PILGRIM AMERICA INVESTMENT FUNDS INC, 485BPOS, 1996-10-31

PILGRIM AMERICA INVESTMENT FUNDS INC
485BPOS, 1996-10-31

Previous: KINARK CORP, 8-K, 1996-10-31

Next: MANITOWOC CO INC, 10-Q, 1996-10-31

<PAGE>

As filed with the Securities and Exchange Commission on October 31, 1996

Registration No. 2-34552
811-1939
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|

PRE-EFFECTIVE AMENDMENT NO. |_|

POST-EFFECTIVE AMENDMENT NO. 37 |X|

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|

AMENDMENT NO. 25 |X|

---------

PILGRIM AMERICA INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)

Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, Arizona 85004
(Address of Principal Executive Office) (Zip Code)

Registrant's Telephone Number, including Area Code: (800) 331-1080

James M. Hennessy, Esq.
Pilgrim America Investments, Inc.
Two Renaissance Square, 12th Floor, 40 North Central Avenue,
Phoenix, Arizona 85004
(Name and Address of Agent for Service of Process)

---------

With copies to:

Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005

---------

It is proposed that this filing will become effective (check appropriate box)

|X| Immediately upon filing pursuant to
paragraph (b)

|_| 60 days after filing pursuant to
paragraph (a)(1)

|_| 75 days after filing pursuant to
paragraph (a)(2)

|_| on (date) pursuant to paragraph (b)

|_| on (date) pursuant to paragraph (a)(1)

|_| on (date) pursuant to paragraph (a)(2) of
rule 485.

If appropriate, check the following box:

|_| this post effective amendment designates a new effective date for a
previously filed post-effective amendment.

Registrant has registered an indefinite number of shares of common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. Registrant filed its Rule 24f-2 Notice for the fiscal year
ended June 30, 1996 on August 29, 1996.
================================================================================

<PAGE>

PILGRIM AMERICA INVESTMENT FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET

N-1A Location in
Item No. Registration Statement
- -------- ----------------------

Part A: Information Required in Prospectus

1. Cover Page Cover Page
2. Synopsis The Funds at a Glance; Summary of
Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant The Funds Investment Objectives and
Policies; Investment Practices and
Risk Considerations
5. Management of the Fund Management of the Funds
5A. Management's Discussion of Fund *
Performance
6. Capital Stock and Other Securities Additional Information; Dividends,
Distributions & Taxes
7. Purchase of Securities Being Offered Shareholder Guide -- Pilgrim America
Purchase Options; Shareholder Guide --
Purchasing Shares
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings Not Applicable

Part B: Information Required in
Statement of Additional Information

10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History History of the Fund; General
information
13. Investment Objectives and Policies Investment Objectives and Policies;
Investment Restrictions
14. Management of the Registrant Directors and Officers; Management of
the Fund
15. Control Persons and Principal Directors and Officers; General
Holders of Securities Information
16. Investment Advisory and Other Management of the Fund
Services
17. Brokerage Allocation Execution of Portfolio Transactions
18. Capital Stock and Other Securities General Information; Distributions
19. Purchase, Redemption and Pricing Additional Purchase and Redemption
of Securities Being Offered Information
Shareholder Services and Privileges;
Determination of Share Price
20. Tax Status Tax Considerations
21. Underwriters Management of the Fund
22. Calculation of Performance Data Performance Information

23. Financial Statements Financial Statements

* Contained in the Annual Report of Registrant

<PAGE>

EXPLANATORY NOTE

This registration statement contains a single prospectus to be used by
both series of the Registrant and is followed by a separate Statement of
Additional Information for each of the Registrant's Series.

<PAGE>
Prospectus

[LOGO]

Elite Series
Pilgrim America MagnaCap Fund
Pilgrim America High Yield Fund
Pilgrim Government Securities Income Fund

TWO RENAISSANCE SQUARE, 40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, ARIZONA
85004
(800) 331-1080

The Pilgrim America Funds are a family of diversified, open-end and closed-end
investment companies. This Prospectus describes three of the open-end investment
company portfolios, also known as mutual funds (the Funds), each of which has
its own investment objectives and policies. These three portfolios are referred
to as the Elite Series.
------------------------

THE FUNDS

PILGRIM AMERICA MAGNACAP FUND (MagnaCap Fund) seeks growth of capital,
with dividend income as a secondary consideration. In making investments,
the Fund also will consider preservation of capital. The Fund seeks to
achieve its objectives by investing in common stocks of companies that the
investment manager, Pilgrim America Investments, Inc. (Investment
Manager), determines are of high quality based upon the selection criteria
under its rising dividends standards.

PILGRIM AMERICA HIGH YIELD FUND (High Yield Fund) seeks high current
income as its primary objective. As a secondary objective, the Fund also
seeks capital appreciation and, in making any investment decision, will
consider the preservation of capital. The Fund seeks to achieve its
objectives by investing at least 65% of its assets in higher yielding debt
securities, preferred stocks and convertible securities.

PILGRIM GOVERNMENT SECURITIES INCOME FUND (Government Securities Income
Fund) seeks high current income, consistent with liquidity and
preservation of capital. The Fund seeks to achieve its objective by
investing at least 70% of its assets in securities issued or guaranteed by
the U.S. Government, or certain of its agencies and instrumentalities.

------------------------------
Each Fund offers three classes of shares, with varying types and amounts of
sales and distribution charges. These Pilgrim America Purchase Options(TM)
permit you to choose the method of purchasing shares that best suits your
investment strategy.

This Prospectus presents information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about each

Fund, dated , 1996, has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus (that
is, it is legally considered a part of this Prospectus). This Statement is
available free upon request by calling Pilgrim America Group, Inc. (Shareholder
Servicing Agent) at (800) 331-1080.

INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISK, INCLUDING RISK OF LOSS OF
PRINCIPAL. THE FUNDS' SHARES ARE NOT OBLIGATIONS, DEPOSITS, OR ACCOUNTS OF A
BANK AND ARE NOT GUARANTEED BY A BANK. IN ADDITION, THE FUNDS' SHARES ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY. MOREOVER, THE HIGHER YIELDING SECURITIES IN WHICH HIGH
YIELD FUND WILL INVEST ARE ORDINARILY IN THE LOWER RATING CATEGORIES OF
RECOGNIZED RATING AGENCIES OR EQUIVALENT UNRATED SECURITIES, AND ARE COMMONLY
KNOWN AS 'JUNK BONDS.' INVESTMENT IN THIS FUND MAY INVOLVE A HIGHER DEGREE OF
RISK THAN A FUND THAT INVESTS IN INVESTMENT GRADE SECURITIES. INVESTORS SHOULD
ONLY INVEST IN THIS FUND THAT PORTION OF THEIR ASSETS THAT THEY WISH TO COMMIT
TO A PORTFOLIO THAT MAY BE ACCOMPANIED BY A HIGH DEGREE OF RISK.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

------------------------

The date of this Prospectus is , 1996

<PAGE>
THE FUNDS AT A GLANCE*

<TABLE>
<S> <C> <C>
FUND OBJECTIVES AND POLICIES STRATEGY
MAGNACAP FUND Long term growth of capital with income as a The Investment Manager selects companies
secondary consideration. that meet the 'Rising Dividends'
Invests in equity securities that are criteria: consistent dividend increases;
determined to be of high quality by the substantial dividend increases;
Investment Manager based upon certain reinvested substantial earnings; strong
selection criteria. balance sheets; and attractive prices.
Normally fully invested. Principal risk factors: exposure to
financial and market risks that accompany
investment in equities. You can expect
fluctuation in the value of the Fund's
portfolio securities and the Fund's
shares.*
HIGH YIELD FUND High level of current income with capital The Investment Manager selects
appreciation as a secondary objective. high-yielding fixed income securities
Invests at least 65% of its assets in a that do not, in its opinion, involve
diversified portfolio of high-yielding debt undue risk relative to the securities'
securities commonly referred to as 'junk return characteristics.
bonds.' May also invest up to 35% of its Principal risk factors: exposure to
total assets in other types of fixed income financial, market and interest rate risks
securities, preferred and common stocks, and greater credit risks than with
warrants and other securities. higher-rated bonds. You can normally
Normally fully invested. expect greater fluctuation in the value
of the Fund's shares than for the
Government Securities Income Fund,
particularly in response to economic
downturns.*
GOVERNMENT SECURITIES INCOME FUND High level of current income consistent with The Investment Manager analyzes various
liquidity and preservation of capital. U.S. Government securities and selects
Normally invests at least 70% of its assets those offering the highest yield
in securities issued or guaranteed by the consistent with maintaining liquidity and
U.S. Government, or certain of its agencies preserving capital.
and instrumentalities. The Fund does not Principal risk factors: exposure to
invest in highly leveraging derivatives, such financial and interest rate risks, and
as swaps, interest-only or principal-only prepayment risk on mortgage related
stripped mortgage-backed securities or securities. You can normally expect
interest rate futures contracts. fluctuation in the value of the Fund's
Normally fully invested. shares in response to changes in interest
rates, and relatively little fluctuation
in the absence of such changes.*
Pilgrim America Investments, Inc. (the Investment Manager) serves as investment manager to each Fund.

Pilgrim America Investments, Inc. manages and administers over $1.5 billion in assets for the Pilgrim America Funds.
</TABLE>

* This summary description should be read in conjunction with the more

complete description of each Fund's investment objectives and policies and
the Investment Manager elsewhere in this Prospectus. For information
regarding the purchase and redemption of shares of each Fund, refer to the
'Shareholder Guide' below.

<PAGE>
SUMMARY OF EXPENSES

Shares of the Funds are available through independent financial professionals,
national and regional brokerage firms and other financial institutions
(Authorized Dealers). You may select from three separate classes of shares:
Class A, Class B and Class M.

SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M
-------- -------- --------
<S> <C> <C> <C>
Maximum initial sales charge imposed on purchases of MagnaCap Fund
(as a percentage of offering price)............................. 5.75%(1) None 3.50%(1)
Maximum initial sales charge imposed on purchases of High Yield
Fund and Government Securities Income Fund (as a percentage of
offering price)................................................. 4.75%(1) None 3.25%(1)
Maximum contingent deferred sales charge (CDSC) on each fund
(at the lower of original purchase price or the
redemption proceeds)............................................ None(2) 5.00%(3) None
</TABLE>

The Funds have no redemption fees, exchange fees or sales charges on reinvested
dividends.
- ------------------------
(1) Reduced for purchases of $50,000 and over. See 'Class A Shares: Initial
Sales Charge Alternative' and 'Class M Shares: Lower Initial Sales Charge
Alternative.'
(2) A CDSC of no more than 1.00% for shares redeemed in the first or second
year, depending on the amount of purchase, is assessed on redemptions of
Class A shares that were purchased without an initial sales charge as part
of an investment of $1 million or more. See 'Class A Shares: Initial Sales
Charge Alternative.'
(3) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See 'Class B Shares: Deferred Sales Charge
Alternative.'

The percentages shown below reflect the annual operating expenses incurred by
the Class A shares of each of the Funds for the fiscal year ended June 30, 1996
and the Class B and Class M shares of each Fund for the fiscal period of July
17, 1995 (commencement of sales) through June 30, 1996. The annual operating
expenses for certain Funds are subject to waivers which are described in the

footnotes following the table.

ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT DISTRIBUTION OTHER OPERATING
MAGNACAP FUND FEES FEES(1) EXPENSES EXPENSES
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.78% 0.30% 0.60% 1.68%
Class B.................... 0.78% 1.00% 0.60% 2.38%
Class M.................... 0.78% 0.75% 0.60% 2.13%

TOTAL FUND
OTHER OPERATING
EXPENSES EXPENSES
MANAGEMENT DISTRIBUTION (AFTER EXPENSE (AFTER EXPENSE
HIGH YIELD FUND FEES(2) FEES(1) REIMBURSEMENT)(2) REIMBURSEMENT)(2)
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.00% 0.25% 0.75% 1.00%
Class B.................... 0.00% 1.00% 0.75% 1.75%
Class M.................... 0.00% 0.75% 0.75% 1.50%
<CAPTION>

TOTAL FUND
OTHER OPERATING
EXPENSES EXPENSES
GOVERNMENT SECURITIES MANAGEMENT DISTRIBUTION (AFTER EXPENSE (AFTER EXPENSE
INCOME FUND FEES(3) FEES(1)(3) REIMBURSEMENT)(3) REIMBURSEMENT)(3)
- --------------------------- ----------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Class A.................... 0.50% 0.25% 0.76% 1.51%
Class B.................... 0.50% 1.00% 0.76% 2.26%
Class M.................... 0.50% 0.75% 0.76% 2.01%
</TABLE>

3
<PAGE>
- ------------------

(1) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by the
Rules of the National Association of Securities Dealers, Inc. (NASD).

(2) High Yield Fund pays the Investment Manager a fee at an annual rate of 0.75%
of the average daily net assets of the Fund on the first $25 million of net
assets; 0.625% of the average daily net assets over $25 million to $100

million; 0.50% of the average daily net assets over $100 million to $500
million; and 0.40% of the average daily net assets in excess of $500
million. Effective July 1, 1995, the Investment Manager has voluntarily
agreed to waive all or a portion of its fees and to reimburse operating
expenses of the Fund, excluding distribution fees, interest, taxes,
brokerage and extraordinary expenses, so that total operating expenses do
not exceed 1.00% for Class A, 1.75% for Class B and 1.50% for Class M
shares. This expense limitation will apply until June 30, 1997. Without such
waiver, the annualized total fund operating expenses for the fiscal year
ended June 30, 1996 would have been 2.19% for Class A, 2.94% for Class B,
and 2.69% for Class M.

(3) The Investment Manager has agreed to reimburse the Government Securities
Income Fund to the extent that the gross operating costs and expenses of the
Fund, excluding any interest, taxes, brokerage commissions, amortization of
organizational expenses, extraordinary expenses, and distribution (Rule
12b-1) fees on Class B and Class M shares in excess of an annual rate of
0.25% of the average daily net assets of these classes, exceed 1.50% of the
Fund's average daily net assets on the first $40 million of net assets and
1.00% of average daily net assets in excess of $40 million for any one
fiscal year. For the fiscal year ended June 30, 1996, without such
reimbursement, the Fund's operating expenses would have been 1.57% for Class
A, 2.41% for Class B, and 2.16% for Class M.

The purpose of the above table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly as a shareholder in
a Fund. For more complete descriptions of the various costs and expenses, please
refer to 'Shareholder Guide' and 'Management of the Funds.'

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming (i) 5%
annual return and (ii) redemption at the end of the period (unless otherwise
noted):

<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
MAGNACAP FUND HIGH YIELD FUND INCOME FUND
------------------------------- -------------------------------- --------------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A............... $74 $107 $144 $245 $67 $88 $110 $173 $62 $93 $126 $219
Class B............... 74 104 147 272 68 85 115 206 73 101 141 260
Class B (assuming no
redemption)......... 24 74 127 272 18 55 95 206 23 71 121 260
Class M............... 56 99 145 273 47 78 112 206 52 94 137 259
</TABLE>

Use of the assumed 5% return is required by the Securities and Exchange

Commission. The example is not an illustration of past or future investment
results. This example should not be considered a representation of past or
future expenses; actual expenses may be more or less than those shown.

<PAGE>

FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

The following tables present condensed financial information about each Fund.
The tables present historical information based upon a share outstanding through
each Fund's fiscal year. This information has been derived from the financial
statements that are in the Annual Report dated as of June 30, 1996 for MagnaCap
Fund, High Yield Fund, and Government Securities Income Fund. For the periods
ended June 30, 1996 and 1995 for MagnaCap Fund and Government Securities Income
Fund and for the fiscal year ended June 30, 1996 and the eight-month period
ended June 30, 1995 for High Yield Fund, the information in the tables below has
been audited by KPMG Peat Marwick LLP, independent auditors. For all periods
ending prior to July 1, 1994, for MagnaCap Fund and Government Securities Income
Fund, and all periods ending prior to November 1, 1994, for High Yield Fund, the
financial information was audited by another independent auditor. Information
for High Yield Fund for the fiscal years ended October 31, 1986 through October
31, 1989 was not included in such Fund's 1994 financial statements. Further
information about each Fund's performance is contained in that Fund's Annual
Report, which may be obtained without charge.

MAGNACAP FUND

investments............ 0.24 0.24 0.24 0.60 0.59 0.77 -- 0.18
------------- ------- ------- -------- -------- -------- -------- --------
Total distributions.... 0.30 0.30 0.30 0.74 0.73 0.89 0.24 0.34
------------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period................... $ 16.69 $ 16.59 $ 16.63 $ 14.03 $ 12.36 $ 12.05 $ 11.98 $ 10.93
------------- ------- ------- -------- -------- -------- -------- --------
------------- ------- ------- -------- -------- -------- -------- --------
TOTAL RETURN(C)............ 21.31% 18.98% 19.26% 20.61% 9.13% 8.21% 11.93% 5.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)........... $ 235,393 $10,509 $ 1,961 $211,330 $190,435 $197,250 $196,861 $199,892
Ratios to average net
assets:
Expenses................. 1.68% 2.38%(d) 2.13%(d) 1.59% 1.53% 1.53% 1.60% 1.50%
Net investment income.... 0.54% 0.07%(d) 0.32%(d) 0.98% 1.16% 1.09% 1.20% 2.00%
Portfolio turnover rate.... 15% 15% 15% 6% 7% 36% 49% 182%

1990 1989 1988 1987
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of period...... $ 10.52 $ 9.12 $ 11.56 $ 10.66
Income from investment
operations:
Net investment income.... 0.15 0.17 0.15 0.18
Net realized and
unrealized gain (loss)
on investments......... 1.24 1.39 (0.74) 1.21
-------- -------- -------- --------
Total from investment
operations........... 1.39 1.56 (0.59) 1.39
-------- -------- -------- --------
Less distributions from:
Net investment income.... 0.17 0.16 0.12 0.26
Realized gains on
investments............ 1.00 -- 1.73 0.23
-------- -------- -------- --------
Total distributions.... 1.17 0.16 1.85 0.49
-------- -------- -------- --------
Net asset value, end of
period................... $ 10.74 $ 10.52 $ 9.12 $ 11.56
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(C)............ 13.84% 17.32% (6.64)% 13.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)........... $224,059 $204,552 $211,064 $243,729
Ratios to average net
assets:

Expenses................. 1.50% 1.60% 1.50% 1.40%
Net investment income.... 1.40% 1.80% 1.60% 1.70%
Portfolio turnover rate.... 12% 129% 206% 127%
</TABLE>

- ------------------

(a) Commencement of offering of shares.
(b) Pilgrim America Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.
(d) Annualized.

<PAGE>

HIGH YIELD FUND
<TABLE>
<CAPTION>
FOR THE PERIOD JULY
FOR THE 17, 1995(A) TO JUNE EIGHT MONTHS
YEAR ENDED 30, 1996 ENDED YEAR ENDED OCTOBER 31,
JUNE 30, 1996 ---------------------- JUNE 30, --------------------------------
CLASS A CLASS B CLASS M 1995(B)(C) 1994 1993 1992
------------- ------- ------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 6.15 $ 6.20 $ 6.20 $ 5.95 $ 6.47 $ 5.77 $ 5.70
Income (loss) from investment
operations:
Net investment income.......... 0.59 0.48 0.50 0.35 0.54 0.53 0.63
Net realized and unrealized
gain (loss) on investments... 0.16 0.14 0.14 0.21 (0.51) 0.70 0.07
------------- ------- ------- ------------ ------- ------- -------
Total from investment
operations................. 0.75 0.62 0.64 0.56 0.03 1.23 0.70
------------- ------- ------- ------------ ------- ------- -------
Less distributions from:
Net investment income.......... 0.54 0.46 0.48 0.36 0.55 0.53 0.63
Realized gains on
investments.................. -- -- -- -- -- -- --
------------- ------- ------- ------------ ------- ------- -------
Total distributions.......... 0.54 0.46 0.48 0.36 0.55 0.53 0.63
------------- ------- ------- ------------ ------- ------- -------
Net asset value, end of
period......................... $ 6.36 $ 6.36 $ 6.36 $ 6.15 $ 5.95 $ 6.47 $ 5.77
------------- ------- ------- ------------ ------- ------- -------
------------- ------- ------- ------------ ------- ------- -------
TOTAL RETURN(D)................. 12.72% 10.37% 10.69% 9.77% 0.47% 22.12% 12.65%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)................. $18,691 $ 2,374 $1,243 $ 15,950 $16,046 $18,797 $17,034
Ratios to average net assets:
Expenses....................... 1.00%(e) 1.75%(e)(f) 1.50%(e)(f) 2.25%(f)(g) 2.00%(g) 2.02% 2.03%
Net investment income.......... 9.46%(e) 9.02%(e)(f) 9.41%(e)(f) 8.84%(f)(g) 8.73%(g) 8.36% 10.93%
Portfolio turnover rate......... 339% 339% 339% 166% 192% 116% 193%

1991 1990 1989 1988 1987
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period......................... $ 5.03 $ 6.46 $ 7.29 $ 7.25 $ 8.15
Income (loss) from investment
operations:

Net investment income.......... 0.66 0.82 0.88 0.89 0.95
Net realized and unrealized
gain (loss) on investments... 0.74 (1.40) (0.80) 0.03 (0.89)
------- ------- ------- ------- -------
Total from investment
operations................. 1.40 (0.58) 0.08 0.92 0.06
------- ------- ------- ------- -------
Less distributions from:
Net investment income.......... 0.68 0.85 0.91 0.88 0.96
Realized gains on
investments.................. 0.05 -- -- -- --
------- ------- ------- ------- -------
Total distributions.......... 0.73 0.85 0.91 0.88 0.96
------- ------- ------- ------- -------
Net asset value, end of
period......................... $ 5.70 $ 5.03 $ 6.46 $ 7.29 $ 7.25
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(D)................. 30.00% (10.08)% 0.94% 13.54% 0.36%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)................. $23,820 $21,598 $31,356 $41,910 $56,523
Ratios to average net assets:
Expenses....................... 1.89% 1.75% 1.79% 1.46% 1.34%
Net investment income.......... 12.40% 14.11% 12.61% 12.20% 11.68%
Portfolio turnover rate......... 173% 183% 210% 80% 114%
</TABLE>

- ------------------

(a) Commencement of offering of shares.

(b) Pilgrim America Investments, Inc., the Fund's Investment Manager, acquired
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.

(d) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction of
sales charges. Total return information for less than one year is not
annualized.

(e) Prior to the waiver and reimbursement of expenses, and for the period ended
June 30, 1996, the annualized ratio of expenses to average net assets was
2.19%, 2.94% and 2.69% for Class A, B and M shares, respectively. Prior to
the waiver and reimbursement of expenses, and for the period ended June 30,
1996, the annualized ratio of net investment income to average net assets
was 8.27%, 8.05% and 8.51% for Class A, B and M shares, respectively.

(f) Annualized.

(g) Prior to the waiver of expenses, the annualized ratio of expenses to average
net assets was 2.35% in 1995 and 2.07% in 1994. Prior to the waiver of

expenses, the annualized ratio of net investment income to average net
assets was 8.74% in 1995 and 8.66% in 1994.

