STATEMENT OF ADDITIONAL INFORMATION
October 31, 1996
PILGRIM AMERICA MAGNACAP FUND
Two Renaissance Square, Suite 1200
40 North Central Avenue
Phoenix, Arizona 85004
(800) 331-1080
Pilgrim America MagnaCap Fund (the "Fund") is a diversified series of Pilgrim
America Investment Funds, Inc., an open-end management investment company (the
"Company"). The principal investment objective of the Fund is to seek growth of
capital, and dividend income as a secondary investment consideration.
Preservation of capital also is an important consideration in attaining these
objectives. While the Fund's investments will generally be in common stocks, in
periods of stock market weakness the Fund may establish a defensive position to
preserve capital by having all or any part of its assets invested in high
quality short-term fixed income securities or retained in cash or cash
equivalents.
A Prospectus for the Fund, dated October 31, 1996, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund or the Fund's Principal Underwriter, Pilgrim
America Securities, Inc. (the "Distributor"), at the address listed above. This
Statement of Additional Information is not a prospectus. It is intended to
provide you additional information regarding the activities and operations of
the Fund, and should be read in conjunction with the Fund's Prospectus. Copies
of the Prospectus may be obtained at no charge by calling (800) 331-1080.
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TABLE OF CONTENTS
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Page
History of the Fund............................................... 2
Investment Objectives and Policies................................ 2
Investment Restrictions........................................... 4
Directors and Officers............................................ 6
Principal Shareholders............................................ 9
Management of the Fund............................................ 9
Pilgrim America Group............................................ 10
Distribution Plan................................................ 11
Execution of Portfolio Transactions.............................. 13
Additional Purchase and Redemption Information .................. 15
Determination of Share Price..................................... 19
Shareholder Services and Privileges.............................. 20
Distributions.................................................... 22
Tax Considerations............................................... 23
Performance Information.......................................... 26
General Information.............................................. 27
Financial Statements............................................. 28
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HISTORY OF THE FUND
Pilgrim America MagnaCap Fund (the "Fund") is a diversified series of Pilgrim
America Investment Funds, Inc. (the "Company"), a Maryland corporation that was
organized in 1969. The Company consists of two series, the Fund and Pilgrim
America High Yield Fund. Shares of the Fund may be purchased through independent
financial professionals, national and regional brokerage firms and other
financial institutions ("Authorized Dealers") or by completing the Fund's
investment application and having the Authorized Dealer forward it to the Fund's
Transfer Agent.
INVESTMENT OBJECTIVES AND POLICIES
The following discussion of investment policies supplements the Fund's
investment objectives and policies set forth in the Prospectus under the heading
"The Fund's Investment Objectives and Policies."
General
As noted in the Prospectus, the principal objective of the Fund is to attain
growth of capital, with dividend income as a secondary consideration.
Preservation of capital also is an important consideration in seeking to obtain
these objectives. There is, of course, no assurance that the Fund's objectives
will be achieved since all investments are inherently subject to market risk.
Common Stock, Convertible Securities and Other Equity Securities
The Fund will invest in common stocks, which represent an equity (ownership)
interest in a company. This ownership interest generally gives the Fund the
right to vote on issues affecting the company's organization and operations.
The Fund 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, the 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.
Repurchase Agreements
The Fund may use any portion of its assets invested in U.S. Government
securities, and concurrently enter into repurchase agreements with respect to
such securities. Such repurchase agreements will be made only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System. Under such agreements, the seller of the security
agrees to repurchase it at a mutually agreed upon time and price. The resale
price is in excess of the purchase price and reflects an agreed upon interest
rate for the period of time the agreement is outstanding. The period of these
repurchase agreements are usually quite short, from overnight to one week, while
the underlying securities generally have longer maturities.
The Fund will always receive as collateral for such repurchase agreements, U.S.
Government securities acceptable to it whose market value is equal to at least
100% of the amount invested by the Fund, and the Fund will make payment for such
securities only upon physical delivery or evidence of book entry transfer to the
account of its Custodian Bank. If the seller defaults, the Fund might incur a
loss or delay in the
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realization of proceeds if the value of the collateral securing the repurchase
agreement declines and it might incur disposition costs in liquidating the
collateral. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities in an amount up to 33-1/3% of total Fund assets to broker-dealers,
major banks, or other recognized domestic institutional borrowers of securities.
No lending may be made with any companies affiliated with Pilgrim America
Investments, Inc. (the "Investment Manager"). The borrower at all times during
the loan must maintain with the Fund cash or cash equivalent collateral or
provide to the Fund an irrevocable letter of credit equal in value to at least
100% of the value of the securities loaned. During the time portfolio securities
are on loan, the borrower pays the Fund any interest paid on such securities,
and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the Fund or the borrower at any time. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.
Foreign Securities
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delivery of securities may not occur at the same time as payment in some foreign
markets. Delays in settlement could result in temporary periods when a portion
of the assets of the Fund is uninvested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
As foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those applicable
to domestic companies, there may be less publicly available information about
certain foreign companies than about domestic companies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States. A foreign
government may impose exchange control regulations that may have an impact on
currency exchange rates, and there is the possibility of expropriation, regular
and confiscatory taxation, political or social instability, or diplomatic
developments that could affect U.S. investments in those countries.
Although the Fund will use reasonable efforts to obtain the best available price
and the most favorable execution with respect to all transactions and the
Investment Manager will consider the full range and quality of services offered
by the executing broker or dealer when making these determinations, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Certain foreign governments levy withholding
taxes against dividend and interest income or may impose other taxes. Although
in some countries a portion of these taxes is recoverable, the non-recovered
portion of foreign withholding taxes will reduce the income received by the Fund
on these investments. However, these foreign
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withholding taxes are not expected to have a significant impact on the Fund,
since the Fund's investment objective is to seek growth of capital, and dividend
income as a secondary consideration.
There are certain additional risks in owning foreign securities, including those
resulting from: (i) fluctuations in currency exchange rates; (ii) devaluation of
currencies; (iii) future political or economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions; (iv) reduced availability of public information concerning
issuers; (v) accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; and (vi) limitations on foreign
ownership of equity securities. Also, securities of many foreign companies may
be less liquid and the prices more volatile than those of domestic companies.
With certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Funds, including the withholding of dividends.
Banking Industry Obligations
The Fund may invest in banking industry obligations, including certificates of
deposit, bankers' acceptances, and fixed time deposits, with a maturity of one
year or less. The Fund will not invest in obligations issued by a bank unless
(i) the bank is a U.S. bank and a member of the FDIC and (ii) the bank has total
assets of at least $1 billion (U.S.) or, if not, the Fund's investment is
limited to the FDIC-insured amount of $100,000.
Portfolio Turnover
In seeking growth of capital, the Fund reserves the right to dispose of any
security without regard to the period of time it has been held, and to take
short- or long-term profits when such action is consistent with its objectives
and with sound investment practice. The Fund may at times take prompt advantage
of changes in market environment or purchase securities based primarily upon
short-term market considerations; however, its principal objective is to seek
long-term gains.
