122
Printing N/A
Payments to Brokers or Dealers 5,105
Miscellaneous 12,198
TOTAL $ 17,427
PILGRIM SILVER FUND, INC
Advertising N/A
Printing N/A
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL N/A
PILGRIM SMALLCAP ASIA GROWTH FUND, INC
Advertising N/A
Printing N/A
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL N/A
PILGRIM TROIKA DIALOG RUSSIA FUND, INC
Advertising N/A
Printing $ 62,000
Payments to Brokers or Dealers N/A
Miscellaneous N/A
TOTAL $ 62,000
PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC
Advertising $42,408.50
Printing N/A
Payments to Brokers or Dealers 135,276
Miscellaneous 18,652
TOTAL $ 196,336
PILGRIM GLOBAL INCOME FUND
Advertising $ 82
Printing N/A
Payments to Brokers or Dealers 34,547
Miscellaneous 6,133
TOTAL $ 40,884
SHAREHOLDER SERVICING AGENT
Pilgrim Group, Inc. serves as Shareholder Servicing Agent for the Funds.
The Shareholder Servicing Agent is responsible for responding to written and
telephonic inquiries from shareholders. Each Fund pays the Shareholder Servicing
Agent a monthly fee on a per-contact basis, based upon incoming and outgoing
telephonic and written correspondence.
OTHER EXPENSES
In addition to the management fee and other fees described previously, each
Fund pays other expenses, such as legal, audit, transfer agency and custodian
out-of-pocket fees, proxy solicitation costs, and the compensation of
Directors/Trustees who are not affiliated with the Investment Manager. Most Fund
expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, where applicable, the Rule 12b-1 Plan fees for each class of
shares are charged proportionately only to the outstanding shares of that class.
For the Lexington Money Market Trust, Fund expenses are allocated
proportionately among all of the outstanding shares of the Fund.
22
<PAGE>
SUPPLEMENTAL DESCRIPTION OF INVESTMENTS
Some of the different types of securities in which the Funds may invest,
subject to their respective investment objectives, policies and restrictions are
described in the Prospectus under "The Funds," and "More Information About
Risks." Additional information concerning the characteristics and risks of
certain of the Funds' investments are set forth below. There can be no assurance
that any of the Funds will achieve their investment objectives.
COMMON STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES
Each Fund (except GNMA Income Fund, Global Income Fund, and Money Market
Trust) may invest in common stocks, which represent an equity (ownership)
interest in a company. This ownership interest generally gives a Fund the right
to vote on issues affecting the company's organization and operations.
Each Fund (other than GNMA Income Fund, Global Income Fund, and Money
Market Trust) may also buy other types of equity securities such as convertible
securities, preferred stock, and warrants or other securities that are
exchangeable for shares of common stock. A convertible security is a security
that may be converted either at a stated price or rate within a specified period
of time into a specified number of shares of common stock. By investing in
convertible securities, a Fund seeks the opportunity, through the conversion
feature, to participate in the capital appreciation of the common stock into
which the securities are convertible, while investing at a better price than may
be available on the common stock or obtaining a higher fixed rate of return than
is available on common stocks. The value of a convertible security is a function
of its "investment value" (determined by its yield in comparison with the yields
of other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth at market
value, if converted into the underlying common stock). The credit standing of
the issuer and other factors may also affect the investment value of a
convertible security. The conversion value of a convertible security is
determined by the market price of the underlying common stock. If the conversion
value is low relative to the investment value, the price of the convertible
security is governed principally by its investment value. To the extent the
market price of the underlying common stock approaches or exceeds the conversion
price, the price of the convertible security will be increasingly influenced by
its conversion value.
The market value of convertible debt securities tends to vary inversely
with the level of interest rates. The value of the security declines as interest
rates increase and increases as interests rates decline. Although under normal
market conditions longer term debt securities have greater yields than do
shorter term debt securities of similar quality, they are subject to greater
price fluctuations. A convertible security may be subject to redemption at the
option of the issuer at a price established in the instrument governing the
convertible security. If a convertible security held by a Fund is called for
redemption, the Fund must permit the issuer to redeem the security, convert it
into the underlying common stock or sell it to a third party.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
23
<PAGE>
PREFERRED STOCK
Each Fund (other than Global Income Fund, GNMA Income Fund, and Money
Market Trust) may invest in preferred stock. Preferred stock, unlike common
stock, offers a stated dividend rate payable from a corporation's earnings. Such
preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. If interest rates rise, the fixed dividend on preferred stocks may
be less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid before dividends are paid on the
issuer's common stock. Preferred stock also generally has a preference over
common stock on the distribution of a corporation's assets in the event of
liquidation of the corporation, and may be "participating," which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of preferred stocks on the distribution of a corporation's assets in
the event of a liquidation are generally subordinate to the rights associated
with a corporation's debt securities.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS
The Funds (other than Global Income Fund, GNMA Income Fund, and Money
Market Trust) may invest in securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or
other similar securities representing securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities they represent. ADRs are receipts typically issued by a United States
bank or trust company evidencing ownership of the underlying foreign securities.
EDRs are receipts issued by a European financial institution evidencing a
similar arrangement. Generally, ADRs, in registered form, are designed for use
in the United States securities markets, and EDRs, in bearer form, are designed
for use in European securities markets.
U.S. GOVERNMENT SECURITIES
The Funds may invest in fixed-rate and floating- or variable-rate U.S.
government securities. The U.S. Government guarantees payments of interest and
principal of U.S. Treasury bills, notes and bonds, mortgage-related securities
and other securities issued by the U.S. government. Other securities issued by
U.S. government agencies or instrumentalities are supported only by the credit
of the agency or instrumentality, for example those issued by the Federal Home
Loan Bank, whereas others, such as those issued by the FNMA, Farm Credit System
and Student Loan Marketing Association, have an additional line of credit with
the U.S. Treasury.
Short-term U.S. government securities generally are considered to be among
the safest short-term investments. However, the U.S. government does not
guarantee the net asset value of the Funds' shares. With respect to U.S.
government securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. government will provide support to such agencies
or instrumentalities. Accordingly, such U.S. government securities may involve
risk of loss of principal and interest.
Each Fund may invest in the following types of money market instruments
(i.e., debt instruments with less than 12 months remaining until maturity)
denominated in U.S. dollars or other currencies: (a) obligations issued or
guaranteed by the U.S. or foreign governments, their agencies, instrumentalities
or municipalities; (b) obligations of international organizations designed or
supported by multiple foreign governmental entities to promote economic
reconstruction or development; (c) finance company obligations, corporate
commercial paper and other short-term commercial obligations; (d) bank
obligations (including certificates of deposit, time deposits, demand deposits
and bankers' acceptances), subject to the restriction that the Fund may not
invest more than 25% of its total assets in bank securities; (e) repurchase
agreements with respect to the foregoing; and (f) other substantially similar
short-term debt securities with comparable characteristics.
24
<PAGE>
CORPORATE DEBT SECURITIES
Each Fund may invest in corporate debt securities. Corporate debt
securities include corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities. The investment
return on a corporate debt security reflects interest earnings and changes in
the market value of the security. The market value of a corporate debt security
will generally increase when interest rates decline, and decrease when interest
rates rise. There is also the risk that the issuer of a debt security will be
unable to pay interest or principal at the time called for by the instrument.
Investments in corporate debt securities that are rated below investment grade
are described in "Junk Bonds" below.
Debt obligations that are deemed investment grade carry a rating of at
least Baa from Moody's or BBB from Standard and Poor's, or a comparable rating
from another rating agency or, if not rated by an agency, are determined by the
Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have
speculative characteristics and changes in economic circumstances are more
likely to lead to a weakened capacity to make interest and principal payments
than higher rated bonds.
With respect to the International and Worldwide Emerging Markets Funds,
when the Funds' portfolio manager believes that debt securities will provide
capital appreciation through favorable changes in relative foreign exchange
rates, in relative interest rate levels or in the creditworthiness of issuers,
the Funds may invest primarily in debt securities.
The Russia Fund and Worldwide Emerging Markets Fund may invest (up to 35%
of its total assets in the case of the Russia Fund) in Short-Term and
Medium-Term Debt Securities. The Short-Term and Medium-Term Debt Securities in
which the Funds may invest are foreign and domestic debt securities, including
short-term (less than twelve months to maturity) and medium-term (not greater
than five years to maturity) obligations issued by the U.S. Government, foreign
governments, foreign and domestic corporations and banks, and repurchase
agreements.
The Global Income Fund, under normal circumstances, invests substantially
all of its assets in debt securities of issuers in the United States, developed
foreign countries, and emerging markets.
The Gold Fund and Silver Fund may invest in debt securities of companies
engaged in mining and processing gold and silver. These debt securities can be
expected to be comparable to that of other debt obligations and generally will
not react to fluctuations in the price of gold and silver. An investment in the
debt instruments of these companies, therefore, cannot be expected to provide
the hedge against inflation that may be provided through investments in equity
securities of companies engaged in such activities and can be expected to
fluctuate inversely with prevailing interest rates.
JUNK BONDS
The Gold Fund and Silver Fund may invest in high yield, lower rated debt
securities known as "junk bonds." Junk bonds are debt obligations rated below
investment grade and non-rated securities of comparable quality. Junk bonds are
considered speculative and thus pose a greater risk of default than investment
grade securities. Investments of this type are subject to greater risk of loss
of principal and interest, but in general provide higher yields than higher
rated debt obligations. Bonds issued by companies domiciled in emerging markets
are usually rated below investment grade.
BRADY BONDS AND ZERO COUPON BONDS
The Global Income Fund may invest in "Brady Bonds" and zero coupon bonds.
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
25
<PAGE>
bonds in connection with a debt restructuring plan. Investors should recognize
that Brady Bonds have been issued only recently and, accordingly, do not have a
long payment history. Zero coupon bonds pay income only at maturity. The prices
of these bonds are highly sensitive to changes in market interest rates. The
original issue discount on the zero coupon bonds must be included ratably in the
income of the Fund as the income accrues even though payment has not been
received. The Fund nevertheless intends to distribute an amount of cash equal to
the currently accrued original issue discount, and this may require liquidating
securities at times they might not otherwise do so and may result in capital
loss. See "Tax Matters" in this Statement of Additional Information.
SAMURAI BONDS AND YANKEE BONDS
Subject to its respective fundamental investment restrictions, the Pilgrim
Global Income Fund may invest in yen-denominated bonds sold in Japan by
non-Japanese issuers ("Samurai bonds"), and may invest in dollar-denominated
bonds sold in the United States by non-U.S. issuers ("Yankee bonds"). It is the
policy of the Fund to invest in Samurai or Yankee bond issues only after taking
into account considerations of quality and liquidity, as well as yield.
EMERGING MARKET DEBT SECURITIES
The Global Income Fund, under normal circumstances, invests substantially
all of its assets in debt securities of issuers in the United States, developed
foreign countries and emerging markets. For purposes of its investment
objective, the Fund considers an emerging country to be any country whose
economy and market the World Bank or United Nations considers to be emerging or
developing. The Fund may also invest in debt securities traded in any market, of
companies that derive 50% or more of their total revenue from either goods or
services produced in such emerging countries and emerging markets or sales made
in such countries. Determinations as to eligibility will be made by the
Investment Manager based on publicly available information and inquiries made to
the companies. It is possible in the future that sufficient numbers of emerging
country or emerging market debt securities would be traded on securities markets
in industrialized countries so that a major portion, if not all, of the Fund's
assets would be invested in securities traded on such markets, although such a
situation is unlikely at present.
Currently, investing in many of the emerging countries and emerging markets
is not feasible or may involve political risks. Accordingly, the Investment
Manager currently intends to consider investments only in those countries in
which it believes investing is feasible and does not involve such risks. The
list of acceptable countries will be reviewed by the Investment Manager and
approved by the Board of Trustees on a periodic basis and any additions or
deletions with respect to such list will be made in accordance with changing
economic and political circumstances involving such countries.
In determining the appropriate distribution of investments among various
countries and geographic regions for the Global Income Fund, the Investment
Manager ordinarily consider the following factors: prospects for relative
economic growth among the different countries in which the Fund may invest;
expected levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range of the
individual investment opportunities available to international investors.
Although the Global Income Fund values assets daily in terms of U.S.
dollars, the Fund does not intend to convert holdings of foreign currencies into
U.S. dollars on a daily basis. The Fund will do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference ("spread") between the prices at which they are buying
and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to sell that currency to the dealer.
26
<PAGE>
SHORT SALES AND SHORT SALES "AGAINST THE BOX"
The Global Income Fund is authorized to make short sales of securities,
although it has no current intention of doing so. A short sale is a transaction
in which a Fund sells a security in anticipation that the market price of that
security will decline. The Fund may make short sales as a form of hedging to
offset potential declines in long positions in securities it owns and in order
to maintain portfolio flexibility. The Fund only may make short sales "against
the box." In this type of short sale, at the time of the sale, the Fund owns the
security it has sold short or has the immediate and unconditional right to
acquire the identical security at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it receives
the proceeds of the sale. To secure its obligation to deliver securities sold
short, the Fund will deposit in a separate account with its custodian an equal
amount of the securities sold short or securities convertible into or
exchangeable for such securities at no cost. The Pilgrim Global Income Fund
could close out a short position by purchasing and delivering an equal amount of
the securities sold short, rather than by delivering securities already held by
the Fund, because the Fund might want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the
securities sold short.
The Global Income Fund might make a short sale "against the box" in order
to hedge against market risks when the Investment Manager believes that the
price of a security may decline, causing a decline in the value of a security
owned by the Fund or a security convertible into or exchangeable for such
security, or when the Investment Manager wants to sell the security the Fund
owns at a current attractive price, but also wishes to defer recognition or gain
or loss for federal income tax purposes and for purposes of satisfying certain
tests applicable to regulated investment companies under the Internal Revenue
Code.
The Gold Fund and Silver Fund may invest in debt securities of companies
engaged in mining and processing gold and silver. These debt securities can be
expected to be comparable to that of other debt obligations and generally will
not react to fluctuations in the price of gold and silver. An investment in the
debt instruments of these companies, therefore, cannot be expected to provide
the hedge against inflation that may be provided through investments in equity
securities of companies engaged in such activities and can be expected to
fluctuate inversely with prevailing interest rates.
GNMA CERTIFICATES
GNMA Income Fund may invest in GNMA certificates. GNMA Certificates are
Government National Mortgage Association ("GNMA") mortgage-backed securities
representing part ownership of a pool of mortgage loans. GNMA is a U.S.
Government corporation within the Department of Housing and Urban Development.
Such loans are initially made by lenders such as mortgage bankers, commercial
banks and savings and loan associations and are either insured by the Federal
Housing Administration (FHA) or Farmers' Home Administration (FMHA) or
guaranteed by the Veterans Administration (VA). A GNMA Certificate represents an
interest in a specific pool of such mortgages which, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each certificate is guaranteed
by the full faith and credit of the United States Government.
GNMA Certificates differ from bonds in that principal is scheduled to be
paid back by the borrower over the length of the loan rather than returned in a
lump sum at maturity. The GNMA Income Fund will purchase "modified pass through"
type GNMA Certificates, which entitle the holder to receive all interest and
principal payments owed on the mortgages in the pool (net of issuers' and GNMA
fees), regardless of whether or not the mortgagor has made such payment. The
Fund will use principal payments to purchase additional GNMA Certificates or
other government guaranteed securities. The balance of the Fund's assets will be
invested in other securities issued or guaranteed by the U.S. Government,
27
<PAGE>
including U.S. Treasury bills, note or bonds. The Fund may also invest in
repurchase agreements secured by such U.S. Government securities or GNMA
Certificates.
GNMA Certificates are created by an "issuer", which is an FHA approved
mortgage banker who also meets criteria imposed by GNMA. The issuer assembles a
pool of FHA, FMHA, or VA insured or guaranteed mortgages which are homogeneous
as to interest rate, maturity and type of dwelling. Upon application by the
issuer, and after approval by GNMA of the pool, GNMA provides its commitment to
guarantee timely payment of principal and interest on the GNMA Certificates
backed by the mortgages included in the pool. The GNMA Certificates, endorsed by
GNMA, are then sold by the issuer through securities dealers.
GNMA is authorized under the Federal National Housing Act to guarantee
timely payment of principal and interest on GNMA Certificates. This guarantee is
backed by the full faith and credit of the United States. GNMA may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee. When
mortgages in the pool underlying GNMA Certificates are prepaid by mortgagors or
by result of foreclosure, such principal payments are passed through to the
certificate holders. Accordingly, the life of the GNMA Certificate is likely to
be substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to predict the life of a particular GNMA certificate but FHA statistics
indicate that 25 to 30 year single family dwelling mortgages have an average
life of approximately 12 years. The majority of GNMA certificates are backed by
mortgages of this type, and accordingly the generally accepted practice has
developed to treat GNMA certificates as 30 year securities which prepay fully in
the 12th year.
GNMA certificates bear a nominal "coupon rate" which represents the
effective FHA-VA mortgage rate at the time of issuance, less 0.5% which
constitutes the GNMA and issuer's fees. For providing its guarantees, GNMA
receives an annual fee of 0.06% of the outstanding principal on certificates
backed by single family dwelling mortgages, and the issuer receives an annual
fee of 0.44% for assembling the pool and for passing through monthly payments of
interest and principal.
Payments to holders of GNMA certificates consist of the monthly
distributions of interest and principal less the GNMA and issuer's fees. The
actual yield to be earned by a holder of a GNMA certificate is calculated by
dividing such payments by the purchase price paid for the GNMA certificate
(which may be at a premium or a discount from the face value of the
certificate). Monthly distributions of interest, as contrasted to semi-annual
distributions which are common for other fixed interest investments, have the
effect of compounding and thereby raising the effective annual yield earned on
GNMA certificates. Because of the variation in the life of the pools of
mortgages which back various GNMA certificates, and because it is impossible to
anticipate the rate of interest at which future principal payments may be
reinvested, the actual yield earned from a portfolio of GNMA certificates, such
as that in which the Fund is invested, will differ significantly from the yield
estimated by using an assumption of a 12 year life for each GNMA certificate
included in such a portfolio as described.
The actual rate of prepayment for any GNMA certificate does not lend itself
to advance determination, although regional and other characteristics of a given
mortgage pool may provide some guidance for investment analysis. Also, secondary
market trading of outstanding GNMA certificates tends to be concentrated in
issues bearing the current coupon rate.
GNMA Income Fund may purchase construction loan securities which are issued
to finance building costs. The funds are disbursed as needed or in accordance
with a prearranged plan. The securities provide for the timely payment to the
registered holder of interest at the specified rate plus scheduled installments
of principal. Upon completion of the construction phase, the construction loan
securities are terminated, and project loan securities are issued. It is the
Fund's policy to record these GNMA certificates on trade date, and to segregate
assets to cover its commitments on trade date as well.
28
<PAGE>
GNMA CERTIFICATES -- WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
GNMA Certificates may at times be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when GNMA Certificates
are purchased or sold by the GNMA Income Fund with payment and delivery taking
place in the future, in order to secure what is considered to be an advantageous
price and yield to the Fund. No payment is made until delivery is due, often a
month or more after the purchase. The Settlement date on such transactions will
take place no more than 120 days from the trade date. When the Fund engages in
when-issued and delayed delivery transactions, the Fund relies on the buyer or
seller, as the case may be, to consummate the sale. Failure of the buyer or
seller to do so may result in the Fund missing the opportunity of obtaining a
price considered to be advantageous. While when-issued GNMA Certificates may be
sold prior to the settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a GNMA
Certificate on a when-issued basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The Fund does not
believe that its net asset value or income will be adversely affected by its
purchase of GNMA Certificates on a when-issued basis. The Fund may invest in
when-issued securities without other conditions. Such securities either will
mature or be sold on or about the settlement date. The Fund may earn interest on
such account or securities for the benefit of shareholders.