<PAGE>

GOVERNMENT SECURITIES INCOME FUND

<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JULY 17, 1995(A) TO
YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30,
JUNE 30, 1996 --------------------- ----------------------------------------
CLASS A CLASS B CLASS M 1995(B) 1994 1993(C) 1992
------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $ 12.97 $ 12.95 $ 12.95 $ 12.73 $ 13.96 $ 13.76 $ 13.76
Income (loss) from investment operations:
Net investment income...................... 0.75 0.66 0.68 0.84 0.84 1.13 1.19
Net realized and unrealized
gain (loss) on investments............... (0.32) (0.37) (0.36) 0.24 (1.17) 0.18 --
------------- ------- ------- ------- ------- ------- -------
Total from investment operations......... 0.43 0.29 0.32 1.08 (0.33) 1.31 1.19
------------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income...................... 0.75 0.65 0.68 0.84 0.90 1.11 1.19
Tax return of capital...................... 0.06 -- -- -- -- -- --
------------- ------- ------- ------- ------- ------- -------
Total distributions...................... 0.81 0.65 0.68 0.84 0.90 1.11 1.19
------------- ------- ------- ------- ------- ------- -------
Net asset value, end of period............... $ 12.59 $ 12.59 $ 12.59 $ 12.97 $ 12.73 $ 13.96 $ 13.76
------------- ------- ------- ------- ------- ------- -------
------------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(D).............................. 3.34% 2.25% 2.52% 8.96% (2.50)% 9.82% 8.98%

RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)...... $38,753 $ 73 $ 24 $43,631 $61,100 $87,301 $96,390
Ratios to average net assets:
Expenses................................... 1.51%(e) 2.26%(e)(f) 2.01%(e)(f) 1.40%(g) 1.21% 1.12% 1.10%
Net investment income...................... 5.84%(e) 4.98%(e)(f) 5.73%(e)(f) 6.37%(g) 6.44% 8.06% 8.59%
Portfolio turnover rate...................... 170% 170% 170% 299% 402% 466% 823%

1991 1990 1989 1988 1987
-------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......... $ 13.79 $ 14.23 $ 14.23 $ 14.51 $ 15.15
Income (loss) from investment operations:
Net investment income...................... 1.25 1.25 1.31 1.34 1.40
Net realized and unrealized
gain (loss) on investments............... (0.03) (0.38) 0.02 (0.25) (0.62)
-------- -------- -------- -------- --------
Total from investment operations......... 1.22 0.87 1.33 1.09 0.78
-------- -------- -------- -------- --------

Less distributions from:
Net investment income...................... 1.25 1.31 1.33 1.37 1.42
Tax return of capital...................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions...................... 1.25 1.31 1.33 1.37 1.42
-------- -------- -------- -------- --------
Net asset value, end of period............... $ 13.76 $ 13.79 $ 14.23 $ 14.23 $ 14.51
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(D).............................. 9.27% 6.51% 10.10% 8.00% 5.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)...... $110,674 $122,212 $144,769 $183,979 $288,024
Ratios to average net assets:
Expenses................................... 1.14% 1.14% 1.06% 0.98% 0.93%
Net investment income...................... 9.09% 9.02% 9.45% 9.50% 9.16%
Portfolio turnover rate...................... 429% 448% 537% 360% 433%
</TABLE>

- ------------------

(a) Commencement of offering of shares.

(c) During this period, average daily borrowings were $11,038,044, average
monthly shares outstanding were 6,429,755 and average daily borrowings per
share were $1.72. The Fund earned income and realized capital gains as a
result of entering into reverse repurchase agreements during the six months
from July to December 1992. Such transactions constituted borrowing
transactions and, as a result, the Fund exceeded its 10% borrowing
limitations during that period. Therefore, the Fund's performance was higher
than it would have been had the Fund adhered to its investment restrictions.
This borrowing technique was discontinued subsequent to December 1992 until
April 4, 1995, when shareholders approved a change in the Fund's investment
policies.

(e) Prior to the waiver and reimbursement of expenses for the period ended June
30, 1996, the annualized ratio of expenses to average net assets was 1.57%,
2.41% and 2.16% for Class A, B and M shares, respectively. Prior to the
waiver and reimbursement of expenses for the period ended June 30, 1996, the
annualized ratio of net investment income to average net assets was 5.74%,
4.83% and 5.58% for Class A, B and M shares, respectively.

(f) Annualized.

(g) Prior to the waiver of expenses the ratio of expenses to average net assets
was 1.54% and the ratio of net investment income to average net assets was
6.23%.

<PAGE>

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES

MAGNACAP FUND. This Fund's objective is growth of capital, with dividend income
as a secondary consideration. In selecting investments for the Fund,
preservation of capital is also an important consideration. The Fund normally
seeks to achieve its objectives by investing in equity securities issued by
companies that the Investment Manager determines are of high quality based upon
selection criteria described below. These companies tend to be leaders in their
respective industries and command a high market share. The equity securities in
which the Fund may invest include common stocks, securities convertible into
common stocks, rights or warrants to subscribe for or purchase common stocks,
repurchase agreements and foreign securities (including American Depository
Receipts (ADRs)). Traditionally, the Fund has invested exclusively in common
stocks and cash equivalents and it is anticipated that the Fund normally will be
invested as fully as practicable in equity securities in accordance with its
investment policies. Assets of the Fund not invested in equity securities may be
invested in high-quality debt securities, as described in 'Investment
Techniques--Temporary Defensive and Other Short-Term Positions.' In a period
that the Investment Manager believes presents weakness in the stock market or in
economic conditions, the Fund may establish a defensive position to attempt to
preserve capital and increase its investment in these instruments.

MagnaCap Fund will be managed in accordance with the Rising Dividends Philosophy
that the Investment Manager has employed in evaluating companies for the Fund
since 1979. The Investment Manager generally requires that portfolio companies
meet the following criteria:

1. CONSISTENT DIVIDEND INCREASES. A company must have increased its dividend at
least eight out of the last ten years with no year showing a decrease.

2. SUBSTANTIAL DIVIDEND INCREASES. A company must have increased its dividend
at least 100% over the past ten years.

3. REINVESTED EARNINGS. Dividend payout must be less than 65% of current
earnings.

4. STRONG BALANCE SHEET. Long-term debt should be no more than 25% of total
capitalization.

5. ATTRACTIVE PRICE. The current price should be in the lower half of the
stock's price/earnings ratio range for the past ten years.

While the Investment Manager also considers other factors in selecting
investments for the Fund, it believes that companies with a pattern of rising
dividends will help the Fund attain its principal objective of growth of
capital. Historically, regulated utility companies generally have met the Fund's
investment philosophy and the Fund has invested in utility companies with
long-term debt in excess of 25% of total capitalization. MagnaCap Fund may not
invest more than 5% of its total assets in the securities of companies which,
including predecessors, have not had a record of at least three years of
continuous operations, and it may not invest in any restricted securities.

HIGH YIELD FUND. This Fund's primary investment objective is to seek a high
level of current income and its secondary objective is capital appreciation,
with preservation of capital as a consideration. The Fund normally seeks to
achieve its objectives by investing at least 65% of its assets in a diversified
portfolio of higher yielding debt securities, including preferred stock and
convertible securities (High Yield Securities),that do not in the opinion of the
Investment Manager involve undue risk relative to their expected return
characteristics. High Yield Securities, which are commonly known as junk bonds,
are ordinarily lower rated and include equivalent unrated securities.

Assets of the Fund not invested in High Yield Securities may be invested
(ordinarily not to exceed 35% of the Fund's assets) in common stocks; preferred
stocks rated Baa or better by Moody's Investor Services, Inc. (Moody's) or BBB
or better by Standard and Poor's Corporation (S&P); debt obligations of all
types rated Baa or higher by Moody's or BBB or better by S&P; U.S. Government
securities; warrants; foreign debt securities of any rating (not to exceed 10%
of the Fund's total assets at the time of investment); money market instruments,
including repurchase agreements on U.S. Government securities; other mortgage-
related securities; financial futures and related options; and participation
interests and assignments in

8
<PAGE>
floating rate loans and notes. See 'Investment Practices and Risk
Considerations--High Yield Securities' for information on High Yield Securities.

GOVERNMENT SECURITIES INCOME FUND. This Fund's investment objective is to seek
high current income, consistent with liquidity and preservation of capital. The
Fund normally seeks to achieve its objectives by investing at least 70% of its
total assets in securities issued or guaranteed by the U.S. Government and the
following agencies or instrumentalities of the U.S. Government: GNMA, Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Association (FHLMC). The 70% threshold may not be met due to changes in value of
the Fund's portfolio or due to the sale of portfolio securities due to
redemptions. In such instances, further purchases by the Fund will be of U.S.
Government Securities until the 70% level is restored. The remainder of the
Fund's assets may be invested in securities issued by other agencies and
instrumentalities of the U.S. Government and in instruments collateralized by
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.

The U.S. Government Securities in which the Fund may invest include, but are not
limited to, the following: (1) direct obligations of the U.S. Treasury including
Treasury bills (maturities of one year or less), Treasury notes (maturities of
one to ten years), and Treasury bonds (generally maturities of greater than ten
years and up to 30 years), and (2) mortgage-backed securities that are issued or
guaranteed by GNMA, FNMA, or FHLMC. The Fund may invest in short-term,
intermediate-term and long term U.S. Government Securities. The Investment
Manager will determine the exact composition and weighted average maturity of
the Fund's portfolio on the basis of its judgment of existing market conditions.
The Fund does not invest in highly leveraged derivatives, such as swaps,
interest-only or principal-only stripped mortgage-backed securities, or interest
rate futures contracts.

INVESTMENT PRACTICES AND RISK CONSIDERATIONS

The following pages contain information about certain types of securities in
which the Funds may invest and strategies the Funds may employ in pursuit of the
investment objectives. See the Statement of Additional Information of each Fund
for more detailed information on these investment techniques and the securities
in which the Funds may invest.

CONSIDERATIONS BEFORE INVESTING. The investment objectives and policies of the
Funds described above should be carefully considered before investing. There is
no assurance that a Fund will achieve its investment objectives. As with any
security, an investment in a Fund's shares involves certain risks, including
loss of principal. The Funds are subject to varying degrees of financial, market
and credit risks.

HIGH YIELD SECURITIES. High Yield Fund will invest in High Yield Securities,
which are high yield/high risk debt securities that are rated lower than Baa by
Moody's or BBB by S&P, or if not rated by Moody's or S&P, of equivalent quality.
High Yield Securities often are referred to as 'junk bonds' and include certain
corporate debt obligations, higher yielding preferred stock and mortgage-related
securities, and securities convertible into the foregoing. Investments in High
Yield Securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal and
income risk. Generally, the Fund will invest in securities rated no lower than B
by Moody's or S&P, unless the Investment Manager believes the financial
condition of the issuer or other available protections reduce the risk to the
Fund. For example, the Fund may invest in such a security if the Investment
Manager believes the issuer's assets are sufficient for the issuer to repay its
outstanding obligations. Nevertheless, the Fund may invest in securities rated C
or D if the Investment Manager perceives greater value in these securities than
it believes is reflected in such securities' prevailing market price.

High Yield Securities are not considered to be investment grade. They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of High
Yield Securities have been found to be less sensitive to interest-rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in High
Yield Securities prices. In the case of High Yield Securities structured as

9
<PAGE>
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities that pay interest periodically and in cash.

The secondary market in which High Yield Securities are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Fund could sell a
High Yield Security, and could adversely affect the daily net asset value of the
Fund's shares. At times of less liquidity, it may be more difficult to value
High Yield Securities because this valuation may require more research, and

elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available. In pursuing the Fund's objectives, the
Investment Manager seeks to identify situations in which the rating agencies
have not fully perceived the value of the security.

Based upon the weighted average ratings of all High Yield Securities held during
High Yield Fund's most recent fiscal year, the percentage of the Fund's total
High Yield Securities represented by (1) High Yield Securities rated by a
nationally recognized statistical rating organization, separated into each
applicable rating category (Aaa, Baa, Ba, B, Caa, or Ca by Moody's or AAA, BBB,
BB, B, CCC, or CC by S&P) by monthly dollar-weighted average is AAA-0%, BBB-0%,
BB-22.67%, B-68.25%, CCC-3.51%, and CC-0%, respectively, and (2) unrated High
Yield Securities as a group-5.57%.

The following are excerpts from Moody's description of its bond ratings:
Ba--judged to have speculative elements; their future cannot be considered as
well assured. B--generally lack characteristics of the desirable investment.
Caa--are of poor standing; such issues may be in default or there may be present
elements of danger with respect to principal or interest. Ca--speculative in a
high degree; often in default. C--lowest rate class of bonds; regarded as having
extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3
to rating categories. The modifier 1 indicates that the security is in the
higher end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking towards the lower end of the category. The following are
excerpts from S&P's description of its bond ratings: BB, B, CCC, CC,
C--predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of the obligation; BB indicates the lowest
degree of speculation and C the highest. S&P applies indicators '+,' no
character, and '-' to its rating categories. The indicators show relative
standing within the major rating categories.

INTERNATIONAL SECURITIES. MagnaCap Fund may invest up to 5% of its total assets
in certain foreign securities (including ADRs). High Yield Fund may invest up to
10% of its total assets in debt obligations (including preferred stocks) issued
or guaranteed by foreign corporations, certain supranational entities (such as
the World Bank) and foreign governments (including political subdivisions having
taxing authority) or their agencies or instrumentalities, including ADRs. These
securities may be denominated in either U.S. dollars or in non-U.S. currencies.
There are certain risks in owning foreign securities, including those resulting
from: (i) fluctuations in currency exchange rates; (ii) devaluation of
currencies; (iii) 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.

MORTGAGE-RELATED SECURITIES. Government Securities Income Fund may invest up to
100% of its assets in certain types of mortgage-related securities. High Yield
Fund may invest up to 35% of its total assets in mortgage-related securities.
Investments in mortgage-related securities involve certain risks. Although
mortgage loans underlying a mortgage-backed security may have maturities of up
to 30 years, the actual average life of a mortgage-backed security typically
will be substantially less because (1) the mortgages will be subject to normal
principal amortization, and (2) may be prepaid prior to maturity due to the sale
of the underlying property, the refinancing of the loan or foreclosure.
Prepayment rates vary widely and cannot be accurately predicted. They may be
affected by changes in market interest rates. Therefore,

10
<PAGE>
prepayments will be reinvested at rates that are available upon receipt, which
likely will be higher or lower than the original yield on the certificates.
Accordingly, the actual maturity and realized yield on mortgage-backed
securities will vary from the designated maturity and yield on the original
security based upon the prepayment experience of the underlying pool of
mortgages.

In periods of declining interest rates, prices of fixed income securities tend
to rise. However, during such periods, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
these prepayments must be reinvested at lower rates. In addition, the value of
these securities may fluctuate in response to the market's perception of the
creditworthiness of the issuers of mortgage-related securities owned by a Fund.
Additionally, although mortgages and mortgage-related securities are generally
supported by some form of government or private guarantee and/or insurance,
there is no assurance that private guarantors or insurers will be able to meet
their obligations.

RESTRICTED AND ILLIQUID SECURITIES. High Yield Fund may invest up to 15% of its
net assets in restricted and illiquid securities. The Fund may invest in an
illiquid or restricted security if the Investment Manager believes that it
presents an attractive investment opportunity. Generally, a security is
considered illiquid if it cannot be disposed of within seven days. This
illiquidity might prevent the sale of the security at a time when the Investment
Manager might wish to sell, and these securities could have the effect of
decreasing the overall level of the Fund's liquidity. Further, the lack of an
established secondary market may make it more difficult to value illiquid
securities, requiring the Fund to rely on judgments that may be somewhat
subjective in determining value, which could vary from the amount the Fund could
realize upon disposition. Restricted securities, including private placements,
are subject to legal or contractual restrictions on resale. They can be eligible
for purchase without Securities and Exchange Commission registration by certain
institutional investors known as 'qualified institutional buyers,' and under the
Fund's procedures, restricted securities could be treated as liquid. However,
some restricted securities may be illiquid and restricted securities that are
treated as liquid could be less liquid than registered securities traded on
established secondary markets. The Fund also may be subject to a more
restrictive limitation on its investment in illiquid securities as required by
the securities laws of certain states.

U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities.
U.S. Government securities include direct obligations of the U.S. Treasury (such
as U.S. Treasury bills, notes and bonds) and obligations directly issued or
guaranteed by U.S. Government agencies or instrumentalities. Some obligations
issued or guaranteed by agencies or instrumentalities of the U.S. Government are
backed by the full faith and credit of the U.S. Government (such as GNMA
certificates); others are backed only by the right of the issuer to borrow from
the U.S. Treasury (such as obligations of FNMA); and still others are backed
only by the credit of the instrumentality (such as obligations of FHLMC), and
thus may be subject to varying degrees of credit risk. While U.S. Government
securities provide substantial protection against credit risk, they do not
protect investors against price declines in the securities due to changing
interest rates. Investors also should refer to the discussion of
'Mortgage-Related Securities.'

BORROWING. The Funds may borrow from banks solely for temporary or emergency
purposes up to certain amounts (10% of net assets in the case of Government
Securities Income Fund, 5% of net assets in the case of MagnaCap Fund and High
Yield Fund). Government Securities Income Fund may not make any additional
investment while any such borrowings exceed 5% of its total assets. The
Government Securities Income Fund's entry into reverse repurchase agreements and
dollar-roll transactions and any Fund's entry into delayed delivery transactions
(including those related to pair-offs) shall not be subject to the above limits
on borrowings. Borrowing may exaggerate the effect on net asset value (NAV) of
any increase or decrease in the NAV of a Fund, and money borrowed will be
subject to interest costs.

DOLLAR ROLL TRANSACTIONS. Government Securities Income Fund may engage in
dollar roll transactions with respect to mortgage-backed securities issued by
GNMA, FNMA and FHLMC in order to enhance portfolio returns and manage prepayment
risks. In a dollar roll transaction, the Fund sells a mortgage security held in
the portfolio to a financial institution such as a bank or broker-dealer, and
simultaneously agrees to repurchase a substantially similar security from the
institution at a later date at an agreed upon price. During the period between
the sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term

11
<PAGE>
instruments, and the income from these investments, together with any additional
fee income received on the sale, could generate income for the Fund exceeding
the yield on the sold security. When it enters into a dollar roll transaction,
the Fund will maintain with its custodian in a segregated account cash or high-
quality debt securities in a dollar amount sufficient to make payment for the
obligations to be repurchased. These securities are marked to market daily and
are maintained until the transaction is settled.

LENDING PORTFOLIO SECURITIES. In order to generate additional income, each 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 the Investment Manager. The borrower at all times during the
loan must maintain with that Fund cash or high quality securities or 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 dividends or 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. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.

PAIRING OFF TRANSACTIONS. Government Securities Income Fund engages in a
pairing-off transaction when it commits to purchase a security at a future date,
and then the Fund 'pairs-off' the purchase with a sale of the same security
prior to or on the original settlement date. At all times when the Fund has an
outstanding commitment to purchase securities, the Fund will maintain with its
custodian in a segregated account cash or high-quality debt securities equal to
the value of the outstanding purchase commitments. When the time comes to pay
for the securities acquired on a delayed delivery basis, the Fund will meet its
obligations from the available cash flow, sale of the securities held in the
separate account, sale of other securities or, although it would not normally
expect to do so, from sale of the when-issued securities themselves (which may
have a market value greater or less than the Fund's payment obligation). Whether
a pairing-off transaction produces a gain for the Fund depends upon the movement
of interest rates. If interest rates decease, then the money received upon the
sale of the same security will be greater than the anticipated amount needed at
the time the commitment to purchase the security at the future date was entered
and the Fund will experience a gain. However, if interest rates increase, then
the money received upon the sale of the same security will be less than the
anticipated amount needed at the time the commitment to purchase the security at
the future date was entered and the Fund will experience a loss.

REVERSE REPURCHASE AGREEMENTS. Government Securities Income Fund may enter into
reverse repurchase agreement transactions, which involve the sale of U.S.
Government Securities held by the Fund, with an agreement that the Fund will
repurchase the securities at an agreed upon price and date. The Fund will employ
reverse repurchase agreements when necessary to meet unanticipated net
redemptions and avoid liquidation of portfolio investments during unfavorable
market conditions. At the time it enters into a reverse repurchase agreement,
the Fund will place in a segregated account with its custodian cash or
high-quality debt securities having a dollar value equal to the repurchase
price. Reverse repurchase agreements, together with the Fund's other borrowings,
may not exceed 33 1/3% of the Fund's total assets.

USE OF DERIVATIVES. Generally, derivatives can be characterized as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset or assets. The Funds will not invest in highly
leveraging derivatives, such as interest-only or principal-only stripped
mortgage-backed securities or swaps. Government Securities Income Fund and High
Yield Fund may invest in U.S. Government agency mortgage-backed securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including GNMA, FNMA, and FHLMC. These instruments might be
considered derivatives.The primary risks associated with these instruments is
the risk that their value will change with changes in interest rates and
prepayment risk. For information on mortgage-backed securities, see "Investment
Practices and Risk Considerations--Mortgage-Related Securities" in this

Prospectus, "Investment Objective and Policies--U.S. Government Securities" in
Government Securities Income Fund's Statement of Additional Information, and
"Investment Objectives and Policies--Mortgage-Related Securities" in High Yield
Fund's Statement of Additional Information.

Other uses of derivatives that may be employed only by High Yield Fund include
writing covered call options; purchasing call options; and engaging in financial
futures and related options. It is expected that these instruments ordinarily
will not be used for High Yield Fund; however, the Fund may make occasional use
of these techniques. When the Fund writes a covered call option, it receives a
premium for entering into a contract to sell a security in the future at an
agreed upon price and date. The Fund would write a call option if it believes
that the premium would increase total return. The primary risk of writing call
options is that, during the option period, the covered call writer has, in
return for the premium on the option, given up the opportunity to profit from a
price increase in the underlying securities above the exercise price. The Fund
may purchase call options for the purpose of "closing out" a position on a
security on which it has already written a call option.

High Yield Fund also may use financial futures contracts and related options
for "hedging" purposes. The Fund would purchase a financial futures contract
(such as an interest rate futures contract or securities index futures contract)
to protect against a decline in the value of its portfolio or to gain exposure
to securities which the Fund otherwise wishes to purchase. A risk of using
financial futures contracts for hedging purposes is that the Investment Manager
might imperfectly judge the market's direction, so that the hedge might not
correlate to the market's movements and may be ineffective. Furthermore, if the
Fund buys a futures contract to gain exposure to securities, the Fund is exposed
to the risk of change in the value of the underlying securities. For information
on options on securities and financial futures and related options, see
"Investment Objectives and Policies--Option Writing" and "--Financial Futures
Contracts and Related Options" in High Yield Fund's Statement of Additional
Information.

TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS. Each Fund's assets may be
invested in certain short-term, high-quality debt instruments for the following
purposes: (i) to meet anticipated day-to-day operating expenses; (ii) pending
the Investment Manager's ability to invest cash inflows; (iii) to permit a Fund
to meet redemption requests; and (iv) for temporary defensive purposes. The
short-term instruments in which MagnaCap and High Yield Funds may invest
include: (i) short-term obligations of the U.S. Government, foreign governments
and their agencies, instrumentalities, authorities or political subdivisions;
(ii) other high-quality short-term debt securities; (iii) commercial paper,
including master notes; (iv) bank obligations, including certificates of
deposit, time deposits and bankers' acceptances; and (v) repurchase agreements.
The short-term instruments in which the Government Securities Income Fund may
invest include short-term U.S. Government Securities and repurchase agreements
on U.S. Government Securities.

<PAGE>
ALL FUNDS: DIVERSIFICATION AND CHANGES IN POLICIES

Each Fund is diversified, so that with respect to 75% of its assets, it may not
invest more than 5% of its assets (measured at market value at the time of
investment) in securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.

The first sentence in the description of each Fund under 'The Funds' Investment
Objectives and Policies,' above, states the Fund's investment objectives. These
investment objectives are 'fundamental.' The other investment policies of
Government Securities Income Fund described in the first paragraph under 'The
Funds' Investment Objectives and Policies,'--'Government Securities Income Fund'
are also 'fundamental.' Fundamental policies may only be changed with the
approval of a majority of shareholders of the pertinent Fund. Other investment
policies of any of the Funds may be changed by the Board of Directors of that
Fund. Each Fund is subject to investment restrictions that are described in that
Fund's Statement of Additional Information under 'Investment Restrictions.' Some
of those restrictions are designated as 'fundamental.' These fundamental
restrictions as well as the diversified status of each Fund require a vote of a
majority of the shareholders of the relevant Fund to be changed.

<PAGE>
SHAREHOLDER GUIDE

PILGRIM AMERICA PURCHASE OPTIONS(TM)

You may select from three separate classes of shares: Class A, Class B and Class
M, each of which represents an identical interest in a Fund's investment
portfolio, but are offered with different sales charges and distribution fee
(Rule 12b-1) arrangements. These sales charges and fees are shown and contrasted
in the chart below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS M
---------- ---------- ----------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases of MagnaCap Fund (1)... 5.75% None 3.50%
Maximum Sales Charge on Purchases of High Yield Fund and
Government Securities Income Fund (1).................. 4.75% None 3.25%
CDSC..................................................... None (2) 5.00% (3) None
Annual Distribution Fees (4)............................. 0.25% (5) 1.00% 0.75%
Maximum Purchase......................................... Unlimited $ 250,000 $1,000,000
Automatic Conversion to Class A.......................... N/A 8 Years N/A
</TABLE>

----------------------------
(1) Imposed upon purchase. Reduced for purchases of $50,000 or more.
(2) For investments of $1 million or more, a CDSC of no more than 1%
is assessed on redemptions made within one or two years from

purchase, depending on the amount of purchase. See 'Class A
Shares: Initial Sales Charge Alternative.'
(3) Imposed upon redemption within 6 years from purchase. Fee has
scheduled reductions after the first year. See 'Class B Shares:
Deferred Sales Charge Alternative.'
(4) Annual asset-based distribution charge.
(5) MagnaCap Fund imposes an annual distribution fee of 0.30%.

When choosing between classes, investors should carefully consider the ongoing
annual expenses along with the initial sales charge or CDSC. The relative impact
of the initial sales charges and ongoing annual expenses will depend on the
length of time a share is held. Orders for Class B shares and Class M shares in
excess of $250,000 and $1,000,000, respectively, will be accepted as orders for
Class A shares or declined. You should discuss which Class of shares is right
for you with your Authorized Dealer.

CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the Funds
are sold at the NAV per share in effect plus a sales charge as described in the
following table. For waivers or reductions of the Class A shares sales charges,
see 'Special Purchases without a Sales Charge' and 'Reduced Sales Charges.'

<TABLE>
<CAPTION>
MAGNACAP FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.......................... 4.50% 4.71% 3.75%
$100,000 but less than $250,000......................... 3.50% 3.63% 2.75%
$250,000 but less than $500,000......................... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000....................... 2.00% 2.04% 1.75%
</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 4.75% 4.99% 4.25%
$50,000 but less than $100,000.......................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000......................... 3.50% 3.63% 3.00%
$250,000 but less than $500,000......................... 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000....................... 2.00% 2.04% 1.75%
</TABLE>

There is no initial sales charge on purchases of $1,000,000 or more. However,
the Distributor will pay Authorized Dealers of record commissions at the rates
shown in the table below for investments subject to

14
<PAGE>
a CDSC. If shares are redeemed within one or two years of purchase, depending on
the amount of the purchase, a CDSC will be imposed on certain redemptions as
follows:

<TABLE>
<CAPTION>
DEALER PERIOD DURING
ON PURCHASES OF: CDSC ALLOWANCE WHICH CDSC APPLIES
- ------------------------------------------------------------ ----- --------- ------------------
<S> <C> <C> <C>
$1,000,000 but less than $2,500,000......................... 1.00% 1.00% 2 Years
$2,500,000 but less than $5,000,000......................... 0.50% 0.50% 1 Year
$5,000,000 and over......................................... 0.25% 0.25% 1 Year
</TABLE>

CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. If you choose the deferred
sales charge alternative, you will purchase Class B shares at their NAV per
share without the imposition of a sales charge at the time of purchase. Class B
shares that are redeemed within six years of purchase, however, will be subject
to a CDSC as described in the table that follows. Class B shares of the Funds
are subject to a distribution fee at an annual rate of 1.00% of the average
daily net assets of the Class, which is higher than the distribution fees of
Class A or Class M shares. The higher distribution fees mean a higher expense
ratio, so Class B shares pay correspondingly lower dividends and may have a
lower NAV than Class A or Class M shares. In connection with sales of Class B
shares, the Distributor compensates Authorized Dealers at a rate of 4% of
purchase payments subject to a CDSC. Orders for Class B shares in excess of
$250,000 will be accepted for Class A shares or declined.

The amount of the CDSC charge is determined as a percentage of the lesser of the
NAV of the Class B shares at the time of purchase or redemption. No charge will
be imposed for any net increase in the value of shares purchased during the
preceding six years in excess of the purchase price of such shares or for shares
acquired either by reinvestment of net investment income dividends or capital
gain distributions. The percentage used to calculate the CDSC will depend on the
number of years since you invested the dollar amount being redeemed according to
the following table:

<TABLE>
<CAPTION>
YEAR OF
REDEMPTION
AFTER PURCHASE CDSC
- ------------------------------------------------------------------ ----
<S> <C>
First........................................................... 5%

Second.......................................................... 4%
Third........................................................... 3%
Fourth.......................................................... 3%
Fifth........................................................... 2%
Sixth........................................................... 1%
Seventh and following........................................... 0%
</TABLE>

To determine the CDSC payable on redemptions of Class B shares, the Funds will
first redeem shares in accounts that are not subject to a CDSC; second, shares
acquired through reinvestment of net investment income dividends and capital
gain distributions; third, shares purchased more than 6 years prior to
redemption; and fourth, shares subject to a CDSC in the order in which such
shares were purchased. Using this method, your sales charge, if any, will be at
the lowest possible CDSC rate.

Class B shares will automatically convert into Class A shares approximately
eight years after purchase. For additional information on the CDSC and the
conversion of Class B shares, see the Statement of Additional Information.

CLASS M SHARES: LOWER INITIAL SALES CHARGE ALTERNATIVE. An investor who
purchases Class M shares pays a sales charge at the time of purchase that is
lower than the sales charge applicable to Class A shares and does not pay any
CDSC upon redemption. Class M shares have a higher annual distribution fee than
Class A shares, but lower than Class B. The higher distribution fees mean a
higher expense ratio than Class A but lower than Class B. Class M shares pay
correspondingly lower dividends and may have a lower NAV per share than Class A
shares, but generally pay higher dividends and have a higher NAV per share than
Class B shares. Orders for Class M shares in excess of $1,000,000 will be
accepted as an order for Class A

15
<PAGE>
shares or declined. The public offering price of Class M shares is the NAV of
each Fund plus a sales charge, which, as set forth below, varies based on the
size of the purchase:

<TABLE>
<CAPTION>
MAGNACAP FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 3.50% 3.63% 3.00%
$50,000 but less than $100,000.......................... 2.50% 2.56% 2.00%
$100,000 but less than $250,000......................... 1.50% 1.52% 1.00%
$250,000 but less than $500,000......................... 1.00% 1.01% 1.00%
$500,000 and over....................................... None None None

</TABLE>

<TABLE>
<CAPTION>
HIGH YIELD FUND AND GOVERNMENT SECURITIES INCOME FUND
- ------------------------------------------------------------------------------------------------------------
DEALERS'
REALLOWANCE AS
AS A % OF OFFERING AS A % OF A % OF
AMOUNT OF TRANSACTION PRICE PER SHARE NAV OFFERING PRICE
- -------------------------------------------------------- ------------------ --------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 3.25% 3.36% 3.00%
$50,000 but less than $100,000.......................... 2.25% 2.30% 2.00%
$100,000 but less than $250,000......................... 1.50% 1.52% 1.25%
$250,000 but less than $500,000......................... 1.00% 1.01% 1.00%
$500,000 and over....................................... None None None
</TABLE>

Class M shares do not convert to Class A.

REDUCED SALES CHARGES. An investor may immediately qualify for a reduced sales
charge on a purchase of Class A or Class M shares of a Fund or for other Funds
in the Pilgrim America Group which offer Class A shares, Class M Shares, or
shares with front-end sales charges ('Participating Funds') by completing the
Letter of Intent section of the Application. Executing the Letter of Intent
expresses an intention to invest during the next 13 months a specified amount,
which, if made at one time, would qualify for a reduced sales charge. An amount
equal to the Letter amount multiplied by the maximum sales charge imposed on
purchases of the applicable Fund and class will be restricted within your
account to cover additional sales charges that may be due if your actual total
investment fails to qualify for the reduced sales charges. See the New Account
Application or the Statement of Additional Information for details on the Letter
of Intent option or contact the Shareholder Servicing Agent at (800) 331-1080
for more information.

The sales charge for your investment may also be reduced by taking into account
the current value of your existing holdings in the Fund or may other funds in
the Pilgrim America Group (excluding Pilgrim America Money Market Shares)
('Rights of Accumulation'). The reduced sales charges apply 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 account(s) for the 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 other employee benefit plans qualified under Section 401 of
the Internal Revenue Code); and (v) by trust companies, registered investment
advisers, banks and bank trust departments for accounts over which they exercise
exclusive discretionary investment authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity. See the New Account Application
or the Statement of Additional Information for details or contact the

Shareholder Servicing Agent at (800) 331-1080 for more information.

For the purposes of Rights of Accumulation and the Letter of Intent Privilege,
shares held by investors in the Pilgrim America Group of Funds which impose a
CDSC may be combined with Class A or Class M shares for a reduced sales charge
but will not affect any CDSC which may be imposed upon the redemption of shares
of a Fund which imposes a CDSC.

WAIVERS OF CDSC. The CDSC on Class A or Class B shares will be waived in the
case of redemption following the death or permanent disability of a shareholder
if made within on year of death or initial determination of permanent
disability. The waiver is available for total or partial redemptions of shares
of each Fund owned by an individual or an individual in joint tenancy (with
rights of survivorship), but only for those share held at the time of death or
initial determination of permanent disability. The CDSC also may be waived for
Class B Shares redeemed pursuant to a Systematic Withdrawal Plan, up to a
maximum of 12% per year of a shareholder's

16
<PAGE>
account value based on the value of the account at the time the plan is
established and annually thereafter, provided all dividends and distributions
are reinvested and the total redemptions do not exceed 12% annually. In
determining whether a CDSC is applicable, it will be assumed that shares held in
the shareholder's account that are not subject to such charge are redeemed
first.

The CDSC also will be waived in the case of a total or partial redemption of
shares in a Fund in connection with any mandatory distribution from a
tax-deferred retirement plan or an IRA. The shareholder must have attained the
age of 70 1/2 to qualify for the CDSC waiver relating to mandatory
distributions. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation of service. The
shareholder must notify the Transfer Agent either directly or through the
Distributor, at the time of redemption, that the shareholder is entitled to a
waiver of the CDSC. The CDSC Waiver Form included in the New Account Application
must be completed and provided to the Transfer Agent at the time of the
redemption request. The waiver will be granted subject to confirmation of the
grounds for the waiver. The foregoing waivers may be changed at any time.

REINSTATEMENT PRIVILEGE. Class B shareholders who have redeemed their shares in
any Pilgrim America Group mutual fund within the previous 90 days may repurchase
Class B shares at NAV (at the time of reinstatement) in an amount up to the
redemption proceeds. Reinstated Class B shares will retain their original cost
and purchase date for purposes of the CDSC. The amount of any CDSC also will be
reinstated.

To exercise this privilege, a written order for the purchase of shares must be

received by the Transfer Agent or be postmarked within 90 days after the date of
redemption. This privilege can be used only once per calendar year. If a loss is
incurred on the redemption and the reinstatement privilege is used, some or all
of the loss may not be allowed as a tax deduction. See 'Tax Considerations' in
the Statement of Additional Information.

SPECIAL PURCHASE WITHOUT A SALES CHARGE. Class A or Class M shares may be
purchased at NAV without a sales charge by:

1) Class A or Class M shareholders who have redeemed their shares in any
Pilgrim America Group mutual fund withing the previous 90 days may
repurchase shares at NAV in an amount equal to their net redemption
proceeds. Authorized Dealers who handle these purchases may charge fees
for this service.

2) 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 CDSC.

3) Any charitable organization or governmental entity that has determined
that a Fund is a legally permissible investment and which is prohibited
by applicable law from paying a sales charge or commission in connection
with the purchase of shares of any mutual fund.

4) Officers, directors and full-time employees of Express America Holdings
Corporation (Express America) and its subsidiaries.

5) Certain fee based broker-dealers or registered representatives thereof
or registered investment advisers under certain circumstances making
investments on behalf of their clients.

6) Shareholders who have authorized the automatic transfer of dividends
from the same class of another Pilgrim America Fund distributed by the
Distributor or from Pilgrim America Prime Rate Trust.

7) Registered investment advisors, trust companies and bank trust
departments investing in Class A shares on their own behalf or on behalf
of their clients, provided that the aggregate amount invested in any
Fund alone or in any combination of shares of any Fund plus Class A
shares of certain other Participating Funds as described herein under
'Pilgrim America Purchase Options(Trademark)--Reduced Sales Charges',
during the 13 month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Authorized
Dealers through which purchases are made an amount up to 0.50% of the
amount invested, over a 12 month period following the transaction.

8) Accounts as to which a banker or broker-dealer charges an account
management fee ('wrap accounts'), provided the bank or broker-dealer has
a separate agreement with the Distributor.

17
<PAGE>
The Funds may terminate or amend the terms of offering shares at NAV to these
investors at any time. For additional information, contact the Shareholder
Servicing Agent at (800) 331-1080, or see the Statement of Additional
Information.

INCENTIVES. The Distributor, at its expense, will provide additional
promotional incentives to Authorized Dealers in connection with sales of shares
of the Funds and other mutual funds in the Pilgrim America Group. In some
instances, additional compensation or promotional incentives will be offered to
Authorized 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 in
connection with pre-approved conferences or seminars, sales or training programs
for invited sales personal, payment for travel expenses (including meals and
lodging) incurred by sales personnel and members of their families, or other
invited guests, to various locations for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding the Funds or
other mutual funds in the Pilgrim America Group and/or other events sponsored by
Authorized Dealers.

In addition, the Distributor may, at its own expense, pay concessions in
addition to those described above to dealers that satisfy certain criteria
established from time to time by the Distributor. These conditions relate to
increasing sales of shares of the Funds over specified periods and to certain
other factors. These payments may, depending on the dealer's satisfaction of the
required conditions, be periodic and may be up to (1) 0.25% of the value of the
Funds' shares sold by the dealer during a particular period, and (2) 0.10% of
the value of the Funds' shares held by the dealer's customers for more than one
year, calculated on an annual basis.

RULE 12B-1 PLAN. Each Fund has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares of that Fund (Rule 12b-1 Plan).
Under the Rule 12b-1 Plan, the Distributor may receive from each Fund an annual
fee in connection with the offering sale and shareholder servicing of Class A,
Class B and Class M shares at an annual rate of up to .25% (.30% in the case of
MagnaCap Fund), 1.00%, and 1.00%, respectively, of the average daily net assets
of the Funds. Currently, the Board of Directors has approved annual fees of .25%
(.30% in the case of MagnaCap Fund), 1.00%, and .75%, respectively, which are
accrued daily and paid monthly. Of these amounts, fees equal to an annual rate
of .25% of the average daily net assets of each Fund is for shareholder
servicing for each of the classes. Fees paid under the Rule 12b-1 Plan may be
used to cover the expenses of the Distributor from the sale of Class A, Class B
or Class M shares of the Funds, including payments to Authorized Dealers, and
for shareholder servicing. These fees may be used to pay the costs of the

following; payments to Authorized Dealers; promotional activities; preparation
and distribution of advertising materials and sales literature; expenses of
organizing and conducting sales seminars; personnel costs and overhead of the
Distributor; printing of prospectuses and statements of additional information
(and supplements thereto) and reports for other than existing shareholders;
supplemental payments to Authorized Dealers that provide shareholders services;
interest on accrued distribution expenses; and costs of administering the Rule
12b-1 Plan. No more than 0.75% per annum of a Fund's average net assets may be
used to finance distribution expenses, exclusive of shareholder servicing
payments, and no Authorized Dealer may receive shareholder servicing payments in
excess of 0.25% per annum of a Fund's average net assets held by the Authorized
Dealer's clients or customers. The Distributor will be reimbursed for its actual
expenses incurred under the 12b-1 Plan, with respect to the Class A shares. With
respect to the Class B and Class M shares, the Distributor will receive payment
without regard to actual distribution expenses that it incurs. Fees paid by one
of the Funds under the Rule 12b-1 Plan may be used to finance distribution of
the shares of that Fund and the servicing of shareholders of the Fund as will as
the other Pilgrim America Funds. The Distributor has informed MagnaCap Fund,
High Yield Fund and Government Securities Income Fund that it incurred costs and
expenses with respect to Class A shares that may be reimbursable in future
months or years in the amounts of $2,352,801 for MagnaCap Fund (.95% of its net
assets), $150,269 for High Yield Fund (0.67% of its net assets), and $466,046
for Government Securities Income Fund (1.20% of its net assets) as of June 30,
1996.

Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for distribution and shareholder servicing at the annual rate
of .25%, .25%, and .40% (.65% in the case of MagnaCap Fund) of the Fund's
average daily NAV 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 on the anniversary date in the
1st month following the date of purchase of Class M shares, and they cease upon
exchange (or purchase) into Pilgrim America Money Market Shares. The payments
are also subject to the continuation of the relevant distribution plan, the
terms of the service agreements between dealers and the Distributor, and any
applicable limits imposed by the National Association of Securities Dealers,
Inc.

OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian out-of-pocket fees, proxy solicitation costs, and the compensation
of Directors who are not affiliated with the Investment Manager. Most Fund
expenses are allocated proportionately among all of the outstanding shares of
that Fund. However, the Rule 12b-1 Plan fees for each class of shares are
charged proportionately only to the outstanding shares of that class.

<PAGE>

PURCHASING SHARES

Your Authorized Dealer can help you establish and maintain your account, and the
Shareholder Servicing Agent is available to assist you with any questions you
may have.

The Fund reserves the right to liquidate sufficient shares to recover annual
Transfer Agent fees should the investor fail to maintain his/her account value
at a minimum of $1,000.00 ($250.00 for IRA's).

<TABLE>
<CAPTION>
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENT
<S> <C> <C>
By contacting your The minimum initial investment in a Fund is The minimum for additional investment in a
Authorized Dealer $1,000 ($250 for IRAs). Fund is $100.

Visit or consult an Authorized Dealer. Visit or consult your Authorized Dealer.

By mail Make your check payable to the Pilgrim Fill out the Account Additions form
America Group and mail it, along with a included on the bottom of your account
completed Application, to the address statement along with your check payable to
indicated on the Application. Please the Fund and mail them in the envelope
indicate an Authorized Dealer on the New provided with the account statement.
Account Application. Remember to write your account number on
the check.

By wire Call the Pilgrim America Order Department Call the Pilgrim America Order Department
at (800) 336-3436 to obtain an account at (800) 336-3436 to obtain a wire
number and indicate an Authorized Dealer on reference number. Give that number to your
the account. Instruct your bank to wire bank and have them wire the funds in the
funds to the Fund in care of: same manner described under 'Initial
Investors Fiduciary Trust Co. Investment.'
ABA #101003621
Kansas City, MO
credit to:
Pilgrim ------------------------------
(Fund)
A/C #752-4854; for further credit to:
Shareholder A/C
#
------------------------------------------
(A/C # you received over the telephone)
Shareholder Name:
------------------------------------------
(Your Name Here)
After wiring funds you must complete the
New Account Application and send it to:
Pilgrim America Order Dept.
P.O. Box 419368
Kansas City, MO 64141-6368
</TABLE>

The Funds and the Distributor reserve the right to reject any purchase order.
Please note third party checks will not be accepted. The Manager reserves the
right to waive minimum investment amounts.

PRICE OF SHARES. Purchase, sale and exchange orders are effected at NAV for the
respective class of shares of each Fund, determined after the order is received
by the Transfer Agent or Distributor, plus any applicable sales charge (Public
Offering Price).

Purchases of each class of a Fund's shares are effected at that Fund's Public
Offering Price determined after a purchase order has been received in proper
form. A purchase order will be deemed to be in proper form when all of the
required steps have been completed. In the case of an investment by wire,
however, the order will be deemed to be in proper form after the telephone
notification and the federal funds wire have

19
<PAGE>
been received. A shareholder who purchases by wire must submit an application
form in a timely fashion. If an order or payment by wire is received after the
close of the New York Stock Exchange, 4:00 p.m. Eastern Time (1:00 p.m., Pacific
Time), the shares will not be credited until the next business day.

You will receive a confirmation of each new transaction in your account, which
also will show you the number of Fund shares you own including the number of
shares being held in safekeeping by the Transfer Agent for your account. You may
rely on these confirmations in lieu of certificates as evidence of your
ownership. Certificates representing shares of the Funds will not be issued
unless you request them in writing.

DETERMINATION OF NET ASSET VALUE. The NAV of each class of each Fund's shares
will be determined daily as of the close of trading on the New York Stock
Exchange (usually at 4:00 p.m. New York City time) on each day that it is open
for business. Each class' NAV represents that class' pro rata share of that
Fund's net assets as adjusted for any class specific expenses (such as fees
under a Rule 12b-1 plan), and divided by that class' outstanding shares. In
general, the value of each Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations and short-term debt securities. The NAV per share of each class of
each Fund will fluctuate in response to changes in market conditions and other
factors. Portfolio securities for which market quotations are readily available
are stated at market value. Short-term debt securities having a maturity of 60
days or less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. In other cases, securities are valued at their fair value as
determined in good faith by the Board of Directors, although the actual
calculations will be made by persons acting under the supervision of the Board.
For information on valuing foreign securities, see each Fund's Statement of
Additional Information.

PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized investment
plan to purchase shares with automatic bank account debiting. For further
information on pre-authorized investment plans, see the New Account Application

or contact the Shareholder Servicing Agent at (800) 331-1080.

RETIREMENT PLANS. The Funds have available prototype qualified retirement plans
for both corporations and for self-employed individuals. They also have
available prototype IRA plans (for both individuals and employers), Simplified
Employee Pension Plans, Pension and Profit Sharing Plans and Tax Sheltered
Retirement Plans for employees of public educational institutions and certain
non-profit, tax-exempt organizations. Investors Fiduciary Trust Company ('IFTC')
acts as the custodian under these plans. For further information, contact the
Shareholder Servicing Agent at (800) 331-1080. IFTC currently receives a $12
custodian fee annually for the maintenance of IRA accounts.

TELEPHONE ORDERS. The Funds and their Transfer Agent will not be responsible for
the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Funds and their Transfer Agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include: (i) recording telephone instructions for
exchanges and expedited redemptions; (ii) requiring the caller to give certain
specific identifying information; and (iii) providing written confirmation to
shareholders of record not later than five days following any such telephone
transactions. If the Funds and their Transfer Agent do not employ these
procedures, they may be liable for any losses due to unauthorized or fraudulent
telephone instructions. Telephone redemptions may be executed on all accounts
other than retirement accounts.

EXCHANGE PRIVILEGES AND RESTRICTIONS

An exchange privilege is available. Exchange requests may be made in writing to
the Transfer Agent or by calling the Transfer Agent at (800) 992-0180. There is
no specific limit on exchange frequency; however, the Funds are intended for
long term investment and not as a trading vehicle. The Investment Manager
reserves the right to prohibit excessive exchanges (more than four per year).
The Investment Manager reserves the right, upon 60 days' prior notice, to
restrict the frequency of, otherwise modify, or impose charges of up to $5.00
upon exchanges. The total value of shares being exchanged must at least equal
the minimum investment requirement of the fund into which they are being
exchanged.

Shares of one class of a Fund may be exchanged for shares of that same class of
any other Pilgrim America Group mutual fund other than Pilgrim America Money
Market Shares ('Money Market'), at NAV without payment of any additional sales
charge. If you exchange and subsequently redeem your shares, any applicable CDSC
will be based on the full period of the share ownership. Shares of a Fund that
are not subject to a CDSC may be exchanged for shares of Money Market, and
shares of Money Market acquired in the exchange may

<PAGE>
subsequently be exchanged for shares of a mutual fund in the Pilgrim America
Group of the same class as the original shares acquired. Shares of a Fund that
are subject to a CDSC may be redeemed to purchase shares of Money Market upon
payment of the CDSC. Shareholders exercising the exchange privilege with any of
Pilgrim America Group's other funds should carefully review the prospectus of
that fund. Exchanges of shares are sales and may result in a gain or loss for
federal and state income tax purposes. You will automatically be assigned the
telephone exchange privilege unless you mark the box on the New Account
Application that signifies that you do not wish to have this privilege. The
exchange privilege is only available in states where shares of the Fund being
acquired may be legally sold.

SYSTEMATIC EXCHANGE PRIVILEGE

Subject to the information and limitations outlined above, you may elect to have
a specified dollar amount of shares systematically exchanged, monthly,
quarterly, semi-annual or annual (on or about the 10th of the applicable month),
from your account to an identically registered account in the same class of any
other Pilgrim America Fund.

The exchange privilege may be modified at any time or terminated upon 60 days
written notice to shareholders.

HOW TO REDEEM SHARES

Shares of each Fund will be redeemed at the NAV (less any applicable CDSC and/or
federal income tax withholding) next determined after receipt of a redemption
request in good form on any day the New York Stock Exchange is open for
business.

<TABLE>
<CAPTION>
METHOD PROCEDURES
<S> <C>
Redemption By Contacting Your Authorized Dealers may communicate redemption orders by wire or telephone to the
Distributor. These firms may charge for their services in connection with your
redemption request but neither the Funds nor the Distributor imposes any such
charge.
Redemption
By Mail A written request for redemption must be received by the Transfer Agent in order
to constitute a valid tender. If certificated shares have been issued, the
certificate must accompany the written request. The Transfer Agent may also
require a signature guarantee by an eligible guarantor. It will also be necessary
for corporate investors and other associations to have an appropriate
certification on file authorizing redemptions by a corporation or an association
before a redemption request will be considered in proper form. A suggested form
of such certification is provided on the New Account Application. If you are
entitled to a CDSC waiver, you must complete the CDSC waiver form in the New
Account Application. To determine whether a signature guarantee or other
documentation is required, shareholders may call the Shareholder Servicing Agent

at (800) 331-1080.

Expedited Redemption The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (maximum $50,000) mailed to an
address which has been on record with Pilgrim America for at least 60 days. This
privilege is automatically assigned to you unless you check the box on the New
Account Application which signifies that you do not wish to utilize such option.
The Expedited Redemption Privilege additionally allows you to effect a
liquidation from your account and have the proceeds (minimum $5,000) wired to
your pre-designated bank account. But, this aspect of the Expedited Redemption
privilege will NOT automatically be assigned to you. If you want to take
advantage of this aspect of the privilege, please check the appropriate box and
attach a voided check to the New Account Application. Under normal circumstances,
proceeds will be transmitted to your bank on the second business day following
receipt of your instructions, provided redemptions may be made. To effect an
Expedited Redemption, please call the Transfer Agent at (800) 992-0180. In the
event that share certificates have been issued, you may not request a wire
redemption by telephone or wire. This option is not available for retirement
accounts.
</TABLE>

21
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount in excess of $100 made to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000. During the withdrawal period, you may
purchase additional shares for deposit to your account if the additional
purchases are equal to at least one year's scheduled withdrawals, or $1,200
whichever is greater. There are no separate charges to you under this Plan,
although a CDSC may apply if you purchased Class A or B shares.

The number of full and fractional shares equal in value to the amount of the
payment will be redeemed at NAV (less any applicable CDSC). Such redemptions are
normally processed on the fifth day prior to the end of the month, quarter or
year. Checks are then mailed or proceeds are forwarded to your bank account on
or about the first of the following month. Shareholders who elect to have a
systematic cash withdrawal must have all dividends and capital gains reinvested.
To establish a systematic cash withdrawal, please complete the Systematic
Withdrawal Plan section of the New Account Application. To have funds deposited
to your bank account, follow the instructions on the New Account Application.

You may change the amount, frequency and payee, or terminate this plan by giving
written notice to the Transfer Agent. As shares of a Fund are redeemed under the
Plan, you may realize a capital gain or loss for income tax purposes. A
Systematic Withdrawal Plan may be modified at any time by the Fund or terminated
upon written notice by you or the relevant Fund.

PAYMENTS. Payment to shareholders for shares redeemed or repurchased ordinarily
will be made within seven days after receipt by the Transfer Agent of a written
request in good order. A Fund may delay the mailing of a redemption check until
the check used to purchase the shares being redeemed has cleared which may take
up to 15 days or more. To reduce such delay, all purchases should be made by

bank wire or federal funds. A Fund may suspend the right of redemption under
certain extraordinary circumstances in accordance with the Rules of the
Securities and Exchange Commission. Due to the relatively high cost of handling
small investments, the Funds reserve the right upon 30 days written notice to
redeem, at NAV, the shares of any shareholder whose account (except for IRAs)
has a value of less than $1,000, other than as a result of a decline in the NAV
per share. Each Fund intends to pay in cash for all shares redeemed, but under
abnormal conditions that make payment in cash unwise, a Fund may make payment
wholly or partly in securities at their then current market value equal to the
redemption price. In such case, a Fund could elect to make payment in securities
for redemptions in excess of $250,000 or 1% of its net assets during any 90-day
period for any one shareholder. An investor may incur brokerage costs in
converting such securities to cash.

MANAGEMENT OF THE FUNDS
MORE ABOUT THE FUNDS. MagnaCap Fund and High Yield Fund are series of Pilgrim
America Investment Funds, Inc., which is a registered investment company that
was organized as a Maryland corporation in July 1969. Government Securities
Income Fund is the single series of Pilgrim Government Securities Income Fund,
Inc., which is a registered investment company that was organized as a
California corporation in May 1984. Each Fund is governed by its Board of
Directors, which oversees the operations of the Fund. The majority of Directors
are not affiliated with the Investment Manager.

INVESTMENT MANAGER. The Investment Manager serves as investment manager to each
Fund. The Investment Manager is responsible for managing the general day-to-day
operations of each Fund including selecting the Fund's investments and placing
each Fund's portfolio transactions. Each Fund and the Investment Manager have
entered into an agreement that requires the Investment Manager to provide all
investment advisory and portfolio management services for the Fund. It also
requires the Investment Manager to assist in managing and supervising all
aspects of the general day-to-day business activities and operations of the
Funds, including custodial, transfer agency, dividend disbursing, accounting,
auditing, compliance and related services. The Investment Manager provides the
Funds with office space, equipment and personnel necessary to administer the
Funds. The agreement with the Investment Manager can be canceled by the Board of
Directors of each Fund upon 60 days written notice. Organized in December 1994,
the Investment Manager is registered as an investment adviser with the
Securities and Exchange Commission.

The Investment Manager acquired assets of the previous adviser to the Funds in a
transaction that closed on April 7, 1995. Although the Investment Manager has
not previously served as an investment adviser to a registered investment
company, investment personnel of the Investment Manager have managed other

22
<PAGE>
registered investment companies and private accounts. In addition, other
personnel of the Investment Manager have serviced registered investment
companies.

The Investment Manager and Pilgrim America Securities, Inc. (Distributor), the

Funds' principal underwriter, are indirect, wholly owned subsidiaries of Express
America (NASDAQ: EXAM). Through its subsidiaries, Express America engages in the
financial services business, focusing on providing investment advisory,
administrative and distribution services to open-end and closed-end investment
companies.

The Investment Manager bears its expenses of providing the services described
above. MagnaCap Fund pays the Investment Manager a fee at an annual rate of
1.00% of the average daily net assets of the Fund up to $30 million; 0.75% of
the average daily net assets above $30 million to $250 million; 0.625% of the
average daily net assets above $250 million to $500 million; and 0.50% of the
average daily net assets in excess of $500 million. These fees are computed and
accrued daily and paid monthly. High Yield Fund pays the Investment Manager a
fee at an annual rate of 0.75% of the average daily net assets of the Fund on
the first $25 million of net assets; 0.625% of the average daily net assets over
$25 million to $100 million; 0.50% of the average daily net assets over $100
million to $500 million; and 0.40% of the average daily net assets in excess of
$500 million. Effective July 1, 1995, the Investment Manager has voluntarily
agreed to waive all or a portion of its fees and to reimburse operating expenses
of the Fund, excluding distribution fees, interest, taxes, brokerage and
extraordinary expenses, so that total operating expenses do not exceed 1.00% for
Class A, 1.75% for Class B and 1.50% for Class M. This expense limitation will
apply until the earlier of December 31, 1996 or until the Fund reaches $50
million in net assets. Government Securities Income Fund pays the Investment
Manager a fee at an annual rate of 0.50% of the average daily net assets of the
Fund up to $500 million; 0.45% of the average daily net assets above $500
million to $1 billion; and 0.40% of the average daily net assets in excess of $1
billion. The agreement with the Investment Manager for the Government Securities
Income Fund provides that the Investment Manager will reimburse the Government
Securities Income Fund to the extent that the gross operating costs and expenses
of that Fund, excluding any interest, taxes, brokerage commissions, amortization
of organizational expenses, extraordinary expenses, and distribution (Rule
12b-1) fees on Class B and Class M shares in excess of an annual rate of .25% of
the average daily net assets of these classes, exceed 1.50% of the Fund's
average daily net asset value for the first $40 million of net assets and 1.00%
of average daily net assets in excess of $40 million for any one fiscal year.
This reimbursement policy cannot be changed unless the agreement is amended,
which would require shareholder approval.

The Investment Manager of MagnaCap Fund and High Yield Fund will reduce its
aggregate fees for any fiscal year, or reimburse the Fund, to the extent
required so that the Funds' expenses do not exceed the expense limitations
applicable to the Funds under the securities laws or regulations of those states
or jurisdictions in which the Funds' shares are registered or qualified for
sale. See the Statement of Additional Information for further information.

INVESTMENT PERSONNEL. Howard N. Kornblue, Vice President, Head of Equity and
Senior Portfolio Manager for the Investment Manager, has served as portfolio
manager of MagnaCap Fund since 1989. Prior to joining Pilgrim America Group (and
its predecessor) in 1986, Mr. Kornblue was Vice President, Director of Research
and Portfolio Manager at First Wilshire Securities Management; supervised

mergers and acquisitions for Getty Oil Company; was portfolio manager and
research analyst in both the fixed-income and equity departments for Western
Asset Management Company; and was research analyst and pension fund manager at
Southern California Edison Company. Mr. Kornblue received a B.S. from U.C.L.A.,
and M.S. and M.B.A. from U.S.C.

Kevin G. Mathews, Vice President and Senior Portfolio Manager of the Investment
Manager, has served as portfolio manager of High Yield Fund since June 1995.
Prior to joining the Investment Manager, Mr. Mathews was Vice President and
Senior Portfolio Manager of Van Kampen American Capital. Since 1987, Mr.
Mathews' responsibilities included the management of open-end high yield bond
funds, two New York Stock Exchange listed closed-end bond funds, variable
annuity high yield products and individual institutional high yield asset
managed accounts. In a prior position, Mr. Mathews was a high yield portfolio
fixed income credit analyst. Mr. Mathews received a B.A. from the University of
Illinois and an M.B.A. from Drake University.

Charles G. Ullerich, has served as portfolio manager of Government Securities
Income Fund since 1996 and co-manager of the Fund since August, 1995. Prior to
joining Pilgrim America Group, Mr. Ullerich was Vice President of Treasury
Services for First Liberty Bank of Macon, GA, where he was portfolio manager

23
<PAGE>
for a conservatively-managed $150 million mortgage and treasury security
portfolio, since 1991. Before that, he was an internal auditor for Georgia
Federal Bank in Atlanta. Mr. Ullerich received a B.S. from Arizona State
University, and he holds the professional designations of Chartered Financial
Analyst and Certified Internal Auditor. He is Past President of the Georgia
Chapter of the Arizona State University Alumni Association.

DISTRIBUTOR. In addition to providing for the expenses discussed above, the Rule
12b-1 Plan also recognizes that the Investment Manager may use its investment
management fees or other resources to pay expenses associated with activities
primarily intended to result in the promotion and distribution of the Funds'
shares. The Distributor may, from time to time, pay to Authorized Dealers in
connection with the sale or distribution of shares of a Fund material
compensation in the form of merchandise or trips. Salespersons and any other
person entitled to receive any compensation for selling or servicing Fund shares
may receive different compensation with respect to one particular class of
shares over another in a Fund.

PORTFOLIO TRANSACTIONS. The Investment Manager will place orders to execute
securities transactions that are designed to implement each Fund's investment
objectives and policies. The Investment Manager will use its reasonable efforts
to place all purchase and sale transactions with brokers, dealers and banks
('brokers') that provide 'best execution' of these orders. In placing purchase
and sale transactions, the Investment Manager may consider brokerage and
research services provided by a broker to the Investment Manager, and a Fund may
pay a commission for effecting a securities transaction that is in excess of the
amount another broker would have charged if the Investment Manager determines in

good faith that the amount of commission is reasonable in relation to the value
of the brokerage and research services provided by the broker. In addition, the
Investment Manager may place securities transactions with brokers that provide
certain services to a Fund. The Investment Manager also may consider a broker's
sale of Fund shares if the Investment Manager is satisfied that the Fund would
receive best execution of the transaction from that broker.

DIVIDENDS, DISTRIBUTIONS & TAXES

DIVIDENDS AND DISTRIBUTIONS. MagnaCap Fund makes semi-annual payments from net
investment income and one or more payments from net realized capital gains, if
any. High Yield Fund and Government Securities Income Fund each have a policy of
paying monthly dividends from their net investment income, and paying capital
gains, if any, annually following the Fund's fiscal year end. Dividends and
distributions will be determined on a class basis.

Any dividends and distributions paid by a Fund will be automatically reinvested
in additional shares of the respective class of that Fund, unless you elect to
receive distributions in cash. When a dividend or distribution is paid, the NAV
per share is reduced by the amount of the payment.

You may, upon written request or by completing the appropriate section of the
New Account Application in this Prospectus, elect to have all dividends and
other distributions paid on a Class A, B or M account in a Fund invested into a
Pilgrim America Fund which offers Class A, B or M shares. Both accounts must be
of the same class. If you are a shareholder of Pilgrim America Prime Rate Trust,
whose shares are not held in a broker or nominee account, you may, upon written
request, elect to have all dividends invested into a pre-existing Class A
account of any of the Participating Funds. Distributions are invested into the
selected funds at the net asset value as of the payable date of the distribution
only if shares of such selected funds have been registered for sale in the
investor's state.

FEDERAL TAXES. Each Fund intends to operate as a 'regulated investment company'
under the Internal Revenue Code. In any fiscal year in which a Fund so qualifies
and distributes to shareholders all of its net investment income and net capital
gains, the Fund itself is relieved of federal income tax.

All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Early each year, you will be notified as to the amount and federal tax
status of all dividends and capital gains paid during the prior year. Such
dividends and capital gains may also be subject to state or local taxes.
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 a 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.

24
<PAGE>
If you have not furnished a certified correct taxpayer identification number

(generally your Social Security number) and have not certified that withholding
does not apply, or if the Internal Revenue Service has notified the Fund that
the taxpayer identification number listed on your account is incorrect according
to their records or that you are subject to backup withholding, federal law
generally requires the Fund to withhold 31% from any dividends and/or
redemptions (including exchange redemptions). Amounts withheld are applied to
your federal tax liability; a refund may be obtained from the Service if
withholding results in overpayment of taxes. Federal law also requires the Fund
to withhold 30% or the applicable tax treaty rate from ordinary dividends paid
to certain nonresident alien, non-U.S. partnership and non-U.S. corporation
shareholder accounts.

The Funds may be required to pay withholding and other taxes imposed by various
countries in connection with its investments outside the U.S. generally at rates
from 10% to 40%, which would reduce a Fund's investment income.

This is a brief summary of some of the tax laws that affect your investment in a
Fund. Please see the Statement of Additional Information and your tax adviser
for further information.

PERFORMANCE INFORMATION

From time to time, a Fund may advertise its average annual total return over
various periods of time as well as the Fund's current yield. The total return
figures show the average percentage change in value of an investment in the Fund
from the beginning date of the measuring period. The 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). Total
returns and current yield are based on past results and are not necessarily a
prediction of future performance. The Fund will compute its yield by dividing
its net investment income per share during a 30-day base period by the maximum
offering price on the last day of the base period. This 30-day yield is then
compounded over six monthly periods and multiplied by two to provide an
annualized yield.

The Fund may also publish a distribution rate in investor communications
preceded or accompanied by a copy of the current Prospectus. The current
distribution rate for the Fund will be calculated by dividing the maximum
offering price per share into the annualization of the total distributions made
by the Fund during a 30-day period. The current distribution rate may differ
from current yield because the distribution rate may contain items of capital
gain and other items of income, while yield reflects only earned net investment
income. In each case, the yield, distribution rates and total return figures
will reflect all recurring charges against Fund income and will assume the
payment of the maximum sales load.

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.

ADDITIONAL INFORMATION

MORE ABOUT THE FUNDS. The Articles of Incorporation permit the Directors to
authorize the creation of additional funds, each of which may issue separate
classes of shares. A Fund may be terminated and liquidated under certain
circumstances.

SHAREHOLDERS HAVE CERTAIN VOTING RIGHTS. Each share of each Fund is given one
vote. Matters such as approval of new investment advisory agreements and changes
in fundamental policies of a Fund will require the affirmative vote of the
shareholders of that Fund. Matters affecting a certain class of a Fund will only
be voted on by shareholders of that particular class and Fund. The Funds are not
required to hold annual shareholder meetings, although special shareholder
meetings may be held from time to time.

25
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
[LOGO]

NEW ACCOUNT APPLICATION

SEND COMPLETED APPLICATION TO: PILGRIM AMERICA FUNDS, P.O. BOX 419368, KANSAS
CITY, MISSOURI 64141-6368
SECTIONS 1 THROUGH 6 MUST BE COMPLETED FOR YOUR ACCOUNT TO BE ESTABLISHED.

- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION

TYPE OF ACCOUNT
(Check one only)
/ / INDIVIDUAL

- ------------------------- ---------- ---------------------------------- ---------------------------------------
First Name Middle Last Name Social Security Number*
Initial (first individual only)

/ / JOINT TENANT

- ------------------------- ---------- ---------------------------------- ---------------------------------------
Joint Tenant's First Name Middle Last Name
Initial

/ / GIFT/TRANSFER TO MINOR

- ------------------------------------------------------------------------- -------------------------------------------
Custodian's Name (one only) Minor's Name (one only)
</TABLE>

/ / GUARDIANSHIP/CONSERVATORSHIP

- ------------------------------------------------------------------------- -------------------------------------------
Minor's Social Security
Under Uniform Gift/Transfers to Minors Act of (State) Number*
</TABLE>

- ------------------------------------------------- --------------------------- ----------------------------------------

Guardian/Conservator Ward/Incompetent or Minor's Ward/Incompetent or Minor's
Name (one only) Social Security Number*
</TABLE>

/ / CORPORATION, PARTNERSHIP, TRUST OR OTHER ORGANIZATION

<TABLE>
<S> <C>
- -------------------------------------------------------------------- ------------------------------------------
Exact Name of Corporation, Partnership or other Organization Tax Identification Number*

Trustee Accounts Only: Name of all Trustees required by trust agreement to sell/purchase shares
</TABLE>

<TABLE>
<S> <C> <C>
- -------------------------- --------------------------------------------------- ----------------------------------------
Date of Trust Agreement Name of Trust Tax Identification Number*
</TABLE>

/ / OTHER

<TABLE>
<S> <C>
/ / CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING.
/ / CHECK HERE IF YOU ARE AWAITING THE ISSUANCE OF
SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER.
</TABLE>

* Pilgrim America reserves the right to reject any application which does not
include a certified Social Security Number or Taxpayer Identification Number,
or does not indicate that such number has been applied for by checking the
'awaiting Social Security or Taxpayer Identification Number' box.
- --------------------------------------------------------------------------------
2. MAILING ADDRESS

<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- ----------- ---------- ---------------------------
Street Address Apartment City State Zip Code
Number
</TABLE>

( ) ( )
- ------------------------------ -----------------------------
Business Phone Home Phone

<PAGE>

- --------------------------------------------------------------------------------
3. INVESTMENT INFORMATION

PLEASE INDICATE DOLLAR AMOUNT AND FUND IN SPACES PROVIDED. $1,000 MINIMUM FOR
EACH FUND. IF MORE THAN ONE FUND IS SELECTED, ACCOUNT MUST HAVE IDENTICAL
REGISTRATIONS, CLASS OF SHARES AND OPTIONS. IF NO CLASS OF SHARES IS SELECTED,
CLASS A SHARES WILL BE AUTOMATICALLY SELECTED.