During its fiscal years ended June 30, 1994, 1995, and 1996, the Fund's annual
total portfolio turnover was 7%, 6% and 15%, respectively. The annual turnover
rate of the Fund's portfolio is generally expected to be less than 100%,
although it may be in excess of 100% in years when the Fund has taken a
significant defensive position. The turnover rate may vary greatly from year to
year as well as within a year, and may also be affected by cash requirements for
redemptions of Fund shares, and by the necessity of maintaining the Fund as a
regulated investment company under the Internal Revenue Code in order to receive
favorable tax treatment.
Diversification
The Fund is a diversified investment company, which means that it meets the
following requirements: at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the Fund's total assets and
to not more than 10% of the outstanding voting securities of such issuer.
INVESTMENT RESTRICTIONS
The following additional fundamental policies and investment restrictions have
been adopted by the Fund and cannot be changed without approval by the vote of a
majority of the outstanding voting securities of the Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
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The Fund may not:
(1) Engage in the underwriting of securities of other issuers.
(2) Invest in "restricted securities" which cannot in the absence of
an exemption be sold without an effective registration statement
under the Securities Act of 1933, as amended.
(3) Engage in the purchase and sale of interests in real estate,
commodities or commodity contracts (although this does not
preclude marketable securities of companies engaged in these
activities).
(4) Engage in the making of loans to other persons, except (a)
through the purchase of a portion of an issue of publicly
distributed bonds, debentures or other evidences of indebtedness
customarily purchased by institutional investors or (b) by the
loan of its portfolio securities in accordance with the policies
described under "Lending of Portfolio Securities."
(5) Borrow money except from banks for temporary or emergency
purposes, and then not in excess of 5% of the value of its total
assets.
(6) Mortgage, pledge or hypothecate its assets in any manner, except
in connection with any authorized borrowings and then not in
excess of 10% of the value of its total assets.
(7) Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of its
portfolio transactions.
(8) Effect short sales, or purchase or sell puts, calls, spreads or
straddles.
(9) Buy or sell oil, gas, or other mineral leases, rights or royalty
contracts, or participate on a joint or joint and several basis
in any securities trading account.
(10) Invest in securities of other investment companies, except as
they may be acquired as part of a merger, consolidation or
acquisition of assets.
(11) Invest more than 25% of the value of its total assets in any one
industry.
(12) Purchase or retain in its portfolio any security if an Officer or
Director of the Fund or its investment manager owns beneficially
more than 1/2 of 1% of the outstanding securities of such issuer,
and in the aggregate such persons own beneficially more than 5%
of the outstanding securities of such issuer.
(13) Issue senior securities, except insofar as the Fund may be deemed
to have issued a senior security by reason of borrowing money in
accordance with the Fund's borrowing policies or investment
techniques, and except for purposes of this investment
restriction, collateral, escrow, or margin or other deposits with
respect to the making of short sales, the purchase or sale of
futures contracts or related options, purchase or sale of forward
foreign currency contracts, and the writing of options on
securities are not deemed to be an issuance of a senior security.
The Fund is also subject to the following restrictions and policies that are not
fundamental and may, therefore, be changed by the Board of Directors without
shareholder approval. The Fund will limit its investments in warrants, valued at
the lower of cost or market, to 5% of its net assets. Included within that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on the New York or American Stock Exchange. The Fund will not engage
in the purchase or sale of real estate or real estate limited
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partnerships. The Fund also will not make loans to other persons unless
collateral values are continuously maintained at no less than 100% by "marking
to market" daily.
DIRECTORS AND OFFICERS
The Board of Directors of the Company is elected by the shareholders. The Board
has responsibility for the overall management of the Fund, including general
supervision and review of its investment activities. The Directors, in turn,
elect the Officers of the Company who are responsible for administering the
day-to-day operations of the Fund. Current Directors and Officers of the
Company, and their affiliations and principal occupations during the past five
years, are:
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 55.) Director. Realtor, The Prudential Arizona Realty, for more than
the last five years. Ms. Baldwin is also Treasurer, United States Olympic
Committee, and formerly was on the teaching staff at Arizona State University.
Ms. Baldwin also is a director or trustee of each of the funds managed by the
Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 68.)
Director. President of Al Burton Productions, for more than the last five years.
Formerly, Executive Producer, Castle Rock Entertainment. Mr. Burton also is a
director or trustee of each of the funds managed by the Investment Manager.
Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida 33140.
(Age 55.) Director. President, South Beach Capital Markets Advisory Corporation
(since January 1995). Mr. Foerster was formerly Managing Director, U.S. Equity
Syndicates Desk, Lehman Brothers (June 1992 - December 1994) and Managing
Director, Equity Transactions Group/Equity Syndicate, PaineWebber Incorporated
(September 1984 - May 1992). Mr. Foerster also is a director or trustee of each
of the funds managed by the Investment Manager.
Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 49.) Director.
President, StockVal, Inc. (1992 - present); director and co-owner, StockVal,
Inc. (1982 - present); director of Artisoft, Inc. Mr. Patton was formerly a
partner and director of the law firm of Streich, Lang, P.A. (1972 - 1992). Mr.
Patton is also a director or trustee of each of the funds managed by the
Investment Manager.
*Robert W. Stallings, Two Renaissance Square, 12th Floor, 40 North Central
Avenue, Phoenix, Arizona 85004. (Age 47.) Chairman, Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim America
Group, Inc. ("Pilgrim America Group") and a director of Pilgrim America
Securities, Inc. and Pilgrim America Investments, Inc. (since December 1994).
Chairman, Chief Executive Officer and President of Pilgrim America Masters
Series, Inc., Pilgrim America Bank and Thrift Fund, Inc., Pilgrim Government
Securities Income Fund, and Pilgrim America Prime Rate Trust (since April 1995).
Chairman and Chief Executive Officer of Express America Holdings Corporation
(since August 1990) and Express America Mortgage Corporation (since May 1991)
and President of Express America Holdings Corporation and Express America
Mortgage Corporation (since December 1993). Mr. Stallings formerly was Chairman
and Chief Executive Officer of First Western Partners, Inc., a consulting and
management services firm to financial institutions and private investors
(February 1990 - December 1991) and Chairman and Chief Executive Officer of
Western Savings & Loan Assoc. (April 1989 - February 1990). Mr. Stallings also
is a director or trustee of each of the funds managed by the Investment Manager.
* Interested person of the Fund, as defined in the Investment Company Act of
1940, as amended.
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The Fund pays each Director who is not an interested person, the Fund's pro rata
share, as described below, of (i) an annual retainer of $20,000; (ii) $1,500 per
quarterly and special Board meeting; (iii) $500 per committee meeting; (iv) $100
per special telephonic meeting; and (v) out-of-pocket expenses. During the
fiscal year ended June 30, 1996, the Fund paid an aggregate of $15,628 to the
Directors. The pro rata share paid by the Fund is based on the 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 serve in common as
directors/trustees.
Compensation of Directors
The following table sets forth information regarding compensation of Directors
by the Fund and other funds managed by the Investment Manager for the fiscal
year ended June 30, 1996. Officers of the Fund and Directors who are interested
persons of the Fund do not receive any compensation from the Fund or any fund
managed by the Investment Manager. In the column headed "Total Compensation From
Registrant and Fund Complex Paid to Directors," the number in parentheses
indicates the total number of boards in the fund complex on which the Director
serves.