COMMERCIAL BANK OBLIGATIONS
The Global Income Fund may invest in commercial bank obligations.
Obligations of foreign branches of U.S. banks and of foreign banks are
obligations of the issuing bank and may be general obligations of the parent
bank. Such obligations, however, may be limited by the terms of a specific
obligation and by government regulation. As with investment in non-U.S.
securities in general, investments in the obligations of foreign branches of
U.S. banks and of foreign banks may subject the Global Income Fund to investment
risks that are different in some respect from those of investments in
obligations of domestic issuers. Although the Global Income Fund typically will
acquire obligations issued and supported by the credit of U.S. or foreign banks
having total assets at the time of purchase in excess of $1 billion, this $1
billion figure is not a fundamental investment policy or restriction of the
Fund. For the purposes of calculation with respect to the $1 billion figure, the
assets of a bank will be deemed to include the assets of its U.S. and non-U.S.
branches.
SETTLEMENT TRANSACTIONS
When the Funds (with the exception of GNMA Income and Growth and Income
Funds and Lexington Money Market Trust) enter into contracts for purchase or
sale of a portfolio security denominated in a foreign currency, they may be
required to settle a purchase transaction in the relevant foreign currency or
receive the proceeds of a sale in that currency. In either event, the Funds will
be obligated to acquire or dispose of such foreign currency as is represented by
the transaction by selling or buying an equivalent amount of United States
dollars. Furthermore, the Funds may wish to "lock in" the United States dollar
value of the transaction at or near the time of a purchase or sale of portfolio
securities at the exchange rate or rates then prevailing between the United
States dollar and the currency in which the foreign security is denominated.
Therefore, the Funds may, for a fixed amount of United States dollars, enter
into a forward foreign exchange contract for the purchase or sale of the amount
of foreign currency involved in the underlying securities transaction. In so
doing, the Funds will attempt to insulate themselves against possible losses
resulting from a change in the relationship between the United States dollar and
the foreign currency during the period between the date a security is purchased
or sold and the date on which payment is made or received. This process is known
as "transaction hedging".
29
<PAGE>
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Funds may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Funds purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Funds' portfolio or securities or prevent loss if the price
of such securities should decline.
PORTFOLIO HEDGING
Some or all of the Global Corporate Leaders, Gold Fund, International,
Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets, and Global
Income Funds' portfolio will be denominated in foreign currencies. As a result,
in addition to the risk of change in the market value of portfolio securities,
the value of the portfolio in United States dollars is subject to fluctuations
in the exchange rate between such foreign currencies and the United States
dollar. When, in the opinion of the Investment Manager it is desirable to limit
or reduce exposure in a foreign currency in order to moderate potential changes
in the United States dollar value of the portfolio, the Funds may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. This technique is known
as "portfolio hedging" and moderates or reduces the risk of change in the United
States dollar value of the Funds' portfolios only during the period before the
maturity of the forward contract (which will not be in excess of one year).
The Global Corporate Leaders, GNMA Income, Gold, Growth and Income,
International, Silver, SmallCap Asia, Russia, Worldwide Emerging Markets, and
Global Income Funds may hedge against changes in financial markets, currency
rates and interest rates. The Funds may hedge with "derivatives." Derivatives
are instruments whose value is linked to, or derived from, another instrument,
like an index or a commodity. Hedging transactions involve certain risks.
Although the Funds may benefit from hedging, unanticipated changes in interest
rates or securities prices may result in greater losses for the Funds than if
they did not hedge. If the Funds do not correctly predict a hedge, they may lose
money. In addition, the Funds pay commissions and other costs in connection with
hedging transactions.
The Global Corporate Leaders, Gold Fund, International, Silver, SmallCap
Asia Growth, Russia, Worldwide Emerging Markets, and Global Income Funds, for
hedging purposes only, may also enter into forward foreign currency exchange
contracts to increase its exposure to a foreign currency that the Investment
Manager expects to increase in value relative to the United States dollar. The
Funds will not attempt to hedge all of its foreign portfolio positions and will
enter into such transactions only to the extent, if deemed appropriate by the
Investment Manager or Sub-Adviser. Hedging against a decline in the value of
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. The Funds will not
enter into forward foreign currency exchange transactions for speculative
purposes. The Funds intend to limit transactions as described in this paragraph
to not more than 70% of total Fund assets.
RISKS ASSOCIATED WITH HEDGING TRANSACTIONS. Hedging transactions have
special risks associated with them, including possible default by the
Counterparty to the transaction, illiquidity and, to the extent the Investment
Manager's view as to certain market movements is incorrect, the risk that the
use of a hedging transaction could result in losses greater than if it had not
been used. Use of call options could result in losses to the Funds, force the
sale or purchase of portfolio securities at inopportune times or for prices
lower than current market values, or cause the Funds to hold a security it might
otherwise sell.
30
<PAGE>
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the Funds if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Funds are engaging in portfolio
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to the Funds if they
are unable to deliver or receive currency or monies in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
In addition, the Funds pay commissions and other costs in connection with
such investments. Losses resulting from the use of hedging transactions will
reduce the Funds' net asset value, and possibly income, and the losses can be
greater than if hedging transactions had not been used.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the U.S., hedging transactions may not be regulated as rigorously as in
the U.S., may not involve a clearing mechanism and related guarantees, and will
be subject to the risk of government actions affecting trading in, or the price
of, foreign securities, currencies and other instruments. The value of positions
taken as part of non-U.S. hedging transactions also could be adversely affected
by: (1) other complex foreign political, legal and economic factors; (2) lesser
availability of data on which to make trading decisions than in the U.S.; (3)
delays in the Funds' ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S.; (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S.; and (5) lower trading volume and liquidity.
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES
Options may be used as a means of participating in an anticipated price
change of a security on a more limited basis than would be possible if the
security itself were purchased. The Funds (with the exception of the GNMA Income
Fund and the Lexington Money Market Trust) may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the U.S.
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. The
Global Income Fund also may purchase put options at a time when the Fund does
not own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Fund seek to benefit from a decline in
the market price of the underlying security or currency. If the put option is
not sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction cost, unless the put option
is sold in a closing sale transaction.
The Global Income and the Russia Funds may purchase call options on
securities that they intend to purchase (or on currencies in which those
securities are denominated) in order to limit the risk of a substantial increase
in the market price of such security (or an adverse movement in the applicable
currency). The Global Income Fund also may purchase call options on underlying
securities or currencies it owns in order to protect unrealized gains on call
options previously written by it. A call option would be purchased for this
purpose where tax considerations make it inadvisable to realize such gains
31
<PAGE>
through a closing purchase transaction. Call options also may be purchased at
times to avoid realizing losses that would result in a reduction of the Fund's
current return. For example, where the Fund has written a call option on an
underlying security or currency having a current market value below the price at
which such security or currency was purchased by the Fund, an increase in the
market price could result in the exercise of the call option written by the Fund
and the realization of a loss on the underlying security or currency with the
same exercise price and expiration date as the option previously written.
COVERED PUT AND CALL OPTIONS
The Russia and Global Income Funds may write put options. The Funds would
write put options only on a covered basis, which means that the Funds would
either (i) set aside cash, U.S. government securities or other liquid,
high-grade debt securities in an amount not less than the exercise price at all
times while the put option is outstanding (the rules of the Options Clearing
Corporation currently require that such assets be deposited in escrow to secure
payment of the exercise price), (ii) sell short the security or currency
underlying the put option at the same or higher price than the exercise price of
the put option, or (iii) purchase a put option, if the exercise price of the
purchased put option is the same or higher than the exercise price of the put
option sold by the Funds. The Funds generally would write covered put options in
circumstances where the Investment Manager and the Sub-Adviser, as applicable,
wish to purchase the underlying security or currency for the Funds' portfolio at
a price lower than the current market price of the security or currency. In such
event, the Funds would write a put option at an exercise price which, reduced by
the premium received on the option, reflects the lower price they are willing to
pay. Since the Funds also would receive interest on debt securities or
currencies maintained to cover the exercise price of the option, this technique
could be used to enhance current return during periods of market uncertainty.
The risk in such a transaction would be that the market price of the underlying
security or currency would decline below the exercise price less the premiums
received.
The Global Corporate Leaders, International, SmallCap Asia Growth, Russia,
and Global Income Funds may write call options only on securities owned by the
Funds or securities which the Funds have the right to acquire without additional
consideration. Since it can be expected that a call option will be exercised if
the market value of the underlying security increases to a level greater than
the exercise price, this strategy will generally be used when the Investment
Manager believes that the call premium received by the Funds plus anticipated
appreciation in the price of the underlying security, up to the exercise price
of the call, will be greater than the appreciation in the price of the security.
The Global Corporate Leaders, SmallCap Asia Growth, Russia, and Global Income
Funds intend to limit transactions as described in this paragraph to those where
the sum of initial margin deposits and premiums paid does not exceed 5% of its
total assets. The International Fund intends to limit transactions as described
in this paragraph to less than 5% of Fund assets. The Global Corporate Leaders,
SmallCap Asia Growth, and Russia Funds will not write options in excess of 25%
of its total assets. The Funds will cause their custodian to segregate cash,
U.S. Government Securities or other high grade liquid debt obligations having a
value sufficient to meet the Fund's obligations under the call options.
The Global Corporate Leaders, International, and SmallCap Asia Growth Funds
will not purchase put and call options by others and will not write any put
options.
Each Fund except GNMA Income Fund and Money Market Trust may purchase put
and call options on stock indices in order to hedge against risks of stock
market or industry wide stock price fluctuations.
The Global Income and Russia Funds will not enter into options on
securities, securities indices or currencies or related options (including
options on futures) if the sum of initial margin deposits and premiums paid for
any such option or options would exceed 5% of its total assets, and it will not
enter into options with respect to more than 25% of its total assets.
32
<PAGE>
FUTURES, SWAPS AND OPTIONS ON FUTURES
Each Fund (except GNMA Income Fund and Money Market Trust) may enter into
interest rate futures contracts. An interest rate futures contract is an
agreement to purchase or sell debt securities, usually U.S. government
securities, at a specified date and price. For example, the fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell the
underlying debt security) in an attempt to hedge against an anticipated increase
in interest rates and a corresponding decline in debt securities it owns. The
Funds will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase. The Funds may purchase and sell futures contracts and
related options under the following conditions: (a) the then-current aggregate
futures market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of each Fund's total
assets, at market value; and (b) no more than 5% of the assets, at market value
at the time of entering into a contract, shall be committed to margin deposits
in relation to futures contracts.
Each Fund (except Global Income, GNMA Income, Growth and Income and Money
Market Trust) may engage in equity swaps. Equity swaps allow the parties to
exchange the dividend income or other components of return on an equity
investment (e.g., a group of equity securities or an index) for a component of
return on another non-equity or equity investment. Equity swap transactions may
be volatile and may present the Funds with counterparty risks.
Global Income Fund may enter into interest rate or currency futures
contracts ("Futures" or "Futures Contracts") as a hedge against changes in
prevailing levels of interest rates or currency exchange rates in order to
establish more definitely the effective return on securities or currencies held
or intended to be acquired by the Fund. The Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates
or currency exchange rates, and purchases of Futures as an offset against the
effect of expected declines in interest rates or currency exchange rates.
The Global Income Fund will not enter into Futures Contracts for
speculation and the Fund only will enter into Futures Contracts which are traded
on national futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal interest rate and currency
Futures exchanges in the United States are the Board of Trade of the City of
Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are exchanged in London at the London International
Financial Futures Exchange. The Fund's Futures transactions will be entered into
for traditional hedging purposes; that is, Futures Contracts will be sold to
protect against a decline in the price of securities or currencies that the Fund
owns, or Futures Contracts will be purchased to protect the Fund against an
increase in the price of securities or currencies it has committed to purchase
or expects to purchase.
An interest rate Futures Contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific financial
instrument (debt security or currency) for a specified price at a designated
date, time and place. Brokerage fees are incurred when a Futures Contract is
bought or sold, and margin deposits must be maintained at all times the Futures
Contract is outstanding.
Although Futures Contracts typically require future delivery of and payment
for financial instruments or currencies, Futures Contracts usually are closed
out before the delivery date. Closing out an open Futures Contract sale or
purchase is effected by entering into an offsetting Futures Contract purchase or
sale, respectively, for the same aggregate amount of the identical financial
instrument or currency and the same delivery date. If the offsetting purchase
price is less than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Fund realizes a gain; if it is less, the
Fund realizes a loss. The transaction costs also must be included in these
calculations. There can be no assurance, however, that the Fund will be able to
33
<PAGE>
enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
Global Income Fund may engage in options on Futures Contracts. Options on
Futures Contracts are similar to options on securities or currencies except that
options on Futures Contracts give the purchaser the right, in return for the
premium paid, to assume a position in a Futures Contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the Futures Contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the Futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
Futures margin account which represents the amount by which the market price of
the Futures Contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the Futures
Contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
level of the securities, currencies or index upon which the Futures Contracts
are based on the expiration date. Purchasers of options who fail to exercise
their options prior to the exercise date suffer a loss of the premium paid.
To reduce or eliminate the leverage then employed by the Global Income
Fund, or to reduce or eliminate the hedge position then currently held by the
Fund, the Fund may seek to close out an option position by selling an option
covering the same securities or contract and having the same exercise price and
expiration date. Trading in options on Futures Contracts began relatively
recently. The ability to establish and close out positions on such options will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop.
The prices of Futures Contracts are volatile and are influenced, among
other things, by actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and international
political and economic events.
There is a risk of imperfect correlation between changes in prices of
Futures Contracts and prices of the securities or currencies in the Global
Income Fund's portfolio being hedged. The degree of imperfection of correlation
depends upon circumstances such as: variations in speculative market demand for
Futures and for debt securities or currencies, including technical influences in
Futures trading; and differences between the financial instruments being hedged
and the instruments underlying the standard Futures Contracts available for
trading, with respect to interest rate levels, maturities, and creditworthiness
of issuers. 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 or interest rate trends.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Global Income Fund has sufficient assets to satisfy its
obligations under a Futures Contract, the Fund sets aside and commits to back
the Futures Contract an amount of cash, U.S. government securities and other
liquid, high grade debt securities equal in value to the current value of the
underlying instrument less margin deposit.
REPURCHASE AGREEMENTS
The Funds' investment portfolios may include repurchase agreements
("repos") with banks and dealers in U.S. Government securities. A repurchase
agreement involves the purchase by a Fund of an investment contract from a bank
or a dealer in U.S. Government securities which contract is secured by debt
securities whose value is equal to or greater than the value of the repurchase
agreement including the agreed upon interest. The agreement provides that the
institution will repurchase the underlying securities at an agreed upon time and
price. Under the Investment Company Act, repurchase agreements are considered to
be loans by a Fund and must be fully collateralized by collateral assets. If the
34
<PAGE>
seller defaults on its obligations to repurchase the underlying security, the
Fund may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and may
incur disposition costs in liquidating the security. The total amount received
on repurchase would exceed the price paid by the Fund, reflecting an agreed upon
rate of interest for the period from the date of the repurchase agreement to the
settlement date, and would not be related to the interest rate on the underlying
securities. The difference between the total amount to be received upon the
repurchase of the securities and the price paid by the Fund upon its acquisition
is accrued daily as interest. If the institution defaults on the repurchase
agreement, the Fund will retain possession of the underlying securities. In
addition, if bankruptcy proceedings are commenced with respect to the seller,
realization on the collateral by the Fund may be delayed or limited and the Fund
may incur additional costs. In such case, the Fund will be subject to risks
associated with changes in the market value of the collateral securities.
The Funds intend to limit repurchase agreements to institutions believed by
the Investment Manager or the Sub-Adviser to present minimal credit risk. The
Global Corporate Leaders, GNMA Income, Gold, International, Silver, and
Worldwide Emerging Markets Funds and Money Market Trust will enter into
repurchase agreements only with member banks of the Federal Reserve System and
with "primary dealers" in United States government securities. The Global
Corporate Leaders, GNMA Income, Gold, International, Silver, and Worldwide
Emerging Markets Funds may enter into repurchase agreements with respect to any
portfolio securities it may acquire consistent with its investment objectives
and policies, but intends to enter into repurchase agreements only with respect
to obligations of the U.S. government or its agencies and instrumentalities, to
meet anticipated redemptions or pending investments or reinvestment of Fund
assets in portfolio securities. The Funds will not enter into repurchase
agreements maturing in more than seven days if the aggregate of such repurchase
agreements and all other illiquid securities when taken together would exceed
15% (10% in the case of the GNMA Income Fund) of the total assets of the Fund.
The Funds treat any securities subject to restrictions on repatriation for more
than seven days, and securities issued in connection with foreign debt
conversion programs that are restricted as to remittance of invested capital or
profit, as illiquid. Illiquid securities do not include securities that are
restricted from trading on formal markets for some period of time but for which
an active informal market exists, or securities that meet the requirements of
Rule 144A under the Securities Act of 1933 and that, subject to the review by
the Board of Directors/Trustees and guidelines adopted by the Board of
Directors/Trustees, the Investment Manager has determined to be liquid.
REVERSE REPURCHASE AGREEMENTS
All of the Funds except Money Market Trust may enter into reverse purchase
agreements. In a reverse repurchase agreement, a Fund sell to a financial
institution a security that it holds and agrees to repurchase the same security
at an agreed-upon price and date. A Fund will maintain, in a segregated account
with a custodian, cash, U.S. government securities or other liquid, high grade
debt securities in an amount sufficient to cover its obligation under reverse
repurchase agreements.
ROLL TRANSACTIONS
The Global Income Fund may engage in "roll" borrowing transactions which
involve the Fund's sale of fixed income securities together with a commitment
(for which the Fund may receive a fee) to purchase similar, but not identical,
securities at a future date. The Fund will maintain, in a segregated account
with a custodian, cash, U.S. government securities or other liquid, high grade
debt securities in an amount sufficient to cover its obligation under "roll"
transactions.
WHEN ISSUED AND FORWARD COMMITMENT SECURITIES
The Global Corporate Leaders, Gold Fund, International, Silver, Worldwide
Emerging Markets, SmallCap Asia Growth, and Global Income Funds may make
contracts to purchase securities for a fixed price at a future date beyond
35
<PAGE>
customary settlement time ("forward commitments") because new issues of
securities are typically offered to investors, such as the Funds, on that basis.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date. This risk is in addition to the
risk of decline in value of the Funds' other assets. Although the Funds will
enter into such contracts with the intention of acquiring the securities, the
Funds may dispose of a commitment prior to settlement if the investment adviser
deems it appropriate to do so. The Funds may realize short-term profits or
losses upon the sale of forward commitments. The Funds may purchase U.S.
government or other securities on a "when-issued" basis and may purchase or sell
securities on a "delayed delivery" basis. The price is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. When-issued securities and forward commitments may be sold prior to
the settlement date, but a Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities. No income accrues on securities that have been purchased pursuant to
a forward commitment or on a when-issued basis prior to delivery to a Fund. At
the time a Fund enters into a transaction on a when-issued or forward commitment
basis, it supports its obligation with collateral assets equal to the value of
the when-issued or forward commitment securities and causes the collateral
assets to be marked to market daily. There is a risk that the securities may not
be delivered and that the Fund may incur a loss.