<TABLE>
<CAPTION>
FUND NAME AMOUNT CLASS OF SHARES (CHECK ONE)
<S> <C> <C>
1. $ A / / B / / M / /
------------------------------------------ -----------
2. $ A / / B / / M / /
------------------------------------------ -----------
3. $ A / / B / / M / /
------------------------------------------ -----------
4. $ A / / B / / M / /
------------------------------------------ -----------
5. $ A / / B / / M / /
------------------------------------------ -----------
6. $ A / / B / / M / /
------------------------------------------ -----------
</TABLE>

/ / A check payable to the Pilgrim America Group is included for $__________.

/ / Payment has been made by Dealer purchase on

____________ $_____________ _____________________________________________
(Date) (Amount) (Order Number)

/ / Payment has been made by Federal funds wire _____________ on ___________
(Reference No.) (Date)

_________________ $_______________
(Account No.) (Amount)

- -------------------------------------------------------------------------------
4. DIVIDEND AND DISTRIBUTION OPTIONS

(Check one only) -- If no option is selected, all distributions will be
reinvested.

/ / Reinvest all dividends and capital gains.

/ / Reinvest all dividends and capital gains into an existing account in
another Pilgrim America Account using the Dividend Transfer Option.

_________________________________ ________________________________
Fund Name Account Number

/ / Pay all dividends and reinvest capital I request the payable distributions be: (Check one.)
gains.
/ / Pay all capital gains in cash and
reinvest dividends. / / Sent to the address in Section 2.
/ / Pay all dividends and capital gains. / / Directly deposited in my bank account. (Please attach a
(IF ANY PAY OPTION IS SELECTED, voided check to Section 6). If voided check is not enclosed,
COMPLETE INFORMATION AT RIGHT) will be sent to address in Section 2.
/ / Sent to a special payee listed in Section 9.
</TABLE>

- --------------------------------------------------------------------------------
5. AUTHORIZED DEALER INFORMATION

<TABLE>
<S> <C>
- ---------------------------------------- ------------------------------------------
Authorized Dealer Name Registered Representative's Name

- ---------------------------------------- ------------------------------------------
Branch Office Address Registered Representative's Number

- ---------------------------------------- ---------------- --------------
City State Zip Code

- ---------------------------------------- ------------------------------------------
Registered Representative's Phone Authorized Signature of Authorized Dealer
</TABLE>

<PAGE>
- --------------------------------------------------------------------------------
6. SIGNATURES

I have read the prospectus and application for the Fund in which I am investing
and agree to its terms. I am also aware that a Telephone Exchange and Redemption
Privileges exist and that these privileges are automatically available unless
affirmatively declined. I also understand that if Pilgrim America, the Fund, the
Transfer Agent or the Sub-Transfer Agent fail to follow the procedures outlined
in the prospectus and in the Telephone Transaction Authorization hereto, such
entity may be liable for losses due to unauthorized or fraudulent instructions.
I further understand that I must carefully review each account confirmation
statement or other documentation of transaction that I receive to ensure that my
instructions have been properly acted upon. If any discrepancies are noted, I
agree to notify Pilgrim America, the Fund, the Transfer Agent or the
Sub-Transfer Agent in a timely manner, but in no event more than 15 days from
receipt of such confirmation statement or documentation of transaction. Failure
to notify one of the above entities on a timely basis will relieve such entities

of any liability with respect to the transaction and any discrepancy. See the
Exchange Privileges and Restrictions and How to Redeem Shares sections in the
Prospectus for procedures. I am of legal age. Sign below exactly as printed in
Section 1. For joint registration, all must sign. Under penalty of perjury, I
certify with my signature below that the number shown in Section 1 is my correct
taxpayer identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.

ATTACH VOIDED CHECK HERE ----->
(IF APPROPRIATE)

For Corporations, Trusts, or Partnerships: We hereby certify that each of the
persons listed below have been duly elected, and are now legally holding the
offices set forth opposite his/her name and have the authority to make this
authorization. Please print titles below if signing on behalf of a business or
trust to establish this account.

<TABLE>
<S> <C>
- ---------------------------------------- ----------------------------------------------------------
Signature Date President, Trustee, General Partner or Title

- ---------------------------------------- ----------------------------------------------------------
Signature Date Co-owner, Secretary of Corporation, Co-Trustee, etc.
</TABLE>

CHECK THE APPROPRIATE BOXES BELOW AND PROVIDE THE REQUESTED INFORMATION

/ / I am a United States Citizen

/ / I am a non-resident alien* (a Form W-8 will be provided to you by Pilgrim
America. Please complete it as requested as soon as possible).

/ / I am a resident alien and a social security number has been supplied on page
one of this New Account application (a Form 1078 will be provided to you by
Pilgrim America. Please complete it and return it as requested).

/ / If not a United Citizen, please indicate what country you are a permanent
tax resident of:

____________________________________________________________________________

* If the Pilgrim America account will be registered in joint registration with
another individual or individuals, each non-resident alien must complete and
return a Form W-8.

- --------------------------------------------------------------------------------
7. PURCHASE OPTIONS

REDUCED SALES CHARGE

/ / I qualify for Reduced Sales Charge with the account(s) listed below.
Included are the account numbers of all classes of shares of Pilgrim America
Funds that I or my immediate family (spouse and children under age 21) already
own.

- ---------------------------------------- ----------------------------------------------------------
Fund Name Account Number

- ---------------------------------------- ----------------------------------------------------------
Fund Name Account Number
</TABLE>

<PAGE>

LETTER OF INTENT (Check one only)

/ / I wish to establish a new Letter of Intent. (If Reduced Sales Charge or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.) I agree to the terms of the Letter of
Intent as set forth in the Prospectus and Statement of Additional
Information, and grant Pilgrim America Securities, Inc. a security
interest in the escrowed shares as set forth in the Statement of
Additional Information. I understand that I am not obligated to invest
an aggregate amount equal to the amount checked below, but if I do not,
Pilgrim America Securities, Inc. may deduct the amount of any sales
charge owed from the escrowed shares.

/ / Please apply this purchase to an existing Letter of Intent with the
account(s) listed below.

/ / Please amend my existing Letter of Intent with the new amount indicated
below.

If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the Prospectus
and Statement of Additional Information. The aggregate amount of these
purchases will be at least equal to the amount listed below:

/ / $50,000 / / $100,000 / / $250,000 / / $500,000 / / $1,000,000

<TABLE>
<S> <C>
- ---------------------------------------- --------------------------------------------
Fund Name Account Number

- ---------------------------------------- --------------------------------------------
Fund Name Account Number
</TABLE>

- --------------------------------------------------------------------------------
PRE-AUTHORIZED INVESTMENT PLAN -- AUTOMATIC INVESTING

/ / I wish to invest on a monthly, quarterly, semi-annual or annual basis,
directly from my checking account into the following fund(s).
(PLEASE COMPLETE THE PRE-AUTHORIZED INVESTMENT PLAN AGREEMENT HEREIN AND
ATTACH A VOIDED CHECK TO SECTION 6.)

Amount $________________________, to start / / 5th or
Minimum $100

/ / 20th of
_______________, ___________________
Month Year

/ / monthly / / quarterly / / semi-annual / / annual

- --------------------------------------------------------------------------------
SPECIAL PURCHASE WITHOUT A SALES CHARGE

/ / I (We) declare that the investment referenced herein is exempt from the
imposition of the normal front-end sales charge for the reason(s)
listed below (please refer to the 'Special Purchases Without a Sales
Charge' section of the prospectus):

- --------------------------------------------------------------------------------

The privilege will only be granted upon confirmation of your entitlement.
- --------------------------------------------------------------------------------
8. ADDITIONAL OPTIONS

TELEPHONE EXCHANGE PRIVILEGE -- IF ACCEPTED ACCOUNTS MUST HAVE THE SAME
ACCOUNT INFORMATION, OPTIONS AND CLASS OF SHARES. Unless you decline this

privilege by checking the box below, you will automatically be assigned
it.*

/ / I decline telephone exchange, and do not want this privilege. (See
Exchange Privileges and Restrictions section for procedures.)

EXPEDITED REDEMPTION PRIVILEGE -- AVAILABLE ON ALL NON-RETIREMENT ACCOUNTS.
UNLESS YOU DECLINE THIS PRIVILEGE, YOU WILL AUTOMATICALLY BE ASSIGNED THE
ABILITY TO REQUEST, VIA THE TELEPHONE, REDEMPTION PROCEEDS TO BE SENT TO THE
ADDRESS IN SECTION 2.

/ / I wish to redeem shares by telephone and request that the proceeds be
directly deposited into my bank account. (Please attach a voided check
to Section 6.) (If voided check is not enclosed, will be sent to address
in Section 2.)

/ / I decline telephone redemption, and do not want this privilege.

See Expedited Redemption section for procedures.

* Pilgrim America is authorized to act upon instructions received from you or
anyone other than yourself representing himself as acting as your
representative who can provide personal identification information as it
appears in Pilgrim America's records.

Pilgrim America will employ reasonable procedures to confirm that instructions
communicated over the telephone are genuine. The Funds and their agents will
not be liable for any loss, injury, damage, or expense incurred as a result of
instructions communicated by telephone reasonably believed to be genuine. By
accepting this privilege, you agree to hold the Funds and

<PAGE>

their agents harmless from any loss, claims, or liability arising from their
compliance with such instructions. Telephone exchange and expedited
redemption privileges are subject are subject to the terms and conditions set
forth in the Prospectus and each Funds' Statement of Additional Information.

SYSTEMATIC EXCHANGE PRIVILEGE

/ / I have at least $5,000 in my Pilgrim America________________Fund account,
for which no certificates have been issued and I would like to exchange:

$________(min. of $50) into the __________ Fund, Account #_______________

on a / / monthly or / / quarterly basis starting in the month of
_____________

(Systematic Exchange Privilege is only available within the same Class of
Shares)
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (SWP)
(Minimum account balance for a SWP is $10,000.)
(Class B SWP's are processed free of contingent deferred sales charge if 12%
or less of account value is redeemed on an annual basis.)

/ / I wish to automatically withdraw $_____________________ from this account.
Minimum $100

/ / Monthly / / Quarterly / / Semi-Annually / / Annually

I request this distribution be: (Check One)

/ / Sent to the address listed in Section 2. To begin
_____________of_________. (Withdrawal will occur about 5 business days
prior to the end of the month.)

/ / Sent to the payee listed in Section 9. To begin
_____________of_________. (Withdrawal will occur about 5 business days
prior to the end of the month.)

/ / Directly deposited in my bank account. (Please attach a voided check to
Section 6.)
To begin _____________of_________. (Withdrawal will occur about 5
business days prior to the end of the month.)
- --------------------------------------------------------------------------------

9. INTERESTED PARTY MAIL/DIVIDEND MAIL

/ / I wish to have my distributions sent to the address listed below.

/ / I wish to have duplicate confirmation statements sent to the interested
party listed below.

- --------------------------------------------------------------------------------

Name of Individual

- --------------------------------------------------------------------------------
Street Address

- ----------------------------- ------------------------------- ----------------
City State Zip Code

- --------------------------------------------------------------------------------
THIS APPLICATION IS NOT A PART OF THE PROSPECTUS.

<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

AUTHORIZED DEALER AGREEMENT

Under these plans, the Authorized Dealer signing the application acts as
principal in all purchases of Fund shares and appoints Pilgrim America as its
agent to execute the purchases and to confirm each purchase to the Investor.
PilgrimAmerica remits semi-monthly to the Authorized Dealer the amount of its
commissions. The Authorized Dealer hereby guarantees the genuineness of the
signature(s) on the application and represents that he is a duly licensed
Authorized Dealer and may lawfully sell Fund shares in the state designated by
the Investor's mailing address, and that he has entered into a Selling Group
Agreement with the Distributor with respect to the sale of fund shares. The
Authorized Dealer signature on the Application, signifies acceptance of the
concession terms, and acceptance of responsibility for obtaining additional
sales charges if specified purchases are not completed.

Cut on perforated line

-------------------------------------------------------------------------------

DETACH HERE AND RETURN THIS TO YOUR BANK IF YOU ARE
ESTABLISHING A PRE-AUTHORIZED INVESTMENT PLAN
(AUTHORIZATION TO HONOR CHECKS OR DEBIT INSTRUCTIONS DRAWN BY DST SYSTEMS, INC.,
ON BEHALF OF THE PILGRIM AMERICA FUNDS, FOR AUTOMATIC PURCHASE PLAN)

PRE-AUTHORIZED INVESTMENT PLAN AGREEMENT

As a convenience, I (we) hereby request and authorize you to pay and charge
to my (our) account checks or debit instructions drawn on my (our) account by
DST Systems, Inc., the Fund's Agent and payable to the order of the Fund
provided there are sufficient collected funds in said account to pay the same
upon presentation: I (we) agree that your rights with respect to each such check
or debit instruction shall be the same as if it were a check or debit
instructions drawn on you and signed personally by me (us). This authority is to
remain in effect until revoked in writing and until you actually receive such
notice. I (we) agree that you shall be fully protected in honoring any such
checks or debit instructions.

I (we) further agree that if any such check or debit instruction is
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability whatsoever.

Signature(s) of Depositor(s) (signed exactly as shown on bank records)

X_______________________________________________________________________________

________________________________________________________________ 19 ____________
Date Signed

(PLEASE PRINT)

Name of Depositor (as shown on bank records)____________________________________

Bank Account Number_____________________________________________________________

Name of Bank____________________________________________________________________

Address of Bank_________________________________________________________________

City/State/Zip of Bank__________________________________________________________

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

[LOGO]

INSTRUCTIONS FOR COMPLETING THE NEW ACCOUNT APPLICATION

This New Account Application can be used to open a new Pilgrim America Account,
establish Shareholder privileges on existing accounts and be used in providing
documentation for certain transactions. The completed Application should be
forwarded along with your investment check payable to the Pilgrim America Group,
or other appropriate documentation to: PILGRIM AMERICA FUNDS, P.O. BOX 419368,
KANSAS CITY, MISSOURI 64141-6368.

This New Account Application may not be used to open a qualified retirement plan
account for which Investors Fiduciary Trust Company acts as custodian.

1 ACCOUNT REGISTRATION
- --------------------------------------------------------------------------------

Check the appropriate box and provide the information requested. Unless
specified, accounts with more than one owner will be assumed to be 'Joint
Tenants With Rights of Survivorship'.

All investors must sign the Account Application, and authorize the requested
privileges.

For a child who is under the age of majority in your state of residence,
'Gift/transfer to minor' registration must be utilized.

2 MAILING ADDRESS
- --------------------------------------------------------------------------------

This is the address of record for your account. All account confirmation
statements will be forwarded to this address.

3 INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

State the fund(s) in which you are investing and the dollar amount of the
investment. (Minimum initial investment is $1,000).

4 DIVIDEND AND DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------

Pilgrim America offers several options for the treatment of dividends and
capital gains distributions, if any, from your Pilgrim America investment.

You can have these payments distributed to you, or any other recipient you
choose, in cash; in additional shares of the Fund which is paying the
distribution or; in shares of another Pilgrim America Fund, at NAV without sales
charge, via the Dividends Transfer Option. The Dividend Transfer Option is
available only for open-end funds within the Pilgrim America Group.

5 AUTHORIZED DEALER INFORMATION
- --------------------------------------------------------------------------------

Your financial professional can complete this section.

6 SIGNATURES
- --------------------------------------------------------------------------------

All investors and authorized signers should sign in order to process the New
Account Application and to certify your Social Security, Tax identification
Number or if applicable, your foreign status.

<PAGE>

7 PILGRIM AMERICA PURCHASE OPTIONS(TRADEMARK)
- --------------------------------------------------------------------------------

You can qualify for reduced sales charges via the Letter of Intent or Cumulative
Discount privileges.

The Letter of Intent allows you to qualify for reduced sales charges
immediately.

Cumulative Discount allows you to use the total of all of your Pilgrim America
open-end fund investments in determining the sales charge of a current
investment.

The Pre-Authorized Investment Plan provides a systematic method of investing
periodically in the Pilgrim America Fund(s) of your choice. Minimum investments
of at least $100 can be automatically debited from your bank account

periodically for investment purposes.

8 ADDITIONAL OPTIONS
- --------------------------------------------------------------------------------

The Telephone Exchange privilege will automatically be assigned to you unless
you check the box in Section 8 which states that you do not wish to have this
privilege.

The Expedited Redemption privilege allows you to effect a liquidation from your
account via a telephone call and have the proceeds (Maximum of $50,000) mailed
to your address of record. This privilege is automatically assigned to you
unless you check the box in this section which states you do not want to take
advantage of this privilege.

The Expedited Redemption privilege additionally allows you to effect a
liquidation from your account and have the proceeds (minimum $5,000) wired to
your pre-designated bank account. This privilege is NOT automatically assigned
to you. If you want to take advantage of this privilege, please check the
appropriate box and attach a voided check to section 6 of the New Account
Application.

The Systematic Exchange Privilege allows you to automatically exchange shares of
one fund for shares of the same class of another fund in regular pre-determined
amounts and at regular pre-determined intervals.

The Systematic Withdrawal Plan allows you to automatically have a specific share
or dollar amount ($100 minimum) liquidated from your account monthly, quarterly,
semi-annually, or annually and forwarded to you or the payee of your choosing as
long as the account has a current value of at least $10,000. Amounts designated
for deposit to your bank account can be forwarded via the Automated Clearing
House system by attaching a voided check for such basic account to Section 7 of
the New Account Application.

9 INTERESTED PARTY MAIL/DIVIDEND MAIL
- --------------------------------------------------------------------------------

You may authorize an additional party to receive copies of your confirmation
statements (your Authorized Dealer will automatically receive such copies). If
you wish to have additional copies of your confirmation statements mailed to an
address other than your address of record, check the appropriate box in Section
9 and indicate such address.

You may have your cash dividend payments forwarded to an address other than your
address of record by so indicating in Section 9. (If you wish your cash
dividends to be forwarded to a bank for deposit to an account, refer to Section
4 of the New Account Application).

<PAGE>

PILGRIM AMERICA FUNDS CLASS A AND B
CONTINGENT DEFERRED SALES CHARGE WAIVER FORM
(TO BE COMPLETED ONLY IF THE UNDERSIGNED BELIEVES THAT HE IS ENTITLED
TO A WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE.)

If you believe you are entitled to a waiver of the Contingent Deferred
Sales Charge in accordance with the terms set forth in the prospectus, you must
complete this Contingent Deferred Sales Charge Waiver Form and send it the
Fund's Transfer Agent at its address given below. The waiver will only be
granted upon confirmation of your entitlement.

Check the item below which the undersigned is relying upon for a waiver of
the Contingent Deferred Sales Charge and send any required documents specified
therein:

/ / Redemption is made upon the death or permanent disability of
shareholder. (Enclose either a certified death certificate or
certification of permanent disability (see below), whichever is
appropriate).

/ / Redemption is made in connection with mandatory distributions (upon
attainment of age 70 1/2) from and IRA or other qualified retirement
plan. (Enclose a certified birth certificate. Please contact Pilgrim
America for a Distribution Request Form for IRA or other qualified
retirement plan accounts where IFTC acts as custodian which must
accompany this Contingent Deferred Sales Charge Waiver Form).

________________________________________________________________________

Signature ______________________________________________________________
(Exactly as on Account Registration)

DATE ___________________________________________________________________

Name(s) ________________________________________________________________

________________________________________________________________________
(Please Print)

MAIL THE COMPLETED WAIVER FORM TO:
PILGRIM AMERICA FUNDS, P.O. BOX 419368, KANSAS CITY, MO 64141-6368
DEFINITION OF DISABILITY

An individual will be considered disabled if he meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code, which in pertinent

part defines a person as disabled if such peron is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long
continued and indefinite duration.

CERTIFICATION OF DISABILITY

I _____________________________________ certify that I am a licensed physician
Licensed Physician Name
in the State of _______________________________________________________________,
License # ____________ and that _________________ is under my care and is unable
to perform the material duties of his or her regular occupation or employment;
or is unable to engage in any substantial gainful activity by reason of a
physical or mental impairment which may result in death or be of continued and
indefinite duration. Date of determination of disability _______________________

Physician Signature _______________________ Date ______________________________

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

IMPORTANT INFORMATION REGARDING COMPLETION OF THE APPLICATION

Effective in 1989, the Fund, and other payers, must, according to IRS
regulations, withhold 31% of reportable dividends (whether paid or accrued) and
redemption payments if a shareholder fails to provide a taxpayer identification
number, and a certification that he is not subject to backup withholding in the
SHAREHOLDER CERTIFICATION section of the Account Application form.

(Section references are to the Internal Revenue Code, as amended).

BACKUP WITHHOLDING
You are subject to backup withholding if:
(1) You fail to furnish your taxpayer identification number to the Fund in
the manner required, OR
(2) The Internal Revenue Service notifies the Fund that you furnished an
incorrect taxpayer identification number, OR
(3) You are notified that you are subject to backup withholding under
section 3406(a)(1)(C), OR
(4) For an interest or dividend account opened after December 31, 1983, you
fail to certify to the payer that you are not subject to backup withholding
under (3) above, or fail to certify your taxpayer identification number.
For payments other than interest or dividends, you are subject to backup
withholding only if (1) or (2) above applies.

OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS 5, application for a Social Security Number Card, or Form
SS 4, application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number. Write 'applied for' in the space provided for a taxpayer identification
number on the application. Circle paragraph 3(b) of the Shareholder
Certification section.

WHAT NUMBER TO GIVE
Give the social security number or employer identification number of the record
owner of the account. If the account belongs to you as an individual, give your
social security number. If the account is in more than one name or is not in the
name of the actual owner, see the chart below for guidelines on which number to
report in completing the account registration section:
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.

PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable

cause and not to willful neglect.

(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
underpayment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.

PAYEES EXEMPT FROM BACKUP WITHHOLDING
Certain payees are specifically exempted from backup withholding on ALL
payments. Write 'exempt payee' after paragraph (3) of the Shareholder
Certification and Signature Certification section if your account falls into one
of the following categories. We will still need your taxpayer identification
number.
o A corporation
o A financial institution.
o An organization exempt from tax under section 501(a), or an individual
retirement plan.
o A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under section 584(a).
o An exempt charitable remainder trust, or a non exempt trust described in
section 4947(a)(1).
o An entity registered at all times under the Investment Company Act of 1940.
Payments of DIVIDENDS not generally subject to backup withholding include the
following:
o Payments to nonresident aliens subject to withholding under section 1441.
o Payments to partnerships NOT engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Beginning January 1, 1984, payers
must generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to a
payer. Certain penalties may also apply.