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Compensation Table
Fiscal Year Ended June 30, 1996
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Pension or Total
Retirement Compensation
Benefits Estimated From
Aggregate Accrued Annual Registrant
Compensation As Part of Benefits and Fund
from Fund Upon Complex Paid
Name of Person, Position Registrant Expenses Retirement to Directors
Mary A Baldwin, Director................. (1)(3) $3,967 N/A N/A $23,800
(5 boards)
Al Burton, Director...................... (2)(3) $3,967 N/A N/A $23,800
(5 boards)
Bruce S. Foerster, Director.............. (1)(3) $3,966 N/A N/A $23,900
(5 boards)
Jock Patton, Director.................... (3)(4) $3,728 N/A N/A $22,400
(5 boards)
Robert W. Stallings, Director and Chairman (1)(5) $0 N/A N/A $0
(5 boards)
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(1) Current Board member, term commencing April 7, 1995.
(2) Board member since 1985.
(3) Member of Audit Committee.
(4) Current Board member, term commencing August 28, 1995.
(5) "Interested person", as defined in the Investment Company Act of 1940.
As an interested person of the Fund, Mr. Stallings will not receive any
compensation as a Director.
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Officers
James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 39.) Vice Chairman (since December 1994) and Executive Vice
President (since April 1995) of Pilgrim America Group and Pilgrim America
Investments, Inc. and a director (since December 1994) and Assistant Secretary
(since January 1995) of Pilgrim America Securities, Inc. Executive Vice
President of Pilgrim America Masters Series, Inc., Pilgrim America Bank and
Thrift Fund, Inc., Pilgrim America Prime Rate Trust, and Pilgrim Government
Securities Income Fund, Inc. (since April 1995). Vice Chairman and Chief
Financial Officer of Express America Holdings Corporation (since December 1993)
and President and Chief Financial Officer of Express America Holdings
Corporation (May 1991 - December 1993). Mr. Reis is also Vice Chairman (since
December 1993) of Express America Mortgage Corporation and formerly was
President (May 1991 - December 1993), and he was also the President and Chief
Financial Officer of First Western Partners, Inc. (February 1990 - December
1991).
Stanley Vyner, Executive Vice President
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. (Age 47.) Mr. Vyner has served as President and Chief Executive Officer
for Pilgrim America Investments, Inc. since August, 1996, Executive Vice
President of Pilgrim America Group since August, 1996, and Executive Vice
President of Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America Masters
Series, Inc., and Pilgrim Government Securities Income Fund, Inc. since July
1996. He served as Chief Executive Officer of HSBC Asset Management Americas,
Inc. until December, 1995, and prior to that was the Chief Executive Officer of
HSBC Life Assurance Co., the largest provider of retirement services in Hong
Kong, where Mr. Vyner worked for nearly 11 years. An actuary by profession, Mr.
Vyner earned his Honors Degree in Economics from Edinburgh University, UK. He is
a Fellow of the Faculty of Actuaries.
James M. Hennessy, Senior Vice President and Secretary
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 47.) Senior Vice President and Secretary, Express America Holdings
Corporation, Pilgrim America Group and Secretary, Pilgrim America Investments,
Inc. and Pilgrim America Securities, Inc. (since April 1995). Senior Vice
President and Secretary, Pilgrim America Masters Series, Inc., Pilgrim America
Bank and Thrift Fund, Inc., Pilgrim America Prime Rate Trust, and Pilgrim
Government Securities Income Fund, Inc. (since April 1995). Senior Vice
President, Express America Mortgage Corporation (June 1992 - August 1994). Mr.
Hennessy was also the President of Beverly Hills Securities Corp. (January 1990
- - June 1992).
Michael J. Roland, CPA, Senior Vice President and Treasurer.
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 38.) Senior Vice President and Chief Financial Officer of Pilgrim
America Group, Inc., Pilgrim America Investments, Inc. and Pilgrim America
Securities, Inc. (since April 1995). Senior Vice President and Treasurer of
Pilgrim Government Securities Income Fund, Inc., Pilgrim America Bank and Thrift
Fund, Inc., Pilgrim America Masters Series, Inc. and Pilgrim America Prime Rate
Trust (since April 1995). From July 1994 through December 1994, Partner at the
consulting firm of Corporate Savings Group in Newport Beach, California. From
1992 to June 1994, Vice President of Pacific Financial Asset Management Corp.
Funds in Newport Beach, California. From 1988 to 1992, Director of Financial
Reporting for Pacific Mutual Life Insurance Company in Newport Beach,
California.
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PRINCIPAL SHAREHOLDERS
As of September 30, 1996, the Directors and Officers of the Fund owned less than
1% of any class of the Fund's outstanding shares. As of September 30, 1996, to
the knowledge of management, no person owned beneficially or of record more than
5% of the outstanding shares of any class of the Fund, except with respect to
the Class A shares of the Fund, Merrill Lynch, Pierce, Fenner & Smith Inc., P.O.
Box 45286, Jacksonville, Florida 32232-5286, owned 15.52% of the shares.
MANAGEMENT OF THE FUND
Investment management and administrative services are provided to the Fund by
the Investment Manager pursuant to an Investment Management Agreement (the
"Agreement") dated April 7, 1995. Pursuant to the Agreement, the Investment
Manager furnishes the Fund with investment advice and investment management and
administrative services with respect to the Fund's assets, including the making
of specific recommendations as to the purchase and sale of portfolio securities,
furnishes office space and most personnel needed by the Fund, and in general
supervises and manages the Fund's investments subject to the ultimate
supervision and direction of the Company's Board of Directors.
As compensation for the foregoing services, the Investment Manager is paid
monthly a fee equal to 1.00% per annum of the average daily net assets of the
Fund on the first $30 million of net assets. The annual rate is reduced to 0.75%
on net assets from $30 million to $250 million; to 0.625% on net assets from
$250 million to $500 million; and to 0.50% on net assets over $500 million. As
of June 30, 1996, the total net assets of the Fund were approximately $248
million.
The Fund pays its own operating expenses, which are not assumed by the
Investment Manager, such as fees of its custodian, transfer and shareholder
servicing agent; costs of pricing and calculating its daily net asset value and
of maintaining its books of account required by the 1940 Act; expenditures in
connection with meetings of the Fund's shareholders, except those called to
accommodate the Investment Manager; salaries of officers and fees and expenses
of Directors who are not affiliated with or interested persons of the Investment
Manager; insurance premiums on property or personnel of the Fund which inure to
its benefit; salaries of personnel of the Fund who are involved in placing
orders for the execution of the Fund's portfolio transactions, shareholder
servicing and in maintaining registration of its shares under state securities
laws; trade association dues; the cost of preparing and printing reports and
proxy statements of the Fund for distribution to its shareholders; legal and
accounting fees; fees and expenses of registering and maintaining registration
of its shares for sale under Federal and applicable state securities laws;
preparing and sending prospectuses to existing shareholders; and all other
expenses in connection with the issuance, registration and transfer of its
shares.