FORWARD CURRENCY CONTRACTS
The Global Corporate Leaders, Gold Fund, International, Silver, SmallCap
Asia Growth, Russia, Worldwide Emerging Markets, and Global Income Funds may
enter into forward currency contracts. A forward currency contract is a contract
individually negotiated and privately traded by currency traders and their
customers and creates an obligation to purchase or sell a specific currency for
an agreed-upon price at a future date. The Funds generally do not enter into
forward contracts with terms greater than one year. The Funds generally enter
into forward contracts only under two circumstances. First, if the Funds enter
into a contract for the purchase or sale of a security denominated in a foreign
currency, they may desire to "lock in" the U.S. dollar price of the security by
entering into a forward contract to buy the amount of a foreign currency needed
to settle the transaction. Second, if the Investment Manager believes that the
currency of a particular foreign country will substantially rise or fall against
the U.S. dollar, it may enter into a forward contract to buy or sell the
currency approximating the value of some or all of the Funds' portfolio
securities denominated in such currency. The Funds will not enter into a forward
contract if, as a result, it would have more than one-third of total assets
committed to such contracts (unless they own the currency that it is obligated
to deliver or has caused its custodian to segregate segregable assets having a
value sufficient to cover its obligations). Although forward contracts are used
primarily to protect the Funds from adverse currency movements, they involve the
risk that currency movements will not be accurately predicted.
Investors should recognize that investing in securities of foreign
companies and in particular securities of companies domiciled in or doing
business in emerging markets and emerging countries involves certain risk
considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. companies.
INTEREST RATE AND CURRENCY AND CURRENCY SWAPS
The Global Income Fund usually will enter into interest rate swaps on a net
basis, that is, the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Inasmuch
as swaps, caps, floors, collars and other derivative transactions are entered
into for good faith hedging purposes, the Investment Manager and the Fund
believe that they do not constitute senior securities under the 1940 Act and,
thus, will not treat them as being subject to the Fund's borrowing restrictions.
The Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless, at the time of entering into the transaction, the unsecured
long-term debt rating of the counterparty combined with any credit enhancements
is rated at least A by Moody's Investors Service, Inc. ("Moody's") or Standard &
36
<PAGE>
Poor's Ratings Group ("S&P") or has an equivalent rating from a nationally
recognized statistical rating organization or is determined to be of equivalent
credit quality by the Investment Manager. If a counterparty defaults, the Fund
may have contractual remedies pursuant to the agreements related to the
transactions. The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
FOREIGN SECURITIES CONSIDERATIONS
FOREIGN CURRENCY CONSIDERATIONS. The Global Corporate Leaders, Gold Fund,
International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets
and Global Income Funds' assets will be invested in securities of foreign
companies and substantially all income will be received by the Funds in foreign
currencies. However, the Funds will compute and distribute their income in
dollars, and the computation of income will be made on the date of its receipt
by the Funds at the foreign exchange rate in effect on that date. Therefore, if
the value of the foreign currencies in which the Funds receive their income
falls relative to the dollar between receipt of the income and the making of
Funds' distributions, the Funds will be required to liquidate securities in
order to make distributions if the Funds has insufficient cash in dollars to
meet distribution requirements.
The value of the assets of the Funds as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. Further, the Funds may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Funds at one rate, while offering a lesser rate of exchange
should the Funds desire immediately to resell that currency to the dealer. The
Funds will conduct their foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward or futures contracts to purchase or
sell foreign currencies.
INVESTMENT AND REPATRIATION RESTRICTIONS. (Global Corporate Leaders, Gold
Fund, International, Silver, Russia, SmallCap Asia Growth, Worldwide Emerging
Markets, and Global Income Funds.)
Some foreign countries may have laws and regulations which currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain foreign
countries through investment funds which have been specifically authorized. The
Funds may invest in these investment funds subject to the provisions of the 1940
Act as discussed below under "Investment Restrictions". If the Funds invest in
such investment funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment funds.
In addition, prior governmental approval for foreign investments may be
required under certain circumstances in some foreign countries, while the extent
of foreign investment in domestic companies may be subject to limitation in
other foreign countries. Foreign ownership limitations also may be imposed by
the charters of individual companies in foreign countries to prevent, among
other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by
foreign investors may require governmental registration and/or approval in some
foreign countries. The Funds could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
37
<PAGE>
EMERGING COUNTRY AND EMERGING SECURITIES MARKETS
Certain Funds may invest in securities in emerging markets. Investing in
securities in emerging countries may entail greater risks than investing in debt
securities in developed countries. These risks include (i) less social,
political and economic stability; (ii) the small current size of the markets for
such securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (iii) certain
national policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interests; (iv) foreign taxation; and (v) the absence of developed
structures governing private or foreign investment or allowing for judicial
redress for injury to private property.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which the Global
Income Fund may invest may have vocal minorities that advocate radical religious
or revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investment in
those countries.
FOREIGN SECURITIES MARKETS. (Global Corporate Leaders, Gold Fund,
International, Silver, SmallCap Asia Growth, Russia, Worldwide Emerging Markets,
Global Income) Trading volume on foreign country and, in particular emerging
market stock exchanges is substantially less than that on the New York Stock
Exchange. Further, securities of some foreign and in particular emerging market
companies are less liquid and more volatile than securities of comparable U.S.
companies. Similarly, volume and liquidity in most foreign bond markets is
substantially less than in the U.S. and, consequently, volatility of price can
be greater than in the U.S. Fixed commissions on foreign exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Funds
endeavor to achieve the most favorable net results on its portfolio transactions
and may be able to purchase the securities in which the Funds may invest on
other stock exchanges where commissions are negotiable. Foreign stock exchanges,
brokers and listed companies are generally subject to less government
supervision and regulation than in the United States. The customary settlement
time for foreign securities may be longer than the five day customary settlement
time for United States securities.
Companies in foreign countries are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. companies. Consequently,
there may be less publicly available information about a foreign company than
about a U.S. company. Further, there is generally less governmental supervision
and regulation of foreign stock exchanges, brokers and listed companies than in
the U.S. Further, the Funds may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts.
ECONOMIC AND POLITICAL RISKS. (Global Corporate Leaders, Gold Fund,
International, Silver, SmallCap Asia Growth, Russia, Emerging Markets and Global
Income Funds)
The economies of individual foreign countries in which the Funds invest may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, the economies of
foreign countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries with which they trade. The export driven
nature of Asian economies is often dependent on the strength of their trading
partners in the United States and Europe, although growing intra-regional trade
is seen mitigating some of this external dependence.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
38
<PAGE>
war) which could affect adversely the economies of such countries or the Funds'
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
INVESTING IN ASIA REGION SECURITIES
The SmallCap Asia Growth Fund will invest at least 65% of its total assets
in equity securities and equivalents of companies in the Asia Region which have
market capitalizations of less than $1 billion. Approximately 13,000 companies
are listed on recognized exchanges in the Asia Region. Approximately 300
companies in the Asia Region are capitalized over $1 billion. These companies
form the principal components of their respective market indices and
consequently attract the majority of foreign investment in the region.
Approximately 3,000 companies, which are considered Small Capitalization
companies, will be the primary focus for the Fund's investments. These companies
are frequently under-researched by international investors and undervalued by
their markets. The companies in which the Fund intends to invest will generally
have the following characteristics: a market capitalization of less than $1
billion; part of a strong growth industry; proven management; under-researched;
and undervalued.
INVESTING IN RUSSIAN SECURITIES
For the purposes of the Russia Fund section of the prospectus, and this
statement of additional information, Russian company means a legal entity (i)
that is organized under the laws of, or with a principal office and domicile in,
Russia, (ii) for which the principal equity securities trading market is in
Russia, or (iii) that derives at least 50% of its revenues or profits from goods
produced or sold, investments made, or services performed, in Russia or that has
at least 50% of its assets situated in Russia.
The Russia Fund intends to invest its assets in Russian companies in a
broad array of industries, including the following: oil and gas, energy
generation and distribution, communications, mineral extraction, trade,
financial and business services, transportation, manufacturing, real estate,
textiles, food processing and construction. The Fund is not permitted to invest
more than 25% of the value of its total assets in any one industry. It may,
however, invest an unrestricted amount of its assets in the oil and gas
industry. The Fund's investments will include investments in Russian companies
that have characteristics and business relationships common to companies outside
of Russia. As a result, outside economic forces may cause fluctuations in the
value of securities held by the Fund.
Under current conditions, the Russia Fund expects to invest at least 20% of
its total assets in very liquid assets to maintain liquidity and provide
stability. As the Russian equity markets develop, however, and the liquidity of
Russian securities becomes less problematic, the Fund will invest a greater
percentage of its assets in Russian equity securities.
As further described above, the Russia Fund is authorized to use various
investment strategies, some or all of which may be classified as derivatives, to
hedge various market risks and to enhance total return, which may be deemed a
form of speculation. Subject to the requirements of the Investment Company Act
of 1940, as amended, the Russia Fund may hedge up to 100% of its assets when
deemed appropriate by the Investment Manager. The Fund is also authorized to use
investment strategies to manage the effective maturity or duration of debt
securities or instruments held by the Fund, or to enhance the Fund's income or
gain. Although these strategies are regularly used by some investment companies
and other institutional investors in various markets, most of these strategies
are currently unavailable in Russia and may not become available in the future.
Techniques and instruments may change over time, however, as new instruments and
strategies are developed or regulatory changes occur.
INVESTMENT IN GOLD AND SILVER
The Gold Fund's and Silver Fund's performance and ability to meet their
objective will generally be largely dependent on the market value of gold and
silver, respectively. The Funds' professional management seeks to maximize on
advances and minimize on declines by monitoring and anticipating shifts in the
relative values of silver and gold and the equity securities of companies
engaged in mining or processing silver and gold ("silver-related securities" and
39
<PAGE>
"gold-related securities"). The Funds may also invest in other precious metals,
including platinum and palladium. A substantial portion of the Gold Fund's and
Silver Fund's investments will be in the securities of foreign issuers.
The Gold Fund and Silver Fund are of the belief that a silver and gold
investment medium will, over the long term, protect capital from adverse
monetary and political developments of a national or international nature and,
in the face of what appears to be continuous worldwide inflation, may offer
better opportunity for capital growth than many other forms of investment.
Throughout history, silver and gold have been thought of as the most basic
monetary standards. Investments in silver and gold may provide more of a hedge
against currencies with declining buying power, devaluation, and inflation than
other types of investments. Of course, there can be no assurance that
management's' belief will be realized or that the investment objective will be
achieved.
To the extent that investments in silver and gold and silver and gold
related securities appreciate in value relative to the U.S. dollar, the Funds'
investments may serve to offset erosion in the purchasing power of the U.S.
dollar.
The Gold Fund and Silver Fund may invest in debt securities of companies
engaged in mining and processing gold and silver. These debt securities can be
expected to be comparable to that of other debt obligations and generally will
not react to fluctuations in the price of gold and silver. An investment in the
debt instruments of these companies, therefore, cannot be expected to provide
the hedge against inflation that may be provided through investments in equity
securities of companies engaged in such activities and can be expected to
fluctuate inversely with prevailing interest rates.
It is anticipated that, except for temporary defensive or liquidity
purposes, 65% of the total assets of the Funds will be invested in silver and
gold and silver-related or gold-related securities. At any time management deems
it advisable for defensive or liquidity purposes, the Funds may hold cash or
cash equivalents in the currency of any major industrial nation, and invest in,
or hold unlimited amounts of debt obligations of the United States Government or
its political subdivisions, and money market instruments including repurchase
agreements with maturities of seven days or less and Certificates of Deposit.
It is the Investment Manager's present intention to manage the Gold Fund's
and the Silver Fund's investments so that (i) less than half of the value of
their portfolios will consist of silver, gold or other precious metals and (ii)
more than half of the value of their portfolios will be invested in silver or
gold-related securities, including securities of foreign issuers. Although the
Funds' Board of Directors/Trustees present policy prohibits investments in
speculative securities trading at extremely low prices and in relatively
illiquid markets, investments in such securities can be made when and if the
Board determines such investments to be in the best interests of the Funds and
their shareholders. The policies set forth in this paragraph are subject to
change by the Board of Directors/Trustees of the Gold Fund or Silver Fund,
respectively, in their sole discretion.
FLUCTUATIONS IN THE PRICE OF GOLD AND SILVER. The prices of silver and gold
have been subject to dramatic downward and upward price movements over short
periods of time and may be affected by unpredictable international monetary and
political policies, such as currency devaluations or revaluations, economic
conditions within an individual country, trade imbalances, or trade or currency
restrictions between countries. The price of silver and gold, in turn, is likely
to affect the market prices of securities of companies mining or processing
silver and gold, and accordingly, the value of the Funds' investments in such
securities may also be affected.
POTENTIAL EFFECT OF CONCENTRATION OF SOURCE OF SUPPLY AND CONTROL OF SALES.
The two largest national producers of silver and gold bullion are the Republic
of South Africa and the United States of America. Changes in political and
economic conditions affecting either country may have direct impact on that
country's sales of silver and gold. Under South African law, the only authorized
sales agent for silver and gold produced in South Africa is the Reserve Bank of
South Africa, which through its retention policies controls the time and place
of any sale of South African bullion. The South African Ministry of Mines
40
<PAGE>
determines silver and gold mining policy. South Africa depends predominately on
silver and gold sales for the foreign exchange necessary to finance its imports,
and its sales policy is necessarily subject to national economic and political
developments.
INVESTMENTS IN SILVER AND GOLD BULLION. Unlike certain more traditional
investment vehicles such as savings deposits and stocks and bonds, which may
produce interest or dividend income, silver and gold bullion earns no income
return. Appreciation in the market price of silver and gold is the sole manner
in which the Funds will be able to realize gains on its investment in silver and
gold bullion. Furthermore, the Funds may encounter storage and transaction costs
in connection with its ownership of silver and gold bullion which may be higher
than those attendant to the purchase, holding and disposition of more
traditional types of investments.
INTERNATIONAL AND DOMESTIC MONETARY SYSTEMS. Substantial amounts of silver
and gold bullion serving as primary official reserve assets play a major role in
the international monetary system. Since December 31, 1974, when it again became
legal to invest in silver and gold, several new markets have developed in the
United States. In connection with this legalization of silver ownership, the
U.S. Treasury and the International Monetary Fund embarked upon programs to
dispose of substantial amounts of silver and gold bullion.
OTHER INVESTMENT COMPANIES
All of the Funds may invest in other investment companies ("Underlying Funds").
Each Fund may not (i) invest more than 10% of its total assets in Underlying
Funds, (ii) invest more than 5% of its total assets in any one Underlying Fund,
or (iii) purchase greater than 3% of the total outstanding securities of any one
Underlying Fund. The Funds may also make indirect foreign investments through
other investment companies that have comparable investment objectives and
policies as the Funds. In addition to the advisory and operational fees a Fund
bears directly in connection with its own operation, the Fund would also bear
its pro rata portions of each other investment company's advisory and
operational expenses.
INVESTMENT STRATEGIES AND RISKS -- MONEY MARKET TRUST
In order for the Lexington Money Market Trust to achieve its objective of
seeking as high a level of current income as is available from short term
investments and consistent with the preservation of capital and liquidity, the
Fund will invest its assets in the following money market instruments: (l)
Obligations issued, or guaranteed as to interest and principal, by the
Government of the United States or any agency or instrumentality thereof; (2)
U.S. dollar denominated time deposits, certificates of deposit and bankers'
acceptances of U.S. banks and their London and Nassau branches and of U.S.
branches of foreign banks, provided that the bank has total assets of one
billion dollars; (3) Commercial paper of U.S. corporations, rated Al, A2 by
Standard & Poor's Corporation or Pl, P2 by Moody's Investors Service, Inc. or,
if not rated, of such issuers having outstanding debt rated A or better by
either of such services, or debt obligations of such issuers maturing in two
years or less and rated A or better; (4) Repurchase agreements under which the
Fund may acquire an underlying debt instrument for a relatively short period
subject to the obligation of the seller to repurchase, and of the Fund to
resell, at a fixed price. The underlying security must be of the same quality as
those described herein, although the usual practice is to use U.S. Government or
government agency securities. The Fund will enter into repurchase agreements
only with commercial banks and dealers in U.S. Government securities. Repurchase
agreements when entered into with dealers, will be fully collateralized
including the interest earned thereon during the entire term of the agreement.
If the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. In addition, if bankruptcy proceedings
are commenced with respect to the seller, realization on the collateral by the
Fund may be delayed or limited and the Fund may incur additional costs. In such
case the Fund will be subject to risks associated with changes in the market
value of the collateral securities. The Fund intends to limit repurchase
agreements to institutions believed by the Investment Manager to present minimal
credit risk. The Fund will not enter into repurchase agreements maturing in more
than seven days if the aggregate of such repurchase agreements would exceed 10%
of the total assets of the Fund; or (5) Other money market instruments.
41
<PAGE>
The obligations of London and Nassau branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental regulation.
Payment of interest and principal upon these obligations may also be affected by
governmental action in the country of domicile of the branch (generally referred
to as "sovereign risk"). In addition, evidences of ownership of portfolio
securities may be held outside of the U.S., and the Lexington Money Market Trust
may be subject to the risks associated with the holding of such property
overseas. Examples of governmental actions would be the imposition of currency
controls, interest limitations, seizure of assets, or the declaration of a
moratorium. Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as by governmental action in the country in which the foreign
bank has its head office. While the Funds will carefully consider these factors
on making such investments, there are no limitations on the percentage of the
Funds' portfolio which may be invested in any one type of instrument.
The Investment Policies stated above are fundamental and may not be changed
without shareholder approval. The Fund may not invest in securities other than
the types of securities listed above and is subject to other specific
restrictions as detailed under "Investment Restrictions" below.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS -- THE PILGRIM GLOBAL CORPORATE LEADERS FUND
The Fund's investment objective and the following investment restrictions
are matters of fundamental policy which may not be changed without the
affirmative vote of the lesser of (a) 67% or more of the shares of the Fund
present at a shareholders' meeting at which more than 50% of the outstanding
shares are present or represented by proxy or (b) more than 50% of the
outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase securities
in accordance with the Fund's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Fund may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Fund may borrow money as authorized by
the 1940 Act.
(2) The Fund will not borrow money, except that: (a) the Fund may enter
into certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary emergency purposes, the Fund
may borrow money in amounts not exceeding 5% of the value of its total assets at
the time when the loan is made; (d) the Fund may pledge its portfolio securities
or receivables or transfer or assign or otherwise encumber them in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If at any time, the
value of the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test. The Fund will only invest in reverse repurchase agreements up to 5%
of the Fund's total assets.
42
<PAGE>
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities by the
Fund, the Fund may be deemed to be an underwriter under the provisions of the
1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may: (a) purchase bonds, debentures or
other debt securities, including short-term obligations; (b) enter into
repurchase transactions; and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, may engage in
transactions on a when-issued or forward commitment basis, and may enter into
forward currency contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in securities
issued by companies principally engaged in any one industry. The Fund considers
securities of individual foreign governments, companies and supranational
organizations to be industries. This limitation, however, will not apply to
securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities.