<TABLE>
<CAPTION>
- ---------------------------------- ----------------------------
GUIDELINES FOR DETERMINING GIVE THE
PROPER NUMBER SOCIAL SECURITY
FOR THIS TYPE OF ACCOUNT: NUMBER OF--

---------------------------------- ----------------------------
<S> <C> <C>
1. An individual's account The individual

2. Two or more individuals The actual owner of the
(joint account) account or, if combined
funds any one of the
individuals(1)

3. Husband and wife (joint The actual owner of the
account) account or, if joint funds,
either person(1)

4. Custodian account to a minor The minor(2)
(Uniform Gift to Minors Act)

5. Adult and minor The adult or if the minor is
the only contributor, the
minor(1)

6. Account in the name of The ward, minor, or
guardian or committee for a incompetent person(3)
designated ward, minor or
incompetent person

7. a. The usual revocable The grantor-trustee(5)
savings trust account
(grantor is also trustee)

b. So called trust account
that is not a legal or valid The actual owner(1)
trust under state law

8. Sole proprietorship account The owner(1)

- ---------------------------------- ----------------------------

<CAPTION>
- ---------------------------------- ----------------------------
GIVE THE EMPLOYER
IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- ---------------------------------- ----------------------------
<S> <C> <C>
9. A valid trust, estate or Legal entity (Do not furnish
pension trust the identifying number of
the personal representative
or trustee unless the legal
entity itself is not
designated in the account
title.)(5)

10. Corporate account The corporation

11. Religious, charitable, or The organization
educational organization
account

12. Partnership account held in The partnership
the name of the business

13. Association, club or other The organization
tax exempt organization

14. A broker or registered The broker or nominee
nominee

15. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a state or local government,
school district, or prison)
that receives agricultural
program payments
- ---------------------------------- ----------------------------
</TABLE>

<PAGE>

ELITE SERIES
PILGRIM AMERICA MAGNACAP FUND
PILGRIM AMERICA HIGH YIELD FUND
PILGRIM GOVERNMENT
SECURITIES INCOME FUND

TWO RENAISSANCE SQUARE, 40 NORTH CENTRAL AVENUE, SUITE 1200,
PHOENIX, ARIZONA 85004
1-800-331-1080

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
THE FUNDS............................................... 1

THE FUNDS AT A GLANCE................................... 2

SUMMARY OF EXPENSES..................................... 3

FINANCIAL HIGHLIGHTS.................................... 5

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES........... 8

INVESTMENT PRACTICES AND RISK CONSIDERATIONS............ 9

SHAREHOLDER GUIDE....................................... 14
Pilgrim America Purchase Options(TM).................. 14
Purchasing Shares..................................... 19
Exchange Privileges and Restrictions.................. 20
How to Redeem Shares.................................. 21

MANAGEMENT OF THE FUNDS................................. 22

DIVIDENDS, DISTRIBUTIONS AND TAXES...................... 24

PERFORMANCE INFORMATION................................. 25

ADDITIONAL INFORMATION.................................. 25

NEW ACCOUNT APPLICATION................................. 27
</TABLE>

[LOGO]

INVESTMENT MANAGER
Pilgrim America Investments, Inc.

Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

DISTRIBUTOR
Pilgrim America Securities, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

SHAREHOLDER SERVICING AGENT
Pilgrim America Group, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004

TRANSFER AGENT
Investors Fiduciary Trust Company
c/o DST Systems, Inc.
P.O. Box 419368
Kansas City, Missouri 64141-6368

CUSTODIAN
Investors Fiduciary Trust Company
127 W. 10th Street/14th Floor
Kansas City, Missouri 64105

LEGAL COUNSEL
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

PROSPECTUS

, 1996

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

______________ __, 1996

PILGRIM AMERICA HIGH YIELD FUND
Two Renaissance Square, Suite 1200
40 North Central Avenue
Phoenix, Arizona 85004
(800) 331-1080

Pilgrim America High Yield Fund (the "Fund") is a diversified series of Pilgrim
America Investment Funds, Inc., an open-end management investment company (the
"Company"). The Fund's primary investment objective is to seek a high level of
current income, with capital appreciation as a secondary investment objective.
Preservation of principal also is an important consideration in attaining these
objectives. To achieve its objectives, the Fund will invest at least 65% of its
total assets in a diversified portfolio consisting primarily of high-yielding,
fixed income securities believed by Pilgrim America Investments, Inc. (the
"Investment Manager") not to involve undue risk ("High Yield Securities"). The
Fund may invest the balance of its total assets in other securities, which
include, among other things, debt obligations, common and preferred stock not
considered High Yield Securities; securities issued by the U.S. Government, its
agencies or instrumentalities; warrants; mortgage-related securities not
considered High Yield Securities; financial futures and related options;
participation interests in floating rate loans; and debt securities of any
rating issued by foreign issuers. During periods of bond market weakness, the
Fund may establish a temporary defensive position to preserve capital by having
all or any part of its assets invested in short-term fixed income securities or
retained in cash or cash equivalents.

A Prospectus for the Fund dated , 1996, which provides the basic
information you should know before investing in the Fund, may be obtained
without charge from the Fund at the address listed above. This Statement of
Additional Information is not a prospectus. It is intended to provide additional
information regarding the activities and operations of the Fund, and should be
read in conjunction with the Prospectus. Copies of the Prospectus may be
obtained at no charge by calling (800) 331-1080.

TABLE OF CONTENTS
Page

General Information and History............................................. 2
Investment Objectives and Policies.......................................... 2
Investment Restrictions.................................................... 16
Directors and Officers..................................................... 18

Principal Shareholders..................................................... 18

Management of the Fund..................................................... 21
Pilgrim America Group...................................................... 22

Distribution Plan.......................................................... 23

Execution of Portfolio Transactions........................................ 25
Additional Purchase and Redemption Information............................. 27
Determination of Share Price............................................... 31

Shareholder Services and Privileges....................................... 32

Distributions............................................................. 33
Tax Considerations........................................................ 33
Performance Information................................................... 37
General Information....................................................... 39
Financial Statements....................................................... 40

<PAGE>

GENERAL INFORMATION AND HISTORY

On August 18, 1989, shareholders of the Fund approved a proposal to reorganize
the Fund from a New York common law trust to a series of Pilgrim America High
Yield Trust, a Massachusetts business trust. Effective January 18, 1990, Pilgrim
High Yield Trust changed its name to Pilgrim Strategic Investment Series
("PSIS") and the Fund became a series of PSIS. Subsequently, on April 4, 1995,
shareholders approved a proposal to reorganize the Fund from a series of PSIS to
a series of Pilgrim America Investment Funds, Inc. (the "Company"), a Maryland
corporation, pursuant to the sale by the former Pilgrim Management Corporation
of its name and its books and records related to the Fund to a subsidiary of
Express America Holdings Corporation. This reorganization, while having no
ramifications with respect to the investment objectives, policies, or
restrictions of the Fund, did result in a change of manager and distributor. See
"Management of the Fund" for a description of the manager and "Distributor" for
a description of the underwriting agreement between the Fund and the
distributor. 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
"Investment Objectives and Policies."

High Yield Securities

High Yield Securities are those rated lower than Baa by Moody's or BBB by S&P.
These securities tend to have speculative characteristics or are speculative,
and generally involve more risk of loss of principal and income than
higher-rated securities. Also, their yields and market values tend to fluctuate
more. Fluctuations in value do not affect the cash income from the securities,
but are reflected in the Fund's net asset value. The greater risks and
fluctuations in yield and value occur, in part, because investors generally
perceive issuers of lower-rated and unrated securities to be less creditworthy.

Many fixed income securities may present risks based on payment expectations.
For example, a fixed income security may contain redemption or call provisions.
These features allow an issuer to call, or buy back, these securities.
Typically, an issuer will exercise a redemption or call provision when interest
rates decline, in order to take advantage of less expensive financing. Such a
call or redemption is usually made at par or at a premium to par. The Fund then
would be forced to replace a called security with a lower yielding security,
thereby decreasing the Fund's rate of return.

High Yield Securities are subject to special risks. These risks cannot be
eliminated, but may be reduced significantly through a careful analysis of
prospective portfolio securities and through diversification. The Fund, by
pooling the funds of many investors, gives each shareholder an opportunity to
participate in the High Yield Securities market with a relatively small
investment. The size and volume of the Fund's portfolio transactions frequently
enable it to obtain better net prices and a resulting higher net yield to
shareholders. In addition, the Fund may further increase its income (see "Option
Writing").

As with any other investment, there is no assurance that the Fund will achieve
its objectives.

The yields earned on High Yield Securities generally are related to the quality
ratings assigned by recognized rating agencies. The medium- to lower-rated and
unrated securities in which the Fund invests tend to offer higher yields than
those of other securities with the same maturities because of the additional
risks associated with them. These risks include:

-2-

<PAGE>

High Yield Bond Market. A severe economic downturn or increase in interest rates
might increase defaults in High Yield Securities issued by highly leveraged
companies. An increase in the number of defaults could adversely affect the
value of all outstanding High Yield Securities, thus disrupting the market for
such securities.

Sensitivity to interest rate and economic changes. High Yield Securities are
more sensitive to adverse economic changes or individual corporate developments
but less sensitive to interest rate changes than are Treasury or investment
grade bonds. As a result, when interest rates rise, causing bond prices to fall,

the value of high yield debt bonds tend not to fall as much as Treasury or
investment grade corporate bonds. Conversely when interest rates fall, high
yield bonds tend to underperform Treasury and investment grade corporate bonds
because high yield bond prices tend not to rise as much as the prices of these
bonds.

The financial stress resulting from an economic downturn or adverse corporate
developments could have a greater negative effect on the ability of issuers of
High Yield Securities to service their principal and interest payments, to meet
projected business goals and to obtain additional financing than on more
creditworthy issuers. Holders of High Yield Securities could also be at greater
risk because High Yield Securities are generally unsecured and subordinate to
senior debt holders and secured creditors. If the issuer of a High Yield
Security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. In addition, periods of economic uncertainty and changes can be
expected to result in increased volatility of market prices of High Yield
Securities and the Fund's net asset value. Furthermore, in the case of High
Yield Securities structured as zero coupon or pay-in-kind securities, their
market prices are affected to a greater extent by interest rate changes and
thereby tend to be more speculative and volatile than securities which pay in
cash.

Payment Expectations. High Yield Securities present risks based on payment
expectations. For example, High Yield Securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Also, the value of High
Yield Securities may decrease in a rising interest rate market. In addition,
there is a higher risk of non-payment of interest and/or principal by issuers of
High Yield Securities than in the case of investment grade bonds.

Liquidity and Valuation Risks. Lower-rated bonds are typically traded among a
smaller number of broker-dealers rather than in a broad secondary market.
Purchasers of High Yield Securities tend to be institutions, rather than
individuals, a factor that further limits the secondary market. To the extent
that no established retail secondary market exists, many High Yield Securities
may not be as liquid as Treasury and investment grade bonds. The ability of the
Company's Board of Directors to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of High Yield
Securities more than other securities, especially in a thinly-traded market. To
the extent the Fund owns illiquid or restricted High Yield Securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.

Zero Coupon and Pay-In-Kind Securities. The Fund may invest in zero coupon and
pay-in-kind securities, which do not pay interest in cash. In the event of a
default, the Fund may receive no return on its investment.

Taxation. Special tax consideration are associated with investing in High Yield
Securities structured as zero coupon or pay-in-kind securities. The Fund reports
the interest on these securities as income even though it receives no cash
interest until the security's maturity or payment date.

Limitations of Credit Ratings. The credit ratings assigned to High Yield
Securities may not accurately reflect the true risks of an investment. Credit
ratings typically evaluate the safety of principal and interest payments, rather
than the market value risk of High Yield Securities. In addition, credit
agencies may fail to adjust

-3-

<PAGE>

credit ratings to reflect rapid changes in economic or company conditions that
affect a security's market value. Although the ratings of recognized rating
services such as Moody's and S&P are considered, the Investment Manager
primarily relies on its own credit analysis, which includes a study of existing
debt, capital structure, ability to service debts and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. Thus, the achievement of the Fund's investment
objective may be more dependent on the Investment Manager's own credit analysis
than might be the case for a fund which invests in higher quality bonds. The
Investment Manager continually monitors the investments in the Fund's portfolio
and carefully evaluates whether to dispose of or retain High Yield Securities
whose credit ratings have changed. The Fund may retain a security whose rating
has been changed.

Congressional Proposals. New laws and proposed new laws may have a negative
impact on the market for High Yield Securities. As examples, recent legislation
requires federally-insured savings and loan associations to divest themselves of
their investments in High Yield Securities and pending proposals are designed to
limit the use of, or tax and eliminate other advantages of, High Yield
Securities. Any such proposals, if enacted, could have a negative effect on the
Fund's net asset value.

Option Writing

The Fund may write only covered call option contracts. Currently, the principal
exchanges on which such options may be written are the Chicago Board Option
Exchange and the American, Philadelphia and Pacific Stock Exchanges. In
addition, and in certain instances, the Fund may purchase and sell options in
the over-the-counter market ("OTC Options"). The Fund's ability to close option
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options. The writing of option contracts is a highly
specialized activity that involves investment techniques and risks different
from those ordinarily associated with investment companies. A call option gives
the purchaser of the option the right to buy the underlying security from the
writer at the exercise price at any time prior to the expiration of the
contract, regardless of the market price of the security during the option
period. The premium paid to the writer is the consideration for undertaking the
obligations under the option contract. The writer forgoes the opportunity to
profit from an increase in the market price of the underlying security above the
exercise price so long as the option remains open and covered, except insofar as
the premium represents such a profit.

The Fund may purchase options only to close out a position. In order to close
out a position, the Fund will make a "closing purchase transaction"-- the
purchase of a call option on the same security with the same exercise price and
expiration date as the call option that it has previously written on any
particular security. The Fund will effect a closing purchase transaction so as
to close out any existing call option on a security that it intends to sell. The
Fund will realize a profit or loss from a closing purchase transaction if the
amount paid to execute a closing purchase transaction is less or more than the
amount received from the sale thereof. In determining the term of any option
written, the Fund will consider the Internal Revenue Code's limitations on the
sale or disposition of securities held for less than three months in order to
maintain its status as a regulated investment company.

The staff of the Securities and Exchange Commission (the "SEC") has taken the
position that purchased over-the-counter options ("OTC Options") and the assets
used as cover for written OTC Options are illiquid securities. The Fund will
write OTC Options only with primary U.S. Government Securities dealers
recognized by the Board of Governors of the Federal Reserve System or member
banks of the Federal Reserve System ("primary dealers"). In connection with
these special arrangements, the Fund intends to establish standards for the
creditworthiness of the primary dealers with which it may enter into OTC Option
contracts and those standards, as modified from time to time, will be
implemented and monitored by the Investment Manager. Under these special
arrangements, the Fund will enter into contracts with primary dealers that
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a repurchase price

-4-

<PAGE>

which represents the fair market value, as determined in good faith through
negotiation between the parties, but that in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any, by
which the option is "in-the-money." The formula will also include a factor to
account for the difference between the price of the security and the strike
price of the option if the option is written "out-of-the-money." "Strike price"
refers to the price at which an option will be exercised. "Cover assets" refers
to the amount of cash or assets that must be segregated to collateralize the
value of the futures contracts written by the Fund. Under such circumstances,
the Fund will treat as illiquid that amount of the cover assets equal to the
amount by which the formula price for the repurchase of the option is greater
than the amount by which the market value of the security subject to the option
exceeds the exercise price of the option (the amount by which the option is
"in-the-money"). Although each agreement will provide that the Fund's repurchase
price shall be determined in good faith (and that it shall not exceed the
maximum determined pursuant to the formula), the formula price will not
necessarily reflect the market value of the option written. Therefore, the Fund
might pay more to repurchase the OTC Option contract than the Fund would pay to
close out a similar exchange traded option.

The Fund will receive a premium (less any commissions) from the writing of such
contracts, and it is believed that the total return to the Fund can be increased
through such premiums consistent with the Fund's investment objectives.
Generally, the Fund expects that options written by it will be conducted on
recognized securities exchanges.

In determining the Fund's net asset value, the current market value of any
option written by the Fund is subtracted from net asset value. If the current
market value of the option exceeds the premium received by the Fund, the excess
represents an unrealized loss, and, conversely, if the premium exceeds the
current market value of the option, such excess would be unrealized gain.

Financial Futures Contracts and Related Options

The Fund may use financial futures contracts and related options to hedge
against changes in the market value of its portfolio securities or securities
that it intends to purchase. Hedging is accomplished when an investor takes a
position in the futures market opposite to his cash market position. There are
two types of hedges -- long (or buying) and short (or selling) hedges.
Historically, prices in the futures market have tended to move in concert with
cash market prices, and prices in the futures market have maintained a fairly
predictable relationship to prices in the cash market. Thus, a decline in the
market value of securities in the Fund's portfolio may be protected against to a
considerable extent by gains realized on futures contracts sales. Similarly, it
is possible to protect against an increase in the market price of securities
that the Fund may wish to purchase in the future by purchasing futures
contracts.

The Fund may purchase or sell any financial futures contracts which are traded
on a recognized exchange or board of trade. Financial futures contracts consist
of interest rate futures contracts and securities index futures contracts. A
public market presently exists in interest rate futures contracts covering
long-term U.S. Treasury bonds, U.S. Treasury notes, three-month U.S. Treasury
bills and GNMA certificates. Securities index futures contracts are currently
traded with respect to the Standard & Poor's 500 Composite Stock Price Index and
such other broad-based stock market indices as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Price Index. A clearing
corporation associated with the exchange or board of trade on which a financial
futures contract trades assumes responsibility for the completion of
transactions and also guarantees that open futures contracts will be performed.

An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, the interest rate securities
called for in the contract at a specified future time and at a specified

-5-

<PAGE>

price. A stock index assigns relative values to the common stocks included in
the index, and the index fluctuates with changes in the market values of the
common stocks so included. A stock index futures

contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
An option on a financial futures contract gives the purchaser the right to
assume a position in the contract (a long position if the option is a call and
short position if the option is a put) at a specified exercise price at any time
during the period of the option.

In contrast to the situation when the Fund purchases or sells a security, no
security is delivered or received by the Fund upon the purchase or sale of a
financial futures contract. Initially, the Fund will be required to deposit in a
segregated account with its custodian bank an amount of cash or liquid assets.
This amount is known as initial margin and is in the nature of a performance
bond or good faith deposit on the contract. The current initial margin deposit
required per contract is approximately 5% of the contract amount. Brokers may
establish deposit requirements higher than this minimum. Subsequent payments,
called variation margin, will be made to and from the account on a daily basis
as the price of the futures contract fluctuates. This process is known as
marking to market. At the time of purchase of a futures contract or a call
option on a futures contract, an amount of cash, U. S. Government securities or
other appropriate high-grade securities equal to the market value of the futures
contract minus the Fund's initial margin deposit with respect thereto will be
deposited in a segregated account with the Fund's custodian bank to
collateralize fully the position and thereby ensure that it is not leveraged.
The extent to which the Fund may enter into financial futures contracts and
related options may also be limited by the requirements of the Internal Revenue
Code for qualification as a regulated investment company.

The writer of an option on a futures contract is required to deposit margin
pursuant to requirements similar to those applicable to futures contracts. Upon
exercise of an option on a futures contract, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.

Although financial futures contracts by their terms call for actual delivery or
acceptance of securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery. Closing out is
accomplished by effecting an offsetting transaction. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller immediately would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the

purchaser would realize a loss.

The Fund will pay commissions on financial futures contracts and related options
transactions. These commissions may be higher than those that would apply to
purchases and sales of securities directly.

Limitations on Futures Contracts and Related Options. The Fund may not engage in
transactions in financial futures contracts or related options for speculative
purposes but only as a hedge against anticipated changes in the market value of
its portfolio securities or securities that it intends to purchase. The Fund may
not purchase or sell financial futures contracts or related options if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing futures and related options positions and the premiums paid for
related options would exceed 2% of the market value of the Fund's total assets
after taking into account

-6-

<PAGE>

unrealized profits and losses on any such contracts. At the time of purchase of
a futures contract or a call option on a futures contract, an amount of cash,
U.S. Government securities or other appropriate high-grade debt obligations
equal to the market value of the futures contract minus the Fund's initial
margin deposit with respect thereto will be deposited in a segregated account
with the Fund's custodian bank to collateralize fully the position and thereby
ensure that it is not leveraged.

The extent to which the Fund may enter into financial futures contracts and
related options also may be limited by the requirements of the Internal Revenue
Code for qualification as a regulated investment company. See "Federal Tax
Treatment of Dividends and Distributions."

Risks Relating to Futures Contracts and Related Options. Positions in futures
contracts and related options may be closed out only on an exchange that
provides a secondary market for such contracts or options. The Fund will enter
into an option or futures position only if there appears to be a liquid
secondary market. However, there can be no assurance that a liquid secondary
market will exist for any particular option or futures contract at any specific
time. Thus, it may not be possible to close out a futures or related option
position. In the case of a futures position, in the event of adverse price
movements the Fund would continue to be required to make daily margin payments.
In this situation, if the Fund has insufficient cash to meet daily margin
requirements it may have to sell portfolio securities at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the securities underlying the futures contracts it holds. The
inability to close out futures positions also could have an adverse impact on
the Fund's ability to hedge its portfolio effectively.

There are several risks in connection with the use of futures contracts as a
hedging device. While hedging can provide protection against an adverse movement
in market prices, it can also preclude a hedger's opportunity to benefit from a
favorable market movement. In addition, investing in futures contracts and

options on futures contracts will cause the Fund to incur additional brokerage
commissions and may cause an increase in the Fund's portfolio turnover rate.

The successful use of futures contracts and related options also depends on the
ability of the Investment Manager to forecast correctly the direction and extent
of market movements within a given time frame. To the extent market prices
remain stable during the period a futures contract or option is held by the Fund
or such prices move in a direction opposite to that anticipated, the Fund may
realize a loss on the hedging transaction that is not offset by an increase in
the value of its portfolio securities. As a result, the Fund's return for the
period may be less than if it had not engaged in the hedging transaction.

Utilization of futures contracts by the Fund involves the risk of imperfect
correlation in movements in the price of futures contracts and movements in the
price of the securities that are being hedged. If the price of the futures
contract moves more or less than the price of the securities being hedged, a
Fund will experience a gain or loss that will not be completely offset by
movements in the price of the securities. It is possible that, where the Fund
has sold futures contracts to hedge its portfolio against a decline in the
market, the market may advance and the value of securities held in the Fund's
portfolio may decline. If this occurred, the Fund would lose money on the
futures contract and would also experience a decline in value in its portfolio
securities. Where futures are purchased to hedge against a possible increase in
the prices of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline; if the Fund then determines not to invest in
securities (or options) at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
that would not be offset by a reduction in the price of the securities
purchased.

The market prices of futures contracts may be affected if participants in the
futures market elect to close out their contracts through off-setting
transactions rather than to meet margin deposit requirements. In such a case,
distortions in the normal relationship between the cash and futures markets
could result. Price

-7-

<PAGE>

distortions could also result if investors in futures contracts opt to make or
take delivery of the underlying securities rather than to engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends may still not result in a successful transaction.