The Investment Manager will reduce its aggregate fees for any fiscal year, or
reimburse the Fund, to the extent required so that the Fund's expenses do not
exceed the expense limitations applicable to the Fund under the securities laws
or regulations of those states or jurisdictions in which the Fund's shares are
registered or qualified for sale. Currently, the most restrictive of such
expense limitations would require the Investment Manager to reduce its
respective fees, or to reimburse the Fund, to the extent required so that the
Fund's expenses, as described above, for any fiscal year do not exceed 2.50% of
the first $30 million of the Fund's average daily net assets, 2.00% of the next
$70 million of the Fund's average net assets and 1.50% of the Fund's remaining
average net assets. Expenses for purposes of this expense limitation include the
management fee, but exclude distribution expenses, brokerage commissions and
fees, taxes, interest and extraordinary expenses such as litigation, paid or
incurred by the Fund. In addition, the Fund has been granted a variance that
permits it to exclude certain shareholder servicing expenses from this
limitation. The Fund's expense limitation may change to reflect changes in the
expense limitations of the state having the most restrictive
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limitation in which shares of the Fund are registered for sale. For the fiscal
year ended June 30, 1996 and the fiscal period April 7, 1995 to June 30, 1995,
the Fund paid management fees to the current Investment Manager of approximately
$1,805,000 and $376,473. For the fiscal period July 1, 1994 to April 7, 1995 and
the fiscal year ended June 30, 1994, the Fund paid management fees to the former
manager of approximately $1,181,463 and $1,556,000, respectively. During the
period of April 7, 1995 to June 30, 1995, the Fund made no reimbursements to the
current Investment Manager for the costs of personnel involved with
recordkeeping and daily net asset value calculations, portfolio trading,
shareholder servicing, and state securities regulation and compliance. During
the period of July 1, 1994 to April 7, 1995 and the fiscal year ended June 30,
1994, the Fund reimbursed the former manager approximately $21,397 and $23,000,
respectively, for the costs of personnel involved with recordkeeping and daily
net asset value calculations, portfolio trading, shareholder servicing, and
state securities regulation and compliance.
The Agreement was approved on April 7, 1995, and will continue in effect for an
initial period of two years and thereafter from year to year so long as such
continuance is approved at least annually by (1) the Fund's Board of Directors
or a vote of a majority of the outstanding voting securities of the Fund, and
(2) the vote of a majority of the Fund's Directors who are not parties to the
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Agreement may be
terminated at any time, without penalty, by either the Fund or the Investment
Manager, upon sixty (60) days' written notice, and is automatically terminated
in the event of its assignment as defined in the 1940 Act.
Distributor
Shares of the Fund are distributed by Pilgrim America Securities, Inc. (the
"Distributor") pursuant to a Distribution Agreement between the Fund and the
Distributor. The Distribution Agreement requires the Distributor to use its best
efforts on a continuing basis to solicit purchases of shares of the Fund. The
Fund 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 reallowed to an Authorized Dealer. The 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 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 Directors 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 Fund, and the charges and expenses
associated with an investment.
PILGRIM AMERICA GROUP
The Investment Manager and the Distributor are wholly-owned subsidiaries of
Pilgrim America Group, a Delaware corporation, which in turn is a wholly-owned
subsidiary of Express America Holdings Corporation, a Delaware corporation the
shares of which are traded on the NASDAQ National Market System. Express America
Holdings Corporation is a holding company that through its subsidiaries engages
in the financial services business, focusing primarily on the business of
providing investment advisory, administrative and distribution services to
mutual funds and closed-end investment companies. The Investment Manager also
acts as the investment manager to Pilgrim America Masters Series, Inc., Pilgrim
Government Securities Income Fund and Pilgrim America High Yield Fund, open-end
investment companies, and to Pilgrim America Bank and Thrift Fund, Inc. and
Pilgrim America Prime Rate Trust, closed-end investment companies. As of October
31, 1996, the Investment Manager had assets under management of approximately
$1.8 billion.
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On May 16, 1991, Express America acquired a now discontinued mortgage banking
operation from the Resolution Trust Corporation ("RTC") following a competitive
bidding process. On December 8, 1995, the RTC filed a complaint in the United
States District Court of Arizona against Express America, its Chief Executive
Officer, who is also Chairman and an officer of the Fund, its Chief Financial
Officer, who is also an officer of the Fund, and others, including Smith Barney,
Harris Upham & Co., Incorporated and Rauscher Pierce Refsnes, Inc. The RTC's
complaint alleges various irregularities in the bidding process and the closing
of the acquisition. The RTC has asked for at least $20 million in actual damages
and at least $60 million in punitive damages from all defendants. Express
America and the officers have advised the Fund that they believe they have
meritorious defenses to the claims brought by the RTC, and that the litigation
is unlikely to have a material adverse effect on the operations of the
Investment Manager.
DISTRIBUTION PLAN
The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). The Fund
intends to operate the Rule 12b-1 Plan in accordance with its terms and the
National Association of Securities Dealers, Inc. ("NASD") Rules concerning sales
charges. Under the Rule 12b-1 Plan, the Distributor may be entitled to payment
each month in connection with the offering, sale, and shareholder servicing of
Class A, Class B, and Class M shares in amounts not to exceed the following:
with respect to Class A shares at an annual rate of up to 0.30% of the average
daily net assets of the Class A shares of the Fund; with respect to Class B
shares at an annual rate of up to 1.00% of the average daily net assets of the
Class B shares of the Fund; and with respect to Class M shares at an annual rate
of up to 1.00% of the average daily net assets of the Class M shares of the
Fund. The Board of Directors has approved under the Rule 12b-1 Plan payments of
the following amounts to the Distributor each month in connection with the
offering, sale, and shareholder servicing of Class A, Class B, and Class M
shares as follows: (i) with respect to Class A shares at an annual rate equal to
0.30% of the average daily net assets of the Class A shares of the Fund; (ii)
with respect to Class B shares at an annual rate equal to 1.00% of the average
daily net assets of the Class B shares of the Fund; and (iii) with respect to
Class M shares at an annual rate equal to 0.75% of the average daily net assets
of the Class M shares of the Fund. Of these amounts, fees equal to an annual
rate of 0.25% of the average daily net assets of the Fund are for shareholder
servicing for each of the classes.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for both distribution and shareholder servicing at the annual
rate of 0.25%, 0.25%, and 0.65% of the Fund's average daily net assets of Class
A, Class B, and Class M shares, respectively, that are registered in the name of
that Authorized Dealer as nominee or held in a shareholder account that
designates that Authorized Dealer as the dealer of record. Rights to these
ongoing payments begin to accrue in the 13th month following a purchase of Class
A or B shares and in the 1st month following purchase of Class M 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, and Class M shares of the Fund,
including payments to Authorized Dealers for selling shares of the Fund and for
servicing shareholders of these classes of the Fund. Activities for which these
fees may be used include: preparation and distribution of advertising materials
and sales literature; expenses of organizing and conducting sales seminars;
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; and costs of administering the Rule 12b-1 Plan.