(8) The Fund will not purchase securities of an issuer, if: (a) more than
5% of the Fund's total assets taken at market value would at the time be
invested in the securities of such issuer, except that such restriction shall
not apply to securities issued or guaranteed by the United States government or
its agencies or instrumentalities or, with respect to 25% of the Fund's total
assets, to securities issued or guaranteed by the government of any country
other than the United States which is a member of the Organization for Economic
Cooperation and Development ("OECD"). The member countries of OECD are at
present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France,
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States; or (b) such purchases would at the time result in
more than 10% of the outstanding voting securities of such issuer being held by
the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non-fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under the
management of the investment adviser to save commissions or to average prices
among them is not deemed to result in a securities trading account.
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
43
<PAGE>
(3) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(4) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(5) The Fund will not invest for the purpose of exercising control over or
management of any company.
(6) The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other securities, if at
the time of the purchase, the Fund's investment in warrants, valued at the lower
of cost or market, would exceed 5% of the Fund's total assets. For these
purposes, warrants attached to units or other securities shall be deemed to be
without value.
(7) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- GNMA INCOME FUND
The following investment restrictions are matters of fundamental policy
which may not be changed without the affirmative vote of the lesser of (a) 67%
or more of the shares of the Fund present at a shareholders' meeting at which
more than 50% of the outstanding shares are present or represented by proxy or
(b) more than 50% of the outstanding shares. Under these investment
restrictions, the Fund will not :
(1) issue senior securities;
(2) borrow money;
(3) underwrite securities of other issuers;
(4) concentrate its investments in a particular industry to an extent
greater than 25% of its total assets, provided that such limitation shall not
apply to securities issued or guaranteed by the U.S. Government or its agencies;
(5) purchase or sell real estate, commodity contracts or commodities
(however, the Fund may purchase interests in GNMA mortgage-backed certificates);
(6) make loans to other persons except: (a) through the purchase of a
portion or portions of an issue or issues of securities issued or guaranteed by
the U.S. Government or its agencies, or (b) through investments in "repurchase
44
<PAGE>
agreements" (which are arrangements under which the Fund acquires a debt
security subject to an obligation of the seller to repurchase it at a fixed
price within a short period), provided that no more than 10% of the Fund's
assets may be invested in repurchase agreements which mature in more than seven
days;
(7) purchase the securities of another investment company or investment
trust, except in the open market and then only if no profit, other than the
customary broker's commission, results to a sponsor or dealer, or by merger or
other reorganization;
(8) purchase any security on margin or effect a short sale of a security;
(9) buy securities from or sell securities (other than securities issued by
the Fund) to any of its officers, directors or its investment adviser, as
principal;
(10) contract to sell any security or evidence of interest therein, except
to the extent that the same shall be owned by the Fund;
(11) purchase or retain securities of an issuer when one or more of the
officers and directors of the Fund or of the Adviser, or a person owning more
than 10% of the stock of either, own beneficially more than 1/2 of 1% of the
securities of such issuer and such persons owning more than 1/2 of 1% of such
securities together own beneficially more than 5% of the securities of such
issuer;
(12) invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government or its
agencies), except that such restriction shall not apply to 25% of the Fund's
portfolio so long as the net asset value of the portfolio does not exceed
$2,000,000;
(13) purchase any securities if such purchase would cause the Fund to own
at the time of purchase more than 10% of the outstanding voting securities of
any one issuer;
(14) purchase any security restricted as to disposition under Federal
securities laws;
(15) invest in interests in oil, gas or other mineral exploration or
development programs; or
(16) buy or sell puts, calls or other options.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) invest in real estate limited partnership interests, oil, gas or
mineral leases, as well as exploration or development programs; or
(2) purchase warrants except in units with other securities in original
issuance thereof or attached to other securities, if at the time of purchase,
the Fund's investment in warrants, valued at the lower of cost or market, would
exceed 5% of the Fund's total assets. Warrants which are not listed on the New
York or American stock exchanges shall not exceed 2% of the Fund's net assets.
Shares of the Fund will not be issued for consideration other than cash.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
45
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS -- GOLD FUND
The Fund's investment objective, as described under "investment policy" and
the following investment restrictions are matters of fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a shareholders' meeting at which more than
50% of the outstanding shares are present or represented by proxy or (b) more
than 50% of the outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase securities
in accordance with the Fund's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Fund may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Fund may borrow money as authorized by
the 1940 Act.
(2) at the end of each quarter of the taxable year, (i) with respect to at
least 50% of the market value of the Fund's assets, the Fund may invest in cash,
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purchases of this calculation to an amount not greater than 5%
of the value of the Fund's total assets, and (ii) not more than 25% of the value
of its total assets be invested in the securities of any one issuer (other than
U.S. Government securities or the securities of other regulated investment
companies).
(3) The Fund will not concentrate its investments by investing more than
25% of its assets in the securities of issuers in any one industry. This limit
will not apply to gold and gold-related securities, and to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
(4) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, and may enter into
forward currency contracts. Transactions in gold, platinum, palladium or silver
bullion will not be subject to this restriction.
(5) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interest except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(6) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds, debentures or
other debt securities, including short-term obligations, (b) enter into
repurchase transactions and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(7) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may enter
into commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow
money in amounts not exceeding 5% of the value of its total assets at the time
when the loan is made; (d) the Fund may pledge its portfolio securities or
receivables or transfer or assign or otherwise encumber then in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
46
<PAGE>
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all assets fails to meet the 300% asset coverage
requirement relative only to leveraging, the Fund will, within three days (not
including Sundays and holidays), reduced its borrowings to the extent necessary
to meet the 300% test. The Fund will only invest in reverse repurchase
agreements up to 5% of the Fund's total assets.
(8) The Fund will not act as underwriter of securities except to the extent
that, in connection with the disposition of portfolio securities by the Fund,
the Fund may be deemed to be an underwriter under the provisions of the 1933
Act.
In additional to the above fundamental restrictions, the Fund has
undertaken the following non fundamental restrictions, which may be changed in
the future by the Board of Directors, without a vote of the shareholders of the
Fund:
(1) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
(2) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(3) The Fund will not write, purchase or sell puts or calls on underlying
securities. However, the Fund may invest up to 15% of the value of its assets in
warrants. This restriction on the purchase of warrants does not apply to
warrants attached to, or otherwise included in, a unit with other securities.
(4) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(6) The Fund will not invest for the purpose of exercising control over or
management of any company.
(7) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under the
management of the investment adviser to save commissions or to average prices
among them is not deemed to result in a securities trading account.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
47
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS -- GROWTH AND INCOME FUND
The Fund shareholder vote required for modification of the investment
policies or restrictions listed below is the lesser of: (a) 67% or more of the
voting securities present at a meeting if the holders of more than 50% are
present or represented by proxy; or (b) more than 50% of the voting securities.
The Fund shall not:
(1) issue senior securities;
(2) underwrite securities of other issuers;
(3) purchase or sell real estate, commodity contracts or commodities
(however, the Fund may purchase interests in real estate investment trusts whose
securities are registered under the Securities Act of 1933 and are readily
marketable);
(4) make loans to other persons except (a) through the purchase of a
portion or portions of publicly distributed bonds, notes, debentures and
evidences of indebtedness authorized by its investment policy, or (b) through
investments in" repurchase agreements" (which are arrangements under which the
Fund acquires a debt security subject to an obligation of the seller to
repurchase it at a fixed price within a short period), provided that no more
than 10% of the Fund's assets may be invested in repurchase agreements which
mature in more than seven days;
(5) purchase the securities of another investment company or investment
trust except in the open market where no profit results to a sponsor or dealer,
other than the customary broker's commission;
(6) purchase any security on margin or effect a short sale of a security;
(7) buy securities from or sell securities to any of its officers and
directors or those of the investment adviser or principal distributor as
principal;
(8) contract to sell any security or evidence of interest therein except to
the extent that the same shall be owned by the Fund;
(9) retain securities of an issuer when one or more of the officers and
directors of the Fund or the investment adviser or a person owning more than 10%
of the stock of either, own beneficially more than 0.5% of the securities of
such issuer and the persons owning more than 0.5% of such securities together
own beneficially more than 5% of the securities of such issuer;
(10) invest more than 5% of the value of its total assets in the securities
of any one issuer nor acquire more than 10% of the outstanding voting securities
of any one issuer;
(11) invest in companies for the purpose of exercising management or
control; or
(12) concentrate its investments in a particular industry; thus the Fund
will not purchase a security if the immediate effect of such purchase would be
to increase the Fund's holdings in such industry above 25% of the Fund's assets.
In addition to the above fundamental investment restrictions, the Fund has
undertaken not to: a) invest an aggregate of more than 5% of its total assets in
the securities of unseasoned issuers and equity securities of issuers which are
not readily marketable; b) invest in puts, calls, straddles, spreads, and any
combination thereof; or c) pledge, mortgage or hypothecate the assets of the
Fund to an extent greater than 15% of the gross assets of the Fund taken at
cost.
48
<PAGE>
The Fund has authority to borrow money from a bank not in excess of the
lesser of: (a) 5% of the gross assets of the Fund at the current market value at
the time of such borrowing; or (b) 10% of the gross assets of the Fund taken at
cost. Any such borrowing may be undertaken only as a temporary measure for
extraordinary or emergency purposes. This borrowing power has not been exercised
by the Fund's management.
The 5% diversification limitation set forth in subparagraph (x) above does
not apply to obligations issued or guaranteed as to principal and interest by
the United States Government, nor does it apply to bank certificates of deposit,
which are not classified by the Fund as securities for the purposes of this
limitation.
The Fund may not use more than 5% of its net assets to purchase illiquid
securities. The Fund treats any securities subject to restrictions on
repatriation for more than seven days, and securities issued in connection with
foreign debt conversion programs that are restricted as to remittance of
invested capital or profit, as illiquid. The Fund also treats repurchase
agreements with maturities in excess of seven days as illiquid. Illiquid
securities do not include securities that are restricted from trading on formal
markets for some period of time but for which an active informal market exists,
or securities that meet the requirements of Rule 144A under the Securities Act
of 1933 and that, subject to the review by the Board of Directors and guidelines
adopted by the Board of Directors, the Investment Manager has determined to be
liquid.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- INTERNATIONAL FUND
The Fund's investment objective and the following investment restrictions
are matters of fundamental policy which may not be changed without the
affirmative vote of the lesser of (a) 67% or more of the shares of the Fund
present at a shareholders' meeting at which more than 50% of the outstanding
shares are present or represented by proxy or (b) more than 50% of the
outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that: (a) The Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including reverse
repurchase agreements, foreign exchange contracts, delayed delivery and
when-issued securities, which may be considered the issuance of senior
securities; (b) the Fund may engage in transactions that may result in the
issuance of a senior security to the extent permitted under applicable
regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund
may engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of futures
contracts and related options shall not be considered to involve the issuance of
senior securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) The Fund will not borrow money, except that: (a) the Fund may enter
into certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary emergency purposes, the Fund
may borrow money in amounts not exceeding 5% of the value of its total assets at
the time when the loan is made; (d) The Fund may pledge its portfolio securities
or receivables or transfer or assign or otherwise encumber them in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If at any time, the
value of the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test.
49
<PAGE>
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities by the
Fund, the Fund may be deemed to be an underwriter under the provisions of the
1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may: (a) purchase bonds, debentures or
other debt securities, including short-term obligations; (b) enter into
repurchase transactions; and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, may engage in
transactions on a when-issued or forward commitment basis, and may enter into
forward currency contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in securities
issued by companies principally engaged in any one industry. The Fund considers
foreign government securities and supranational organizations to be industries.
This limitation, however, will not apply to securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would at the time be invested
in the securities of such issuer, except that such restriction shall not apply
to securities issued or guaranteed by the United States government or its
agencies or instrumentalities or, with respect to 25% of the Fund's total
assets, to securities issued or guaranteed by the government of any country
other than the United States which is a member of the Organization for Economic
Cooperation and Development ("OECD"). The member countries of OECD are at
present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France,
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States; or (b) such purchases would at the time result in
more than 10% of the outstanding voting securities of such issuer being held by
the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under the
management of the investment adviser to save commissions or to average prices
among them is not deemed to result in a securities trading account.
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) The then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
50
<PAGE>
(3) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(4) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(5) The Fund will not invest for the purpose of exercising control over or
management of any company.
(6) The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other securities, if at
the time of the purchase, the Fund's investment in warrants, valued at the lower
of cost or market, would exceed 5% of the Fund's total assets. For these
purposes, warrants attached to units or other securities shall be deemed to be
without value.
(7) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- SILVER FUND
The Fund's investment objective, as described under "Investment Objective"
in the Fund's prospectus, and the following investment restrictions are matters
of fundamental policy which may not be changed without the affirmative vote of
the lesser of (a) 67% or more of the shares of the Fund present at a
shareholders' meeting at which more than 50% of the outstanding shares are
present or represented by proxy or (b) more than 50% of the outstanding shares.
Under these investment restrictions:
(1) At least 80% of the Fund's assets will be invested in established
silver-related companies which have been in business for more than three years.
(2) At the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets be invested in cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer counted for the
purposes of this calculation only if the value of thereof is not greater than 5%
of the value of the Fund's total assets, and (ii) not more than 25% of its total
assets be invested in securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies).
(3) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
51
<PAGE>
(4) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, may engage in
transactions on a when-issued or forward commitment basis, and may enter into
forward currency contracts. Transactions in which silver bullion is taken in
payment of principal, interest or both or a debt instrument and where the Fund
disposes of the silver bullion for cash will not be subject to this restriction.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds, debentures or
other debt securities, including short-term obligations, (b) enter into
repurchase transactions and (c) lend portfolio securities or bullion provided
that the value of such loaned securities does not exceed one-third of the Fund's
total assets.
(6) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may enter
into commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow
money in amounts not exceeding 5% of the value of its total assets at the time
when the loan is made; (d) the Fund may pledge its silver or portfolio
securities or receivables or transfer or assign or otherwise encumber them in an
amount not exceeding one-third of the value of its total assets; and (e) for
purposes of leveraging, the Fund may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of the
Fund's assets, including the amount borrowed, less its liabilities, is equal to
at least 300% of the amount borrowed, plus all outstanding borrowings. If at any
time, the value of the Fund's assets fails to meet the 300% asset coverage
requirement relative only to leveraging, the Fund will, within three days (not
including Sundays and holidays), reduce its borrowings to the extent necessary
to meet the 300% test.
(7) The Fund will not issue any senior security (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), except that (a) the
Fund may enter into commitments to purchase securities in accordance with the
Fund's investment program, including reverse repurchase agreements, foreign
exchange contracts, delayed delivery and when-issued securities, which may be
considered the issuance of senior securities; (b) the Fund may engage in
transactions that may result in the issuance of a senior security to the extent
permitted under applicable regulations, interpretations of the 1940 Act or an
exemptive order; (c) the Fund may engage in short sales of securities to the
extent permitted in its investment program and other restrictions; (d) the
purchase or sale of futures contracts and related options shall not be
considered to involve the issuance of senior securities; and (e) subject to
fundamental restrictions, the Fund may borrow money as authorized by the 1940
Act.
(8) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities by the
Fund, the Fund may be deemed to be an underwriter under the provisions of the
Securities Act of 1933, as amended (the "1933 Act").
In addition to the above fundamental restrictions, the Fund has undertaken
the following nonfundamental restrictions, which may be changed in the future by
the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not invest more than 15% of its total net assets at
market value in illiquid securities. Illiquid securities are securities that are
not readily marketable or cannot be disposed of promptly within seven days and
in the usual course of business without taking a materially reduced price. Such
securities include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may be resold
under Rule 144A or securities offered pursuant to Section 4(2) of the 1933 Act
shall not be deemed illiquid solely by reason of being unregistered. The
Investment Adviser shall determine whether a particular security is deemed to be
liquid based on the trading markets for the specific security and other factors.
52
<PAGE>
(2) The Fund will not invest for the purpose of exercising control over
management of any company.
(3) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the Fund's total assets, at market
value at the time of entering into a contract, shall be committed to margin
deposits in relation to futures contracts.
(4) The Fund will not issue its securities for any considerations other
than cash or securities except as a dividend or distribution in connection with
a reorganization.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(6) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(7) The Fund will not write, purchase or sell puts, calls on underlying
securities. However, the Fund may invest up to 15% of the value of its total
assets in warrants. This restriction on the purchase of warrants does not apply
to warrants attached to, or otherwise included in, a unit with other securities.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- SMALLCAP ASIA GROWTH FUND
The Fund's investment objective and the following investment restrictions
are matters of fundamental policy which may not be changed without the
affirmative vote of the lesser of (a) 67% or more of the shares of the Fund
present at a shareholders' meeting at which more than 50% of the outstanding
shares are present or represented by proxy or (b) more than 50% of the
outstanding shares. Under these investment restrictions:
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase securities
in accordance with the Fund's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Fund may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Fund may borrow money as authorized by
the 1940 Act.
(2) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may enter
into commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow
money in amounts not exceeding 5% of the value of its total assets at the time
when the loan is made; (d) The Fund may pledge its portfolio securities or
receivables or transfer or assign or otherwise encumber them in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
53
<PAGE>
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If at any time, the
value of the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test.
(3) The Fund will not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities by the
Fund, the Fund may be deemed to be an underwriter under the provisions of the
1933 Act.
(4) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(5) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds, debentures or
other debt securities, including short-term obligations, (b) enter into
repurchase transactions and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(6) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, enter into transactions in financial
and index futures contracts and related options, engage in transactions on a
when-issued or forward commitment basis, and enter into forward currency
contracts.
(7) The Fund will not concentrate its investments in any one industry,
except that the Fund may invest up to 25% of its total assets in securities
issued by companies principally engaged in any one industry. The Fund considers
foreign government securities and supranational organizations to be industries.
This limitation, however, will not apply to securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities.
(8) The Fund will not purchase securities of an issuer, if (a) more than 5%
of the Fund's total assets taken at market value would, at the time, be invested
in the securities of such issuer, except that such restriction shall not apply
to securities issued or guaranteed by the United States government or its
agencies or instrumentalities or, with respect to 25% of the Fund's total
assets, to securities issued or guaranteed by the government of any country
other than the United States which is a member of the Organization for Economic
Cooperation and Development ("OECD"). The member countries of OECD are at
present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France,
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United
Kingdom and the United States; or (b) such purchases would at the time result in
more than 10% of the outstanding voting securities of such issuer being held by
the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non-fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The "bunching" of orders for the sale or
purchase of marketable portfolio securities with other accounts under the
management of the investment adviser or sub-adviser to save commissions or to
average prices among them is not deemed to result in a securities trading
account.
54
<PAGE>
(2) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
(3) The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(4) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(5) The Fund will not invest for the purpose of exercising control over or
management of any company.
(6) The Fund will not purchase warrants except in units with other
securities in original issuance thereof or attached to other securities, if at
the time of the purchase, the Fund's investment in warrants, valued at the lower
of cost or market, would exceed 5% of the Fund's total assets. For these
purposes, warrants attached to units or other securities shall be deemed to be
without value.
(7) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
(8) The Fund will not enter into options on securities, securities indices
or currencies or related options (including options on futures) if the sum of
initial margin deposits and premiums paid for any such option or options would
exceed 5% of its total assets, and it will not enter into options with respect
to more than 25% of its total assets.