Compared to the purchase or sale of futures contracts, the purchase of put or
call options on futures contracts involves less potential risk for the Fund
because the maximum amount at risk is the premium paid for the options plus
transaction costs. However, there may be circumstances when the purchase of an
option on a futures contract would result in a loss to the Fund while the
purchase or sale of the futures contract would not have resulted in a loss, such
as when there is no movement in the price of the underlying securities.

Mortgage-Related Securities

The Fund may invest in certain types of mortgage related securities. One type of
mortgage-related security includes certificates that represent pools of mortgage
loans assembled for sale to investors by various governmental and private
organizations. These securities provide a monthly payment, which consists of
both an interest and a principal payment that is in effect a "pass-through" of
the monthly payment made by each individual borrower on his or her residential
mortgage loan, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing, or
foreclosure, net of fees or costs that may be incurred. Some certificates (such
as those issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether the mortgagor actually makes the payment.

A major governmental guarantor of pass-through certificates is the Government
National Mortgage Association ("GNMA"). GNMA guarantees, with the full faith and
credit of the United States government, the timely payments of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) are backed by
pools of FHA-insured or VA-guaranteed mortgages. Other governmental guarantors
(but not backed by the full faith and credit of the United States Government)
include the Federal National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"). FNMA purchases residential mortgages from a
list of approved seller/services that include state and federally chartered
savings and loan associations, mutual saving banks, commercial banks, credit
unions and mortgage bankers.

GNMA Certificates. Certificates of the GNMA ("GNMA Certificates") evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds, in that principal is paid back monthly as payments of principal,
including prepayments, on the mortgages in the underlying pool are passed
through to holders of GNMA Certificates representing interests in the pool,
rather than returned in a lump sum at maturity. The GNMA Certificates that the
Fund may purchase are the "modified pass-through" type. "Modified pass-through"
GNMA Certificates entitle the holder to receive a share of all interest and
principal payments paid or owed to the mortgage pool, net of fees paid or due to
the "issuer" and GNMA regardless of whether or not the mortgagor actually makes
the payment.

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the timely

payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or the Farmers' Home
Administration ("FMHA") or guaranteed by the Veterans

-8-

<PAGE>

Administration ("VA"). GNMA is also empowered to borrow without limitation from
the U.S. Treasury, if necessary, to make payments required under its guarantee.

Life of GNMA Certificates. The average life of a GNMA Certificate is likely to
be substantially less than the stated maturity of the mortgages underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal investment
long before the maturity of the mortgages in the pool. Foreclosures impose no
risk of loss of the principal balance of a Certificate, because of the GNMA
guarantee, but foreclosure may impact the yield to shareholders because of the
need to reinvest proceeds of foreclosure. As prepayment rates of individual
mortgage pools vary widely, it is not possible to predict accurately the average
life of a particular issue of GNMA Certificates. However, statistics published
by the FHA indicate that the average life of single family dwelling mortgages
with 25 to 30-year maturities, the type of mortgages backing the vast majority
of GNMA Certificates, is approximately 12 years. Prepayments are likely to
increase in periods of falling interest rates. It is customary to treat GNMA
Certificates as 30-year mortgage-backed securities that prepay fully in the
twelfth year.

Yield Characteristics of GNMA Certificates. The coupon rate of interest of GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the certificates, by the amount of the fees
paid to GNMA and the issuer. The coupon rate by itself, however, does not
indicate the yield that will be earned on GNMA Certificates. First, GNMA
Certificates may be issued at a premium or discount rather than at par, and,
after issuance, GNMA Certificates may trade in the secondary market at a premium
or discount. Second, interest is earned monthly, rather than semi-annually as
with traditional bonds; monthly compounding raises the effective yield earned.
Finally, the actual yield of a GNMA Certificate is influenced by the prepayment
experience of the mortgage pool underlying it. For example, if interest rates
decline, prepayments may occur faster than had been originally projected and the
yield to maturity and the investment income of the Fund would be reduced.

FHLMC Securities. "FHLMC" is a federally chartered corporation created in 1970
through enactment of Title III of the Emergency Home Finance Act of 1970. Its
purpose is to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities, mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made or owed on the underlying pool. The FHLMC guarantees timely payment of
interest on PCs and the ultimate payment of principal. Like GNMA Certificates,
PCs are assumed to be prepaid fully in their twelfth year. GMCs also represent a

pro rata interest in a pool of mortgages. However, these instruments pay
interest annually and return principal once a year in guaranteed minimum
payments. The expected average life of these securities is approximately ten
years.

FNMA Securities. "FNMA" is a federally chartered and privately owned corporation
that was established in 1938 to create a secondary market in mortgages insured
by the FHA. It was originally established as a government agency and was
transformed into a private corporation in 1968. FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates in that each FNMA Certificate represents a pro rata share of all
interest and principal payments made or owed on the underlying pool. FNMA
guarantees timely payment of interest on FNMA certificates and the full return
of principal. Like GNMA Certificates, FNMA Certificates are assumed to be
prepaid fully in twelfth year.

Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
in addition be the originators of the underlying mortgage loans as well as the
guarantors of the pass-through certificates. Pools created by such
non-governmental issuers generally offer a higher rate of return than
governmental pools because there are no direct or indirect governmental
guarantees of payments

-9-

<PAGE>

in the former pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.

The Fund expects that governmental or private entities may create mortgage loan
pools offering pass-through investments in addition to those described above. As
new types of pass-through securities are developed and offered to investors, the
Investment Manager may, consistent with the Fund's investment objectives,
policies and restrictions, consider making investments in such new types of
securities.

Other types of mortgage-related securities include debt securities that are
secured, directly or indirectly, by mortgages on commercial real estate or
residential rental properties, or by first liens on residential manufactured
homes (as defined in section 603(6) of the National Manufactured Housing
Construction and Safety Standards Act of 1974), whether such manufactured homes
are considered real or personal property under the laws of the states in which
they are located.

Securities in this investment category include, among others, standard
mortgage-backed bonds and newer collateralized mortgage obligations ("CMOs").
Mortgage-backed bonds are secured by pools of mortgages, but unlike pass-through
securities, payments to bondholders are not determined by payments on the

mortgages. The bonds consist of a single class, with interest payable
periodically and principal payable on the stated date of maturity. CMOs have
characteristics of both pass-through securities and mortgage-backed bonds. CMOs
are secured by pools of mortgages, typically in the form of "guaranteed"
pass-through certificates such as GNMA, FNMA, or FHLMC securities. The payments
on the collateral securities determine the payments to bondholders, but there is
not a direct "pass-through" of payments. CMOs are structured into multiple
classes, each bearing a different date of maturity. Monthly payments of
principal received from the pool of underlying mortgages, including prepayments,
is first returned to investors holding the shortest maturity class. Investors
holding the longest maturity class receive principal only after the shorter
maturity classes have been retired.

CMOs are issued by entities that operate under order from the SEC exempting such
issuers from the provisions of the 1940 Act. Until recently, the staff of the
SEC had taken the position that such issuers were investment companies and that,
accordingly, an investment by an investment company (such as the Fund) in the
securities of such issuers was subject to the limitations imposed by Section 12
of the 1940 Act. However, in reliance on SEC staff interpretations, the Fund may
invest in securities issued by certain "exempted issuers" without regard to the
limitations of Section 12 of the 1940 Act. In its interpretation, the SEC staff
defined "exempted issuers" as unmanaged, fixed asset issuers that: (a) invest
primarily in mortgage-backed securities; (b) do not issue redeemable securities
as defined in Section 2(a)(32) of the 1940 Act; (c) operate under the general
exemptive orders exempting them from all provisions of the 1940 Act; and (d) are
not registered or regulated under the 1940 Act as investment companies.

Investments in mortgage-related securities involve certain risks. In periods of
declining interest rates, prices of fixed income securities tend to rise.
However, during such periods, the rate of prepayment of mortgages underlying
mortgage-related securities tends to increase, with the result that such
prepayments must be reinvested by the issuer at lower rates. In addition, the
value of such securities may fluctuate in response to the market's perception of
the creditworthiness of the issuers of mortgage-related securities owned by the
Fund. Because investments in mortgage-related securities are interest sensitive,
the ability of the issuer to reinvest favorably in underlying mortgages may be
limited by government regulation or tax policy. For example, action by the Board
of Governors of the Federal Reserve System to limit the growth of the nation's
money supply may cause interest rates to rise and thereby reduce the volume of
new residential mortgages. Additionally, although mortgages and mortgage-related
securities are generally supported by some form of government or private
guarantees and/or insurance, there is no assurance that private guarantors or
insurers will be able to meet their obligations. Further, stripped
mortgage-backed securities are likely to experience greater price volatility
than other types of mortgage securities. The yield to maturity on the interest
only class

-10-

<PAGE>

is extremely sensitive, both to changes in prevailing interest rates and to the
rate of principal payments (including prepayments) on the underlying mortgage

assets. Similarly, the yield to maturity on CMO residuals is extremely sensitive
to prepayments on the related underlying mortgage assets. In addition, if a
series of a CMO includes a class that bears interest at an adjustable rate, the
yield to maturity on the related CMO residual will also be extremely sensitive
to changes in the level of the index upon which interest rate adjustments are
made. A Fund could fail to fully recover its initial investment in a CMO
residual or a stripped mortgage-backed security.

Subordinated Mortgage Securities. The Fund may also invest in subordinated
mortgage securities that have certain characteristics and certain associated
risks. In general, the subordinated mortgage securities in which the Fund may
invest consist of a series of certificates issued in multiple classes with a
stated maturity or final distribution date. One or more classes of each series
may be entitled to receive distributions allocable only to principal, principal
prepayments, interest or any combination thereof prior to one or more other
classes, or only after the occurrence of certain events, and may be subordinated
in the right to receive such distributions on such certificates to one or more
senior classes of certificates. The rights associated with each class of
certificates are set forth in the applicable pooling and servicing agreement,
form of certificate and offering documents for the certificates.

The subordination terms are usually designed to decrease the likelihood that the
holders of senior certificates will experience losses or delays in the receipt
of their distributions and to increase the likelihood that the senior
certificate holders will receive aggregate distributions of principal and
interest in the amounts anticipated. Generally, pursuant to such subordination
terms, distributions arising out of scheduled principal, principal prepayments,
interest or any combination thereof that otherwise would be payable to one or
more other classes of certificates of such series (i.e., the subordinated
certificates) are paid instead to holders of the senior certificates. Delays in
receipt of scheduled payments on mortgage loans and losses on defaulted mortgage
loans are typically borne first by the various classes of subordinated
certificates and then by the holders of senior certificates.

In some cases, the aggregate losses in respect of defaulted mortgage loans that
must be borne by the subordinated certificates and the amount of the
distributions otherwise distributable on the subordinated certificates that
would, under certain circumstances, be distributable to senior certificate
holders may be limited to a specified amount. All or any portion of
distributions otherwise payable to holders of subordinated certificates may, in
certain circumstances, be deposited into one or more reserve accounts for the
benefit of the senior certificate holders. Since a greater risk of loss is borne
by the subordinated certificate holders, such certificates generally have a
higher stated yield than the senior certificates.

Interest on the certificates generally accrues on the aggregate principal
balance of each class of certificates entitled to interest at an applicable
rate. The certificate interest rate may be a fixed rate, a variable rate based
on current values of an objective interest index or a variable rate based on a
weighted average of the interest rate on the mortgage loans underlying or
constituting the mortgage assets. In addition, the underlying mortgage loans may
have variable interest rates.

Generally, to the extent funds are available, interest accrued during each

interest accrual period on each class of certificates entitled to interest is
distributable on certain distribution dates until the aggregate principal
balance of the certificates of such class has been distributed in full.

The amount of interest that accrues during any interest accrual period and over
the life of the certificates depends primarily on the aggregate principal
balance of the class of certificates, which, unless otherwise specified, depends
primarily on the principal balance of the mortgage assets for each such period
and the rate of payment (including prepayments) of principal of the underlying
mortgage loans over the life of the trust.

-11-

<PAGE>

A series of certificates may consist of one or more classes as to which
distributions allocable to principal will be allocated. The method by which the
amount of principal to be distributed on the certificates on each distribution
date is calculated and the manner in which such amount could be allocated among
classes varies and could be effected pursuant to a fixed schedule, in relation
to the occurrence of certain events or otherwise. Special distributions are also
possible if distributions are received with respect to the mortgage assets, such
as is the case when underlying mortgage loans are prepaid.

A mortgage-related security that is senior to a subordinated residential
mortgage security will not bear a loss resulting from the occurrence of a
default on an underlying mortgage until all credit enhancement protecting such
senior holder is exhausted. For example, the senior holder will only suffer a
credit loss after all subordinated interests have been exhausted pursuant to the
terms of the subordinated residential mortgage security. The primary credit risk
to the Fund by investing in subordinated residential mortgage securities is
potential losses resulting from defaults by the borrowers under the underlying
mortgages. The Fund would generally realize such a loss in connection with a
subordinated residential mortgage security only if the subsequent foreclosure
sale of the property securing a mortgage loan does not produce an amount at
least equal to the sum of the unpaid principal balance of the loan as of the
date the borrower went into default, the interest that was not paid during the
foreclosure period and all foreclosure expenses.

The Investment Manager will seek to limit the risks presented by subordinated
residential mortgage securities by reviewing and analyzing the characteristics
of the mortgage loans that underlie the pool of mortgages securing both the
senior and subordinated residential mortgage securities. The Investment Manager
has developed a set of guidelines to assist in the analysis of the mortgage
loans underlying subordinated residential mortgage securities. Each pool
purchase is reviewed against the guidelines. The Fund seeks opportunities to
acquire subordinated residential mortgage securities where, in the view of the
Investment Manager, the potential for a higher yield on such instruments
outweighs any additional risk presented by the instruments. The Investment
Manager will seek to increase yield to shareholders by taking advantage of
perceived inefficiencies in the market for subordinated residential mortgage
securities.

Credit Enhancement. Credit enhancement for the senior certificates comprising a
series is provided by the holders of the subordinated certificates to the extent
of the specific terms of the subordination and, in some cases, by the
establishment of reserve funds. Depending on the terms of a particular pooling
and servicing agreement, additional or alternative credit enhancement may be
provided by a pool insurance policy and/or other insurance policies, third party
limited guaranties, letters of credit, or similar arrangements. Letters of
credit may be available to be drawn upon with respect to losses due to mortgagor
bankruptcy and with respect to losses due to the failure of a master service to
comply with its obligations, under a pooling and servicing agreement, if any, to
repurchase a mortgage loan as to which there was fraud or negligence on the part
of the mortgagor or originator and subsequent denial of coverage under a pool
insurance policy, if any. A master service may also be required to obtain a pool
insurance policy to cover losses in an amount up to a certain percentage of the
aggregate principal balance of the mortgage loans in the pool to the extent not
covered by a primary mortgage insurance policy by reason of default in payments
on mortgage loans.

Optional Termination of a Trust. A pooling and servicing agreement may provide
that the depositor and master service could effect early termination of a trust,
after a certain specified date or the date on which the aggregate outstanding
principal balance of the underlying mortgage loans is less than a specific
percentage of the original aggregate principal balance of the underlying
mortgage loans by purchasing all of such mortgage loans at a price, unless
otherwise specified, equal to the greater of a specified percentage of the
unpaid principal balance of such mortgage loans, plus accrued interest thereon
at the applicable certificate interest rate, or the fair market value of such
mortgage assets. Generally, the proceeds of such repurchase would be
applied to the distribution of the specified percentage of the principal balance
of each outstanding certificate of such series, plus accrued interest, thereby
retiring such certificates. Notice of such optional termination would be given
by the trustee prior to such distribution date.

-12-

<PAGE>

Underlying Mortgage Loans. The underlying trust assets are a mortgage pool
generally consisting of mortgage loans on single, multi-family and mobile home
park residential properties. The mortgage loans are originated by savings and
loan associations, savings banks, commercial banks or similar institutions and
mortgage banking companies.

Various services provide certain customary servicing functions with respect to
the mortgage loans pursuant to servicing agreements entered into between each
service and the master service. A service duties generally include collection
and remittance of principal and interest payments, administration of mortgage
escrow accounts, collection of insurance claims, foreclosure procedures and, if

necessary, the advance of funds to the extent certain payments are not made by
the mortgagors and are recoverable under applicable insurance policies or from
proceeds of liquidation of the mortgage loans.

The mortgage pool is administered by a master service who (a) establishes
requirements for each service, (b) administers, supervises and enforces the
performance by the services of their duties and responsibilities under the
servicing agreements, and (c) maintains any primary insurance, standard hazard
insurance, special hazard insurance and any pool insurance required by the terms
of the certificates. The master service may be an affiliate of the depositor and
also may be the service with respect to all or a portion of the mortgage loans
contained in a trust fund for a series of certificates.

International Debt Securities.

The Fund may invest in debt obligations (which may be denominated in U.S. dollar
or in non-U.S. currencies) of any rating issued or guaranteed by foreign
corporations, certain supranational entities (such as the World Bank) and
foreign governments (including political subdivisions having taxing authority)
or their agencies or instrumentalities, including American Depository Receipts.
No more than 10% of the Fund's total assets, at the time of purchase, will be
invested in securities of foreign issuers. These investments may include debt
obligations such as bonds (including sinking fund and callable bonds),
debentures and notes, together with preferred stocks, pay-in-kind securities,
and zero coupon securities.

In determining whether to invest in debt obligations of foreign issuers, the
Fund will consider the relative yields of foreign and domestic High Yield
Securities, the economies of foreign countries, the condition of such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. Dollar. These factors are
judged on the basis of fundamental economic criteria (e.g., relative inflation
levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. Subsequent foreign
currency losses may result in the Fund having previously distributed more income
in a particular period than was available from investment income, which could
result in a return of capital to shareholders. The Fund's portfolio of foreign
securities may include those of a number of foreign countries, or, depending
upon market conditions, those of a single country.

Investments in securities of issuers in non-industrialized countries generally
involve more risk and may be considered highly speculative. Although a portion
of the Fund's investment income may be received or realized in foreign
currencies, the Fund will be required to compute and distribute its income in
U.S. dollars and absorb the cost of currency fluctuations and the cost of
currency conversions. Investment in foreign securities involves considerations
and risks not associated with investment in securities of U.S. issuers. For
example, foreign issuers are not required to use generally accepted accounting
principles. If foreign securities are not registered under the Securities Act of
1933, as amended, the issuer does not have to comply with the disclosure
requirements of the Securities Exchange Act of 1934, as amended. The values of

foreign securities investments will be affected by incomplete or inaccurate
information available to the Investment Manager as to foreign issuers, changes
in currency rates, exchange control regulations or currency blockage,
expropriation or nationalization of assets, application of foreign tax laws
(including withholding taxes), changes in

-13-

<PAGE>

governmental administration or economic or monetary policy. In addition, it is
generally more difficult to obtain court judgments outside the United States.

When-Issued Securities

The Fund may invest up to 10% of its net assets in High Yield Securities or
Other Securities on a when-issued basis. Under such an arrangement, delivery of,
and payment for, the instruments occur up to 45 days after the agreement to
purchase the instrument is made by the Fund. The purchase price to be paid by
the Fund and the interest rate on the instruments to be purchased are both
determined when the Fund agrees to purchase the securities "when issued." The
Fund is permitted to sell when-issued securities prior to the issuance of such
securities, but will not purchase such securities with the intent to make such a
sale. Securities purchased on a when-issued basis are subject to the risk that
yields available in the market, when delivery takes place, may be higher or
lower than the rate to be received on the securities the Fund is committed to
purchase. After the Fund is committed to purchase when-issued securities, but
prior to the issuance of said securities, the Fund is subject to adverse changes
in the value of these securities based upon changes in interest rates, as well
as changes based upon the public perception of the issuer and its
creditworthiness. The Fund will maintain a segregated account with its
custodian, consisting of cash and liquid assets at least equal to the value of
purchase commitments until payment is made.

Restricted and Illiquid Securities

The Fund may purchase restricted securities (i.e., securities the disposition of
which may be subject to legal restrictions) and securities that may not be
readily marketable. Because of the nature of these securities, a considerable
period of time may elapse between the Fund's decision to dispose of these
securities and the time when the Fund is able to dispose of them, during which
time the value of the securities could decline. The expenses of registering
restricted securities (excluding securities that may be resold by the Fund
pursuant to Rule 144A) may be negotiated at the time such securities are
purchased by the Fund. When registration is required before the securities may
be resold, a considerable period may elapse between the decision to sell the
securities and the time when the Fund would be permitted to sell them. Thus, the
Fund may not be able to obtain as favorable a price as that prevailing at the
time of the decision to sell. The Fund may also acquire securities through
private placements. Such securities may have contractual restrictions on their
resale, which might prevent their resale by the Fund at a time when such resale

would be desirable. Securities that are not readily marketable will be valued by
the Fund in good faith pursuant to procedures adopted by the Company's Board of
Directors.

Zero Coupon and Pay-In-Kind Securities

The Fund may invest in zero coupon and pay-in-kind securities. Zero coupon, or
deferred interest securities are debt obligations that do not entitle the holder
to any periodic payment of interest prior to maturity or a specified date when
the securities begin paying current interest (the "cash payment date") and
therefore are issued and traded at a discount from their face amounts or par
value. The discount varies, depending on the time remaining until maturity or
cash payment date, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, decreases as the final maturity or cash
payment date of the security approaches. The market prices of zero coupon and
delayed interest securities generally are more volatile than the market prices
of securities that pay interest periodically and are likely to respond to
changes in interest rates to a greater degree than do non-zero coupon securities
having similar maturities and credit quality. Current federal income tax law
requires holders of zero coupon securities to report as interest income each
year the portion of the original issue discount on such securities (other than
tax-exempt original issue discount from a zero coupon security) that accrues
that year, even though the holders receive no cash payments of interest during
the year.

-14-

<PAGE>

Pay-in-kind securities are securities that pay interest or dividends through the
issuance of additional securities. The Fund will be required to report as income
annual inclusions of original issue discount over the life of such securities as
if it were paid on a current basis, although no cash interest or dividend
payments are received by the Fund until the cash payment date or the securities
mature. Under certain circumstances, the Fund could also be required to include
accrued market discount or capital gain with respect to its pay-in-kind
securities.

The risks associated with lower rated debt securities apply to these securities.
Zero coupon and pay-in-kind securities are also subject to the risk that in the
event of a default, the Fund may realize no return on its investment, because
these securities do not pay cash interest.

Lending of Portfolio Securities

100% of the value of the securities loaned. During the time portfolio securities
are on loan, the borrower pays the Fund any dividends or 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.

Participation Interests

The Fund may invest in participation interests, subject to the limitation on its
net assets that may be invested in illiquid investments. Participation interests
provide the Fund an undivided interest in a loan made by a bank or other
financial institution in the proportion that the Fund's participation interest
bears to the total principal amount of the loan. No more than 5% of the Fund's
net assets can be invested in participation interests of the same issuing bank.
The Fund must look to the creditworthiness of the borrowing corporation, which
is obligated to make payments of principal and interest on the loan. In the
event the borrower fails to pay scheduled interest or principal payments, the
Fund would experience a reduction in its income and might experience a decline
in the net asset value of its shares. In the event of a failure by the bank to
perform its obligations in connection with the participation agreement, the Fund
might incur certain costs and delays in realizing payment or may suffer a loss
of principal and/or interest.