In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the
obligations of the 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. The Distributor will be
reimbursed for its actual expenses incurred under the Rule 12b-1 Plan, with
respect to Class A shares. With
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respect to Class B shares and Class M shares, the Distributor will receive
payment without regard to actual distribution expenses it incurs.
In addition to providing for the expenses discussed above, the Rule 12b-1 Plan
also recognizes 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 Fund's shares and other funds
managed by the Investment Manager. In some instances, additional compensation or
promotional incentives may be offered to dealers that have sold or may sell
significant amounts of shares during specified periods of time. 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 Fund or other
funds managed by the Investment Manager and/or other events sponsored by
dealers.
The Rule 12b-1 Plan has been approved by the Board of Directors, including all
of the Directors who are not interested persons of the Fund as defined in the
1940 Act, and by the Fund's shareholders. Each Rule 12b-1 Plan must be renewed
annually by the Board of Directors, including a majority of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Rule 12b-1 Plan, cast in person at a
meeting called for that purpose. It is also required that the selection and
nomination of such Directors be committed to the Directors who are not
interested persons. The 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 or by a vote of a majority of the Fund's outstanding shares on 60
days' written notice. The Distributor or any Authorized Dealer may also
terminate its respective distribution or service agreement at any time upon
written notice.
In approving each Rule 12b-1 Plan, the Board of Directors has determined that
differing distribution arrangements in connection with the sale of new shares of
the Fund is necessary and appropriate in order to meet the needs of different
potential investors. Therefore, the Board of Directors, including those
Directors who are not interested persons of the Fund, 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 Plan, as tailored
to each class of the Fund, will benefit the Fund and the 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 the Fund's outstanding shares, and all
material amendments to a Plan or any distribution or service agreement shall be
approved by the Directors 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 at
least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as
well as to furnish the Board with such other information as may be reasonably
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 the Rule
12b-1 Plan should be continued.
Total distribution expenses incurred by the Distributor for the costs of
promotion and distribution of the Fund's Class A shares for the fiscal year
ended June 30, 1996 were $2,766,263, including expenses for: advertising -
$107,373; salaries and commissions - $1,537,402; printing, postage, and handling
- - $380,686; brokers' servicing fees - $516,714; and miscellaneous and other
promotional activities - $224,088. Total distribution expenses incurred by the
Distributor for the costs of promotion and distribution of the Fund's Class B
shares for the fiscal year ended June 30, 1996 were $46,518, including expenses
for: advertising -- $1,806; salaries and commissions -- $25,853; printing,
postage, and handling -- $6,402; brokers' servicing fees -
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- - $8,689; and miscellaneous and other promotional activities -- $3,768. Total
distribution expenses incurred by the Distributor for the costs of promotion and
distribution of the Fund's Class M shares for the fiscal year ended June 30,
1996 were $6,484, including expenses for: advertising -- $252; salaries and
commissions -- $3,604; printing, postage, and handling -- $892; brokers'
servicing fees -- $1,211; and miscellaneous and other promotional activities --
$525. Of the total amount incurred by the Distributor during the last year,
$1,198,767 was for the costs of personnel of the Distributor and its affiliates
involved in the promotion and distribution of the Fund's shares.
Under the Glass-Steagall Act and other applicable laws, certain banking
institutions are prohibited from distributing investment company shares.
Accordingly, such banks may only provide certain agency or administrative
services to their customers for which they may receive a fee from the
Distributor under a Rule 12b-1 Plan. If a bank were prohibited from providing
such services, shareholders would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in services provided might occur and such
shareholders might no longer be able to avail themselves of any automatic
investment or other service then being provided by the bank. It is not expected
that shareholders would suffer any adverse financial consequences as a result of
any of these occurrences.
EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the portfolio of the Fund, the
primary consideration is to obtain the most favorable price and execution
available. Pursuant to the Management Agreement, the Investment Manager
determines, subject to the instructions of and review by the Board of Directors
of the Company, which securities are to be purchased and sold by the Fund and
which brokers are to be eligible to execute portfolio transactions of the Fund.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker," unless in the opinion of the
Investment Manager, a better price and execution can otherwise be obtained by
using a broker for the transaction.
In placing portfolio transactions, the Investment Manager will use its best
efforts to choose a broker capable of providing the brokerage services necessary
to obtain the most favorable price and execution available. The full range and
quality of brokerage services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm's risk in positioning a
block of securities, and other factors. The Investment Manager seeks to obtain
the best commission rate available from brokers which are believed to be capable
of providing efficient execution and handling of the orders. In those instances
where it is reasonably determined that more than one broker can offer the
brokerage services needed to obtain the most favorable price and execution
available, consideration may be given to those brokers that supply research and
statistical information to the Fund and/or the Investment Manager, and provide
other services in addition to execution services. The Investment Manager
considers such information, which is in addition to and not in lieu of the
services required to be performed by the Investment Manager under its Agreement
with the Fund, to be useful in varying degrees, but of indeterminable value. The
placement of portfolio brokerage with broker-dealers who have sold shares of the
Fund is subject to rules adopted by the NASD. Provided the Fund's officers are
satisfied that the Fund is receiving the most favorable price and execution
available, the Fund may also consider the sale of the Fund's shares as a factor
in the selection of broker-dealers to execute its portfolio transactions.
While it will continue to be the Fund's general policy to seek first to obtain
the most favorable price and execution available, in selecting a broker to
execute portfolio transactions for the Fund, the Fund may also give weight to
the ability of a broker to furnish brokerage and research services to the Fund
or the Investment Manager, even if the specific services were not imputed just
to the Fund and were useful to the Investment Manager in advising other clients.
In negotiating commissions with a broker, the Fund may therefore pay a
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higher commission than would be the case if no weight were given to the
furnishing of these supplemental services, provided that the amount of such
commission has been determined in good faith by the Investment Manager to be
reasonable in relation to the value of the brokerage and research services
provided by such broker, which services either produce a direct benefit to the
Fund or assist the Investment Manager in carrying out its responsibilities to
the Fund.
During the Fund's last three fiscal years ended June 30, 1994, 1995, and 1996,
total brokerage commissions paid by the Fund amounted to approximately $95,000,
$96,732, and $113,000 respectively. The Fund does not intend to effect any
brokerage transaction in its portfolio securities with any broker-dealer
affiliated directly or indirectly with the Investment Manager, except for any
sales of portfolio securities that may legally be made pursuant to a tender
offer, in which event the Investment Manager will offset against the management
fee a part of any tender fees that legally may be received by such affiliated
broker-dealer.
Investment decisions for the Fund are made independently from those of the other
funds in the Pilgrim America Group, although it is possible that at times
identical securities will be acceptable for more than one of such funds.
Simultaneous transactions may be effected when the same security is considered
suitable for the investment objectives of more than one of these funds. However,
the position of each fund in the same issuer may vary and the length of time
that each fund may choose to hold its investment in the same issuer may likewise
vary. Due to the cash position of a fund at any given time, an acceptable
security for investment by such fund may not in fact be purchased by that fund
at the same time or at all. To the extent any of the funds seeks to acquire the
same security at the same time, one or more of the funds may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price for such security. Similarly, a fund may not be able to obtain as
high a price for, or as large an execution of, an order to sell a particular
security if one or more of the other funds desires to sell the same security at
the same time. If more than one of such funds simultaneously purchases or sells
the same security, each day's transactions in such security will be averaged as
to price and allocated between such funds in accordance with the total amount of
such security being purchased or sold by each of such funds. It is recognized
that in some cases this system could have a detrimental effect on the price or
value of the security insofar as the Fund is concerned.