(9) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- TROIKA DIALOG RUSSIA FUND
The Fund's investment objective, as described under `investment policy' and
the following investment restrictions are matters of fundamental policy which
may not be changed without the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a shareholders' meeting at which more than
50% of the outstanding shares are present or represented by proxy or (b) more
than 50% of the outstanding shares. Under these investment restrictions:
55
<PAGE>
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may enter into commitments to purchase securities
in accordance with the Fund's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Fund may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of
securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Fund may borrow money as authorized by
the 1940 Act.
(2) at the end of each quarter of the taxable year, (i) with respect to at
least 50% of the market value of the Fund's assets, the Fund may invest in cash,
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purchases of this calculation to an amount not greater than 5%
of the value of the Fund's total assets, and (ii) not more than 25% of the value
of its total assets be invested in the securities of any one issuer (other than
U.S. Government securities or the securities of other regulated investment
companies).
(3) The Fund will not concentrate its investments by investing more than
25% of its assets in the securities of issuers in any one industry. This limit
will not apply to oil and gas related securities and to securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
(4) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, and may enter into
forward currency contracts.
(5) The Fund will not purchase real estate, interests in real estate or
real estate limited partnership interest except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(6) The Fund will not make loans, except that, to the extent appropriate
under its investment program, the Fund may (a) purchase bonds, debentures or
other debt securities, including short-term obligations, (b) enter into
repurchase transactions and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(7) The Fund will not borrow money, except that (a) the Fund may enter into
certain futures contracts and options related thereto; (b) the Fund may enter
into commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow
money in amounts not exceeding 5% of the value of its total assets at the time
when the loan is made; (d) the Fund may pledge its portfolio securities or
receivables or transfer or assign or otherwise encumber then in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If at any time, the
value of the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test. The Fund will only invest in reverse repurchase agreements up to 5%
of the Fund's total assets.
56
<PAGE>
(8) The Fund will not act as underwriter of securities except to the extent
that, in connection with the disposition of portfolio securities by the Fund,
the Fund may be deemed to be an underwriter under the provisions of the 1933
Act.
In addition to the above fundamental restrictions, the Russia Fund has
undertaken the following non- fundamental restrictions, which may be changed in
the future by the Board of Directors, without a vote of the shareholders of the
Fund:
(1) The Fund will not invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
(2) The Fund will not make short sales of securities, other than short
sales `against the box,' or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment programs of the Fund.
(3) The Fund may invest up to 15% of the value of its assets in warrants.
This restriction on the purchase of warrants does not apply to warrants attached
to, or otherwise included in, a unit with other securities.
(4) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
(5) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(6) The Fund will not invest for the purpose of exercising control over or
management of any company.
(7) The Fund will not participate on a joint or joint-and-several basis in
any securities trading account. The `bunching' of orders for the sale or
purchase of marketable portfolio securities with other accounts under the
management of the investment adviser to save commissions or to average prices
among them is not deemed to result in a securities trading account.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
FUNDAMENTAL INVESTMENT RESTRICTIONS --
WORLDWIDE EMERGING MARKETS FUND
The Fund's investment objective and the following investment restrictions
are matters or fundamental policy which may not be changed without the
affirmative vote of the lesser of (a) 67% or more of the shares of the Fund
present at a shareholders' meeting at which more than 50% of the outstanding
shares are present or represented by proxy or (b) more than 50% of the
outstanding shares. Under these investment restrictions:
57
<PAGE>
(1) The Fund will not issue any senior security (as defined in the 1940
Act), except that: (a) the Fund may enter into commitments to purchase
securities in accordance with the Fund's investment program, including reverse
repurchase agreements, foreign exchange contracts, delayed delivery and
when-issued securities, which may be considered the issuance of senior
securities; (b) the Fund may engage in transactions that may result in the
issuance of a senior security to the extent permitted under applicable
regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund
may engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of futures
contracts and related options shall not be considered to involve the issuance of
senior securities; and (e) subject to fundamental restrictions, the Fund may
borrow money as authorized by the 1940 Act.
(2) The Fund shall not act as an underwriter of securities except to the
extent that, in connection with the disposition of portfolio securities by the
Fund, the Fund may be deemed to be an underwriter under the provisions of the
1933 Act.
(3) The Fund shall not purchase real estate, interests in real estate or
real estate limited partnership interests except that, to the extent appropriate
under its investment program, the Fund may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein.
(4) The Fund will not invest in commodity contracts, except that the Fund
may, to the extent appropriate under its investment program, purchase securities
of companies engaged in such activities, may enter into transactions in
financial and index futures contracts and related options, may engage in
transactions on a when-issued or forward commitment basis, and may enter into
forward currency contracts.
(5) The Fund shall not make loans, except that, to the extent appropriate
under its investment program, the Fund may: (a) purchase bonds, debentures or
other debt securities, including short-term obligations; (b) enter into
repurchase transactions; and (c) lend portfolio securities provided that the
value of such loaned securities does not exceed one-third of the Fund's total
assets.
(6) The Fund will not hold more than 5% of the value of its total assets in
the securities of any one issuer or hold more than 10% of the outstanding voting
securities of any one issuer. This restriction applies only to 75% of the value
of the Fund's total assets. Securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities are excluded from this
restriction.
(7) The Fund will not concentrate its investments in any one industry
except that the Fund may invest up to 25% of its total assets in securities
issuers principally engaged in any one industry. This limitation, however, will
not apply to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, securities invested in, or repurchase agreements
for, U.S. Government securities, and certificates of deposit, or bankers'
acceptances, or securities of U.S. banks and bank holding companies.
(8) The Fund shall not borrow money, except that (a) the Fund may enter
into certain futures contracts and options related thereto; (b) the Fund may
enter into commitments to purchase securities in accordance with the Fund's
investment program, including delayed delivery and when-issued securities and
reverse repurchase agreements; (c) for temporary emergency purposes, the Fund
may borrow money in amounts not exceeding 5% of the value of its total assets at
the time when the loan is made; (d) the Fund may pledge its portfolio securities
or receivables or transfer or assign or otherwise encumber them in an amount not
exceeding one-third of the value of its total assets; and (e) for purposes of
leveraging, the Fund may borrow money from banks (including its custodian bank),
only if, immediately after such borrowing, the value of the Fund's assets,
including the amount borrowed, less its liabilities, is equal to at least 300%
of the amount borrowed, plus all outstanding borrowings. If at any time, the
58
<PAGE>
value of the Fund's assets fails to meet the 300% asset coverage requirement
relative only to leveraging, the Fund will, within three days (not including
Sundays and holidays), reduce its borrowings to the extent necessary to meet the
300% test.
In addition to the above fundamental restrictions, the Fund has undertaken
the following non-fundamental restrictions, which may be changed in the future
by the Board of Directors, without a vote of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options
under the following conditions: (a) the then-current aggregate futures market
prices of financial instruments required to be delivered and purchased under
open futures contracts shall not exceed 30% of the Fund's total assets, at
market value; and (b) no more than 5% of the assets, at market value at the time
of entering into a contract, shall be committed to margin deposits in relation
to futures contracts.
(2) The Fund will not purchase the securities of any other investment
company, except as permitted under the 1940 Act.
(3) The Fund will not purchase any securities on margin or make short sales
of securities, other than short sales `against the box,' or purchase securities
on margin except for short-term credits necessary for clearance of portfolio
transactions, provided that this restriction will not be applied to limit the
use of options, futures contracts and related options, in the manner otherwise
permitted by the investment restrictions, policies and investment programs of
the Fund.
(4) The Fund shall not buy securities from or sell securities (other than
securities issued by the Fund) to any of its officers, directors or its
investment adviser or distributor as principal.
(5) The Fund shall not contract to sell any security or evidence of
interest therein, except to the extent that the same shall be owned by the Fund.
(6) The Fund will not invest for the purpose of exercising control over or
management of any company.
(7) The Fund shall not write, purchase or sell puts or calls on underlying
securities. However, the Fund may invest up to 15% of the value of its assets in
warrants. This restriction on the purchase of warrants does not apply to
warrants attached to, or otherwise included in, a unit with other securities.
(8) The Fund will invest more than 15% of its total assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business without taking a materially reduced price. Such securities include, but
are not limited to, time deposits and repurchase agreements with maturities
longer than seven days. Securities that may be resold under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended, shall not be deemed illiquid solely by reason of being unregistered.
The Investment Adviser shall determine whether a particular security is deemed
to be liquid based on the trading markets for the specific security and other
factors.
The percentage restrictions referred to above are to be adhered to at the
time of investment and are not applicable to a later increase or decrease in
percentage beyond the specified limit resulting from change in values or net
assets.
59
<PAGE>
FUNDAMENTAL INVESTMENT RESTRICTIONS -- GLOBAL INCOME FUND
The Fund's investment policy, and the investment restrictions set forth
below, may not be changed without the affirmative vote (defined as the lesser
of: 67% of the shares represented at a meeting at which 50% of the outstanding
shares are present or 50% of the outstanding shares) of the Fund's shareholders.
These restrictions may be summarized as follows:
The Fund shall not:
(1) issue any senior security (as defined in the 1940 Act), except that (a)
the Fund may enter into commitments to purchase securities in accordance with
the Fund's investment program, including reverse repurchase agreements, delayed
delivery and when-issued securities, which may be considered the issuance of
senior securities to the extent permitted under applicable regulations; (b) the
Fund may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, the
interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in
short sales of securities to the extent permitted in its investment program and
other restrictions; (d) the purchase or sale of futures contracts and related
options shall not be considered to involve the issuance of senior securities;
and (e) subject to fundamental restrictions, the Fund may borrow money as
authorized by the 1940 Act;
(2) borrow money, except that (a) the Fund may enter into certain futures
contracts and options related thereto; (b) the Fund may enter into commitments
to purchase securities in accordance with the Fund's investment program,
including delayed delivery and when-issued securities and reverse repurchase
agreements, and (c) for temporary emergency purposes, the Fund may borrow money
in amounts not exceeding 5% of the value of its total assets at the time when
the loan is made.
(3) underwrite securities of other issuers;
(4) concentrate its investments in a particular industry to an extent
greater than 25% of the value of its total assets, provided that such limitation
shall not apply to securities issued or guaranteed by the U.S. Government or its
agencies;
(5) invest in commodity contracts, except that the Fund may, to the extent
appropriate under its investment program, purchase securities of companies
engaged in such activities, may enter into transactions in financial and index
futures contracts and related options for hedging purposes, may engage in
transactions on a when-issued or forward commitment basis and may enter into
forward currency contracts. The Fund will not purchase real estate, interests in
real estate or real estate limited partnership interests except that, to the
extent appropriate under its investment program, the Fund may invest in
securities secured by real estate or interests therein issued by companies,
including real estate investment trusts, which deal in real estate or interests
therein.
(6) make loans to other persons except: (a) through the purchase of a
portion or portions of an issue or issues of securities issued or guaranteed by
the U.S. Government or its agencies, or (b) through investments in `repurchase
agreements' (which are arrangements under which the Fund acquires a debt
security subject to an obligation of the seller to repurchase it at a fixed
price within a short period), provided that no more than 5% of the Fund's assets
may be invested in repurchase agreements;
(7) purchase the securities of another investment company or investment
trust, except in the open market and then only if no profit, other than the
customary broker's commission, results to a sponsor or dealer, or by merger or
other reorganization;
(8) buy securities from or sell securities (other than securities issued by
the Fund) to any of its officers, Trustees or the Adviser as principal; (9)
contract to sell any security or evidence of interest therein, except to the
extent that the same shall be owned by the Fund;
60
<PAGE>
(10) purchase or retain securities of an issuer when one or more of the
officers and Trustees of the Fund or of the investment adviser, or a person
owning more that 10% of the stock of either, own beneficially more than 1/2 of
1% of the securities of such issuer and such persons owning more than 1/2 of 1%
of such securities together own beneficially more than 5% of the securities of
such issuer;
(11) invest more than 5% of its total assets in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government) except
that such restriction shall not apply to 50% of the Fund's portfolio;
(12) purchase any security if such purchase would cause the Fund to own at
the time of purchase more than 10% of the outstanding voting securities of any
one issuer;
(13) invest more than 15% of its net assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Such securities include, but are not
limited to, time deposits and repurchase agreements with maturities longer than
seven days. Securities that may be resold under Rule 144A or securities offered
pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be
deemed illiquid solely by reason of being unregistered. The Adviser shall
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors; and
(14) invest in interest in oil, gas or other mineral exploration or
development programs.
The following investment policy of the Fund is not a fundamental policy and
may be changed by a vote of a majority of the Fund's Board of Trustees without
shareholder approval. The Fund may purchase and sell futures contracts and
related options under the following conditions: (a) the then-current aggregate
futures market prices of financial instruments required to be delivered and
purchased under open futures contracts shall not exceed 30% of the Fund's total
assets, at market value; and (b) no more than 5% of the Fund's total assets, at
market value at the time of entering into a contract, shall be committed to
margin deposits in relation to futures contracts.
FUNDAMENTAL INVESTMENT RESTRICTIONS -- LEXINGTON MONEY MARKET TRUST
The following investment restrictions adopted by the Fund may not be
changed without the affirmative vote of a majority (defined as the lesser of:
67% of the shares represented at a meeting at which 50% of outstanding shares
are present, or 50% of outstanding shares) of its outstanding shares. The Fund
may not: (l) purchase any securities other than money market instruments or
other debt securities maturing within two years of the date of purchase; (2)
borrow an amount which is in excess of one-third of its total assets taken at
market value (including the amount borrowed); and then only from banks as a
temporary measure for extraordinary or emergency purposes. The Fund will not
borrow to increase income but only to meet redemption requests which might
otherwise require undue disposition of portfolio securities. The Fund will not
invest while it has borrowings outstanding; (3) pledge its assets except in an
amount up to 15% of the value of its total assets taken at market value in order
to secure borrowings made in accordance with number (2) above; (4) sell
securities short unless at all times while a short position is open the Fund
maintains a long position in the same security in an amount at least equal
thereto; (5) write or purchase put or call options; (6) purchase securities on
margin except the Fund may obtain such short term credit as may be necessary for
the clearance of purchases and sales of portfolio securities; (7) make
investments for the purpose of exercising control or management; (8) purchase
securities of other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization; (9) make loans to other persons,
provided that the Fund may purchase money market securities or enter into
repurchase agreements and lend securities owned or held by it as provided
herein; (10) lend its portfolio securities, except in conformity with the
guidelines set forth below; (11) concentrate more than 25% of its total assets,
taken at market value at the time of such investment, in any one industry,
except U.S. Government and U.S. Government agency securities and U.S. bank
61
<PAGE>
obligations; (12) purchase any securities other than U.S. Government or U.S.
Government agency securities, if immediately after such purchase more than 5% of
its total assets would be invested in securities of any one issuer for more than
three business days; (taken at market value) (13) purchase or hold real estate,
commodities or commodity contracts; ( 14 ) invest more than 5% of its total
assets (taken at market value) in issues for which no readily available market
exists or with legal or contractual restrictions on resale except for repurchase
agreements; (15) act as an underwriter (except as it may be deemed such as to
the sale of restricted securities); or (16) enter into reverse repurchase
agreements.
LENDING OF PORTFOLIO SECURITIES. As stated in number (10) above, subject to
guidelines established by the Funds and by the Securities and Exchange
Commission, the Lexington Money Market Trust, from time-to-time, may lend
portfolio securities to brokers, dealers, corporations or financial institutions
and receive collateral which will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Such
collateral will be either cash or fully negotiable U. S. Treasury or agency
issues. If cash, such collateral will be invested in short term securities, the
income from which will increase the return to the Fund. However, a portion of
such incremental return may be shared with the borrower. If securities, the
usual procedure will be for the borrower to pay a fixed fee to the Fund for such
time as the loan is outstanding. The Fund will retain substantially all rights
of beneficial ownership as to the loaned portfolio securities including rights
to interest or other distributions and will have the right to regain record
ownership of loaned securities in order to exercise such beneficial rights. Such
loans will be terminable at any time. The Fund may pay reasonable fees to
persons unaffiliated with it in connection with the arranging of such loans.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Funds' Board of Trustees, the
Investment Manager is responsible for the execution of the Funds' portfolio
transactions and the selection of brokers/dealers that execute such transactions
on behalf of the Funds. The Funds' primary policy is to execute all purchases
and sales of portfolio instruments at the most favorable prices consistent with
best execution, taking into account such factors as the price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved. This policy governs
the selection of brokers and dealers and the market in which a transaction is
executed. Consistent with this policy, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and such other policies as the
Directors may determine, Pilgrim Investments may consider sales of shares of the
Funds and of the other funds managed by Pilgrim Investments (the `Pilgrim
Funds') as a factor in the selection of broker-dealers to execute the Funds'
portfolio transactions.
Consistent with the interests of the Funds, the Investment Manager may
select brokers to execute the Funds' portfolio transactions on the basis of the
research and brokerage services they provide to the Investment Manager for its
use in managing the Funds and its other advisory accounts so long as the
criteria of Section 28(e) of the Securities Exchange Act of 1934 are met.
Section 28(e) of the Securities Exchange Act of 1934 was adopted in 1975 and
specifies that a person with investment discretion shall not be `deemed to have
acted unlawfully or to have breached a fiduciary duty' solely because such
person has caused the account to pay higher commissions than the lowest
available under certain circumstances, provided that the person so exercising
investment discretion makes a good faith determination that the amount of
commissions paid was `reasonable in relation to the value of the brokerage and
research services provided are viewed in terms of either that particular
transaction or his overall responsibilities with respect to the accounts as to
which he exercises investment discretion.' Such services may include furnishing
analyses, reports and information concerning issuers, industries, securities,
geographic regions, economic factors and trends, portfolio strategy, and
performance of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). Research and
brokerage services received from such brokers are in addition to, and not in
lieu of, the services required to be performed by the Investment Manager under
the Investment Management Agreement. A commission paid to such brokers may be
higher than that which another qualified broker would have charged for effecting
the same transaction, provided that the Investment Manager determines in good
faith that such commission is reasonable in terms either of that particular
62
<PAGE>
transaction or the overall responsibility of the Investment Manager to the Fund
and its other clients and that the total commissions paid by the Fund will be
reasonable in relation to the benefits received by the Fund over the long term.
Research services may also be received from dealers who execute Fund
transactions.
Currently, it is not possible to determine the extent to which commissions
that reflect an element of value for research services (`soft dollars') might
exceed commissions that would be payable for execution services alone. Nor
generally can the value of research services to the Funds be measured. Research
services furnished might be useful and of value to Pilgrim Investments and its
affiliates, in serving other clients as well as the Funds. On the other hand,
any research services obtained by Pilgrim Investments or its affiliates from the
placement of portfolio brokerage of other clients might be useful and of value
to Pilgrim Investments in carrying out its obligations to the Funds. With
respect to Gold Fund and Silver Fund it is, as a general matter, the Funds'
policy to execute in the U.S. all transactions with respect to securities traded
in the U.S. and to execute its gold transactions in the U.S. except when better
price and execution can, in the judgment of management of the Funds, be obtained
elsewhere. For the Gold Fund and Silver Fund, over-the-counter purchases and
sales are normally made with principal market makers, except where, in the
opinion of management, the best executions are available elsewhere.