Repurchase Agreements

The Fund may invest any portion of its assets otherwise invested in money market
instruments 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 Board of
Governors of the Federal Reserve System 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 is usually quite short, from overnight to one week, while the
underlying securities generally have longer maturities.

-15-

<PAGE>

The Fund will always receive as collateral, 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. If the seller
defaults, the Fund might incur a loss or delay in the 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.

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.

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"). (All policies of
the Fund not specifically identified in this Statement of Additional Information
or the Prospectus as fundamental may be changed without a vote of the
shareholders.)

The Fund may not:

1. Issue senior securities. Good faith hedging transactions and similar
investment strategies will not be treated as senior securities for purposes
of this restriction so long as they are covered in accordance with
applicable regulatory requirements and are structured consistent with
current SEC interpretations.

2. Underwrite securities of other issuers.

3. Invest in commodities except that the Fund may purchase and sell futures
contracts, including those relating to securities, currencies, indexes and
options on futures contracts or indexes and currencies underlying or
related to any such futures contracts.

4. Make loans to persons except (a) through the purchase of a portion of an
issue of publicly distributed bonds, notes, debentures and other evidences
of indebtedness customarily purchased by institutional investors, (b) by
the loan of its portfolio securities in accordance with the policies
described under "Lending of Portfolio Securities," or (c) to the extent the
entry into a repurchase agreement is deemed to be a loan.

5. Purchase the securities of another investment company or investment trust,
except as they may be acquired as part of a merger, consolidation or
acquisition of assets.

6. Purchase any securities on margin or effect a short sale of a security.
(This restriction does not preclude the Fund from obtaining such short-term
credits as may be necessary for the clearance of purchases and sales of its
portfolio securities.)

-16-

<PAGE>

7. Buy securities from or sell securities to its investment adviser or
principal distributor or any of their affiliates or any affiliates of its
Directors, as principal.

8. Buy, lease or hold real property except for office purposes. (This
restriction does not preclude investment in marketable securities of
companies engaged in real estate activities.)

9. As to 75% of the value of its total assets, invest more than 5% of the
value of its total assets in the securities of any one issuer (other than
the United States Government) or acquire more than 10% of the outstanding
voting securities of any one issuer; but as to the remaining 25% of its
total assets, it retains freedom of action.

10. Borrow money except from banks for temporary or emergency purposes and not
for investment purposes, and then only in amounts not in excess of 5% of
the value of its total assets.

11. Invest in the securities of any company that, including its predecessors,
has not been in business for at least three years.

12. Invest more than 25% of the value of its total assets in any one industry.

13. Invest in securities of any one issuer for the purpose of exercising
control or management.

Notwithstanding the restrictions above, the Fund will not, so long as its shares
are registered for sale in the State of South Dakota: (i) have more than 10% of
its total assets invested in securities of issuers that the Fund is restricted
from selling to the public without registration under the Securities Act of
1933, as amended; (ii) have more than 10% of its total assets invested in real
estate investment trusts or investment companies; (iii) have more than 5% of its
assets invested in options, financial futures or stock index futures, other than
hedging positions or positions that are covered by cash or securities; (iv) have
more than 5% of its assets invested in equity securities of issuers that are not
readily marketable and securities of issuers that have been in operation for
less than three years; and (v) invest any part of its total assets in real
estate or interests in real estate, excluding readily marketable securities and
real estate used for office purposes; commodities, other than precious metals
not to exceed 10% of the Fund's total assets; commodity futures contracts or
options other than as permitted by investment companies qualifying for an
exemption from the definition of commodity pool operator; or interests in
commodity pools or oil, gas or other mineral exploration or development
programs.

The Fund will not, so long as its shares are registered for sale in the State of
Texas, invest in oil, gas or other mineral leases or in real estate limited
partnerships. 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 make loans
unless collateral values are continuously maintained at no less than 100% by
"marking to market" daily.

The Fund will not, so long as its shares are registered for sale in the State of
Ohio: (i) purchase or retain securities of any issuer if the officers or
directors of the Fund, its adviser or manager owning beneficially more than
one-half of one percent of the securities of an issuer together own beneficially
more than five percent of the securities of that issuer, or (ii) borrow, pledge,
mortgage or hypothecate its assets in excess of 1/3 of total Fund assets. The
Fund will only borrow money for emergency or extraordinary purposes.

-17-

<PAGE>

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, 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 67.)
Director. President of Al Burton Productions, for more than the last five years,
and 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 46.) 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, Inc., 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.

The Fund pays each Director who is not an interested person, be a 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 (vi) out of pocket expenses. During the
fiscal year ended June 30, 1996, the Fund paid an aggregate of approximately
$1,500 to the Directors. The pro rata share paid by the Fund is based on the
Fund's average net assets for the previous quarter as a percentage of

-18-

<PAGE>

the average net assets of the Company and 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 other funds 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.

Compensation Table
Fiscal Year Ended June 30, 1996

==========================================================================================
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
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Mary A Baldwin, Director (1)(3)..... $290 N/A N/A $23,800
(5 boards)
- ------------------------------------------------------------------------------------------

Al Burton, Director (2)(3).......... $290 N/A N/A $23,800
(5 boards)
- ------------------------------------------------------------------------------------------

Bruce S. Foerster, Director (1)(3).. $290 N/A N/A $23,900
(5 boards)
- ------------------------------------------------------------------------------------------

Jock Patton (3)(4).................. $272 N/A N/A $22,400
(5 boards)
- ------------------------------------------------------------------------------------------

Robert W. Stallings, Director and $ 0 N/A N/A $0
Chairman (1)(5)................... (5 boards)
==========================================================================================

</TABLE>

- ----------
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.

-19-

<PAGE>

Officers

James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 38.) Vice Chairman (since December 1994) and Executive Vice
President (since January 1995) of Pilgrim America Group and Pilgrim America
Investments, Inc. and a director (since December 1994) and Assistant Secretary
(since April 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 46.) 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 46.) Senior Vice President and Secretary, Express America Holdings
Corporation, Pilgrim America Group, 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 37.) Senior Vice President and Chief Financial Officer of Pilgrim
America Group, 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.

-20-

<PAGE>

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 Funds, except with respects to
the Class A shares of the Fund, Merrill Lynch, Pierce Fenner & Smith, Inc., P.O.
Box 45286, Jacksonville, Florida 32232-5286, owned 8.68% of the shares, and U.S.
Trust of California, 770 Broadway, 10th Floor, New York, New York 10003-9522,
owned 11.98% of the shares. With respect to the Class M shares of the Fund,
Prudential Securities, Inc., for the benefit of the Jerrold C. Schanker Family

Trust, Mt. Prospect, Illinois 60056, owned 6.32% of the shares, and Prudential
Securities, Inc., for the benefit of the Richard C. Mize Trust, West Palm
Beach, Florida 33414, owned 12.73% of the shares.

MANAGEMENT OF THE FUND

Investment management services are provided to the Fund by Pilgrim America
Investments, Inc. pursuant to an Investment Management Agreement (the
"Agreement") dated April 7, 1995. As compensation for its services, the
Investment Manager is paid monthly an annual fee at the rate of .75% of the
average daily net asset value of the Fund on the first $25 million of net
assets; an annual rate of .625% on net assets from $25 million to $100 million;
an annual rate of .50% on net assets from $100 million to $500 million; and an
annual rate of .40% on net assets over $500 million. Effective July 1, 1995, the
Investment Manager has voluntarily agreed to waive all or a portion of its fees
and to reimburse operating expenses of the Fund, excluding distribution fees,
interest, taxes, brokerage and extraordinary expenses, so that total operating
expenses do not exceed 1.00% for Class A, 1.75% for Class B and 1.50% for
Class M. This expense limitation will apply until June 30, 1997.

The Fund pays its own operating expenses, which are not assumed by the
Investment Manager, such as expenses incurred in connection with the issuance,
registration and transfer of its shares; fees and costs of its custodian,
transfer and shareholder servicing agents; 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;
salaries of officers and fees and expenses of Directors who are not members of
or affiliated with the Investment Manager, insurance premiums on property or
personnel of the Fund that 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 and in maintaining registration of its shares under state
securities laws; the cost of preparing and printing reports and proxy statements
of the Fund for distribution to its shareholders; preparing and sending
prospectuses and statements of additional information to existing shareholders;
trade association dues; legal and accounting fees; and fees and expenses of
registering and maintaining registration of its shares for sale under Federal
and applicable state securities laws.

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

-21-

<PAGE>

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. The Fund's expense limitation may change to reflect
changes in the expense limitations of the state having the most restrictive
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
$127,000 and $24,163. For the fiscal period November 1, 1994 to April 7, 1995
and the fiscal year ended October 31, 1994, the Fund paid management fees to the
former manager of approximately $54,524 and $135,300, 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 November 1, 1994 to April 7, 1995 and the fiscal year ended
October 31, 1994, the Fund reimbursed the former manager approximately $766 and
$2,002, 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. For the fiscal year ended June
30, 1996, the eight month period ended June 30, 1995 and the fiscal year ended
October 31, 1994, the voluntary fee reduction resulted in a waiver of $127,903,
$10,417 and $12,543, respectively.

The Agreement will remain in effect for two years, and will be continued in
effect from year to year thereafter so long as such continuation is approved at
least annually (1) by the Board of Directors of the Fund or the vote of a
majority of the outstanding voting securities of the Fund, and (2) by a majority
of the Directors who are not interested persons of any party to the Agreement,
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 60 days' written notice, and is automatically
terminated in the event of its assignment as defined in the 1940 Act. As used in
this Statement of Additional Information, the term "majority of the outstanding
voting securities" means the affirmative vote of (a) more than 50% of the
outstanding shares of the Fund, or (b) 67% or more of the shares present at a
meeting if more than 50% of the outstanding shares of the Fund, as appropriate,
are represented at the meeting in person or by proxy, whichever is less.

Distributor. Shares of the Fund are distributed by Pilgrim America Securities,
Inc. (the "Distributor") pursuant to a Distribution Agreement dated April 7,
1995. 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, Inc., a Delaware corporation, which in turn is a
wholly-owned subsidiary of Express America Holdings Corporation ("Express
America"), a Delaware corporation the shares of which are traded on the NASDAQ
National Market System. Express America 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 America MagnaCap Fund and Pilgrim Government Securities Income
Fund, open-end investment companies, and to Pilgrim America

-22-

<PAGE>

Bank and Thrift Fund, Inc. and Pilgrim America Prime Rate Trust, closed-end
investment companies. As of June 30, 1996, total assets under management in the
Pilgrim America Group were approximately $1.5 billion.

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 Trust, its Chief Financial
Officer, who is also an officer of the Trust, 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 Trust 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. 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 0.35% 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 will be made 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
0.25% 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 0.40% 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 a 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.

-23-

<PAGE>

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 the Class A shares. With respect to the 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
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 the 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 $177,062, including expenses for: advertising - $7,585;
salaries and commissions - $89,348; printing, postage, and handling - $26,99;

-24-

<PAGE>

brokers' servicing fees - $36,347 and miscellaneous and other promotional
activities - $16,891. 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 $7,475, including expenses for: advertising
- -- $320; salaries and commissions -- $3,772; printing, postage, and handling --
$1,135; brokers' servicing fees -- $1,534; and miscellaneous and other
promotional activities -- $713. 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 $1,864, including expenses
for: advertising -- $80; salaries and commissions -- $941; printing, postage,
and handling -- $283; brokers' servicing fees -- $383; and miscellaneous and
other promotional activities -- $178. Of the total amount incurred by the
Distributor during the fiscal year ended June 30, 1996, $88,772 was for the
costs of personnel of the Distributor and its affiliates involved in the
promotion and distribution of the Fund's shares.

The sales charge retained by the Distributor and the commissions allowed to
selling dealers are not an expense of the Fund and have no effect on the net
asset value of the Fund. During the fiscal year ended June 30, 1996, and the
fiscal period of April 7, 1995 through June 30, 1995, the Distributor received
commissions, after allowance to dealers on the sale of the Fund's shares, of
$1,125 and $209, respectively, or approximately 1.09% or 9.81%, respectively, of
total commissions assessed on purchases of the Fund. During the fiscal period of
November 1, 1994 through April 7, 1995, and during the fiscal year ended October

31, 1994, the former distributor received commissions, after allowance to
dealers on the sale of the Fund's shares, of $344 (approximately 16.15% of total
commissions assessed on purchases of the Fund) and $0, respectively.

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 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.

-25-

<PAGE>

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 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, 1996, June 30, 1995,
and October 31, 1994, total brokerage commissions paid by the Fund amounted to
approximately $0, $0 and $275, 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 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. During the
year ended October 31, 1994, the Fund reimbursed the former manager $2,002 for
the costs of personnel involved in placing orders for the execution of portfolio
transactions, shareholder servicing and maintaining registration of the Fund's
shares under state securities laws.

In addition to the foregoing, the Fund may obtain securities by exchanging its
shares for securities that meet its investment criteria (See the Fund's
prospectus, "Shareholder's Guide - How to Buy Shares of the Fund"). The
Investment Manager, subject to the instructions and review of the Company's
Board of Directors, will determine the value of securities to be exchanged for
Fund shares in the same manner as it values its portfolio securities. The Fund
will exchange securities for its shares at the public offering price. In this
regard, the Fund may be obligated to pay firms a dealer reallowance. In the
event the Fund has insufficient cash to pay the dealer reallowance for shares of
the Fund you purchase through an exchange, it may be required to sell some
portfolio securities. Such sale of portfolio securities may result in realized
loss at a time when the Fund would prefer to hold such securities, such as in a
rising market.

the length of time that each fund may choose to hold its investment in the same
issuer may likewise vary. To the extent any of these 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, any of the funds may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security if either 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 transaction 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

-26-

<PAGE>

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 the 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 that 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 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.

The Fund does not emphasize short-term trading profits and usually expects to
have an annual portfolio turnover rate generally not exceeding 100-200%.

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

-27-

<PAGE>

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.

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.

-28-

<PAGE>

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 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

-29-

<PAGE>

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 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

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.

-30-

<PAGE>

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.

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, including any options written by the Fund, 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. Portfolio securities
underlying traded call options written by the Fund will be valued at their
market price as determined above; however, the current market value of the
option written by the Fund will be subtracted from net asset value. 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. Short-term obligations maturing in less than 60 days will
generally be valued at amortized cost. 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

-31-

<PAGE>

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.

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

-32-

<PAGE>

Investors Fiduciary Trust Company, Kansas City, Missouri, will act as Custodian
under the Plan, and will furnish custodial services for an annual maintenance

fee of $12.00 for each participant, with no other charges. (This fee is in
addition to the normal Custodian charges paid by the Fund.) The annual contract
maintenance fee may be waived from time to time. For further details, including
the right to appoint a successor Custodian, see the Plan and Custody Agreements
as provided by the 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 forth in the Funds'
Prospectus or herein.

4. Telephone redemption requests must meet the following
conditions to be accepted by Pilgrim America Group:

(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.

TAX CONSIDERATIONS

The following discussion summarizes certain U.S. federal tax considerations
incident to an investment in the Fund.

-33-

<PAGE>

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 are not expected to be eligible for the
corporate 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

-34-
<PAGE>

and distributions are taxable to shareholders, whether received in cash or
reinvested in 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.

Original Issue Discount/Market Discount

Certain of the debt securities acquired by the Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security

was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount that accrues on a debt
security in a given year generally is treated for federal income tax purposes as
interest and, therefore, such income is subject to the distribution requirements
of the Code.

Some of the debt securities may be purchased by the Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.

Foreign Currency Transactions

Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its shareholders as
ordinary income. For examples fluctuations in exchange rates may increase the
amount of income that the Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, the Fund would not be able to
make ordinary dividend distributions, or distributions made before the losses
were

-35-

<PAGE>

realized would be recharacterized as return of capital to shareholders for
federal income tax purposes, rather than as an ordinary dividend, reducing each
shareholder's basis in his Fund shares, or as capital gain.

Options and Hedging Transactions

Certain options and financial contracts in which the Fund may invest are

"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses
("60/40"); however, foreign currency gains or losses (as discussed below)
arising from certain section 1256 contracts may be treated as ordinary income or
loss. Also, section 1256 contracts held by the Fund at the end of each taxable
year (and on certain other dates as prescribed under the Code) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.

Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Fund of hedging transactions are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Fund which is taxed as ordinary income when
distributed to shareholders.

The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders an ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.

Requirements relating to the Fund's tax status as a regulated investment company
may limit the extent to which the Fund will be able to engage in transactions in
options and foreign currency forward contracts.

Sale of Shares

Upon the sale or taxable 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 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

-36-

<PAGE>

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.

PERFORMANCE INFORMATION

The Fund may, from time to time, include "total return" or "yield" 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

-37-

<PAGE>

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:

2[((a-b)/cd+1)^6-1]

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.

Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (1) computing the yield to maturity of each obligation
held by the Fund based on the market value of the obligation (including actual
accrued interest) at the close of business on the last day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the Fund will disclose the maximum sales
charge as well as any amount or specific rate of any nonrecurring account
charges. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.

The Fund may also from time to time advertise its yield based on a 30-day or
90-day period ended on a date other than the most recent balance sheet included
in the Fund's Registration Statement, computed in accordance with the yield
formula described above, as adjusted to conform with the differing period for
which the yield computation is based.

Any quotation of performance stated in terms of yield (whether based on a 30-day
or 90-day period) will be given no greater prominence than the information
prescribed under SEC rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

-38-

<PAGE>

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.

Total returns and yields 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 annual rate of return of the Class A shares of the Fund for the one,
five and ten year periods ended June 30, 1996 was 7.31%, 11.99% and 8.46%,
respectively. The average total return for the Class B and Class M shares for
the period from commencement of sales (July 17, 1995) through June 30, 1996, was
5.40% and 7.06%, respectively.

GENERAL INFORMATION

The Articles of Incorporation of the Company dated July 7, 1969, a copy of which
is on file in the office of the Secretary of the State of Maryland, authorizes
the issuance of shares of the Fund. 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 MagnaCap Fund, and 100,000,000 shares are not
classified. All shares when issued are fully paid, non-assessable, and
redeemable. Shares have no preemptive rights. Each share of the Fund has one
vote and shares equally in dividends and distributions when and if declared by
the Fund and in the Fund's net assets upon liquidation. Shares of the Company do
not have cumulative voting rights and, as such, holders of at least 50% of the
shares voting for Directors can elect all Directors and the remaining
shareholders would not be able to elect any Directors.

The Board of Directors may classify or reclassify any unissued shares of the
Fund 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.

The Board of Directors may create additional series (or classes of series) of
shares without shareholder approval. Any series or class of shares may be
terminated by a vote of the shareholders of such series or class entitled to
vote or by the Directors of the Company by written notice to shareholders of
such series or class.

The overall management of the business of the Fund is vested with the Board of

Directors. The Board of Directors approves all significant agreements between
the Fund and persons or companies furnishing services

-39-

<PAGE>

to the Fund. The day-to-day operations of the Fund are delegated to the Fund's
officers subject to the investment objective and policies of the Fund, the
general supervision of the Company's Board of Directors and the applicable laws
of the State of Maryland.

Generally, there will not be annual meetings of shareholders. Shareholders may
remove Directors from office by votes cast at a meeting of shareholders or by
written consent.

Custodian. The cash and securities owned by the Fund are held by Investors
Fiduciary Trust Company, Kansas City, Missouri, as Custodian, which takes no
part in the decisions relating to the purchase or sale of the Fund's portfolio
securities.

Independent Auditors. KPMG Peat Marwick LLP, 725 South Figueroa Street, Los
Angeles, California 90017, acts as independent auditors for the Fund.

Legal Counsel. Legal matters for the Fund are passed upon by Dechert Price &
Rhoads, 1500 K Street, N.W., Washington, D.C. 20005.

Other Information. The Fund is registered with the SEC as a management
investment company. Such registration does not involve supervision of the
management or policies of the Fund. 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 in the Fund will be kept informed of its progress through periodic
reports showing diversification of portfolio, statistical data and any other
significant data. Financial statements audited by independent public accountants
will be submitted to shareholders at least annually.

FINANCIAL STATEMENTS

The Financial Statements of the Fund for the year ended June 30, 1996 are
incorporated herein by reference from the Fund's 1996 Annual Report to
Shareholders. Copies of the Fund's Annual Report may be obtained without charge
by contacting the Fund at Two Renaissance Square, Suite 1200, 40 North Central
Avenue, Phoenix, Arizona 85004, 1-800-331-1080.

-40-

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

____________, 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 ___________, 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.

TABLE OF CONTENTS

Page
----
History of the Fund..........................................................2
Investment Objectives and Policies...........................................2
Investment Restrictions......................................................4
Directors and Officers.......................................................5

Principal Shareholders.......................................................8

Management of the Fund.......................................................8
Pilgrim America Group.......................................................10
Distribution Plan...........................................................10
Execution of Portfolio Transactions.........................................12
Additional Purchase and Redemption Information .............................14
Determination of Share Price................................................18
Shareholder Services and Privileges.........................................19
Distributions...............................................................20

Tax Considerations..........................................................20
Performance Information.....................................................23

General Information.........................................................25

Financial Statements........................................................26

<PAGE>

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

-2-
<PAGE>

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

-3-
<PAGE>

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

(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

-4-
<PAGE>

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

-5-
<PAGE>

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:

Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 50.) 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 46.) 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.

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

-6-
<PAGE>

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 for the previous quarter as a
percentage of the average net assets of the Company and 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.

Compensation Table

Fiscal Year Ended June 30, 1996

<TABLE>
<CAPTION>
===================================================================================================
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
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

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)

===================================================================================================
</TABLE>

- -----------------------
(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.

Officers

James R. Reis, Executive Vice President
Two Renaissance Square, 12th Floor, 40 North Central Avenue, Phoenix, Arizona
85004. (Age 39.)

-7-
<PAGE>

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).

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 46.) 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 37.) 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.

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.

-8-
<PAGE>

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 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

-9-
<PAGE>

$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 June
30, 1996, total assets under management in the Pilgrim America Group were
approximately $1.5 billion.

-10-
<PAGE>

DISTRIBUTION PLAN

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 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

-11-
<PAGE>

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.

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 - - $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.

-12-
<PAGE>

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.

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.

-13-
<PAGE>

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 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.

-14-
<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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.

-15-
<PAGE>

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.

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.

Letters of Intent and Rights of Accumulation

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 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.

-16-
<PAGE>

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.

-17-
<PAGE>

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.

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

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.

-18-
<PAGE>

DETERMINATION OF SHARE PRICE

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.

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.

-19-
<PAGE>

SHAREHOLDER SERVICES AND PRIVILEGES

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. (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

-20-
<PAGE>

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.

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

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 forth in the Funds'
Prospectus or herein.

4. Telephone redemption requests must meet the following
conditions to be accepted by Pilgrim America Group:

(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.