A broker or dealer utilized by the Investment Manager may furnish statistical,
research and other information or services that are deemed by the Investment
Manager to be beneficial to a Fund's investment programs. Research services
received from brokers supplement the Investment Manager's own research, and may
include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities, markets,
specific industry groups and individual companies; information on political
developments; portfolio management strategies; performance information on
securities and information concerning prices of securities; and information
supplied by specialized services to the Investment Manager and to the Fund's
Board Members with respect to the performance, investment activities and fees
and expenses of other mutual funds. Such information may be communicated
electronically, orally or in written form. Research services may also include
providing equipment used to communicate research information, arranging meetings
with management of companies and providing access to consultants who supply
research information.
The outside research assistance is useful to the Investment Manager since the
brokers utilized by the Investment Manager as a group tend to follow a broader
universe of securities and other matters than the Investment Manager's staff can
follow. In addition, this research provides the Investment Manager with a
diverse perspective on financial markets. Research services which are provided
to the Investment Manager by brokers are available for the benefit of all
accounts managed or advised by the Investment Manager. In some cases, the
research services are available only from the broker providing such services. In
other cases, the research services may be obtainable from alternative sources in
return for cash payments. The Investment Manager is of the opinion that because
the broker research supplements, rather than replaces, its research, the receipt
of such research does not tend to decrease its expenses, but tends to improve
the quality of its
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investment advice. However, to the extent that the Investment Manager would have
purchased any such research services had such services not been provided by
brokers, the expenses of such services to the Investment Manager could be
considered to have been reduced accordingly. Certain research services furnished
by brokers or dealers may be useful to the Investment Manager with respect to
clients other than a specific Fund. The Investment Manager is of the opinion
that this material is beneficial in supplementing the Investment Manager's
research and analysis, and, therefore, it may benefit a Fund by improving the
quality of the investment advice. The advisory fees paid by a Fund are not
reduced because the Investment Manager receives such services.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are offered at the net asset value next computed following
receipt of the order by the dealer (and/or the Distributor) or by the Fund's
transfer agent, Investors Fiduciary Trust Company ("Transfer Agent"), plus, for
Class A and Class M shares, a varying sales charge depending upon the class of
shares purchased and the amount of money invested, as set forth in the
Prospectus. The Distributor may, from time to time, at its discretion, allow the
selling dealer to retain 100% of such 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 in connection with sales of shares of the Fund
and other funds managed by the Investment Manager. In some instances, such
incentives may be made available only to dealers whose representatives have sold
or are expected to sell significant amounts of such shares. 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. Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of any state.
Certain investors may purchase shares of the Fund with liquid assets with a
value which is readily ascertainable by reference to a domestic exchange price
and which would be eligible for purchase by the Fund consistent with the Fund's
investment policies and restrictions. These transactions only will be effected
if the Investment Manager intends to retain the security in the Fund as an
investment. Assets so purchased by the Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The Fund
reserves the right to amend or terminate this practice at any time.
Special Purchases at Net Asset Value
Class A or Class M shares of the Fund may be purchased at net asset value,
without a sales charge, by persons who have redeemed their Class A or Class M
shares of the 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 Fund's 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.
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Class A or M shares 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 unrelated mutual fund on which
a sales charge was paid or which were subject, at any time, to a Contingent
deferred Sales Charge.
Class A or Class M shares of the Fund 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 the 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 authority"). If an investment by an eligible 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 funds in the Pilgrim America Group), the
Distributor may pay the selling firm 0.25% of the amount invested.
Shareholders of Pilgrim America General Money Market Shares who acquired their
shares by using all or a portion of the proceeds from the redemption of Class A
or Class M shares of the Fund or other funds in the Pilgrim America Group may
reinvest such amount plus any shares acquired through dividend reinvestment in
Class A or Class M shares of the Fund at its current net asset value, without a
sales charge.
Officers, directors and bona fide full-time employees of the Fund and officers,
directors and full-time employees of the Investment Manager, the Distributor,
the Fund's service providers 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, 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, may purchase Class A or Class M shares of
the 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
Fund 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 or M 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 Participating Fund or from Pilgrim America Prime Rate
Trust.
Letters of Intent and Rights of Accumulation
An investor may immediately qualify for a reduced sales charge on a purchase of
Class A or Class M shares of the Fund or any fund in the Pilgrim America Group
which offers Class A shares, Class M shares or shares with front-end sales
charges, 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 Fund. 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 fund in the Pilgrim America
Group 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 America General Money Market
Shares) acquired within 90 days before the Letter of Intent is filed will be
counted towards completion of the
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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.
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 5.75% of the total intended purchase will be held
in escrow at Pilgrim America Group,, 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 to 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 Fund plus shares of the other funds distributed by
the Distributor (excluding Pilgrim America 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
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benefit of a child under the Uniform Gifts 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 advisers, 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.
The reduced sales charge also applies 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 Fund and other funds of the Pilgrim America Group (excluding
Pilgrim America 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.
Redemptions
Payment to shareholders for shares redeemed will be made within three days after
receipt by the Fund's Transfer Agent of the written request in proper form,
except that the Fund may suspend the right of redemption or postpone the date of
payment as to the Fund during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
(the "SEC" or the "Commission") or such Exchange is closed for other than
weekends and holidays; (b) an emergency exists as determined by the Commission
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable; or (c) for such other period as the Commission may
permit for the protection of the Fund's shareholders. At various times, the 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 Fund 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, an investor may incur brokerage costs in converting such
securities to cash. However, the Fund has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act, which contain a formula for
determining the minimum amount of cash to be paid as part of any redemption. In
the event the Fund must liquidate portfolio securities to meet redemptions, it
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, the 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 the Fund has previously
waived the minimum investment requirements.
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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.
Conversion of Class B Shares
A shareholder's Class B shares will automatically convert to Class A shares in
the 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 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.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of the Fund's
shares will be determined once daily as of the close of trading on the New York
Stock Exchange (4:00 p.m. New York time) during each day on which that Exchange
is open for trading. As of the date of this Statement of Additional Information,
the New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Portfolio securities listed or traded on a national securities exchange or
included in the NASDAQ National Market System will be valued at the last
reported sale price on the valuation day. Securities traded on an exchange or
NASDAQ for which there has been no sale that day and other securities traded in
the over-the-counter market will be valued at the last reported bid price on the
valuation day. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under the
authority of the Board of Directors as the primary market. Securities for which
quotations are not readily available and all other assets will be valued at
their respective fair values as determined in good faith by or under the
direction of the Board of Directors of the Company. Any assets or liabilities
initially expressed in terms of non-U.S. dollar currencies are translated into
U.S. dollars at the prevailing market rates as quoted by one or more banks or
dealers on the day of valuation.