Investment decisions for the Funds and for other investment accounts
managed by the Investment Manager are made independently of each other in light
of differing conditions. However, the same investment decision occasionally may
be made for two or more of such accounts. In such cases, simultaneous
transactions may occur. Purchases or sales are then allocated as to price or
amount in a manner deemed fair and equitable to all accounts involved. While in
some cases this practice could have a detrimental effect upon the price or value
of the security as far as the Funds are concerned, in other cases the Investment
Manager believes that coordination and the ability to participate in volume
transactions will be beneficial to the Funds.
Debt securities generally are traded on a `net' basis with a dealer acting
as principal for its own account without a stated commission, although the price
of the security usually includes a profit to the dealer. U.S. and foreign
government securities and money market instruments generally are traded in the
OTC markets. In underwritten offerings, securities usually are purchased at a
fixed price which includes a amount of compensation to the underwriter. On
occasion, securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid. Brokers/dealers may receive commissions on
futures, currency and options transactions.
The Funds anticipate that their brokerage transactions involving securities
of companies domiciled in countries other than the United States will normally
be conducted on the principal stock exchanges of those countries. Fixed
commissions of foreign stock exchange transactions are generally higher than the
negotiated commission rates available in the United States. There is generally
less government supervision and regulation of foreign stock exchanges and
broker-dealers than in the United States.
The Funds engage in portfolio trading when the Investment Manager concludes
that the sale of a security owned by the Funds and/or the purchase of another
security of better value can enhance principal and/or increase income. A
security may be sold to avoid any prospective decline in market value, or a
security may be purchased in anticipation of a market rise. Consistent the
Funds' investment objectives, a security also may be sold and a comparable
security purchased coincidentally in order to take advantage of what is believed
to be a disparity in the normal yield and price relationship between the two
securities.
Although the Funds do not generally intend to trade for short-term profits,
the Funds' investments may be changed when circumstances warrant, without regard
to the length of time a particular security has been held. It is expected that
the Funds will have an annual portfolio turnover rate that will generally not
exceed 100%. A 100% portfolio turnover rate would occur if the lesser of the
value of purchases or sales of portfolio securities for the Fund for a year
(excluding purchases of U.S. Treasury and other securities with a maturity at
63
<PAGE>
the date of purchase of one year or less) were equal to 100% of the average
monthly value of the securities, excluding short-term investments, held by the
Funds during such year. A high turnover rate (100% or more) results in
correspondingly greater brokerage commissions and other transactional expenses
which are borne by the Funds. High portfolio turnover may result in the
realization of net short-term capital gains by the Funds which, when distributed
to shareholders, will be taxable as ordinary income. See `Tax Considerations.'
The brokerage commissions paid by each Fund and the Fund's portfolio
turnover rate for the last three years are as follows:
PILGRIM GLOBAL CORPORATE LEADERS FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 275,413 $ 37,312 117.48%
1998 $ 203,102 $ 68,164 137.33%
1999 $ 18,457 $ 7,360 12.76%
PILGRIM GNMA INCOME FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 40,646 $ 0 134.28%
1998 $ 34,516 $ 0 54.47%
1999 $ 60,939 $ 0 25.10%
PILGRIM GOLD FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 223,351 $ 42,728 38.32%
1998 $ 124,761 $ 31,159 28.93%
1999 $ 389,449 $ 110,507 78.55%
PILGRIM GROWTH AND INCOME FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 457,246 $ 172,381 88.15%
1998 $ 372,204 $ 177,110 63.20%
1999 $ 482,487 $ 237,439 86.31%
PILGRIM INTERNATIONAL FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 177,179 $ 20,613 122.56%
1998 $ 174,405 $ 40,453 143.67%
1999 $ 167,074 $ 38,707 148.82%
64
<PAGE>
PILGRIM TROIKA DIALOG RUSSIA FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 5,475 $ 0 66.84%
1998 $ 47,806 $ 0 65.76%
1999 $ 91,247 $ 0 91.14%
PILGRIM SILVER FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 111,983 $ 0 18.76%
1998 $ 62,713 $ 0 28.78%
1999 $ 36,882 $ 11,129 29.44%
PILGRIM SMALLCAP ASIA GROWTH FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 632,268 $ 0 187.41%
1998 $ 290,149 $ 0 192.28%
1999 $ 235,538 $ 0 172.89%
PILGRIM WORLDWIDE EMERGING MARKETS FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 2,989,156 $ 234,472 112.05%
1998 $ 924,618 $ 36,566 107.19%
1999 $ 1,367,102 $ 170,098 184.39%
PILGRIM GLOBAL INCOME FUND, INC.
TOTAL BROKERAGE SOFT DOLLAR PORTFOLIO
COMMISSION PAID COMMISSION PAID TURNOVER RATE
--------------- --------------- -------------
1997 $ 212,446 $ 0 117.94%
1998 $ 317,877 $ 0 45.26%
1999 $ 334,433 $ 0 24.56%
ABOUT THE MONEY MARKET TRUST
Portfolio securities are normally purchased directly from the issuer or
from an underwriter or market maker for money market instruments. Therefore,
usually no brokerage commissions were paid by the Fund. Transactions are
allocated to various dealers by the Investment Manager in its best judgment.
Dealers are selected primarily on the basis of prompt execution of orders at the
most favorable prices. The Fund has no obligation to deal with any dealer or
group of dealers. Particular dealers may be selected for research or statistical
and other services to enable the Investment Manager to supplement its own
research and analysis with that of such firms. Information so received will be
in addition to and not in lieu of the services required to be performed by the
Investment Manager under the Investment Management Agreement and the expenses of
the Investment Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.
65
<PAGE>
ABOUT GLOBAL INCOME FUND
Portfolio securities are purchased directly from dealers acting as
principal underwriters or market makers for GNMA certificates or government
securities. Such transactions are usually conducted on a net basis and
accordingly no brokerage commissions are paid by the Fund. The Fund may also
execute transactions through broker-dealers on a commission basis.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
A complete description of the manner in which shares may be purchased,
redeemed or exchanged appears in the Prospectus under `Shareholder Guide.'
Shares of the Funds are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Funds'
transfer agent, DST Systems, Inc. (`Transfer Agent'), plus, for Class A, a
varying sales charge depending upon the amount of money invested, as set forth
in the Prospectus.
SPECIAL PURCHASES AT NET ASSET VALUE
Class A shares of the Funds may be purchased at net asset value, without a
sales charge, by persons who have redeemed their Class A shares of a Fund (or
shares of other funds managed by the Investment Manager in accordance with the
terms of such privileges established for such funds) within the previous 90
days. The amount that may be so reinvested in the Fund is limited to an amount
up to, but not exceeding, the redemption proceeds (or to the nearest full share
if fractional shares are not purchased). In order to exercise this privilege, a
written order for the purchase of shares must be received by the Transfer Agent,
or be postmarked, within 90 days after the date of redemption. This privilege
may only be used once per calendar year. Payment must accompany the request and
the purchase will be made at the then current net asset value of the Fund. Such
purchases may also be handled by a securities dealer who may charge a
shareholder for this service. If the shareholder has realized a gain on the
redemption, the transaction is taxable and any reinvestment will not alter any
applicable Federal capital gains tax. If there has been a loss on the redemption
and a subsequent reinvestment pursuant to this privilege, some or all of the
loss may not be allowed as a tax deduction depending upon the amount reinvested,
although such disallowance is added to the tax basis of the shares acquired upon
the reinvestment.
Class A shares of the Funds may also be purchased at net asset value by any
person who can document that Fund shares were purchased with proceeds from the
redemption (within the previous 90 days) of shares from any unaffiliated mutual
fund on which a sales charge was paid or which were subject at any time to a
CDSC, and the Distributor has determined in its discretion that the unaffiliated
fund invests primarily in the same types of securities as the Pilgrim Fund
purchased.
Additionally, Class A shares of the Funds may also be purchased at net
asset value by any charitable organization or any state, county, or city, or any
instrumentality, department, authority or agency thereof that has determined
that a Fund is a legally permissible investment and that is prohibited by
applicable investment law from paying a sales charge or commission in connection
with the purchase of shares of any registered management investment company (`an
eligible governmental authority'). If an investment by an eligible governmental
authority at net asset value is made though a dealer who has executed a selling
group agreement with respect to the Fund (or the other open-end Pilgrim Funds)
the Distributor may pay the selling firm 0.25% of the Offering Price.
The officers, directors/trustees and bona fide full-time employees of each
Fund and the officers, directors and full-time employees of the Investment
Manager, any Sub-Advisers, the Distributor, any service provider to the Funds or
affiliated corporations thereof or any trust, pension, profit-sharing or other
benefit plan for such persons, broker-dealers, for their own accounts or for
members of their families (defined as current spouse, children, parents,
66
<PAGE>
grandparents, uncles, aunts, siblings, nephews, nieces, step-relations,
relations at-law, and cousins) employees of such broker-dealers (including their
immediate families) and discretionary advisory accounts of the Investment
Manager or any Sub-Adviser, may purchase Class A shares of a Fund at net asset
value without a sales charge. Such purchaser may be required to sign a letter
stating that the purchase is for his own investment purposes only and that the
securities will not be resold except to the Fund. The Funds may, under certain
circumstances, allow registered investment advisers to make investments on
behalf of their clients at net asset value without any commission or concession.
Class A shares may also be purchased at net asset value by certain fee
based registered investment advisers, trust companies and bank trust departments
under certain circumstances making investments on behalf of their clients and by
shareholders who have authorized the automatic transfer of dividends from the
same class of another open-end fund managed by the Investment Manager or from
Pilgrim Prime Rate Trust.
Class A shares may also be purchased without a sales charge by (i)
shareholders who have authorized the automatic transfer of dividends from the
same class of another Pilgrim Fund distributed by the Distributor or from
Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies
and bank trust departments investing in Class A shares on their own behalf or on
behalf of their clients, provided that the aggregate amount invested in any one
or more Funds, during the 13 month period starting with the first investment,
equals at least $1 million; (iii) broker-dealers, who have signed selling group
agreements with the Distributor, and registered representatives and employees of
such broker-dealers, for their own accounts or for members of their families
(defined as current spouse, children, parents, grandparents, uncles, aunts,
siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv)
broker-dealers using third party administrators for qualified retirement plans
who have entered into an agreement with the Pilgrim Funds or an affiliate,
subject to certain operational and minimum size requirements specified from
time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or
broker-dealer charges an account management fee (`wrap accounts'); and (vi) any
registered investment company for which Pilgrim Investments serves as Investment
Manager.
The Funds may terminate or amend the terms of these sales charge waivers at
any time.
LETTERS OF INTENT AND RIGHTS OF ACCUMULATION
An investor may immediately qualify for a reduced sales charge on a
purchase of Class A shares by completing the Letter of Intent section of the
Shareholder Application in the Prospectus (the `Letter of Intent' or `Letter').
By completing the Letter, the investor expresses an intention to invest during
the next 13 months a specified amount which if made at one time would qualify
for the reduced sales charge. At any time within 90 days after the first
investment which the investor wants to qualify for the reduced sales charge, a
signed Shareholder Application, with the Letter of Intent section completed, may
be filed with the Funds. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one investment in the Pilgrim Funds
will be effective only after notification to the Distributor that the investment
qualifies for a discount. The shareholder's holdings in the Investment Manager's
funds (excluding Pilgrim General Money Market shares) acquired within 90 days
before the Letter of Intent is filed will be counted towards completion of the
Letter of Intent but will not be entitled to a retroactive downward adjustment
of sales charge until the Letter of Intent is fulfilled. Any redemptions made by
the shareholder during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less redemption)
during the period.
67
<PAGE>
An investor acknowledges and agrees to the following provisions by
completing the Letter of Intent section of the Shareholder Application in the
Prospectus. A minimum initial investment equal to 25% of the intended total
investment is required. An amount equal to the maximum sales charge or 5.75% of
the total intended purchase will be held in escrow at Pilgrim Funds, in the form
of shares, in the investor's name to assure that the full applicable sales
charge will be paid if the intended purchase is not completed. The shares in
escrow will be included in the total shares owned as reflected on the monthly
statement; income and capital gain distributions on the escrow shares will be
paid directly by the investor. The escrow shares will not be available for
redemption by the investor until the Letter of Intent has been completed, or the
higher sales charge paid. If the total purchases, less redemptions, equal the
amount specified under the Letter, the shares in escrow will be released. If the
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made by the Distributor and the dealer with
whom purchases were made pursuant to the Letter of Intent (to reflect such
further quantity discount) on purchases made within 90 days before, and on those
made after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the applicable offering price.
If the total purchases, less redemptions, are less than the amount specified
under the Letter, the investor will remit to the Distributor an amount equal to
the difference in dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single account in the name of the investor or
to the investor's order. If within 10 days after written request such difference
in sales charge is not paid, the redemption of an appropriate number of shares
in escrow to realize such difference will be made. If the proceeds from a total
redemption are inadequate, the investor will be liable to the Distributor for
the difference. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption and the balance will be forwarded
to the Investor. By completing the Letter of Intent section of the Shareholder
Application, an investor grants to the Distributor a security interest in the
shares in escrow and agrees to irrevocably appoint the Distributor as his
attorney-in-fact with full power of substitution to surrender for redemption any
or all shares for the purpose of paying any additional sales charge due and
authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares
and pay the proceeds as directed by the Distributor. The investor or the
securities dealer must inform the Transfer Agent or the Distributor that this
Letter is in effect each time a purchase is made.
If at any time prior to or after completion of the Letter of Intent the
investor wishes to cancel the Letter of Intent, the investor must notify the
Distributor in writing. If, prior to the completion of the Letter of Intent, the
investor requests the Distributor to liquidate all shares held by the investor,
the Letter of Intent will be terminated automatically. Under either of these
situations, the total purchased may be less than the amount specified in the
Letter of Intent. If so, the Distributor will redeem at NAV to remit to the
Distributor and the appropriate authorized dealer an amount equal to the
difference between the dollar amount of the sales charge actually paid and the
amount of the sales charge that would have been paid on the total purchases if
made at one time.
The value of shares of the Funds plus shares of the other open-end funds
distributed by the Distributor (excluding Pilgrim General Money Market shares)
can be combined with a current purchase to determine the reduced sales charge
and applicable offering price of the current purchase. The reduced sales charge
applies to quantity purchases made at one time or on a cumulative basis over any
period of time by (i) an investor, (ii) the investor's spouse and children under
the age of majority, (iii) the investor's custodian accounts for the benefit of
a child under the Uniform Gift to Minors Act, (iv) a trustee or other fiduciary
of a single trust estate or a single fiduciary account (including a pension,
profit-sharing and/or other employee benefit plans qualified under Section 401
of the Code), by trust companies' registered investment advisors, banks and bank
trust departments for accounts over which they exercise exclusive investment
discretionary authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity.
68
<PAGE>
The reduced sales charge also apply on a non-cumulative basis, to purchases
made at one time by the customers of a single dealer, in excess of $1 million.
The Letter of Intent option may be modified or discontinued at any time.
Shares of the Funds and other open-end Pilgrim Funds (excluding Pilgrim
General Money Market shares) purchased and owned of record or beneficially by a
corporation, including employees of a single employer (or affiliates thereof)
including shares held by its employees, under one or more retirement plans, can
be combined with a current purchase to determine the reduced sales charge and
applicable offering price of the current purchase, provided such transactions
are not prohibited by one or more provisions of the Employee Retirement Income
Security Act or the Internal Revenue Code. Individuals and employees should
consult with their tax advisors concerning the tax rules applicable to
retirement plans before investing.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim Funds which impose a CDSC may
be combined with Class A shares for a reduced sales charge but will not affect
any CDSC which may be imposed upon the redemption of shares of a Fund which
imposes a CDSC.
REDEMPTIONS
Payment to shareholders for shares redeemed will be made within seven days
after receipt by the Funds' Transfer Agent of the written request in proper
form, except that a Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the SEC or such exchange is closed for
other than weekends and holidays; (b) an emergency exists as determined by the
SEC making disposal of portfolio series or valuation of net assets of the Fund
not reasonably practicable; or (c) for such other period as the SEC may permit
for the protection of the Funds' shareholders. At various times, a Fund may be
requested to redeem shares for which it has not yet received good payment.
Accordingly, the Fund may delay the mailing of a redemption check until such
time as it has assured itself that good payment has been collected for the
purchase of such shares, which may take up to 15 days or longer.
The Funds intend to pay in cash for all shares redeemed, but under abnormal
conditions that make payment in cash unwise, a Fund may make payment wholly or
partly in securities at their then current market value equal to the redemption
price. In such case, an investor may incur brokerage costs in converting such
securities to cash. However, the Funds have elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contains a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Funds must liquidate portfolio securities to meet redemptions,
they reserves the right to reduce the redemption price by an amount equivalent
to the pro-rated cost of such liquidation not to exceed one percent of the net
asset value of such shares.
Due to the relatively high cost of handling small investments, each Fund
reserves the right, upon 30 days written notice, to redeem, at net asset value
(less any applicable deferred sales charge), the shares of any shareholder whose
account has a value of less than $1,000 in the Fund, other than as a result of a
decline in the net asset value per share. Before the Fund redeems such shares
and sends the proceeds to the shareholder, it will notify the shareholder that
the value of the shares in the account is less than the minimum amount and will
allow the shareholder 30 days to make an additional investment in an amount that
will increase the value of the account to at least $1,000 before the redemption
is processed. This policy will not be implemented where a Fund has previously
waived the minimum investment requirements.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of the portfolio securities
at the time of redemption or repurchase.
Certain purchases of Class A shares and most Class B and Class C shares may
be subject to a CDSC. Shareholders will be charged a CDSC if certain of those
shares are redeemed within the applicable time period as stated in the
prospectus.
69
<PAGE>
No CDSC is imposed on any shares subject to a CDSC to the extent that those
shares (i) are no longer subject to the applicable holding period, (ii) resulted
from reinvestment of distributions on CDSC shares, or (iii) were exchanged for
shares of another fund managed by the Investment Manager, provided that the
shares acquired in such exchange and subsequent exchanges will continue to
remain subject to the CDSC, if applicable, until the applicable holding period
expires.
The CDSC or redemption fee will be waived for certain redemptions of shares
upon (i) the death or permanent disability of a shareholder, or (ii) in
connection with mandatory distributions from an Individual Retirement Account
(`IRA') or other qualified retirement plan. The CDSC or redemption fee will be
waived in the case of a redemption of shares following the death or permanent
disability of a shareholder if the redemption is made within one year of death
or initial determination of permanent disability. The waiver is available for
total or partial redemptions of shares owned by an individual or an individual
in joint tenancy (with rights of survivorship), but only for redemptions of
shares held at the time of death or initial determination of permanent
disability. The CDSC or redemption fee will also be waived in the case of a
total or partial redemption of shares in connection with any mandatory
distribution from a tax-deferred retirement plan or an IRA. The waiver does not
apply in the case of a tax-free rollover or transfer of assets, other than one
following a separation from services, except that a CDSC or redemption fee may
be waived in certain circumstances involving redemptions in connection with a
distribution from a qualified employer retirement plan in connection with
termination of employment or termination of the employer's plan and the transfer
to another employer's plan or to an IRA. The shareholder must notify the Fund
either directly or through the Distributor at the time of redemption that the
shareholder is entitled to a waiver of CDSC or redemption fee. The waiver will
then be granted subject to confirmation of the shareholder's entitlement. The
CDSC or redemption fee, which may be imposed on Class A shares purchased in
excess of $1 million, will also be waived for registered investment advisors,
trust companies and bank trust departments investing on their own behalf or on
behalf of their clients. These waivers may be changed at any time.