The value of the foreign securities traded on exchanges outside the United
States is based upon the price on the exchange as of the close of business of
the exchange preceding the time of valuation (or, if earlier, at the time of the
Fund's valuation). Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents using the foreign exchange quotation in
effect at the time net asset value is computed. The calculation of net asset
value of the Fund may not take place contemporaneously with the determination of
the prices of certain portfolio securities of foreign issuers used in such
calculation. Further, the prices of foreign securities are determined using
information derived from pricing services and other sources. Information that
becomes known to the Fund or its agents after the time that net asset value is
calculated on any business day may be assessed in determining net asset value
per share after the time of receipt of the information, but will not be used to
retroactively adjust the price of the security so determined earlier or on a
prior day. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time when the Fund's net
asset value is determined may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at fair value as determined by
the management and approved in good faith by the Board of Directors.
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In computing the Fund's net asset value, all liabilities incurred or accrued are
deducted from the Fund's total assets. The resulting net assets are divided by
the number of shares of the Fund outstanding at the time of the valuation and
the result (adjusted to the nearest cent) is the net asset value per share.
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
M shares. 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.
Orders received by dealers prior to the close of trading on the New York Stock
Exchange will be confirmed at the offering price computed as of the close of
trading on that Exchange provided the order is received by the Distributor prior
to its close of business that same day (normally 4:00 P.M. Pacific time). It is
the responsibility of the dealer to insure that all orders are transmitted
timely to the Fund. Orders received by dealers after the close of trading on the
New York Stock Exchange will be confirmed at the next computed offering price as
described in the Prospectus.
SHAREHOLDER SERVICES AND PRIVILEGES
As discussed in the Prospectus, the Fund provides a Pre-Authorized Investment
Program for the convenience of investors who wish to purchase shares of the Fund
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 Fund. The minimum investment requirements may be
waived by the Fund 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 Fund 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 Fund on
a periodic basis, the Fund 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 Fund's
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 the 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.
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<PAGE>
(This fee is in addition to the normal Custodian charges paid by the Fund.) The
annual contract maintenance charge 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 Fund. Employers who wish to use shares of
the 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 the Fund under
an Individual Retirement Account ("IRA") pursuant to Section 408(a) of the
Internal Revenue Code. An individual who creates an IRA may contribute annually
certain dollar amounts of earned income, and an additional amount if there is a
non-working spouse. 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 Fund). 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 Fund. An IRA using shares of the 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.
3. Pilgrim America Group will not permit exchanges in violation of
any of the terms and conditions set froth in the Funds'
Prospectus or herein.
4. Telephone redemption requests must meet the following conditions
to be accepted by Pilgrim America Group:
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(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 (60) 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 $50,000.
(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 America 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 America 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 Pilgrim America 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 Funds'
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.
DISTRIBUTIONS
As noted in the Prospectus, the Fund's shareholders have the privilege of
reinvesting both income dividends and capital gains distributions, if any, in
additional shares of the same class at the then current net asset value, with no
sales charge. Alternatively, a shareholder can elect at any time to receive
dividends and/or capital gains distributions in cash. In the absence of such an
election, each purchase of shares of the Fund is made upon the condition and
understanding that the Fund's Transfer Agent is automatically 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 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.
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TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in the Fund.
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Fund must,
among other things: (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loaned, gains from the sale or
other disposition of stock or securities and gains from the sale or other
disposition of foreign currencies, or other income (including gains from
options, futures contracts and forward contracts) derived with respect to the
Fund's business of investing in stocks, securities or currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of the
following assets held for less than three months: (i) stock and securities, (ii)
options, futures and forward contracts (other than options, futures and forward
contracts on foreign currencies), and (iii) foreign currencies (and options,
futures and forward contracts on foreign currencies) which are not directly
related to the Fund's principal business of investing in stocks and securities
(or options and futures with respect to stock or securities); (c) diversify its
holdings so that, at the end of each quarter, (i) at least 50% of the value of
the Fund's total assets is represented by cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities, with such other securities limited in respect of any one issuer to
an amount not greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Fund's total assets in invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any one issuer or of any two or more issuers
that the Fund controls and that are determined to be engaged in the same
business or similar or related businesses; and (d) distribute at least 90% of
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) each taxable year.
The U.S. Treasury Department is authorized to issue regulations providing that
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) will be excluded from the income which qualifies
for purposes of the 90% gross income requirement described above. To date,
however, no such regulations have been issued.
The status of the Fund as a regulated investment company does not involve
government supervision of management or of their investment practices, or
policies. As a regulated investment company, the Fund generally will be relieved
of liability for U.S. federal income tax on that portion of its investment
company taxable income and net realized capital gains which it distributes as
dividends to its shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are subject to a
nondeductible 4% excise tax. To prevent application of the excise tax, the Fund
intends to make distributions in accordance with the calendar year distribution
requirement.
Distributions
Dividends of investment company taxable income (including net short-term capital
gains) are taxable to shareholders as ordinary income. Distributions of
investment company taxable income may be eligible for the corporate
dividends-received deduction to the extent attributable to the Fund's dividend
income from U.S. corporations and if other applicable requirements are met.
However, the alternative minimum tax applicable to corporations may reduce the
benefit of the dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
designated by the Fund as capital gain dividends are taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund's shares have
been hold by a shareholder, and are not eligible for the dividends-received
deduction. Generally, dividends and distributions are taxable to shareholders,
whether received in cash or reinvested in
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shares of the Fund. Any distributions that are not from the Fund's investment
company taxable income or net capital gain may be characterized as a return of
capital to shareholders or in some cases, as capital gain. Shareholders will be
notified annually as to the federal tax status of dividends and distributions
they receive and any tax withheld thereon.
Dividends, including capital gain dividends, declared in October, November or
December with a record date in such month and paid during the following January
will be treated as having been paid by the Fund and received by shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
Distributions by the Fund reduce the net asset value of the Fund shares. Should
a distribution reduce the net asset value below a shareholder's cost basis, the
distribution nevertheless may be taxable to the shareholder as ordinary income
or capital gain an described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
be careful to consider the tax implication of buying shares just prior to a
distribution by the Fund. The price of shares purchased at that time includes
the amount of the forthcoming distribution, but the distribution will generally
be taxable to them.
Passive Foreign Investment Companies
The Fund may invest in stocks of foreign companies that are classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income in investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over the period during
which the Fund held the PFIC stock. The Fund itself will be subject to tax on
the portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (and an interest factor will be added to
the tax, as if the tax had actually been payable in such prior taxable years)
even though the Fund distributes the corresponding income to shareholders.
Excess distributions include any gain from the sale of PFIC stock as well an
certain distributions from a PFIC. All excess distributions are taxable as
ordinary income.
The Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, the Fund generally
would be required to include in its gross income its share of the earnings of a
PFIC on a current basis, regardless of whether any distributions are received
from the PFIC. If this election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
another election may be available that would involve marking to market the
Fund's PFIC shares at the end of each taxable year (and on certain other dates
prescribed in the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at the Fund level
under the PFIC rules would generally be eliminated, but the Fund could, in
limited circumstances, incur nondeductible interest charges. The Fund's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC stock, as well as subject the Fund itself to tax
on certain income from PFIC stock, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not invest in PFIC stock.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries.
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<PAGE>
Sale of Shares
Upon the sale or exchange of his shares, a shareholder will realize a taxable
gain or loss depending upon his basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and generally will be long-term if the shareholder's
holding period for the shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a-period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of the Fund's shares held by the shareholder for six months or less
will be treated for federal income tax purposes as a long-term capital loss to
the extent of any distributions or capital gain dividends received by the
shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges into
account for purposes of determining the amount of gain or loss realized on the
disposition of their shares. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the shareholder subsequently acquires
shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding from the tax basis of the shares
exchanged all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable sales
charge with respect to the newly acquired shares is reduced as a result of
having incurred a sales charge initially. Sales charges affected by this rule
are treated as if they were incurred with respect to the stock acquired under
the reinvestment right.
This provision may be applied to successive acquisitions of stock.
Backup Withholding
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number and to make such certifications as the Fund may require, (2) the
IRS notifies the shareholder or the Fund that the shareholder has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (3) when required to do so, the shareholder fails
to certify that he in not subject to backup withholding. Any amounts withheld
may be credited against the shareholder's federal income tax liability.
Other Taxes
Distributions also may be subject to state, local and foreign taxes. U.S. tax
rules applicable to foreign investors may differ significantly from those
outlined above. This discussion does not purport to deal with all of the tax
consequences applicable to shareholders. Shareholders are advised to consult
their own tax advisers for details with respect to the particular tax
consequences to them of an investment in the Fund.
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<PAGE>
PERFORMANCE INFORMATION
The Fund may, from time to time, include "total return" in advertisements or
reports to shareholders or prospective investors. Quotations of average annual
total return will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Fund over periods of 1, 5 and 10
years (up to the life of the Fund), calculated pursuant to the following formula
which is prescribed by the SEC:
P(1 + T)n = ERV
where:
P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
From time to time, the Fund may advertise its average annual total return over
various periods of time. These total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of the
measuring period. These figures reflect changes in the price of the Fund's
shares and assume that any income dividends and/or capital gains distributions
made by the Fund during the period were reinvested in shares of the Fund.
Figures will be given for one, five and ten year periods (if applicable) and may
be given for other periods as well (such as from commencement of the Fund's
operations, or on a year-by-year basis).
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
where:
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
Additional Performance Quotations
Advertisements of total return will always show a calculation that includes the
effect of the maximum sales charge but may also show total return without giving
effect to that charge. Because these additional quotations will not reflect the
maximum sales charge payable, these performance quotations will be higher than
the performance quotations that reflect the maximum sales charge.
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<PAGE>
Total returns are based on past results and are not necessarily a prediction of
future performance.
Performance Comparisons
In reports or other communications to shareholders or in advertising material,
the Fund may compare the performance of its Class A, Class B, and Class M shares
with that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc., Morningstar, Inc., CDA Technologies, 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 Fund 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 the 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.
The average total return for Class A shares of the Fund for the one-, five-, and
ten-year periods ended June 30, 1996 was 14.30%, 12.75%, and 10.52%,
respectively. The total return for the Class B and Class M Shares for the period
from July 17, 1995 (commencement of sales) through June 30, 1996, was 14.00% and
15.06%, respectively.
GENERAL INFORMATION
The Underwriting Agreement between the Fund and the Distributor was approved on
April 7, 1995, and will continue from year to year thereafter if approved at
least annually (i) by the Board of Directors of the Company or by the vote of a
majority of the outstanding voting securities of the Fund and (ii) by a majority
of the Directors of the Company who are not parties to the Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated without
penalty by either party on 60 days' written notice and shall automatically
terminate in the event of its assignment as defined in the 1940 Act. The
Distributor is a wholly-owned subsidiary of Pilgrim America Group, Inc.
The sales charge retained by the Distributor and the commissions reallowed to
selling dealers are not an expense of the Fund and have no effect on the net
asset value of the Fund. For the fiscal years ended June 30, 1994, 1995, and
1996, total commissions allowed to other dealers were approximately $171,000,
$96,732, and $954,329 respectively. For the fiscal year ended June 30, 1996 and
the fiscal period April 7, 1995 to June 30, 1995, the current Distributor
retained approximately $23,160 and $11,049 or approximately 2.37% and 4.06% of
the total commissions assessed on shares of the Fund. For the period July 1,
1994 to April 7, 1995 and the fiscal year ended June 30, 1994 the former
distributor retained approximately $4,952 and $171,000, or approximately 1.82%
and 5.70%, respectively, of the total commissions assessed on purchases of the
Fund.
Shares of the Fund are acquired at net asset value by Investors Fiduciary Trust
Company, Kansas City, Missouri, as Custodian for Pilgrim Investment Plans, a
unit investment trust for the accumulation of shares of the Fund. As of June 30,
1995, less than 2% of the Fund's then total outstanding shares were held by said
Custodian for the account of such plan holders.
Capitalization -- The Company's authorized capital stock consists of 500,000,000
shares of $.10 par value each, of which 200,000,000 shares are classified as
shares of the Fund, 200,000,000 shares are classified as shares of Pilgrim
America High Yield Fund, and 100,000,000 are not classified. All shares when
issued are fully paid,
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non-assessable, and redeemable. Shares have no preemptive rights. All shares
have equal voting, dividend and liquidation rights. The Board of Directors may
classify or reclassify any unissued shares into shares of any series by setting
or changing in any one or more respects, from time to time, prior to the
issuance of such shares, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or qualifications of such
shares. Any such classification or reclassification will comply with the
provisions of the 1940 Act.
Non-Cumulative Voting -- The shares of the Company have non-cumulative voting
rights which means that holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they choose to do so,
and in such event, the holders of the remaining less than 50% of the shares
voting for the election of the Directors will not be able to elect any person or
persons to the Board of Directors.
Custodian -- The cash and securities owned by the Fund are held by Investors
Fiduciary Trust Company, 127 W. 10th Street, Kansas City, Missouri 64105, as
Custodian, which takes no part in the decisions relating to the purchase or sale
of the Fund's portfolio securities.
Legal Counsel -- Legal matters for the Fund are passed upon by Dechert Price &
Rhoads, 1500 K Street, N.W., Washington, D.C. 20005.
Independent Auditors -- KPMG Peat Marwick LLP, 725 South Figueroa Street, Los
Angeles, California 90017, acts as independent auditors for the Fund.
Other Information -- The Company is registered with the SEC as a management
investment company. Such registration does not involve supervision of the
management or policies of the Fund by any governmental agency. The Prospectus
and this Statement of Additional Information omit certain of the information
contained in the Registration Statement filed with the Commission and copies of
such information may be obtained from the Commission upon payment of the
prescribed fee or examined at the Commission in Washington, D.C. without charge.
Investors of the Fund will be kept informed of its progress through semi-annual
reports showing diversification of portfolio, statistical data and any other
significant data, including financial statements audited by independent
certified public accountants.
FINANCIAL STATEMENTS
The financial statements of the Fund for the fiscal year ended June 30, 1996 are
incorporated herein by reference from the Fund's 1996 Annual Report to
Shareholders dated June 30, 1996.
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