REINSTATEMENT PRIVILEGE
If you sell Class B or Class C shares of a Pilgrim Fund, you may reinvest
some or all of the proceeds in the same share class within 90 days without a
sales charge. Reinstated Class B and Class C shares will retain their original
cost and purchase date for purposes of the CDSC. The amount of any CDSC also
will be reinstated. To exercise this privilege, the written order for the
purchase of shares must be received by the Transfer Agent or be postmarked
within 90 days after the date of redemption. This privilege can be used only
once per calendar year. If a loss is incurred on the redemption and the
reinstatement privilege is used, some or all of the loss may not be allowed as a
tax deduction.
CONVERSION OF CLASS B SHARES
A shareholder's Class B shares will automatically convert to Class A shares
in a Fund on the first business day of the month in which the eighth anniversary
of the issuance of the Class B shares occurs, together with a pro rata portion
of all Class B shares representing dividends and other distributions paid in
additional Class B shares. The conversion of Class B shares into Class A shares
is subject to the continuing availability of an opinion of counsel or an
Internal Revenue Service (`IRS') ruling, if the Investment Manager deems it
advisable to obtain such advice, to the effect that (1) such conversion will not
constitute taxable events for federal tax purposes; and (2) the payment of
different dividends on Class A and Class B shares does not result in the Fund's
dividends or distributions constituting `preferential dividends' under the
Internal Revenue Code of 1986. The Class B shares so converted will no longer be
subject to the higher expenses borne by Class B shares. The conversion will be
effected at the relative net asset values per share of the two Classes.
70
<PAGE>
DEALER'S COMMISSIONS AND OTHER INCENTIVES
In connection with the sale of shares of the Funds, the Distributor may pay
Authorized Dealers of record a sales commission as a percentage of the purchase
price. In connection with the sale of Class A shares, the Distributor will
re-allow to Authorized Dealers of record from the sales charge on such sales the
following amounts:
EQUITY FUNDS
DEALER'S REALLOWANCE AS A
PERCENTAGE OF OFFERING PRICE
----------------------------
AMOUNT OF TRANSACTION CLASS A
--------------------- -------
Less than $ 50,000 5.00%
$ 50,000 -- $ 99,999 3.75%
$ 100,000 -- $ 249,999 2.75%
$ 250,000 -- $ 499,999 2.00%
$ 500,000 -- $ 999,999 1.75%
$1,000,000 and over See below
INCOME FUNDS
DEALER'S REALLOWANCE AS A
PERCENTAGE OF OFFERING PRICE
----------------------------
AMOUNT OF TRANSACTION CLASS A
--------------------- -------
Less than $ 50,000 4.25%
$ 50,000 -- $ 99,999 4.00%
$ 100,000 -- $ 249,999 3.00%
$ 250,000 -- $ 499,999 2.25%
$ 500,000 -- $ 999,999 1.75%
$1,000,000 and over See below
The Distributor may pay to Authorized Dealers out of its own assets
commissions on shares sold in Classes A, B and C, at net asset value, which at
the time of investment would have been subject to the imposition of a contingent
deferred sales charge (`CDSC') if redeemed. There is no sales charge on
purchases of $1,000,000 or more of Class A shares. However, such purchases may
be subject to a CDSC, as disclosed in the Prospectus. The Distributor will pay
Authorized Dealers of record commissions at the rates shown in the table below
for purchases of Class A shares that are subject to a CDSC.
DEALER COMMISSION AS A
AMOUNT OF TRANSACTION PERCENTAGE OF AMOUNT INVESTED
--------------------- -----------------------------
$1,000,000 to $2,499,000 1.00%
$2,500,000 to $4,999,999 0.50%
$5,000,000 and over 0.25%
Also, the Distributor will pay out of its own assets a commission of 1% of
the amount invested for purchases of Class A shares of less than $1 million by
qualified employer retirement plans with 50 or more participants.
71
<PAGE>
The Distributor will pay out of its own assets a commission of 4% of the
amount invested for purchases of Class B shares subject to a CDSC. For purchases
of Class C shares subject to a CDSC, the Distributor may pay out of its own
assets a commission of 1% of the amount invested of each Fund.
The Distributor may, from time to time, at its discretion, allow a selling
dealer to retain 100% of a sales charge, and such dealer may therefore be deemed
an `underwriter' under the Securities Act of 1933, as amended. the Distributor,
at its expense, may also provide additional promotional incentives to dealers.
The incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualifying registered representatives
and members of their families to locations within or outside of the United
States, merchandise or other items. For more information on incentives, see
`Management of the Funds -- 12b-1 Plans' in this Statement of Additional
Information.
DETERMINATION OF SHARE PRICE
The Funds calculate net asset value as of the close of normal trading on
the New York Stock Exchange (currently 4:00 p.m., Eastern time, unless weather,
equipment failure or other factors contribute to an earlier closing time) each
business day. It is expected that the New York Stock Exchange will be closed on
Saturdays and Sundays and on New Year's Day, Martin Luther King Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Per share net asset value is calculated by dividing the value
of the Funds' total net assets by the total number of the Funds' shares then
outstanding. For the Money Market Trust, substantially all of the Fund's net
income calculated from the immediately preceding determination of net income, is
declared daily as dividends.
The Funds' portfolio securities and other assets are valued as follows:
Portfolio securities are valued using current market valuations: either the
last reported sales price or, in the case of securities for which there is no
reported last sale and fixed-income securities, the mean between the closing bid
and asked price. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at their fair values as determined in
good faith by or under the supervision of each Fund's Board, in accordance with
methods that are specifically authorized by the Board. The valuation procedures
applied in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any registration
expenses that might be borne by the Funds in connection with such disposition).
In addition, specific factors also are generally considered, such as the cost of
the investment, the market value of any unrestricted securities of the same
class (both at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
The fair value of other assets is added to the value of all securities
positions to arrive at the value of a Fund's total assets. The Fund's
liabilities, including accruals for expenses, are deducted from its total
assets. Once the total value of the Fund's net assets is so determined, that
value is then divided by the total number of shares outstanding (excluding
treasury shares), and the result, rounded to the nearest cent, is the net asset
value per share. Short-term obligations with maturities of 60 days or less are
valued at amortized cost as reflecting fair value. Options are valued at the
mean of the last bid and asked price on the exchange where the option is
primarily traded.
Long-term debt obligations are valued at the mean of representative quoted
bid or asked prices for such securities or, if such prices are not available, at
prices for securities of comparable maturity, quality and type; however, when
the Investment Manager deems it appropriate, prices obtained for the day of
valuation from a bond pricing service will be used. Short-term debt investments
are amortized to maturity based on their cost, adjusted for foreign exchange
translation, provided such valuation represents fair value.
72
<PAGE>
Options on currencies purchased by the Funds are valued at their last bid
price in the case of listed options or at the average of the last bid prices
obtained from dealers in the case of OTC options. The value of each security
denominated in a currency other than U.S. dollars will be translated into U.S.
dollars at the prevailing market rate as determined by the Investment Manager on
that day.
The value of securities denominated in foreign currencies and traded on
foreign exchanges or in foreign markets will be translated into U.S. dollars at
the last price of their respective currency denomination against U.S. dollars
quoted by a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good faith by the
Boards. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar may affect the net asset value of a Fund's shares
even without any change in the foreign-currency denominated values of such
securities.
Because foreign securities markets may close before a Fund determines its
net asset value, events affecting the value of portfolio securities occurring
between the time prices are determined and the time the Fund calculates its net
asset value may not be reflected unless the Investment Manager, under
supervision of the Board, determines that a particular event would materially
affect the Fund's net asset value.
European, Far Eastern or Latin American securities trading may not take
place on all days on which the NYSE is open. Further, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days on
which the NYSE is not open. Consequently, the calculation of a Fund's respective
net asset values therefore may not take place contemporaneously with the
determination of the prices of securities held by the Fund. Events affecting the
values of portfolio securities that occur between the time their prices are
determined and the close of regular trading on the NYSE will not be reflected in
a Fund's net asset value unless the Investment Manager, under the supervision of
the Fund's Board of Trustees, determines that the particular event would
materially affect net asset value. As a result, the Fund's net asset value may
be significantly affected by such trading on days when a shareholder cannot
purchase or redeem shares of the Fund.
The per share net asset value of Class A shares generally will be higher
than the per share net asset value of shares of the other classes, reflecting
daily expense accruals of the higher distribution fees applicable to Class B and
Class C. It is expected, however, that the per share net asset value of the
classes will tend to converge immediately after the payment of dividends or
distributions that will differ by approximately the amount of the expense
accrual differentials between the classes.
The price of silver and gold bullion is determined by measuring the mean
between the closing bid and asked quotations of silver and gold bullion set at
the time of the close of the New York Stock Exchange, as supplied by the Gold
Fund's and Silver Fund's custodian bank or other broker-dealers or banks
approved by the Gold Fund and Silver Fund, on each date that the Exchange is
open for business.
LEXINGTON MONEY MARKET TRUST
For the purpose of determining the price at which shares are issued and
redeemed, the net asset value per share is calculated immediately after the
daily dividend declaration by: (a) valuing all securities and instruments as set
forth below; (b) deducting the Fund's liabilities; and (c) dividing the
resulting amount by the number of shares outstanding. As discussed below, it is
the intention of the Fund to maintain a net asset value per share of $1.00. The
Fund's portfolio instruments are valued on the basis of amortized cost. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
the Fund would receive if it sold its portfolio. During periods of declining
interest rates, the daily yield on shares of the Fund computed as described
above may be higher than a like computation made by a fund with identical
73
<PAGE>
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all its portfolio instruments. Thus, if the use
of amortized cost by the Fund results in a lower aggregate portfolio value on a
particular day, a prospective investor in the Fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund utilizing
solely market values, and existing investors in the Fund would receive less
investment income. The converse would apply in a period of rising interest
rates.
The Fund's use of amortized cost and the maintenance of the Fund's per
share net value at $1.00 is based on its election to operate under the
provisions of Rule 2a-7 under the Investment Company Act of 1940. As a condition
of operating under that rule, the Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less, and invest only in securities
which are determined by the Board of Trustees to present minimal credit risks
and which are of high quality as required by the Rule, or in the case of any
instrument not so rated, considered by the Board of Trustees to be of comparable
quality. Securities in the Trust will consist of money market instruments that
have been rated (or whose issuer's short-term debt obligations are rated) in one
of the two highest categories (i.e., `Al/Pl') by both Standard & Poor's
Corporation (`S&P') and Moody's Investors Services, Inc. (`Moody's'), two
nationally recognized statistical rating organizations (`NRSRO').
The Fund may invest up to 5% of its assets in any single `Tier I' security
(other than U.S. Government securities), measured at the time of acquisition;
however, it may invest more than 5% of its assets in a single Tier 1 security
for no more than three business days. A `Tier I' security is one that has been
rated (or the issuer of such security has been rated) by both S&P and Moody's in
the highest rating category or, if unrated, is of comparable quality. A security
rated in the highest category by only one of these NRSROs is also considered a
Tier 1 security.
In addition, the Fund may invest not more than 5% of its assets in `Tier 2'
securities. A Tier 2 security is a security that is (a) rated in the second
highest category by either S&P or Moody's or (b) an unrated security that is
deemed to be of comparable quality by the Fund's investment advisor. The Fund
may invest up to 1% of its assets in any single Tier 2 security.
The Fund may invest only in a money market instrument that has a remaining
maturity of 13 months (397 days) or less, provided that the Fund's average
weighted maturity is 90 days or less.
The Board of Trustees has also agreed, as a particular responsibility
within the overall duty of care owed to its shareholders, to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Board deems appropriate and at such intervals as
are reasonable in light of current market conditions, of the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. In such review, investments for
which market quotations are readily available are valued at the most recent bid
price or quoted yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from one or more of the major
market makers for the securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by the Board of Trustees.
SHAREHOLDER INFORMATION
Certificates representing shares of the Funds will not normally be issued
to shareholders. The Transfer Agent will maintain an account for each
shareholder upon which the registration and transfer of shares are recorded, and
any transfers shall be reflected by bookkeeping entry, without physical
delivery.
The Transfer Agent will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
74
<PAGE>
Each Fund reserves the right, if conditions exist that make cash payments
undesirable, to honor any request for redemption or repurchase order with
respect to shares of the Fund by making payment in whole or in part in readily
marketable securities chosen by the Fund and valued as they are for purposes of
computing a Fund's net asset value (redemption-in-kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting theses
securities to cash. Each Fund has elected, however, to be governed by Rule 18f-1
under the 1940 Act as a result of which the Fund is obligated to redeem shares
with respect to any one shareholder during any 90-day period solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Funds provide a Pre-Authorized
Investment Program for the convenience of investors who wish to purchase shares
of the Funds on a regular basis. Such a Program may be started with an initial
investment ($1,000 minimum) and subsequent voluntary purchases ($100 minimum)
with no obligation to continue. The Program may be terminated without penalty at
any time by the investor or the Funds. The minimum investment requirements may
be waived by the Funds for purchases made pursuant to (i) employer-administered
payroll deduction plans, (ii) profit-sharing, pension, or individual or any
employee retirement plans, or (iii) purchases made in connection with plans
providing for periodic investments in Fund shares.
For investors purchasing shares of the Funds under a tax-qualified
individual retirement or pension plan or under a group plan through a person
designated for the collection and remittance of monies to be invested in shares
of the Funds on a periodic basis, the Funds may, in lieu of furnishing
confirmations following each purchase of Fund shares, send statements no less
frequently than quarterly pursuant to the provisions of the Securities Exchange
Act of 1934, as amended, and the rules thereunder. Such quarterly statements,
which would be sent to the investor or to the person designated by the group for
distribution to its members, will be made within five business days after the
end of each quarterly period and shall reflect all transactions in the
investor's account during the preceding quarter.
All shareholders will receive a confirmation of each new transaction in
their accounts, which will also show the total number of Fund shares owned by
each shareholder, the number of shares being held in safekeeping by the Funds'
Transfer Agent for the account of the shareholder and a cumulative record of the
account for the entire year. Shareholders may rely on these statements in lieu
of certificates. Certificates representing shares of the Fund will not be issued
unless the shareholder requests them in writing.
SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS
For self-employed individuals and corporate investors that wish to purchase
shares of a Fund, there is available through the Fund a Prototype Plan and
Custody Agreement. The Custody Agreement provides that Investors Fiduciary Trust
Company, Kansas City, Missouri, will act as Custodian under the Plan, and will
furnish custodial services for an annual maintenance fee of $12.00 for each
participant, with no other charges. (This fee is in addition to the normal
Custodian charges paid by the Funds.) The annual contract maintenance fee may be
waived from time to time. For further details, including the right to appoint a
successor Custodian, see the Plan and Custody Agreements as provided by the
Funds. Employers who wish to use shares of a Fund under a custodianship with
another bank or trust company must make individual arrangements with such
institution.
INDIVIDUAL RETIREMENT ACCOUNTS
Investors having earned income are eligible to purchase shares of a Fund
under an IRA pursuant to Section 408(a) of the Internal Revenue Code. An
individual who creates an IRA may contribute annually certain dollar amounts of
75
<PAGE>
earned income, and an additional amount if there is a non-working spouse. Simple
IRA plans that employers may establish on behalf of their employees are also
available. Roth IRA plans that enable employed and self-employed individuals to
make non-deductible contributions, and, under certain circumstances, effect
tax-free withdrawals, are also available. Copies of a model Custodial Account
Agreement are available from the Distributor. Investors Fiduciary Trust Company,
Kansas City, Missouri, will act as the Custodian under this model Agreement, for
which it will charge the investor an annual fee of $12.00 for maintaining the
Account (such fee is in addition to the normal custodial charges paid by the
Funds). Full details on the IRA are contained in an IRS required disclosure
statement, and the Custodian will not open an IRA until seven (7) days after the
investor has received such statement from the Funds. An IRA using shares of a
Fund may also be used by employers who have adopted a Simplified Employee
Pension Plan.
Purchases of Fund shares by Section 403(b) and other retirement plans are
also available. Section 403(b) plans are arrangements by a public school
organization or a charitable, educational, or scientific organization that is
described in Section 501(c)(3) of the Internal Revenue Code under which
employees are permitted to take advantage of the federal income tax deferral
benefits provided for in Section 403(b) of the Code. It is advisable for an
investor considering the funding of any retirement plan to consult with an
attorney or to obtain advice from a competent retirement plan consultant.
TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES
As discussed in the Prospectus, the telephone redemption and exchange
privileges are available for all shareholder accounts; however, retirement
accounts may not utilize the telephone redemption privilege. The telephone
privileges may be modified or terminated at any time. The privileges are subject
to the conditions and provisions set forth below and in the Prospectus.
(1) Telephone redemption and/or exchange instructions received in good
order before the pricing of a Fund on any day on which the New York Stock
Exchange is open for business (a `Business Day'), but not later than 4:00 p.m.
eastern time, will be processed at that day's closing net asset value. For each
exchange, the shareholder's account may be charged an exchange fee. There is no
fee for telephone redemption; however, redemptions of Class A and Class B shares
may be subject to a contingent deferred sales charge (See `Redemption of shares'
in the Prospectus).
(2) Telephone redemption and/or exchange instructions should be made by
dialing 1-800-992-0180 and selecting option 3.
(3) The Funds will not permit exchanges in violation of any of the terms
and conditions set forth in the Funds' Prospectus or herein.
(4) Telephone redemption requests must meet the following conditions to be
accepted by the Funds:
(a) Proceeds of the redemption may be directly deposited into a
predetermined bank account, or mailed to the current address on the
registration. This address cannot reflect any change within the previous
sixty (30) days.
(b) Certain account information will need to be provided for
verification purposes before the redemption will be executed.
(c) Only one telephone redemption (where proceeds are being mailed to
the address of record) can be processed with in a 30 day period.
(d) The maximum amount which can be liquidated and sent to the address
of record at any one time is $100,000.
76
<PAGE>
(e) The minimum amount which can be liquidated and sent to a
predetermined bank account is $5,000.
(5) If the exchange involves the establishment of a new account, the dollar
amount being exchanged must at least equal the minimum investment requirement of
the Pilgrim Fund being acquired.
(6) Any new account established through the exchange privilege will have
the same account information and options except as stated in the Prospectus.
(7) Certificated shares cannot be redeemed or exchanged by telephone but
must be forwarded to Pilgrim at P.O. Box 419368, Kansas City, MO 64141 and
deposited into your account before any transaction may be processed.
(8) If a portion of the shares to be exchanged are held in escrow in
connection with a Letter of Intent, the smallest number of full shares of the
Fund to be purchased on the exchange having the same aggregate net asset value
as the shares being exchanged shall be substituted in the escrow account. shares
held in escrow may not be redeemed until the Letter of Intent has expired and/or
the appropriate adjustments have been made to the account.
(9) Shares may not be exchanged and/or redeemed unless an exchange and/or
redemption privilege is offered pursuant to the Fund's then-current prospectus.
(10) Proceeds of a redemption may be delayed up to 15 days or longer until
the check used to purchase the shares being redeemed has been paid by the bank
upon which it was drawn.
SYSTEMATIC WITHDRAWAL PLAN
You may elect to make periodic withdrawals from your account in any fixed
amount in excess of $100 to yourself, or to anyone else you properly designate,
as long as the account has a current value of at least $10,000. To establish a
systematic cash withdrawal, complete the Systematic Withdrawal Plan section of
the Account Application. To have funds deposited to your bank account, follow
the instructions on the Account Application. You may elect to have monthly,
quarterly, semi-annual or annual payments. Redemptions are normally processed on
the fifth day prior to the end of the month, quarter or year. Checks are then
mailed or proceeds are forwarded to your bank account on or about the first of
the following month. You may change the amount, frequency and payee, or
terminate the plan by giving written notice to the Transfer Agent. A Systematic
Withdrawal Plan may be modified at any time by the Funds or terminated upon
written notice by the relevant Fund.
During the withdrawal period, you may purchase additional shares for
deposit to your account, subject to any applicable sales charge, if the
additional purchases are equal to at least one year's scheduled withdrawals, or
$1,200, whichever is greater. There are no separate charges to you under this
Plan, although a CDSC may apply if you purchased Class A, B or C shares.
Shareholders who elect to have a systematic cash withdrawal must have all
dividends and capital gains reinvested. As shares of the Fund are redeemed under
the Plan, you may realize a capital gain or loss for income tax purposes.
DISTRIBUTIONS
As noted in the Prospectus, shareholders have the privilege of reinvesting
both income dividends and capital gains distributions, if any, in additional
shares of a respective class of a Fund at the then current net asset value, with
no sales charge. The Funds' management believes that most investors desire to
take advantage of this privilege. It has therefore made arrangements with its
Transfer Agent to have all income dividends and capital gains distributions that
are declared by the Funds automatically reinvested for the account of each
shareholder. A shareholder may elect at any time by writing to the Fund or the
Transfer Agent to have subsequent dividends and/or distributions paid in cash.
In the absence of such an election, each purchase of shares of a class of a Fund
is made upon the condition and understanding that the Transfer Agent is
77
<PAGE>
automatically appointed the shareholder's agent to receive his dividends and
distributions upon all shares registered in his name and to reinvest them in
full and fractional shares of the respective class of the Fund at the applicable
net asset value in effect at the close of business on the reinvestment date. A
shareholder may still at any time after a purchase of Fund shares request that
dividends and/or capital gains distributions be paid to him in cash.
TAX CONSIDERATIONS
Information set forth in the Prospectus and this SAI is only a summary of
certain key tax considerations generally affecting purchasers of shares of the
Funds. The following is only a summary of certain additional tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt has been made to present a complete explanation of
the federal, state and local tax treatment of the Funds or the implications to
shareholders, and the discussions here and in the Funds' Prospectus are not
intended as substitutes for careful tax planning. Accordingly, potential
purchasers of shares of the Funds are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this SAI is based on tax law in effect on the
date of the Prospectus and this SAI; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, each Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
for the taxable year (the `Distribution Requirement'), and satisfies certain
other requirements of the Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains of the taxable year and will, therefore, count toward
satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the `Income Requirement').
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales `against the box.'
However, gain recognized on the disposition of a debt obligation purchased by a
Fund at a market discount (generally, at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code section 1256
(unless the Fund elects otherwise), will generally be treated as ordinary income
or loss.
78
<PAGE>
Further, the Code also treats as ordinary income a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2) the
capital interest on acquisition indebtedness under Code section 263(g). Built-in
losses will be preserved where a Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to a Fund's shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected if (1) the asset is used to
close a `short sale' (which includes for certain purposes the acquisition of a
put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Fund as part of a `straddle' (which term
generally excludes a situation where the asset is stock and the Fund grants a
qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto), or (3) the asset is stock and the Fund
grants an in-the-money qualified covered call option with respect thereto. In
addition, a Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position. Any gain recognized by a Fund on
the lapse of, or any gain or loss recognized by a Fund from a closing
transaction with respect to, an option written by the Fund will be treated as a
short-term capital gain or loss.
Certain transactions that may be engaged in by certain Funds (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) 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, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a `mixed straddle' with other investments of the Fund that are
not Section 1256 contracts.
Certain Funds may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Fund invests in a PFIC, it has three separate
options. First, it may elect to treat the PFIC as a qualified electing fund (a
"QEF"), in which event the Fund will each year have ordinary income equal to its
pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, a Fund that invests in stock of
a PFIC may make a mark-to-market election with respect to such stock. Pursuant
to such election, the Fund will include as ordinary income any excess of the
fair market value of such stock at the close of any taxable year over the Fund's
79
<PAGE>
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given taxable year,
such excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net mark-to-market gains on the stock that
the Fund included in income in previous years. A Fund's holding period with
respect to its PFIC stock subject to the election will commence on the first day
of the next taxable year. If the Fund makes the mark-to-market election in the
first taxable year it holds PFIC stock, it will not incur the tax described
below under the third option.
Finally, if a Fund does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Fund upon the sale or other disposition of its interest in the PFIC or any
`excess distribution' (as defined) received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC
stock, (2) the portion of such gain or excess distribution so allocated to the
year in which the gain is recognized or the excess distribution is received
shall be included in the Fund's gross income for such year as ordinary income
(and the distribution of such portion by the Fund to shareholders will be
taxable as an ordinary income dividend, but such portion will not be subject to
tax at the Fund level), (3) the Fund shall be liable for tax on the portions of
such gain or excess distribution so allocated to prior years in an amount equal
to, for each such prior year, (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to its shareholders of the portions of such gain or
excess distribution so allocated to prior years (net of the tax payable by the
Fund thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss (including, to
the extent provided in Treasury Regulations, losses recognized pursuant to the
PFIC mark-to-market election) incurred after October 31 as if it had been
incurred in the succeeding year.
In addition to satisfying the requirements described above, each Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
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 Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security, not the issuer of the option.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
80
<PAGE>
EXCISE TAX ON REGULATED INVESTMENT COMPANIES.
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of its
ordinary income for such calendar year and 98% of capital gain net income for
the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a `taxable year election')). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1)
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) exclude foreign
currency gains and losses and ordinary gains or losses arising as a result of a
PFIC mark-to-market election (or upon the actual disposition of the PFIC stock
subject to such election) incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (and,
instead, include such gains and losses in determining ordinary taxable income
for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS
Each Fund anticipates distributing all or substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes. Distributions attributable to dividends received by
a Fund from domestic corporations will qualify for the 70% dividends-received
deduction for corporate shareholders only to the extent discussed below.
Distributions attributable to interest received by a Fund will not, and
distributions attributable to dividends paid by a foreign corporation generally
should not, qualify for the dividend-received deduction.
Ordinary income dividends paid by each Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by a Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items).
81
<PAGE>
A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
(58% for alternative minimum tax purposes) of the capital gain recognized upon a
Fund's disposition of domestic `small business' stock will be subject to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. If a Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders of record on
the last day of its taxable year treated as if each received a distribution of
his pro rata share of such gain, with the result that each shareholder will be
required to report his pro rata share of such gain on his tax return as
long-term capital gain, will receive a refundable tax credit for his pro rata
share of tax paid by the Fund on the gain, and will increase the tax basis for
his shares by an amount equal to the deemed distribution less the tax credit.
Alternative minimum tax (`AMT') is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for non corporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income (`AMTI') over an exemption
amount. For purposes of the corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is otherwise disallowed in determining a corporation's AMTI.
However, a corporate shareholder will generally be required to take the full
amount of any dividend received from a Fund into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Investment income that may be received by a Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Fund to a reduced rate of, or exemption from, taxes on such income. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of a Fund's assets to be invested in various countries is not known.
If more than 50% of the value of a Fund's total assets at the close of its
taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to `pass through' to its shareholders the amount of foreign taxes
paid by the Fund. If a Fund so elects, each shareholder would be required to
include in gross income, even though not actually received, his pro rata share
of the foreign taxes paid by the Fund, but would be treated as having paid his
pro rata share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject to
various Code limitations) as a foreign tax credit against federal income tax
(but not both). For purposes of the foreign tax credit limitation rules of the
Code, each shareholder would treat as foreign source income his pro rata share
of such foreign taxes plus the portion of dividends received from the Fund
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
Each shareholder should consult his own tax adviser regarding the potential
application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional Fund shares or shares of another Fund. Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
82
<PAGE>
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although they economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders (and made by the Fund) on December 31 of such
calendar year if such dividends are actually paid in January of the following
year. Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
The Funds will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to properly report the receipt of interest or
dividend income, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or that it is an exempt recipient (such as a
corporation).
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares
(however, because the Money Market Trust normally maintains a stable value, in
most cases there will be no gain or loss on the sale of shares of that Fund).
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of a Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of a Fund will be considered capital gain
or loss and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership (`foreign shareholder') depends on whether the income from a Fund is
`effectively connected' with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
a foreign shareholder will be subject to U.S. withholding tax at the rate of 30%
(or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such foreign shareholder may be subject to U.S. withholding tax at
the rate of 30% (or lower applicable treaty rate) on the gross income resulting
from a Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against this gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having paid. Such foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of a Fund, capital gain dividends, and amounts
retained by a Fund that are designated as undistributed capital gains.
83
<PAGE>
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign non-corporate shareholders, a Fund may be required
to withhold U.S. federal income tax at the rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
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 advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; STATE AND LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. 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.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies may differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in a Fund.
CALCULATION OF PERFORMANCE DATA
For the purpose of quoting and comparing the performance of the Funds (with
the exception of the Lexington Money Market Trust) to that of other mutual funds
and to other relevant market indices in advertisements or in reports to
shareholders, performance may be stated in terms of total return. Under the
rules of the SEC (`SEC rules'), funds advertising performance must include total
return quotes calculated according to the following formula:
n
P(l+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods or at the end
of the 1, 5 or 10 year periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five and ten year periods or a shorter period dating from the effectiveness
of the Funds' Registration Statement. In calculating the ending redeemable
value, all dividends and distributions by the Funds are assumed to have been
reinvested at net asset value as described in the prospectus on the reinvestment
dates during the period. Total return, or `T' in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and 10
year periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. Any recurring account charges
that might in the future be imposed by the Funds would be included at that time.
The Funds may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the performance of the Funds with other
measures of investment return. For example, in comparing the Funds' total return
84
<PAGE>
with data published by Lipper Analytical Services, Inc., or with the performance
of the Standard and Poor's 500 Stock Index or the Dow Jones Industrial Average,
the Funds calculate their aggregate total return for the specified periods of
time assuming the investment of $10,000 in Fund shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
With respect to the Lexington Money Market Fund, the Fund provides current
yield and effective yield quotations, which are calculated in accordance with
the regulations of the Securities and Exchange Commission, based upon changes in
account value during a recent seven-day base period.
Current yield quotations are computed by annualizing (on a 365-day basis)
the `base period return'. The `base period return' is computed by determining
the net change exclusive of capital changes in the value of the account, divided
by the value of the account at the beginning of the base period. Effective yield
is computed by compounding the `base period return.' Based upon dividends
actually credited to the shareholders' accounts (i.e.: based upon net investment
income), the current yield to an investor in the Fund during the last seven
calendar days of its fiscal year ended December 31, 1999 was at an annual rate
of 5.08% and the effective yield was at an annual rate of 4.96%. The average
weighted maturity of investments was 46 days. The current and effective yield
are affected by market conditions, portfolio quality, portfolio maturity, type
of instruments held and operating expenses. The Fund attempts to keep its net
asset value per share at $1.00, but attainment of this objective is not
guaranteed. This Statement of Additional Information may be in use for a full
year and it can be expected that these yields will fluctuate substantially from
the example shown above.
The current and effective yield figures are not a representation of future
yield as the Fund's net income and expenses will vary based on many factors,
including changes in short term money market yields generally and the types of
instruments in the Fund's portfolio. The stated yield of the Fund may be useful
in reviewing the Fund's performance and in providing a basis for comparison with
other investment alternatives. However, unlike bank deposits and other
investments which pay fixed yields for stated periods of time, the yield of the
Fund fluctuates. In addition, other investment companies may calculate yield on
a different basis and may purchase securities for their portfolios which have
different qualities and maturities than those of the Fund's portfolio
securities.
PERFORMANCE COMPARISONS
In reports or other communications to shareholders or in advertising
material, a Fund may compare the performance of its Class A, Class B, Class C or
Class Q shares with that of other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc., Morningstar, Inc., CDA
Technologies, Inc., Value Line, Inc. or similar independent services that
monitor the performance of mutual funds or with other appropriate indexes of
investment securities. In addition, certain indexes may be used to illustrate
historic performance of select asset classes. The performance information may
also include evaluations of the Funds published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Business Week, Forbes, Fortune, Institutional Investor, Money and The Wall
Street Journal. If a Fund compares its performance to other funds or to relevant
indexes, the Fund's performance will be stated in the same terms in which such
comparative data and indexes are stated, which is normally total return rather
than yield. For these purposes the performance of the Fund, as well as the
performance of such investment companies or indexes, may not reflect sales
charges, which, if reflected, would reduce performance results.
85
<PAGE>
Reports and promotional literature may also contain the following
information: (i) a description of the gross national or domestic product and
populations, including but not limited to age characteristics, of various
countries and regions in which a Fund may invest, as compiled by various
organizations, and projections of such information; (ii) the performance of
worldwide equity and debt markets; (iii) the capitalization of U.S. and foreign
stock markets prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial organization; (iv)
the geographic distribution of a Fund's portfolio; (v) the major industries
located in various jurisdictions; (vi) the number of shareholders in the Funds
or other Pilgrim Funds and the dollar amount of the assets under management;
(vii) descriptions of investing methods such as dollar-cost averaging, best
day/worst day scenarios, etc.; (viii) comparisons of the average price to
earnings ratio, price to book ratio, price to cash flow and relative currency
valuations of the Funds and individual stocks in a Fund's portfolio, appropriate
indices and descriptions of such comparisons; (ix) quotes from the Sub-Adviser
of a Fund or other industry specialists; (x) lists or statistics of certain of a
Fund's holdings including, but not limited to, portfolio composition, sector
weightings, portfolio turnover rate, number of holdings, average market
capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for
each class of shares of each Fund; and descriptions of the benefits of working
with investment professionals in selecting investments.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Sub-Advisers, Pilgrim Capital, Pilgrim
Group, Inc. or affiliates of the Company, the Investment Manager, the
Sub-Advisers, Pilgrim Capital or Pilgrim Group, Inc. including: (i) performance
rankings of other funds managed by the Investment Manager or a Sub-Adviser, or
the individuals employed by the Investment Manager or a Sub-Adviser who exercise
responsibility for the day-to-day management of a Fund, including rankings of
mutual funds published by Lipper Analytical Services, Inc., Morningstar, Inc.,
CDA Technologies, Inc., or other rating services, companies, publications or
other persons who rank mutual funds or other investment products on overall
performance or other criteria; (ii) lists of clients, the number of clients, or
assets under management; (iii) information regarding the acquisition of the
Pilgrim Funds by Pilgrim Capital; (iv) the past performance of Pilgrim Capital
and Pilgrim Group, Inc.; (v) information regarding rights offerings conducted by
closed-end funds managed by the Investment Manager.
The average annual total returns, [including sales charges,] for each Fund
for the one-, five-, and ten-year periods ended December 31, 1999, is as
follows:
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
Pilgrim Global Corporate Leaders Fund, Inc. 39.06% 17.93% 11.01%
Pilgrim GNMA Income Fund, Inc. 0.58% 7.87% 7.47%
Pilgrim Gold Fund, Inc. 8.58% -9.32% -4.53%
Pilgrim Growth and Income Fund, Inc (1). 15.54% 23.17% 14.62%
Pilgrim International Fund, Inc (2). 47.85% 16.52% N/A
Pilgrim Silver Fund, Inc. 8.70% -4.15% 1.89%
Pilgrim SmallCap Asia Growth Fund, Inc (3). 57.29% N/A N/A
Pilgrim Troika Dialog Russia Fund, Inc (4). 159.76% N/A N/A
Pilgrim Worldwide Emerging Markets Fund, Inc. 112.58% 6.18% 7.68%
Pilgrim Global Income Fund -0.31% 9.04% 7.16%
Lexington Money Market Trust
----------
(1) Prior to June 17, 1991, the Growth and Income Fund operated under a
different investment objective.
(2) The International Fund commenced operations on January 1, 1994.
(3) The SmallCap Asia Fund commenced operations on July 3, 1995. Since that
time, the Fund's average annual return has been -2.38%.
(4) The Russia Fund commenced operations on July 3, 1996. Since that time, the
Fund's average annual return has been -9.47%.
86
<PAGE>
GENERAL INFORMATION
CUSTODIAN
Brown Brothers Harriman & Co., 40 Walker Street, Boston, Massachusetts
12109, has been retained to act as the Custodian for all Funds' (except Pilgrim
Growth & Income Fund, Pilgrim GNMA Income Fund and Lexington Money Market Trust)
portfolio securities including those to be held by foreign banks and foreign
securities depositories which qualify as eligible foreign custodians under the
rules adopted by the SEC and for the Funds' domestic securities and other
assets. State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02181, has been retained to act as the custodian for the portfolio
securities of Pilgrim Growth & Income Fund, Pilgrim GNMA Income Fund and
Lexington Money Market Trust. DST Systems, Inc. has been retained to act as the
transfer agent. Neither Brown Brothers Harriman nor DST Systems, Inc. have any
part in determining the investment policies of the Funds or in determining which
portfolio securities are to be purchased or sold by the Funds or in the
declaration of dividends and distributions.
LEGAL COUNSEL
Legal matters for the Funds are passed upon by Dechert Price & Rhoads, 1775
Eye Street, N.W., Washington, D.C. 20006.
INDEPENDENT AUDITORS
KPMG LLP, 355 South Grand Avenue, Los Angeles, California 90071, has been
selected as independent auditors for the Funds for the fiscal year ending
December 31, 2000.
DECLARATION OF TRUST
The Global Income Fund and Money Market Trust are organized as
Massachusetts business trusts. The Declaration of Trust of each of these Funds
provides that obligations of the Fund are not binding upon its Trustees,
officers, employees and agents individually and that the Trustees, officers,
employees and agents will not be liable to the trust or its investors for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee, officer, employee or agent against any liability to the trust or its
investors to which the Trustee, officer, employee or agent would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of his or her duties. The Declaration of Trust also provides
that the debts, liabilities, obligations and expenses incurred, contracted for
or existing with respect to a designated Fund shall be enforceable against the
assets and property of such Fund only, and not against the assets or property of
any other Fund or the investors therein.
OTHER INFORMATION
The Funds are registered with the SEC as an open-end management investment
company. Such registration does not involve supervision of the management or
policies of the Funds by any governmental agency. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the Funds' Registration Statement filed with the SEC and copies of this
information may be obtained from the SEC upon payment of the prescribed fee or
examined at the SEC in Washington, D.C. without charge.
Investors in the Funds will be kept informed of their progress through
semi-annual reports showing portfolio composition, statistical data and any
other significant data, including financial statements audited by independent
certified public accountants.
87
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of the Funds ends on December 31. The Funds will send
financial statements to its shareholders at least semiannually. An annual report
containing financial statements audited by the independent accountants will be
sent to shareholders each year.
FINANCIAL STATEMENTS
The financial statements from the Funds' December 31, 1999 Annual Report
are incorporated herein by reference. Copies of the Funds' Annual and
Semi-Annual Reports may be obtained without charge by contacting Pilgrim Funds
at Suite 1200, 40 North Central Avenue, Phoenix, Arizona 85004, (800) 992-0180.
88
